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Financial Industry Overview 1

Financial Industry Overview Constituencies Shareholders Communities Employees Customers Regulators 2

Financial Industry Overview Headwinds n Interest Rate Environment/Margins – Stagnant economy, historical low interest rates, and high unemployment n Capital – Management of capital, implementation of Basel III and changes to risk weightings n Regulatory Environment – Changes, compliance, enforcement and cost n Credit and Overall Risk Management – Credit metrics improving but still high and focus is on banks to better assess, manage and monitor their risks n Technology - Utilization and delivery channels n Shareholders – Expectations on rate of return and illiquidity of stock 3

Financial Industry Overview Credit and Overall Risk Management n Asset quality remains a concern. n NPAs, including OREO, are taking a long time to resolve. Source: SNL Financial, LC 4 n Reserve ratios are historically low. Combined with lower collateral values, regulators are concerned. n Regulators reduced the five “c’s” (character, capacity, capital, collateral, conditions) of credit to one: cash flow. If it doesn’t cash flow, it gets written down.

Financial Industry Overview Interest Rate Environment Source: SNL Financial, LC 5

Financial Industry Overview Emerging Trends and Issues - Lending n Declining loan demand is muting the positive impact of increased core deposits and downward liability repricing. n Floors implemented during the financial crisis will contribute to margin contraction as rates begin to rise. Source: SNL Financial, LC & FDIC *Lending Trend graph - First quarter 2010 increase in consumer loan balances was due to a $294. 9 billion increase in credit card receivables caused by the implementation of FASB 166 & 167. This accounting change resulted in the consolidation of more that $300 billion in securitized credit card receivables. Consumer loan balances declined in subsequent quarters with the largest decline in the fourth quarter 2010 of $40 billion and $39 billion in first quarter 2011. 6

Financial Industry Overview Mortgages and Non-Bank Competition Source: Federal Reserve Bank of New York 7

Financial Industry Overview Growth by NAICS Code Source: U. S. Census Bureau 8

Financial Industry Overview C&I Loans to Total Loans Source: FDIC. gov 9

Financial Industry Overview C&I Loan Growth Source: FDIC. gov 10

Financial Industry Overview Small Business Lenders with assets in excess of $10 billion accounted for approximately 49% of total business loans under $1 million. Source: U. S. Small Business Administration, Office of Advocacy, Small business Lending in the United States, various years, special tabulations of the Call Reports 11

Financial Industry Overview CRE Asset Quality *Non-farm, non-residential real estate. Source: FDIC. gov 12

Financial Industry Overview CRE Profitability Source: TKG Peer Reports 13

Financial Industry Overview Coterminous Deposit Spreads in Branches Source: TKG Peer Reports 14

Financial Industry Overview Deposit Fees in Branches Source: TKG Peer Reports 15

Financial Industry Overview Operating Efficiencies n The economies of scale argument was not as compelling prior to 2008. n Industry observers see this as compelling evidence of the need for scale. Source: SNL Financial, LC 16

Financial Industry Overview Operating Efficiencies Source: SNL Financial, LC 17

Financial Industry Overview Emerging Customer Preferences Among all consumers, the preference for online banking was followed by visiting branches and using ATMs. Survey results showed that the popularity of online banking was not exclusive to the youngest consumers, it was the preferred banking method for all bank customers. Source: ABA 2012 Banking Survey 18

Financial Industry Overview Industry Consolidation and Branch Trends n Transaction volumes in branches are declining. n Branching decisions will evolve around location, size, and staffing to maximize profit potential. Source: Financial Management Solutions, Inc. 19

Financial Industry Overview Industry Consolidation and Branch Trends n Branch decline over past several years is predominantly driven by acquisitions and subsequent branch footprint consolidations of large financial institutions. n Future branch consolidations may result from demographic trends and technology utilization. Source: FDIC 20

Financial Industry Overview Industry Consolidation and Branch Trends Source: FDIC 21

Financial Industry Overview Emerging Trends and Issues – Branching Opened June 1999 Opened July 2011 Opened January 2002 Opened August 2011 22

Financial Industry Overview Emerging Customer Preferences Source: Ernst & Young Global Banking Survey 2012 23

Financial Industry Overview Industry Consolidation and Branch Trends Will there be another round of branch closures? n The pace of branch growth has far outstripped population growth for decades. Compared to prior years, in 2011, there was an average of one branch for every 1, 400 U. S. households. n This trend is unsustainable, especially considering how customers are downplaying branch usage in favor of remote channels. 24

Financial Industry Overview Emerging Trends and Issues – Branching n Half of bank customers live within 2 miles of their branch. n Nearly one quarter of credit union customers live over 15 miles from the nearest branch. Source: Chadwick Martin Bailey consumer pulse 25

Financial Industry Overview Emerging Trends and Issues – Branching n Perceived importance of branch convenience doesn’t translate into actual visits. n A significant percentage of bank customers visit their branch fewer than 5 times a year. The only exception is community banks where 22% of bank customers visit branches fewer than 5 times a year. Source: Chadwick Martin Bailey consumer pulse 26

Financial Industry Overview Emerging Trends and Issues – Customer Satisfaction n The proportion of customers who have ever changed their bank increased by 7% in the last year to 45%, and another 5% of customers are planning to leave their bank. n Of those surveyed, 63% of customers turn to friends, family and colleagues for information on banking products. n Approximately 58% of customers have more than one bank compared to 49% a year ago. Source: Ernst & Young 2012 Customer Banking Survey 27

Financial Industry Overview Will there be a role for community banks in the future? 28

Financial Industry Overview The Future of Community Banks Survival Guide § Diversity and risk management § Rely on scale of vendors § Build your bank around your customers § Be more nimble than TBTF § Clearly answer, “why bank with us”, and deliver on the promise. § Brand value and limited focus should result in acceptable profit. 29