Strategies for Mutual Banking Profitability Amid Economic Changes

1. A presentation to the Mutual Community Banking:Unprecedented Challenges, New Opportunities Nicholas Ceto, Jr.Chairman and Chief Executive OfficerCeto and AssociatesAtlanta, Georgia Robert Monteith, JR. Vice President March 1, 2012 Massachusetts Bankers Association Marlborough, Massachusetts

2. The Topic of increasing profitability is • Extremely broad and very timely • Discussion of three broad areas First: Current state of the economy and Government’s attempt to fix it Second: Current and historic profitability of mutual banks in Massachusetts Third: Suggestions to increase individual mutual bank profitability

3. Current State of the Economy

4. Current State of Economy U.S.Unemployment Situation

5. Current State of Economy U.S. Unemployment Situation 600,000 new jobs a month for 5 years to get to 5% again!

6. Current State of Economy Housing Industry

7. Current State of Economy Housing Industry • Home Prices • Average home value down 40% • Wealth lost in housing bubble: 7.1 Trillion • Reality Trac • Home prices will hit bottom late 2012 – early 2013

8. Current State of Economy Home Mortgages – 3rd Qtr 2011 52 million mortgages • 28 million in good shape • 24 million in trouble • 14.6 million underwater • 3.7 million delinquent • 5.7 million foreclosed There will be no housing boom in the near future

9. Current State of Economy Government Intervention Dodd–Frank Wall Street Reform and Consumer Protection Act • Signed into law on July 21, 2010 • “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end consumers from abusive financial services practices, and for other purposes” • 2,319 Pages

10. Current State of Economy Government Intervention Durbin Amendment • Gives the Federal Reserve the power to regulate and put a cap on debit card interchange fees. This will cost the larger banks roughly $9.4 billion annually, according to CardHub.com.

11. Current State of Economy Government Intervention Regulation E Modifications • Effective July 1, 2010 • $38.5 Billion Revenue in 2009 • 10% - 20% Projected Revenue Loss ($3.8 Billion - $7.7 Billion)

12. Current and Historical Profitability of Mutual Banks in Massachusetts

13. Non-Interest Income and Efficiency Ratios Massachusetts Mutual Banks Notes: Includes All Mutuals Source: FDIC Call Reports All U.S. Banks Notes: Includes Banks, Savings Banks, Thrifts, excluding Massachusetts Banks Source: FDIC Call Reports

14. Conclusion Community Banks have lower levels of non-interest income Community Banks have higher efficiency ratios than larger banks

15. Suggestions to Increase Mutual Bank Profitability

16. Increasing Bank ProfitabilityThe Profit Improvement Process Continuum Phase I Phase III Phase II

17. Increasing Bank ProfitabilityIntroduction

18. Increasing Bank ProfitabilityIntroduction A prudent, highly cost effective, incremental three (3) phase approach that could result in an increase of 20% or more in ROA…

19. Phase I • Revenue Optimization Increasing the level of earning assets, and non-interest and interest income…

20. Revenue OptimizationOverview Description • A strategic review of core bank products, ancillary services, interest rates and fees on both the asset and liability side of the balance sheet, with the objective of maximizing revenue or product profitability. Concentration • Non-Interest Income • Interest Income • Interest Expense • Non-Earning Assets Organizational Units • Retail Banking • Commercial Banking • Commercial, Consumer, & Mortgage Lending • Deposit Operations, Loan Operations and Administration

21. Revenue Optimization Examples • Deposit Characteristics • Deposit Rates, Fees, & Balance Requirements • Checking Accounts • Savings Accounts • Money Market Accounts • CDs • IRAs • Courtesy Overdraft Program • Cash/Treasury Management • Account/Commercial Analysis • Electronic Banking • ATM/Debit Cards • Cashier Checks • Money Orders • Check Cashing • Dormant Accounts • Collection Items • Stop Payment • NSF/OD Fees • Charge Back Fees • Wire Transfers • Night Depository Services • Safe Deposit Boxes • Waivers, Refunds, & Collection Rates • Un-posted Debits/Credits • Loan Processing • Loan Rates, Fees, & Costs • Auto/Motorcycle/Boat/RV • CD Secured/Savings Secured • Unsecured Term Loans • Overdraft LOC • Unsecured LOC/Credit Cards • 1st Mortgages (secondary market) • 1st Mortgages (portfolio) • 2nd Mortgages • HELOCs • Commercial Real Estate • Construction & Development • Commercial & Industrial • Commercial LOC • Skip-a-Payment Programs • Interest Rate Calculations • Secondary Market Activities • Miscellaneous Loan Fees • ATMs • Branch/ATM Cash Balances • Vault Cash Management • FRB Reserve Balances • FR2900 Reports • Correspondent Banking • Wealth Management/Trust Services Note: This is just a partial list of the areas typically reviewed. The number of areas reviewed depends on the size and complexity of thebank. However, based on experience, 300 - 500 areas are reviewed.

22. Revenue Optimization Increasing earning assets a couple of examples…

23. Revenue Optimization Retail Sweep Programs What is it? How does it work? • Change is completely invisible to the customer. After Checking Sub-Account Before Reservable Transaction Account Savings Sub-Account Non Reservable Reservable

24. Revenue Optimization Retail Sweep Programs Benefits FRB Balance Reduction of $3 Million Benefits in ($000)’s

25. Revenue OptimizationBranch & ATM Cash Management Managing Costs: Order Cost vs. Carry Cost • Order Cost = Transportation Costs • Delivery Schedules, Carrier Contracts • Carry Cost = Investment Costs • Investment Rates, Order Frequency On average, banks carry 15% - 25% excess cash, and could reduce armored car deliveries by 20% - 25%!

26. Revenue OptimizationBranch & ATM Cash Management Customer Usage Opportunity to Reduce Cash

27. Revenue OptimizationBranch & ATM Cash Management Benefits Cash Reduction of 25%, or $625,000 Benefits in ($000)’s

28. Revenue Optimization Increasingnon-interest income a couple of examples…

29. Revenue OptimizationLocal Market Analysis & Competitor Surveys

30. Revenue OptimizationHELOCs Annual Fee Closing Costs Overdraft Protection Transfer Grace Period & Late Fee Returned Loan Payment Fee Over the Limit Fee Subordination Agreement Fee Rate Floors Rate Discount Options Fixed Rate Options Stop Payments

31. Revenue OptimizationAccount Analysis Reserve Requirement Earnings Credit Rate FDIC Insurance Hard/Soft Charge (NSF, Stop Payment, Wires, etc.) Waivers Negative Collected Balances Service Charges • Monthly Service Charge • Debit per Check • Deposit Ticket • Deposit Item • Cash Processing • Cash Management

32. Revenue OptimizationDormant/Inactive Accounts Account Types • Timing • Service Charges • Balance Thresholds • Escheatment …Zzzzz

33. Revenue OptimizationWaivers, Refunds, & Collection Rates Hard Code Waivers Refunds & Reversals Miscellaneous Fee Schedule Free Services Collection Rates Bank Employees

34. Revenue OptimizationPhase I: Benefits • $1,000 - $2,000 per $1 million in assets For example, a $500 million bank should expect $500,000 - $1,000,000 in new recurring revenue annually! Other Benefits • No Funding Required • No Credit Risk • No Interest Rate Risk • Permanent and Recurring • Less Vulnerable to Economic Downturn

35. Decreasingnon-interest expense with vendor contract management and renegotiation. a couple of examples… Phase II • Contract Management

36. Contract ManagementOverview & Examples Primary Vendor Contracts • Core Processing • Item Processing • ATM/Debit Card Processing • Internet Banking & Electronic Bill Payment • Check Vendor • Telecommunications • Armored Car Carrier Considerations • Develop a System • Evaluate All Services • Evaluate Transactional Costs vs. Aggregate Costs • Consider Multiple Vendors • Negotiation Window • Market-based Target Pricing

37. Contract ManagementPhase II: Benefits • $125 - $250 per $1 million in assets For example, a $500 million bank should expect $62,500 - $125,000 in new recurring cost savings annually! Other Benefits • Reduce & Control Costs • Improve Service Quality & Vendor Performance • No Adverse Impact to Customers • Enhance Legal & Protection Verbiage

38. Decreasingnon-interest expense with organizational effectiveness and optimizing staffing levels. a couple of examples… Phase III • Organizational Effectiveness

39. Organizational EffectivenessOverview Concentration • Non-Interest Expense • Staffing • Marketing & Advertising • Information Technology • Legal • External Audit • Office Supplies & Postage • Organization Strategy & Design • Management Process • Risk Management • Operations Strategy • Service Delivery Strategy • Channel Utilization • Technology Utilization Organizational Units • Retail Banking • Commercial Banking • Deposit Operations & Loan Operations • Consumer & Mortgage Lending • Accounting & Finance • Trust, Insurance & Brokerage • Information Technology • Marketing • Human Resources

40. Organizational EffectivenessPeer Analysis

41. Organizational EffectivenessBenchmarking Study: Non-Interest Expense

42. Organizational EffectivenessBenchmarking Study: Non-Interest Expense

43. Organizational EffectivenessManagement Process ScoreCard 120 Best Practices 7 Categories of Management • Organization Structure • Organization Objectives • Planning • Policies & Procedures • Performance Standards & Goals • Communications • Management Reporting Board of Directors Internal Audit CEO OREO Management Operations Finance & ERM Lending Marketing Human Resources

44. Organizational EffectivenessRisk Management ScoreCard 250 Best Practices 8 Categories of Risk Management • Internal Environment • Objective Setting • Risk Identification • Risk Assessment • Risk Response • Control Activities • Information Communications • Monitoring

45. Organizational EffectivenessPhase III: Benefits • $500 - $1,000 per $1 million in assets For example, a $500 million bank should expect $250,000 - $500,000 in new recurring cost savings annually! Other Benefits • Optimum Staffing Levels • Stronger Organizational Alignment & Management Process • Better Controls • Shorter Cycle Times • Reduced Operating Losses • Minimized Internal & External Risks • Improved Process & Productivity • Higher Levels of Customer Satisfaction

46. Increasing Bank ProfitabilitySummary Summary of Potential Benefits for SAMPLE BANK Potential Pre-Tax Benefits, by Phase • Notes: • Phase I, Revenue Optimization benefits of new revenue based on $1,000 - $2,000 per million dollars in assets. • Phase II, Contract Management benefits of cost savings based on $125 - $250 per million dollars in assets. • Phase III, Organizational Effectiveness benefits of cost savings based on $500 - $1,000 per million dollars in assets.

47. Increasing Bank ProfitabilitySummary New Regulations & Costs • Reg E and Durbin Amendment alone will cost almost $16 billion in lost income annually or 18% of bank profits of $87 billion in 2010! • The Dodd-Frank bill (and others to come) will also add significantly to bank costs.

48. Increasing Bank ProfitabilitySummary Banks desperately need to do everything they can to replace the permanent loss of this revenue and look for new sources… while at the same time… become more efficient.

49. Increasing Bank ProfitabilitySummary Community Bankingis a key element in our nation’s financial system and we must do everything we can to preserve its unique place in our economy!! * * * * * * I hope these ideas are helpful to you in meeting these challenges! Thank You!

50. Contact Us Ceto and Associates 3325 Paddocks Parkway, Ste 400 Suwanee, GA 30024 1.866.227.1361 678.297.1151 (f) cetoinc@ceto.com www.ceto.com