Bank Directors Seminar, Coeur d'Alene, ID

Bank Directors Seminar  Coeur d’Alene, Idaho  September 16‐18, 2018 

Sunday, September 16, 2018 

Welcome Remarks Sebastien Monnet 

3:00 PM  

Vice President, Learning & Development  Conference of State Bank Supervisors  U.S. Economy & Community Banking Outlook Scott E. Hein, Ph.D.  Emeritus Professor of Finance  Texas Tech University  Happy Hour Networking Reception All registered attendees and guests welcome 

3:15 PM  

5:00 PM  

Monday, September 17, 2018 

Continental Breakfast

8:00 AM  

Customer Resiliency in the Aftermath of a Destructive Cyber‐Attack Trey Maust  Chief Executive Officer  Sheltered Harbor 

8:30 AM  

Break

9:30 AM  

Current Trends in Executive & Director Compensation and Benefit Plans Bill Gardiner  Senior Consultant  Equias Alliance 

9:45 AM  

Break

10:45 AM  

Current & Emerging Trends in the Banking Landscape Tom Hayes  Managing Director, Investment Banking  D.A. Davidson & Co. 

11:00 AM  

Lunch

12:00 PM  

Treasury’s War James P. “Paul” Cummings, Jr.  Director of Compliance Review Services  Hamby & Hengeli LLC

1:30 PM  

Break

3:00 PM  

Inside the Beltway: Regulatory Policy & Legislative Update Michael L. Stevens  Senior Executive Vice President  Conference of State Bank Supervisors 

3:15 PM  

Adjourn

4:30 PM  

Networking Reception & Dinner Dinner Cruise on Lake Coeur d'Alene 

5:30 PM  

Tuesday, September 18, 2018 

Continental Breakfast

8:00 AM  

The Thief in Your Bank Tiffany Couch, CPA/CFF, CFE  Owner  Acuity Forensics 

8:30 AM  

Break

10:00 AM  

The State Regulators Roundtable Susan Dumontet  Program Manager  Washington Department of Financial Institutions 

10:15 AM  

Gavin Gee  Director  Idaho Department of Finance 

Melanie G. Hall  Commissioner  Montana Division of Banking and Financial Institutions 

G. Edward Leary  Commissioner  Utah Department of Financial Institutions 

Closing Remarks Sebastien Monnet 

11:30 AM  

Vice President, Learning & Development  Conference of State Bank Supervisors

Bank Directors Seminar Coeur D'Alene, Idaho September 16‐18, 2018

ATTENDEES Joe Adams

1st Security Bank of Washington

joea@fsbwa.com kbauk@comcast.net

425‐697‐8048 360‐754‐3400 801‐598‐1596 206‐795‐8393 406‐273‐4495 253‐589‐1499 360‐533‐4747 626‐765‐2369 360‐754‐3400 406‐752‐7375 406‐829‐2668 208‐720‐3311 406‐829‐2668 406‐642‐3431 801‐545‐6004 406‐253‐4893 360‐399‐7002 406‐442‐3080 801‐545‐6004 425‐254‐2004 360‐538‐7850 406‐363‐1250 360‐754‐3400 406‐439‐7506 360‐570‐7355 406‐228‐9363 208‐528‐3035 406‐228‐8232 425‐275‐9734 425‐275‐9734 360‐533‐4747 704‐444‐5220 406‐228‐8231 360‐533‐4747 360‐754‐3400 208‐528‐3008 406‐273‐4495 818‐621‐1449 360‐754‐3400 406‐829‐2668 360‐902‐8704 208‐332‐8010 406‐841‐2920 801‐538‐8761

Kathleen Bauknight

Olympia Federal Savings People's Utah Bancorp

Rick Beard

richard.beard@peoplesutah.com sandracavanaugh@yahoo.com john@communitybankers‐wa.org jd2tall@gmail.com mdent@greendot.com ldrummond@olyfed.com ceble@valleybankmt.com charlie@peakmissoula.com estep@mackayriver.com tpfennessy@fastmail.com groff@cybernet1.com fredhealey007@gmail.com mhensley@valleybankmt.com ahunter@savibank.com pjohnson@oppbank.com klandvatter@finwisebank.com Kathy.l@rampartgroup.com Larry@coldwellbankewsa.com jmaxwell4347@gmail.com etchart8@gmail.com millergragg@gmail.com dgsports@nemont.net j.newgard@bankofidaho.net tim.newton@nemont.net Ronoh2001@gmail.com cindy.runger@gmail.com mrsand@timberlandbank.com jason.schugel@ally.com ksimensen@fcbank.net harbordrug@seanet.com westaley@comcast.net stephensdlsc@gmail.com rossh@ffnwb.com kayc@farmersebank.com

Sandy Cavanaugh Kay Clevidence

HomeStreet Bank Farmers State Bank

John Collins Jim Davis Mary Dent

Community Bankers of Washington

Timberland Bank GreenDot Corp

Lori Drummond

Olympia Federal Savings

Chuck Eble

Valley Bank

Charlie Eiseman

First Montana Bank, Inc Valley Bank of Kalispell First Montana Bank Farmers State Bank

Brent Estep

Terry Fennessy Ann Groff Fred Healey Mark Hensley Andy Hunter Pete Johnson Kent Landvatter

FinWise Bank

Valley Bank of Kalispell

SaviBank

Opportunity Bank of Montana

FinWise Bank

Joann Lee

First Financial Northwest Bank

Kathy Leodler

Timberland Bank Farmers State Bank

Larry Lund

John Maxwell Tom McCarvel Gragg Miller

Olympia Federal Savings

Opportunity Bank

Heritage Financial Corporation

Darrell Morehouse

First Community Bank

Jeff Newgard Tim Newton

Bank of Idaho

First Community Bank

Ronald Oh

UniBank UniBank

Cindy Runger

Mike Sand

Timberland Bank

Jason Schugel Kris Simensen Dave Smith Wayne Staley Denise Stephens Jim Tadvick Don Voss John Warjone Tom Weaver REGULATORS Susan Dumontet

Ally Financial

First Community Bank

Timberland Bank

Olympia Federal Savings

Bank of Idaho

Farmers State Bank HomeStreet Bank

thetads@gmail.com dvoss818@sbcglobal.net owarjone@comcast.net mt.weaver@yahoo.com

Olympia Federal Savings First Montana Bank

Washington Department of Financial Institutions

susan.dumontet@dfi.wa.gov gavin.gee@finance.idaho.gov

Gavin Gee Melanie Hall

Idaho Department of Finance

Montana Division of Banking and Financial Institutions

mghall@mt.gov eleary@utah.gov

Ed Leary

Utah Department of Financial Institutions

SPEAKERS Tiffany Couch, CPA/CFF, CFE James P. "Paul" Cummings, Jr.

Acuity Forensics

Hamby & Hengeli LLC

Bill Gardiner Tom Hayes

Equias Alliance

D.A. Davidson & Co. Texas Tech University

Scott E. Hein, Ph.D.

Trey Maust

Sheltered Harbor

CSBS STAFF Sebastien Monnet Michael L. Stevens

Conference of State Bank Supervisors Conference of State Bank Supervisors

smonnet@csbs.org mstevens@csbs.org

202‐549‐2017 202‐728‐5701

U.S. Economy and Community Banking Outlook

Scott Hein, Emeritus Professor of Finance, Rawls College of Business, Texas Tech University; and Independent Director, FinPro Inc.

– CSBS Bank Directors Seminar, Coeur d’Alene, Idaho, September 2018

Things you should know

– If you're too open-minded, your brains will fall out. – Age is a very high price to pay for maturity.

Making America Great Again – “America’s problems are self-made and can’t be solved by wringing the necks of the Chinese and Mexicans until they give us back our greatness.” – Holman Jenkins, WSJ, May 7, 2016. – “Community banks play big role in making America Great.” – Scott Hein, CSBS Bank Directors Seminar, 2018

U.S. Economy has finally fully recovered from the “great recession” of 2007-2009 – The negatives of Dodd-Frank and Affordable Healthcare Act are behind us to a great extent now, so the headwinds are not as fierce. – The tax reform and regulatory relief are providing needed tailwinds. – The threat of a trade war and ever escalating tariffs is a threat. – Still, the U.S. economy has been adding over 200,000 new jobs each month and the unemployment rate is 3.9% today. – We don’t feel really good about this, as the growth has been low by historical standards and median wages are not growing. – In addition we are producing more goods and services at the same rate we are adding jobs resulting in low increases in labor productivity.

Empirical Observations regarding Post-WWII U.S. GDP Growth – Cycles happen with no obvious length of period in between recessions (shaded areas in chart) – GDP annual growth rates averaged – 3.5% 1955-2000 – 1.9% 2000-2016 – Contrasting views – “Secular stagnation” view. Permanently stuck in mud – “Hein-sight” Stupid policies caused economic sluggishness: Dodd-Frank, Affordable Care Act, Green initiatives, low interest rates

Taken from Thomas K. Brown Bankstocks post “ A Wrongheaded Take on the Effects of Dodd-Frank” in response to points from FDIC Chair Gruenberg

Traditional view of monetary policy (a Keynesian view) – Conventional wisdom is that lower interest rates will encourage borrowing, expand spending, and thus stimulate economic growth. – The experience of the last 8 or so years should encourage us to rethink this chain, as the economy has not expanded robustly as suggested by this model. – Failures of this model are not confined to the U.S., but Europe and Japan are showing equal evidence of contrary evidence. – What is wrong with the conventional thinking? – Hein-sight: There is an unintended consequence of low interest rates that most ignore and that is that savers are penalized. Those that are trying to build net worth have a harder time doing so from saving. Unfortunately, that was the sense of most in the economy after the financial crisis. Continued low interest rates just encourage savers to take on more risk then, with no reason to expect enhanced returns. How can this be good? U.S. Monetary Policy: An Interest Rate Perspective – In my view, the excessively easy monetary policy from 2008-2016 was not very effective in stimulating demand for goods and services. – It is more effective in stimulating demand for financial assets, i.e. bonds and stocks, and even real estate and commodity prices. – In my thinking, as long as the Federal Reserve is targeting interest rates to be less than they are targeting inflation (meaning they are targeting negative “real interest rates). – It is better to think that the Federal Reserve has “lightened up on the accelerating” as opposed to it “has put its foot on the brakes.” – While the Fed has recently increased the target for the federal funds rate, the policy still meets my definition of easy. – Use inflation as the benchmark against which to judge the level of interest rates

Monetary Policy: What should we conclude since we didn’t get the bang for the buck expected? – Chairman Powell’s conclusion: the ‘natural rate of interest’ is really low now, and we are lucky the Federal Reserve was wise enough to cut interest rates as they did or things would have even been worse. – This is an example of a “counterfactual argument” that presumes one knows the “truth” and low interest rates or base expansion do indeed stimulate economic activity. – Hein concludes: monetary policy and Federal Reserve Actions are not very helpful in stimulating economic activity. – Low interest rates have harmful effects. They hurt those trying to save.

The Fed is economist #2. You?

Its been a long time since we talked about rising rate

But, don’t forget the earlier rising rate environment – the 1960s and 1970s

Not only did the Fed target the federal funds rate to be exceedingly low in response to the 2007-2009 financial crisis, they also engaged in three different episodes of quantitative easing (QE). The aim here was to lower longer term interest rates and get investors into riskier investments, like stocks

None of the QE periods resulted in lower interest rates, but each did drive up stock prices

Why is inflation so “low” with QE in place? – The Fed starting paying interest on deposits that banks hold at Federal Reserve Banks at the end of 2008. – As a result, money growth did not greatly accelerated as markedly at the Fed’s balance sheet, as the bank reserves are being held in excess, on deposit at Fed banks, as we have seen. – Inflation should be a concern for bankers, because inflation directly impacts interest rates, unless the Fed is doing something strange. The more inflation, the higher are interest rates. – The Fed’s preferred measure, the core PCE deflator, ignores food and energy prices and adjusts for improved quality of goods and services. – Nonmonetary factors such as, technological advances in oil production and the expansion of reserves due to fracking have made the U.S. a net exporter of oil to some extent. – We should be dancing in the streets celebrating this advance.

Bank’s Excess Reserves

– Depository institutions in the U.S. today are holding about $2000 billion, that is $2 trillion , in excess reserves. – Prior to the financial crisis, depository institutions were quite successful in keeping next to nothing in excess reserves. – In other words, we have never experienced in our financial system that which we are seeing today. – Make sure the “old bankers” in your shop understand the situation regarding the excess reserves at your bank. This is a source of liquidity especially for the big and foreign banks – Banks now have the wherewithal to make new loans without the Fed having to do anything. – This wasn’t the case in the past. – Banks have a financial incentive to lend this money out. They are currently only earning 1.95% on deposits (reserves) held at Federal Reserve banks.

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QE now: Europe and Japanese Central Banks still engaged – Both of these central banks are still seeking to keep low interest rates to stimulate economic growth and are engaged in quantitative easing . – Both Europe and Japan have taken things one more step toward the absurd by targeting negative interest rates, i.e. borrowers give back less than they got originally. This might make borrowers happy, but what about lenders? – Fed is engaged in very small QT (quantitative tightening)

Major central bank asset accumulation since 2003

U.S. “Quantitative Tightening”

Beginning one year ago the Fed began a gradual process of not repurchasing longer-term securities in it portfolio as they mature. Starting in 4Q/2018, they will allow about $50 billion such securities a month to leave the portfolio.

The FOMC’s plan to shrink its Treasury security holdings (WSJ Sept 2017)

The FOMC’s plan to shrink its mortgage-backed security holdings (WSJ Sept 2017)

Anticipated Fed Balance Sheet Normalization (WSJ Sept 2017)

QE (in 3) and QT https://www.wsj.com/articles/dont-worry- about-the-end-of-qe-worry-about-rates-1533580338?mod=searchresults&page=1&pos=2

Money Supply in QE and QT

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U.S. Inflation is low, but rising of late (CPI inflation, 2.9% year over year)

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International Balances

What about our international trade deficit? Answer: Don’t lose too much sleep over it – We have been running a trade deficit for the last 40 years! Suggest to me it is not a big problem. It is growing, but I think this is due to “globalization,” which is a good thing. – Note also, that our trade deficit generally gets smaller in our recessions (shaded areas in above chart). In other words, the way to eliminate our trade deficit is to make our economy worse! – The reason we have a trade deficit, to a certain extent, can be because foreigners want to buy our assets at a greater rate than we want to buy theirs. – This tells me that foreigners see greater opportunities in owning our assets, than we see in owning theirs. Isn’t this a good sign for the U.S. economy? – Note also that we earn more on our foreign asset holdings than foreigners earn own our assets. In other words, we seem to be better investors. Admittedly, this does work to keep our interest rates low, as Bernanke argues. But, this is not the only reason our interest rates are low. – In an increasingly Globalized World, borders matter less and less. For example, note that the iPhone is considered an import into the U.S. since the last stage of manufacturing is done in China, although the components are manufactured elsewhere, and the genius of it came from Steve Jobs and Apple, nothing more American exists, not even apple pie.

More things you should know – Artificial intelligence is no match for natural stupidity. – If you must choose between two evils, pick the one you've never tried before.

Even More Things You Should Know

– “The taxpayer – that is someone that works for the federal government but doesn’t have to take a civil service examination.” -- Ronald Reagan – “The income tax has made more liars out of the American people than golf has.” – Will Rogers

– Key attributes should include: – Somewhat limited geographic footprint – Smaller organizations – Rely on relationship banking , gathering more expensive information – Decision making is streamlined and more local in nature – Less likely to do really stupid things than big organizations do. (WTF) – What’s a community bank? – We have no universally accepted definition. – Some say a bank with less than say $200 million, $500 million, $ 1 billion, $5 billion, $10 billion in total assets

– FDIC criteria to be considered a “community bank”

– Noncommunity banks have the majority of offices

Evidence on how the banking world looks using the FDIC community bank identifier

Community Banks, March 2018 – There are 5,168 CB institutions (92% of all insured banks) – They have $ 2.201 trillion in total assets (13% of all insured bank assets) – $425 million average CB asset size in 2018

Noncommunity Banks, March 2018 – There are 438 NCB institutions (8% of all insured banks) – They have $15.331 trillion in total assets (87% of all insured bank assets) average NCB asset size in 2018 – $35,002 million

– Shrinking numbers of institutions (it is not clear, but noncommunity banks are shrinking at a slightly higher annual rate, -3.41% vs - 3.26%)

Growth of community bank total assets

Growth of noncommunity bank total assets

Average annual growth rate of community bank total assets 1984-2017

Average annual growth rate of noncommunity bank total assets 1984-2017

– 1.42%

– 5.76%

– Community banks as percent of all banks (community banks grew from 87% of all banks in 1984 to 92% in 2018, but only have a declining share of asset holdings; only13% of all banking assets now)

– Community Banks are better capitalized (leverage capital ratio is tier 1 capital divided by average consolidated assets)

– Deposits are a more important source of funding for community banks

– Community banks are generally not as efficient as noncommunity banks

– ROE for Community Banks vs Noncommunity Banks (Similar of late)

– Conclusion

– “Community banks” are numerous and growing in relative numbers, but shrinking it control of assets. – CBs are especially important engines for economic growth. Decision making is more local and better informed. – We need to recognize their uniqueness and not regulate them as we do the very large banks in the country. – CSBS is helping here!! – A 2-tiered regulatory system would help further – Big banks are especially worrisome and deserve more regulatory scrutiny and attention.

Putting it all together: Implications for community bankers – It remains a good time to be a community banker in the U.S. Most parts of the country prospered modestly since the financial crisis. Economic growth appears to have picked up. – We have survived the financial crisis, and the economy seems to be fighting less headwinds now than a few years ago and may even have some tailwinds. – Are you ready for the next recession caused by the Fed? (The Fed is going to invert the yield curve, or stop raising interest rates –either would be bad) – Don’t allow competition to make your decisions for you. Make you own decisions based on the facts and prospects, not the current environment.

Thanks for the privilege of your time and attention; and to CSBS for inviting me

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Compensation Strategies to Attract and Retain All Generations

Bill Gardiner

CSBS Bank Directors Seminar Coeur d’Alene, ID September 17, 2018

©2018Equias Alliance, an NFP Company

Community Bank Compensation Challenges

©2018Equias Alliance, an NFP Company

2

BankDirector 2017 Compensation Survey

3 Five Elements of Compensation Total Executive Compensation

©2018Equias Alliance, an NFP Company

Nonqualified Benefit Plans/Perks

Equity Plans

Group Benefits

Qualified Plans

Cash Compensation

ƒ SERP/Salary Continuation Plan ƒ Performance Driven Deferred Compensation Plan ƒ Split Dollar Plans ƒ Supplemental Disability ƒ Long-Term Care ƒ Employment Agreement ƒ Change-in-Control Agreement

ƒ Pension ƒ 401(k) ƒ ESOP ƒ Profit Sharing

ƒ Stock Options ƒ Restricted Stock ƒ Phantom Stock ƒ Stock Appreciation Rights ƒ Book Value Appreciation Rights

ƒ Base Salary ƒ Annual Bonus

ƒ Medical Insurance ƒ Group Disability ƒ Group Term Life

©2018Equias Alliance, an NFP Company

4

• Attract and retain key officers • Align compensation to performance

• Increase performance to increase shareholder value • Develop a compensation plan that includes more than salary and bonus

©2018Equias Alliance, an NFP Company

5 Overview of Nonqualified Plans • Unsecured promise to pay future cash compensation • Purpose is to help attract, retain and/or reward key people • Documented in a legal agreement – Terms include normal retirement, early termination, disability, change in control and death • Limited to select management, highly compensated officers and directors when set up as a retirement age benefit • Plans include: – account balance plans (Incentive Retirement, Deferred Compensation), also known as “defined contribution” plans – non-account balance plans (Supplemental Executive Retirement Plans (SERP’s), Salary Continuation Plans and Director Retirement Plans), also known as “defined benefit” plans

©2018Equias Alliance, an NFP Company

6

• Payout events

– Normal Retirement – Early Retirement – Change in Control – Disability – Death

• Terms of payout – Accrued liability, present value of full benefit, or full benefit – Paid immediately or at normal retirement age – Paid in a lump sum or over time Defined Benefit SERP • DB SERPs (also called Salary Continuation Plans) help overcom retirement shortfalls 7 • The benefit is a fixed amount or percentage of salary paid at retirement • Examples: a) $50,000 per year for 15 years b) 35% of final salary for 15 years c) 70% of final salary minus social security and 401k plan benefit payments

©2018Equias Alliance, an NFP Company

©2018Equias Alliance, an NFP Company

8

• Assumptions – Officer

Age 37

– Current Salary

$125,000

– Projected Age 65 Salary $286,000 – Annual SERP Benefit Formula 35% of final salary – Annual SERP Amount

$100,000/year for 15 years

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

9 SERP/SCP Example (cont.) Annual Age Ben fit 50 $30,800 55 $48,800 60 $72,000 65 $100,000

The plan can provide that the vested annual benefit is forfeited if the officer competes with the bank.

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

10

Incentive Deferred Compensation Plan • Bank contributes a specific dollar amount or percentage of salary each year • Bank contributions are discretionary or dependent on meeting budget or other goals • The contributions may vest over 3 to 10 years • Participant deferrals allow further tax-deferral • Interest is credited to the account balance (rate could be tied to an external index or an internal index such as bank ROE) Objectives of Incentive Deferred Compensation Plans • Link component of senior management’s compensation to the long-term succ ss of the ba k • Increase bank performance and shareholder value • Reward officers for long-term performance 11

©2018Equias Alliance, an NFP Company

©2018Equias Alliance, an NFP Company

12

Plan Example #1

• Assumptions – Officer

Age 37 – Incentive Contribution (target) 8% of salary – Current Salary $125,000 – Crediting Rate ROE – Planned Retirement Age 65

This is a hypothetical illustration and is for informational purposes only.

13 Incentive Deferred Compensation Plan Example (cont.) Projected Account Age Balance 50 $274,000 55 $515,000 60 $898,000 65 $1,469,000 Projected Annual Benefit (15 years) $130,000 Total Benefits $1,950,000 The plan can provide that the account balance is forfeited if the officer competes with the bank.

©2018Equias Alliance, an NFP Company

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

14

Plan Example # 2

• Assumptions – Officer

Age 37 – Incentive Contribution (target) 8% of salary – Current Salary $125,000 – Crediting Rate ROE – Two Children

Current Ages 3 and 7 $25,000/year for 4 years for each Child

– Withdrawals for College

– Planned Retirement Age

65

This is a hypothetical illustration and is for informational purposes only.

15 Incentive Deferred Compensation Plan Example # 2 (cont.) Projected Account Age Balance 50 $213,000 55 $281,000 60 $505,000 65 $877,000

©2018Equias Alliance, an NFP Company

Plus withdrawals of $25k/year for 8 years (ages 49-56)

Projected Annual Benefit (15 years)

$78,000

Total Benefits

$1,370,000

The plan can provide that the account balance is forfeited if the officer competes with the bank.

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

16

©2018Equias Alliance, an NFP Company Workforce of the Future using Deferred Compensation • Most terms/conditions for nonqualified retirement plans also apply • “Top Hat” limits on participants do NOT apply if non retirement payment • Why used? – In lieu of stock plan (similar duration) – Younger officers not looking to retirement, but shorter term • CIC, disability, normal retirement accelerates vesting to 100% Attracting and Retaining Millennials Using Deferred Compensation Example 1 • Assumptions – VP, Credit Age 38 – Monthly Contribution (target) 6.00% of salary – Current Salary $77,000 – Crediting Rate 75% of ROE – Projected Account Balance End of Year 10 $76,000 – Deferral period can be extended under certain conditions – Projected Account Balance if extended to age 65 $535,000 – Benefits are forfeited if he/she competes 17

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

18

Using Deferred Compensation Age 27 – Monthly Contribution (target) 7.50% of salary – Current Salary $60,000 – Crediting Rate – Projected Account Balance End of Yr 10 $76,000 – Deferral period can be extended under certain conditions – Projected Account Bal if extended to age 65 $1,350,000 – Benefits are forfeited if he/she competes Example 2 • Assumptions – AVP, Accounting

50% of ROE (subchapter S)

This is a hypothetical illustration and is for informational purposes only.

©2018Equias Alliance, an NFP Company

19 Death Benefit Plans

• Split-Dollar Plans – Arrangement between parties to share the benefits of a BOLI policy upon the death of the insured – Typically the bank pays the premium while allowing the executive or director to name a beneficiary to receive a portion of the death benefit (insured participant is taxed on the value of the economic benefit) – Agreement may state that the benefit is retained after separation from service if certain requirements are met – Death benefits to the beneficiary are not subject to federal income tax

©2018Equias Alliance, an NFP Company

20

• Survivor Income/Death Benefit Only Plans

– The bank agrees to pay a benefit to the beneficiaries of a director or executive

– The benefits are typically paid from the general assets of the bank.

– The amounts paid to the beneficiaries are taxed as ordinary income

– Payments can be “grossed up” to cover taxes

– Contingent liability is normally offset by the bank’s ownership of BOLI

©2018Equias Alliance, an NFP Company

21

Supplemental Disability Plans as a Risk Management Tool

©2018Equias Alliance, an NFP Company

22

Of today’s 20 year-olds will become disabled before they retire 1

1 in 4

Of disabilities are caused by illnesses not injuries 2

90%

Workers will be disabled for 5 years or more during their working careers 3

1 in 5

1.SocialSecurityAdministration,Fact Sheet, October 2015 2.Council forDisabilityAwareness, Long-Term DisabilityClaims Review, 2014 3.Commissioner’sDisability Insurance Tables A and C, assuming equal weights by gender and occupationclass.

.

©2018Equias Alliance, an NFP Company Up to $10,000 Employer Paid (Taxable) Individual Disability Insurance (IDI) Benefits Typical Group LTD Plan This Group Long Term Disability (LTD) Plan provides coverage for most workers but leaves gaps for highly compensated employees: • Base salary above $200,000 is not covered • No bonus compensation is covered • The benefits are taxable Group LTD 60% of Base Salary

©2018Equias Alliance, an NFP Company

Individual Disability Insurance (IDI) Benefits

Income Protection Gaps

After-Tax LTD Income Replacement

0% 10% 20% 30% 40% 50% 60% 70%

Challenge: Generally, Group LTD leaves high earners with lower disability income replacement than most other employees. This is due to low plan maximums, lack of bonus protection, and high tax rates.

60% Group

50% Group

29% Group

Employee 1 Employee 2 Employee 3

Base Salary

$50,000

$90,000 $10,000 $100,000

$250,000 $100,000 $350,000

Bonus

$0

Total Compensation

$50,000

1 Assumes employerpaidGroup LTDbenefit of 60% ofBase Salaryup to $10,000 per month. 2 Based onestimated federal, state and local taxes applied to employerpaidportion.

$30,000 $30,000

$54,000 $50,000

$120,000 $100,000

Pre-Tax Annual Group LTD Benefit 1 After-Tax Annual Group LTD Benefit 2 After-Tax LTD Income Replacement

60%

50%

29%

©2018Equias Alliance, an NFP Company

Individual Disability Insurance (IDI) Benefits - Restoration 80%

Income Protection Gaps Solution:

After-Tax LTD Income Replacement

Individual

Individual

60%

10% 31%

60%

Individual disability benefits increase overall plan maximums, protect bonus, and allow for tax-free benefits – all of which enable higher paid employees to raise their income replacement to necessary levels.

40%

Group

Group 50%

Group 29%

20%

0%

Employee 1

Employee 2

Employee 3

Base Salary

$50,000

$90,000 $10,000 $100,000

$250,000 $100,000 $350,000 $120,000 $100,000

$0

Bonus

Total Compensation

$50,000

Pre-Tax Annual Group LTD Benefit After-Tax Annual Group LTD Benefit After-Tax LTD Income Replacement After-Tax Annual Individual LTD Benefit

$30,000 $30,000

$54,000 $50,000

60%

50%

29%

$0

$10,000

$110,000

After-Tax Annual LTD Income Replacement

60%

60%

60%

©2018Equias Alliance, an NFP Company

Individual Disability Insurance (IDI) Benefits – Maximum 80% Individual

Income Protection Gap

After-Tax LTD Income Replacement

Individual

Solution: Individual disability benefits increase overall plan maximums, protect bonus, and allow for tax-free benefits – all of which enable higher paid employees to raise their income replacement to necessary levels.

20% 41%

60%

60% Group

40%

Group 50%

Group 29%

20%

0%

Employee 1

Employee 2

Employee 3

Base Salary

$50,000

$90,000 $10,000 $100,000

$250,000 $100,000 $350,000 $120,000 $100,000

$0

Bonus

Total Compensation

$50,000

Pre-Tax Annual Group LTD Benefit After-Tax Annual Group LTD Benefit After-Tax LTD Income Replacement After-Tax Annual Individual LTD Benefit

$30,000 $30,000

$54,000 $50,000

60%

50%

29%

$0

$20,000

$142,500

After-Tax Annual LTD Income Replacement

60%

70%

70%

©2018Equias Alliance, an NFP Company

Combined Offering Advantages Benefits to the employee: • Provides maximum income replacement ratios up to 75% of total compensation • IDI rates are permanent to age 67 • IDI can be offered as guaranteed standard issue, meaning no medical exams • Contracts and discounted rates are portable if the employee leaves • Plan can be designed to cover all forms of compensation including Equity • Plan can include an additional Catastrophic Benefit Benefits to the employer: • Competitive bidding is high with group LTD carriers when the maximum benefit is not increased • LTD rate volatility is reduced with spread of risk to a combination of group LTD and IDI

©2018Equias Alliance, an NFP Company

BOLI in the Current Market

29 Reasons Cited by Banks for Purchasing BOLI – Generate tax-advantage income to help offset and recover a portion of the costs of employee benefit plans – Provides informal funding for nonqualified officer and director benefit plans – Generates stable revenue from non-loan sources and enhances the “Other Non-Interest Income” component of the Income Statement

©2018Equias Alliance, an NFP Company

– Strong credit quality

©2018Equias Alliance, an NFP Company

30

Purchasing BOLI

– Book value accounting treatment – Increases earnings per share and shareholder value – Current BOLI net yields are in the 3.00% to 3.75% range – Tax equivalent net yields of 4.00% to 5.00% (25% tax rate) – BOLI is the most common method of financing the cost of employee and director benefits, including nonqualified benefit plans. Market Trends • Total BOLI Cash Surrender Value held by U.S. banks grows by $5 billion to $6 billion per year 31

©2018Equias Alliance, an NFP Company

• BOLI held by:

– 63% of all banks – 70% of banks over $100 million in assets – 78% of banks over $300 million in assets

Source: FDIC

©2018Equias Alliance, an NFP Company

32

Pro Forma Balance Sheet

December 31, 2017

BOLI Purchase

December 31, 2017

Actual

Debit

Credit

Pro Forma

(1)

(2)

Assets Cash & Due From Bank

19,650,000 140,657,000 854,237,000 846,735,000 38,689,000 1,045,731,000 909,137,000 20,152,000 18,427,000 947,716,000 24,537,000 48,914,000 24,564,000 98,015,000 1,045,731,000 7,502,000

19,650,000 This pro forma balance sheet illustrates changes that may result from implementation of the

5,000,000 1

Securities

135,657,000 854,237,000

recommended financing strategy. Please note that this schedule is based upon the bank's call report data as of December 31, 2017.

Loans

Less: Reserve

7,502,000

Net Loans

846,735,000

5,000,000 2

Other Assets

43,689,000 Column 1 represents actual balance sheet data before the BOLI investment.

Total Assets

1,045,731,000

Liabilities And Capital

Column 2 reflects a pro forma balance sheet with the BOLI investment.

Deposits

909,137,000 20,152,000 18,427,000 947,716,000 24,537,000 48,914,000 24,564,000 98,015,000 1,045,731,000

Federal Funds Purchased

1 Allocation of current investment. 2 Recognition of BOLI asset cash values. 3 Loads or surrender charges, if any.

Other Liabilities

Total Liabilities

Stock

Surplus

0 3

Undivided Profits

Equias Alliance does not provide legal, tax or accounting services or advice. We recommend that you consult with appropriate counsel before making an investment decision.

Total Equity Capital

Total Liabilities & Capital

33 BOLI vs. Traditional Bank Investment $5,000,000 BOLI Purchase 129,000 Yield @ 3.50% BOLI

©2018Equias Alliance, an NFP Company

Traditional Bank Investment

Bank Invests

$5,000,000

5 Yr. Agency Bullet @ 2.58% Tax on Earnings @ 25.00%

175,000

32,250 96,750

Tax on Earnings

0

Net After-Tax Income

Net After-Tax Income

175,000

Net Yield from BOLI Investment Bank Investment After-Tax Yield

3.50% 1.94%

Net Income - BOLI Investment Net Income - Bank Investment

$175,000 $96,750

Spread advantage using BOLI

1.57%

BOLI Net Income Advantage

$78,250

This example depicts adding 157 bps for a bottom line improvement of $78,250 from BOLI vs. alternative investments. The 5 Yr. Agency Bullet rate is as of 2/9/18. The BOLI Yield is a composite yield among multiple BOLI carriers as of 2/1/18. Example is a hypothetical illustration to be used strictly as an educational tool. It is not intended as offering specific investment advice or recommendations.

©2018Equias Alliance, an NFP Company

34

• Regulatory – BOLI is an allowable transaction under Interagency Guidance 2004-56 (FIL 127-2004)

– The business purpose is defined as financing employee benefit liabilities

– The general guideline is that BOLI should not exceed 25% of regulatory capital in total and not more than 15% to any one carrier

©2018Equias Alliance, an NFP Company

35 BOLI Overview

• Tax & Accounting – Growth in cash value is recorded as “Other Non-Interest Income”

– The policy’s death benefit proceeds are received tax-free by the bank

©2018Equias Alliance, an NFP Company

36

P R E S E N TAT I O N F O R : C S B S – B A N K D I R E C T O R S S E M I N A R

C U R R E N T & E M E R G I N G T R E N D S I N T H E B A N K I N G L A N D S C A P E

D.A. Davidson & Co.

Tom Hayes Managing Director, Investment Banking Phone: (406) 268-3084 E-mail: thayes@dadco.com

P R I V A T E & C O N F I D E N T I A L S E P T E M B E R 1 7 , 2 0 1 8

T A B L E O F C O N T E N T S

1. Overview of D.A. Davidson & Co.

2. Pacific Northwest Banking Overview

3. Public Markets Update

4. National Bank M&A Market Update

This presentation, and any oral or video presentation that supplements it, have been developed by and are proprietary to D.A. Davidson & Co., member SIPC, and were prepared exclusively for the benefit and use of the recipient. Neither the printed presentation nor any oral or video presentation that supplements it, nor any of their contents, may be reproduced, distributed or used for any other purpose without the prior written consent of D.A. Davidson & Co. The analyses contained herein rely upon information obtained from the recipient or from public sources, the accuracy of which has not been verified, and cannot be assured, by D.A. Davidson & Co. Moreover, many of the projections and financial analyses herein are based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. Finally, the printed presentation is incomplete without any oral or video presentation that supplements it.

5. Pacific Northwest Bank M&A Market Update

This material is protected under applicable copyright laws and does not carry any rights of publication or disclosure.

2

S E C T I O N

1

Overview of D.A. Davidson & Co.

3

D.A. Davidson Is A Large, Growing Firm

1935 FOUNDED OVER 80 YEARS AGO

100%

TRANSATLANTIC

EMPLOYEE OWNED

OFFICES IN 25 STATES & 4 EUROPEAN COUNTRIES

$48B+

1,400 EMPLOYEES NATIONWIDE

IN CLIENT ASSETS UNDER MANAGEMENT AND ADMINISTRATION

N E T R E V E N U E ($ in millions)

S H A R E H O L D E R S ’ E Q U I T Y ($ in millions)

$460.5

$229.3

$402.3

$192.6

$355.9

$176.7

$147.1

$285.9

$248.0

$117.5 $130.8

$212.0 $211.0

2007 2009 2011 2013 2015 2017

2007 2009 2011 2013 2015 2017 LTM

4

Expanding Presence Throughout The United States

ECM Locations FICM/WM Locations

5

Diversified Financial Services Firm

EQUITY CAPITAL MARKETS HIGHLIGHTS

D . A . D A V I D S O N C O M P A N I E S

120+ INVESTMENT BANKING

Our full-service platform offers significant depth and expertise for middle market companies operating in select industries

PROFESSIONALS IN U.S. & EUROPE

D . A . D A V I D S O N & C O .

40+ INSTITUTIONAL EQUITY RESEARCH PROFESSIONALS

E Q U I T Y C A P I T A L M A R K E T S

W E A L T H M A N A G E M E N T

F I X E D I N C O M E C A P I T A L M A R K E T S

20+ SALES & TRADING PROFESSIONALS

Investment Banking Equity Research Institutional Sales & Trading Corporate Services

Public Finance Institutional Sales & Trading Fixed Income Strategy Group Structured Investments

Personal Wealth Management Financial Planning Investment Advisory Significant Distribution Capabilities

300+ COMPANIES UNDER RESEARCH COVERAGE

I N V E S T M E N T A D V I S O R S

90+ UNDERWRITTEN CAPITAL OFFERINGS IN THE LAST 5 YEARS

T R U S T C O M P A N Y

F I X E D I N C O M E M A N A G E M E N T

6

FIG Investment Banking Overview

D.A. Davidson Financial Institutions Group (FIG)

Full Range of Services:

Capital Offerings

ƒ Top ranked advisor to banks in the United States

ƒ Public offerings ƒ Private placements

ƒ Extensive deal experience – M&A advisory and capital offerings

ƒ Common and preferred equity ƒ Senior and subordinated debt

ƒ Focused on developing long-term relationships with clients

M&A Advisory

ƒ Dedicated team of senior-level bankers focused solely on commercial banks

ƒ Whole bank ƒ Branch divestitures ƒ FDIC-assisted ƒ Fairness opinions

Ranked #2 most active M&A advisor and underwriter for banks in the Western U.S.

Other Services

Top 5 M&A advisor for banks nationally

ƒ 3rd party valuations ƒ Restructuring ƒ Going private or subchapter S transactions

Source: S&P Global Market Intelligence,as of 8/30/2018 Note: WesternU.S. includes AZ, CA, CO, ID, MT, NM, NV, OR, UT, WA,WY

7

Note: Advisor rankings for pending and completed bank and thriftwhole-bank M&A in the WesternU.S. Ranked by number of deals since 1/1/2016 and includes top 20 ranking only Note: Rankings for book, lead, or co-manager on underwritten public offerings of common stock for banks and thrifts in the WesternU.S. Ranked by number of offerings since 1/1/2016

D.A. Davidson’s Recent FIG M&A Advisory

September 2018

August 2018

July 2018

May 2018

April 2018

Has Agreed to Acquire

Has Acquired

Has Agreed to Acquire

Has Agreed to Acquire

Has Agreed to Acquire

Buy-Side Advisor $922.0M Assets

Buy-Side Advisor $112.9M Assets

Sell-Side Advisor $102.7M Assets

Sell-Side Advisor $39.6M Assets

Sell-Side Advisor $826.8M Assets

April 2018

March 2018

March 2018

March 2018

March 2018

Has Acquired

Has Agreed to Acquire

Has Acquired

Has Acquired

Has Acquired

Sell-Side Advisor $563.2M Assets

Sell-Side Advisor $218.6M Assets

Buy-Side & Sell-Side Advisor $104.9M Assets

Buy-Side Advisor $400.5M Assets

Sell-Side Advisor $323.1M Assets

February 2018

January 2018

December 2017

December 2017

December 2017

Has Acquired

Has Acquired

Has Acquired

Has Acquired

Has Acquired

Sell-Side Advisor $3.7B Assets

Sell-Side Advisor $325.0M Assets

Sell-Side Advisor $351.1M Assets

Sell-Side Advisor $465.6M Assets

Sell-Side Advisor $346.9M Assets

8

Note: Assets of the target bank acquired as of the most recent quarter prior to announcement

S E C T I O N

2

Pacific Northwest Banking Overview

9

Commercial Bank Landscape – Western U.S.

Total Banks in Western U.S.

State

# of Banks

Arizona California Colorado

15

46

158

48

81 13 48 19 39 17 42 46 31

Idaho

Montana Nevada

17

13

New Mexico

31

Oregon

Utah

Washington

Wyoming

Total

509

81

19

42

Pending mergers in Western U.S.

158

State

# of Banks

California Colorado Montana

1 3 1 1 3 1

15

New Mexico Washington

39

Wyoming

Total

10

10

Source: FDIC and S&P Global Market Intelligence as of 8/30/2018

Credit Union Landscape – Western U.S.

Total Credit Unions in Western U.S.

State

# of Credit Unions

87

Arizona

42

California Colorado

299

51

81 26 51 10 41 58 63 87 27

Idaho

Montana Nevada

58

26

New Mexico

27

Oregon

Utah

Washington

Wyoming

Total

785

81

10

63

ƒ 171 credit unions in the Pacific Northwest ƒ 73 commercial banks left in the Pacific Northwest

299

42

41

11

Source: NCUA and S&P Global Market Intelligence as of 8/30/2018

Pacific Northwest Public Bank Landscape

12

Note: Excludes pending merger targets