Directors’ College

Report of Examination Workshop

Remember to bring this Manual to the Workshop!

VERSION: APRIL 19, 2017 Examination Workshop Overview

We have prepared a sanitized version of an actual examination report. Before the last session, please review this report in its entirety, taking special note of the comments on the following pages:

• Examination Conclusions and Comments • Risk Management Assessment

During the case study, participants will be divided into groups to analyze and discuss the CAMELS components. At least one examiner will participate in each group discussion. The objective is to identify the major topics/trends related to each CAMELS component(s) that the examiner listed for discussion. Then, the entire class will assign ratings for each component. After the ratings are determined, the participants will discuss corrective actions for the significant issues identified and recommend any enforcement actions, if necessary.

Your familiarity with the examination report’s contents will greatly enhance the effectiveness of this exercise. Checklists and question guides for each of the CAMELS components are included to facilitate an orderly review of the report. We recommend either highlighting or making note of the topics deserving corrective action or comment as you review the report.

The following documents are included with the examination report:

• Purpose of the Presentation • Background Information • Points to Consider • Question Guides • Uniform Bank Performance Report • Definitions for Composite and Component CAMELS Ratings • Workshop Feedback Form

Please be sure to bring the examination report and the other documents to the last session.

Introduction – Background Page 1

Presentation Purpose

This project is intended to enhance the participants’ understanding of the most significant topics that are contained in an examination report. An additional objective is to have the directors appreciate and understand the reasoning behind the topics that were addressed in the January 9, 2014 examination report.

There are two major sources that all regulatory agencies utilize to analyze a bank’s condition. The first is an onsite examination report which, since February 1994, is uniformly used by all federal bank regulatory agencies and most state banking departments. The second source is the many offsite monitoring reports, which are produced quarterly from bank records and examination reports. The most commonly used offsite monitoring tool is the Uniform Bank Performance Report, which is generated from data submitted by banks in quarterly Consolidated Reports of Condition and Income (Call Reports).

Introduction – Background Page 2

Background Information

Valhalla Commerce Bank

The Bank was established as a state nonmember institution in 2004. It is wholly- owned by Valhalla Community Bancorp, Inc., a one-bank holding company. Ownership is widely held, with no shareholder owning or controlling 5 percent or more of holding company stock. Stock is held by 388 shareholders. Directors and executive officers own 14.3% of the outstanding shares. Chairman of the Board and President Henry Shackelton is the largest shareholder at 3.83% ownership interest.

Valhalla Commerce Bank (VCB) began operations in 2004 pursuing a traditional community bank business plan. It subsequently expanded into three local communities with six offices in Asgard, Odin, and Glasir. The bank and its branches are located in affluent communities in the far western suburbs of the Anytown area. VCB has always been assigned a composite 2 rating.

In 2015, bank management embarked on an aggressive growth strategy in real estate construction lending. A significant number of new housing developments were being approved in VCB’s market area. Competition is fierce as the Anytown area is heavily banked with both community institutions and multibillion dollar organizations. During 2015, the bank added $10 million in new land development and real estate construction credits. This represented a 33% increase in this type of lending. At the end of 2015, acquisition, development and construction (ADC) credits totaled 265% of total capital. These credits were funded, in part, with $6.5 million borrowed from the Federal Home Loan Bank. The bank’s loan/deposit ratio far exceeded 100% by the end of 2015. At no time did the board set a limit on commercial real estate (CRE) credits in relation to capital.

Demographic and Market Data

Demographics The Bank operates six offices in AnyCounty, AnyState, which is located in the Anytown metropolitan area. The Bank’s main office holds 60 percent of the institution’s total deposits. The Bank’s deposits represent 5 percent of the total deposits in AnyCounty.

None of the Bank’s six offices are located in or within one mile of a low- or moderate-income (LMI) census tract.

Introduction – Background Page 3

There are approximately 180,000 households within AnyCounty. Low-income households account for 13 percent of the total number of households in the market area, while moderate-income households also account for 21 percent.1 Middle-income households comprise the largest group in the metro, accounting for 35 percent of households. Upper-income households account for the remaining 31 percent of households. The median household income in AnyCounty is $68,969, significantly above the national median.2

Economic Overview Weakness in the housing and manufacturing sectors, as well as disruption in capital markets, has negatively affected key employment sectors in AnyState. Nonfarm employment in the state fell 0.1 percent in the third quarter 2014 from a year ago. Employment losses have been broad-based across the state with the largest declines in the leisure and hospitality, government, construction, and financial activities sectors. The Anytown metro area has also experienced economic deterioration; employment in the area declined 1.7 percent in the third quarter 2014 from a year earlier.

The AnyState housing market remains under pressure, but some areas are experiencing increasing home sales. Home prices were down .5 percent in AnyState in the second quarter 2015 compared to a year earlier, and down 1 percent from the peak in 2014.3

Management Information

Henry Shackelton - Chairman of the Board, President, and Chief Executive Officer. President Shackelton is the original founder. He was an organizer of Baldr Community Bank, AnyCity, AnyState, where he served as its president and CEO from 1995 to 2002. After Baldr Community Bank was purchased, he helped start Valhalla Commerce Bank in 2004. Mr. Shackelton is a graduate of the Valkyrie University Graduate School of Banking.

Frank Wild - Senior Vice President. He supervises the loan portfolio. He has over 30 years of banking experience. He previously served as a vice president in loan administration for Cypress Bank, AnyCity, AnyState. SVP Wild replaced former senior lender, Mr. Thomas McLeod, who resigned in November 2014.

1 For the purposes of this analysis, low-income households are households earning $24,999 or less, moderate-income households are households earning between $25,000 and $49,999, middle-income households are households earning between $50,000 and $99,999, and upper-income households are households earning $100,000 or more. 2 Income data are from the U.S. Census Bureau 2014-2015 American Community Survey. 3 House price data are from the Federal Housing Finance Agency All-Transactions Index.

Introduction – Background Page 4

Hedy Lamarr - Senior Vice President/Cashier. Ms. Lamarr is the head of bank operations and serves as cashier, BSA officer, IT officer, and securities officer. She was previously employed at Baldr Community Bank, AnyCity, AnyState.

Hubert Hudson - Vice President. Joined the bank in 2014 and is a commercial lender. He has 15 years of commercial lending experience. His previous employment includes Bear Stearns, Inc.; Cypress Bank, AnyCity, AnyState; and Merchant Marine Commerce Bank.

Frank Hurley – Vice President. Joined the bank in 2011 and is a commercial lender. His prior experience as a lender includes Icelandic Commerce Bank and Regents Savings Bank.

Thomas Crean - Vice President. Joined the bank in 2013 and is a commercial lender. He has more than 20 years of banking experience serving as a lender and in bank operations. His previous employment includes Macklin Bank and Cypress Bank.

Frank Worsley - Vice President. Joined the bank in 2014 and is head of the mortgage banking operation. He has more than 28 years of retail, commercial, and trust banking experience. His previous employment includes Regents Savings Bank, Idhammar Commerce Bank, and Cypress Bank.

The Directorate – 8 Members

Nikola Tesla (1)(3)(4)(6)(7) Joined Bank: 2004 Born: 1954 Mr. Tesla is president of Tesla Industries and is a director of AnyCounty Mutual Insurance, both located in AnyCity, AnyState. He also owns and operates Tesla Generators in AnyCity, AnyState.

John Vincent (1)(2)(5)(6)(7) Joined Bank: 2004 Born: 1955 Mr. Vincent is a retired engineer. He is former president and sole shareholder of Hull Maintenance, Ltd., AnyCity, AnyState. He previously served as a director at Merchant Bank, AnyCity, AnyState.

Alfred Cheetham (2)(4)(6)(7) Joined Bank: 2004 Born: 1961 Mr. Cheetham is a private investor, a partner in Boat Slip Partnership, and a philanthropist.

Introduction – Background Page 5

Robert Clark (3)(5)(6)(7) Joined Bank: 2004 Born: 1955 Mr. Clark is president of Biologics, Inc., a genetic testing company. He also owns and operates various commercial properties in AnyCounty. He previously served as a director of Denbury Bank, AnyCity, AnyState.

Henry Shackelton (1)(6)(7) Joined Bank: 2004 Born: 1960 Chairman of the Board, President, and Chief Executive Officer.

Thomas Orde-Lees (1)(3)(5)(6)(7) Joined Bank: 2004 Born: 1958 Mr. Orde-Lees is a practicing attorney with Westgarth and Harrison, LLC, AnyCity, AnyState.

Charles Green (2)(3)(6)(7) Joined Bank: 2004 Born: 1937 Mr. Green is a retired pharmacist. He previously owned Green Drugs.

Louis Rickenson (1)(2)(3)(4)(5)(6)(7) Joined Bank: 2004 Born: 1957 Mr. Rickenson is a practicing CPA and partner in Rickenson Ltd., AnyCity, AnyState.

(1)-ALCO; (2)-Audit; (3)-Loan Risk Management; (4)-Personnel; (5)-Information Technology; (6)-Compliance; (7)-Executive Loan Committee

Introduction – Background Page 6

The Holding Company

The bank is wholly-owned by Valhalla Community Bancorp, Inc., a one bank holding company. Stock is widely held by 388 shareholders. The parent company issued $3 million of subordinated debt in 2011. Between 2011 and 2014, the Bank relied upon support from the parent with injections of approximately $2.9 million.

The holding company had been a regular source of additional capital from 2009 through 2015, in which the following annual injections were made:

Fiscal Year Ending HC Capital Injection (000s)

2009 $ 900 2010 $ 500 2011 $ 700 2012 $ 1,050 2013 $ 750 2014 $ 400 2015 $ 550

Total Capital Injections 2009 -2015 $ 4,850

Recent Financial and Examination Data – Valhalla Commerce Bank

FINANCIAL INFORMATION Financial Data ($000s) 12/31/2014 Total Assets 154,403 Total Loans 125,904 Total Deposits 136,975 Brokered Deposits/Total Liab. 2.79% FHLB Advances/Total Liabilities 2.11% Return on Average Assets 0.51% Net Interest Margin 4.06% Noncurrent Loans/Gross Loans 0.50% ADC Loans/Total Capital 211.52% CRE Loans/Total Capital 525.28% Tier 1 Leverage Capital Ratio 7.88% Total Risk-Based Capital Ratio 10.34%

Introduction – Background Page 7

Previous Exam – January 9, 2014

The adversely classified coverage ratio was only 5% with two credits classified. Credit administration and underwriting were considered satisfactory. No concentrations were noted. Bank earnings continued to be an issue due to high overhead expenses. Earnings were assigned a “3” rating.

Current Exam in Process (Case Study) Examination Start Date: August 20, 2015 Examination As Of Date: March 31, 2015 (financial analysis date)

Significant Events

6-24-2004 Bank opened for business. June, 2011 Bank’s holding company issues $3.1 million in subordinated debt securities to support growth. 6-30-2012 Bank reports an Adequately Capitalized position on its Call Report. 8-27-2012 Bank sent a letter indicating it is Adequately Capitalized per PCA. 9-30-2012 Bank returns to Well Capitalized position.

Prior Regulatory Actions

Prior Board Resolution – A Board Resolution (BR) was adopted effective July 19, 2013, due to less than satisfactory Compliance Management System that was identified at the June 21, 2013 Compliance examination. The most recent State exam reported that the bank appeared to be in substantial compliance with the BR.

Prior Information Technology (IT) Memorandum of Understanding (MOU) – An IT MOU became effective May 5, 2013. The lack of an effective internal audit program and inadequate management oversight are the primary causes for recurring weaknesses. There was no IT strategic planning evident, resulting in a lack of corporate direction in the IT control environment. The bank failed to meet the standards mandated by the Gramm Leach Bliley Act (Privacy of Consumer Financial Information). The State exam upgraded IT to a “2” after the most recent exam and noted compliance with the outstanding provisions of the MOU. Minor recommendations to enhance audit, patch management, and dormant account procedures were addressed within the State report. The MOU was terminated June 30, 2014, based on the findings of the State report.

Introduction – Background Page 8

Points to Consider When Assigning Supervisory Ratings

Capital

A. Level and quality of capital and overall financial condition

B. Management ability to address capital needs

C. Nature, trend, and volume of problem assets

D. Adequacy of allowance for loan and lease losses

E. Balance sheet risk, including concentrations and market risk

F. Risk exposure of off-balance sheet activities

G. Quality and strength of earnings, and reasonableness of dividends

H. Prospects and plans for growth

Points to Consider – Capital Page 1

Points to Consider When Assigning Supervisory Ratings

Asset Quality

A. Underwriting standards/Credit administration/Risk identification

B. Level, distribution, severity, and trend of problem/classified/nonperforming assets

C. Adequacy of the allowance for loan and lease losses

D. Off-balance sheet credit risk

E. Diversity and quality of loan / investment portfolios

F. Asset concentrations

G. Securities underwriting and trading exposure

H. Adequacy of loan and investment policies

I. Management ability to identify and collect problem assets

J. Internal controls and management information systems

K. Volume and nature of technical exceptions

Points to Consider – Asset Quality Page 2

Points to Consider When Assigning Supervisory Ratings

Management

A. Board and Management Oversight

B. Ability to Plan and Respond to Changing Business Conditions and New Products

C. Adequacy of, and Conformance with, Internal Policies and Controls

D. Adequacy of Management Information Systems

E. Adequacy of Audits and Internal Controls

F. Compliance with Laws and Regulations

G. Responsiveness to Recommendations from Auditors and Regulators

H. Management Depth and Succession

I. Susceptibility to a Dominant Influence or Concentration of Authority within the Board or Management

J. Reasonable of Compensation Policies and Avoidance of Self-dealing

K. Demonstrated Willingness to meet the Banking Needs of the Community

L. Overall Performance of the Institution and its Risk Profile

Points to Consider - Management Page 3

Points to Consider When Assigning Supervisory Ratings

Earnings

A. Level, Trend, and Stability

B. Quality and Composition

C. Strength of Net Interest Margin

D. Vulnerability of Earnings to Changes in Interest Rates

E. Adequacy of Valuation Reserves

F. Reliance on Nonrecurring Gains

G. Securities Transactions

H. Budgeting

I. Dividend Payouts

J. Tax Effects to Net Income

K. Level of Nonearning Assets/Effects of Asset Quality

L. Future Prospects

Points to Consider - Earnings Page 4

Points to Consider When Assigning Supervisory Ratings

Liquidity

A. Current Levels and Trends

B. Adequacy of Funds Management Practices

C. Ability to Meet Liquidity Needs without Adversely Affecting Operations or Conditions (Liquidity Sources vs. Funding Needs)

D. Composition and Stability of Deposits

E. Degree and Trend of Reliance on Short-term, Volatile Sources of Funds

F. Liquidity Provided by Securities and Other Assets

G. Access to Alternative Funding Sources

Points to Consider - Liquidity Page 5

Points to Consider When Assigning Supervisory Ratings

Sensitivity to Market Risks

A. Management’s Oversight, Abilities, and Policies

B. Capital Sensitivity to Changes in Interest Rates

C. Earnings Sensitivity to Changes in Interest Rates

D. Exposure from other Interest Rate Sensitive Banking Activities

E. Exposure from Trading and Foreign Operations

F. Hedging Programs

Points to Consider – Sensitivity to Market Risks Page 6

Question Guide

Capital

Please answer these questions regarding the Capital component rating from the viewpoint of the Board of Directors.

1. What are the key concerns regarding capital identified in the Report of Examination?

2. What are the factors causing the concerns?

3. What questions would you ask bank management regarding capital?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do in response to the bank’s capital position?

6. What CAMELS components do you think are impacted by capital in this case study?

Question Guide Page 1

Question Guide

Asset Quality

Please answer these questions regarding the Asset Quality component rating from the viewpoint of the Board of Directors.

1. What are the key concerns regarding asset quality identified in the Report of Examination?

2. What are the factors causing the concerns?

3. What questions would you ask bank management regarding asset quality?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do in response to the bank’s asset quality problems?

6. What CAMELS components do you think are impacted by asset quality in this case study?

Question Guide Page 2

Question Guide

Management/Administration

Please answer these questions regarding the Management component rating from the viewpoint of the Board of Directors.

1. What are the key concerns regarding management identified in the Report of Examination?

2. How have these management deficiencies impacted the financial condition of the bank?

3. Now that you are aware of these regulatory concerns, what questions would you like to address to bank management?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do to correct management deficiencies?

6. How will you prioritize these corrective measures?

7. What CAMELS components do you think are impacted by management/administration in this case study?

Question Guide Page 3

Question Guide

Earnings

Please answer these questions regarding the Earnings component rating from the viewpoint of the Board of Directors.

1. What are the key concerns regarding earnings identified in the Report of Examination?

2. What are the factors causing the concerns?

3. What questions would you ask bank management regarding earnings?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do in response to the bank’s earnings performance?

6. What CAMELS components do you think are impacted by the earnings performance in this case study?

Question Guide Page 4

Question Guide

Liquidity

Please answer these questions regarding the Liquidity component rating from the viewpoint of the Board of Directors.

1. What are the key concerns regarding liquidity identified in the Report of Examination?

2. What are the factors causing the concerns?

3. What questions would you ask bank management regarding liquidity?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do in response to the bank’s liquidity management?

6. What CAMELS components do you think are impacted by liquidity in this case study?

Question Guide Page 5

Question Guide

Sensitivity to Market Risks

Please answer these questions regarding the Sensitivity to Market Risks component rating from the viewpoint of the Board of Directors.

1. What are the key concerns identified in the Report of Examination regarding the bank’s sensitivity to market risks?

2. What are the factors causing the concerns?

3. What questions would you ask bank management regarding earnings?

4. What questions would you like to ask the examiner-in-charge/regulatory agency?

5. What would you, as a Board, do in response to the bank’s sensitivity management practices?

6. What CAMELS components do you think are impacted by sensitivity to market risk in this case study?

Question Guide Page 6

VALHALLA COMMERCE BANK ANYTOWN ANYCOUNTY ANYSTATE Region: Anyregion Certificate Number: 12345 Examiner-In-Charge: John Smith Examination Start Date: August 20, 2015 Examination As Of Date: March 31, 2015

Table of Contents 12345

Examination Conclusions and Comments 1 Risk Management Assessment 10 Violations of Laws and Regulations 20 Examination Data and Ratios 25 Items Subject to Adverse Classification 26 Items Listed for Special Mention 32 Concentrations 34 Analysis of Earnings 38 Composite Rating Definitions 39

Signatures of Directors/Trustees 40

All dollar amounts are reported in thousands, unless otherwise indicated.

Examination Conclusions and Comments 12345

Current Exam Prior Exam Prior Exam

Ratings by Examination Function 08/20/2015 01/09/2014 01/18/2013

Risk Management Composite 2 2

Risk Management Component:

Capital 2 2 Asset Quality 2 3 Management 2 2 Earnings 3 3 Liquidity 2 2 Sensitivity to Market Risk 2 2

Information Technology 2 2 2 Compliance1 3 Community Reinvestment Act2 S

1Rating assigned at the June 21, 2013 Compliance examination. 2Rating assigned at the March 13, 2011 Community Reinvestment Act evaluation.

SCOPE

The following comments and conclusions reflect the findings of the Safety and Soundness examination conducted concurrently with Information Technology (IT) and Bank Secrecy Act (BSA) reviews. A summary of the most recent Compliance and Community Reinvestment Act (CRA) examinations is also included.

SUMMARY

The overall condition of the bank is less than satisfactory. Asset quality, concentration monitoring, loan underwriting, and credit administration need improvement. Management oversight is insufficient, especially in both the lending area and compliance with laws and regulations. Earnings performance is less than satisfactory. Capital is satisfactory, with growth primarily supported from parent company capital infusions rather than retained earnings. Sensitivity to Market Risk is modest; however, the board and management must improve interest rate risk measurement and monitoring processes. Liquidity is less than satisfactory in relation to the financial condition of the bank and management must enhance funds management practices. The BSA program, while satisfactory, requires strengthening. The IT area is satisfactory.

ASSET QUALITY –

Asset quality is less than satisfactory. Credit risk, as reflected in the levels of adversely classified and criticized items, has increased since the State examination dated January 9, 2014. Significant concern also exists because management has not implemented a method to monitor and control a large concentration of credit in acquisition, development, and construction (ADC) and commercial real estate (CRE) and development loans. Extensive underwriting and credit administration weaknesses are also identified.

1 Examination Conclusions and Comments (Continued) 12345

The Adversely Classified Items Coverage Ratio has increased to 24% from 5% at the State examination. Adversely classified assets total $3,313M and primarily consist of commercial, ADC, and CRE loans classified Substandard. Many of these loans have had erratic payment histories or weaknesses with collateral coverage. Criticized assets, which include adversely classified assets plus items listed for Special Mention, are high at 62% of Tier 1 Capital plus the Allowance for Loan and Lease Losses (ALLL). Many of the criticized assets are ADC and CRE loans. Loans specifically listed for Special Mention total $5,335M and reflect weak underwriting and credit administration practices. These weaknesses include originating loans with debt service coverage ratios below 1.0x.

Asset quality risk is also heightened by the large concentration of credit in ADC/CRE loans and management’s inadequate oversight of this area. The total CRE portfolio, including unfunded amounts, represents 720% of Tier 1 Capital as of June 30, 2015. Excluding owner-occupied CRE and residential construction loans under contract, the portfolio represents 532% of Tier 1 Capital. Within this total, higher risk loans exceed Tier 1 Capital. For example, speculative residential construction credits, commercial construction loans, and land development and unimproved land loans total 115%, 112%, and 106% of Tier 1 Capital, respectively. Despite ADC loans being the main source of loan growth over the past several years, management has not implemented a sufficient ADC and CRE concentration monitoring system so that risks are clearly identified, reported to the Board, and mitigated when appropriate.

Deteriorating asset quality results from poor underwriting and credit administration practices as numerous deficiencies have been identified, especially ADC credits. The weaknesses include, but are not limited to, the following:

• Insufficient repayment capacity assessment and monitoring.

• Liberal underwriting and administration of unsecured lines of credit.

• Inadequate assessment of project costs, with equity and/or source of equity not specifically identified.

• Insufficient tracking of construction cost changes.

• Failure to set prudent release prices on individual lots and/or units.

• Inadequate monitoring of sales progress.

• Insufficient project analysis and liberal renewals.

Given that much of the bank’s recent loan activity has centered in construction and development loans, strengthening these functions is imperative. Comments detailed on the Risk Management Assessment pages provide examples of underwriting and credit administration weaknesses. In addition, underwriting and credit administration weaknesses are illustrated within the written comments of the loans adversely classified and listed for Special Mention. Refer to the Risk Management Assessment, Items Subject to Adverse Classification, Items Listed for Special Mention, and Concentrations pages for further detail.

2 Examination Conclusions and Comments (Continued) 12345

MANAGEMENT –

Director supervision, management performance, and risk identification practices need to be strengthened to preclude further deterioration of the bank. Various weaknesses have been identified and are summarized below, with additional details provided on the Risk Management Assessment page of this Report.

Apparent Violations Several apparent violations of laws and regulations are cited in this Report. Of particular concern is that the prior FDIC examination cited apparent violations similar to those cited at this examination that relate to the FDIC’s Part 323, the FDIC’s Part 353, and the Treasury Department’s Part 103. The cited apparent violations and contraventions include the following:

• Section 337.3 of the FDIC Rules and Regulations for extending credit to President Henry Shackelton in excess of allowable limits.

• Section 323.3 of the FDIC Rules and Regulations for failure to obtain appropriate appraisals for two loans prior to funding.

• Section 353.3 of the FDIC Rules and Regulations for failure to file timely Suspicious Activity Reports (SAR) and to notify the Board of SARs filed.

• Part 103 of the Treasury Department’s Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulations as a result of management not completing FinCEN 314(a) search requests within designated timeframes.

• Section 357 of the Anystate Banking Act for extending loans in excess of the legal lending limit.

• Joint Policy Statement on Interest Rate Risk for inadequately measuring and monitoring of interest rate risk.

Board and management are reminded of the importance and fiduciary responsibility of adhering to applicable laws and regulations. Refer to the Violations of Laws and Regulations page of this Report for further detail and management’s responses.

Concentration of Credit Monitoring Management’s monitoring of concentrations is insufficient given the volume of concentrations that exist. Concentrations should be closely monitored by management and require a more in-depth review than the diversified portions of the bank’s assets. This will also allow management to consider areas where concentration reductions may be necessary. Management plans to implement a CRE concentration monitoring program, developed by an outside firm, by December 31, 2015. Management should also monitor and report to the board its concentrations of credit to individuals and small, interrelated groups of individuals. Additionally, management should review these concentrations to determine if legal lending limit violations exist, as apparent violations within the Lancaster Investors relationship were found during the examination.

Oversight of Loan Underwriting and Administration Board and management oversight of loan underwriting and administration needs to improve. Although some of the underwriting and administration deficiencies noted at the prior FDIC examination have been addressed, many weaknesses still exist, as discussed in the Asset Quality section above and on the Risk Management Assessment

3 Examination Conclusions and Comments (Continued) 12345 pages of this Report. Also, management did not sufficiently address six of the seven deficiencies in the Mortimer Corporation credit that was listed for Special Mention at the prior FDIC examination. This loan is not listed for Special Mention in this Report because of its current low balance. The softening real estate market adds to the importance of management’s timely correction of the loan underwriting and administration deficiencies.

Loan Grading System The loan grading system is ineffective. The grading system does not accurately reflect the risk in the portfolio and several differences between the ratings assigned by management and the examiners were identified. In addition, the system does not accurately reflect the risk in the portfolio or reconcile with the framework used by Federal regulatory agencies, as required by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (Financial Institutions Letter 105-2006). Management is reminded that an accurate loan grading system is critical to effective portfolio monitoring, ALLL analysis, and board supervision.

ALLL Methodology The ALLL methodology needs improvements, as it does not fully adhere to outstanding regulatory and accounting guidance. Despite the methodology weaknesses, the current level of the ALLL is at the low end of an acceptable range based on the loan portfolio’s risk profile and an additional provision does not appear necessary at this time.

Funds Management Liquidity monitoring policies and procedures require strengthening, especially given the declining liquidity position. Current liquidity monitoring focuses primarily on adherence to specific balance sheet and contingency ratios and lacks forward analysis to project liquidity needs. Management must improve its monitoring by utilizing a projected sources and uses of funds and ensure that future liquidity needs can be met at a reasonable cost. Additionally, management should more thoroughly analyze its deposit base to determine which deposits are considered core.

Management committed to correct the apparent violations, address the loan underwriting and administration deficiencies, and revise the ALLL methodology and loan grading system. Senior Vice President (SVP) Frank Wild stated that in addition to implementing the CRE concentration monitoring program, he will enhance the recently developed large borrower report to monitor concentrations to individual and small groups. He added that the individual and small group concentrations will also be reviewed to verify compliance with the legal lending limit, although he does not believe that any violations exist other than the ones cited in this Report. During the examination, SVP Hedy Lamarr developed a sources and uses worksheet, which will be utilized going forward to improve liquidity monitoring. She also agreed to develop an analysis to better predict the potential volatility within the deposit base.

EARNINGS –

Earnings remain less than satisfactory. The Return on Average Assets (ROA) through March 31, 2015, is 0.42% and declined to 0.35% as of June 30, 2015. Earnings performance is negatively affected by a below peer1 net interest margin (NIM) and high overhead.

As of March 31, 2015, the NIM is 3.97%, reflecting a slight decline since the prior State examination, and is 26 basis points below peer. The compressed NIM is largely a result of significant competition in the market area that

1 Insured commercial banks having assets between $100MM and $300MM in a metropolitan area with three or more full service offices.

4 Examination Conclusions and Comments (Continued) 12345 has reduced asset yields and increased funding costs. Interest expense, which is 20 basis points above peer, is anticipated to rise given recent increases in higher-cost time deposits and FHLB borrowings.

Non-interest expense is high at 3.48% and 30 basis points above peer. The bank’s operations include six facilities, and the aggressive branch expansion program has yet to generate the growth needed to support the current infrastructure. Earnings are further eroded by losses generated by the mortgage banking operation, which opened in February 2014. As of July 31, 2015, the mortgage banking operation incurred a year-to-date net loss of $136M.

The bank’s budgeting process is generally adequate and closely monitored by the Board. The budget projects net income of $807M, asset growth of approximately 12%, and an ROA of approximately 0.50% for year-end 2015.

President Shackelton stated that for year-end 2015, he anticipates net income to be approximately $150M to $200M less than budgeted. He added that the Board will discuss restricting asset growth for the remainder of the year. He stated that management has identified several potential cost-cutting strategies, and it has recently hired a consultant to identify means to reduce overhead expenses and generate additional income. Management closed the mortgage banking department in September 2015 because of the net losses that it has incurred.

LIQUIDITY –

Liquidity is strained due to the overall financial condition of the institution. The bank has access to sufficient sources of funds on acceptable terms to meet anticipated liquidity needs; however, continued poor operating performance and loan growth continues to stress liquid assets. As of March 31, 2015, on balance sheet liquidity is $14.2 million, representing 9.25% of total assets. Liquidity consists of $2.3 million in cash and due from bank balances and $11.9 million in unpledged investment securities. The investment portfolio is designated entirely as available-for-sale and 31% of the securities portfolio is now pledged. On-balance sheet liquidity has remained within the range of 13% to 26% since the prior examination. The Net Loans and Leases to Total Assets ratio has increased to 86% as of March 31, 2015, versus 77% in the prior examination.

Historically, the bank has funded loan demand and deposit runoff with liquid assets. For the first quarter of 2015, funding demands approximating $8 million were primarily addressed through asset resources of securities, Federal funds sold, and cash and due from balances approximating $7 million. The balance of the funding needs was met through liability funding sources.

Reliance on non-core funding is heightened and an increasing trend is noted. The Net Non-Core Funding Dependence (NNCFD) ratio has steadily increased from 17% to 23% during the 12 months ending March 31, 2015. In 2012, the ratio approximated 8% and has increased due to the bank funding approximately $20.9 million of asset growth with $16.3 million of volatile funds over this time. These volatile funding sources include $11 million of time deposits greater than $100,000, $2.3 million of Federal funds purchased, and $3 million of FHLB borrowings. Reliance on volatile sources stems, in part, from a significant competition for deposits in the bank’s market. This competition has made core deposit growth difficult, and management has relied on a deposit strategy of offering promotional rates to retain existing depositors and acquire new customers. Due to this strategy, there may be some instability in the core deposit base. Furthermore, as of June 30, 2015, FHLB borrowings total $6.5 million, with an additional $2 million drawn in July 2015 resulting in the line being 97% utilized.

5 Examination Conclusions and Comments (Continued) 12345

Off-balance sheet sources of liquidity are sufficient; however, future access may be restricted if the overall financial condition does not improve. Secondary sources include $2 million in short-term unsecured borrowings and a secured borrowing limit of up to 90% of pledged securities from Independent Bankers’ Bank of Valhalla. The bank also has a $2 million short-term unsecured borrowing line from Black Granite Partners. The investment portfolio is another source of liquidity, with approximately 60% of the portfolio pledged as of June 30, 2015.

Management has noted that the liquidity position is tightening. As illustrated by the bank’s internally calculated Liquidity Ratio, liquidity has exhibited a downward trend in 2015, with an average of 13% versus average ratios of 26% and 21% at the prior FDIC and State examinations, respectively. Management must strengthen funds management monitoring given the tightening liquidity trend and increasing reliance on non-core funding sources. Policies and procedures must be strengthened to provide a forward analysis to project liquidity needs. Additionally, management must more thoroughly analyze its deposit base to determine which deposits are considered core. Refer to the Risk Management Assessment page for additional recommendations regarding liquidity and funds management.

President Shackelton committed to have the liquidity policies revised and strengthened by December 31, 2015.

SENSITIVITY TO MARKET RISK –

Sensitivity to market risk, specifically interest rate risk (IRR), needs to improve through more effective management of the bank’s position and system of controls. The bank’s elevated risk profile combined with deteriorating asset quality, places pressure on capital, earnings, and liquidity, resulting in heightened market risk exposure.

The balance sheet structure remains non-complex and short-term in nature and the bank currently maintains an asset sensitive position. Short-term assets represent 117 percent of short-term liabilities. Approximately 58 percent of the loan portfolio matures or re-prices within one year. The effect of interest rate changes on net interest income is modest; however, the impact on net income is significant due to the reduced level of current earnings. Further, adverse (increases) in interest rate risks may bring further stress on the ability to repay for those borrowers with weakened credit, potentially causing deterioration of the bank’s earnings.

The net interest margin decreased by 5 basis points to 3.97 percent since the last State examination and remains well below the peer level of 4.23 percent. Management is extending wholesale liabilities where possible to reduce exposure to rising rates caused by floors on the majority of variable rate loans. Both the bank’s yield on loans and cost of deposits compare unfavorably to peer and may worsen with adverse rate movement and increased competition.

Management does not adequately measure the level of interest rate risk, which could impair their ability to control market risk given changes in the interest rate environment. Overall IRR exposure in relation to earnings and capital levels cannot readily be determined because: 1. The model used to measure risk does not capture sufficient detail of the bank’s assets and liabilities, 2. Model assumptions do not capture the characteristics of the balance sheet and customer behavior with a sufficient level of detail and analysis, 3. Scenarios of risk are limited; and 4. Independent measures of control are not adequate. An apparent contravention of the Joint Agency Policy Statement on Interest Rate Risk is cited due to weaknesses with the IRR model and the independent review of the IRR management process. Refer to the Violations of Laws

6 Examination Conclusions and Comments (Continued) 12345 and Regulations pages of this Report for details. A comprehensive list of IRR management recommendations, as well as management's response, is detailed on the Risk Management Assessment page of this Report.

CAPITAL –

With a Tier 1 Leverage ratio of 8.29% as of March 31, 2015, the capital position is satisfactory. Between 2011 and 2014, the bank has relied on support from the parent with injections approximating $2.9 million. These funds were primarily obtained by the parent when it issued $3 million of subordinated debt securities in 2011. Through September 2015, the bank has received an additional $550 thousand from the parent, with the most recent injection made to ensure the bank’s Total Risk Based Capital ratio remains above 10%. The 2015 injections have been provided by the parent’s use of its $3 million line of credit. In addition, it is anticipated that the bank should be able to maintain capital ratios in the “Well-Capitalized” category per Part 325 of the FDIC’s Rules and Regulations for the next year through injections from the parent.

Many capital risk concerns exist, and management must vigilantly prevent capital erosion and deterioration. Risks to capital include the weaknesses in asset quality, the CRE concentration, less than satisfactory earnings performance, and interest rate risk. Future parent company support may be limited, as the funds from the debt issuance have been exhausted and much of the $3 million line has been used for capital injections and to service debt. In addition, dividend pressure from the holding company will likely increase as the line of credit is depleted.

SVP Lamarr indicated that approximately $500 thousand will be available on the holding company’s $3 million line of credit after debt service payments through June 2016. President Shackelton acknowledged the weakening capital position of the bank and stated that asset growth will be restricted as necessary, with growth for 2016 likely to be limited to approximately 5%. He also stated that significant cost cutting measures should boost retained earnings. President Shackelton added that in May 2018, the exercise of stock options will generate approximately $350 thousand in cash for the holding company. In addition, a capital planning committee will be established to provide recommendations during the bank’s October 2015 strategic planning session.

INFORMATION TECHNOLOGY – 2

Information Technology (IT) risk management practices are generally reasonable for the complexity and extent of IT-related risks, and the bank is in substantial compliance with the Interagency Guidelines Establishing Standards for Safeguarding Customer Information (Appendix B to Part 364, FDIC Rules and Regulations). Plans to respond to and recover from unexpected business interruptions are improving, although expansion of procedures is expected after the bank’s first testing effort. The IT risk assessment process needs slight adjustment, and some enhancements are recommended for the audit program. Minor data security, information security, and wire transfer issues need further attention. Management oversight is generally appropriate. Refer to the Risk Management Assessment page for additional detail.

7 Examination Conclusions and Comments (Continued) 12345

BANK SECRECY ACT (BSA) COMPLIANCE

Compliance with the provisions of the BSA, anti-money laundering and financial recordkeeping regulations, Customer Identification Program, and the USA PATRIOT Act are less than satisfactory. Deficiencies exist that require management’s attention, including the lack of a formal customer due diligence (CDD) program, weak internal policies, procedures, and controls; and, untimely FinCEN reporting. The deficiencies are addressed on the Risk Management Assessment pages of this Report. Additionally, some of the deficiencies have resulted in apparent violations, which are detailed on the Violations of Laws and Regulations pages.

COMPLIANCE AND COMMUNITY REINVESTMENT ACT

The most recent Compliance examination and evaluation of CRA performance were conducted on June 21, 2013, and March 13, 2011, respectively. The Compliance examination cited numerous apparent violations and reported that the overall compliance program was weak and informal, board and senior management oversight was insufficient, and internal monitoring was ineffective. The directorate adopted a Board Resolution in July 2013 to address the deficiencies noted at the compliance examination. The CRA evaluation noted satisfactory performance.

MEETING WITH MANAGEMENT

A meeting was held with senior management on September 7, 2015, to discuss examination findings. In attendance for the bank were President Shackelton, SVP Lamarr, and SVP Wild, and Directors Thomas Orde- Lees and Louis Rickenson. The FDIC was represented by Examiner John Smith and Supervisory Examiner Sybil Ludington. Examination findings and recommendations were discussed. Management was receptive to recommendations and agreed to take the necessary corrective action. President Shackelton agreed to charge-off the Loss classifications by the time the next Call Report is filed. Management disagreed with the Asset Quality, Management, Sensitivity to Market Risk, and Composite ratings.

MEETING WITH THE DIRECTORATE

A meeting with the Board of Directors was conducted on October 16, 2015. All directors, with the exception of Director John Vincent, were present. Additionally attending the meeting were SVP Lamarr, SVP Wild, VP Hubert Hudson, VP Frank Hurley, VP Thomas Crean, and Attorney Alexander Hamilton. Examiner John Smith and Field Supervisor John Kemp represented the FDIC, Managing Examiner John Jay represented the Federal Reserve Bank of Valhalla, and Director of Bank Supervision James Wilkinson represented the State. The primary report findings, composite and component ratings, and provisions of a proposed regulatory action were discussed. The board and management were receptive to examiner recommendations and committed to correct the deficiencies noted in the Report. Management has started addressing many of the issues. The board indicated it would prefer to continue addressing the examination findings through the Board Resolution that it adopted on October 9, 2015, rather than through a MOU; however, it indicated that the deficiencies would be addressed regardless of the format. President Shackelton indicated that he would appreciate additional dialogue regarding any proposed regulatory action prior to it being formalized.

8 Examination Conclusions and Comments (Continued) 12345

DIRECTORATE RESPONSIBILITY

Members of the Board of Directors are responsible for thoroughly reviewing this Report of Examination. Each director must sign the Signatures of Directors page, affirming that each has reviewed the Report in its entirety.

Examiner (Signature) Reviewing Official (Signature) and Title

9 Risk Management Assessment 12345

1. Are risk management processes adequate in relation to economic conditions and asset concentrations?

No.

Local economic conditions have deteriorated and the market is saturated with stalled residential developments and vacant commercial strip centers. The regional research and business development park that was to be the center of growth in Anycity never left the planning stages and is unlikely to do so in the immediate future.

CRE concentration monitoring Overall portfolio risk identification, monitoring, and reporting practices are ineffective. The Loan Policy lacks specific parameters for limiting concentrations, promoting diversification, and establishing risk appetite. Management has a concentration report that splits out loans by general purpose; however, the report is not specific. Management must establish concentration limits and diversification goals relative to permissible and desirable property types, market areas, builder/developers, risk grades, LTVs, speculative lending, and other similar attributes. Refer to the Concentrations page for additional details regarding unmonitored loan concentrations.

2. Are risk management policies and practices for the credit function adequate?

No.

Risk management practices are not adequate in relation to the significant weaknesses in the ADC/CRE lending program. ADC lending is a high risk activity as economic prospects for real estate projects can change considerably between inception and completion. Similarly, investment property loans are highly dependent on market appreciation for successful conversion of collateral. Management has not implemented appropriate risk management systems which allow the institution to identify, measure, monitor, and control risk related to ADC/CRE loans.

CREDIT RISK MANAGEMENT PRACTICES

Loan Underwriting and Administration Procedures Loan underwriting and administration deficiencies have been identified in many of the construction and development credits reviewed during the examination. These loans represent a significant volume of the bank’s activities, magnifying the need to strengthen this area. Management should implement corrective action to address these weaknesses.

• Repayment Capacity Assessment: Global financial analyses were either not performed or contained inaccuracies (i.e. failure to reflect outside debt service, inclusion of nonrecurring capital gains, failure to obtain and analyze all relevant tax return information, and utilizing income information that does not reconcile to tax return data). Examples include loans related to the following: Tudor House, Lancaster Investors, York Builders, and Augustine. In addition, management does not consistently update credit analyses utilizing recent financial information.

• Unsecured Lines of Credit: Underwriting of some unsecured lines extended to builders appears liberal, as there was no tracking of line usage and no repayment program enforced. Examples include loans related to the following: Tudor House, York Builders, Duke Construction, and Gloucester Construction.

10 Risk Management Assessment (Continued) 12345

• Project Costs/Borrower Equity: Management does not consistently perform a loan-to-cost assessment or identify the borrower’s source of equity. Examples include loans related to the following: Gloucester Construction, Sixpence, and York Builders.

• Contractor Statement Review: Management does not consistently review and document changes in contractor statements to determine the significance of and reasoning for changes and how cost increases will be funded. In addition, there is often no assessment of the reasonableness of charges for those items performed by the borrower or a related company to determine any additional profit taken out by the borrower. Examples include loans related to the following: Bolingbroke relationship, Cornwall Custom Homes, York Builders, and Gloucester Construction.

• Release Price Determination: Release prices for individuals lots or units are not always properly set, with sales nearing or equal to 100% required in order to fully payoff the debt. Examples include loans related to the following: Mortimer Corporation, Bedford Lakes, and Bolingbroke Sidwell. In addition, the loan documents for Suffolk Creek do not appear to specify a minimum release price per unit.

• Tracking of Sales: Management does not appropriately monitor lot sales, including the dates of contracts and closings, sales prices, and proceeds realized. Examples include loans related to the following: Mortimer Corporation, Suffolk Creek, and Live Oak Development loans.

• Project Overview and Renewals: Project overview and expected timeframes for completion of the various stages are not consistently provided. In addition, renewals are granted without any discussion of the original plan, or revisions, if applicable. Examples include loans related to the following: Bolingbroke Sidwell, Bolingbroke Hyde, Live Oak Development, York Builders, Suffolk Creek, and Bedford Lakes.

• Inspections: Inspections conducted on several loans were performed by the loan officer rather than an individual independent of the transaction. SVP Wild stated that management generally requires inspections to be conducted by someone other than the loan officer. To mitigate the risk of improper advances, management should ensure that all officers are following these procedures uniformly. At a minimum, management should establish a dollar limit for which independent inspections will be required. Examples include loans related to the following: The Neville Limited Partnership and Cornwall Custom Homes.

Management should also enhance construction monitoring reports. Specifically, the bank would benefit from reports that highlight those construction and development loans that may need closer attention. These loans can include credits that are out-of-balance, have depleted interest reserves, and are experiencing delays in construction, or have slower-than-expected sales.

Management agreed to address these loan underwriting and administration deficiencies.

Loan Grading System The loan rating system is ineffective. The loan rating definitions are extremely brief and insufficient granularity exists within the rating system, as almost the entire portfolio is rated “average.” Differences between the ratings assigned by the bank and the examiners were identified on several loans. For example, the loans to Gloucester Construction, Farmgate Enterprises, Suffolk Creek, and Mary Gueldres were rated one to two grades higher internally than the assigned regulatory classification. In addition, two relationships totaling $5,335M are listed for Special Mention, yet management has not identified these credits as containing weaknesses or warranting

11 Risk Management Assessment (Continued) 12345 additional monitoring. Management should expand the definitions to provide specific credit rating criteria. In addition, management should ensure that the loan rating definitions reconcile with the framework used by Federal regulatory agencies as required by the Interagency Policy Statement on the Allowance for Loan and Lease Losses (Financial Institutions Letter 105-2006).

SVP Wild stated that management is in the process of revising the risk grading system and that the above weaknesses will be addressed.

ALLL Methodology The ALLL methodology does not fully consider outstanding regulatory and accounting guidance, including ASC 450, ASC 310, and the Interagency Policy Statement on the Allowance for Loan and Lease Losses. Management should revise the ALLL Policy and methodology as follows:

• The impairment amount determined under the bank’s ASC 310 Accounting for Creditors for Impairment of a Loan (formerly known as FAS 114) analysis should be more adequately documented and supported.

• Additional analysis and documentation is needed to support management’s allocation for loans classified by regulators and unimpaired Watch List loans under its ASC 450 Contingencies (formerly FAS 5) analysis.

• The ASC 450 qualitative analysis should be expanded to more fully address each of the environmental factors, as the current analysis is brief. In addition, the qualitative factors should be assessed for each loan type rather than for the portfolio as a whole.

• Management should develop a method that allows for quantifying the ASC 450 qualitative assessment, as the results of this analysis are not directly translated to their impact on the historical net loss figures.

• Management currently utilizes the Report of Condition loan categories for its ASC 450 analysis. Management should review this segmentation and ensure that loans are sufficiently segregated based on similar risk characteristics.

• The ALLL analysis relies on the most recent three-year loss history. A review of the bank’s loss history since inception reveals that the average of the most recent three years is one of the lowest. Management should review the use of a three-year loss history for reasonableness and ensure that it is relevant to the institution’s current loan portfolio.

• The policy states that a historical loss rate for a modified local peer group will be calculated and utilized. However, management does not use a modified local peer group. Management should revise its policy and practices to ensure consistency.

• Management should ensure that an independent validation of the ALLL methodology is periodically performed.

SVP Wild stated that the bank has contracted with an independent firm to evaluate the ALLL methodology. He agreed to ensure that the above recommendations are addressed.

12 Risk Management Assessment (Continued) 12345

Loan Review Engagement Letter The scope of the loan review should be more clearly detailed in the engagement letter. Loan review is outsourced to an independent company. Currently, the engagement letter with this company does not specifically note that the loan review will include insider credits, loans previously classified by regulators, and an adequate sample of smaller loans. In practice, these risk areas are captured by the third-party loan review team. Management should ensure that the engagement letter identifies these credits as part of the review process. In addition, management should regularly report to the board the total dollar and percentage of loans reviewed and ascertain if sufficient review coverage is being provided.

SVP Wild agreed to discuss these recommendations with the bank’s loan reviewer.

Watch List To enhance the Board and management’s knowledge of Watch List credits, it is recommended that the Watch List be expanded to include the assigned loan rating and the collateral value.

SVP Wild agreed to expand the Watch List accordingly.

Loan Policy The Loan Policy should be revised to incorporate the following recommendations: • The advance rate on development loans should be reduced from 80% to 75% in conformance with Part 365 advance guidelines. • The policy indicates two different internal lending limits; the limits should be revised for consistency. • Minimum requirements for the initial investment or the maintenance of hard equity by the borrower in construction projects should be addressed. Additionally, the policy provides general portfolio mix guidelines for construction and development loans of 5% to 20% of total loans. As of June 30, 2015, these loans represent approximately 28% of total loans.

SVP Wild agreed to revise the policy to incorporate the above recommendations. He further stated that management does not monitor for compliance with the policy’s stated portfolio mix guidelines, but he agreed to implement monitoring procedures.

Real Estate Appraisal Policy and Procedures Management should address the following real estate appraisal weaknesses: • An approved list of appraisers, based on management’s experience and satisfaction, should be periodically reviewed and approved by the Board. • The Appraisal Policy’s guidelines for evaluations should be revised to comply with the guidance contained in the Interagency Appraisal and Evaluation Guidelines issued in Financial Institution Letter 74-94 dated November 11, 1994. • Some appraisals contain assumptions that are not adequately supported. Examples include loans to Bolingbroke Hyde and Sixpence. Although an appraisal review form is completed by management, no concerns or deficiencies were indicated. Management should ensure that assumptions are fully supported and that any potential concerns or questions are discussed with the appraiser and documented accordingly. SVP Wild agreed to submit a list of appraisers for approval to the Board and review the Policy’s evaluation guidelines. He indicated that appraisers are often questioned regarding their assumptions; however, time limits do not permit the documentation of this information.

13 Risk Management Assessment (Continued) 12345

Part 365 Monitoring Report The current report utilized to monitor those loans with advance rates in excess of the supervisory guidelines contained in Appendix A to Part 365 does not include the loan-to-value ratio. Management should regularly provide this information to the board so that it is appropriately informed as to the extent of each loan’s departure from established regulatory guidelines.

SVP Wild agreed to revise the report accordingly.

3. Are risk management policies and practices for asset/liability management and the investment function adequate?

No.

The following recommendations for improving sensitivity to market risk and liquidity risk management practices are provided below:

Sensitivity to Market Risk Management Asset/liability risk management policies and practices need to improve. Management regularly monitors the bank's rate sensitivity position using income simulations and an economic value of equity (EVE) model. Management presents detailed quarterly reports to the board. However, management and the board must establish, and monitor compliance with, policy limits that reflect the board’s interest rate risk tolerance.

The model used to identify, measure, monitor, and control IRR needs to be improved. Model inputs do not capture, with sufficient detail, unique balance sheet characteristics as they are derived from raw Call Report data. In addition, behavior assumptions used for modeling are not bank-specific but rather, rely on default assumptions provided by the modeler. Additional rate movement scenarios should be developed. Specific recommendations are as follows: 1. The board should ensure that the modeling tool used to measure and monitor IRR is sufficiently robust to capture the characteristics of the bank’s balance sheet. The model must provide reliable output and sufficient information for the board to navigate potential threats given adverse rate movements.

2. Model outputs provide reports on the rate impact over a one-year time horizon using parallel rate shocks of +/-50 to 200 basis points. This narrow band of rate shocks is insufficient given the current historically low rate environment. Stress tests should be expanded to include the two-year horizon and measure the impact of +/-300 and 400 basis point interest rate movements, as outlined in regulatory guidance.

3. In addition to the static, no-growth, instantaneous rate shock scenarios modeled, management would also benefit from modeling additional scenarios that show a gradual increase or decrease in rates over the course of a specified time-period, otherwise known as a ramped-rate scenario. These additional scenarios would be effective in identifying and measuring exposure to rising interest rates and its potential impact on earnings performance against management’s budgeted growth.

4. The policy should outline the risk limits for net interest income (NII) and EVE at each stress interval for each scenario measured (i.e., shock +/- 50–400, ramp +/- 50-400 bps). The risk limits should specify acceptable levels of earnings and capital volatility in the context of the stress scenarios of potential changes in market interest rates and reflect those outlined in the model reports.

14 Risk Management Assessment (Continued) 12345

5. Management must refine assumptions used in the modeling process. Specifically, and at a minimum, management must refine assumptions regarding pricing correlation (beta) of non-maturity deposits and other volatile funding sources, rate of decay of the non-maturity deposits, and prepayment variability on the loan portfolio. Bank-specific behavior should be analyzed in varying rate environments using qualitative and quantitative analysis.

6. Management should perform sensitivity analysis (annually, at a minimum) on key assumptions to determine which assumptions have the most influence on the model's output and report the results of the analysis to the board.

7. The independent review is not adequate and needs to improve. For instance, the review did not note the aforementioned weaknesses associated with the IRR management process with the exception of noting the lack of ramped-rate scenarios. The 1996 Joint Agency Policy Statement on Interest Rate Risk outlines the requirements of the independent review.

8. The results of the annual back-test, validation, and independent review have not been to ALCO and the board as required.

President Shackelton committed to correcting all interest rate risk management deficiencies by December 31, 2015.

Liquidity Risk Management Liquidity risk management policies and practices need to improve. Current procedures for monitoring liquidity include weekly meetings with senior management to discuss repricing strategies, competitor rates, and funding costs. Although liquidity risk tolerances and exceptions are reported monthly, management does not provide the board with a corrective action plan to restore exceptions to internal policy guidelines. The Funds Management Policy should be updated to provide limits for the use and amount of brokered deposits. In addition, the Funds Management Policy should detail contingency planning in the event use of brokered deposits needs to be curtailed.

Management prepares a maturity report weekly that analyzes liquidity. This report shows month by month cash inflows from securities, loans, and loans held for sale and cash outflows from maturing liabilities. The cash flow analysis does not include any cash outflows from reinvestment of funds in securities or from loan growth. The analysis also does not include cash inflows from renewal of time deposits or from deposit growth. Management should use a more extensive pro-forma cash flow analysis to manage liquidity. This analysis should show the institution’s projected sources and uses of funds, including those listed above, under likely liquidity scenarios.

Management performs an annual stress test that identifies the bank's liquidity needs over three separate scenarios: a base case, a loss of 10% of assets over 3 months, and a loss of 20% of assets over 12 months. Management should develop bank-specific scenarios for use in the CFP stress test.

President Shackelton committed reviewing examiner recommendations and may consider developing bank- specific stress tests. He stated that brokered funds were a key to the bank’s growth given their relative low cost and accessibility. He was not receptive to implementing limits on the usage of brokered funds.

15 Risk Management Assessment (Continued) 12345

4. Are risk management processes adequate in relation to and consistent with, the institution’s business plan, competitive conditions, and proposed new activities or products?

No.

Strategic planning needs to improve. Loan and deposit growth have not materialized as projected, thus resulting in significant operating losses and a declining capital position. Additionally, overall economic conditions have deteriorated further weakening potential loan demand. Management must formulate a strategic plan that considers relevant market factors and changing economic and competitive conditions.

5. Are internal controls, audit procedures, and compliance with laws and regulations adequate (includes compliance with the Bank Secrecy Act [BSA] and related regulations)?

No.

BANK SECRECY ACT (BSA)/ANTI-MONEY LAUNDERING (AML) PROGRAM

The board and senior management need to revise internal policies and procedures to ensure a compliant BSA program, as several program weaknesses and apparent violations are included in this Report. Of note, some of these weaknesses were identified in the last two regulatory examinations, and violations of two BSA regulations were cited in the prior FDIC Report. The areas noted below deserve management’s attention.

Customer Due Diligence (CDD) Management has not implemented a formal, comprehensive CDD program. Recommendations regarding CDD were included in the prior FDIC Report. While the bank has some informal due diligence and monitoring programs in place, they have not been uniformly adopted across all business lines. Management must formally adopt and implement a CDD program to enable the bank to predict with relative certainty the types of transactions that customers are likely to engage, particularly those that present a high risk for money laundering and terrorist financing. The CDD program should be tailored to the risks identified in the bank’s BSA Anti-Money Laundering (AML) risk assessment.

The CDD program must also address enhanced procedures for BSA high-risk customers identified by management. Due diligence for high-risk customers is critical in order to better understand and analyze their anticipated transactions as part of an adequate suspicious activity monitoring system. The CDD procedures should also include a periodic review of the customer relationship to determine whether there are substantive changes to the original CDD information that would warrant an adjustment to the level of monitoring being applied.

Furthermore, management has identified numerous higher-risk customers, all of which are commercial customers. Monitoring of these perceived higher-risk customers is on-going, but no formal policies or procedures are in place. During the examination, several individual customers were noted with higher-risk characteristics or engaging in suspicious activity which falls within the informal guidelines management has established. There is no documented monitoring of these individuals.

Management indicated it would monitor these individual customers after reviewing and discussing the issues with the BSA committee. Additionally, SVP and BSA Officer Lamarr indicated that a Board approved CDD policy and program will be implemented October 31, 2015.

16 Risk Management Assessment (Continued) 12345

Suspicious Activity Monitoring and Reporting The bank’s BSA program has a well-established and efficient monitoring system to detect suspicious activity in a timely manner. However, as noted at the previous State examination and the bank’s 2014 independent review, adequate procedures and processes need to be implemented to ensure that SARs are filed within the required time-frames and appropriately reported to the board, and that decisions not to file a SAR are adequately documented. As a prudent practice, all decisions not to file a SAR should be reported to the directorate as well. Refer to the Violations of Laws and Regulations page for additional detail.

Currency Transaction Reports The bank’s policy and practice regarding the aggregation of complex customer relationships should be reviewed. Currently, management is aggregating transactions conducted on an “individual basis” for certain customers (the David Berwick relationship and the Anthony Towton relationship). Upon review of the bank’s internal monitoring reports concerning the Berwick relationship, it would appear that the additional litmus test of beneficial interest and commingling of funds potentially has been met. Therefore, management must contact the Internal Revenue Service (IRS) and determine the requirement for backfiling all transactions not previously aggregated and not previously reported because multiple persons conducted the transactions and not just a single individual.

Additionally, management needs to amend the exemption granted for Abbey’s Finer Foods, Inc., in 2012 and reaffirmed in 2014. The business has been recognized by Anystate as AFF Enterprises, Inc., since August of 2013. Since the corporation’s status as organized under the laws of Anystate ultimately determines how the exemption should be filed, the exemption should be amended to reflect AFF Enterprises, Inc., d/b/a Abbey’s Finer Foods, Inc.

SVP and BSA Officer Lamarr indicated that management will contact the IRS to determine backfiling requirements for the Berwick relationship and will universally apply the aggregation of funds and file on Berwick appropriately going forward. Management will also review the Towton relationship. SVP and BSA Officer Lamarr stated that the amendment to the AFF Enterprises, Inc. exemption will be filed immediately.

FinCEN 314(a) Searches Management has not instituted sufficient procedures to ensure compliance with FinCEN 314(a) search requests. While the bank’s records are generally searched in accordance with regulatory directives, there have been instances when the searches have not been completed in a timely manner and where the reviews of search results are not properly documented. Management should develop policies and procedures to document compliance. Refer to the Violations of Laws and Regulations page for additional detail.

During the examination, SVP and BSA Officer Lamarr implemented appropriate controls to ensure compliance with 314(a) search requirements.

Training The bank’s BSA Policy states that “training will be bank-wide.” SVP and BSA Officer Lamarr indicated that the requirement is fulfilled by having Assistant Cashier Dora Leatherwood annually conduct for all employees numerous classes that cover the bank’s BSA Policy and all pertinent regulatory issues. Documentation of the topics covered and tests administered, however, is weak. Additionally, in June 2015 management reported that all BSA training was 100% complete. However, documentation provided during the examination indicates that 15 out of 71 employees (21%) have not received their annual BSA training from Assistant Cashier Leatherwood. Furthermore, management requires additional online classes regarding BSA that are directed to the individual

17 Risk Management Assessment (Continued) 12345 needs of each employee; again, however, there is no comprehensive tracking of course completion rates. Board reporting should reflect the true status of the bank’s BSA training program.

SVP and BSA Officer Lamarr indicated that, going forward; employee training will be better monitored and properly reported to the Board.

Independent Review The last two independent BSA reviews conducted by Rose and Associates, Inc., appear adequate, with the exception of the lack of a CDD program review. Management’s resolution of the exceptions identified in the independent BSA reviews is not always sufficiently documented in its tracking report. While management responses to the reports indicate that policy or procedural changes were made or will be made, there is no indication or documentation within the audit tracking report that several of the changes have been implemented.

SVP and BSA Officer Lamarr indicated that she would contact the auditor regarding the inclusion of the CDD program in the BSA audit scope. Additionally, she indicated that the tracking reports will reflect the final resolution of all findings.

INFORMATION TECHNOLOGY

The following recommendations should be implemented to enhance the Information Technology (IT) area.

Audit The IT audit plan assigns responsibility for annual testing. Though controls are generally operating effectively, audit documentation for several issues is lacking. Examples include automated clearing house (ACH), internet banking, website and vendor management, and security incident evaluation. Management should review the risk assessment control worksheets and ensure that the audit scope covers all critical controls. Thereafter, management should ensure that an adequate internal review provides sufficient detail to document an independent assessment of critical controls.

Automated Clearing House (ACH) The bank offers both debit and credit ACH origination services to its customers. Credit origination risk is limited by requiring adequate available funds prior to the transaction. However, the bank has no corresponding control for debit origination risk (the possibility of excessive returns/rejects from the originator’s customers). Scheduled reviews of each debit originator’s financial strength are one compensating control that management should consider incorporating into practice.

Incident Response Guidance regarding incident response practices is found in Supplement A to Appendix B to Part 364 of the FDIC’s Rules and Regulations, entitled Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice. This guidance requires contact with the bank’s primary regulatory agency in the event of an incident involving improper access of customer information. The guidance also provides additional customer notification content not included in the current policy. Management should review its incident response procedures and expand them to reflect current guidance.

President Shackelton and SVP Lamarr are currently reviewing bids for future IT audits. They agreed to ensure that the scope of these audits incorporates all critical controls. SVP Lamarr also agreed to perform annual credit reviews of ACH originators and expand the incident response issues as recommended.

18 Risk Management Assessment (Continued) 12345

6. Is Board supervision adequate, and are controls over insider transactions, conflicts of interest, and parent/affiliate relationships acceptable?

No.

A series of loans to President Shackelton was extended in apparent violation of Part 337 of the FDIC’s Rules and Regulations. Refer to the Violations of Rules and Regulations page for additional detail.

Holding Company Ownership Valhalla Bancshares, Inc. owns 100% of the Valhalla Commerce Bank outstanding shares. President Shackelton, Director Nikola Tesla, and Director Thomas Orde-Lees, acting as a group own 51% of the holding company stock. No exceptions were noted regarding transactions with the holding company.

19 Violations of Laws and Regulations 12345

FDIC’S RULES AND REGULATIONS

Part 337 – Unsafe and Unsound Banking Practices

Section 337.3(c)(2) authorizes insured nonmember banks to extend credit to any executive officer of the bank for any purpose if the aggregate amount of such extensions of credit does not exceed $100,000. Extensions of credit to finance the education of the executive officer’s children or loans secured by a first lien on the residence of the executive officer for the purchase, construction, maintenance, or improvement of the residence are excluded from this dollar limitation. The bank is in violation of this Section because three loans with commitments totaling $167,500 have been extended to President Shackelton. All of these credits are subject to the $100,000 limitation, as the purpose for each of the three loans is not one of the exclusions outlined above.

President Shackelton acknowledged the violation during the examination. He stated that management incorrectly assumed that the home equity line of credit commitment totaling $75,000 was excluded from the $100,000 threshold due to its purpose for improvement of his residence. However, the collateral for this line was not a first lien on the residence. President Shackelton stated that the violation will be corrected as soon as possible, most likely by refinancing the loan at another institution.

Part 323 – Appraisals

Section 323.3(a) requires an appraisal for all real estate-related financial transactions over $250,000 where the underlying real estate is taken as collateral. The bank is in apparent violation of this Section as a result of the following loans:

Borrower Loan Amount Origination Date Calais Development, LLC $ 480,000 October 19, 2014 Bedford Lakes Investment Group, Inc. $3,134,974 February 6, 2015

Regarding the Calais Development credit, the bank financed 100% of the purchase of a single family lot secured by the subject lot and an additional residential lot. An appraisal on the lot being purchased was obtained prior to the October 19, 2014, loan funding date, but the appraisal on the additional lot was not obtained until January 17, 2015.

The bank did not obtain an appropriate appraisal on eight lots securing the loan extended to Bedford Lakes Investment Group. These lots were part of an original 56-lot single family subdivision. An appraisal of the entire subdivision, dated March 26, 2014, was completed for another lender. Management used the average value per lot contained in this appraisal as a basis for determining the loan-to-value ratio. However, management did not assess the size and configuration of the eight lots to support that the average was a reasonable method of valuation.

SVP Wild acknowledged the failure to obtain appraisals prior to funding the above loans. He indicated management was comfortable with utilizing the average lot value for the Bedford Lakes Investment Group credit.

20 Violations of Laws and Regulations (Continued) 12345

Part 353 – Suspicious Activity Reports (SAR)

Failure to File a Timely Suspicious Activity Reports

Section 353.3(b) of the FDIC’s Rules and Regulations requires, in part, that a covered financial institution file a SAR (Form FDIC 6710/06) within timeframes prescribed by this Section. Management did not complete and submit three reports within the required timelines. In addition, the BSA Committee reconsidered and decided to file a SAR on previously reviewed and unreported suspicious activity from July 2014 following the bank’s independent review in September 2014. While the SAR is found within the bank’s records, Section IV is neither completed nor dated, and there is no record of receipt of the report by the FDIC.

Failure to Notify the Board of SARs Filed Section 353.3(f) of the FDIC’s Rules and Regulations requires management to notify the board, or a committee thereof, of any reports filed pursuant to this Section. File documentation indicates that management did not report three SARs filed in 2014 and one SAR filed in 2015 to the board or the Compliance Committee.

SVP and BSA Officer Lamarr stated that the July SAR will be submitted immediately and all previously unreported SARs will be reported to the Board of Directors at the September 2015 meeting.

TREASURY DEPARTMENT’S FINANCIAL RECORDKEEPING REGULATIONS

Part 103 – Financial Recordkeeping and Reporting of Currency and Foreign Transactions

Section 103.100(b)(2)(i) of the Treasury Department’s financial recordkeeping regulations requires institutions to search certain records when provided with an information request from the Financial Crimes Enforcement Network (FinCEN). Management does not appear to have completed the FinCEN 314(a) search requests within the designated timeframes for the lists received on January 30, 2014, and June 5, 2014. Additionally, internal procedures do not fully document compliance with this requirement, as the “reviewed” column of the internal Patriot Officer Report does not contain any entries noting the timely review of the search results. Management must develop policies and procedures to document compliance with the USA Patriot Act.

During the examination, SVP and BSA Officer Lamarr implemented appropriate procedures to ensure the accurate and timely search of all future FinCEN requests and to ensure that all reviews are documented accordingly.

21 Violations of Laws and Regulations (Continued) 12345

ANYSTATE BANKING ACT

Section 357 – Basic Lending Limits

The bank is in apparent violation of Section 357 of the Anystate Banking Act. Section 357 states, in part, that the liabilities outstanding at one time to a state bank of a person for money borrowed shall not exceed 25% of the amount of the bank’s unimpaired capital and surplus. On March 16, 2014, the bank extended three loans to three different LLCs: 1) $1,360M to ParkWest Center, LLC 2) $1,200M to ParkWest Station, LLC 3) $1,200M to Salisbury Place, LLC

Three individuals, Tracy Warwick, J. Arney Trollope, and Scott Salisbury, are members of each of the LLCs, and sign each of the notes as managers, in addition to signing the loan to ParkWest Station, LLC, individually. They also sign other notes at the institution individually. When the loans were extended, the bank’s legal lending limit totaled $3,348M, as determined by the most recently filed Call Report dated December 31, 2014.

The loans are secured by three different income-producing properties. However, at origination, the loan presentation for each of the loans indicates inadequate debt service ability (debt service coverage ratios of less than 1.0x). In addition, the loan presentations indicate the primary source of repayment as rental income/co- borrower/guarantor personal assets. LLCs under Section 357 are deemed to be legal entities distinct from its members provided that each LLC has sufficient collateral and anticipated income to service its debt without relying on individual members to repay the loan; and, if so, the loans would not be aggregated with the members’ individual borrowings. However, the above LLCs do not have sufficient debt service ability, and therefore, the loans are aggregated with the members’ individual borrowings for Section 357 purposes. An internal calculation by management indicates that member Tracy Warwick individually signs on loans totaling $1,807M, J. Arney Trollope individually signs on loans totaling $1,200M, and Scott Salisbury individually signs on loans totaling $2,829M. Combining the above loans to ParkWest Center, LLC, and Salisbury Place, LLC, which total $2,560M, with the individual loans of these three borrowers, results in total extensions above the legal lending limit of $3,348M for each of these individuals.

SVP Wild indicated that management will determine the best way to correct these violations.

22 Violations of Laws and Regulations (Continued) 12345

CONTRAVENTIONS OF FDIC STATEMENTS OF POLICY

The Joint Agency Policy Statement on Interest Rate Risk (1996)

The Joint Agency Policy Statement on Interest Rate Risk (IRR) provides guidance to banks on prudent IRR management principles. This Policy Statement provides, in part, that

“...Effective Board and senior management oversight of a bank's IRR' activities is the cornerstone of a sound risk management process. The Board and senior management are responsible for understanding the nature and level of IRR being taken by the bank and how that risk fits within the overall business strategies of the bank. They are also responsible for ensuring that the formality and sophistication of the risk management process is appropriate for the overall level of risk. Effective risk management requires an informed board, capable management and appropriate staffing. Senior management is responsible for ensuring that IRR is managed on both a long range and day-to-day basis. In managing the bank's activities, senior management should oversee the implementation and maintenance of management information and other systems that identify, measure, monitor, and control the bank's IRR…”

“…Effective control of IRR requires a comprehensive risk management process that includes the following elements: 1. Policies and procedures designed to control the nature and amount of interest rate risk the bank takes including those that specify risk limits and define lines of responsibilities and authority for managing risk. 2. A system for identifying and measuring IRR. 3. A system for monitoring and reporting risk exposures. 4. A system of internal controls, review and audit to ensure the integrity of the overall risk management process.”

“…The bank's measurement system(s) should enable management to recognize and identify risks arising from the bank's existing activities and from new business initiatives. It should also facilitate accurate and timely measurement of its current and potential IRR exposure. The agencies believe that a well-managed bank will consider both earnings and economic perspectives when assessing the full scope of its IRR exposure. The impact on earnings is important because reduced earnings or outright losses can adversely affect a bank's liquidity and capital adequacy…”

“…Regardless of the type and level of complexity of the measurement system used, bank management should ensure the adequacy and completeness of the system. Because the quality and reliability of the measurement system is largely dependent upon the quality of the data and various assumptions used in the model, management should give particular attention to these items. The measurement system should include all material interest rate positions of the bank and consider all relevant re-pricing and maturity data. Such information will generally include:

(i) current balance and contractual rate of interest associated with the instruments and portfolios, (ii) principal payments, interest reset dates, maturities, and (iii) (iii) the rate index used for re-pricing and contractual interest rate ceilings or floors for adjustable-rate items. The system should also have well-documented assumptions and techniques…”

23 Violations of Laws and Regulations (Continued) 12345

“…Effective control of the IRR management process includes independent review and, where appropriate, internal and external audit. The bank should conduct periodic reviews of its risk management process to ensure its integrity, accuracy and reasonableness. Items that should be reviewed and validated include:

1. The adequacy of, and personnel’s compliance with, the bank’s internal control system. 2. The appropriateness of the bank's risk measurement system given the nature, scope and complexity of its activities. 3. The accuracy and completeness of the data inputs into the bank's risk measurement system. 4. The reasonableness and validity of scenarios used in the risk measurement system. 5. The validity of the risk measurement calculations. The validity of the calculations is often tested by comparing actual versus forecasted results.”

An apparent contravention of the Joint Policy Statement on Interest Rate Risk is cited because the exact nature and level of IRR cannot be determined due to the model’s weaknesses and lack of adequate assumptions regarding customer behavior as described in the RMA pages of this Report. As a result, the extent of IRR, and its effect on earnings and capital levels, is not being accurately determined and reported to the board. In addition, model scenarios and policy guidance (including identification of appropriate risk limits) must be expanded. Internal controls are insufficient. The independent review of the IRR function did not address most of the model deficiencies or any of the process and oversight weaknesses. While the independent review does back-test against actual results, material variances are not reconciled with explanation of the difference between the model's projections and actual results provided to ALCO or the Board.

President Shackelton stated that he and his staff would work with the bank’s IRR model vendor to correct all IRR-related deficiencies by December 31, 2015.

24 Examination Data and Ratios 12345

ASSET QUALITY ADVERSELY CLASSIFIED Substandard Doubtful Loss Total Loans and Leases 3,240 62 3,302 Securities Other Real Estate Owned Other Assets 11 11 Other Transfer Risk Subtotal 3,240 73 3,313 Contingent Liabilities Totals at Exam Date 03/31/2015 3,240 73 3,313 Totals at Prior Exam 09/30/2013 / S 600 600 Totals at Prior Exam 09/30/2012 3,028 3,028

Exam Date Prior Exam Prior Exam 03/31/2015 09/30/2013/ S 09/30/2012 Total Special Mention 5,335 1,411 Adversely Classified Items Coverage Ratio 23.62 5.07 27.60 Total Adversely Classified Assets/Total Assets 2.16 0.42 2.23 Past Due and Nonaccrual Loans and Leases/Gross Loans and Leases 1.78 0.19 0.54 Adversely Classified Loans and Leases/Total Loans 2.50 0.53 3.03 ALLL/Total Loans and Leases 1.04 1.01 0.98

CAPITAL Exam Date Prior Exam Prior Exam 03/31/2015 9/30/2013 / J 09/30/2012 Tier 1 Leverage Capital/Average Total Assets 8.29 7.68 7.51 Tier 1 Risk-Based Capital/Risk-Weighted Assets 9.12 9.15 9.35 Total Risk-Based Capital/Risk-Weighted Assets 10.06 10.12 10.27 Capital Category The capital category relates only to the Prompt Corrective Action W W W provisions of Part 325 of the FDIC Rules and Regulations. PCA Categories: W – Well-capitalized, A – Adequately capitalized, U – Undercapitalized, S – Significantly undercapitalized, C – Critically undercapitalized Period Ended Peer Period Ended Period Ended 03/31/2015 03/31/2015 12/31/2014 12/31/2013 Retained Earnings/Average Total Equity 5.17 5.65 2.36 6.65 Asset Growth Rate 3.89 8.36 5.57 9.49 Cash Dividends/Net Income 33.12 64.77

EARNINGS Period Ended Peer Period Ended Period Ended 03/31/2015 03/31/2015 12/31/2014 12/31/2013 Net Income (After Tax)/Average Assets 0.42 0.99 0.51 0.50 Net Interest Income (TE)/Average Earning Assets 3.97 4.23 4.06 4.12 Total Noninterest Expense/Average Assets 3.48 3.18 3.47 3.48

LIQUIDITY Period Ended Peer Period Ended Period Ended 03/31/2015 03/31/2015 12/31/2014 12/31/2013 Net Non-Core Funding Dependence New $100M 20.23 17.00 21.29 17.34 Net Non-Core Funding Dependence New $250M 0.0 0.0 0.0 0.0 Net Loans and Leases/Assets 85.06 69.08 80.68 80.68

25 Items Subject to Adverse Classification 12345

Includes assets and off-balance sheet items which are detailed in the following categories: Substandard Assets - A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful Assets - An asset classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss Assets - An asset classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss

LOANS 115 115 B IN TIME

44 44 CARLSON, DOUGLAS

228 228 FARMGATE ENTERPRISES, LLC By and Gty: Randall Farmgate

This relationship was similarly classified at the previous FDIC and State examinations. Credit extended to sky diving business operating out of Colorado collateralized by a first lien on a 1976 Beech King airplane. Value estimates for similar planes range from $350M to $400M, but the subject airplane has been modified with the passenger seats removed in order to function as a jump plane. This modification reduces the realizable value of the aircraft, but the dollar size of this adjustment is not readily determinable. Erratic payment performance since inception in December 2012 with marginal profitability experienced since the business was purchased. Recently, significant repairs were made to the airplane’s engine requiring financing from additional investors and another institution. Although this indicates a willingness of other parties to extend funds to the business, the additional debt will further strain already marginal repayment capacity. This credit needs to be closely monitored, including obtaining updates on the value and condition of the airplane. Loan is internally rated “watch.” Management does agrees with the Substandard classification.

Originating Officer: Former Loan Officer David Pennypacker Servicing Officer: VP Frank Hurley Reviewing Examiner: Douglas Eberley

453 Days Past Due: 408 / Nonaccrual 399 54 SIXPENCE, DENNIS AND SHARON

Debt consists of one loan extended for the acquisition and rehab of a single-family residence in Anycity, Anystate. The majority of the proceeds advanced under this credit facility were used to pay off existing mortgages with the bulk of the renovation costs to be funded by the borrower. Initial financial statements submitted by the borrower at inception showed adequate resources to fund the renovation costs. However, the borrower has been unable to complete the rehab work, and there has not been any activity on the home for almost twelve months. According to SVP Wild, there is approximately $120M to $150M in work remaining to finish the home.

26 Items Subject to Adverse Classification (Continued) 12345

CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss

An appraisal of the residence, based upon completion of the renovation, dated August 19, 2012, shows a value of $597M. SVP Wild believes the realizable value of the completed home is in excess of the appraised value. But a review of the appraisal raises questions as to whether the $597M appraised value is reasonable. Sales comparisons provided in the appraisal for similar size and room configurations show three homes with sales prices ranging from $413M to $550M. The lower-end home is two blocks from the subject property while the other two are located over two miles away in a different section of Anycity, Anystate. Recent sales data and listing information for other homes in the area also show values in the $450M to $550M range.

Due to the borrower’s inability to complete the rehabilitation or make interest payments, repayment is solely dependent upon the sale of the home. Foreclosure judgment has already been obtained, and the courthouse sale is scheduled for October 2015. A Loss classification of $54M is warranted based upon the deficiency balance produced when adding the estimated $150M remaining costs, incorporating 5% sales commission, delinquent real estate taxes totaling $7.5M, and projected closing costs $10M. The remaining balance is classified Substandard. Once title to the property is received, an updated appraisal should be obtained, and adjustments to the actual loss recognition can be made utilizing the value in this appraisal. Additionally, $11M in accrued interest is classified Loss. Loan is internally rated “watch” and is on nonaccrual. Management agrees with the Substandard classification but disagrees with the Loss amount.

Originating and Servicing Officer: SVP Frank Wild Reviewing Examiner: Douglas Eberley

208 (1) Days Past Due: 209 / Nonaccrual 63 (2) Days Past Due: 147 / Nonaccrual 271 271 SWAG PRODUCERS, INC.

29 (3) Nonaccrual 29 CARLISLE, JENNIFER

373 (4) Days Past Due: 147 / Nonaccrual 373 CARLISLE, RONALD

673 SWAG PRODUCERS, INC. RELATIONSHIP This relationship was similarly classified at the previous FDIC and State examinations. Swag Producers, Inc., is a manufacturer of various small items for advertising and marketing. Debt consists of a working capital line of credit and a term equipment loan extended to the company, and a refinanced mortgage on the Carlisle residence. The loan to Jennifer Carlisle is a renewed unsecured line of credit. The refinanced mortgage included consolidation of other loans advanced for the benefit of Swag Producers and approximately $30M in overdrafts. Collateral for the business loans consists of a lien on the company’s assets and a junior mortgage on the Carlisle residence located in Anycity, Anystate. The personal loan to Ronald Carlisle is collateralized by a first mortgage on the residence. The primary business asset with material value is equipment, which was appraised at $220M per an appraisal dated December 13, 2014. An appraisal of the residence dated December 12, 2014, shows a value of $540M. However, the appraised value was not well supported. The most similar comparable sold at prices ranging from $420M to $430M, which appears to be a more realistic valuation for the residence.

27 Items Subject to Adverse Classification (Continued) 12345

CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss

Swag Producers along with its predecessor company has experienced poor profitability over the last five years and insufficient cash flow generation to service all related debt. Excessive debt appears to have been extended by the bank, which could not be accommodated by sales revenues and working capital bases. Payment performance has been erratic with numerous delinquencies occurring. All related debt to Swag Producers, Inc., and Ronald Carlisle has been placed on nonaccrual status with days past due ranging from 147 to 209. Additionally, a charge- off of $120M was recognized in 2015 and foreclosure action has been initiated. The Carlisles have limited financial capacity with no material assets outside their residence and the business. Income sources outside the company total only $20M per the most recent personal tax return. The borrowers are attempting to sell the business and refinance the mortgage with another lender. Given the mediocre operation of the business and the overall marginal collateral position, a Substandard classification is warranted for the entire relationship. Management agrees with this classification and has similarly rated the relationship, with the exception of the Jennifer Carlisle loan that is internally rated “watch.”

Originating Officer: Former Loan Officer Dean Lamarr Servicing Officer: VP Thomas Crean Reviewing Examiner: Douglas Eberley

516 (1) Days Past Due: 9 344 (2) 178 (3) 50 (4) 1,088 1,088 GLOUCESTER CONSTRUCTION, LLC By: Michel McFetridge Gty: Michel McFetridge(1)(2)(3)(4)

Borrower is a local residential home builder. Loans (1) and (2) funded the construction of two speculative homes. Collateral for the construction loans are first mortgages on the homes located in Bamburgh and Anycity, Anystate. Construction is complete on both homes with outstanding balances of $344M and $516M. Appraisals for these completed homes are $470M and $645M, respectively. Loan (3) is a lot acquisition credit facility. Collateral for the $178M lot acquisition credit consists of a first mortgage on three single-family lots with a combined appraised value of $252M. Loan (4) is an unsecured line of credit to provide funding for miscellaneous construction cost overruns along with general working capital.

The underwriting of the speculative home construction loans was based upon extending 80% of appraised value for the completed homes, with no consideration of project costs or determination of actual equity. Management did not assess the loan-to-cost ratio as a baseline for assessing realizable market value of the completed home. A review of the cost components indicates that over 100% was financed on one of the homes and approximately 91% on the other. Management also failed to assess the components of the contractor statements regarding the reasonableness of the dollar amounts for line items paid to the borrower. There was also no reconcilement or review of the changes in the contractor statements that occurred between draws.

Both homes were completed in 2014 and have been on the market for an extended period of time. Listing prices have been reduced during this time period and only limited buyer interest has occurred. Within the last two months, the listing price for each home has been reduced to near the appraised values and still no firm offers have

28 Items Subject to Adverse Classification (Continued) 12345

CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss been received. The guarantor has stated that the activity in the Sugar Grove subdivision has not been attractive and he will not be building any more speculative homes in this location. Given the softening real estate market and the extended length of time these two homes have been on the market, there is a high degree of uncertainty regarding realization of sales prices sufficient to pay-off the subject debt.

Although the borrower has generated profits throughout the last five years, there is insufficient cash flow generation to service the interest payments on the debt. Only $27M in net income was reported for 2014 with nominal amounts of depreciation and interest expense. Interest payments on the subject debt total approximately $88M annually. Incorporating the actual cash distributions to the guarantor and combining wages paid from the borrower along with other income sources results in available cash flow of approximately $162M. In addition to the interest payments on the subject loans, the guarantor has approximately $49M in annual payment requirements on personal debt. Therefore, it does not appear there is sufficient cash flow generation to service all debt, pay related income taxes, and provide for normal living expenses. This is supported by the request of the guarantor to move to quarterly interest payments and the failure to make the scheduled payments for August 2015. Further demonstration of the insufficient repayment capacity is the payment performance on the line of credit, as it had no principal reductions since inception and a fully drawn balance since December 2014. These loans are rated “average” by management and are not on the Watch List. However, President Shackelton did not disagree with this Substandard classification.

Origination Officer: Former Loan Officer Dean Lamarr Servicing Officer: VP Thomas Crean Reviewing Examiner: Douglas Eberley

23 23 NOVAK, RICHARD

342 (1) 540 (2) 60 (3) 942 670 SUFFOLKCREEK, LLC By: Duke Construction Company, Managing Member Tracy A. Warwick, President

Note (1) originated on December 16, 2012, as a two-year loan to purchase five remaining vacant lots in the Suffolk Creek Subdivision from Highhouse Road Development, the former owner and borrower who was in bankruptcy. The note renewed on December 15, 2014, for $342M and requires quarterly interest payments with principal due at maturity. There are currently three vacant lots; the fourth lot contains a completed duplex. A duplex was also built on the fifth lot; both units were sold and released per management. The note was also previously secured by a junior lien on a duplex on a sixth lot that had one finished and one unfinished unit, which have since been sold and released according to management. It was also secured by four vacant lots in Woodview Subdivision, Anycity, Anystate; however, this collateral has also been released according to management. File documentation was insufficient to determine items such as the sales dates and prices, proceeds applied to the loan, and releases of collateral. The note ($950M) was classified Substandard at the prior FDIC examination.

29 Items Subject to Adverse Classification (Continued) 12345

CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss

Apparent violations of Part 323 were cited at the prior FDIC examination for failure to properly obtain appraisals on the vacant lots and the units on the sixth lot. Appraisals were subsequently obtained on the vacant lots in February 2013, with the three vacant lots’ AVs totaling $488M. Appraisals on the fourth lot with the completed duplex units were obtained in March 2014 and valued the units in the duplex at $342M each (total $684M). However, the units are listed for $334.9M each; one of the duplexes sold for the list price after the exit meeting. There is no documentation of any offers for the remaining duplex or vacant lots.

Note (2) originated on April 12, 2014, for the construction of a duplex on the fourth lot noted above. The note was renewed on April 11, 2015, requires quarterly interest payments and principal at maturity on October 11, 2015. Collateral consists of a third mortgage on the property, and as noted above, the units are completed, and one was sold after the exit meeting. This loan is also signed individually by Tracy A. Warwick and Matthew Worley.

Note (3) originated on May 20, 2013, and has been renewed twice. Current terms call for an interest payment on August 20, 2015, and remaining principal and interest due at maturity December 15, 2015. The purpose of the note was for site improvements for noise reduction, as the property is immediately adjacent to railroad tracks. Collateral consists of a second mortgage on the four lots in Note (1).

There is no financial information on Suffolk Creek available. State financial information on Duke Construction consisting of a 2012 Federal tax return showed a loss of $273M. In addition to signing individually on Note (2), Mr. Warwick and Mr. Worley guarantee Note (1) with limits of $222M and $728M, respectively. Mr. Warwick’s October 2014 PFS includes TA of approximately $1,762M (consisting primarily of RE, with cash and marketable securities totaling $110M), TL of $1,465M, and NW of $297M. His personal debt-to-income ratio is approximately 40% based on a 2013 tax return and a recent credit report. Mr. Worley’s October 2014 PFS appears to include business assets/liabilities and reports cash and marketable securities totaling approximately $25M. His personal debt-to-income ratio is approximately 66% based on a 2013 tax return and an October 2014 credit report.

This relationship is classified Substandard [with the exception of the amount of Note (2) that was paid down from the sale of the duplex unit] due to its uncertain repayment prospects and collateral protection. The total loan to value for the relationship is approximately 81%, using the list price of the remaining duplex unit and the AVs of the vacant lots. However, the collateral protection is questionable because of the uncertain marketability of the property, with no contracts on the three remaining vacant lots or duplex unit that management indicated was completed in early spring 2015, the proximity of the subject to railroad tracks, and a softening real estate market. The repayment prospects are also uncertain, as there is no financial information on Suffolk Creek available, only stale financial information on Duke Construction, and limited guarantor support. The board approved the removal of this borrower from the Watch List at the February 2015 board meeting; however, the June board minutes note that the borrower is experiencing cash flow problems and that demand letters for past due payments had been sent. Management stated that this borrower has since been added back to the Watch List. President Shackelton disagrees with the Substandard classification.

Originating Officer: Former Loan Officer Jack Johnson Servicing Officer: VP Thomas Crean Reviewing Examiner: Lisa Myers

30 Items Subject to Adverse Classification (Continued) 12345

CATEGORY AMOUNT, DESCRIPTION AND COMMENTS Substandard Doubtful Loss

8 8 STOVER, RUSSELL ______TOTAL ADVERSELY CLASSIFIED LOANS 3,240 62

OTHER ASSETS

11 11 ACCRUED INTEREST

______TOTAL ADVERSELY CLASSIFIED OTHER ASSETS 11

______TOTAL ADVERSELY CLASSIFIED ITEMS 3,240 73

31 Items Listed for Special Mention 12345

Includes assets and off-balance sheet items which are detailed as follows: Special Mention Assets – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. DESCRIPTION AMOUNT

LOANS 1,200 (1) 1,200 SALISBURY PLACE, LLC By: Tracy A. Warwick, J. Arney Trollope, and Scott A. Salisbury, as Managers Gty: Tracy A. Warwick, J. Arney Trollope, and Scott A. Salisbury

1,360 (2) 1,360 PARKWEST CENTER, LLC By: Tracy A. Warwick, J. Arney Trollope, and Scott A. Salisbury, as Managers Gty: Tracy A. Warwick, J. Arney Trollope, and Scott A. Salisbury

1,200 (3) 1,200 PARKWEST STATION, LLC By: Tracy A. Warwick, J. Arney Trollope, and Scott A. Salisbury, Individually and as Managers 3,760

LANCASTER INVESTORS RELATIONSHIP Loan (1) to the Salisbury Place, LLC, originated on March 16, 2015, at $1,200M and matures on March 16, 2020. The note requires interest only monthly for the first 12 months and then converts to monthly principal and interest payments. The note is secured by a first mortgage on a commercial, mixed-use building with commercial units on the first floor and apartments on the second floor. The property is located at 121 Bergeron Way, Anycity, Anystate. The building appraised for $1,500M on September 27, 2014, resulting in a loan-to-value of 80%. The purpose of the loan was to refinance and provide $46M cash out to the borrower. According to a loan file memo dated February 20, 2015, the property’s debt service coverage (DSC) ratio was 0.80x; however, using information from a 2014 tax return results in a DSC of 0.57x.

Loan (2) to the ParkWest Center, LLC, originated on March 16, 2015, at $1,360M and matures on March 16, 2020. The note requires interest only monthly for the first 12 months and then converts to monthly principal and interest payments. The note is secured by a first mortgage on a commercial, mixed-use building with commercial units on the first floor and four apartments on the second floor. The property is located at 102 Parkgate Road, Anycity, Anystate. The building appraised for $1,700M on September 27, 2014, resulting in a loan-to-value of 80%. The purpose of the loan was to refinance and provide $46M cash out to the borrower. According to file documentation dated February 20, 2015, the property’s debt service coverage (DSC) ratio was 0.91x; however, using information from a 2014 tax return results in a DSC of 0.73x.

Loan (3) to the ParkWest Station, LLC, originated on March 16, 2015, at $1,200M and matures on March 16, 2020. The note requires interest only monthly for the first 12 months and then converts to monthly principal and interest payments. The note is secured by a first mortgage on a commercial, mixed-use building with commercial units on the first floor and an office and apartments on the second floor. The property is located at 104 Widdington Lane, Anycity, Anystate. The building appraised for $1,500M on September 27, 2014, resulting in a loan-to-value of 80%. The purpose of the loan was to refinance and provide $46M cash out to the borrower. According to file documentation dated February 20, 2015, the property’s debt service coverage (DSC) ratio was 0.87x; however, information from a 2014 tax return indicates the property has a negative cash flow of $36M prior to interest and depreciation expenses.

32 Items Listed for Special Mention (Continued) 12345

DESCRIPTION AMOUNT

Although each credit is internally rated “Average,” deficiencies exist that require correction. The weaknesses include the following: • The bank originated all credits with a debt service coverage (DSC) ratio below 1.0x without proper file support of repayment given that the primary repayment source is insufficient to service the loan. Specifically, management failed to verify liquid assets reported by the guarantors on their personal financial statements and calculate global debt service ability. • Differences between cash flow figures reported on tax returns and operating statements have not been reconciled. In addition for Loan (3) to the ParkWest Station, LLC, the loan approval memorandum uses rents of $119M versus actual rents of only $42M on the tax return. It appears the bank based its figures on a 2015 rent roll that includes rents for two units that are vacant. Management should include a cash flow calculation based on actual data. • Final title policies have not been obtained. • Management has not verified that taxes are current since prior years’ taxes have been sold and redeemed. • Lease information for the properties is not updated. Two of the six leases on the apartments for Loan (1) to the Salisbury Place, LLC have expired; three of the seven leases on the apartments for Loan (2) to the ParkWest Center, LLC, have expired; and three of the six leases on the apartments for Loan (3) to the ParkWest Station, LLC, have expired.

Guarantor Salisbury’s March 2014 PFS includes TA of $6,900M (mainly RE, with cash and marketable investments totaling $545M), TL of $840M, and NW of $6,060M. His personal and company deposit balances approximate $236M. Guarantor Trollope’s February 2015 PFS includes TA of $1,465M (mainly RE, with cash and marketable securities totaling $225M), TL of $570M, and NW of $895M. Guarantor Warwick’s October 2014 PFS includes TA of approximately $1,762M (mainly RE, with cash and marketable securities totaling $110M), TL of $1,465M, and NW of $297M.

The guarantors are ensuring that the debt is serviced given that all the properties have DSC ratios less than 1.0x. Management indicated that the loans were approved based on the financial strength of Guarantor Salisbury. Adverse classification is precluded due to the current status of the loan, guarantor deposit balances at the bank, and liquid assets of two of the guarantors.

VP Thomas Crean agreed to address the above items. He stated that the loans require interest only payments for the first year to allow the borrower time to release one of the units in another building where the tenant had not been paying for one year and for the borrowers to improve their overall cash flow. Additionally, VP Crean stated that the apartment rents are at below-market rates, and the borrower plans to increase the rents to improve overall cash flow. At the end of the examination, he provided an unsigned lease for the ParkWest Station loan that will provide an additional $42M of rental income. He expects a signed copy to be received shortly. VP Crean indicated that there is interest in the remaining vacant unit in the ParkWest Station loan. He also stated that there is a waiting list for the apartments, which should allow the borrower to increase rents to market rates.

Originating Officer: Former Loan Officer Jack Johnson Servicing Officer: VP Thomas Crean Reviewing Examiner: Gloria Ware

33 Concentrations 12345

Listed below are concentrations of obligations, direct and indirect, according to the following guidelines: 1) Concentrations of 25% or more of Tier 1 Capital by individual borrower, small interrelated group of individuals, single repayment source or individual project; 2) Concentrations of 100% or more of Tier 1 Capital by industry, product line, type of collateral, or short term obligations of one financial institution or affiliated group. Any other concentrations may be listed in the 25% category if desired. An appropriate %age of total assets is used when a bank's capital is so low as to make its use meaningless. U.S. Treasury securities, obligations of U.S. Government agencies and corporations, and any assets collateralized by same are not scheduled.

DESCRIPTION DETAIL AMOUNT EXTENDED

Financial Institution Letter 104-2006 entitled Commercial Real Estate Lending Joint Guidance notes that,

"As part of their ongoing supervisory monitoring processes, the Agencies will use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis of the level and nature of its CRE concentration risk:

(1) Total reported loans for construction, land development, and other land represent 100% or more of the institution’s total capital; or

(2) Total commercial real estate loans as defined in this Guidance represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

The Agencies will use the criteria as a preliminary step to identify institutions that may have CRE concentration risk. Because regulatory reports capture a broad range of CRE loans with varying risk characteristics, the supervisory monitoring criteria do not constitute limits on an institution’s lending activity but rather serve as high level indicators to identify institutions potentially exposed to CRE concentration risk."

As reported in the bank’s March 31, 2015 Call Report, the level of overall CRE of 565.79% exceeds the supervisory criteria of 300% of total capital. Further, the level of construction, land development, and other land loans at 265.97% of total capital exceeds the supervisory criteria of 100% of total capital.

COMMERCIAL REAL ESTATE (CRE) LOANS

Construction, Land Development, and Other Loans 47,740 Non-farm Non-residential 44,213 Total CRE Loans 91,953

The total CRE figure above of $91,953M includes unfunded amounts. The CRE concentration represents 727% of March 31, 2015, Tier 1 Capital of $12,650M.

Using Tier 1 Capital as of June 30, 2015, of $12,770M, the CRE concentration declines to 720%. For June 30, 2015, excluding owner-occupied CRE and residential construction loans under contract, the portfolio represents 532% of Tier 1 Capital.

34 Concentrations (Continued) 12345

Embedded within the CRE concentration are additional concentrations that are detailed below. Refer to the Examination Conclusions and Comments pages for concentration monitoring and credit administration comments. All concentrations ratios below are based on Tier 1 Capital as of June 30, 2015.

Speculative Residential Construction Loans Speculative Residential Construction Loans – Funded 12,881 Speculative Residential Construction Loans – Unfunded 1,826 Total Speculative Residential Construction Loan Commitments 14,707

The amount of funded and unfunded speculative residential real estate construction loans represents 115% of Tier 1 Capital.

Commercial Construction Loans Construction Loans – Funded 8,652 Construction Loans – Unfunded 5,620 Total Construction Loan Commitments 14,272

The amount of funded and unfunded non-owner occupied commercial construction loans represents 112% of Tier 1 Capital. Land Development and Unimproved Land 13,538

The amount of funded land development and unimproved land loans (there are no unfunded amounts as of June 30, 2015) represents 106% of Tier 1Capital.

INDIVIDUAL BORROWER AND SMALL, INTERRELATED GROUPS OF INDIVIDUALS The concentrations to individual borrowers and interrelated groups of individuals listed below each represent over 25% of Tier 1 Capital as of June 30, 2015. Loans within the concentrations contain unfunded amounts and are net of participations sold. Many of the other loans within the concentrations listed below contain underwriting and administration weaknesses, as detailed on the Risk Management Assessment pages of this Report.

B & B Relationship B & B Enterprises 808 B & B Development Limited Partnership 1,525 Barlow Woods 180 Blackberry Creek Development 250 C. Kenneth Bloodworth 1,502 CKB Properties, Inc. 300 CSC Properties, Inc. 243 Carol Boose 2,838 Griffin & Hoskins, LLC 187 Jerry Boose 1,792 Bedford Lakes Investment Group 1,060 Sandra Bloodworth 1,300 Live Oak Development, LP 364 Total 12,349

This concentration represents approximately 97% of Tier 1 Capital.

35 Concentrations (Continued) 12345

Patel Puri Relationship Asheville Interstate Development 1,339 Dekalb, Harlem, LLC 830 First Franklin Investment, LLC 512 Ranger Partners XXV, LLC 875 Ranger Partners XXVI, LLC 608 Schaumburg Ranger, LLC 1,159 Patel LaSalle, LLC 709 Patel Puri 1,747 Patel Puri, LLC 1,400 Total 9,179

This concentration represents approximately 72% of Tier 1 Capital.

Salisbury Relationship Salisbury Farms 1,770 Salisbury Place, LLC 1,200 SKLH, LLC 550 Scott and Michele Salisbury 126 ParkWest Center, LLC 1,360 ParkWest Station, LLC 1,200 Total 6,206

This concentration represents approximately 49% of Tier 1 Capital. The loans to Salisbury Place, LLC, ParkWest Center, LLC, and ParkWest Station, LLC, are listed for Special Mention in this Report and referred to as the Lancaster Investors Relationship. These three loans are also detailed on the Violations of Laws and Regulations pages as an apparent violation of the legal lending limit.

Bolingbroke Relationship Bolingbroke Sidwell Court Company, LLC 1,812 Bolingbroke Hyde, LLC 2,871 RPTP, LLC 949 Scott Dixon 214 Total 5,846

This concentration represents approximately 46% of Tier 1 Capital.

Augustine Relationship Augustine Custom Homes, Inc. 274 Calais Development, LLC 1,940 David A. Jaeger 268 King Luc, LLC 850 Todd W. Augustine 1,290 Total 4,622

This concentration represents approximately 36% of Tier 1 Capital.

36 Concentrations (Continued) 12345

Warwick Relationship Salisbury Place, LLC 1,200 Suffolk Creek, LLC 540 ParkWest Center, LLC 1,360 ParkWest Station, LLC 1,200 Total 4,300

This concentration represents approximately 34% of Tier 1 Capital. The loans to Salisbury Place, LLC, ParkWest Center, LLC, and ParkWest Station, LLC, are listed for Special Mention in this Report and referred to as the Lancaster Investors Relationship. These three loans are also detailed on the Violations of Laws and Regulations pages as an apparent violation of the legal lending limit. In addition, Tracy Warwick individually signs on a loan to Suffolk Creek, LLC, which is classified Substandard in this Report.

Thompson Relationship John M. Thompson 1,845 Premier Homes, LLC 2,482 Total 4,327

This concentration represents approximately 34% of Tier 1 Capital.

Trollope Relationship Salisbury Place, LLC 1,200 ParkWest Center, LLC 1,360 ParkWest Station, LLC 1,200 Total 3,760

This concentration represents approximately 29% of Tier 1 Capital. These loans are listed for Special Mention in this Report and referred to as the Lancaster Investors Relationship. These three loans are also detailed on the Violations of Laws and Regulations pages as an apparent violation of the legal lending limit.

Berwick Relationship David R. Berwick Trust 844 Julie A. Berwick Family Trust 1,459 Berwick’s Liquor World, Inc. 1,169 Total 3,472

This concentration represents approximately 27% of Tier 1 Capital.

37 Analysis of Earnings 12345

Comparative Statement of Income

Period Ended Period Ended Period Ended 03/31/2015 12/31/2014 12/31/2013 Interest Income 2,621 9,919 8,089 Interest Expense 1,150 4,000 2,583 Net Interest Income 1,471 5,919 5,506 Noninterest Income 134 582 626 Total Noninterest Expense 1,330 5,229 4,809 Provision for Loan and Lease Losses 33 104 284 Securities Gains (Losses) 0 0 0 Net Operating Income (Pre-Tax) 242 1,168 1,039 Applicable Income Taxes 83 396 351 Net Operating Income (After-Tax) 159 772 688 Extraordinary Credits (Charges), Net 0 0 0 Net Income (loss) attributable to bank 159 772 688 and noncontrolling (minority) interests Less: Net income (loss) attributable to noncontrolling (minority) interests 0 0 0 Net Income (loss) attributable to bank 159 772 688 Other Increases/Decreases 317 544 557 Includes changes in the net unrealized holding gains (losses) on Available-For- Sale Securities Cash Dividends 0 500 0 Net Change in Equity Accounts 476 816 1,245

Reconcilement of Allowance for Loan and Lease Losses

Period Ended Period Ended Period Ended 03/31/2015 12/31/2014 12/31/2013 Beginning Balance 1,335 1,230 931 Gross Loan and Lease Losses 0 1 25 Recoveries 0 2 40 Provision for Loan and Lease Losses 33 104 284 Other Increases (Decreases) 0 0 0 Ending Balance 1,368 1,335 1,230

Other Component Ratios and Trends

Ratio Period Ended Period Ended Period Ended 03/31/2015 12/31/2014 12/31/2013 Net Interest Income (TE)/Average Earning Assets 3.97 4.06 4.12 Total Noninterest Expense/Average Assets 3.48 3.47 3.48 Net Income/Average Total Equity 5.17 6.71 6.65

Net Losses/Average Total Loans and Leases (0.01) Earnings Coverage of Net Losses (X) N/A N/A N/A ALLL/Total Loans and Leases 1.04 1.06 1.03 Noncurrent Loans and Leases/ALLL 56.90 47.12 23.98

Footnotes:

38 Composite Rating Definitions 12345

Safety and Soundness Composite ______Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution's size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions.

Information Technology Composite 2 Financial institutions and service providers rated composite ''2'' exhibit safe and sound performance but may demonstrate modest weaknesses in operating performance, monitoring, management processes or system development. Generally, senior management corrects weaknesses in the normal course of business. Risk management processes adequately identify and monitor risk relative to the size, complexity and risk profile of the entity. Strategic plans are defined but may require clarification, better coordination or improved communication throughout the organization. As a result, management anticipates, but responds less quickly to changes in market, business, and technological needs of the entity. Management normally identifies weaknesses and takes appropriate corrective action. However, greater reliance is placed on audit and regulatory intervention to identify and resolve concerns. The financial condition of the service provider is acceptable and while internal control weaknesses may exist, there are no significant supervisory concerns. As a result, supervisory action is informal and limited.

Compliance Composite 3 Generally, an institution in this category is in a less than satisfactory compliance position. It is a cause for supervisory concern and requires more than normal supervision to remedy deficiencies. Violations may be numerous. In addition, previously identified practices resulting in violations may remain uncorrected. Overcharges, if present, involve a few consumers and are minimal in amount. There is no evidence of discriminatory acts or practices. Although management may have the ability to effectuate compliance, increased efforts are necessary. The numerous violations discovered are an indication that management has not devoted sufficient time and attention to consumer compliance. Operating procedures and controls have not proven effective and require strengthening. This may be accomplished by, among other things, designating a compliance officer and developing and implementing a comprehensive and effective compliance program. By identifying an institution with marginal compliance early, additional supervisory measures may be employed to eliminate violations and prevent further deterioration in the institution's less-than-satisfactory compliance position.

Community Reinvestment Act (CRA)

A CRA rating of "Satisfactory" is assigned. An institution in this group has a satisfactory record of helping to meet the credit needs of its assessment area, including low- and moderate income neighborhoods, in a manner consistent with its resources and capabilities.

Refer to http://www.fdic.gov/regulations/examinations/ratings/index.html for definitions of all composite ratings.

39 Signatures of Directors/Trustees 12345

We the undersigned directors/trustees of Valhalla Commerce Bank, Anycity, Anystate have personally reviewed the contents of the Report of Examination dated March 31, 2015.

Signatures of Directors/Trustees Date

______Nikola Tesla ______

______John Vincent ______

______Alfred Cheetham ______

______Robert Clark ______

______Henry Shackelton ______

______Thomas Orde-Lees ______

______Neville Green ______

______Louis Rickenson ______

NOTE: This form should remain attached to the Report of Examination and be retained in the institution's file for review during subsequent examinations. The signatures of committee members will suffice only if the committee includes outside directors and a resolution has been passed by the full board delegating the review to such committee. 40

UNIFORM BANK PERFORMANCE REPORT (UBPR) VALHALLA COMMERCE BANK CERTIFICATE NUMBER 12345

TABLE OF CONTENTS

SUMMARY RATIOS 1

INCOME INFORMATION

INCOME STATEMENT - REVENUES AND EXPENSES ($000) 2

NONINTEREST INCOME AND EXPENSES ($000) AND YIELDS 3

BALANCE SHEET INFORMATION

BALANCE SHEET - ASSETS, LIABILITIES & CAPITAL ($000) 4

OFF-BALANCE SHEET ITEMS 5

DERIVATIVE INSTRUMENTS 5A DERIVATIVES ANALYSIS 5B

BALANCE SHEET - % COMPOSITION OF ASSETS & LIABILITIES 6

ANALYSIS OF CREDIT ALLOWANCE AND LOAN MIX 7

ANALYSIS OF LOAN AND LEASE ALLOWANCE AND LOAN MIX 7A ANALYSIS OF CONCENTRATIONS OF CREDIT 7B

ANALYSIS OF PAST DUE, NONACCRUAL & RESTRUCTURED LN&LS 8

ANALYSIS OF PAST DUE, NONACCRUAL & RESTRUCTURED LOANS & LEASES 8A

INTEREST RATE RISK ANALYSIS 9

LIQUIDITY AND INVESTMENT PORTFOLIO 10

LIQUIDITY AND INVESTMENT PORTFOLIO 10A

RISK-BASED CAPITAL ANALYSIS 11

CAPITAL ANALYSIS 11A

ONE QUARTER ANNUALIZED INCOME ANALYSIS 12

SECURITIZATION AND ASSET SALE ACTIVITIES 13

PAST DUE AND CHARGED OFF SECURITIZATION ACTIVITIES 13A

No Summary Information Available for this Institution

Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 0 Charter: NA County: Year: 2015 - Quarter: 1 Information

THIS UNIFORM BANK PERFORMANCE REPORT COVERS THE OPERATIONS OF YOUR BANK AND THAT OF A COMPARABLE GROUP OF PEER BANKS. IT IS PROVIDED FOR YOUR USE AS A MANAGEMENT TOOL BY THE FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL. DETAILED INFORMATION CONCERNING THIS REPORT IS PROVIDED IN "A USER'S GUIDE FOR THE UNIFORM BANK PERFORMANCE REPORT"; FORWARDED TO YOUR BANK UNDER SEPARATE COVER.TO OBTAIN ADDITIONAL USER'S GUIDE OR OTHER UBPR MATERIALS, CALL THE NUMBER INDICATED BELOW FOR ORDERING ASSISTANCE.

As of the date of preparation of this report, Your Bank's Federal Regulator was The Federal Deposit Insurance Corporation. Your Current Peer Group #4 includes all Insured Commercial Banks having Assets ASSETS BETWEEN $100 MILLION AND $300 MILLION IN A METRO AREA WITH 3 OR MORE FULL SERVICE OFFICES. For the Definition of Other UBPR Peer Groups, Refer to the UBPR User's Guide. ADDRESSEE Bank and Bank Holding Company Information CERTIFICATE #: 12345 CHARTER #: NA DIST/RSSD: Valhalla Commerce Bank (HOLDING CO. # ) Anycity, Anystate (Holding company refers to top holder) Table of Contents

Sections Page Number

Summary Ratios 1 Income Information: Income Statement - Revenues and Expenses ($000) 2 Noninterest Income and Expenses ($000) and Yields 3 Balance Sheet Information: Balance Sheet - Assets, Liabilities & Capital ($000) 4 Off-Balance Sheet Items 5 Balance Sheet - % Composition of Assets & Liabilities 6 Analysis of Credit Allowance and Loan Mix 7 Analysis of Past Due, Nonaccrual & Restructured LN&LS 8 Interest Rate Risk Analysis 9 Liquidity and Investment Portfolio 10 Capital Analysis 11 One Quarter Annualized Income Analysis 12 Securitization and Asset Sale Activities 13 State Average Summary STAVG

For Ordering Assistance Phone: (800) 945-2186 (In the Washington, DC Area: (202) 898-7108) Questions Regarding Content of Reports: (202) 872-7500

Note: This Report has been produced for the use of the Federal Regulators of Financial Institutions in carrying out their supervisory responsibilities. All informaiton contained herein was obtained from sources deemed reliable. However, no guarantee is given as to the accuracy of the data or of the calculations derived therefrom the data and calculations in this report do not indicate approval of disapproval of any particular institution's performance and are not to be construed as a rating of any institution by Federal Bank Regulators. Users are cautioned that any conclusions drawn from this report are their own and are not to be attributed to the Federal Bank Regulators.

The Reports of condition and income for this bank contain additional information not included in this performance report, such as an optional narrative statement by the bank. Valhalla Cert #: 12345 DIST/RSSD: Commerce Bank Page 1 Charter: NA County: Anycounty Summary Ratios Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Average Assets ($000) 152,696 146,277 150,613 138,151 127,468 Net Income ($000) 159 182 772 688 450 Number Of Banks In Peer Group 848 867 847 864 912

Earnings And Profitability Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Percent Of Average Assets: Interest Income (TE) 6.87 6.76 58 6.23 6.27 49 6.59 6.62 49 5.86 5.89 5.23 5.38 - Interest Expense 3.01 2.82 59 2.31 2.16 58 2.66 2.49 59 1.87 1.75 1.45 1.34 Net Interest Income (TE) 3.85 3.94 47 3.92 4.12 39 3.93 4.14 40 3.99 4.15 3.78 4.04 + Noninterest Income 0.35 0.73 16 0.41 0.75 20 0.39 0.78 15 0.45 0.8 0.46 0.85 - Non-interest Expense 3.48 3.19 66 3.53 3.19 69 3.47 3.21 64 3.48 3.2 3.52 3.21 - Provision: Loan&lease Losses 0.09 0.11 47 0.05 0.14 27 0.07 0.16 29 0.21 0.16 0.19 0.18 = Pretax Operating Income (TE) 0.63 1.37 16 0.75 1.55 10 0.78 1.54 13 0.75 1.61 0.53 1.52 + Realized Gain/loss Secs 0 0 91 0 0 93 0 0 85 0 0 0 0.01 = Pretax Net Operating INC(TE) 0.63 1.37 16 0.75 1.55 11 0.78 1.53 14 0.75 1.6 0.54 1.53 Net Operating Income 0.42 0.99 14 0.5 1.1 11 0.51 1.1 12 0.5 1.13 0.35 1.09 Adjusted Net Operating Income 0.5 1.06 17 0.55 1.2 11 0.58 1.17 12 0.71 1.21 0.48 1.16 NET INC ATTRIB TO MIN INTS N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Net Income Adjusted Sub S 0.42 0.89 15 0.5 1 11 0.51 1 13 0.5 1.04 0.35 1 Net Income 0.42 0.99 14 0.5 1.1 11 0.51 1.1 12 0.5 1.14 0.35 1.09

Margin Analysis: Avg Earning Assets To Avg Asst 97.03 93.55 91 97.09 93.53 93 96.8 93.55 91 96.71 93.42 95.78 93.26 Avg Int-bearing Funds To Avg Ast 79.88 75.84 67 76.8 74.89 54 75.45 74.92 47 75.61 74.5 76.91 75.19 Int Inc (TE) To Avg Earn Assets 7.08 7.24 43 6.41 6.72 35 6.8 7.09 37 6.05 6.33 5.46 5.78 Int Expense To Avg Earn Assets 3.1 3.02 53 2.38 2.32 51 2.74 2.66 52 1.93 1.88 1.51 1.44 Net Int Inc-te To Avg Earn Asset 3.97 4.23 40 4.03 4.41 32 4.06 4.44 34 4.12 4.46 3.94 4.34

Loan & Lease Analysis Net Loss To Avg Total Ln&ls 0 0.07 40 0 0.06 27 0 0.12 13 -0.01 0.13 0.09 0.16 Earnings Coverage Of Net LOSS(X) N/A 56.34 N/A 65.55 N/A 46.75 N/A 50.23 10.9 38.12 Ln&ls Allowance To Net LOSSES(X) N/A 33.77 N/A 32.59 N/A 24.71 N/A 24.03 11.08 18.42 Ln&ls Allow to Ln&lS not HFS 1.04 1.21 31 1.07 1.2 35 1.06 1.2 35 1.03 1.21 0.95 1.22 Ln&ls Allowance To Total Ln&ls 1.04 1.2 31 1.07 1.2 36 1.06 1.2 35 1.03 1.2 0.95 1.22 Non-current Ln&ls To Gross Ln&ls 0.59 0.7 56 0 0.54 9 0.5 0.63 52 0.25 0.56 0.16 0.57

Liquidity Net Non Core Fund Dependence $100M 20.23 17.02 58 13.97 16.57 42 21.29 17.84 58 17.34 16.42 8.78 15.41 Net Non Core Fund Dependence $250M 23.01 18.52 61 16.99 17.82 49 21.29 19.1 56 17.34 17.54 8.78 16.34 Net Loans & Leases To Assets 85.06 69.07 93 78.49 68.58 76 80.68 69 84 80.68 68.29 72.48 67.99

Capitalization: Tier One Leverage Capital 8.29 9.59 25 8.03 9.43 23 7.88 9.51 17 7.84 9.36 7.6 9.16 Cash Dividends To Net Income 0 33.27 48 0 27.97 50 64.77 37.76 72 0 32.51 0 30.99 Retain Earns To Avg Tot Equity 5.17 5.59 44 6.44 7.01 44 2.36 6.12 22 6.65 7.14 4.86 6.96 Restr+nonac+re Acq To Eqcap+all 3.24 4.95 48 0 3.97 11 3.56 4.49 52 0 4.1 1.4 4.24

Growth Rates Assets 3.89 8.36 34 9.83 10.9 52 5.57 8.82 41 9.49 10.54 11.37 10.68 Tier One Capital 7.7 8.65 52 14.58 11.01 74 5.83 9.24 40 14.2 11.44 17.37 11.64 Net Loans & Leases 12.59 9.75 64 16.66 12.61 67 5.57 10.53 36 21.87 12.15 13.11 14.01 Short Term Investments -34.02 50.42 21 -5.79 80.61 34 104.07 57.94 75 -57.92 74.29 24.14 39.39 Short Term Non Core Funding 96.61 31.85 88 -21.3 40.32 6 58.45 37.73 71 25.64 35.56 19.47 19.66 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 2 Charter: NA County: Income Statement - Revenues and Expenses ($000) Year: 2015 - Quarter: 1

Percent Change Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 (1 Year) Interest and Fees on Loans 2,443 2,074 9,070 7,236 5,908 17.79 Income from Lease Financing 0 0 0 0 0 N/A Tax-Exempt 0 0 0 0 0 N/A Estimated Tax Benefit 0 0 0 0 0 N/A Income on Loans & Leases (TE) 2,443 2,074 9,070 7,236 5,908 17.79

U.S. Treas & Agency (EXCL MBS) 165 168 738 729 717 -1.79 Mortgage Backed Securities 0 0 0 0 0 N/A Estimated Tax Benefit 0 0 0 0 0 N/A All Other Securities 3 9 25 33 0 -66.67 Tax Exempt Securities Income 0 0 0 0 0 N/A Investmt Interest Income (TE) 168 177 763 762 717 -5.08

Interest on Due from Banks 0 1 2 4 0 -100.00 Interest on Fed Funds Sold & Resales 10 25 84 86 39 -60.00 Trading Account Income 0 0 0 0 0 N/A Other Interest Income 0 0 0 1 0 N/A

Total Interest Income (TE) 2,621 2,277 9,919 8,089 6,664 15.11

Int on Deposits in Foreign Off N/A N/A N/A N/A N/A N/A Interest on Time Deposit Over $100M 355 215 1,033 630 417 65.12 Interest on All Other Deposits 741 588 2,746 1,866 1,399 26.02 Int on Fed Funds Purch & Repos 1 14 75 57 33 -92.86 Int Trad Liab + Oth Borrowings 53 28 146 30 0 89.29 Int on Mortgages & Leases N/A N/A N/A N/A N/A N/A Int on Sub Notes & Debentures 0 0 0 0 0 N/A

Total Interest Expense 1,150 845 4,000 2,583 1,849 36.09

Net Interest Income (TE) 1,471 1,432 5,919 5,506 4,815 2.72 Non-Interest Income 134 149 582 626 584 -10.07 Adjusted Operating Inc (TE) 1,605 1,581 6,501 6,132 5,399 1.52

Non-Interest Expense 1,330 1,290 5,229 4,809 4,483 3.10 Provision: Loan & Lease Losses 33 17 104 284 240 94.12 Pretax Operating Income (TE) 242 274 1,168 1,039 676 -11.68

Realized G/L HLD-To-Maturity SEC 0 0 0 0 0 N/A Realized G/L Avail-For-Sale SEC 0 0 0 0 6 N/A Pretax Net Operating Inc (TE) 242 274 1,168 1,039 682 -11.68

Applicable Income Taxes 83 92 396 351 232 -9.78 Current Tax Equiv Adjustment 0 0 0 0 0 N/A Other Tax Equiv Adjustments 0 0 0 0 0 N/A Applicable Income Taxes (TE) 83 92 396 351 232 -9.78

Net Operating Income 159 182 772 688 450 -12.64 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 2 (continued) Charter: NA County: Income Statement - Revenues and Expenses ($000) Year: 2015 - Quarter: 1

Percent Change Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 (1 Year)

Net Extraordinary Items 0 0 0 0 0 N/A Net income Noncontrolling minority interests N/A N/A N/A N/A N/A N/A Net Income 159 182 772 688 450 -12.64

Cash Dividends Declared 0 0 500 0 0 N/A Retained Earnings 159 182 272 688 450 -12.64 MEMO: Net International Income N/A N/A N/A N/A N/A N/A Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 3 Charter: NA County: Non Interest Income and Expenses ($000) and Yields Year: 2015 - Quarter: 1 Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Non-Interest Income & Expenses

Fiduciary Activities 0 0 0 0 0 Deposit Service Charges 103 122 427 470 460 Trading,Vent,Cap,Securtz Inc 0 0 0 0 0 Inv banking, Advisory Inc 0 0 0 0 0 Insurance Comm and Fees 0 0 0 0 0 Net Servicing Fees 0 0 0 0 0 Loan & LSE net gain/loss 0 0 0 0 0 Other net gains/losses 0 0 0 0 0 Other Non-Interest Income 31 27 155 156 124 Non-Interest Income 134 149 582 626 584 Personnel Expense 713 668 2,700 2,423 2,298 Occupancy Expense 292 271 1,095 1,048 1,031 Goodwill impairment 0 0 0 0 0 Other intangible amortiz 0 0 0 0 0 Other Oper Exp 325 351 1,434 1,338 1,154 Total Overhead Expense 1,330 1,290 5,229 4,809 4,483 Domestic Banking Offices(#) 4 4 4 4 4 Foreign Branches(#) 0 0 0 0 0 Assets Per Domestic Office 38,361 36,924 38,600 36,565 33,396

Percent of Average Assets Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4

Personnel Expense 1.87 1.78 60 1.83 1.78 57 1.79 1.78 52 1.75 1.77 1.8 1.77 Occupancy Expense 0.76 0.47 93 0.74 0.46 93 0.73 0.46 91 0.76 0.46 0.81 0.47 Other Oper Exp(Incl. Intangibles) 0.85 0.93 45 0.96 0.93 58 0.95 0.96 53 0.97 0.96 0.91 0.97 Total Overhead Expense 3.48 3.19 66 3.53 3.19 69 3.47 3.21 64 3.48 3.2 3.52 3.21 Overhead Less Noninterest Income 3.13 2.43 87 3.12 2.41 86 3.09 2.41 85 3.03 2.37 3.06 2.33 Other Income & Expense Ratios: Efficiency Ratio 82.87 68.39 86 81.59 65.54 90 80.43 65.42 89 78.42 64.47 83.03 65.37 Avg Personnel Exp Per Empl($000) 52.81 56.17 44 50.42 54.32 41 46.55 53.45 27 44.87 51.17 40.32 49.58 Assets Per Employee($Million) 2.84 3.33 34 2.79 3.21 34 2.66 3.29 28 2.71 3.16 2.34 3.06

Yield On or Cost Of: Total Loans & Leases (TE) 7.58 8.01 30 7.03 7.51 29 7.44 7.9 31 6.72 7.12 6.18 6.59 Loans in Domestic Offices 7.58 8 30 7.03 7.5 29 7.44 7.88 31 6.72 7.11 6.18 6.58 Real Estate 7.58 7.83 39 7.04 7.33 37 7.47 7.7 39 6.81 6.98 6.22 6.49 Commercial & Industrial 7.56 8.58 16 7.03 7.99 17 7.12 8.41 10 6.18 7.39 6.12 6.63 Individual 7.19 8.7 15 6.47 8.26 10 7.86 8.56 30 6.48 8.17 5.69 7.98 Credit Cards 8.73 11.18 26 6.8 12.47 9 7.85 11.4 17 8.07 10.8 6.9 11.3 Agricultural N/A 8.17 N/A 7.77 N/A 8.12 N/A 7.42 N/A 6.55 Loans in Foreign Offices N/A 0 N/A 0 N/A 0 N/A 0 N/A 4.83 Total Investment Securitites (TE) 3.61 4.82 2 3.36 4.35 5 3.53 4.57 4 3.23 4.08 3.14 3.92 Total Investment Securitites (Book) 3.61 4.47 3 3.36 4.02 9 3.53 4.22 7 3.23 3.75 3.14 3.61 U.S. Treas & Agency (Excl MBS) 3.55 4.47 7 3.21 3.85 12 3.43 4.11 11 3.11 3.5 3.17 3.3 Mortgage Backed Securities N/A 4.67 N/A 4.32 N/A 4.54 N/A 4.06 N/A 3.86 All Other Securities N/A 4.15 20.57 4.11 99 24.94 4.15 99 22.49 4.11 0 4.14 Interest-Bearing Bank Balances 0 4.27 19 5.63 3.2 87 4.47 4.31 41 1.03 2.79 0 1.39 Federal Funds Sold & Resales 400 5.18 99 4.27 4.4 26 4.88 4.97 35 5.97 3.19 1.22 1.31 Total Int-Bearing Deposits 3.73 3.66 52 2.97 2.79 58 3.44 3.23 60 2.43 2.24 1.88 1.68 Transaction Accounts 1.79 1.36 69 1.77 1.07 81 1.82 1.23 74 1.55 0.85 0.7 0.6 Other Savings Deposits 1.87 2.53 28 1.64 1.94 36 1.76 2.27 31 0.64 1.49 0.61 1.01 Time Deps Over $100M 4.93 4.77 62 3.99 3.76 71 4.08 4.27 29 3.15 3.13 2.71 2.41 All Other Time Deposits 4.82 4.57 70 3.89 3.57 78 4.95 4.08 95 3.58 3 2.91 2.44 Foreign Office Deposits N/A 0 N/A 3.6 N/A 0 N/A 2.7 N/A 1.14

Federal Funds Purchased & Repos 0.25 4.09 8 3.7 3.54 40 9.94 4.23 96 13.8 2.83 4.32 1.31 Other Borrowed Money 7.07 4.82 97 4.48 4.31 57 4.82 4.68 55 2.11 3.86 0 3.21 Subordinated Notes & Debentures N/A -6.96 N/A 6.13 N/A 6.95 N/A 4.95 N/A 4.16 All Interest Bearing funds 3.77 3.73 51 3.01 2.88 55 3.52 3.32 59 2.47 2.34 1.89 1.77 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 4 Charter: NA County: Anycounty Balance Sheet - Assets, Liabilities and Capital ($000) Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent Change 1 Quarter 1 Year Assets: Real Estate Loans 112,187 98,933 106,624 100,012 78,926 5.22 13.40 Commercial Loans 15,046 14,137 14,446 14,176 14,075 4.15 6.43 Individual Loans 4,596 4,210 4,940 5,133 4,871 -6.96 9.17 Agricultural Loans 0 0 0 0 0 N/A N/A Other LN&LS in Domestic Offices 181 0 0 0 0 N/A N/A LN&LS in Foreign Offices N/A N/A N/A N/A N/A N/A N/A Loans held for sale 0 0 0 0 0 N/A N/A Loans not held for sale 131,895 117,181 125,904 119,230 97,755 4.76 12.56 LN&LS Allowances 1,369 1,248 1,335 1,230 931 2.55 9.70 Net Loans & Leases 130,526 115,933 124,569 118,000 96,824 4.78 12.59 U.S. Treasury & Agency Securities 17,270 20,371 20,110 20,932 21,699 -14.12 -15.22 Municipal Securities 0 0 0 0 0 N/A N/A Foreign Debt Securities 0 0 0 0 0 N/A N/A All Other Securities 0 175 0 175 175 N/A -100.00 Interest-Bearing Bank Balances 42 56 28 80 0 50.00 -25.00 Federal Funds Sold & Resales 0 3,898 2,029 151 8,254 -100.00 -100.00 Trading Account Assets 0 0 0 0 0 N/A N/A Total Investments 17,312 24,500 22,167 21,338 30,128 -21.90 -29.34 Total Earning Assets 147,838 140,433 146,736 139,338 126,952 0.75 5.27

NonInt Cash & Due from Banks 2,279 3,890 4,403 3,974 3,745 -48.24 -41.41 Premises, Fix Assts, Cap Leases 1,507 1,381 1,515 1,277 1,389 -0.53 9.12 Other Real Estate Owned 0 0 0 0 0 N/A N/A DIR & INDIRECT INV RE VENTURES 0 0 0 0 0 N/A N/A Inv in Unconsolidated Subs 0 0 0 0 0 N/A N/A Acceptances and Oth Assets 1,820 1,992 1,749 1,672 1,501 4.06 -8.63 Total Assets 153,444 147,696 154,403 146,261 133,587 -0.62 3.89 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 4(continued) Charter: NA County: Anycounty Balance Sheet - Assets, Liabilities and Capital ($000) Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent Change

Average Assets During Quarter 152,696 146,277 155,446 147,626 133,423 -1.77 4.39 Liabilities: Demand Deposits 16,306 20,940 20,053 21,149 21,344 -18.69 -22.13 All Now & Ats Accounts 29,086 33,730 28,618 34,200 29,410 1.64 -13.77 Money Market Deposit Accounts 8,806 7,742 8,165 7,201 6,800 7.85 13.74 Other Savings Deposits 6,145 6,700 6,147 6,636 7,491 -0.03 -8.28 Time Dep under $100M 45,547 39,462 45,145 39,466 38,953 0.89 15.42 Core Deposits 105,890 108,574 108,128 108,652 103,998 0.00 -0.88 Time Dep of $100M or More N/A N/A N/A N/A N/A -2.15 -2.53 Time Deps At Or Below Insurance Limit 45,547 39,462 45,145 39,466 38,953 0.00 -0.88 Less: Fully Insured Brokered Deposits 3,965 4,000 3,965 2,000 0 0.42 26.10 Core Deposits 101,925 104,574 104,163 106,652 103,998 -2.07 -2.47 Fully Insured Brokered Deposits 3,965 4,000 3,965 2,000 0 -1.55 2.51 Time Deps Above Insurance Limit 28,967 22,972 28,846 21,100 17,930 0.42 26.10 Deposits in Foreign Offices 0 0 0 0 0 Total Deposits 134,856 131,548 136,975 129,752 121,928 -1.55 2.51 Federal Funds Purchased & Resale 2,336 1,327 1,351 1,602 1,197 72.91 76.04 Fed Home Loan Bor Mat < 1 yr 0 0 0 0 0 N/A N/A Fed Home Loan Bor Mat > 1 yr 3,000 2,500 3,000 2,500 0 0.00 20.00 Oth Borrowing Mat < 1 yr 0 0 0 0 0 N/A N/A Oth Borrowing Mat > 1 yr 0 0 0 0 0 N/A N/A Acceptances & Other Liabilities 722 947 1,022 1,167 468 -29.35 -23.76 Total Liabilities (Incl Mortg) 140,914 136,322 142,348 135,021 123,593 -1.01 3.37 Subordinated Notes & Debentures 0 0 0 0 0 N/A N/A All Common & Preferred Capital 12,530 11,374 12,055 11,240 9,994 3.94 10.16 Total Liabilities & Capital 153,444 147,696 154,403 146,261 133,587 -0.62 3.89 Memoranda: Officer, Shareholder Loans(#) 2 1 1 1 1 Officer, Shareholder Loans($) 3,233 3,395 4,463 2,641 2,310 -27.56 -4.77 Held-to-Maturity Securities 0 175 0 175 175 N/A -100.00 Available-for-Sale Securities 17,270 20,371 20,110 20,932 21,699 -14.12 -15.22 All Brokered Deposits 3,965 4,000 3,965 2,000 0 0.00 -0.88 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 5 Charter: NA County: Off-Balance Sheet Items Year: 2015 - Quarter: 1 Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent Change 1 Quarter 1 Year Outstanding ($000) Home Equity (1-4 Family) 5,890 6,344 5,896 6,884 6,092 -0.10 -7.16 Credit Card 1,128 1,332 1,079 1,320 1,082 4.54 -15.32 Commercial Re Secured By Re 25,060 23,979 20,405 18,747 22,701 22.81 4.51 1-4 FAMILY RESIDENTIAL 5,494 N/A N/A N/A N/A N/A N/A COMML RE, OTH CONST & LAND 19,566 N/A N/A N/A N/A N/A N/A Commercl Re Not Secured By Re 0 0 0 0 0 N/A N/A All Other 2,119 3,676 1,273 2,468 1,620 66.46 -42.36 Securities Underwriting 0 0 0 0 0 N/A N/A Memo:unused Commit W/mat Gt 1 Yr 12,421 15,150 8,471 11,366 8,163 46.63 -18.01 Standby Letters Of Credit 7,119 4,956 6,470 4,734 5,472 10.03 43.64 Amount Conveyed To Others 0 0 0 0 0 N/A N/A Commercial Letters Of Credit 0 0 0 0 0 N/A N/A Assets Securitized or sold W rec 0 0 0 0 0 N/A N/A Amount Of Recourse Exposure 0 0 0 0 0 N/A N/A Credit Derivs Banks As Gtr 0 0 0 0 0 N/A N/A Credit Derivs Banks As Benef 0 0 0 0 0 N/A N/A All Oth Off-balance Sheet Item 0 0 0 0 0 N/A N/A Off-balance Sheet Items 41,316 40,287 35,123 34,153 36,967 17.63 2.55

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Outstanding (% Of Total) Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Home Equity (1-4 Family) 3.84 1.67 83 4.3 1.66 86 3.82 1.62 83 4.71 1.62 4.56 1.6 Credit Card 0.74 0.16 85 0.9 0.18 86 0.7 0.16 84 0.9 0.18 0.81 0.2 Commercial Re Secured By Re 16.33 4.04 97 16.24 4.46 95 13.22 4 95 12.82 4.53 16.99 4.09 1-4 FAMILY RESIDENTIAL 3.58 1.79 79 N/A 0 N/A 0 N/A 0 N/A 0 COMML RE, OTH CONST & LAND 12.75 2.48 98 N/A 0 N/A 0 N/A 0 N/A 0 Commercl Re Not Secured By Re 0 0.01 87 0 0.01 88 0 0.01 89 0 0.01 0 0.01 All Other 1.38 5.29 13 2.49 5.46 22 0.82 5.32 7 1.69 5.32 1.21 5 Total Ln&ls Commitments 22.29 12.51 90 23.92 13.09 90 18.56 12.35 83 20.11 13.02 23.58 12.22 Securities Underwriting 0 0 99 0 0 99 0 0 99 0 0 0 0 Standby Letters Of Credit 4.64 0.45 99 3.36 0.45 98 4.19 0.45 99 3.24 0.44 4.1 0.42 Amount Conveyed To Others 0 0.03 95 0 0.02 97 0 0.02 96 0 0.01 0 0.01 Commercial Letters Of Credit 0 0.01 86 0 0.01 86 0 0.01 87 0 0.01 0 0.02 Assets Securitized or Sold w/Rec 0 0.03 91 0 0 93 0 0.01 91 0 0 0 0 Amount Of Recourse Exposure 0 0 91 0 0 93 0 0 92 0 0 0 0 Credit Derivs Bank As Gtr 0 0 99 0 0 99 0 0 99 0 0 0 0 Credit Derivs Bank As Benef 0 0 99 0 0 99 0 0 99 0 0 0 0 All Oth Off-balance Sheet Item 0 0.03 91 0 0.01 92 0 0.03 91 0 0 0 0 Off-balance Sheet Items 26.93 13.99 91 27.28 14.41 90 22.75 13.76 86 23.35 14.21 27.67 13.29 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 5A Charter: NA County: Derivative Instruments Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2015 12/31/2014 12/31/2013 12/31/2012 Notional Amount (000) Derivative Contracts 0 0 0 0 0 Interest Rate Contracts 0 0 0 0 0 Foreign Exchange Contracts 0 0 0 0 0 Equity, Comm & Other Contracts 0 0 0 0 0

Derivatives Position Futures And Forwards 0 0 0 0 0 Written Options 0 0 0 0 0 Exchange Traded 0 0 0 0 0 Over-the-counter 0 0 0 0 0 Purchase Options 0 0 0 0 0 Exchange Traded 0 0 0 0 0 Over-the Counter 0 0 0 0 0 Swaps 0 0 0 0 0 Held-for-trading 0 0 0 0 0 Interest Rate Contracts 0 0 0 0 0 Foreign Exchange Contracts 0 0 0 0 0 Equity, Comm, & Other Contracts 0 0 0 0 0 Non-traded 0 0 0 0 0 Interest Rate Contracts 0 0 0 0 0 Foreign Exchange Contracts 0 0 0 0 0 Equity, Comm & Other Contracts 0 0 0 0 0 Memo: Marked-to-market 0 0 0 0 0 Derivative Contracts (RBC Def.) 0 0 0 0 0 One Year Or Less 0 0 0 0 0 Over 1 Year To 5 Years 0 0 0 0 0 Over 5 Years 0 0 0 0 0 Gross Negative Fair Value 0 0 0 0 0 Gross Positive Fair Value 0 0 0 0 0 Held-for-trading 0 0 0 0 0 Non-traded 0 0 0 0 0 Memo Marked-to-market 0 0 0 0 0 Curr Credit Exp On Rbc Deriv Contr 0 0 0 0 0 Credit Losses Off-bs Derivs N/A N/A N/A N/A N/A

Past Due Deriv Instruments: Fair Value Carried As Assets N/A N/A N/A N/A N/A

Impact Nontraded Deriv Contracts: Increase (DECR) In Interest Inc N/A N/A N/A N/A N/A Increase (DECR) In Interest Exp N/A N/A N/A N/A N/A Increase (DECR) In Nonint Alloc N/A N/A N/A 0 0 Increase (DECR) In Net Income N/A N/A N/A N/A N/A Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 5B Charter: NA County: Derivatives Analysis Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent of Notional Amount Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Interest Rate Contracts N/A 21.97 N/A 24.3 N/A 12.77 N/A 24.35 N/A 96.64 Foreign Exchange Contracts N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Equity, Comm, & Other Contr N/A 0.34 N/A 0.42 N/A 0.34 N/A 0.42 N/A 0.06 Futures And Forwards N/A 16.73 N/A 17.95 N/A 16.66 N/A 18.64 N/A 13.83 Written Options N/A 24.89 N/A 27.94 N/A 23.25 N/A 24.95 N/A 24.74 Exchange Traded N/A 0 N/A 0.92 N/A 0 N/A 0 N/A 0 Over-the-counter N/A 24.89 N/A 26.67 N/A 23.25 N/A 24.95 N/A 24.74 Purchased Options N/A 5.24 N/A 1.31 N/A 2.67 N/A 2.18 N/A 0.38 Exchange Traded N/A 0 N/A 0 N/A 0 N/A 0.84 N/A 0 Over-the-counter N/A 5.24 N/A 1.31 N/A 2.67 N/A 1.29 N/A 0.38 Swaps N/A 3.5 N/A 4.66 N/A 2.89 N/A 4.95 N/A 4.15 Held For Trading N/A 0 N/A 0 N/A 0 N/A 0 N/A 1.67 Interest Rate Contracts N/A 0 N/A 0 N/A 0 N/A 0 N/A 1.67 Foreign Exchange Contracts N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Equity, Comm & Other Contracts N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Non-traded N/A 96.72 N/A 0 N/A 0 N/A 0 N/A 98.33 Interest Rate Contracts N/A 19.99 N/A 13.09 N/A 7.66 N/A 14.21 N/A 19.33 Foreign Exchange Contracts N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Equity, Comm & Other Contracts N/A 0.34 N/A 0.42 N/A 0.34 N/A 0.42 N/A 0.06 Memo: Marked To Market N/A 96.72 N/A 0 N/A 0 N/A 0 N/A 98.33 Derivative Contracts (RBC Def.) N/A 29.57 N/A 24.64 N/A 28.17 N/A 30.04 N/A 26.53 One Year Or Less N/A 17.09 N/A 16.6 N/A 18.34 N/A 18.66 N/A 16.04 Over 1 Year To 5 Years N/A 7.73 N/A 2.76 N/A 5.25 N/A 5.69 N/A 6.69 Over 5 Years N/A 0.05 N/A 0 N/A 0.08 N/A 1.85 N/A 2.26 Gross Negative Fair Value N/A 0.57 N/A 0.62 N/A 0.61 N/A 0.87 N/A 0.44 Gross Positive Fair Value N/A 0.9 N/A 0.8 N/A 0.81 N/A 0.94 N/A 0.36

Percent Of Tier One Capital: Gross Negative Fair Value (X) 0 0 96 0 0 95 0 0 96 0 0 0 0 Gross Positive Fair Value (X) 0 0 94 0 0 94 0 0 94 0 0 0 0 Held For Trading (X) 0 0 99 0 0 99 0 0 99 0 0 0 0 Non-traded (X) 0 0 90 0 0 91 0 0 91 0 0 0 0 Non-traded Marked-to-market (X) 0 0 90 0 0 91 0 0 91 0 0 0 0 Curr Credit Exposure (X) 0 0 97 0 0 97 0 0 97 0 0 0 0 Credit Losses On Derivatives N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Past Due Derivative Instruments: Fair Value Carried As Assets N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Other Ratios: Curr Credit Exposure/ Risk Wt Asset 0 0 97 0 0 97 0 0 97 0 0 0 0 Credit Losses On Derivs /cr Allow N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Impact Of Nontraded Deriv Contracts: INCR (DECR) Interest Inc/net Inc N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 INCR (DECR) Interest Exp/net Inc N/A 0 N/A 0 N/A 0 N/A -1.61 N/A 3.09 INCR (DECR) Nonint Alloc/net Inc N/A 0 N/A 0 N/A 0 N/A 0.28 N/A 0 INCR (DECR) Net Income/net Inc N/A 0 N/A 0 N/A 0 N/A -1.33 N/A 3.09 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 6 Charter: NA County: Balance Sheet-Percentage Composition of Assets And Liabilities Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Assets, Percent of AVG Assets Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Loans held for sale 0 0.09 71 0 0.08 71 0 0.09 68 0 0.09 0 0.11 Loans not held for sale 83.74 69.61 90 80.42 69.05 82 81.32 69.49 83 77.11 68.59 73.74 67.62 Less: LN&LS Allowance 0.88 0.83 58 0.84 0.82 53 0.85 0.83 53 0.77 0.83 0.69 0.84 Net Loans & Leases 82.86 69.08 90 79.58 68.46 81 80.47 68.94 83 76.34 68.04 73.05 67.08

Interest-Bearing Bank Balances 0.02 0.4 33 0.05 0.45 43 0.03 0.39 33 0.43 0.49 0.35 0.62 Federal Funds Sold & Resales 0.66 3.2 21 1.38 2.68 39 0.81 2.69 24 2.34 2.52 3.67 2.48 Trading Account Assets 0 0.06 97 0 0 99 0 0 99 0 0 0 0.01 Held-To-Maturity Securities 0 1.49 59 0.12 1.84 61 0.07 1.65 60 0.13 1.95 0.14 1.96 Available-For-Sale Securities 12.14 14.09 45 14.05 14.71 50 13.78 15.37 51 15.96 16.12 17.27 16.05

Total Earning Assets 95.69 91.88 95 95.17 91.77 94 95.16 91.68 94 95.2 91.77 94.47 91.83

Nonint Cash & Due from Banks 2.17 2.84 30 2.68 3.15 39 2.72 3.07 42 2.68 3.19 3.52 3.31 Premises Fix Assts & Cap Leases 0.98 2.29 15 0.9 2.16 14 0.94 2.24 14 0.97 2.15 1.17 2.14 Other Real Estate Owned 0 0.09 46 0 0.08 48 0 0.08 37 0 0.09 0 0.1 DIR & INDIRECT INV RE VENTURES 0 0.01 97 0 0.01 97 0 0.01 97 0 0 0 0 INV IN UNCONSOLIDATED SUBS 0 0 92 0 0 91 0 0 91 0 0 0 0 Acceptances & Other Assets 1.16 2.56 10 1.25 2.52 15 1.18 2.59 11 1.15 2.49 0.84 2.32 Subtotal 4.31 8.12 4 4.83 8.23 5 4.84 8.32 5 4.8 8.23 5.53 8.17 Total Assets 100 100 100 100 100 100 100 100 100 100

Standby Letters of Credit 4.41 0.45 99 3.3 0.45 98 3.46 0.45 98 3.55 0.43 2.81 0.41

Liabilities, Percent of AVG ASST Demand Deposits 11.81 12.61 49 14.32 14.07 56 13.94 13.67 57 14.56 14.5 15.18 14.15 All NOW & ATS Accounts 18.74 8.09 94 23.11 9.25 96 20.74 8.75 96 22.83 9.98 23.5 10.71 Money Market Deposit Accounts 5.51 12.74 22 5.08 12.72 18 5.16 12.67 20 5.17 12.8 5.69 12.98 Other Savings Deposits 3.99 8.09 33 4.54 8.73 32 4.23 8.36 30 5.3 9.27 5.68 9.45 Time Dep Less than $100M 29.46 22.55 76 26.85 20.63 73 27.67 21.25 74 28.18 20.46 29.47 21.08 Core Deposits 69.52 67.6 57 73.9 69.2 66 71.74 68.23 62 76.04 70.29 79.53 71.45 Time Dep of $100M or More 18.78 16.38 65 14.99 14.6 56 16.08 15.48 57 13.88 13.4 11.86 12.39 Time Deps At or Below Insurance Limit 29.46 22.55 76 26.85 20.63 73 27.67 21.25 74 28.18 20.46 29.47 21.08 Less: Fully Insured Brokered Deposits 2.58 1.67 74 2.04 1.26 76 2.38 1.39 76 0.58 1.07 0.54 0.71 Core Deposits 66.94 65.37 52 71.86 67.56 60 69.36 66.5 56 75.46 68.88 78.99 70.38 Fully Insured Brokered Deposits 2.58 1.67 74 2.04 1.26 76 2.38 1.39 76 0.58 1.07 0.54 0.71 Time Deps Above Insurance Limit 18.78 16.38 65 14.99 14.6 56 16.08 15.48 57 13.88 13.4 11.86 12.39 Deposits in Foreign Offices 0 0 99 0 0.01 99 0 0 99 0 0.01 0 0.03 Total Deposits 88.3 84.58 74 88.89 84.38 78 87.82 84.28 73 89.91 84.22 91.39 84.37 Federal Funds Purch & Repos 1.2 0.82 71 1 1 64 1.74 1 73 1.41 1.03 0.95 1.01 Total FED Home Loan Borrowings 1.95 -30.63 50 1.7 -8.39 43 2.12 -29.75 46 0.72 2.04 0 30.01 Total Oth Borrowings 0 211.11 81 0 -63.62 80 0 -41.87 76 0 -22.13 0 22.18 Memo: SHT Term N. Core Funding 16.79 16.5 53 10 14.04 34 12.77 15.36 39 11.34 12.68 9.43 11.83

Acceptances & Other Liabilities 0.57 0.69 40 0.72 0.6 69 0.69 0.65 61 0.49 0.58 0.35 0.53 Total Liabilities (Incl Mortg) 92.01 90.14 81 92.31 90.45 82 92.37 90.26 86 92.53 90.44 92.69 90.52

Subordinated Notes & Debentures 0 0.02 97 0 0.03 97 0 0.03 97 0 0.03 0 0.03 All Common & Preferred Capital 7.99 9.83 18 7.69 9.51 18 7.63 9.71 13 7.47 9.53 7.31 9.44 Total Liabilities & Capital 100 100 100 100 100 100 100 100 100 100

Memo: All Brokered Deposits 2.58 1.93 71 2.04 1.52 74 2.38 1.63 73 0.58 1.27 0.54 0.89 Insured Brokered Dep 2.58 1.67 74 2.04 1.26 76 2.38 1.39 76 0.58 1.07 0.54 0.71

Direct & Indirect INV in RE 0 0.01 97 0 0.01 97 0 0.01 97 0 0 0 0 Loans HFS as A % Loans 0 0.13 71 0 0.11 71 0 0.13 68 0 0.14 0 0.16 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 7 Charter: NA County: Analysis of Credit Allowance and Loan Mix Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Change: Credit Allowance ($000) Beginning Balance 1,335 1,230 1,230 931 775 Gross Credit Losses 0 0 1 25 116 Memo: Loans HFS Writedown 0 0 0 0 0 Recoveries 0 1 2 40 32 Net Credit Losses 0 -1 -1 -15 84

Provision for Credit Loss 33 17 104 284 240 Other Adjustments 0 0 0 0 0 Ending Balance 1,368 1,248 1,335 1,230 931

Average Total Loans & Leases 128,979 117,931 121,846 107,637 95,615

Analysis Ratios Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Loss Provision to Average Assets 0.09 0.11 47 0.05 0.14 27 0.07 0.16 29 0.21 0.16 0.19 0.18 Recoveries to Prior Per Credit Loss 0 27.68 16 16 32.13 45 8 36.37 19 34.48 33.29 7.06 28.3

Net Loss to Average Total LN&LS 0 0.07 40 0 0.06 27 0 0.12 13 -0.01 0.13 0.09 0.16 Gross Loss to Average Tot LN&LS 0 0.11 21 0 0.1 22 0 0.17 5 0.02 0.18 0.12 0.22 Recoveries to Average Tot LN&LS 0 0.03 20 0 0.04 21 0 0.04 11 0.04 0.05 0.03 0.05

LN&LS Allow to LN&LS Not HFS 1.04 1.21 31 1.07 1.2 35 1.06 1.2 35 1.03 1.21 0.95 1.22 LN&LS Allowance to Total LN&LS 1.04 1.2 31 1.07 1.2 36 1.06 1.2 35 1.03 1.2 0.95 1.22 LN&LS Allowance to Net Losses (X) N/A 33.77 N/A 32.59 N/A 24.71 N/A 24.03 11.08 18.42 LN&LS All to Nonaccrual LN&LS (X) 3.04 5.77 N/A 7.36 2.8 6.23 N/A 6.52 6.09 7.24

Earn Cover of Net LN&LS Loss (X) N/A 56.34 N/A 65.55 N/A 46.75 N/A 50.23 10.9 38.12

Net Losses by Type of LN&LS Real Estate Loans 0 0.02 77 0 0.01 81 0 0.04 52 0 0.03 0.01 0.04 Loans to Finance Comml Real EST N/A 5.12 N/A 0.01 N/A 1.61 N/A 0.71 N/A 3.11 Construction & Land Dev 0 0 94 0 0.02 97 0 0.01 88 0 0 0 0.01 1-4 FAMILY CONSTRUCTION 0 0.17 95 N/A 0 N/A 0 N/A 0 N/A 0 OTHER CONST & LAND 0 0.03 97 N/A 0 N/A 0 N/A 0 N/A 0 Secured by Farmland 0 -0.05 98 N/A 0 N/A -0.01 N/A 0.03 N/A 1.67 Single & Multi Family Mortgage 0 0.01 84 0 0.01 86 0 0.05 60 0 0.04 0.02 0.04 Home Equity Loans 0 0.03 97 0 0 98 0 0 92 0 0 0 0 1-4 Family Non-Revolving 0 0.01 85 0 0.01 87 0 0.05 63 0 0.04 0.03 0.05 Multifamily Loans N/A 0.4 0 -0.15 99 0 0.07 97 0 0.04 0 0.15 Non-Farm Non-Residential MTG 0 0 94 0 0 93 0 0.02 82 0 0.01 0 0.03 OWNER OCCUPIED NONFARM NONRESI 0 0.07 96 N/A 0 N/A 0 N/A 0 N/A 0 OTHER NONFARM NONRESIDENTIAL 0 -0.1 97 N/A 0 N/A 0 N/A 0 N/A 0 RE Loans in foreign Offices N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Agricultural Loans N/A -0.02 N/A -0.01 N/A 0 N/A 0.06 N/A 0.04 Commercial and Industrial Loans 0 0.08 77 0 0.06 74 0 0.25 45 -0.23 0.29 0.53 0.35 Lease Financing N/A 0 N/A 0.01 N/A 0.02 N/A 0.14 N/A 0.02 Loans to Individuals 0 0.28 50 -0.09 0.3 19 -0.02 0.47 14 0.36 0.56 0.1 0.67 Credit Card Plans 0 0.75 66 0 1.18 60 0.36 1.27 39 0.31 1.8 0 1.9 All Other Loans & Leases 0 0.03 88 0 0.04 89 0 0.11 81 0 0.12 0 0.07 Loans to Foreign Governments N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 7A Charter: NA County: Analysis of Loan and Lease Allowance and Loan Mix Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Loan Mix, % Average Gross LN&LS Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Construction & Development 25.6 14.62 81 18.93 12.94 73 20.42 13.44 75 13.9 11.71 11.91 10.4 1 - 4 Family Construction 13.53 6.5 82 N/A 0 N/A 0 N/A 0 N/A 0 Other Const & Land Devel 15.39 8.99 77 N/A 0 N/A 0 N/A 0 N/A 0 1 - 4 Family Residential 24.21 24.05 54 26.35 24.7 58 25.23 24.58 56 28.74 25.36 25.96 25.72 Home Equity Loans 4.54 2.68 74 7.06 2.88 83 6.05 2.74 82 8.42 2.98 8.26 3 Other Real Estate Loans 34.99 34.47 53 38.8 34.95 62 38.62 34.43 64 39.7 35.01 41.94 34.76 Farmland 0.23 1.89 38 0 1.76 28 0 1.85 25 0 1.79 0 1.75 Multifamily 0 1.93 9 0.18 1.92 18 0.07 1.85 12 0.25 1.97 0.45 1.96 Non-Farm Non-Residential 34.76 29.05 66 38.62 29.65 74 38.55 29.18 77 39.45 29.59 41.48 29.39 Owner Occupied NFARM NRESID 13.83 15.28 40 N/A 0 N/A 0 N/A 0 N/A 0 Other Nonfarm NonResidential 18.78 14.6 69 N/A 0 N/A 0 N/A 0 N/A 0 Total Real Estate 84.8 76.77 71 84.08 76.12 71 84.27 76 72 82.34 75.59 79.8 74.23

Financial Institution Loans 0 0.01 97 0 0.04 96 0 0.02 96 0 0 0 0.05 Agricultural Loans 0 1.15 42 0 1.06 40 0 1.2 38 0 1.12 0.11 1.17 Commercial & Industrial Loans 11.43 14.09 43 11.97 14.47 44 11.92 14.45 43 13.2 14.59 14.55 14.99 Loans to Individuals 3.7 4.92 48 3.95 5.2 49 3.82 5.22 47 4.46 5.56 5.53 6.32 Credit Card Loans 0.24 0.06 83 0.25 0.06 83 0.25 0.06 83 0.27 0.07 0.29 0.09 Municipal Loans 0 0.31 55 0 0.32 54 0 0.31 51 0 0.34 0 0.32 Foreign Office Loans & Leases 0 0 99 0 0 99 0 0 99 0 0 0 0.01 All Other Loans 0.07 0.18 50 0 0.19 17 0 0.19 15 0 0.19 0 0.19 Lease Financing Receivables 0 0.03 83 0 0.03 83 0 0.03 81 0 0.03 0 0.04

Supplemental: Loans to Foreign Governments 0 0 99 0 0 99 0 0 99 0 0 0 0 Loans to Finance Comml Real EST 0 0.06 80 0 0.05 82 0 0.06 79 0 0.05 0 0.06

Memorandum(% of AVG Tot Loans) Loan & Lease Commitments 26.51 18.47 82 29.96 19.63 83 22.81 18.25 71 25.1 19.54 30.64 18.38 Officer, Shareholder Loans 2.51 1.73 71 2.88 1.79 73 3.55 1.75 81 2.25 1.78 2.25 1.83 Officer, Shareh Loans to Assets 2.11 1.19 76 2.3 1.21 79 2.89 1.2 85 1.81 1.2 1.73 1.22

Other Real Estate Owned % Assets Construction & Land Development 0 0.01 83 0 0 85 0 0.01 78 0 0.01 0 0.01 Farmland 0 0 97 0 0 96 0 0 95 0 0 0 0 1 - 4 Family Residential 0 0.02 64 0 0.02 64 0 0.02 52 0 0.02 0 0.03 Multifamily 0 0 97 0 0 97 0 0 95 0 0 0 0 Non-Farm Non-Residential 0 0.02 74 0 0.03 71 0 0.03 65 0 0.03 0 0.03 Foreclosed GNMS 0 0 99 0 0 99 0 0 99 N/A 0 N/A 0 Foreign Offices N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Subtotal 0 0.09 46 0 0.08 48 0 0.08 37 0 0.09 0 0.1 Direct and Indirect Inv. 0 0.01 97 0 0.01 97 0 0.01 97 0 0 0 0 Total 0 0.09 45 0 0.08 46 0 0.09 35 0 0.09 0 0.1

Asset Servicing % Assets Mortgages Serv. with Recourse 0 0 94 0 0.49 95 0 0.52 95 0 0.48 0 0.38 Mortgages Serv. without Recourse 0 0.68 85 0 0.8 85 0 0.63 85 0 0.87 0 1.01 Other Financial Assets 0 0 94 0 0.79 95 0 0.77 95 0 0.82 0 0.64 Total 0 1.7 78 0 1.79 79 0 1.56 80 0 1.84 0 1.83 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 7B Charter: NA County: Analysis of concentrations of credit Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Loan&LSE % T1 Cap + Allow LL Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Construction & Development 265.97 104.2 92 169.75 94.28 80 211.52 100.89 86 177.39 91.16 83.64 80.34 1 - 4 Family Construction 124.41 46.31 89 N/A 0 N/A 0 N/A 0 N/A 0 Other 141.56 64.13 86 N/A 0 N/A 0 N/A 0 N/A 0 1 - 4 Family Residential 229.66 161.92 75 231.38 165.93 74 222.73 163.91 72 251.98 168.07 261.1 174.26 Home Equity Loans 38.51 18.65 79 62.44 19.77 89 46.39 18.63 85 67.09 20.47 80.75 22.15 Other Real Estate Loans 304.05 238.3 73 359.72 244.42 83 350.56 238.88 83 351.6 245.36 368.37 247.14 Farmland 4.23 12.82 51 0 11.76 28 0 12.6 26 0 11.83 0 11.86 Multifamily 0 13.63 10 1.61 13.5 22 0 12.87 11 1.64 13.62 3.26 13.91 Non-Farm Non-Residential 299.81 200.63 82 358.11 207.96 89 350.56 202.59 91 349.96 208.43 365.11 209.89 Owner Occupied 127.14 108.09 56 N/A 0 N/A 0 N/A 0 N/A 0 Other 172.67 101.67 81 N/A 0 N/A 0 N/A 0 N/A 0 Total Real Estate 799.68 530.48 95 760.85 529.25 91 784.81 528.06 94 780.98 529.77 713.1 526.66

Financial Institution Loans 0.02 0.09 98 0 0.25 96 0 0.09 98 0 0.34 0 0.39 Agricultural Loans 0 7.38 43 0 6.76 41 0 7.73 42 0 7.25 0 7.41 Commercial & Industrial Loans 107.23 97.48 59 108.72 100.82 58 106.33 100.2 57 110.7 98.5 127.17 103.53 Loans to Individuals 32.76 32.02 59 32.38 33.84 55 36.36 33.23 62 40.08 34.84 44.01 39.53 Credit Card Loans 2.19 0.36 88 2.25 0.39 88 2.29 0.4 88 2.36 0.43 2.8 0.54 Municipal Loans 0 1.96 57 0 1.97 56 0 1.95 56 0 2.03 0 2.04 Foreign Office Loans & Leases 0 0 99 0 0 99 0 0 99 0 0 0 0.02 All Other Loans 1.29 1.12 70 0 1.26 19 0 1.18 20 0 1.2 0 1.19 Lease Financing Receivables 0 0.17 85 0 0.2 84 0 0.2 84 0 0.18 0 0.23

Supplemental: Loans to Foreign Governments 0 0 99 0 0.02 99 0 0.02 99 0 0 0 0 Loans to Finance Comml Real EST 0 0.4 82 0 0.32 83 0 0.36 83 0 0.33 0 0.34

Nonowner OCC Comml Re % TOT Cap 438.64 254.83 87 N/A 0 N/A 0 N/A 0 N/A 0 Total Comml Real Estate % TOT Cap 565.79 336.82 90 529.47 335.05 86 562.08 334.71 91 528.99 332.3 452.01 322.54

Construction & Devel % TOT Lns 28.29 14.84 84 18.84 13.23 72 22.82 14.25 77 19.05 12.79 9.47 11.1 Nonowner OCC Comml Re % TOT Lns 46.66 35.78 74 N/A 0 N/A 0 N/A 0 N/A 0 Total Comml Real Estate % TOT Lns 60.18 48.42 70 58.75 47.58 68 60.65 47.83 71 56.82 47.29 51.18 45.18 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 8 Charter: NA County: Analysis of Past Due, Nonaccrual & Restructured Loans & Leases Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Non-Current LN&LS ($000) 90 Days and Over Past Due 328 0 152 295 0 Total Nonaccrual LN&LS 451 0 477 0 153 Total Non-Current LN&LS 779 0 629 295 153 LN&LS 30-89 Days Past Due 1,569 190 519 444 396

Restructured LN&LS 90+ Days P/D 0 0 0 0 0 Restructured LN&LS Nonaccrual 0 0 0 0 0 Restructured LN&LS 30-89 Days P/D 0 0 0 0 0 CURRENT 1-4 FAMILY RESTRUC LN&LS N/A N/A N/A N/A N/A Current Restructured LN&LS 0 0 0 0 0 LOANS SECURED 1-4 RE IN N/A N/A N/A N/A N/A FORECLOSURE All Other Real Estate Owned 0 0 0 0 0

Gtyd Portion of LN&LS 90+ Days P/D 0 0 0 0 0 Gtyd Portion of LN&LS on Nonaccrual 0 0 0 0 0 Gtyd Portion of LN&LS 30-89 Days P/D 0 19 0 27 48 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 8 (continued)

Charter: NA County: Analysis of Past Due, Nonaccrual & Restructured Loans & Leases Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 % of Non-Curr LN&LS by LN Type * Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Real Estate LNS-90+ Days P/D 0 0.1 59 0 0.08 59 0 0.1 58 0 0.08 0 0.09 - Nonaccrual 0.4 0.45 62 0 0.37 30 0.45 0.41 65 0 0.38 0 0.37 - Total 0.4 0.61 52 0 0.5 21 0.45 0.57 54 0 0.51 0 0.5 30-89 Days P/D 0.34 0.97 30 0.15 0.76 25 0.1 0.84 19 0.39 0.69 0 0.66

Lns Fin Coml RE-90+ Days P/D N/A 0.29 N/A 0 N/A 0.41 N/A 0.03 N/A 0.14 - Nonaccrual N/A 0 N/A 0 N/A 0.02 N/A 0.03 N/A 0 - Total N/A 0.29 N/A 0 N/A 0.42 N/A 0.06 N/A 0.14 30-89 Days P/D N/A 0.93 N/A 0.07 N/A 0.11 N/A 0 N/A 0.72

Const & Land Dev-90+ Days P/D 0 0.02 90 0 0 92 0 0.01 90 0 0.01 0 0 - Nonaccrual 1.21 0.34 85 0 0.12 81 1.66 0.19 90 0 0.09 0 0.07 - Total 1.21 0.49 82 0 0.22 75 1.66 0.33 87 0 0.16 0 0.12 30-89 Days P/D 0 0.79 54 0 0.42 65 0 0.58 57 0 0.31 0 0.24

1 - 4 FAM Const & L Dev 90+ Days 0 0 93 N/A 0 N/A 0 N/A 0 N/A 0 Nonaccrual 2.58 0.26 91 N/A 0 N/A 0 N/A 0 N/A 0 Total 2.58 0.38 89 N/A 0 N/A 0 N/A 0 N/A 0 30-89 Days P/D 0 0.87 68 N/A 0 N/A 0 N/A 0 N/A 0

Other Const & Land Dev 90+ Days 0 0 94 N/A 0 N/A 0 N/A 0 N/A 0 Nonaccrual 0 0.2 82 N/A 0 N/A 0 N/A 0 N/A 0 Total 0 0.31 78 N/A 0 N/A 0 N/A 0 N/A 0 30-89 Days P/D 0 0.45 68 N/A 0 N/A 0 N/A 0 N/A 0

Single & Multi Mtg-90+ Days P/D 0 0.09 68 0 0.07 68 0 0.1 66 0 0.09 0 0.1 - Nonaccrual 0 0.38 41 0 0.3 43 0 0.33 43 0 0.33 0 0.33 - Total 0 0.54 33 0 0.43 32 0 0.5 33 0 0.49 0 0.5 30-89 Days P/D 1.17 1.05 60 0.49 0.86 45 0.34 0.97 37 1.04 0.85 0 0.83

Non-Farm/Resi Mtg-90+ Days P/D 0 0.04 85 0 0.03 85 0 0.03 85 0 0.03 0 0.04 - Nonaccrual 0 0.34 62 0 0.36 61 0 0.37 62 0 0.37 0 0.34 - Total 0 0.48 55 0 0.46 54 0 0.5 54 0 0.46 0 0.46 30-89 Days P/D 0 0.66 43 0 0.51 46 0 0.59 43 0.11 0.46 0 0.45

Own Occ Nfarm Nonre 90+ Days P/D 0 0.01 91 N/A 0 N/A 0 N/A 0 N/A 0 - Nonaccrual 0 0.27 73 N/A 0 N/A 0 N/A 0 N/A 0 - Total 0 0.37 68 N/A 0 N/A 0 N/A 0 N/A 0 30-89 Days P/D 0 0.48 60 N/A 0 N/A 0 N/A 0 N/A 0

Oth Nonfarm Nonres 90+ Days P/D 0 0.01 92 N/A 0 N/A 0 N/A 0 N/A 0 - Nonaccrual 0 0.21 77 N/A 0 N/A 0 N/A 0 N/A 0 - Total 0 0.31 73 N/A 0 N/A 0 N/A 0 N/A 0 30-89 Days P/D 0 0.41 66 N/A 0 N/A 0 N/A 0 N/A 0 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 8A Charter: NA County: Analysis of Past Due, Nonaccrual & Restructured Loans & Leases Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 % of Non-Curr LN&LS by LN Type * Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Coml, Indust Lns-90+ Days P/D 2.18 0.08 96 0 0.05 78 1.05 0.08 93 2.08 0.05 0 0.06 - Nonaccrual 0 0.6 42 0 0.44 45 0 0.53 44 0 0.48 1.09 0.53 - Total 2.18 0.81 83 0 0.6 39 1.05 0.74 73 2.08 0.65 1.09 0.69 30-89 Days P/D 7.7 0.9 97 0.18 0.84 38 2.82 0.73 89 0.23 0.71 2.67 0.62

Loans To Indivdls-90+ Days P/D 0 0.07 64 0 0.07 64 0.02 0.09 64 0 0.1 0 0.1 - Nonaccrual 0 0.17 54 0 0.19 50 0 0.17 54 0 0.19 0 0.21 - Total 0 0.31 41 0 0.32 36 0.02 0.31 41 0 0.36 0 0.37 30-89 Days P/D 0.75 1.12 45 0.38 1.07 34 0.19 1.22 25 0.56 1.27 0.39 1.31

Credit Card Plans-90+ Days P/D 0 0.34 67 0 0.24 68 0 0.27 65 0 0.32 0 0.37 - Nonaccrual 0 0.03 96 0 0.09 96 0 0.06 96 0 0.06 0 0.04 - Total 0 0.37 65 0 0.32 65 0 0.31 64 0 0.38 0 0.4 30-89 Days P/D 0 0.92 44 0.34 1.1 47 0 0.94 42 0 1.27 0.65 1.24

Foreign Govt Lns-90+ Days P/D N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 - Nonaccrual N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 - Total N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 30-89 Days P/D N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Lease Financing-90+ Days P/D N/A 0.12 N/A 0 N/A 0.04 N/A 0.09 N/A 0.01 - Nonaccrual N/A 0.01 N/A 0 N/A 0.01 N/A 0.01 N/A 0.01 - Total N/A 0.03 N/A 0.02 N/A 0.01 N/A 0.02 N/A 0.14 30-89 Days P/D N/A 0.06 N/A 0.1 N/A 0.16 N/A 0.15 N/A 0.15

Agricultural Lns-90+ Days P/D N/A 0.07 N/A 0.03 N/A 0.04 N/A 0.01 N/A 0.04 - Nonaccrual N/A 0.14 N/A 0.21 N/A 0.19 N/A 0.13 N/A 0 - Total N/A 0.35 N/A 0.32 N/A 0.31 N/A 0.2 N/A 0.01 30-89 Days P/D N/A 0.52 N/A 0.58 N/A 0.26 N/A 0.25 N/A 0.02

Other LN&LS-90+ Days P/D 0 0.01 91 N/A 0.01 N/A 0.01 N/A 0 N/A 0 - Nonaccrual 0 0.02 89 N/A 0.01 N/A 0.02 N/A 0.02 N/A 0.02 - Total 0 0.08 83 N/A 0.05 N/A 0.07 N/A 0.05 N/A 0.06 30-89 Days P/D 0 0.27 69 N/A 0.22 N/A 0.24 N/A 0.19 N/A 0.23

Gross LN&LS-90+ Days P/D 0.25 0.12 77 0 0.09 42 0.12 0.11 68 0.25 0.1 0 0.1 - Nonaccrual 0.34 0.51 51 0 0.4 15 0.38 0.46 57 0 0.42 0.16 0.42 - Total 0.59 0.7 56 0 0.54 9 0.5 0.63 52 0.25 0.56 0.16 0.57 30-89 Days P/D 1.19 1.07 61 0.16 0.89 18 0.41 0.95 32 0.37 0.76 0.4 0.78

Other Pertinent Ratios: Non-cur LN&LS to-LN&LS Allowance 56.9 57.75 58 0 45.41 9 47.12 52.79 54 23.98 46.42 16.43 46.48 -Equity Capital 6.22 4.94 65 0 3.96 9 5.22 4.51 63 2.62 3.99 1.53 4.05 %Total P/D LN&LS-Incl Nonaccrual 1.78 1.9 54 0.16 1.54 10 0.91 1.69 33 0.62 1.47 0.56 1.46 IENC-Loans to Total Loans N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Non-Curr Lns+Oreo to Lns+Oreo 0.59 0.88 46 0 0.7 7 0.5 0.8 43 0.25 0.71 0.16 0.74 Non-curr Restruct Debt/GR LN&LS 0 0.02 95 0 0 94 0 0.01 95 0 0 0 0 Curr+Non-curr Restruct/GR LN&LS 0 0.01 85 0 0.01 85 0 0.01 85 0 0.02 0 0.02 Current Restruct LN&LS 0 0.01 87 0 0 88 0 0.01 88 0 0.01 0 0.01 LOANS SEC 1-4 FAM RE IN FORECLOSURE AS % TOTAL LOANS SEC 1-4 FAM RE N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Gtyd LN&LS 90+ P/D / LN&LS 90+ P/D 0 2.23 95 N/A 0.07 0 0 94 0 1.82 N/A 0 Gtyd Nonaccrual LN&LS / Nonaccrual LN&LS 0 1.36 85 N/A 1.27 0 1.5 85 N/A 1.53 0 1.23 Gtyd LN&LS 30-89 P/D / LN&LS 30-89 P/D 0 0.13 90 10 0.21 94 0 0.12 92 6.08 0.04 12.12 0.25 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 9 Charter: NA County: Interest Rate Risk Analysis as a Percent of Assets Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Long Assets Insts W/ Options Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Mortgage Loans & Pass Thrus 15.17 15.5 53 13.62 16.02 44 13.16 15.6 44 14.9 16.33 14.32 17.24 Loans & Securities Over 15 Yrs 1.17 1.52 61 0.98 1.32 61 1.42 1.51 64 1.19 1.37 1.61 1.42 Loans & Securities 5-15 Yrs 1.9 2.65 53 1.18 3.11 39 1.23 2.69 41 1.79 3.24 2.75 3.96

Other Loans and Securities 81.83 69.39 87 79.7 69.69 81 81.17 69.79 86 81.11 69.36 75.21 68.87 Loans & Securities Over 15 Yrs 0 1.03 21 0 0.97 22 0 1.06 20 0 1 0 1.1 Loans & Securities 5-15 Yrs 4.28 7.12 36 2.55 6.6 22 3.25 7.08 26 2.79 6.62 5.44 7.15 Total Loans & Securities Over 15 1.17 2.81 39 0.98 2.56 41 1.42 2.83 43 1.19 2.66 1.61 2.84

CMO'S Total 0 0.93 54 0 0.9 53 0 0.9 53 0 0.9 0 1.05 AVG Life Over 3 Years 0 0.45 64 0 0.42 65 0 0.41 65 0 0.37 0 0.33

Structured Notes 0 0.52 59 0 0.62 58 0 0.54 59 0 0.64 0 0.57 Mortgage Servicing 0 0 90 0 0 90 0 0 90 0 0 0 0 Total 0 0.55 53 0 0.66 53 0 0.57 54 0 0.67 0 0.6

Overall Risk Indicators Available for Sale 11.25 13.88 43 13.79 14.64 49 13.02 14.24 48 14.31 14.85 16.24 15.67 Held to Maturity 0 1.46 60 0.12 1.78 61 0 1.55 59 0.12 1.84 0.13 1.92 Off Balance Sheet 26.93 13.99 91 27.28 14.41 90 22.75 13.76 86 23.35 14.21 27.67 13.29

Unrealized APPN/DEPN 0 0 85 0 -0.02 86 0 -0.01 85 0 -0.01 0 0.01 Unreal APP/DEP % Tier One Cap 0 -0.03 85 0 -0.16 86 0 -0.06 85 0 -0.14 0 0.1

Contractual Mat/Reprice Data Loans/Securities Over 3 Years 26.22 28.91 44 25.23 28.81 42 26.02 29 43 26.04 29.13 31.56 31.95 Liabilities Over 3 Years 5.26 2.15 85 7.1 3.04 82 5.45 2.33 83 3.07 3.29 4.29 3.63 Net 3 Year Position 20.96 26.38 36 18.12 25.15 33 20.57 26.34 36 22.97 25.22 27.27 27.67

Loans/Securities Over 1 Year 50.78 49 53 47.73 49.18 44 51.22 49.33 52 48.72 49.37 53.38 51.12 Liabilities Over 1 Year 12.37 8.87 72 24.04 12.04 89 15 9.24 79 16.24 12.69 19.38 13.3 Net Over 1 Year Position 38.41 39.54 45 23.69 36.39 23 36.22 39.49 40 32.49 35.96 33.99 37.09

Non-Maturity Deposits 39.33 44.35 37 46.79 47.46 49 40.79 45.01 40 47.3 48.17 48.69 49.93 Non-Maturity Deps % Long Assets 149.99 183.07 46 185.5 202.08 57 156.77 185.21 49 181.67 200.77 154.27 186.55 Net Over 3 Year Position -13.11 -15.22 55 -21.57 -18.36 43 -14.77 -15.75 53 -21.26 -18.75 -17.13 -17.89

As % Tier 1 Capital Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Structured Notes 0 5.55 59 0 6.81 58 0 5.77 59 0 7.03 0 6.42 Mortgage Servicing (FV) 0 0.02 90 0 0.03 90 0 0.02 90 0 0.03 0 0.03 Total 0 5.83 53 0 7.14 53 0 6.05 54 0 7.35 0 6.73 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 10 Charter: NA County: Anycounty Liquidity and Funding Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent of Total Deposits Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Individ, Partnerships, and Corp. 95.73 92.58 61 93.61 92.67 48 95.9 92.42 63 94.91 92.56 94 92.09 U.S. Govt, States & Political Sub in U.S. 1.1 6 23 2.81 5.9 37 1 6.16 22 3.42 5.99 2.43 6.08 Comml Banks & Other Dep Inst. in U.S. 3.17 0.62 87 3.59 0.62 89 3.1 0.58 88 1.67 0.63 3.57 0.91 Banks in Foreign Countries 0 0.06 99 0 0.01 99 0 0.06 99 0 0.01 0 0.01 Foreign Govts and Official Inst. 0 0 99 0 0 99 0 0 99 0 0 0 0 Total deposits 100 100 99 100 100 99 100 100 99 100 100 100 100 Domestic Demand Deposits 12.09 14.73 40 15.92 16.44 52 14.64 15.36 52 16.3 17.04 17.51 17.13 Domestic Other Transaction Accounts 21.57 9.47 94 25.64 10.81 95 20.89 9.78 91 26.36 11.27 24.12 12.69 Domestic Nontransaction Accounts 66.34 75.23 20 58.44 71.99 13 64.47 74.18 19 57.34 70.93 58.37 69.32 Total Domestic Deposits 100 100 99 100 99.99 99 100 100 99 100 99.99 100 99.96 Deposits in Foreign Offices 0 0 99 0 0.01 99 0 0 99 0 0.01 0 0.04 Total deposits 100 100 99 100 100 99 100 100 99 100 100 100 100 Liquidity/Funding Ratios Net Non Core Fund Dependence $250M 23.01 18.52 61 16.99 17.82 49 21.29 19.1 56 17.34 17.54 8.78 16.34 Net Non Core Fund Dependence $100M 20.23 17.02 58 13.97 16.57 42 21.29 17.84 58 17.34 16.42 8.78 15.41 Core Deposits 66.42 65.51 50 70.8 67.22 58 67.46 65.51 54 72.92 67.89 77.85 69.82 Short Term Non Core Funding 17.15 16.43 56 9.06 14.35 28 16.43 16.39 53 10.94 13.61 9.54 12.02 Short Term Inv to S.T. Ncore Fund 20.95 55.9 28 62.43 62.48 61 29.63 52.33 42 23.01 60.75 68.7 61.32 Short Term Asset to S.T. Liabilities 117.28 99.73 69 142.33 113.54 71 112.54 100.98 64 169.6 115.53 175.61 114.03 Net S.T. Liabilities to Assets -6.85 2.35 28 -8.73 -1.22 30 -4.48 2.12 33 -19.47 -1.78 -18.22 -1.37 Net Loans & Leases to Deposits 96.79 82.05 83 88.13 81.76 61 90.94 82.35 70 90.94 81.73 79.41 81.45 Net LN&LS to Core Deposits 128.06 108.57 74 110.86 105.04 62 119.59 108.11 67 110.64 103.21 93.1 99.71 Broker Dep Mat < 1 Yr to Broker Deps 49.56 53.86 26 0 50.34 8 49.56 56.58 22 0 50.1 N/A 45.87 Brokered Deposits to Deposits 2.94 2.33 71 3.04 1.94 74 2.89 2.22 71 1.54 1.79 0 1.28 Listing Service Dep to Deposits N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Listing Service & Brkd Dep to Dep N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Sec Bor + Sec FFP to Tot Bor + FFP 0 1.05 85 N/A 0 0 0.94 86 N/A 0 N/A 0 Reciprocal Brkd Dep to Tot Brkd Dep N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Total Deposits Individ, Partnerships, and Corp. 129,101 123,136 131,361 123,147 114,616 U.S. Govt, States & Political Sub in U.S. 1,482 3,693 1,364 4,440 2,957 Comml Banks & Other Dep Inst. in U.S. 4,273 4,719 4,250 2,165 4,355 Banks in Foreign Countries 0 0 0 0 0 Foreign Govts and Official Inst. 0 0 0 0 0 Total Deposits 134,856 131,548 136,975 129,752 121,928 Domestic Demand Deposits 16,306 20,940 20,053 21,149 21,344 Domestic Other Transaction Accounts 29,086 33,730 28,618 34,200 29,410 Domestic Nontransaction Accounts 89,464 76,878 88,304 74,403 71,174 Total Domestic Deposits 134,856 131,548 136,975 129,752 121,928 Deposits in Foregin Offices 0 0 0 0 0 Total Deposits 134,856 131,548 136,975 129,752 121,928 Other Liquidity/Funding Data Non Core Liabilities $250M 38,268 30,799 37,162 27,202 19,127 Non Core Liabilities $100M 34,303 26,799 37,162 27,202 19,127 Short Term Non Core Funding 26,311 13,382 25,363 16,007 12,740 Core Deposits 101,925 104,574 104,163 106,652 103,998 Time Dep $250M & Under Mat < 1 Year N/A N/A N/A N/A N/A Time Dep $250M & Under Mat > 1 Year N/A N/A N/A N/A N/A Time Dep over $250M Mat < 1 Year N/A N/A N/A N/A N/A Time Dep over $250M Mat > 1 Year N/A N/A N/A N/A N/A Fed Home Loan Bor Mat < 1 Yr 0 0 0 0 0 Fed Home Loan Bor Mat > 1 Yr 3,000 2,500 3,000 2,500 0 Other Borrowing Mat < 1 Yr 0 0 0 0 0 Other Borrowing Mat > 1 Yr 0 0 0 0 0 Secured Other Borrowings 0 N/A 0 N/A N/A Federal Funds Purchased 1,214 0 0 0 0 Secured Federal Funds Purchased 0 N/A 0 N/A N/A Listing Service Deposits N/A N/A N/A N/A N/A Brokered Deposits 3,965 4,000 3,965 2,000 0 Reciprocal Brokered Deposits N/A N/A N/A N/A N/A Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 10A Charter: NA County: Anycounty Liquidity and Investment Portfolio Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent of Total Assets Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Short Term Investments 3.59 7.3 27 5.66 6.6 49 4.87 6.75 45 2.52 6.12 6.55 5.18 Marketable Equity Sec (MES) 0 0.02 85 0 0.02 83 0 0.02 85 0 0.02 0 0.04 Net LN&LS & SBLC to Assets 89.7 69.67 97 81.85 69.16 85 84.87 69.58 92 83.91 68.87 76.58 68.55 Pledged Assets N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Securities Mix % Total Securities US Treas & Govt Agencies 100 47.4 99 99.15 51.22 94 100 50.89 99 99.17 50.6 99.2 44.74 Municipal Securities 0 18.02 20 0 16.94 20 0 18.07 19 0 16.96 0 15.8 Pass-Through Mtg Back Secs 0 15.53 20 0 15.7 19 0 15.05 19 0 16.11 0 18.65 CMO & REMIC Mtg Back Secs 0 4.78 53 0 4.45 52 0 4.58 52 0 4.51 0 5.13 Commercial Mtg Back Secs N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Asset Backed Securities 0 0.22 96 0 0.23 96 0 0.21 96 0 0.26 0 0.27 Structured Financial Products N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Other Domestic Debt Secs 0 0.69 75 0.85 0.93 75 0 0.84 72 0.83 1.03 0.8 1.53 Foreign Debt Securities 0 0.09 97 0 0.08 97 0 0.07 97 0 0.07 0 0.05 Inv Mut Fnd & Oth Mktbl 0 0.1 85 0 0.13 83 0 0.1 85 0 0.12 0 0.19 Total 100 100 99 100 100 99 100 100 99 100 100 100 100 Liquidity/Securities Ratios: App (DEP) Hi Risk & Struc/T1CAP 0 -0.04 93 0 -0.32 99 0 -0.17 95 0 -0.28 0 -0.03 App (Dep) in AFS sec to AFS Sec -1.1 -0.57 23 -2.75 -1.65 13 -1.7 -0.8 12 -2.37 -1.39 -1 0.03 App (DEP) In HTM Sec to HTM Sec N/A 0.01 0 -0.5 68 N/A -0.05 0 -0.24 0 1.11 App (DEP) In HTM Sec to EQY CAP 0 -0.03 85 0 -0.16 86 0 -0.05 85 0 -0.14 0 0.1 Pledged Securities to TOT Sec 31.26 44.44 35 26.77 45.15 33 22.38 47.13 25 26.77 45.37 23.54 43.68 Pledged Loans to Total Loans N/A 0 N/A 0 N/A 0 N/A 0 N/A 0 Loans Held for Sale to Total Loans 0 0.13 73 0 0.1 75 0 0.12 73 0 0.1 0 0.13 Short Term Investments 5,512 8,354 7,516 3,683 8,752 Short Term Assets 71,378 43,340 62,105 69,397 56,521 Debt Securities 90+ Days P/D 0 0 0 0 0 Total Non-Current Debt Sec 0 0 0 0 0 Fair Value Structured Notes 0 0 0 0 0 Pledged Securities 5,399 5,500 4,500 5,650 5,150 Pledged Loans & Leases N/A N/A N/A N/A N/A Loans Held for Sale 0 0 0 0 0 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 11 Charter: NA County: Risk-Based Capital Analysis Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 End of Period Capital ($000) Perpetual Preferred 0 0 0 0 0 + Common Stock 2,196 2,196 2,196 2,196 2,196 + Surplus 7,350 6,695 7,100 6,695 5,945 + Undivided Profits 3,114 2,864 2,955 2,685 1,996 + Accum Other Comp Income -130 -381 -196 -336 -143 + Other Equity Capital Comp 0 0 0 0 0 Total Equity Capital 12,530 11,374 12,055 11,240 9,994 Subordinated Notes & Debentures 0 0 0 0 0 Changes in Total Equity ($000) Balance at Beginning of Period 12,055 11,239 11,239 9,994 8,574 + Net Income 159 182 772 688 450 + Sale or Purchase of Capital 0 0 4 0 0 + Merger & Absorptions 0 0 0 0 0 + Restate Due to Acctg Error & Chg 0 0 0 0 0 + Trans. with Parent 250 0 400 750 1,050 - Dividends 0 0 500 0 0 + Other Comprehensive Income 66 -47 140 -193 -80 Balance at End of Period 12,530 11,374 12,055 11,239 9,994 Intangible Assets Mortgage Servicing Rights 0 0 0 0 0 + Purch Cred Card Relation. 0 0 0 0 0 + Other Intangibles 0 0 0 0 0 + Goodwill 0 0 0 0 0 Total Intangibles 0 0 0 0 0 Memo:Grandfathered Intangibles N/A N/A N/A N/A N/A Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Capital Ratios Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Percent of Total Equity: Net Loans & Leases (X) 10.42 7.23 94 10.19 7.42 90 10.33 7.26 94 10.5 7.35 9.69 7.36 Subord Notes & Debentures 0 0.28 97 0 0.43 97 0 0.32 97 0 0.37 0 0.46 Long Term Debt 0 0.28 97 0 0.43 97 0 0.32 97 0 0.37 0 0.46 Com RE & Related Ventures 633.47 335.36 93 603.46 339.75 91 633.46 333.35 94 600.83 332.76 496.97 321.26 Percent of Average Total Equity: Net Income 5.17 10.11 20 6.44 11.61 18 6.71 11.53 20 6.65 12.02 4.86 11.59 Dividends 0 3.77 47 0 3.61 50 4.35 4.77 54 0 4.2 0 3.98 Retained Earnings 5.17 5.59 44 6.44 7.01 44 2.36 6.12 22 6.65 7.14 4.86 6.96 Other Capital Ratios: Dividends to net Oper Income 0 34.73 46 0 28.77 49 64.77 38.76 72 0 33.29 0 31.71 Equity Capital to Assets 8.17 9.86 21 7.7 9.51 19 7.81 9.81 15 7.68 9.56 7.48 9.5 Growth Rates: Total Equity Capital 10.16 10.31 58 14.69 10.19 76 7.25 10.07 45 12.47 9.48 16.56 11.02 Equity Growth Less ASST Growth 6.27 2.29 68 4.87 -0.39 73 1.68 1.45 51 2.98 -0.87 5.2 0.29 Intang Assets % Total Equity Mortgage Servicing Rights 0 0.02 90 0 0.03 90 0 0.02 90 0 0.03 0 0.03 Goodwill 0 1.55 74 0 1.37 75 0 1.76 74 0 1.55 0 1.14 Purch Credit Card Relation 0 0.03 97 0 0.02 97 0 0.02 97 0 0.02 0 0.01 All Other Intangibles 0 0.17 83 0 0.19 83 0 0.23 82 0 0.2 0 0.19 Total Intangibles 0 2.12 62 0 2.02 62 0 2.39 62 0 2.17 0 1.76 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 11A Charter: NA County: Capital Analysis Year: 2015- Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Risk-Based Capital ($000) Tier One Capital Total Equity Capital Adjusted 12,660 11,755 12,251 11,576 10,137 - Ineligible Def Tax Assets 0 0 0 0 0 - Ineligible Intangibles 0 0 0 0 0 - Cumul Change F.V. Financeial Liab 0 N/A N/A N/A N/A Net Tier One 12,660 11,755 12,251 11,576 10,137

Tier Two Capital + Qualif Debt and Redeem Pfd 0 0 0 0 0 + Cumulative Preferred Stock 0 0 0 0 0 + Allowable LN&LS Loss Allowance 1,369 1,248 1,335 1,230 931 + Unrl Gain Mktbl Eqy Sec (45%) 0 0 0 0 0 + Other Tier 2 Capital Comp 0 0 0 0 0 Net Eligible Tier Two 1,369 1,248 1,335 1,230 931 Total RBC Before Deductions Tier One & Tier Two 14,029 13,003 13,586 12,806 11,068 Tier Three & Fin Sub Adj 0 0 0 0 0 - Reciprocal Capital Holdings N/A N/A N/A N/A N/A - Deductions for Total RBC 0 0 0 0 0 Total Risk-Based Capital 14,029 13,003 13,586 12,806 11,068

Risk-Weighted Assets On-Balance Sheet Category Two - 20% 3,887 5,753 5,292 5,101 6,750 Category Three - 50% 9,865 10,057 10,156 10,895 9,563 Category Four - 100% 114,770 99,728 108,127 99,498 80,803 Total On-Balance Sheet 128,522 115,539 123,575 115,494 97,117 Memo: Category One - 0% 1,066 909 1,184 1,205 1,053

Off-Balance Sheet Category Two - 20% 0 0 0 0 0 Category Three - 50% 0 0 0 0 0 Category Four - 100% 10,273 10,311 7,734 8,233 7,020 Total Off-Balance Sheet 10,273 10,311 7,734 8,233 7,020 Memo: Category One - 0% 0 0 0 0 0

Adjustments to Risk-Weighted Assets Risk-Weighted Asset Before Ded 138,795 125,850 131,309 123,727 104,137 - Ineligible Deferred Tax Assets N/A N/A N/A N/A N/A - Ineligible Intangibles N/A N/A N/A N/A N/A - Deductions for Total RBC 0 0 0 0 0 - Reciprocal Capital Holdings N/A N/A N/A N/A N/A - Excess Allowable LN&LS Loss AL 0 0 0 0 0 - Allocated Transfer Risk Reserv 0 0 0 0 0 + MARKET RISK EQUIV ASSETS 0 0 0 0 0 Total Risk-Weighted Assets 138,796 125,851 131,310 123,728 104,138

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Risk-Based Capital Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Tier One RBC to Risk-WGT Assets 9.12 12.89 3 9.34 12.83 8 9.32 12.82 5 9.35 12.84 9.73 12.76 Total RBC to Risk-Weight Assets 10.1 13.96 2 10.33 13.91 5 10.34 13.9 4 10.35 13.93 10.63 13.88 Tier One Leverage Capital 8.29 9.59 25 8.03 9.43 23 7.88 9.51 17 7.84 9.36 7.6 9.16

Other Capital Ratio: Def Tax Asset to T1 Cap 2.42 1.34 70 2.66 1.63 67 1.87 1.47 61 1.48 1.7 0.73 1.28 Note:From March 31, 2001 forward risk based capital ratios and data do include adjustment for financial subsidiaries. For banks with financial subsidiaries, please refer to call report for information on the adjustment. Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 12 Charter: NA County: One Quarter Annualized Income Analysis Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Earnings and Profitability Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 PCT Bank Peer4 Bank Peer4 Percent of Average Assets: Interest Income (TE) 6.87 6.76 58 6.23 6.27 49 6.92 6.83 56 6.25 6.18 5.36 5.49 - Interest Expense 3.01 2.82 59 2.31 2.16 58 3.01 2.76 62 2.09 2 1.53 1.4 Net Interest Income (TE) 3.85 3.94 47 3.92 4.11 40 3.91 4.08 43 4.16 4.18 3.83 4.09 + Noninterest Income 0.35 0.73 16 0.41 0.74 20 0.29 0.77 10 0.41 0.78 0.45 0.81 - Non-Interest Expense 3.48 3.19 66 3.53 3.19 69 3.32 3.26 57 3.39 3.23 3.47 3.25 - Provision: Loan & Lease Losses 0.09 0.11 47 0.05 0.14 27 0.06 0.18 36 0.29 0.17 0.14 0.2 = Pretax Operating Income (TE) 0.63 1.37 16 0.75 1.55 10 0.81 1.4 22 0.89 1.58 0.68 1.49 + Realized Gains/Losses Secs 0 0 91 0 0 93 0 0 89 0 0 0 0 = Pretax Net Operating Inc (TE) 0.63 1.37 16 0.75 1.54 11 0.81 1.4 22 0.89 1.57 0.68 1.5 Net Operating Income 0.42 0.99 14 0.5 1.1 11 0.53 1 21 0.59 1.11 0.44 1.07 Adjusted Net Operating Income 0.5 1.06 17 0.55 1.2 11 0.6 1.05 22 0.85 1.16 0.29 1.13 Net Income Adjusted Sub S 0.42 0.89 15 0.5 1 11 0.53 0.91 22 0.59 1.03 0.44 0.98 Net Income 0.42 0.99 14 0.5 1.1 11 0.53 1 21 0.59 1.11 0.44 1.07 Margin Analysis: Int Inc (TE) to AVG Earn Assets 7.08 7.24 43 6.41 6.72 35 7.16 7.32 44 6.61 6.63 5.58 5.89 Int Expense to AVG Earn Assets 3.11 3.02 53 2.38 2.32 51 3.12 2.96 57 2.21 2.14 1.59 1.5 Net Int Inc-TE to AVG Earn Asst 3.97 4.23 40 4.03 4.41 32 4.04 4.37 37 4.4 4.49 3.99 4.4

Loan & Lease Analysis Net Loss to Average Total LN&LS 0 0.07 40 0 0.06 27 0 0.2 23 0.04 0.17 0.38 0.2 Earnings Coverage of Net Loss (X) N/A 6.14 -291 3.68 7 N/A 15.88 36.42 18.2 2.8 22.3 LN&LS Allowance to Net Losses (X) N/A 3.52 -312 -0.48 3 N/A 8.24 25.63 7.48 2.38 10.67

Capitalization Cash Dividends to Net Income 0 33.27 48 0 27.97 50 0 43.32 41 0 40.05 0 36.42 Retain Earns to AVG Total Equity 5.08 5.49 44 6.4 6.9 44 6.94 4.2 60 8.03 5.65 5.9 5.72

Yield On or Cost Of: Total Loans & Leases (TE) 7.58 8.01 30 7.03 7.51 29 7.84 8.12 37 7.09 7.45 6.22 6.69 Loans in Domestic Offices 7.58 7.99 30 7.03 7.49 29 7.84 8.11 37 7.09 7.44 6.22 6.67 Real Estate 7.58 7.83 39 7.04 7.33 37 7.96 7.92 51 7.23 7.29 6.12 6.57 Commercial & Industrial 7.56 8.58 16 7.03 7.99 17 6.17 8.66 4 6.09 7.84 7.14 6.88 Individual 7.19 8.7 15 6.47 8.26 10 10.06 8.82 78 7.16 8.38 4.76 8.08 Credit Card Plans 8.73 11.18 26 6.8 12.47 9 9.03 11.22 31 6.76 10.58 9.85 10.62 Agricultural N/A 8.17 N/A 7.69 N/A 8.4 N/A 7.67 N/A 6.8 Loans In Foreign Offices N/A 0 N/A 0 N/A 0 N/A 0 N/A 0

Total Investment Securities (TE) 3.61 4.82 2 3.36 4.35 5 3.61 4.74 4 3.52 4.21 3.17 3.94 Total Investment Securities (Book) 3.61 4.47 3 3.36 4.02 9 3.61 4.39 6 3.52 3.88 3.17 3.62 U.S. Treas & Agency (Excl MBS) 3.55 4.47 7 3.21 3.85 12 3.56 4.34 11 3.21 3.67 3.2 3.28 Mortgage Backed Securities N/A 4.67 N/A 4.32 N/A 4.64 N/A 4.15 N/A 3.92 All Other Securities N/A 4.15 20.57 4.11 99 N/A 4.16 41.14 4.08 0 4.1 Interest-Bearing Bank Balances 0 4.27 19 5.63 3.2 87 11.76 4.53 91 16.67 3.35 N/A 1.71 Federal Funds Sold & Resales 400 5.18 99 4.27 4.4 26 5.09 5.27 22 194.44 3.94 1.96 1.91 Total Int-Bearing Deposits 3.73 3.66 52 2.97 2.78 58 3.74 3.61 55 2.71 2.58 1.99 1.76 Transaction Accounts 1.79 1.35 69 1.77 1.07 81 1.82 1.35 69 1.69 0.99 0.81 0.66 Other Savings Deposits 1.87 2.53 28 1.64 1.94 36 1.9 2.5 30 0.69 1.77 0.58 1.1 Time Deps Over $100M 4.93 4.76 62 3.99 3.76 71 4.4 4.7 22 2.87 3.51 2.64 2.53 All Other Time Deposits 4.82 4.57 70 3.89 3.57 78 5.2 4.53 89 4.55 3.39 3.01 2.5 Deposits in Foreign Offices N/A 0 N/A 3.6 N/A 0 N/A 3.13 N/A 1.65 Federal Funds Purchased & Repos 0.25 4.09 8 3.7 3.53 41 27.07 4.22 97 32.91 3.12 15 1.62 Other Borrowed Money 7.07 4.82 97 4.48 4.31 57 6.2 4.9 90 1.76 4.21 N/A 3.42 Subordinated Notes & Debentures N/A -6.96 N/A 6.13 N/A 7.27 N/A 5.56 N/A 4.58 All Interest-Bearing Funds 3.77 3.73 51 3.01 2.88 55 3.88 3.68 59 2.78 2.69 2.01 1.86

Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 13 Charter: NA County: Securitization and Asset Sale Activities Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 Percent Change 1 Quarter 1 Year Activity ($000) Securitization Activities 0 0 0 0 0 N/A N/A 1-4 Family Residential Loans 0 0 0 0 0 N/A N/A Home Equity Lines 0 0 0 0 0 N/A N/A Credit Card Receivables 0 0 0 0 0 N/A N/A Auto Loans 0 0 0 0 0 N/A N/A Commercial & Industrial Loans 0 0 0 0 0 N/A N/A All Other Loans and Leases 0 0 0 0 0 N/A N/A Retained Interest-only Strips 0 0 0 0 0 N/A N/A 1-4 Family Residential Loans 0 0 0 0 0 N/A N/A Home Equity Loans 0 0 0 0 0 N/A N/A Credit Card Receivables 0 0 0 0 0 N/A N/A Auto Loans 0 0 0 0 0 N/A N/A Commercial & Industrial Loans 0 0 0 0 0 N/A N/A All Other Loans and Leases 0 0 0 0 0 N/A N/A

Retained Credit Enhancements 0 0 0 0 0 N/A N/A 1-4 Family Residential Loans 0 0 0 0 0 N/A N/A Home Equity Loans 0 0 0 0 0 N/A N/A Credit Card Receivables 0 0 0 0 0 N/A N/A Auto Loans 0 0 0 0 0 N/A N/A Commercial & Industrial Loans 0 0 0 0 0 N/A N/A All Other Loans and Leases 0 0 0 0 0 N/A N/A

Unused Liquidity Committments 0 0 0 0 0 N/A N/A

Sellers Interest in Secs & Loans 0 0 0 0 0 N/A N/A Home Equity Lines 0 0 0 0 0 N/A N/A Credit Card Receivables 0 0 0 0 0 N/A N/A Commercial & Industrial Loans 0 0 0 0 0 N/A N/A

Total Retained Credit Exposure 0 0 0 0 0 N/A N/A

Asset Backed Comml Paper Cond 0 0 0 0 0 N/A N/A Cr Exp Spons by Bank & Other 0 0 0 0 0 N/A N/A Liquid Comm by Bank & Other 0 0 0 0 0 N/A N/A Activity %total Assets Securitization Activities 0 0 0 0 0 1-4 Family Residential Loans 0 0 0 0 0 Home Equity Lines 0 0 0 0 0 Credit Card Receivables 0 0 0 0 0 Auto Loans 0 0 0 0 0 Commercial & Industrial Loans 0 0 0 0 0 All Other Loans and Leases 0 0 0 0 0 Asset Backed Comml Paper Cond 0 0 0 0 0 Cr Exp Spons by Bank & Other 0 0 0 0 0 Liquid Comm by Bank & Other 0 0 0 0 0

Percent of Tot Managed Assets on Balance Sheet 1-4 Family& Sec AssetsResidential Loans 20 18 19 19 20 Home Equity Lines 4 6 5 7 9 Credit Card Receivables 0 0 0 0 0 Auto Loans 3 3 3 3 4 Commercial & Industrial Loans 11 12 11 11 14 All Other Loans and Leases 60 58 60 56 51 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 13A Charter: NA County: Securitization and Asset Sale Activities Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 % Tot Securitization Act by Type Retained Int Only Strips N/A N/A N/A N/A N/A 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Auto Loans N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Retained Credit Enhancement N/A N/A N/A N/A N/A 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Auto Loans N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Unused Comm to Provide Liquidity N/A N/A N/A N/A N/A Sellers Int in Secs& Lns % Trust N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Commercial and Industrial Loans N/A N/A N/A N/A N/A

Percent of Tier 1 Capital Total Retained Credit Exposure 0 0 0 0 0 Retained Interest-only Strips 0 0 0 0 0 Retained Credit Enhancements 0 0 0 0 0

30-89 Day Pd Securitized Assets 1-4 Family Residential Loans 0 0 0 0 0 Home Equity Lines 0 0 0 0 0 Credit Card Receivables 0 0 0 0 0 Auto Loans 0 0 0 0 0 Commercial & Industrial Loans 0 0 0 0 0 All Other Loans and Leases 0 0 0 0 0 Total 30-89 Day Pd Secur Asset 0 0 0 0 0

90+ Days Pd Securitized Assets 1-4 Family Residential Loans 0 0 0 0 0 Home Equity Lines 0 0 0 0 0 Credit Card Receivables 0 0 0 0 0 Auto Loans 0 0 0 0 0 Commercial & Industrial Loans 0 0 0 0 0 All Other Loans and Leases 0 0 0 0 0 Total 90 + Day Pd Secur Asset 0 0 0 0 0

Total Past Due Securitized Assets 0 0 0 0 0

Net Losses Securitized Assets 1-4 Family Residential Loans 0 0 0 0 0 Home Equity Lines 0 0 0 0 0 Credit Card Receivables 0 0 0 0 0 Auto Loans 0 0 0 0 0 Commercial & Industrial Loans 0 0 0 0 0 All Other Loans and Leases 0 0 0 0 0 Total Net Charge Off Secur Asset 0 0 0 0 0 Cert #: 12345 DIST/RSSD: Valhalla Commerce Bank Page 13B Charter: NA County: Past Due and Charged Off Securitization Activities Year: 2015 - Quarter: 1

Date 3/31/2015 3/31/2014 12/31/2014 12/31/2013 12/31/2012 30-89 Day Pd Securitized Assets % 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Auto Loans N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Total 30-89 Day Pd Secur Asset N/A N/A N/A N/A N/A

90+ Day Pd Securitized Assets 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Auto Loans N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Total 90 + Day Pd Secur Asset N/A N/A N/A N/A N/A

Total Pd Securitized Assets % N/A N/A N/A N/A N/A

Net Losses on Securitized Assets% 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Auto Loans N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Net Losses on Secur Assets N/A N/A N/A N/A N/A

30-89 Day Pd Managed Assets % 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Total 30-89 Day Pd Manage Asset N/A N/A N/A N/A N/A

90+ Day Pd Managed Assets % 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Total 90 + Day Pd Manage Asset N/A N/A N/A N/A N/A

Total Past Due Managed Assets % N/A N/A N/A N/A N/A

Net Losses on Managed Assets % 1-4 Family Residential Loans N/A N/A N/A N/A N/A Home Equity Lines N/A N/A N/A N/A N/A Credit Card Receivables N/A N/A N/A N/A N/A Commercial & Industrial Loans N/A N/A N/A N/A N/A All Other Loans and Leases N/A N/A N/A N/A N/A Net Losses on Manage Assets N/A N/A N/A N/A N/A

Core Analysis

LIQUIDITY Core Analysis Decision Factors

Examiners should evaluate the Core Analysis in this section to determine if an Expanded Analysis is necessary. Click on the hyperlinks found within each of the Core Analysis Decision Factors to reference the applicable Core Analysis Procedures. To return to the Decision Factors from the Core Analysis Procedures, click on the

Do Core Analysis and Decision Factors indicate that risks are appropriately identified, measured, monitored, and controlled? Core analysis and decision factors do not indicate that risks are appropriately identified, measured, monitored, and controlled. Liquidity is strained due to the overall condition of the bank. On-balance sheet liquidity is declining while use of volatile and alternative funding increases. As a result, funding costs are higher than peer. Policies and procedures require improvement. In addition, monitoring and reporting exhibit weaknesses. See the questions below for recommendations and analysis.

C.1. Are policies, procedures, and risk limits adequate? Policies, procedures, and risk limits require enhancement, especially given the declining liquidity position and increasing risk profile of the bank. Current procedures for monitoring liquidity include weekly meetings with senior management to discuss repricing strategies, competitor rates, and funding costs. Liquidity risk tolerances and exceptions are reported monthly, however management does not provide the Board with a corrective action plan to restore exceptions to internal policy guidelines.

The Funds Management Policy is generally adequate. However, there are no limits regarding brokered deposits. Given the bank’s use of these volatile funds, the policy should be updated to provide limits for the use and amount of brokered deposits. Additionally, it should detail contingency planning in the event brokered deposits can no longer be utilized.

C.2. Are internal controls adequate? Internal controls are generally adequate. However, the Funds Management Policy should be updated to include limits for the use of brokered deposits. There are also recommendations regarding reporting and monitoring. See questions 1, 4, and 7 for additional information.

C.3. Are the audit or independent review functions adequate? The independent review function is adequate. The scope of the audit is adequate and includes a review of policy, procedures, reporting, and monitoring. No weaknesses were noted in the independent reviews pertaining to liquidity.

C.4. Are information and communications systems adequate and accurate? Information and communication systems exhibit weaknesses. Management prepares a weekly maturity report that analyzes liquidity. The report shows monthly cash inflows from securities, loans, and loans held for sale and cash outflows from maturing liabilities. However, the report does not fully depict all the bank’s cash inflows and outflows. For example, the analysis does not include any cash outflows from reinvestment of funds in securities or from loan growth. It also does not include cash inflows from renewal of time deposits or from deposit growth. A more extensive pro-forma cash flow analysis is needed to manage liquidity. It should show projected sources and uses of funds under likely liquidity

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Core Analysis

scenarios. This would allow management and the Board to determine where there may be funding gaps or surpluses.

C.5. Is the use of alternative and rate sensitive funding sources reasonable? Management’s use of alternative and rate sensitive funding sources has increased. The Net Non-Core Funding Dependence ratio increased from 13.97 percent as of March 31, 2014, to 20.23 percent as of March 31, 2015. Increase is due to the bank funding approximately $20.9 million of asset growth with $16.3 million of volatile funds over the period from 2012 to 2015. Volatile funding sources include $11 million of time deposits over $100M, $2.3 million of Federal funds purchased, and $3 million of FHLB borrowings. Reliance on volatile sources is partially a result of significant competition for deposits in the bank’s market. As a result, core deposit growth has been difficult. Core deposits as a percent of total deposits decreased from 77 percent at December 31, 2012, to 66 percent at the current exam. However, the dollar volume of core deposits has remained relatively stable since 2012. There are no large depositors. Although the amount of brokered deposits as a percent of total deposits is not significant at 2.94 percent, it is higher than the peer 2.33 percent.

Funding costs may also impact the volatility of core deposits. Management has relied on a strategy of offering promotional rates to retain existing depositors and attract new customers. The bank is paying slightly above market on most deposits, most notably on transaction accounts and time deposits as the table below illustrates. Management should more thoroughly analyze its deposit base to determine which deposits can truly be considered core.

Interest Expenses Page 3 UBPR BP Date 3/31/2015 above Percent of Total Assets Bank Peer Peer4 PCT Total Int-Bearing Deposits 3.73 0.07 3.66 52 Transaction Accounts 1.79 0.43 1.36 69 Other Savings Deposits 1.87 -0.66 2.53 28 Time Deps Over $100M 4.93 0.16 4.77 62 All Other Time Deposits 4.82 0.25 4.57 70

Furthermore, as of June 30, 2015, FHLB borrowings total $6,500M, with an additional $2,000M drawn in July 2015 making the line 97 percent utilized.

C.6. Does the overall assessment of liquidity, including cash flow analysis and contingency funding plans, indicate liquidity needs can be met without adversely affecting operations or financial condition? Liquidity is strained due to the overall financial condition of the bank. Management currently has access to sufficient sources of funds on acceptable terms to meet anticipated liquidity needs; however, continued poor operating performance and loan growth continue to stress liquid assets. On balance sheet liquidity has declined from an average of 26 percent and 21 percent at the prior FDIC and state examinations, respectively, to an average of 13 percent in 2015. As of March 31, 2015, on balance sheet liquidity is $14.2 million, representing 9.25 percent of total assets.

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Core Analysis

On Balance Sheet Liquidity Interest Bearing Balances 42 Cash & Due from 2,279 Unpledged Securities 11,871 Fed funds sold - Total Liquid Sources 14,192

Demand deposits 16,306 Money Market and NOW Accts 37,892 Savings deposits 6,145 Total CDs 74,513 Total deposits 134,856

Liquidity as a % of deposits 10.52% Liquidity as a % of total assets 9.25%

The securities portfolio provides a source of additional liquidity although the availability is declining. As of June 30, 2015, 60 percent of the portfolio is pledged, an increase from the 31 percent reported as of the exam date. It is held entirely as Available For Sale (AFS) in marketable U.S. government securities. Depreciation is minimal at (1.1) percent.

Off-balance sheet sources of liquidity are currently sufficient; however, future access may be restricted if the overall financial condition of the institution does not improve. Secondary sources include $2 million in short-term unsecured borrowings and a secured borrowing limit of up to 90 percent of pledged securities from Independent Bankers’ Bank of Valhalla, as well as a $2 million short-term unsecured borrowing line from Black Granite partners.

Management performs an annual stress test that identifies the bank’s liquidity needs over three separate scenarios: a base case, a loss of 10 percent of assets over three months, and a loss of 20 percent of assets over one year. To more accurately determine whether the bank has the ability to meet liquidity needs management should develop scenarios that are bank-specific for use in the Contingency Funding Plan (CFP) stress test.

C.7. Do the board and senior management effectively supervise this area? Board and senior management supervision need improvement. The Board and management have allowed funding costs and reliance on volatile funds to increase without establishing and enforcing appropriate limits. Furthermore, on-balance sheet liquidity continues to decline. Liquidity monitoring currently focuses primarily on adherence to specific balance sheet and contingency ratios and lacks forward analysis to project liquidity needs. Management should improve monitoring by utilizing a projected sources and uses of funds to ensure that future liquidity needs can be met at a reasonable cost.

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Core Analysis

EARNINGS Core Analysis Decision Factors

Examiners should evaluate the Core Analysis in this section to determine if an Expanded Analysis is necessary. Click on the hyperlinks found within each of the Core Analysis Decision Factors to reference the applicable Core Analysis Procedures. To return to the Decision Factors from the Core Analysis Procedures, click on the

Do Core Analysis and Decision Factors indicate that risks are appropriately identified, measured, monitored, and controlled?

Analysis does not indicate that risks are appropriately identified, measured, monitored, and controlled. Earnings are less than satisfactory with a declining ROAA and NIM. Reduced asset yields and high funding costs are shrinking the bank’s margin. In addition, high overhead expenses continue to negatively impact earnings and non-interest income provides marginal support. Asset quality concerns and interest rate movements present a potential threat to future earnings.

C.1. Are profit planning and budgeting practices adequate?

Profit planning and budgeting practices are generally adequate. The Board monitors the budgeting process and comparisons of projected to actual results closely. The 2015 budget projects year-end net income of $807M, representing an ROAA of approximately 0.50 percent. Asset growth is expected to be approximately 12 percent. However, President Shackelton stated he does not believe these projections will be achieved. Net income is anticipated to be about $150M to $200M less than budgeted.

C.2. Are internal controls adequate?

Internal controls are satisfactory given the size and complexity of the institution. No deficiencies were noted regarding insider related items, significant charges, or income and expense posting, reconcilement, and review processes.

C.3. Are the audit or independent review functions adequate?

The audit function is adequate. The audit was reviewed and contained sufficient coverage of earnings activities relative to the bank’s size, complexity, and risk profile. It determined compliance with accounting standards, included transaction testing to assure income and expenses are accurately recorded, and assessed separation of duties and internal controls.

C.4. Are information and communication systems adequate and accurate?

Information and communication systems are generally adequate and accurate. Senior management and the Board review periodic earnings results. They also receive comparisons of budget projections and actual performance which are reviewed closely. However, given less than satisfactory earnings performance and projections, reports may need to be expanded and produced more frequently going forward to increase the level of monitoring.

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Core Analysis

No issues were noted regarding accuracy of the Call Report.

C.5. Are earnings sufficient to support operations, provide for funding of the allowance for loan and lease losses (ALLL) and augment capital?

Earnings are less than satisfactory. Net income through March 31, 2015, is $159M reflecting a Return on Average Assets (ROAA) of 0.42 percent. ROAA decreased slightly from 0.50 percent as of March 31, 2014. Overhead expense continues to hamper earnings performance. Non-interest expense as a percent of average assets is 3.48 percent and 29 basis points above peer. This can be attributed to the aggressive branch expansion program which resulted in 6 facilities. The program has yet to generate the growth needed to support the current infrastructure. Earnings are further impaired by losses generated by the mortgage banking department that opened in February 2014. As of July 31, 2015, the mortgage banking operation incurred a year-to-date net loss of $136M.

Furthermore, earnings performance is negatively impacted by a declining Net Interest Margin (NIM). As of March 31, 2015, the NIM is 3.97 percent, a decrease from 4.03 percent at March 31, 2014, and 4.12 percent at December 31, 2013. NIM compression is largely the result of reduced asset yields and high funding costs. Interest expense is 20 basis points above peer and is expected to increase given recent growth in higher cost time deposits and FHLB borrowings.

As of March 31, 2015, earnings were sufficient to fund the allowance for loan and lease losses (ALLL). However, examination findings stated the ALLL is minimally adequate and loan grading is inaccurate. This is highly likely to lead to flawed modeling. Although extra provisions are not required at the current exam, future extraordinary provision expense due to the high risk portfolio is possible.

Historically, earnings have been able to modestly augment capital. As of March 31, 2015, retained earnings to average total equity is 5.17 percent. The only dividends paid were $500M in 2014, representing a 65 percent payout ratio. Capital growth can mainly be attributed to injections from the holding company. However, future holding company support may be limited, as much of its funds and credit lines have been exhausted. As a result, dividend pressure will likely increase to help service holding company debt.

C.6. Are earnings sustainable?

Earnings are from core, recurring operations. Management does not rely on sales of securities or other extraordinary items to be profitable. Future earnings performance is largely dependent on stabilizing asset quality and improving overhead costs. While total past due and nonaccrual loans remain low, the current examination identified significant concerns regarding the loan portfolio. If the issues are not addressed and remedied, earnings will not be able to sustain the potential large provision expenses and losses. Furthermore, overhead and fixed asset costs should be reduced to improve the level of earnings.

Additionally, noninterest income is not a significant source of income and is well below peer average. Noninterest income as a percent of average assets is 0.35 percent as of March 31, 2015, compared to the peer 0.73 percent. If asset quality continues to deteriorate and interest income declines, noninterest income will not provide adequate support to earnings.

Earnings may also be susceptible to negative impacts from interest rate changes. The bank is in an asset

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Core Analysis

sensitive position, with 58 percent of the loan portfolio maturing or repricing within one year. Funding is primarily provided by short-term time and non-maturity deposits. The modest earnings performance increases the potential that operations could be adversely impacted by deviations in interest rates.

C.7. Do the board and senior management effectively supervise this area?

Board and senior management oversight need improvement. Although the Board and management review earnings performance, they have not managed income and expenses, specifically overhead expense, in a manner that preserves earnings. Additionally, non-interest income does not provide sufficient support. The bank should determine strategies to improve current earnings and develop methods to more effectively monitor the sustainability and quality of earnings going forward. President Shackleton stated that to improve earnings management has identified several potential cost-cutting measures, and has recently hired a consultant to identify ways of reducing overhead expenses and generating additional income. The Board will also discuss restricting asset growth for the remainder of the year.

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INDEX TO COMPOSITE AND COMPONENT RATINGS

Composite Rating Pages 3, 4, and 5

Capital Adequacy Pages 5 and 6

Asset Quality Pages 6 and 7

Management Pages 7, 8, and 9

Earnings Pages 9 and 10

Liquidity Pages 10 and 11

Sensitivity to Market Risk Pages 11 and 12

THE UNIFORM FINANCIAL INSTITUTIONS RATING SYSTEM Introduction

The Uniform Financial Institutions Rating System (UFIRS) was adopted by the Federal Financial Institutions Examination Council (FFIEC) on November 13, 1979. In December 1996, the FFIEC updated the UFIRS. The revised system was effective January 1, 1997. Over the years, the UFIRS has proven to be an effective internal supervisory tool for evaluating the soundness of financial institutions on a uniform basis and for identifying those institutions requiring special attention or concern. A number of changes occurred in the banking industry and in the Federal supervisory agencies' policies and procedures that prompted a review and revision of the 1979 rating system. The 1996 revisions to UFIRS include the addition of a sixth component addressing sensitivity to market risks, the explicit reference to the quality of risk management processes in the management component, and the identification of risk elements within the composite and component rating descriptions. The UFIRS takes into consideration certain financial, managerial, and compliance factors that are common to all institutions. Under this system, the supervisory agencies endeavor to ensure that all financial institutions are evaluated in a comprehensive and uniform manner, and that supervisory attention is appropriately focused on the financial institutions exhibiting financial and operational weaknesses or adverse trends. The UFIRS also serves as a useful vehicle for identifying problem or deteriorating financial institutions, as well as for categorizing institutions with deficiencies in particular component areas. Further, the rating system assists Congress in following safety and soundness trends and in assessing the aggregate strength and soundness of the financial industry. As such, the UFIRS assists the agencies in fulfilling their collective mission of maintaining stability and public confidence in the nation's financial system.

Overview

Under the UFIRS, each financial institution is assigned a composite rating based on an evaluation and rating of six essential components of an institution's financial condition and operations. These component factors address the adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk. Evaluations of the components take into consideration the institution’s size and sophistication, the nature and complexity of its activities, and its risk profile. Composite and component ratings are assigned based on a 1 to 5 numerical scale. A 1 indicates the highest rating, strongest performance and risk management practices, and least degree of supervisory concern, while a 5 indicates the lowest rating, weakest performance, inadequate risk management practices and, therefore, the highest degree of supervisory concern. The composite rating generally bears a close relationship to the component ratings assigned. However, the composite rating is not derived by computing an arithmetic average of the component ratings. Each component rating is based on a qualitative analysis of the factors comprising that component and its interrelationship with the other components. When assigning a composite rating, some components may be given more weight than others depending on the 2 situation at the institution. In general, assignment of a composite rating may incorporate any factor that bears significantly on the overall condition and soundness of the financial institution. Assigned composite and component ratings are disclosed to the institution’s board of directors and senior management. The ability of management to respond to changing circumstances and to address the risks that may arise from changing business conditions, or the initiation of new activities or products, is an important factor in evaluating a financial institution's overall risk profile and the level of supervisory attention warranted. For this reason, the management component is given special consideration when assigning a composite rating. The ability of management to identify, measure, monitor, and control the risks of its operations is also taken into account when assigning each component rating. It is recognized, however, that appropriate management practices vary considerably among financial institutions, depending on their size, complexity, and risk profile. For less complex institutions engaged solely in traditional banking activities and whose directors and senior managers, in their respective roles, are actively involved in the oversight and management of day-to-day operations, relatively basic management systems and controls may be adequate. At more complex institutions, on the other hand, detailed and formal management systems and controls are needed to address their broader range of financial activities and to provide senior managers and directors, in their respective roles, with the information they need to monitor and direct day-to-day activities. All institutions are expected to properly manage their risks. For less complex institutions engaging in less sophisticated risk taking activities, detailed or highly formalized management systems and controls are not required to receive strong or satisfactory component or composite ratings. Foreign Branch and specialty examination findings and the ratings assigned to those areas are taken into consideration, as appropriate, when assigning component and composite ratings under UFIRS. The specialty examination areas include: Compliance, Community Reinvestment, Government Security Dealers, Information Systems, Municipal Security Dealers, Transfer Agent, and Trust. The following two sections contain the composite rating definitions, and the descriptions and definitions for the six component ratings.

Composite Ratings

Composite ratings are based on a careful evaluation of an institution’s managerial, operational, financial, and compliance performance. The six key components used to assess an institution’s financial condition and operations are: capital adequacy, asset quality, management capability, earnings quantity and quality, the adequacy of liquidity, and sensitivity to market risk. The rating scale ranges from 1 to 5, with a rating of 1 indicating: the strongest performance and risk management practices relative to the institution’s size, complexity, and risk profile; and the level of least supervisory concern. A 5 rating indicates: the most critically deficient level of performance; inadequate risk management practices relative to the institution’s size, complexity, and risk profile; and the greatest supervisory concern. The composite ratings are defined as follows:

3

Composite 1

Financial institutions in this group are sound in every respect and generally have components rated 1 or 2. Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. These financial institutions are the most capable of withstanding the vagaries of business conditions and are resistant to outside influences such as economic instability in their trade area. These financial institutions are in substantial compliance with laws and regulations. As a result, these financial institutions exhibit the strongest performance and risk management practices relative to the institution’s size, complexity, and risk profile, and give no cause for supervisory concern.

Composite 2

Financial institutions in this group are fundamentally sound. For a financial institution to receive this rating, generally no component rating should be more severe than 3. Only moderate weaknesses are present and are well within the board of directors’ and management’s capabilities and willingness to correct. These financial institutions are stable and are capable of withstanding business fluctuations. These financial institutions are in substantial compliance with laws and regulations. Overall risk management practices are satisfactory relative to the institution’s size, complexity, and risk profile. There are no material supervisory concerns and, as a result, the supervisory response is informal and limited.

Composite 3

Financial institutions in this group exhibit some degree of supervisory concern in one or more of the component areas. These financial institutions exhibit a combination of weaknesses that may range from moderate to severe; however, the magnitude of the deficiencies generally will not cause a component to be rated more severely than 4. Management may lack the ability or willingness to effectively address weaknesses within appropriate time frames. Financial institutions in this group generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences than those institutions rated a composite 1 or 2. Additionally, these financial institutions may be in significant noncompliance with laws and regulations. Risk management practices may be less than satisfactory relative to the institution’s size, complexity, and risk profile. These financial institutions require more than normal supervision, which may include formal or informal enforcement actions. Failure appears unlikely, however, given the overall strength and financial capacity of these institutions.

Composite 4

Financial institutions in this group generally exhibit unsafe and unsound practices or conditions. There are serious financial or managerial deficiencies that result in unsatisfactory performance. The problems range from severe to critically deficient. The weaknesses and problems are not 4 being satisfactorily addressed or resolved by the board of directors and management. Financial institutions in this group generally are not capable of withstanding business fluctuations. There may be significant noncompliance with laws and regulations. Risk management practices are generally unacceptable relative to the institution’s size, complexity, and risk profile. Close supervisory attention is required, which means, in most cases, formal enforcement action is necessary to address the problems. Institutions in this group pose a risk to the deposit insurance fund. Failure is a distinct possibility if the problems and weaknesses are not satisfactorily addressed and resolved.

Composite 5

Financial institutions in this group exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance; often contain inadequate risk management practices relative to the institution’s size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of problems are beyond management’s ability or willingness to control or correct. Immediate outside financial or other assistance is needed in order for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk to the deposit insurance fund and failure is highly probable.

Component Ratings

Each of the component rating descriptions is divided into three sections: an introductory paragraph; a list of the principal evaluation factors that relate to that component; and a brief description of each numerical rating for that component. Some of the evaluation factors are reiterated under one or more of the other components to reinforce the interrelationship between components. The listing of evaluation factors for each component rating is in no particular order of importance.

Capital Adequacy

A financial institution is expected to maintain capital commensurate with the nature and extent of risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The effect of credit, market, and other risks on the institution’s financial condition should be considered when evaluating the adequacy of capital. The types and quantity of risk inherent in an institution's activities will determine the extent to which it may be necessary to maintain capital at levels above required regulatory minimums to properly reflect the potentially adverse consequences that these risks may have on the institution's capital. The capital adequacy of an institution is rated based upon, but not limited to, an assessment of the following evaluation factors: • The level and quality of capital and the overall financial condition of the institution. • The ability of management to address emerging needs for additional capital. • The nature, trend, and volume of problem assets, and the adequacy of allowances for loan and lease losses and other valuation reserves. 5 • Balance sheet composition, including the nature and amount of intangible assets, market risk, concentration risk, and risks associated with nontraditional activities. • Risk exposure represented by off-balance sheet activities. • The quality and strength of earnings, and the reasonableness of dividends. • Prospects and plans for growth, as well as past experience in managing growth. • Access to capital markets and other sources of capital, including support provided by a parent holding company.

Ratings

1. A rating of 1 indicates a strong capital level relative to the institution’s risk profile. 2. A rating of 2 indicates a satisfactory capital level relative to the financial institution’s risk profile. 3. A rating of 3 indicates a less than satisfactory level of capital that does not fully support the institution's risk profile. The rating indicates a need for improvement, even if the institution's capital level exceeds minimum regulatory and statutory requirements. 4. A rating of 4 indicates a deficient level of capital. In light of the institution’s risk profile, viability of the institution may be threatened. Assistance from shareholders or other external sources of financial support may be required. 5. A rating of 5 indicates a critically deficient level of capital such that the institution's viability is threatened. Immediate assistance from shareholders or other external sources of financial support is required.

Asset Quality

The asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned, and other assets, as well as off- balance sheet transactions. The ability of management to identify, measure, monitor, and control credit risk is also reflected here. The evaluation of asset quality should consider the adequacy of the allowance for loan and lease losses and weigh the exposure to counter-party, issuer, or borrower default under actual or implied contractual agreements. All other risks that may affect the value or marketability of an institution's assets, including, but not limited to, operating, market, reputation, strategic, or compliance risks, should also be considered. The asset quality of a financial institution is rated based upon, but not limited to, an assessment of the following evaluation factors: • The adequacy of underwriting standards, soundness of credit administration practices, and appropriateness of risk identification practices. • The level, distribution, severity, and trend of problem, classified, nonaccrual, restructured, delinquent, and nonperforming assets for both on- and off-balance sheet transactions. • The adequacy of the allowance for loan and lease losses and other asset valuation reserves.

6 • The credit risk arising from or reduced by off-balance sheet transactions, such as unfunded commitments, credit derivatives, commercial and standby letters of credit, and lines of credit. • The diversification and quality of the loan and investment portfolios. • The extent of securities underwriting activities and exposure to counter-parties in trading activities. • The existence of asset concentrations. • The adequacy of loan and investment policies, procedures, and practices. • The ability of management to properly administer its assets, including the timely identification and collection of problem assets. • The adequacy of internal controls and management information systems. • The volume and nature of credit documentation exceptions. Ratings

1. A rating of 1 indicates strong asset quality and credit administration practices. Identified weaknesses are minor in nature and risk exposure is modest in relation to capital protection and management’s abilities. Asset quality in such institutions is of minimal supervisory concern. 2. A rating of 2 indicates satisfactory asset quality and credit administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital protection and management’s abilities. 3. A rating of 3 is assigned when asset quality or credit administration practices are less than satisfactory. Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure. The level and severity of classified assets, other weaknesses, and risks require an elevated level of supervisory concern. There is generally a need to improve credit administration and risk management practices. 4. A rating of 4 is assigned to financial institutions with deficient asset quality or credit administration practices. The levels of risk and problem assets are significant, inadequately controlled, and subject the financial institution to potential losses that, if left unchecked, may threaten its viability. 5. A rating of 5 represents critically deficient asset quality or credit administration practices that present an imminent threat to the institution's viability.

Management

The capability of the board of directors and management, in their respective roles, to identify, measure, monitor, and control the risks of an institution’s activities and to ensure a financial institution’s safe, sound, and efficient operation in compliance with applicable laws and regulations is reflected in this rating. Generally, directors need not be actively involved in day- to-day operations; however, they must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies, procedures, and practices have been established. Senior management is responsible for developing and implementing policies, procedures, and

7 practices that translate the board’s goals, objectives, and risk limits into prudent operating standards. Depending on the nature and scope of an institution’s activities, management practices may need to address some or all of the following risks: credit, market, operating or transaction, reputation, strategic, compliance, legal, liquidity, and other risks. Sound management practices are demonstrated by: active oversight by the board of directors and management; competent personnel; adequate policies, processes, and controls taking into consideration the size and sophistication of the institution; maintenance of an appropriate audit program and internal control environment; and effective risk monitoring and management information systems. This rating should reflect the board’s and management’s ability as it applies to all aspects of banking operations as well as other financial service activities in which the institution is involved. The capability and performance of management and the board of directors is rated based upon, but not limited to, an assessment of the following evaluation factors: • The level and quality of oversight and support of all institution activities by the board of directors and management. • The ability of the board of directors and management, in their respective roles, to plan for, and respond to, risks that may arise from changing business conditions or the initiation of new activities or products. • The adequacies of, and conformance with, appropriate internal policies and controls addressing the operations and risks of significant activities. • The accuracy, timeliness, and effectiveness of management information and risk monitoring systems appropriate for the institution’s size, complexity, and risk profile. • The adequacy of audits and internal controls to: promote effective operations and reliable financial and regulatory reporting; safeguard assets; and ensure compliance with laws, regulations, and internal policies. • Compliance with laws and regulations. • Responsiveness to recommendations from auditors and supervisory authorities. • Management depth and succession. • The extent that the board of directors and management is affected by, or susceptible to, dominant influence or concentration of authority. • Reasonableness of compensation policies and avoidance of self-dealing. • Demonstrated willingness to serve the legitimate banking needs of the community. • The overall performance of the institution and its risk profile. Ratings

1. A rating of 1 indicates strong performance by management and the board of directors and strong risk management practices relative to the institution’s size, complexity, and risk profile. All significant risks are consistently and effectively identified, measured, monitored, and controlled. Management and the board have demonstrated the ability to promptly and successfully address existing and potential problems and risks. 2. A rating of 2 indicates satisfactory management and board performance and risk management practices relative to the institution’s size, complexity, and risk profile. Minor weaknesses may exist, but are not material to the safety and soundness of the

8 institution and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled. 3. A rating of 3 indicates management and board performance that need improvement or risk management practices that are less than satisfactory given the nature of the institution’s activities. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled. 4. A rating of 4 indicates deficient management and board performance or risk management practices that are inadequate considering the nature of an institution’s activities. The level of problems and risk exposure is excessive. Problems and significant risks are inadequately identified, measured, monitored, or controlled and require immediate action by the board and management to preserve the soundness of the institution. Replacing or strengthening management or the board may be necessary. 5. A rating of 5 indicates critically deficient management and board performance or risk management practices. Management and the board of directors have not demonstrated the ability to correct problems and implement appropriate risk management practices. Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability of the institution. Replacing or strengthening management or the board of directors is necessary.

Earnings

This rating reflects not only the quantity and trend of earnings, but also factors that may affect the sustainability or quality of earnings. The quantity as well as the quality of earnings can be affected by excessive or inadequately managed credit risk that may result in loan losses and require additions to the allowance for loan and lease losses, or by high levels of market risk that may unduly expose an institution's earnings to volatility in interest rates. The quality of earnings may also be diminished by undue reliance on extraordinary gains, nonrecurring events, or favorable tax effects. Future earnings may be adversely affected by an inability to forecast or control funding and operating expenses, improperly executed or ill-advised business strategies, or poorly managed or uncontrolled exposure to other risks. The rating of an institution's earnings is based upon, but not limited to, an assessment of the following evaluation factors: • The level of earnings, including trends and stability. • The ability to provide for adequate capital through retained earnings. • The quality and sources of earnings. • The level of expenses in relation to operations. • The adequacy of the budgeting systems, forecasting processes, and management information systems in general. • The adequacy of provisions to maintain the allowance for loan and lease losses and other valuation allowance accounts. • The earnings exposure to market risk such as interest rate, foreign exchange, and price risks.

9 Ratings

1. A rating of 1 indicates earnings that are strong. Earnings are more than sufficient to support operations and maintain adequate capital and allowance levels after consideration is given to asset quality, growth, and other factors affecting the quality, quantity, and trend of earnings. 2. A rating of 2 indicates earnings that are satisfactory. Earnings are sufficient to support operations and maintain adequate capital and allowance levels after consideration is given to asset quality, growth, and other factors affecting the quality, quantity, and trend of earnings. Earnings that are relatively static, or even experiencing a slight decline, may receive a 2 rating provided the institution’s level of earnings is adequate in view of the assessment factors listed above. 3. A rating of 3 indicates earnings that need to be improved. Earnings may not fully support operations and provide for the accretion of capital and allowance levels in relation to the institution's overall condition, growth, and other factors affecting the quality, quantity, and trend of earnings. 4. A rating of 4 indicates earnings that are deficient. Earnings are insufficient to support operations and maintain appropriate capital and allowance levels. Institutions so rated may be characterized by erratic fluctuations in net income or net interest margin, the development of significant negative trends, nominal or unsustainable earnings, intermittent losses, or a substantive drop in earnings from the previous years. 5. A rating of 5 indicates earnings that are critically deficient. A financial institution with earnings rated 5 is experiencing losses that represent a distinct threat to its viability through the erosion of capital.

Liquidity

In evaluating the adequacy of a financial institution’s liquidity position, consideration should be given to the current level and prospective sources of liquidity compared to funding needs, as well as to the adequacy of funds management practices relative to the institution’s size, complexity, and risk profile. In general, funds management practices should ensure that an institution is able to maintain a level of liquidity sufficient to meet its financial obligations in a timely manner and to fulfill the legitimate banking needs of its community. Practices should reflect the ability of the institution to manage unplanned changes in funding sources, as well as react to changes in market conditions that affect the ability to quickly liquidate assets with minimal loss. In addition, funds management practices should ensure that liquidity is not maintained at a high cost, or through undue reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions. Liquidity is rated based upon, but not limited to, an assessment of the following evaluation factors: • The adequacy of liquidity sources compared to present and future needs and the ability of the institution to meet liquidity needs without adversely affecting its operations or condition. • The availability of assets readily convertible to cash without undue loss. 10 • Access to money markets and other sources of funding. • The level of diversification of funding sources, both on- and off-balance sheet. • The degree of reliance on short-term, volatile sources of funds, including borrowings and brokered deposits, to fund longer term assets. • The trend and stability of deposits. • The ability to securitize and sell certain pools of assets. • The capability of management to properly identify, measure, monitor, and control the institution’s liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans.

Ratings

1. A rating of 1 indicates strong liquidity levels and well-developed funds management practices. The institution has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs. 2. A rating of 2 indicates satisfactory liquidity levels and funds management practices. The institution has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. Modest weaknesses may be evident in funds management practices. 3. A rating of 3 indicates liquidity levels or funds management practices in need of improvement. Institutions rated 3 may lack ready access to funds on reasonable terms or may evidence significant weaknesses in funds management practices. 4. A rating of 4 indicates deficient liquidity levels or inadequate funds management practices. Institutions rated 4 may not have or be able to obtain a sufficient volume of funds on reasonable terms to meet liquidity needs. 5. A rating of 5 indicates liquidity levels or funds management practices so critically deficient that the continued viability of the institution is threatened. Institutions rated 5 require immediate external financial assistance to meet maturing obligations or other liquidity needs.

Sensitivity To Market Risk

The sensitivity to market risk component reflects the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect a financial institution’s earnings or economic capital. When evaluating this component, consideration should be given to: management’s ability to identify, measure, monitor, and control market risk; the institution’s size; the nature and complexity of its activities; and the adequacy of its capital and earnings in relation to its level of market risk exposure. For many institutions, the primary source of market risk arises from nontrading positions and their sensitivity to changes in interest rates. In some larger institutions, foreign operations can be a significant source of market risk. For some institutions, trading activities are a major source of market risk.

11 Market risk is rated based upon, but not limited to, an assessment of the following evaluation factors: • The sensitivity of the financial institution's earnings or the economic value of its capital to adverse changes in interest rates, foreign exchange rates, commodity prices, or equity prices. • The ability of management to identify, measure, monitor, and control exposure to market risk given the institution’s size, complexity, and risk profile. • The nature and complexity of interest rate risk exposure arising from nontrading positions. • Where appropriate, the nature and complexity of market risk exposure arising from trading and foreign operations.

Ratings

1. A rating of 1 indicates that market risk sensitivity is well controlled and that there is minimal potential that the earnings performance or capital position will be adversely affected. Risk management practices are strong for the size, sophistication, and market risk accepted by the institution. The level of earnings and capital provide substantial support for the degree of market risk taken by the institution. 2. A rating of 2 indicates that market risk sensitivity is adequately controlled and that there is only moderate potential that the earnings performance or capital position will be adversely affected. Risk management practices are satisfactory for the size, sophistication, and market risk accepted by the institution. The level of earnings and capital provide adequate support for the degree of market risk taken by the institution. 3. A rating of 3 indicates that control of market risk sensitivity needs improvement or that there is significant potential that the earnings performance or capital position will be adversely affected. Risk management practices need to be improved given the size, sophistication, and level of market risk accepted by the institution. The level of earnings and capital may not adequately support the degree of market risk taken by the institution. 4. A rating of 4 indicates that control of market risk sensitivity is unacceptable or that there is high potential that the earnings performance or capital position will be adversely affected. Risk management practices are deficient for the size, sophistication, and level of market risk accepted by the institution. The level of earnings and capital provide inadequate support for the degree of market risk taken by the institution. 5. A rating of 5 indicates that control of market risk sensitivity is unacceptable or that the level of market risk taken by the institution is an imminent threat to its viability. Risk management practices are wholly inadequate for the size, sophistication, and level of market risk accepted by the institution.

12 Other Aids

Contents Glossary ...... 2 Core deposits ...... 2 NIM ...... 2 TE- Technical Exception ...... 3 Formal and Informal Regulatory Actions ...... 4 Memorandums of Understanding ...... 4 Formal Administrative Actions ...... 6

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Other Aids

Glossary Core deposits – Core deposits are not defined by statute. Rather, they are defined for analytical and examination purposes in the Uniform Bank Performance Report (UBPR). Until March 31, 2011, core deposits were defined in the UBPR User Guide as the sum of demand deposits, all NOW and automatic transfer service (ATS) accounts, money market deposit accounts (MMDAs), other savings deposits, and time deposits under $100,000.

As of March 31, 2011, the definition was revised to reflect the permanent increase to FDIC deposit insurance coverage from $100,000 to $250,000 and to exclude insured brokered deposits from core deposits. This revision defines core deposits as the sum of demand deposits, all NOW and ATS accounts, MMDAs, other savings deposits and time deposits under $250,000, minus all brokered deposits under $250,000. For periods before March 2011, the definition was revised to the sum of demand deposits, all NOW and ATS accounts, MMDAs, other savings deposits and time deposits under $100,000, minus all brokered deposits under $100,000.

Core deposits, as an analytical and supervisory tool, are intended to include those deposits that are stable and lower cost and that reprice more slowly than other deposits when interest rates rise. These deposits are typically funds of local customers that also have a borrowing or other relationship with the bank. However, in some instances, core deposit accounts (e.g., time deposits) may exhibit characteristics associated with more volatile funding sources. Conversely, deposit accounts generally viewed as volatile funding (e.g., certificates of deposit—CDs—larger than $250,000) may be relatively stable funding sources. [ source = STUDY ON CORE DEPOSITS AND BROKERED DEPOSITS Submitted to Congress pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act Federal Deposit Insurance Corporation July 8, 2011]

NIM – NIM is the commonly used acronym for “Net Interest Margin.” In general the NIM is the spread between income earned on assets and the expense of liabilities. The NIM is defined and calculated in the Uniform Bank Performance Report (UBPR) User's Guide ( www.ffiec.gov ) as follows:

Net Interest Income (TE) as a percent of Average Earning Assets= Total interest income on a tax-equivalent basis, less total interest expense, divided by the average of the respective asset accounts involved in generating interest income.

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Other Aids

TE- Technical Exception – TE is the commonly used acronym for “technical exception” and also known as “documentation exceptions” in the lending process. TEs include, but are not limited to the following: 1. Appraisal 2. Title Search or Legal Opinion 3. Borrowing Authorization 4. Recordation 5. Insurance 6. Collateral Assignment 7. Financial Statement 8. Inadequate Income/Cash Flow Information 9. Livestock Inspection 10. Crop Inspection

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Other Aids

Formal and Informal Regulatory Actions As described in the FDIC Risk Management Manual of Examination Policies

Section 13.1 - Memorandums of Understanding

Introduction By definition, institutions which have been assigned a composite 3 rating pursuant to the Uniform Financial Institutions Rating System have overall strength and financial capacity sufficient to make failure only a remote possibility. However, their weaknesses are such that if not properly addressed and corrected, deterioration could concur. The memorandum of understanding is a means of seeking informal corrective administrative action from institutions considered to be of supervisory concern, but which have not deteriorated to the point where they warrant formal administrative action. It is the policy of the Division of Supervision that matters in need of corrective action within such institutions should be addressed in the form of a memorandum of understanding. This is in lieu of the use of letter agreements, board resolutions passed at the request of the Regional Director, or other forms of bilateral or unilateral agreements. As a general rule, and as a minimum, this informal administrative action is to be considered for all institutions rated a composite 3. General use of a memorandum of understanding for composite 3 rated institutions does not rule out recourse to formal enforcement action when it is believed management is unwilling to take necessary corrective action, nor does it prohibit use of a memorandum of understanding in situations where other than a composite 3 rating is assigned.

A memorandum of understanding is usually drafted at the Regional level and jointly signed by the Regional Director, Deputy Regional Director, or an Assistant Regional Director and the institution's board of directors. In all instances, the State authority should be invited to join in these actions. Contents of a memorandum of understanding should be uniquely fashioned to address the specific problems of an individual institution. It is important that the language used in the memorandum of understanding be precise so that all parties fully understand exactly what is agreed to and expected. Use of a memorandum of understanding, as opposed to more formal action, is particularly appropriate where the Regional Office believes the problems discussed with management and the board of directors of the institution has been adequately detailed and the institution, in good faith, will move to eliminate the problems. An institution's failure to comply with the provisions of a memorandum of understanding, or continued deterioration in the areas addressed in the memorandum of understanding, may facilitate implementation of more formal administrative action in the future. After consultation with the Regional Office, examiners should discuss fully with management and the directorate the probable use of a memorandum of understanding at all

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Other Aids

examinations where a composite 3 rating is recommended. Examiners should also inform management in these cases that, should the memorandum of understanding prove ineffective in correcting the deficiencies, consideration may be given to initiation of formal administrative action at a later date.

Exceptions, which are defined as not obtaining at least a memorandum of understanding from institutions rated a composite 3, will be considered by the Regional Director when the condition of the institution clearly reflects significant improvements or individual circumstances strongly mitigate the appropriateness or feasibility of this supervisory tool. For example, an acceptable action by the State authority might preempt the need for FDIC action. Mere belief that management has recognized its error and will improve is not generally a sufficient basis for granting an exception. At the Regional Director's discretion, the memorandum of understanding may be drafted in the field and signatures of the directors obtained at the board meeting held at the conclusion of the examination. Termination of an outstanding memorandum of understanding should be considered when the institution's overall condition has improved significantly and the institution has substantially complied with its terms. The Regional Office will coordinate any terminations with the State authority if the latter is a party to the action. Flexibility is the keynote of this action. The goal is to obtain correction by sharply focusing on the institution's problem areas and defining responsibilities for ensuring that deficiencies are addressed.

Monitoring of adherence to an outstanding memorandum of understanding may be done by any combination of progress reports, visitations or examinations. The examiner should detail each provision of the memorandum of understanding and provide sufficient details regarding the institution's action (or inaction) to allow for meaningful conclusions concerning the extent of compliance.

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Other Aids

Section 15.1 - Formal Administrative Actions

Consent Cease and Desist Orders - Under Section 8(b), the FDIC attempts to obtain a Consent Cease and Desist Order in an effort to eliminate the need for time consuming administrative hearings. The Consent Cease and Desist procedure is premised upon agreement to a stipulation between the representatives of the FDIC and the bank's board of directors whereby the bank agrees to the issuance of a Cease and Desist Order without admitting or denying that any unsafe or unsound practices and/or violations of law or regulation have occurred. The effect of this procedure is to reduce the time period between initial review of the case and the date on which an enforceable and binding Cease and Desist Order is issued. Concurrence of the State supervisor is sought; however, failure to obtain such concurrence is no reason to discontinue the pursuit of Section 8(b) action. The responsibility for negotiating a stipulation with the bank’s board of directors is that of the Regional Counsel and other Regional Office representatives. The stipulation provides for waiver by the bank of its rights to a hearing and its consent to an agreed upon Consent Cease and Desist Order. Once a stipulation is obtained, the Regional Counsel certifies in writing that the bank has been advised of its rights to a Notice of Charges and the directors or their chosen representative sign the stipulation. The Legal Division is responsible for certifying the legal sufficiency or for notifying the Division of Supervision of the legal insufficiency of the documents relating to Consent Cease and Desist Orders. After finalization of a stipulation, the FDIC issues the Order. If a satisfactory stipulation cannot be agreed upon, the FDIC gives notice of the time and place for a hearing.

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