Presented at:

1
Surviving the Short Term and Excelling at the
Long Term
Presented By Jeffrey C. Gerrish Gerrish
McCreary Smith, Attorneys and Consultants

• Presented at
• Community Bankers Association of Illinois
• 35th Annual Convention Exposition
• Renaissance Hotel, Schaumburg, Illinois
• September 25, 2009

Gerrish McCreary Smith Consultants and
Attorneys 700 Colonial Road, Suite 200 Memphis,
Tennessee 38117 Telephone [phone] Facsimile
(901)-684-2339 www.gerrish.com jgerrish_at_gerrish.c
om
2
Series ofPertinent Questions

• Why are there interstate highways in Hawaii?
• If a man is in the woods by himself and disagrees
  with his wife, is he still wrong?
• Why is it called a hot water heater?
• Why do we drive on parkways and park on driveways?

Gerrish McCreary Smith Consultants and Attorneys
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Series ofPertinent Questions

• Why is it when youre driving and looking for an
  address, you turn down the volume on the radio?
• If con is the opposite of pro, is Congress
  the opposite of progress?
• Why did kamikaze pilots wear helmets?

Gerrish McCreary Smith Consultants and Attorneys
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Community Banks Surviving the Short Term and
Excelling at the Long Term

• The present assure the short term or there will
  be no long term
• Major trends for the future
• Focus on ways to thrive in the future

Gerrish McCreary Smith Consultants and Attorneys
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Surviving the Short-Term

• Look in the Rearview Mirror at 2008
• Likely Environment for the Rest of 2009
• Regulatory Issues

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Excelling at the Long-Term

• Maintaining Shareholder Value
• Focus on Profitability, Asset Quality and
  Liquidity
• Manage the Risks
• Plan for It

Gerrish McCreary Smith Consultants and Attorneys
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The Directors and Officers Real Job

• Allocate Managerial (Human) Capital and Financial
  Capital
• Enhance/Maintain Shareholder Value

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Allocate Managerial and Financial Capital

• All Decisions Involve Allocation of Managerial
  and Financial Capital
• Managerial Capital (Human Capital)
• Do we have adequate management for the long term
  goals of the institution?
• Financial Capital
• Does excess capital exist?
• How should it be allocated?

Gerrish McCreary Smith Consultants and Attorneys
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Primary Obligation To Enhance Shareholder Value

• Growing Earnings Per Share 8 to 10 a Year
• Return on Equity of 15 or Better
• Liquidity for the Shares
• Appropriate Cash Flow

Do these metrics still hold?
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Looking in the Rearview Mirror 2008

• Wild Ride National Economy
• Stock Market Freefall
• Unprecedented Job Losses
• Recession/Depression
• Multi-Billion Dollar Stimulus Plan for the
  General Economy

Gerrish McCreary Smith Consultants and Attorneys
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Bank-Specific Issues

• Capital Markets Meltdown
• TARP/CPP
• Regulatory Aggression
• Bank Liquidity Issues
• Asset Quality/Real Estate Valuation Freefall
• Bank Failures
• Merger and Acquisition Creativity
• The Haves and Have Nots

Gerrish McCreary Smith Consultants and Attorneys
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Bank-Specific Issues 2008

• Capital/Credit Markets Meltdown
• TARP/CPP/CAP
• Regulatory Aggression
• Bank Liquidity Issues
• Asset Quality/Real Estate Valuation Freefall
• Bank Failures
• Merger and Acquisition Creativity
• The Haves and Have Nots

Gerrish McCreary Smith Consultants and Attorneys
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Looking to the Short TermThe Rest of 2009

• Critical Needs
• Stabilization of Real Estate Values PPIP
• Liquidity Contingency Planning
• Capital Contingency Planning

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Looking to the Short TermThe Rest of 2009
(Contd)

• The Haves and Have Nots
• Increased Bank Failures
• Continued Regulatory Aggression
• Hunker Down Philosophy

Gerrish McCreary Smith Consultants and Attorneys
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Dealing with Short-TermRegulatory Aggression

• Hot Buttons for 2009
• Asset Quality
• Identification of Problem Assets
• Snowball Effect
• Liquidity
• Bank Failure Potential
• Contingency Planning
• Capital
• Scarce
• Debt versus Equity
• Capital Contingency Planning
• Strategic Opportunity Issues

Gerrish McCreary Smith Consultants and Attorneys
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Dealing with the Regulators

• Know Your Options Board is in Control
• Know Their Options
• Resolution/MOU
• CD/Written Agreement/Formal Agreement
• Civil Money Penalties
• Removal From Banking
• Miscellaneous
• Understand Your Banks Due Process Rights

Gerrish McCreary Smith Consultants and Attorneys
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Miscellaneous Regulatory Issues of Importance

• Publication of Enforcement Actions
• Appeal of Examinations
• Approval of Directors and Officers
• Prohibition of Parachute Payments
• Prohibition of Brokered Deposits

Gerrish McCreary Smith Consultants and Attorneys
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10 Commandments for Dealing with the Regulators

• Environment Has Changed
• Prepare the Board
• Identify Problems Yourself
• Treat Examination Personnel Fairly
• Note Your Disagreements in Writing
• Understand the Regulators Options
• Understand Your Options
• Work Toward a Win/Win Result
• Realize They are Not Your Friends
• Get Help If You Need It

Gerrish McCreary Smith Consultants and Attorneys
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10 Commandments for Dealing with the Regulators

• Environment Has Changed
• Prepare the Board
• Identify Problems Yourself
• Treat Examination Personnel Fairly
• Note Your Disagreements In Writing
• Understand The Regulators Options
• Understand Your Options
• Work Toward A Win/Win Result
• Realize They Are Not Your Friends
• Know When To Get Help If You Need It

Gerrish McCreary Smith Consultants and Attorneys
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Strategic Opportunities Long TermOnce Out of
the Trough

• When Mid 2010??
• Industry Trends for the Long, Long Term
• Consolidation Survival of Community Banks
• Continuous Community Bank Advantage
• Technology
• Ownership
• Erosion of Customer Confidence/Less Loyal
  Shareholder/Customer Base

Gerrish McCreary Smith Consultants and Attorneys
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Industry Trends -Consolidation of the Industry

• Unprecedented 30-year consolidation
• Only five remaining banks?
• Is there a future for community banks?

Gerrish McCreary Smith Consultants and Attorneys
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Industry Trends Competition for Products and
Services

• More Intense
• Niche Player
• Wal-Mart

Gerrish McCreary Smith Consultants and Attorneys
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Industry Trends Continuous Community Bank
Advantage

• Distinct Advantage in Small Business Lending and
  Agricultural Lending
• Strengths High Touch/Relationship/Trust
• Large Banks Stubbing Their Toes

Gerrish McCreary Smith Consultants and Attorneys
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Industry Trends Dominance of Technology

• Community Bank Advantages Regarding Technology
• Technology Strategy

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Industry Trends Ownership Will Be Important

• Most Survivors Sub S
• Likely Further Relaxation of the Rules
• Only Public Bank Holding Companies Those That
  Derive Significant Advantages

Gerrish McCreary Smith Consultants and Attorneys
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Customer/Stockholder Trends

• Less Loyal Shareholder/Customer Base
• Aging of the Population and the Changes Resulting
• Changing Demographics
• Flight to Quality/Customer confidence

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Product and Service/Line of Business Trends

• Allocation of Capital Purchase or Joint Venture
• All Things to all People?
• Target Changing Demographics, including Elderly,
  Hispanic/Latino, Un-banked and Women

Gerrish McCreary Smith Consultants and Attorneys
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Employee Trends

• Attract and Retain Human Capital
• 2009 Employee on Steroids
• Demand for Comparable Benefits of Mega Banks

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Regulatory Trends

• Federal Regulatory Consolidation?
• Systemic Regulator?
• Community Bank Regulator?
• Regulatory Burden
• The Good Old Days

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Todays Tough Environment

• Not for the Faint of Heart
• Pick Your Issue
• Risk
• Financial
• Regulatory
• Shareholder
• Market

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Excelling Over the Long Term

• Survive the Short Term
• Focus on Profitability, Asset Quality and
  Liquidity
• Enhancing Shareholder Value
• Manage the Risks
• Plan for It or It Will Not Happen
• Lets Get Back to the Basics

Gerrish McCreary Smith Consultants and Attorneys
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Focus On Profitability

• Understand the Secret Formula
• Revenue Expenses Profit
• Deconstruct the Income Statement
• Sources of Revenue and How to Increase
• Expenses and How to Reduce

Gerrish McCreary Smith Consultants and Attorneys
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Sources of Revenue and How to Increase

• Yield on Securities Portfolio
• Reduce Non-Earning Fixed Assets, e.g.
  sale/leaseback
• Increase Yield on Earning Assets
• Loan Floors
• Pricing Models
• Fee Income Increase
• New Lines of Business

Gerrish McCreary Smith Consultants and Attorneys
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Focus on Profitability

• Reduction of Expenses
• Loan Loss Reserve Snowball Effect
• Personnel
• Deposit and Other Funding Costs
• Wholesale vs. Retail Funding
• Increase Demand Accounts
• Charitable Contributions
• Miscellaneous Other Expenses

Gerrish McCreary Smith Consultants and Attorneys
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Focus on Profitability

• Reduction of Expenses
• Increased Deposit Insurance Assessment
• Loan Loss Reserve Snowball Effect
• Personnel
• Deposit and Other Funding Costs
• Wholesale vs. Retail Funding
• Increase Demand Accounts
• Charitable Contributions
• Miscellaneous Other Expenses

Gerrish McCreary Smith Consultants and Attorneys
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Excelling Over the Long Term

• Enhancing Shareholder Value
• Manage the Risks
• Plan for It or It Will Not Happen
• Lets Get Back to the Basics

Gerrish McCreary Smith Consultants and Attorneys
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Recognize the Need for Change

• Resistance to Change
• Change for Change Sake
• Open Mind/Willing Ear
• Establishment of Company Policy

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Plan for Success Action Planning

• Board Obligation
• Understand the Foundation
• Enhance Shareholder Value
• Prepare for Change
• Get Off Site
• Dont Waste Time
• Have Two Agendas
• Analyze Substantive Issues
• Use an Outside Facilitator (Shameless
  Self-Promotion)
• Create an Action Plan

Gerrish McCreary Smith Consultants and Attorneys
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Long-Term Capital Allocation Techniques to
Enhance Shareholder Value

• Structure Bank Holding Company
• Allocating Capital for Share Liquidity
• Dividend Policy
• Allocating Capital to Restructure Ownership
  Public/Private/Sub S
• New Lines of Business
• Technology to Improve Service
• Capital to Foster Relationship Building
• Attracting and Retaining Key Personnel
• Planning for the Future

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Conclusion

• Focus on the short term or there will not be a
  long term
• Short Term Profitability The Secret Formula
• Strategic Long Term Obligation Enhance
  Shareholder Value
• Long Term Success Take Advantage of Strategic
  Opportunities

Gerrish McCreary Smith Consultants and Attorneys
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Surviving the Short Term and Excelling at the
Long Term
Presented By Jeffrey C. Gerrish Gerrish
McCreary Smith, Attorneys and Consultants

• Presented at
• Community Bankers Association of Illinois
• 35th Annual Convention Exposition
• Renaissance Hotel, Schaumburg, Illinois
• September 25, 2009

Gerrish McCreary Smith Consultants and
Attorneys 700 Colonial Road, Suite 200 Memphis,
Tennessee 38117 Telephone [phone] Facsimile
(901)-684-2339 www.gerrish.com jgerrish_at_gerrish.c
om