Louisiana Bankers Association CFO Conference. M ay 21, 2 015

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1 Louisiana Bankers Association CFO Conference M ay 21, 2 015

2 Agenda Economic Value of Equity challenges Earnings at Risk issues Vendor contracts Bond portfolio monitoring Tax allocation agreements FHLB product update

3 Economic Value of Equity Practical limitations Reasonable treatment of assets Securities is market value really market value? Loans What is the market value of the loan portfolio? Nonmaturity deposit decay rates Surge / parked deposits Historical bank-specific decay rates vs. industry estimates Decay analysis issues # of accounts vs $ in accounts True historical analysis vs. recent closed accounts analysis

4 Deposit Decay Issues Recent closed account analysis Easier to perform Usually overstates churn Long-term historical analysis Much more complex analysis More likely to yield accurate historical results Historical data may not reflect future customer behavior Unique current rate environment Growth of bank since starting date (new markets, products)

5 Two Types of Customers Stable customers Accounts remain open for years or decades Balances grow over time as customers mature Relationship customer, not single-product user Churn customers Students Special-purpose accounts Abusers Analysis of recently closed accounts captures churn Application of close percentage in a decay model overstates runoff

6 May 2005 Nov 2005 May 2006 Nov 2006 May 2007 Nov 2007 May 2008 Nov 2008 May 2009 Nov 2009 May 2010 Nov 2010 May 2011 Nov 2011 May 2012 Nov 2012 May 2013 Nov 2013 May 2014 Nov % Deposit Balances vs. Number of Accounts Decay Analysis Issues 120% 100% 80% 60% 40% 20% # of Accounts $ Volume 0%

7 120.0% Actual # of Accounts vs. Generic Assumption 100.0% 80.0% 60.0% 40.0% DDA Savings NOW MM 20.0% Grand Total APC Default A APC Default B 0.0%

8 200.0% 180.0% Actual $ of Deposits vs. Generic Assumption 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% DDA Savings 40.0% NOW MM 20.0% APC Default A APC Default B 0.0%

9 Earnings at Risk Issues Surge deposit relocation Parallel vs. nonparallel rate shocks Independent review of IRR system, processes Magnitude of shocks Stress testing / sensitivity analysis

10 Jan-53 Jan-57 Jan-61 Jan-65 Jan-69 Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 Jan YoY and MoM Fed Funds Target Rate Changes

11 Easy EaR Sensitivity Analysis

12 Vendor Contracts Core IT system Why sign a 7-year contract? Do the math on termination fees Don t accept the standard termination language EFT / Bill Pay / Internet Banking Beware of the signing bonus No reason for huge termination fees unless huge value is received up front Use a consultant to negotiate major contracts

13 Bond Portfolio Monitoring Municipal bonds Prepurchase analysis / documentation Ongoing analysis Purchase pricing Beware of Greeks bearing gifts Resource:

14 Tax Allocation Agreements A holding company and its subsidiary institutions are encouraged to enter into a written tax allocation agreement. Such an agreement should: Require a subsidiary depository institution to compute its income taxes (both current and deferred) on a separate entity basis; Discuss the amount and timing of the institution's payments for current tax expense, including estimate tax payments; Discuss reimbursements to an institution when it has a loss for tax purposes; and Prohibit the payment or other transfer of deferred taxes by the institution to another member of the consolidated group.

15 Tax Allocation Agreements Agreements should: Clearly acknowledge that an agency relationship exists between the holding company and its subsidiary Insured Depository institutions (IDIs) with respect to tax refunds, not contain other language to suggest a contrary intent, and include the following paragraph or similar language: Resources: The [holding company] is an agent for the [IDI and its subsidiaries] (the "Institution") with respect to all matters related to consolidated tax returns and refund claims, and nothing in this agreement shall be construed to alter or modify this agency relationship. If the [holding company] receives a tax refund from a taxing authority, these funds are obtained as agent for the Institution. Any tax refund attributable to income earned, taxes paid, and losses incurred by the Institution is the property of and owned by the Institution, and shall be held in trust by the [holding company] for the benefit of the Institution. The [holding company] shall forward promptly the amounts held in trust to the Institution. Nothing in this agreement is intended to be or should be construed to provide the [holding company] with an ownership interest in a tax refund that is attributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agrees that this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes of the Institution.

16 FHLB-Dallas Product Update Cost of FHLB LOC has dropped to 5.5bp Great for securing public deposits Fluctuating balance LOC ($25MM+ / one depositor) Puttable and Callable Advances Put = FHLB s option to call Call = Bank s option to repay Expander Advance Increase amount of borrowing 2-10x, at one or more set dates Capped and Floored Advances Future Funding Locks (optional and mandatory) Symmetrical Prepay Feature CIP / EDP / EDP+