MEMBER FINRA/SIPC

Financial Institutions Group

July 31, 2013

Confidential

Basel III Interim Final RuleOverview and Implications to

Community Banks

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♦ On July 9, after reviewing 2,600 comment letters, the Joint Agencies have individually and collectively approved the U.S. implementation of the Basel III Final Rule

♦ The Interim Final Rule establishes:• The definition of Capital & Minimum Capital Requirements• A refinement to risk-weighted assets• Implementation Timelines

♦ Key changes from the 2012 NPR’s incorporated into the final rule:• Non-Qualifying Capital Instruments and Tier-1 Capital – TruPS and cumulative perpetual

preferred stock issued prior to 5/19/10 by banking institutions with assets less then $15 Billion as of 12/31/09, certain SLHC’s (not exempt by insurance or commercial activities) or by mutual organizations formed as of 5/19/10, are grandfathered in Tier-1 capital− subject to a 25% limitation on inclusion in tier-1 capital elements, excluding non-qualifying instruments

and after all regulatory capital deductions and adjustments have been applied to tier-1 capital

• AOCI – non-advanced approaches institutions are provided a one-time option to filter certain AOCI components out of regulatory capital and must elect this option on the institution’s first Call Report, FR Y9C, or FR Y-9SP, filed after January 1, 2015 (by March 31, 2015)

• Mortgage Risk Weights – the final rule retains a 50% risk weight for prudently underwritten first lien mortgage loans that are not past due, reported as nonaccrual , or restructured and 100% risk weight for all other residential mortgages

• Implementation Time Frame – Advanced Approaches Banks are required to comply with the final rule starting January 1, 2014 and all other banking organizations and SLHCs that are not excluded from the final rule to comply starting January 1, 2015

The Final Rule Is Here And Slightly Less Onerous To Community Banks Than Anticipated

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♦ The final rule formally harmonizes minimum regulatory capital requirements and the prompt corrective action (PCA) frameworks by:• incorporating the new minimum capital ratios into the framework, • and aligning the definition of tangible equity for purposes of the critically undercapitalized PCA

category with the definition of Tier-1 capital

♦ Makes additional improvements to the quality of Regulatory Capital• Introduces stricter eligibility criteria for regulatory capital instruments going forward• Introduces Common Equity Tier 1 (CET1) capital and requires that most regulatory capital

deductions be made from it • Introduces the Capital Conservation Buffer• Eliminates the use of Credit Ratings by introducing two new methodologies in which to

determine appropriate risk weights for securitization exposures• Imposes stricter limitations on MSAs, DTAs and certain investments by way of regulatory

capital deductions− DTAs arising from temporary differences, MSAs and Significant investments in the capital of

unconsolidated financial institutions in the form of common stock are:• Each subject to an individual limit of 10% of CET1, and• In aggregate subject to a 15% limitation• Amounts not deducted due to either the 10% or 15% thresholds are assigned a 250% risk-weight

• Revises risk weights for past due loans, HVCRE, some equity exposures, and other selected asset classes

The Final Rule Also Introduces Major Changes From Current General Risk-Based Capital Rule

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♦ On July 2, 2013, the Federal Reserve Board approved a final rule that implements changes to the regulatory capital framework for all banking organizations

♦ Those provisions deemed most relevant to smaller, non-complex banking organizations (Community Banks) include:• Higher capital ratios with emphasis on

higher capital content • More restrictive capital elements and a

refinement to the Definition of Capital• Establishes a Capital Conservation Buffer• Increases Risk-Weighting for select assets

♦ Key exclusions (wins) for Community Banks (provisions that differ significantly from the June 2012 NPR’s):• No change to the treatment of AOCI in

regulatory capital (retains its exclusion)• No change to the risk-weighting of

residential mortgages based on LTV and lien position (existing RWA’s retained)

• Certain Trust Preferred Securities (securities issued prior to May 19, 2010 by smaller institutions) retain Tier-1 eligibility

♦ Non-Advanced Approaches institutions will need to comply by January 1, 2015

Basel III Final Rule on Enhanced Regulatory Capital Standards – Implications for Community Banking Organizations

♦

♦

♦

♦

Implications for Community Banking Organizations

__________1 The final rule includes transition periods to help ease potential burden; community banking organizations must begin complying with the rule on January 1, 2015. 2 Currently, banking organizations with the highest supervisory composite rating are subject to a 3% minimum leverage ratio; generally, other community banking organizations are subject to a 4% minimum leverage ratio.3 HVCRE is a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction of real property, unless the facility finances: (1) one- to four-family residential properties; (2) certain community development projects; (3) the purchase or development of agricultural land; or (4) commercial real estate projects that meet the criteria in the rule, including criteria regarding the loan-to-value ratio and capital contributions to the project

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Basel III Will Affect EVERYONE, In More Ways Than You Think

INSTITUTIONS SUBJECT TO PROVISIONS: BY SIZE< $500 million > $500M - $15 BN $15 BN - $250 BN > $250 BN

Applicability & Key FeaturesBHC's Yes - some exclusions Yes Yes YesBanks Yes Yes Yes YesSLHC's (excl. Ins. and Comm'l activities) Yes Yes Yes YesThrifts Yes Yes Yes YesAOCI Inclusion in Regulatory Capital Opt-out feature Opt-out feature Opt-out feature Advanced Approach BanksPhase Out TruPS Grandfathered Grandfathered Yes - 2 year Yes - 2 yearNew Issuance of TruPS No No No NoCapital Conservation Buffer Yes Yes Yes YesCountercyclical Captial Buffer No No Advanced Approach Banks Advanced Approach BanksSupplementary Tier-1 Leverage Ratio No No Advanced Approaches Rule 1 Yes

Risk-WeightingStandardized Approach - RWA's Yes Yes Yes NoAdvanced Approach - RWA's No No Advanced Approaches Rule 1 Yes

Advanced Approaches and Market Risk InclusionAdvanced Approaches Institutions subject to Institutions subject to Risk Based Capital Rule No No Advanced Approaches Rule 1 Advanced Approaches Rule 1

Market Risk Capital Rule No No or market risk rules 2 or market risk rules 2

Selected Additional Regulation & OversightSIFI surcharges No No Pending (Top 20) Pending (Top 20)Stress Testing No Yes - Banks > $10 BN Yes YesEnhanced Supervision No No > $50 BN YesCapital Review - CCAR No No No Yes1 advanced approaches organizations generally are those with consolidated assets of at least $250 BN or consolidated on-balancesheet foreign exposures of at least $10 BN2 Market risk banking organizations generally are those with aggregate trading assets and trading liabilities equal to at least 10% oftotal assets or $1 BN

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Transition Arrangements Are Gradual In An Effort To Allow Banks Time To Prepare, Adapt And Comply

___All dates are as of January 1; All ratios in support of the “adequately capitalized” statusCapital Conservation Buffer (“CCB”) subject to tiered capital restrictions during phase in period; lowest capital ratio triggers restrictions. Under the final rule, the Capital Conservation Threshold (“CCB”) would not apply to the Leverage ratio, only to the regulatory ratios that include RWAs in their denominator. The CCBthreshold is only breached when, by rule, it falls under 2.50% (once fully implemented) of risk weighted assets

Phase-in arrangements for non Advanced Approaches Institutions (shading indicates transition periods)

2015 2016 2017 2018 2019 and Beyond

Minimum Common Equity Tier-1 ("CET1") Capital Ratio 4.50% 4.50% 4.50% 4.50% 4.50%Capital Conservation Buffer ("CCB") n/a 0.625% 1.250% 1.875% 2.500%Minimum Common Equity Plus Capital Conservation Buffer 4.50% 5.13% 5.75% 6.38% 7.00%

Minimum Tier 1 Risk-Based Capital (plus CCB) 6.00% 6.00% 6.00% 6.00% 6.00%Capital Conservation Buffer ("CCB") n/a 0.625% 1.250% 1.875% 2.500%Minimum Tier 1 Risk-Based Ratio Plus Capital Conservation Buffer 6.00% 6.63% 7.25% 7.88% 8.50%

Minimum Total Risk-Based Capital 8.00% 8.00% 8.00% 8.00% 8.00%Capital Conservation Buffer ("CCB") n/a 0.625% 1.250% 1.875% 2.500%Minimum Total Capital Plus Conservation Buffer 8.00% 8.63% 9.25% 9.88% 10.50%

Leverage Ratio - New Tier-1 Capital/Average Consolidated Assets 5.00% 5.00% 5.00% 5.00% 5.00%

Capital Conservation Buffer ("CCB") 0.000% 0.000% 0.000% 0.000%

Minimum Leverage Ratio Plus Capital Conservation Buffer 5.00% 5.00% 5.00% 5.00% 5.00%

Phase-in Of Deductions & Adjustments From CET1 (including amounts exceeding the limit for DTAs, MSRs and financials) 40% 60% 80% 100% 100%

Capital Instruments That No Longer Qualify As Non-Core Tier 1 Capital or Tier 2 Capital

Grandfathered for Banking Organizations < $15 BN; Phased out by 1/1/16 for Banking Organizations > $15 BN

New Risk-Weighted Asset Calculations - Standardized Approach Becomes Effective

AOCI Opt-Out Determination (first regulatory filing) 3/31/2015

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Capital Conservation Buffer (“CCB”) Digested

♦ Types of payments that are restricted if a bank does not satisfy the Capital Conservation Buffer requirement:• Dividends• Share buybacks • Discretionary payments on Tier 1

instruments • Discretionary bonus payments

♦ Eligible Retained Income: The most recent four quarters of net income preceding the current calendar quarter, net of any capital distributions, and certain discretionary bonus payments

♦ Agencies maintain the supervisory authority to impose further restrictions and / or require capital commensurate with the bank’s risk profile

♦ The CCB is calculated based on the lowest of all three (CET1, Tier-1, Total Capital) risk –based regulatory capital ratios• It does not utilize the Leverage Ratio in its

calculation

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♦

_____Source: FDIC; Basel III Overview

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MINIMUM REGULATORY CAPITAL REQUIREMENTS 1 PROMPT CORRECTIVE ACTION CLASSIFICATIONSCurrent Final Rule Comments Current Final Rule Comments

CET1 / RWA's Well Capitalized Aligns "minimum > 6.5% Refocuses capital ratio( NEW ) Adequately Capitalized N/A 4.5% regulatory capital N/A > 4.5% management to:

Undercapitalized requirements" with < 4.5% "adequately capitalized" plusSignificantly Undercaptialized "PCA" classifications < 3% CCB + management cushion

Tier 1 Capital / RWA's Well Capitalized 6% > 8%Adequately Capitalized 4% 6% " " " 4% > 6% " " "Undercapitalized < 4% < 6%Significantly Undercaptialized < 3% < 4%

Total Capital / RWA's Well Capitalized 10% > 10%Adequately Capitalized 8% 8% " " " 8% > 8% " " "Undercapitalized < 8% < 8%Significantly Undercaptialized < 6% < 6%

Leverage Ratio Well Capitalized Not Dependant Upon 5% > 5%(under new definition Adequately Capitalized > 4% (or3%) > 4% Supervisory Rating 4% > 4% " " "of Tier-1 Capital) Undercapitalized Implements Proposed <4% < 4%

Significantly Undercaptialized def. of Tier-1 Capital <3% < 3%Critically Undercapitalized Category

Tangible equity to total assets ratio <

2%

Tangible equity to total assets ratio <

2%

Tangible equity defined as Tier-1 Capital plus non-

tier 1 perpetual preferred stock

The Final Rule Will Force Management To Consider “Adequately Capitalized” plus the “CCB” plus a “Cushion” In Managing Capital

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Review/Preview: Tier 1 And Tier 2 Capital Elements (Basel III)

HC Line of Credit

Subordinated Debt(+ / - Warrants)

Trust Preferred &Cumulative Preferred

Non-CumulativePerpetual Preferred

Non-CumulativeConvertible

Preferred

CommonStock

Tier 2Tier 1

High Cost

FinancialFlexibility

High

Low

Low Cost

Impact of Basel III: more capital and a lot more TCE

Additional Tier 1 if non-cum. perpetual

preferred

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Regulatory Capital Components

REGULATORY CAPITAL COMPONENTS

Current Definition / Instruments Under New Rules: Definitions / Instruments

CET1 No Specific Definition Mostly retained earnings and common stock that meets specified eligibility criteria (plus limited amounts of minority interest in the form of common stock) less the majority of the regulatory deductions

Tier 1 Capital Common Stock (plus related surplus) Unchanged

Retained Earnings Unchanged

Non-Cum. Pref. Stock and related surplus Unchanged, but instruments must meet new eligibility criteria

Cumulative Pref Stock Not permitted going forward, but grandfathered securities are permitted

Trust Preferred Securities (for BHC's) Not permitted going forward, but grandfathered securities are permitted

Limited Amounts of Minority Interest In the form of additional tier-1 capital instruments

Less the majority of regulatory deductions Less certain deductions

Tier 2 Capital Certain capital instruments (Sub. Debt) and limited amounts of ALLL

Generally unchanged for most banking organizations with respect to subordinated debt and ALLL.

However, there are new eligibility criteria that tier-2 capital instruments, including subordinated debt, must meet

Less applicable deductions Less applicable deductions

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Deductions, Limitations and Adjustments

Deductions

♦ Goodwill

♦ Deferred Tax Assets (NOL & Tax Credit Carryforwards)

♦ Other Intangibles (except for MSAs)

♦ Gain on Sale of Securitization Exposures

♦ Certain investments in other unconsolidated financial institutions’ capital instruments

Adjustments

♦ Deduct unrealized gains and add unrealized losses on cash flow hedges

Threshold Deductions

♦ Deduct amounts > 10% individually or > 15% aggregate of Common Equity Tier-1 Capital:• Mortgage Servicing Assets (MSAs)• Deferred Tax Assets related to

temporary timing differences• Significant investments in other

unconsolidated financial institutions’ common stock

Amounts not deducted are generally subject to a 250% Risk Weight

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In Addition To A Narrowing Of Capital Instrument Qualifications, New Deductions, Limitations and Adjustments Make It Harder To Comply

_____Adjustments not deducted from regulatory capital would be subject to higher risk weighting

REGULATORY DEDUCTIONS AND ADJUSTMENTS AND LIMITATIONSCurrent General Risk-Based

Capital Rule Basel III Final Rule Comments Time Line

Regulatory Deductions Goodwill; other intangibles; DTA's above certain levels and MSA's above certain levels

Goodwill, Other Intangibles, DTAs that arise from NOLs and tax credit carryforwards (above certain levels), securitization gain-on-sale, defined benefit pension fund net asset (for banking organizations that are not insured depository institutions), investments in a banking organization's own capital instruments, MSAs (above certain levels), DTAs arising from temporary differences that the banking organization could not realize through NOL carrybacks, and certain investments infinancial institutions

Each are limited to 10% of CET1 and in combination are limited to 15% of CET1. Limited assets that are not deducted are subject to 250% risk weighting

1/1/2014 - 1/1/2018 (most are not subject to a transition period; advanced approaches start in 2014, others as applicable start in

2015)

Regulatory Adjustments

Advanced approaches and other institutions that have not made the AOCI opt-out election

Current adjustments include the neutralization of unrealized gains and losses on AFS debt securities for regulatory capital purposes

For banking organizations that make the one-time, irrevocable AOCI opt-out election, adjustments include the neutralization of unrealized gains/(losses) on AFS debt securities for regulatory capital purposes

Upon the filing of the first regulatory report

after adoption on January 1, 2015

Cash Flow Hedges Deduct unrealized gains and add unrealized losses on cash flow hedges

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Risk Weighted Assets Were Moderately Affected – Only Certain Loan Categories and Unused Commitments Drift Higher

Loan Type Current Risk Weight Final Rule

Mortgage Loans 50% 50%- first lien, prudently underwritten, owner-occupied or rented, not 90 days or more past due or on non-accrual, not restructured or modified

Consumer Loans 100% 100%

Construction Loans 50% or 100% 50% - Presold with qualified purchase contract (100% if cancelled during constr.) - Statutory multifamily mortgages meeting prescribed payment history LTV, Amortizaiton & interest payment history

HVCRE 100% 150%(acquisition, development, & construction loan exposures unless the loan is for a 1-4 single family residential propertyor low LTV CRE and the borrower has contributed > 15% of the appraised completion value)

Commercial LoansCorporate Exposures 100% 100%Qualifying Broker-Dealer 20% 100%HVCRE 100% 150%Not Assigned 100% 100%

Off-Balance Sheet CommitmentsUnused Portions of commitments 0% CCF 0% CCFthat are unconditionally cancelable (Credit Conversion Factor "CCF")by banking organization

Commitments with original maturity 0% CCF 20% CCF≤ 1 year; not cancelable

Commitments with original maturity 50% CCF 50% CCF> 1 year; not cancelable

Off-balance sheet guarantees, repurchase agreements, securities 100% CCF 100% CCFlending or borrowing transactions, financial standby letters of credit, forward, agreements & other similar exposures

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Basel III Also Addresses Risk Weighted Assets and The Denominator By Increasing Risk Weightings On Key Assets And ExposuresCategory Current Risk Weight Risk Weight Under New Capital RuleClaims on qualifying securities firms 20% 100%CRE 100% Unchanged; 150% for HVCRE qualification

HVCRE is defined as a credit facility, prior to permanent financing, that finances or has financed the acquisition, development, or construction ("ADC") of real property, unless the facility finances (1) 1-4 family residential properties; (2) certain community development projects; (3) the purchase or developemnt of agricultural land; or (4) commercial real estate projects that meet the criteria in the rule, including criteria regarding the LTV ratio and capital contributions to the project.

Past-due exposures Generally does not change upon delinquency or classified as non-accrual 150% for the non-guaranteed portionMortgage-backed securities (MBS), Asset-backed (ABS), and structured securities

Two general approaches; (1) ratings-based approach and (2) gross-up approach

Two general approaches; (1) gross-up approach and (2) simplified supervisory formula approach. May also choose to risk weight a securitization exposure at 1,250%

Equity exposures 100% or incremental deduction approach for nonfinancial equity investments

Risk weights ranging between 0% and 600% depending on the entity and whether the equity is publically traded

20% floor on investment fund holdings. unchangedTwo approaches available

Equity exposures to investment funds (1) risk weight at the highest risk weight investment the fund is permitted to hold

Unchanged - now called the Simple Modified Look-Through Approach

(2) a banking organization may assign risk weight on a pro rata basis based on the investment limits in the fund's prospectus

Unchanged - now called the Alternative Modified Look-Through ApproachA third treatment (Full Look-Through Approach) has been intruduced and it risk weights each asset of the fund (as if owned directly) and multiplies by the banking organization's proportional ownership in the fund

0% for unused portion of commitment with original maturity of one year or less, or which is unconditionally cancellable at any time;

0% for the unused portion of a commitment that is unconditionally cancellable by the banking organization20% for the unused portion with an original maturity of one year or less that is not unconditionally cnacellable

20% for self-liquidating, trade-related contingent items;Conversion factors for off-balance sheet items

50% for the unused portion of a commitment with an original maturity of more than one year that is not unconditionally cancellable;

Unchanged

50% for transaction-related contingent items (performance bonds, bid bonds, warranties, and standby letters of credit);

Unchanged

100% for guarantees, repurchase agreements, securities lending and borrowing transactions, financial standyby letters of credit, and forward agreements and certain credit-enhancing representations and warranties that are not securitization exposures.

Unchanged

_____Selected assets and exposures receiving adjustments to their risk weighting

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Basel III Also Addresses Risk Weighted Assets and The Denominator By Increasing Risk Weightings On Key Assets And Exposures

Category Current Risk Weight Risk Weight Under New Capital RuleDerivative Contracts Conversion to on-balance sheet amount based on current exposure plus

potential future exposure and a set of conversion factorsUnchanged

50% risk weight cap. NO risk weight cap.Guarantees Generally recognizes guarantees provided by central governments, GSEs,

PSEs in OECD countries, multilateral lending institutions, regional development banking organizations, U.S. depository institutions, foreign banking organizations, and qualifying securities firms in OECD countries

Recognizes guarantees from eligible guarantors: sovereign entities, certain international organziations, such as the BIS, FHLBs, Farmer Mac, a depository institution, a bank holding company, an SLHC, a foreign banking organziation, a qualifying central counterparty banking organization, or certain entities that have investment grade debt.

Substitution approach that allows the banking organization to substitute the risk weight of the protection provider for the risk weight ordinarily assigned to the exposure

Unchanged

Collateralized transactions Recognize only cash on deposit, securities issued or guaranteed by OECD countries, securities issued or guaranteed by the U.S. government or a U.S. government agency, and securities issued by certain multilateral development banks.

The new rule provides two approaches for recognizing a broader range of financial collateral.

Substitute risk weight of collateral for risk weight of exposure, sometimes with a 20% risk weight floor

Unchanged (now called the Simple Approach)

Includes a new treatment (Collateral Haircut Approach) tha tis available only for eligible margin loans, repo-style transactions, and collateralized derivative contracts.

MSAs, certain DTAs arising from temporary differences, and certain significant investments in the common stock of unconsolidated financial institutions

MSAs and DTAs that are not deducted and investments in common stock are subject to a 100% risk weight

Items not deducted from CET1 are subject to a 250% risk weight

_____Selected assets and exposures receiving adjustments to their risk weighting

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High Volatility Commercial Real Estate “HVCRE” Digested

_____Source: FDIC; Basel III Overview

*ADC loans meeting certain criteria are not “HVCRE”:♦ LTV is at or below maximum supervisory LTV; and

♦ Borrower has contributed at least 15% of “as completed” appraised value in cash or unencumbered readily marketable assets; and

♦ Borrower contributed capital is contractually required to remain throughout the project life

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Fixed Income Investment Securities – Management Must Understand The Complexity of the Security, Monitor, and Report On It

__________Source: FDIC, Basel III Overview

If management is unable to demonstrate

this understanding, regulators may require a bank

to assign the exposure a risk

weight of 1,250%

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Equity Investment Securities – Equity Risk Weights Could Drift Higher

♦ To the extent that the aggregate adjusted carrying value of certain equity exposures does not exceed 10% of the bank’s total capital, a 100% risk weight may be applied

♦ For equity exposures to investment funds as well as investments in a separate account, such as bank-owned life insurance, one of three risk-weighting approaches are available• Full Look-Through Approach, • Simple Modified Look-Through Approach• Modified Look-Through Approach__________

Source: FDIC, Basel III Overview

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How Will Community Banks Respond to Basel III?

♦ Regulators are permanently reducing leverage (and therefore equity returns) for the banking sector, absent a reaction from the industry

♦ Banks have three paths to choose from:• Do nothing• Alter pricing

− Pricing on affected asset classes will / should rise or returns on risk-adjusted assets will drop, causing reduced investor demand for bank equities

• Alter products and services− A response by banks by implementing a re-allocation of lending to B-III friendly asset

classes (as opposed to a pricing response)− Higher risk weightings on product and business line profitability – capital allocation, cost of

capital, ROIC, EVA by business line will affect the business model− Certain collateralized Real estate lending classes are now affected (high-volatility CRE and

certain AD&C loans) – may cause a change in the business model

♦ Changes will occur to business models, large and small, causing real strategic discussion at the Board level

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Community Banks (Especially) Will Feel The Hard And Soft Costs Of Compliance By Retooling The Back Office In Preparing For Its First Exam

♦ Banking Operations• Complexity in capital calculations will put pressure on operations groups for some

time− Over a dozen deductions and adjustments, bifurcation of hedging gains and losses,

securities risk weighting changes based on credit performance and detrimental effects of the CCB if an institution falls short (restrictions on dividends, repurchases and some bonuses)

• Significant enhancement to the required analysis and tracking of the investment portfolio

• How to combat this … Systems, MIS, Systems, Data Enhancements, Systems, Reporting, Systems, Policies, Systems, Procedures, Systems

• Increased workload on existing staff – a need for additional staff• Regulatory filings will be a challenge initially and may change to accommodate Basel

III requirements• SEC and regulatory reporting policies and procedures will need to be re-vamped

(auditors / regulatory examiners will be interested in this)• Terminology, concepts and awareness throughout all levels of staff heightened• Enhancements to regulatory reporting data requirements: capital and liquidity• Anticipated increased depth in examinations and in the calculations themselves

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Banks And Their Culture Will Be Nudged One Step Closer To An Enterprise Risk Management (“ERM”) Framework

♦ Corporate Culture• Increase in overall expectations for the sophistication of both management and the

Board• Integrations of risk and finance and a convergence of the responsibilities of the CFO

and CRO on strategic objectives• Renewed emphasis on risk management and yet another step toward a true ERM

culture - covering all business lines and markets• Given the real impact of the CCB, policies and procedures will need to be revamped,

budgeting and forecasting processes enhanced and dividend policies revisited• Stress testing – not a requirement but we let the cat out of the bag and regulators will

appreciate and possibly expect stress tests – absent a stress test, “sensitivity analysis” is a great way to bridge this gap and remain aware of potential policy breaches

• Banks that choose to use B-III as a tool for success rather than “another compliance cost” will get ahead in the long run

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…And The Net Impact

More Capital Required

Less Qualifying Capital Available

Higher Risk Weighting

Lower ROE’s

Less Leverage

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There Are A Lot Of Changes Coming - Be Informed, Be Prepared, Be Proactive and Be Strategic In Your Thinking

♦ Basel III, for Community Banks, may trump Dodd-Frank and other recent changes to the regulatory structure of our industry as it will impact us all and it will be painful

♦ Begin to prepare as the phase-in period (January 1, 2015) will get here sooner than we think and regulators may be ready before we are

♦ Evaluate the impact of each provision on your business plan and your business model; everyone else is, and don’t be last to adjust as needed

♦ Understand and plan for the higher capital requirements and evaluate your capital structure if needed. If access to capital is required, start planning early as the capital markets have not completely thawed as of this point in the rebound

♦ Consider exiting products or business lines that don’t cover their cost of capital

♦ Stay alert to opportunities that arise from these dramatic changes; larger institutions will invariably shed business lines at attractive prices

♦ Evaluate your ability to partner up with institutions who can’t, won’t and couldn’t weather Basel III. Size and scale has never been more important than today

♦ And remember our 4 favorite numbers …

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Some Key Numbers

8 / 8 / 10 / 12( CET1 / Leverage / Tier-1 / Total Capital Ratios )

♦ According to Basel Staff:• Common Equity Tier 1 Ratio Compliance:

− > 95% of BHC’s with less than $10 BN in Assets would meet the 4.5% CET1 requirement− 100% of BHC’s over $10 BN in Assets already meet the 4.5% CET1 requirement

• CET1 Plus CCB:− 90% of BHC’s < $10 BN in Assets comply with the 4.5% + 2.5% = 7.0% threshold− 95% of BHC’s > $10 BN in Assets comply with the 4.5% + 2.5% = 7.0% threshold

♦ According to Griffin:• Griffin maintains a Basel III Assessment tool in which compliance with final capital thresholds

can be assessed on an institution by institution basis• Based on preliminary analysis, we anticipate compliance with both the CET1 ratio and the CCB

threshold, by regionally domiciled institutions, will meet or exceed the national estimates • Griffin would be pleased to run and review an assessment for you

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• Former CFO at Sovereign Bancorp and Sovereign Bank where at different times had primary responsibility for the corporate development and M&A, treasury, financial accounting, SEC compliance, risk management, investor relations, tax and strategic planning functions

• Worked in corporate development and accounting policy at the former Meridian Bancorp and was formerly with Price Waterhouse

• While at Sovereign, instrumental in executing over 20 acquisitions, with over $57 billion in assets and $39 billion in deposits, and executed over $4 billion in debt and equity offerings

Griffin Contacts

• Uses his banking experience to assist clients in capital planning and public and private placements of debt and equity

• Provides strategic planning services to banks and depository institutions and assists them in assessing investment risk and managing banks’ assets and liabilities

• Former executive at Sovereign Bank specializing in asset/liability management, capital planning, regulatory and rating agency concerns, forecasting and modeling

MJ@griffinfingroup.com610-478-2044

MRM@griffinfingroup.com610.478.2106

Matthew JozwiakVice President - Financial Institutions

Mark R. McCollomSenior Managing Director, Co-Head - Financial Institutions

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Disclosure Statement

This presentation is not considered complete without the accompanying oral presentation made by Griffin Financial Group (“Griffin”).

Any projections or recommendations contained herein involve many assumptions regarding trends, company-specific operating characteristics, financial market perceptions and the general state of the economy as well as internal factors within management control, such as capital investment. As such, any projections contained herein represent only one of an infinite number of outcomes and should not be construed as the only possible outcome.

The information contained in this presentation and attached exhibits have been obtained from sources that are believed to be reliable. Griffin makes no representations or warranties as to the accuracy or completeness of the information herein.

All terms and conditions contained herein are based upon current market conditions and are estimates based upon prevailing market rates. Any or all estimates may or may not change as market conditions dictate. As such, any or all terms and conditions presented herein are preliminary in nature and should not be construed, either in whole or in part, as a commitment to perform or provide any specific services. Any and all services that may be provided by Griffin or any other entity referred to in this discussion outline will be contingent upon the signing of a proposal or contract.

Griffin Financial Group, Inc. does not provide legal, tax or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, and was writing to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of Griffin Financial Group, Inc. should obtain their own independent tax and legal advice based on their particular circumstances.