Institution Name

Capital Plan for 2014-2018 Contents Management Summary In the Fall of 2013 FARIN & Associates assisted XYZ Institution with the development of a formalized capital planning approach that helps to determine the appropriate levels of capital given the higher requirements imposed by the regulators under BASEL III and the risks associated with the institutional balance sheet. The goal of the capital planning process is to align the work done on strategic planning with the financial risk management process to “right size” the capital for known and potential risks in order to maintain a well-capitalized rating under the CAMEL rating system. In this process we will identify those risks that have the most significant impact on the plan, develop a process for building “scenarios” for testing the plan, and discuss the use and implementation of sensitivity testing within the plan.

Overview The continuing downturn in the economy and resulting challenges posed to financial instructions has highlighted the importance to all financial institutions to strengthen their capital planning process. A robust planning process is needed in order to enable financial institutions to maintain sufficient levels of capital to meet known, and unknown potential risks from stressed conditions or unforeseen events that may constrain the ability to maintain safe and sound operations. Such capital planning is and has always been a key concern of the Board and management of this institution in order to meet market needs and ownership concerns.

In order to ensure proper controls, it is the belief of our Board of Directors and management team that an effective internal capital planning process be managed at a minimum of annually to assess current risks in operations, financial conditions, and market concerns to prioritize the inevitable tradeoffs between capital levels, growth expectations earnings required to satisfy these divergent goals as well as dividend expectations for shareholders. This capital planning process must be realistic in its undertakings when considering the overall risk levels of the institution, the market conditions in which we are operating, and the regulatory environment that governs our safety and soundness parameters.

Strategic Financial Goals

Compliance Analysis

SWOT Analysis

Capital Failure Definition

Linkage to Business Plan

Capital Plan The following sets forth the capital plan goals of ABC Bank. The plan includes detailed steps that the bank will follow to maintain the desired capital levels, growth expectations, and necessary earnings to meet these objectives. Earnings, Growth and Capital Targets

The following schedule outlines the agreed upon goals for regulatory capital targets, anticipated asset growth and required earnings & dividend payments to achieve. Note that the goals reflect our institutional expectations for potential buffer needs, risk levels and overall market opportunities.

INSERT A SUMMARY TABLE FROM SPEEDBOAT HERE

The table above illustrates clearly the tradeoff between the growth and earnings required to meet our regulatory capital goals. As part of the annual planning process our Board has reviewed these goals and the requisite tradeoffs should either the earnings or growth levels exceed or fall short of these targets by reasonable amounts. As part of that review the Board has directed management to follow a priority for goals as follows

INSERT RANK ORDER OF EARNINGS, GROWTH, CAPITAL goals here

Risk Factors With respect to the capital plan, the key risk factors that the bank is exposed to include credit quality, asset concentrations, earnings and liquidity. The capital plan considers these risks, as well as other factors, that could potentially impact the capital goals as follows:

Credit Risk: Insert credit risk review of past performance and current challenges. What assumptions are being made around the major credit quality measures such as:

 Past due Loans/Total Loans

 Non-performing assets/Total Assets

 Classified Assets/Total Assets

 Past Due Loans ($)

 Non-performing Assets

 ALLL/Total Loans

 ALLL/Total Capital

Show past performance on ratios to planned performance assumptions and document major rationale for changes in future performance to past.

Asset Concentration The nature and level of the bank’s asset concentrations can have a major impact on capital levels that need to be maintained due to changes in underlying factors that impact the assets beyond control of the bank. Our bank’s highest level of asset concentrations are in commercial real estate loans, with particular concern over geographic concentrations in outside markets beyond our normal business market from participations.

In recent periods the number of non-owner occupied CRE loans have been increasing and have been identified in our most recent examination as a concern over the brick building in this area. Accordingly, the trends involving these loan types are being closely monitored and the impact of potential stress events on collateral values and debt coverage concerns are run two (2) times per year to determine potential capital exposures.

The following factors show the historical and are projected 8 quarters levels to ensure our capital plan is based on realistic rends regarding concentration limits. The Asset/Liability Committee (ALCO) monitors current and planned compliance quarterly.

 Construction Loans/Capital  Non-owner CRE/Capital  Construction Loans ($)  Non-owner CRE ($)  Total Risk Based Capital ($)  Total Risk Based Capital Ratio

As set forth above, the bank is set on reducing overall concentrations in these 2 asset classes. The reduction comes from growth at faster rates in other areas as well as selected renewals on existing credits and tighter standard on new loan acquisition.

Note that the bank has historically targeted lending on properties secured by on-owner occupied real estate as a core business practice. The historical loss rates experienced with respect to the overall exposure to this segment of the market does not warrant a strategy to reduce these loan levels, but rather better plan for potential losses and hold capital cushions for reasonable risk events. A change in strategy to focus on other lending products would require the bank to acquire talent, systems and knowledge that is costly, and may not prove to provide required returns on the diversification to sufficiently add to or maintain overall capital levels, commensurate with the risks associated with the new loans.

Allowance for Loan Loss The regulatory capital levels require us to maintain a fully funded allowance for loan loss. Our calculation methodology for the allowance for loan loss is based upon the loan classifications and loss rate experience, internal loan review results, trends in loan performance including delinquency, non- accrual and charge off by loan class.

The following table shows the major loan loss performance for the past 8 quarters as well as planned performance for the upcoming plan years.

ADD IN ALLL RATIO PERFORMANCE MEASURES HERE Profitability The capital plan assumes the bank will strive to meet the growth goals set forth in the capital goals section. These goals in reality are a balance between desired growth and realistic earnings projections. As such, the profitability targets set forth here have been established with an understanding that these are the required amounts to satisfy the competing goals of growth and capital levels. Below we see the 8 quarter earnings performance versus the planned goals.

TABLE OF PROFIT MEASURES HERE

Major issues in managing these levels include:

List concerns or underlying assumptions that will drive the IRR/Liquidity discussions.

This capital plan anticipates the bank to operate with a growth strategy to (grow/shrink/maintain) overall asset size. The ability to meet profitability levels given the overall asset projections are major drivers of pricing actions, product development/deployment, fee income generation and expense controls.

The current operating budget anticipates an increase/decrease in profitability for the year over past performance.

Interest Rate Risk Outline how potential risks to earnings from market changing market conditions may impact profitability and capital levels, and discuss management plans for adjusting relative to the prioritized goals.

Liquidity Discuss current liquidity levels and potential needs for “contingent” events. Link events to IRR and Credit Risk (ALLL) areas.

8 quarter past/future projections

Future Capital Needs Discuss the tradeoff between earnings, growth and capital that exist in possible alternative scenarios. This is the contingent capital plan that looks at how the risks from liquidity, earnings and credit may impact capital performance and what actions management will employ to remain in compliance. Detailed Report

Compliance Analysis

Static A static compliance analysis holds the projected balance sheet at current levels, and applies the new capital regulations based upon the regulatory phase-in periods. This analysis shows whether your current balance sheet would be in compliance as phase-in changes are made. Note that this analysis assumes no growth, earnings, no balance sheet modifications, no capital actions, or dividend payments.

The purpose of this analysis is primarily regulatory focused. Most regulators like to see the “static” approach to eliminate questions on the source and validity of major assumptions. Most regulatory models released to deal with risk management have been focused on static approached, despite guidance language indicating a need for more “scenario” or “plan” review of risk.

The following shows the results of the “static” projections with the current BASEL III phase in schedule:

Financial SWOT Analysis The internal portion of the financial SWOT analysis lays out strengths and weaknesses you have identified by looking at past performance. This review should include a review of the results against a relevant peer group, as well as the regulatory peer for Board comparison. Any deviation between peers should be well documented.

Strengths Enumerated list of major financial strengths

Weaknesses Enumerated list of major financial Weaknesses

Opportunities Enumerated list of major financial Opportunities that have the potential to improve financial performance

Threats Enumerated list of major economic and competitive Threats that may damage financial performance

Capital Failure Definition The capital regulations require us to maintain not only minimum levels of capital consistent with the regulatory standards, but an undefined “buffer” to cover the risks within our balance sheet. Our stress testing process is designed to help identify and assess the levels of these risks under sever situations to determine compliance with these levels. The regulatory requirement for buffer levels is not specific but can be expected to mean that in such situations, the minimum capital levels are maintained. In reality, our stress test may show a non-compliant situation. Furthermore, we have always strived to maintain a capital level above the minimum levels in the past, but have not attempted to quantify the amount above the minimum necessary. As such, we feel that the definition of capital failure (the minimum capital goals) must be negotiated between the Board and management team to reflect the business plan activities taken to reach the Board established financial goals and direction.

In determining these levels we set forth the following rating scale and definitions:

IN THIS SECTION OF THE PLAN WE NEED TO DISCUSS AND DEFINE THE INSTITUTIONAL DEFINITION FOR CAPITAL FAILURE AND EXPLAIN HOW AND WHY THE GROUP ARRIVED AT THIS DEFINITION. THIS IS THE MOST CRUCIAL PART OF THE PLAN AS IT SETS THE MINIMUM GOALS AND AND INTERIM LEVELS OF CAPITAL RISK

Dynamic The development of a dynamic based plan is an on-going, iterative process. The process begins with the initial assessment from the strategic planning process and base business plan. These dynamic results provide a look at the impact of the major plan assumptions for growth, earnings, dividend payout, and changing regulatory capital landscape in relation to the institutional goals for capital.

Moving from then initial assessment phase to the modified stage requires institutional review of the individual stress test assumptions for the major risk areas, development of the key stress scenarios and sensitivity testing with each scenario. The scenario testing combines risk assumptions from the major financial risk areas that are complimentary in nature, providing a cross-risk framework to help determine the multi-factor impact of a stress situation.

From the results of the scenario testing management reviews the results with the Board of Directors to outline the overall risk profile, focusing on the key risks that may impact the plan, and determine if the plan as built maintains capital goal compliance with Board goals.

Initial Business Plan Results

Stress Testing IN THIS SECTION WE LAY OUT THE THOUGHT PROCESS BEHIND STRESS TESTING WITHIN THE INSTITUTION. WHAT METHODOLOGY ARE WE USING? WHAT KIND OF RESULTS DO WE GET AND HOW ARE THEY INCORPORATED INTO OUR OVERALL RESULTS.

Stress Test Results

Types of Testing

Key Vulnerabilities

Stress Assumptions

Impact of Stress Assumptions

Tier 1 Leverage

Common Equity Risk Based Capital

Tier 1 Risk Based Capital

Total Risk Based Capital

Contingency Capital Plan The purpose of a contingency capital plan is top lay out the actions that management would take should the institution find itself in a position where the major elements of a stress event seem to be occurring or about to occur. The indicators of a need for action are governed by the “triggers” we will use to monitor risk levels and performance. Note that triggers are not to be confused with our risk limits. In many cased triggers may be areas of focus outside the institution that will have an impact of the potential performance. Instead, triggers act as leading indicators of events or issues that may cause capital compliance issues to arise. When triggers are reached, the plan outlines key actions and reporting processes that management and Board should expect in order to act in accordance with the capital goals established.

Triggers Below are a listing of the key triggers for each scenario and trigger limits

SCENARIO NAME Trigger Limit/Action Point

SCENARIO NAME Trigger Limit/Action Point Key Actions This section outlines the basic actions planned to preserve capital based upon the scenario stress test and corresponding results. The commitment to take these actions may reduce the need for extra buffer levels needed to meet regulatory minimums. Therefore these actions result in a “contingency capital plan” outline.

Note that some actions listed take place automatically within the capital stress test scenario. For example, if an asset quality problem is driven by an economic factor such as a downturn in local or national economic conditions, the environment itself would lead to a drop in demand from quality credit loans. In addition, loan officers would likely be spending more time dealing with problem loans within the portfolio vs. new business development. With the reduction in loan demand, investment activity will pick up, likely reducing the risk weights on total assets. In addition, if the prospect for profitable investments is uncertain, the institution may elect to run off deposits and pay down borrowings and thus shrinking the overall size in the process. This may trigger liquidity concerns, but can be a true situation for capital compliance management.

Actions as a part of the capital plan are likely to focus in on the following areas, but other areas may be required.

Growth Actions: What kind of actions would you take to manage loan, deposit and asset growth? How much of the growth change would occur as a result of the stress environment itself vs. management actions?

Dividend Actions: What kind of actions would you take in terms of changing the dividend payout from base plan?

Capital Actions How might a stress test affect and anticipated capital actions (buyback, raises, etc)? Do you have dependable alternate capital sources in the event of stress?

Asset Distribution Actions What kinds of changes would happen as a result of the stress test naturally? What additional actions are you likely to consider if needed to manage capital based on asset distribution?

Operating Expense Actions What actions are possible or anticipated in the event of stress? These expenses may be planned decreases or planned increased resulting from the stress event (legal and collecation?). Contingency Plan Result In this section we illustrate the results of the contingency capital plan. Did the planned actions meet objectives? If we are wrong about key scenario assumptions, what would we be facing (sensitivity testing)? The comparison should show the pre and post stress results on capital minimums and other planned key ratios such as:

Sample Action Outline Scenario Name Growth Actions Dividend Actions Capital Actions Asset Distribution Actions Operating Expense Actions Contingency Plan Result s