1. Economic and Banking Sector Update Brian Hextell, Chief Credit Officer Audra Scharf, Relationship Manager May 16, 2013

2. Today’s Presentation Economic Commentary Banking Sector Update Collateral Requirements Interest Rate Outlook

3. Economic Commentary Economic Overview U.S. Employment remains weak Inflation remains tame Improving housing conditions aiding household balance sheets In December, the Federal Reserve said it does not expect to increase rates until unemployment falls below 6.5% The Fed projects the Fed Funds rate will not increase until mid-2015 World growth slowed in 2012 Largest downside risks have eased – But austerity, deleveraging and policy risks continue in the U.S. and Europe U.S. banking sector not fully recovered As of: March 28, 2013

4. 4 World GDP U.S. GDP revised to 0.4% in the 4 th quarter Most Eurozone countries and the U.K. have entered recession Growth has been declining in Brazil, Russia, India and China (BRICs) since 2010 – BRICs experienced stronger 4 th quarter 2012 growth Source: Bloomberg, 2013

5. 5 U.S. Employment The U.S. employment picture remains weak even as the February unemployment rate moved two ticks down to 7.7% Total nonfarm payroll growth has exceeded 200K for three of the past four months Declining labor participation contributing to lower unemployment rate Source: Bloomberg, 2013

6. 6 Housing Market Sustained recovery in the housing market since Spring 2012 Existing home sales and home prices are both rising Case-Shiller Home Price Index recent bottom in March 2012 Eight months of year-over-year growth in home prices first since September 2010 Residential construction housing starts highest since Summer 2008 Source: Bloomberg, 2013

7. 7 Growth and Inflation 2012 CPI of only 1.7% Low and falling energy prices in October through December following price surges in August and September Core and headline CPI increased in February ISM Manufacturing Index expanded the past three months following fiscal cliff uncertainty near year-end Source: Bureau of Labor Statistics Source: Bloomberg, 2013

8. 8 U.S. Consumer Household Net Worth nearly fully recovered after losing $16 trillion in 2007-2009 Debt payments declining compared to personal income Consumer confidence trending up, but still low Growth in retail sales near historical levels Source: Bloomberg, 2013

9. 9 Economic Summary Significant crisis averting measures in Europe have left many countries facing a long period of weak and sometimes negative growth Look for housing momentum and improved consumer confidence to continue in 2013 Domestically, we appear headed, slowly, toward more normal economic conditions Geopolitical risks are rising again As of: March 28, 2013

10. Banking Sector Update

11. Bank Failure Trends 11 Bank failures should have peaked for this cycle at 157 in 2010 – based on previous comments from the Chairman of the FDIC Illinois incurred 9 and 8 bank failures in 2011 and 2012, respectively. Year Number of Bank Failures 20007 20014 200211 20032 20044 20050 20060 20073 200825 2009140 2010157 201192 201251 2013 (through 3/27/13)4 TOTAL500 Source: FDIC, 2013

12. FDIC Problem Bank List 12 Source: FDIC Quarterly Banking Profile, 2/26/13

13. U.S. Banking Trends 13 IL = Illinois Commercial Banks; U.S. = U.S. Commercial Banks Source: SNL Financial, 2013

14. U.S. Banking Trends 14 IL = Illinois Commercial Banks; U.S. = U.S. Commercial Banks Source: SNL Financial, 2013

15. U.S. Banking Trends 15 IL = Illinois Commercial Banks; U.S. = U.S. Commercial Banks Source: SNL Financial, 2013

16. Asset Quality Recovery Comparison 16 Source: SNL Financial, 2013 1990s Banking Crisis 2000s Financial Crisis 3-Year NPA Improvement: 2.00% 3-Year NPA Improvement: 0.73% Reduction

17. U.S. Banking Trends Source: OCC Mortgage Metrics Report, Fourth Quarter 2012

18. U.S. Banking Industry Outlook Expected trends Asset quality improvement Constrained revenue growth Small decline in credit-related charges Elevated regulatory, compliance and legal costs Slow earnings growth Little loan growth Strong capital maintained High liquidity continues

19. Collateral Requirements

20. FDIC Insurance Dodd-Frank – Deposit Insurance TAG Expired 12/31/12 TAG provided unlimited FDIC coverage on certain noninterest bearing transaction accounts These accounts must once again be collateralized

21. FDIC Collateral Requirements The Agreement must be: In Writing Signed by the Proper Parties Approved by Bank’s Board of Directors *Collateral Must be Held by a Custodian

22. Collateral Security Agreement Between Depositor and Bank – Grants Pledgee a “Perfected Security Interest” – Describes: Types of acceptable collateral Amount of collateral (e.g. 100% of deposits) – Should reference the Pledge Agreement

23. Collateral FDIC Advisory Opinion (FDIC-93-10) “Circumstances Under Which the FDIC as Receiver Will Not Seek to Avoid Security Interest or Collateral Pledge Under 12 U.S.C. 1823(e).”

24. Collateral Pledge Agreement Between Bank and Custodian – Custodian agrees to hold pledged securities in a segregated account – Custodian agrees to provide Pledgee with monthly collateral statements

25. Collateral Pledge Agreement Between Bank and Custodian – Control Depositor (Pledgee) must approve all withdraws and substitutions of collateral Pledgee can waive this right, but the agreement must state that in the event that the Pledgee notifies the Custodian that the Bank has defaulted on its obligations (“Event of Default”), the Custodian must follow only instructions of the Pledgee

26. Collateral Why is a Third Party Necessary? Oakwood Deposit Bank – Failed in 2004 – Bank had pledged securities as collateral – The CEO was accused of posting the same assets for multiple accounts – Schools, villages and hospitals all lost money in the failure

27. Collateral Common Collateral Mistakes Board minutes not received Executed agreements not held by client Monthly collateral statement not received Collateral statement not reconciled to deposits Pledged collateral is not allowed per investment policy No third party custodian

28. Interest Rate Outlook

29. 29 Interest Rates Source: Bloomberg, March 28, 2013

30. Interest Rate Outlook The Fed publicly linked future policy to an unemployment rate of 6.5% Based on the Fed’s projections, it does not expect to increase rates until 2015 No guidance yet on the Fed’s approach for ending the asset purchase programs Next step is likely to scale back, not end, purchases – Prior to ending purchases, the Fed might first stop net purchases, but reinvest maturing proceeds to keep the size of the balance sheet steady As of: March 28, 2013

31. Questions?

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