1. MANAGING INTEREST RATE RISK: SETTING THE STAGE FOR TOMORROW MIKE DELISLE, ALM ADVISORS GROUP WVBA Convention July 29, 2014

2. 2 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

3. 3 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

4. 4 What we know… Rates as they are

5. 5 What we know… How we got here

6. 6 What we know… Historical transitions

7. 7

8. 8

9. 9

10. 10 What we know… Historical transitions

11. 11 What we know… Historical transitions

12. 12 What we know… Historical transitions

13. 13 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

14. 14 NII at Risk  Earnings at Risk (EAR) – Net Interest Income (NII)  Short term view of risk  Asset Sensitive: Increased income in rising rate scenarios  Liabilities Sensitive: Decreased income in rising rate scenarios

15. 15 NII at Risk Profile Asset Sensitive -200 bps-100 bpsBase+100 bps+200 bps+300 bps+400 bps 1st Quarter7,0357,1677,3127,4947,6627,8207,965 2nd Quarter6,6927,2407,6677,9468,2018,4398,669 3rd Quarter6,5847,3267,9548,3458,7019,0389,368 4th Quarter6,6127,4868,2178,6158,9729,3089,639 26,92429,21931,14932,40033,53734,60535,642 % Difference-13.6%-6.2% 4.0%7.7%11.1%14.4%

16. 16 NII at Risk Profile Liability Sensitive -200 bps-100 bpsBase+100 bps+200 bps+300 bps+400 bps 1st Quarter3,4213,3913,3023,2703,2453,2273,196 2nd Quarter3,5283,5003,3753,3373,3093,2933,278 3rd Quarter3,5753,5603,4143,3963,3563,3493,346 4th Quarter3,6063,6003,4343,4643,4293,4423,459 14,12914,05013,52613,46813,33913,31113,279 % Difference4.5%3.9% -0.4%-1.4%-1.6%-1.8%

17. 17 Peer Data March 14 NII Rates Up 200 bps

18. 18 Peer Data March 14 NII Rates Up 200 bps Asset Sensitive 62% Liability Sensitive 14%

19. 19 EVE at Risk  Economic Value of Equity (EVE)  EVE = PV Assets – PV Liabilities  Long term view of risk

20. 20 EVE at Risk Profile Asset Sensitive EVEDifference% Difference UP 30058,5201,7243.0% UP 20058,0381,2422.2% UP 10057,6048091.4% Base Case56,796 DN 10050,812(5,984)-10.5% Book Value:46,529

21. 21 EVE at Risk Profile Liability Sensitive EVEDifference% Difference UP 30077,816(9,912)-11.3% UP 20081,773(5,955)-6.8% UP 10086,145(1,583)-1.8% Base Case87,728 DN 10089,9132,1852.5% Book Value:89,452

22. 22 Peer Data March 14 EVE Rates Up 200 bps

23. 23 Peer Data March 14 EVE Rates Up 200 bps Asset Sensitive 24% Liability Sensitive 57%

24. 24 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

25. 25 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

26. 26 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

27. 27 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

28. 28 CD Migration

29. 29 CD Migration

30. 30 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

31. 31 Securities

32. 32 Securities

33. 33 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

34. 34 Brokered CD’s Brokered CD's 7/21/2014 For settlement 7/30/2014 Indicative Levels for Best-Efforts Posting CD RatesBenchmark Term All-In Low All-In HighFHLB-BostSpread 3-mos 0.250.300.35(5) 6-mos 0.300.350.36(1) 9-mos 0.350.400.373 1 yr 0.400.500.3911 15-mos 0.450.550.514 18-mos 0.500.600.64(4) 2 yr 0.650.750.90(15) 2.5 yr 0.901.001.13(13) 3 yr 1.101.201.37(17) 3.5 yr 1.301.401.59(19) 4 yr 1.501.601.81(21) 5 yr 1.851.952.12(17) 7 yr 2.402.502.68(18) 10 yr 3.053.153.27(12) Note: Calendar convention for CD rates are Actual/365, UST are Actual/Actual, Swaps are 30/360 & FHLB-Bost are Actual/360.

35. 35 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

36. 36 Blend and Extend Strategy  Old advance is closed out and new advance is initiated at par value.  There is no cash settlement of the prepayment fee.  The prepayment fee is then “blended” into the rate of a new advance.  The term of the new advance is selected to take advantage of the current low rate environment and minimize the annual impact of the penalty.

37. 37 Blend and Extend Results  Lower advance costs and improved net interest margin.  Allows liability sensitive institution to extend duration of advances without increasing total advances outstanding.  No accounting concerns if structured correctly.  Lock in today’s low rates.

38. 38 Blend and Extend Example Current Structure After Restructure Par Value $15,000,000 Interest Rate 4.06%2.64% Prepayment Fees $664,833 Included in the new interest rate Years to Maturity 1.2 Years3.0 Years Annual Savings $213,000

39. 39 Blend and Extend Example

40. 40 Blend and Extend Example

41. 41 Positioning the Balance Sheet  Retail Tactics  Loans  Deposits  Wholesale Tactics  Securities  Brokered Deposits  Advances  Off Balance Sheet  Derivatives

42. Derivatives Fixed Rate Loan Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Borrower Institution Receive Fixed % Customer Desires Fixed Rate Loan

43. Derivatives Fixed Rate Loan Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Borrower Institution Receive Fixed % Pay Fixed Receive LIBOR Floating Swap Loan Receipt to Floating

44. Derivatives - Results of Swap Fixed Rate Loan Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Fixed Rate Loan with Interest Rate Swap Borrower Institution Receive Fixed 4.50% Pay Fixed 4.50% Receive 1M LIBOR + 2.84% Floating Pay Fixed Loan Rate: 4.50% Amount: $5,000,000 Amortization: 20 years Maturity: 5 years Hedged Transaction Loan: Receive Fixed 4.50% Swap: Pay Fixed (4.50%) Receive 1M Libor+2.84% 2.99% Net Floating Cash Flow 2.99%

45. 45 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

46. 46 Estimating the Cost of Being Wrong  Alternate Rate Scenarios  Asset Growth  Deposit Migration  Deposit Runoff  NMD Assumptions

47. 47 Alternate Rate Scenarios  Historical Transitions  Bear / Bull  Worst Case

48. 48 Alternate Rate Scenarios  Bear Flattener  When short term interest rates rise faster than long term interest rates  Bear Steepener  When long term interest rates rise faster than short term interest rates  Bull Flattener  When the shape of the yield curve flattens as a result of long term interest rates falling faster than short term interest rates  Bull Steepener  When short term interest rates fall faster than long term interest rates

49. 49 Alternate Rate Scenarios

50. 50 Estimating the Cost of Being Wrong  Alternate Rate Scenarios  Asset Growth  Deposit Migration  Deposit Runoff  NMD Assumptions

51. 51 Asset Growth Growth AssumptionsTotal Total Asset Growth$162.8MM Cash/Fed Funds$36.0MM Securities$4.0MM Loans$122.8MM Funded ByTotal Non Interest Bearing DDA$38.2MM Interest Bearing DDA$53.4MM CDs/IRAs$67.9MM FHLB/Other($5.9MM) Equity$9.2MM

52. 52 Asset Growth Growth AssumptionsTotal Total Asset Growth$162.8MM Cash/Fed Funds$36.0MM Securities$4.0MM Loans$122.8MM Funded ByTotal Non Interest Bearing DDA$38.2MM Interest Bearing DDA$53.4MM CDs/IRAs$67.9MM FHLB/Other($5.9MM) Equity$9.2MM NII Impact of $2.9MM

53. 53 Asset Growth - NII

54. 54 Estimating the Cost of Being Wrong  Alternate Rate Scenarios  Asset Growth  Deposit Migration  Deposit Runoff  NMD Assumptions

55. 55 Deposit Migration Current PositionTotal Total Non-Interest DDA$245.9MM Interest Bearing DDA/MMDA/Savings$575.7MM Customer Repo$47.3MM Deposit ChangesMigrationCost Migrate 20% of Non-Interest DDA to Premier Savings $49.2MM16bps Replace Non-Interest DDA with FHLB Advance $15.0MM261bps Replace Customer Repo with FHLB Advance $15.0MM242bps

56. 56 Deposit Migration Current PositionTotal Total Non-Interest DDA$245.9MM Interest Bearing DDA/MMDA/Savings$575.7MM Customer Repo$47.3MM Deposit ChangesMigrationCost Migrate 20% of Non-Interest DDA to Premier Savings $49.2MM16bps Replace Non-Interest DDA with FHLB Advance $15.0MM261bps Replace Customer Repo with FHLB Advance $15.0MM242bps Impact to NII ($0.834MM) And EVE ($7.2MM)

57. 57 Deposit Migration - NII

58. 58 Deposit Migration - EVE

59. 59 Estimating the Cost of Being Wrong  Alternate Rate Scenarios  Asset Growth  Deposit Migration  Deposit Runoff  NMD Assumptions

60. 60 Estimating the Cost of Being Wrong  Alternate Rate Scenarios  Asset Growth  Deposit Migration  Deposit Runoff  NMD Assumptions

61. 61 Beta Stress Test Assumptions Regular Betas Stressed Betas Interest Paying DDA9%15% MMDA75%85% Savings30%60% Premier Savings80%90% Christmas Club30%60% Customer Repo80%90%

62. 62 Beta Stress Test - NII

63. 63 Average Life Stress Test Assumptions Regular Average Life Stressed Average Life Non Interest Deposits63 Interest Paying DDA52 MMDA32 Savings63 Premier Savings32 Christmas Club63 Customer Repo32

64. 64 Average Life Stress Test - EVE

65. 65 The Cost of Being Wrong  Impact to:  Earnings  Liquidity Position  Risk Profile (NII and EVE)

66. 66 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns

67. 67 Other Regulatory Concerns  Assumption inputs, documentation, and presentation  Stress testing betas, average lives, and prepayment speeds  Concern with market value losses  Setting policy limits  Back testing  Liquidity

68. 68 Agenda  Evaluating and Anticipating the Rate Environment  Understanding Your Current Risk Profile  Positioning the Balance Sheet  Estimating the Cost of Being Wrong  Considering Other Regulatory Concerns