1. Growing Non Interest Income with Fees Consumers Willingly Pay Charles Gearhart, Salin Bank Bob Giltner, Velocity Solutions, Inc. February 18, 2013

2. Contents Introduction: Salin Bank Fee Revenue Strategy Fees Consumers Willing Pay Conclusion

3. Salin Bank is a $850 Million Bank in Indianapolis, IN 24 Branch Locations 30,000 Checking Accounts $4.1 MM in Service Charges on Deposits Key Service Charge Revenue Strategies: Implemented Dynamic NSF/OD Limits Implement Targeted Debit Use Incentives Aggressive Acquisition and Referral Program 2013: Considering Tiered NSF Fees and Small Dollar Loans Introduction

4. Fee revenues on transaction account activity are up nearly 15%! Billions 20082012 $70B $82B $48B $44B ….but not at banks. FIsFIs, PayPal, Billers, Others Source: FDIC, Our Analysis; Banks and CUs FDIC Service Charges on Deposits Fee Revenue Strategy

5. Revenue Strategy We would be well-served to understand revenue growth from both FI and non-bank perspectives. 3.Make account acquisition revenue as important as current account revenue. 1. Target fees according to consumer willingness to pay for what they value. 2.Grow usage revenue by enhancing transaction context and experience. Action Plan 3.Add revenue with debit use, and premium services providing contextual value. 1. Grow overdraft revenue through improved service and segmentation. 2.Use similar tools to penetrate the market of similar size for payment liquidity services. Fee Revenue Strategy

6. The key revenue sources, for financial institutions and non banks, are overdraft and “payment liquidity” service fees rather than monthly account fees. Billions 2012 $82B $44B FIsFIs, PayPal, Billers, Others Source: FDIC, Our Analysis FDIC Service Charges on Deposits $38B How much do you pay in monthly check fees? - Nothing 69% - $3 or less14% - > $317% Source: ABA/Ipsos 2012 Study Key Sources $29 B Payment Liquidity FI Maintenance Fees Bank Non Bank $27 B NSF/OD Fee Revenue Strategy $56B

7. Fee Revenue Strategy 7 Consumer response is well-documented and has been unequivocal in shifting away from maintenance fee-based banks. Source: FDIC Deposit Growth

8. Consumers wanting more assured methods of covering shortfalls find paying biller late fees more attractive. The Biller Late Fee Market Source: Our Analysis Census Data, FRB Boston Payments Study NSF/OD $27B $56B Fee Revenue Strategy

9. Nearly 30% of households pay bills late, and half of those pay 10+ bills late a year. In the past 12 months, did you pay a bill after the due date or miss a payment? Fee Revenue Strategy

10. NSF 27B $56B 1.4 Billion late payments (28% of HHs) x $16 = $22B 871 Million NSFs (25% of Accts) x $31 = $27B 186 Million payday loans (13% of HHs) x $37 = $7B Average overdraft is $60 and average 12 items a year ($720) @ $31/item = $372 ($52 per $100) Average bill is $95 and average 10 items a year ($950) @ $16/item = $160 ($16 per $100) Average cost of a payday loan of $250 x 8 per year ($2,000) @ $37 = $296 ($15 per $100) FIs need to segment and understand the needs of checking account holders for liquidity services, and deliver a superior alternative to payday lending. Fee Revenue Strategy

11. Non-bank “payments” competitors like PayPal’s Billfloat are segmenting the largest industry revenue source with deposit risk management. Fee Revenue Strategy

12. We need to move from one standard product at one price… Financial institutions must shift from providing one service delivered in one way at one price. …to multiple products, sizes and prices. Fee Revenue Strategy

13. CFPB and Regulatory Summary Regulatory interests can be defined: CFPB – Emerging for large FIs (payment order, misleading or unfair practices, mistreating low income or young) “Appropriate action should be taken to address any risks that are identified including excessive usage, disproportionate impact and nonperformance, such as … adjusting credit terms, fees or limits….” Set overdraft limits appropriately and justifiably. Document information for regulators showing who the heavy users of overdraft services are and their preferences. Fee Revenue Strategy

14. 10+ overdrafts fee users pay $1,100 a year in fees; 7% of accounts; want items paid; low per item price sensitivity. Heavy NSFer Only OK Service Poor Service 1-3 items a year pay $60 a year in fees,12% of accounts; may opt out; high per item price sensitivity. Rare NSFer No Service Users of overdraft and liquidity services have different needs and service desires. Sample Bank Consumer Need Your Service Fees Consumers Willingly Pay: Overdraft and Liquidity Services 20% of accounts; opt out; low credit score; focus on alternatives to OD. Non NSF Liquidity Borrower 30%

15. Dynamic limit management, based on deposit activity, improves regulatory compliance, customer service and revenue, recapturing debit declines. Sample Regional FI with Deposit Tracking Community FI Fees Consumers Willingly Pay: Overdraft and Liquidity Services

16. With improved limit and service management, tiered NSF in use since 2008 provides better service and more revenue. Tiered NSF Fee Structure “Many banks adopt tiered NSF fee rate structure.” Wall Street Journal, November 12, 2008 Community FIs with Tiered Fee Structures MainSource Bank, Greensburg, IN Landmark National Bank, Manhattan, KS First Federal Savings Bank, Elizabethtown, KY Fees Consumers Willingly Pay: Overdraft and Liquidity Services Overdraft Fee Fulton Bank, PA$39 Susquehanna Bank, MD$40 RBC Bank, NC$41

17. For example, one community bank charging $32 per item lowered prices for nearly 70% of its accounts presenting NSFs and increased revenue 16%. Tiered Pricing Example Fees Consumers Willingly Pay: Overdraft and Liquidity Services

18. Why is it that we will provide a $700 overdraft limit to a customer where we would not provide a $700 line of credit? –Overdraft services are underwritten based on deposit activity and right of offset. –Low APR lines of credit have not been profitable. How could this combination be re-priced? Fees Consumers Willingly Pay: Overdraft and Liquidity Services

19. 19 Some FIs are providing small dollar loans with low APRs and maintenance fee pricing via automated websites. Used deposit scoring to underwrite small loans. Reg. Z excludes “participation or membership fees” from interest Fee-based checking service: Earn triple rewards Cash back offers worth hundreds $$ Automated small dollar loans for 1.25% for 30 days Fees Consumers Willingly Pay: Overdraft and Liquidity Services

20. The most significant opportunity in the near term is to improve and “own” the relationships we already have. Fees Consumers Willingly Pay: Usage and Premium Services

21. The key to revenue growth is to have actively-engaged transaction accounts. The debit card is the single best indicator of engaged transaction accounts. Fees Consumers Willingly Pay: Usage and Premium Services

22. Your highest return opportunity is “onboarding” existing accounts so you are their primary financial institution which increases revenue and relationships per account. Nearly half of your accounts are non debit swipers or light users and swiping elsewhere… Source: Velocity Solutions Sample Client Analysis …and getting them to swipe with you drives revenue. Increasing swipes among non and light card holders adds $56/yr per responding account. Fees Consumers Willingly Pay: Usage and Premium Services

23. Examples: Wine with dinner Overdraft services Popcorn at a theater Contextual Drivers Location Timing Information Simplicity Revenue Sources: Service Fees Third Party Revenues (network effects) What are new revenue sources consumers are willing to pay for added contextual value. Fees Consumers Willingly Pay: Usage and Premium Services

24. Introduce contextual value through premium services that can be added to any account. Premium Service Pricing Overdraft revenue is an example of successful contextual revenue Characteristics are: Can be added to any account Consumer action drives revenue Majority forego service Willing users drive revenue Fees Consumers Willingly Pay: Usage and Premium Services

25. 80% of Prepaid Card Users Have a Checking Account Over a checking account configured like a GPR Prepaid Card: Prepaid Check Card $5.95 a month No overdraft fees ever Load with online banking, ATM deposits For example, you can easily ride the growth in prepaid by simply re-configuring a checking account. Fees Consumers Willingly Pay: Usage and Premium Services

26. Below are examples of how FIs are implementing contextual value strategies to drive premium service revenue. Zions Bank: Three Levels of Online Banking Mercantile Bank of Michigan has 30% Sign Up for $4/month “Positive Pay” View. Banco Popular Offers $25 Premium Rewards Debit Card M&T Bank Offers Credit Score and Online Banking for $2/mo. CommunityONE Offers Premium ID Theft $15/mo. Oregon Employees CU Offers Doxo Online Filing Cabinet. United Community Bank Offers PFM for $2/mo. Fees Consumers Willingly Pay: Usage and Premium Services

27. And so are a lot of non-FI competitors… Scan & Pay Fees Consumers Willingly Pay: Usage and Premium Services

28. FI Checking Acct Revenue Relationship Risk Regulatory Compliance (ID) Aggregators (BillFloat, PinPoint, Mint, BillMyParents, Banno) Billers and Services (Online/Phone Payment; Manilla, Doxo, Volly) Payment Networks: (PayPal, Google, Dwolla) Merchants (Walmart, Target, Home Depot) Telephone (Isis, Boku, Verizon, AT&T) The Internet, electronic payments and information network are moving contextual value, revenue and relationship management to competitors outside the FI checking account. $ $ $ $ $ Acct Contextual Value Fees Consumers Willingly Pay: Usage and Premium Services

29. This is the most significant impact of “mobile” growth: it vastly increases the contextual value of networked information that can occur outside the “account.” 10 Times Growth Source: The Economist Contextual Value Drivers Location Timing Information Simplicity Fees Consumers Willingly Pay: Usage and Premium Services

30. Many are targeting transaction information that creates FI revenue through merchant advertising revenue. Some predict revenue as high as $35 per all accounts. Firms Targeting Merchant Marketing Revenue Aite Group Merchant Revenue Projection Source: Aite Group, 2011 Project of Merchant Marketing Revenue Fees Consumers Willingly Pay: Usage and Premium Services

31. FIs are under attack by competitors providing networked contextual value, stealing revenue from our “accounts.” Don’t lose your debit dominance. “In-store payments are PayPal’s to lose…” Don Kingsborough, PayPal Will Debit Continue to Lead In-Store Payments? Fees Consumers Willingly Pay: Usage and Premium Services

32. Winning Trends We would be well-served to understand revenue growth from both FI and non-bank perspectives. 3.Make account acquisition revenue as important as current account revenue. 1. Target fees according to consumer willingness to pay for what they value 2.Grow usage by enhancing transaction context and experience. Action Plan 3.Add revenue with debit use, and premium services providing contextual value. 1. Grow overdraft and payment through improved service and segmentation. 2.Use similar tools to penetrate the market of similar size for payment liquidity services. Conclusion

33. Salin Bank is a $850 Million Bank in Indianapolis, IN 24 Branch Locations 30,000 Checking Accounts $4.1 MM in Service Charges on Deposits Key Service Charge Revenue Strategies: Implemented Dynamic NSF/OD Limits Implement Targeted Debit Use Incentives Aggressive Acquisition and Referral Program 2013: Considering Tiered NSF Fees and Small Dollar Loans