Understanding the Full Lending Performance Cycle

1. FULL LENDING PERFORMANCE CYCLE John Robertson Noah Coonce, Emprise Bank

2. Confidential & Privileged DocumentConfidential & Privileged Document Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring & ALLL Asset & Liability Management Business Analytics Full lending performance cycle

3. Confidential & Privileged DocumentConfidential & Privileged Document The power of pricing • An increase of 2.5% in loan interest income equals a gain of more than 7% in net income • $1 in added pretax income = almost $3 in added earnings • A 2.5% decrease in operating expenses would increase net income by 2.5% • Pricing is almost three times as powerful as expense reduction in potential impact on earnings

4. Confidential & Privileged DocumentConfidential & Privileged Document Why has the interest in pricing amplified? • Strategic reasons – Margin compression – Relationship management – Risk management – Performance measurement – Return on shareholders equity – Business and marketing strategy

5. Confidential & Privileged DocumentConfidential & Privileged Document The importance of pricing • Provides consistency • Provides a scale • Provides risk-adjusted view • Enhances lender knowledge • Enables profit-based reporting • It’s indifferent

6. Confidential & Privileged DocumentConfidential & Privileged Document Truths about pricing • Regulations will heighten competitive pressures • CECL will dictate how much risk to consider • Know the return you’re getting – back of the napkin isn’t good enough • Additional production can have not only a positive influence, but also a negative effect on the whole portfolio

7. Confidential & Privileged DocumentConfidential & Privileged Document What fuels the return results • Interest rate • Cost of funds/cost of deposits (FTP) • Non-interest income • Non-interest expense • Risk expense • Spreads – Gross margin – Net interest margin – Net income

8. • Interest rates • Non-interest income • Cost of funds • Non interest expense • Risk premium • Net income • ROA • ROE Calculating a return - single loan Totals Average assets % O/S balance 100,000.00 Interest rate (V 100) 4.25% Interest income 4,250.00 4.25% Non-interest income 1,000.00 1.00% Gross revenue 5,250.00 5.25% Cost of funds 1,330.00 1.33% Non-interest expenses 1,932.00 1.93% Risk expense 0.3000% 300.00 0.30% Total expenses 3,562.00 3.56% Profit before tax 1,688.00 1.69% Federal tax (34.0%) 573.97 0.57% State tax (2.0%) 33.76 0.03% Total tax 607.68 0.61% Profit after tax 1,080.32 1.08% ROA 1.08% Average assets 100,00.00 ROE (8.0000) 14.14 ROA target 1.50 Additional fees 576.00 Additional basis points 57.60 Proposed Loan Profitability Detail Report Loan: Proposed Type: Commercial LOC Grade: Average

9. Confidential & Privileged DocumentConfidential & Privileged Document Critical measures • Return on Assets (ROA) – Net income / average asset • Return on Equity (ROE) – ROA / equity • Risk-Adjusted Return on Capital (RAROC)

10. Confidential & Privileged DocumentConfidential & Privileged Document Funds Transfer Pricing (FTP) • A method used to individually measure how much each source of funding is contributing to overall profitability. • The FTP process is most often used as a means of outlining the areas of strength and weakness within the funding of the institution.

11. Confidential & Privileged DocumentConfidential & Privileged Document Relationship pricing Relationship Profitability Loans Account Number Type Rpt Av OS Rate COF Grade Fees Total Exp Profit ROA ROE Proposed C&I $272,176 3.25% 0.30% 3 - $2,566 $1,672 0.61% 8.19% Deposits Account Number Type Rpt Av OS Rate FTP Fees Total Exp Profit ROL 9875641 DDA $10,000 0.00% 5.25% - - $317 317.00% Relationship Total $272,176 - $2,566 $1,989 0.73% 9.75%

12. Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring CECL & ALLL Business Analytics Credit, closing, capture the data

13. Confidential & Privileged DocumentConfidential & Privileged Document Manage simple to complex • Credit analysis • Statement spreading and financial analysis • Exception tracking • Closing requirements • Capture and save the data forever

14. Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring CECL & ALLL Business Analytics Credit monitoring

15. Confidential & Privileged DocumentConfidential & Privileged Document What do we monitor? No Change Good quality Poor quality Origination Charge off Deterioration Salvage? Workout?

16. Confidential & Privileged DocumentConfidential & Privileged Document Micro to macro • Exception monitoring • Portfolio overview • Flags/triggers/alerts • Proactive management • Portfolio concentrations • Stress testing

17. Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring CECL & ALLL Business Analytics Risk exposure

18. Confidential & Privileged DocumentConfidential & Privileged Document Protect the stakeholder - regulators • Capital adequacy • CECL and the ALLL

19. Capital evolution

20. Confidential & Privileged DocumentConfidential & Privileged Document Current Expected Credit Loss (CECL) • Replace the incurred loss with a predictive loss approach • CECL would require institutions to use – Historical information – Consider current conditions – Use reasonable and supportable forecasts to estimate expected shortfalls over the life of a loan – Create a consistent measurement approach for all financial assets

21. Confidential & Privileged DocumentConfidential & Privileged Document Loss Rate Methods – Today & Future Current U.S. GAAP CECL Unadjusted historical charge-off experience Qualitative adjustments Loss emergence period Loan category balance ASC 450 (FAS 5) ALLLL Annual Lifetime Unadjusted historical charge-off experience Qualitative adjustments Loss emergence period Loan category balance CECL ACL (ASC 326)

22. Confidential & Privileged DocumentConfidential & Privileged Document CECL Methodology considerations • Loss Rate Methods – Snapshot/Open Pool – Remaining Life – Vintage • Statistical Valuation Methods – Loss migration – Correlation analysis – Probability of Default/Loss Given Default (PD/LGD) – Discounted Cash Flow (DCF) • Q factor or qualitative adjustments

23. Confidential & Privileged DocumentConfidential & Privileged Document Challenges • Significant adjustments are necessary when: – Losses are minimal – Losses are sporadic with no predictive patterns – There is a low number of loans in each pool – Data is only available for a short historical period – Today’s portfolio composition varies significantly from historical portfolios – There are changes in economic environment (e.g., available historical data is from a recessionary period, but today’s environment is mid- expansionary period)

24. Confidential & Privileged DocumentConfidential & Privileged Document Emprise Bank • Emprise Bank is a $1.8 billion bank serving more than 20 communities across Kansas. Now under the third generation of Michaelis family leadership, we're still committed to empowering our communities and delivering the stellar service and innovative banking products that have made Emprise the premier community bank in Kansas. – History goes back to 1910 when Stockyards National Bank was formed. – Michaelis family purchased Stockyards in 1965 and in 1989 combined several bank holdings under the Emprise Bank name.

25. Confidential & Privileged DocumentConfidential & Privileged Document Emprise Bank – Data Initiative • Renewed emphasis on relationship profitability – Evaluating tools to have clearer picture • Portfolio concentration limits – Established internal limits for certain NAICS/Call Codes • CECL – Identified additional origination data we were not capturing in the core – Began capturing loan data to create an adequate historical database – Defined further segmentation in our loan pools

26. Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring CECL & ALLL Business Analytics Analyze the performance

27. Confidential & Privileged DocumentConfidential & Privileged Document System of Record Account Information Risk Ratings Rates Fees Transactions Officers/Branches General Ledger Deposits/Loans Off Balance Sheet Non-Interest Expense Non-Interest Income Net Interest Margin Accounts Payable External Data Demographics Businessgraphics Agrigraphics Geographics Economics Markets Data aggregation and warehousing Data Integration Client Relationships Artificial Intelligence Models Analytics and Implementation

28. Confidential & Privileged DocumentConfidential & Privileged Document Business analytics • Trending analysis • Profitability analysis • Identify strengths and weaknesses • Outline strategic direction

29. Confidential & Privileged DocumentConfidential & Privileged Document Relationship combinations – most popular

30. Confidential & Privileged Document Relationship combinations – most profitable

31. Confidential & Privileged DocumentConfidential & Privileged Document $6,808.05 $10,109.27 $27,465.82 $- $5,000.00 $10,000.00 $15,000.00 $20,000.00 $25,000.00 $30,000.00 0 50 100 150 200 250 300 350 Business Loan Business Loan with Checking Business Loan with BBS and Checking Business Total Relationships Average Profit Strategic analysis

32. Confidential & Privileged DocumentConfidential & Privileged Document Executive summary cycle comparisons

33. Confidential & Privileged DocumentConfidential & Privileged Document Financial Institution Platform Opportunities Pricing and Profitability Credit and closing - capturing the data Credit Monitoring & ALLL Asset & Liability Management Business Analytics Full lending performance cycle

34. Understand how it all connects and prosper

Understanding the Full Lending Performance Cycle

Understanding the Full Lending Performance Cycle

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Understanding the Full Lending Performance Cycle