ProfitStarS Client Bulletin

copyright ©2011 Jack Henry & Associates, Inc.® ProfitStars is a registered trademark of Jack Henry & Associates, Inc.

PS Update | October 2011

AlSo In ThIS ISSUe

2012 Educational Conference March 6-9, 2012 | Caesars Palace | Las Vegas, NV

SAVE THE DATE 2012 Educational Conference –––––––– 1

The Use of OTS Prepayment Tables and Decay Speeds in PROFITstar® –––––––– 2

Survival to Profitability Webinars –––––––– 3

Make Better Decisions Faster w/Optimizer –––––––– 4

What’s Your Profitability Risk? –––––––– 5

Margin Maximizer™ Minute –––––––– 6

Development Update –––––––– 8

Classroom Training –––––––– 9

eLearning Training –––––––– 9

eSeries Training –––––––– 9

Margin Maximizer University –––––––– 9

ProfitStars Services ––––––––10

Key Rates ––––––––10

RegistRation opens novembeR 7, 2011

Conference Registration Fee:Early Bird Rate 11/7/2011 - 2/12/2012: $645 2/13/2012 - 2/27/2012: $695

Guest Fee: $100 (includes welcome reception only)

Hotel Room Rate until January 27, 2012: $189 single/double

ProfitStarS Client Bulletin PS Update | October 2011 2

As of 8/1/2011, the Office of Thrift Supervision was officially and completely absorbed into the Office of the Comptroller of the Currency. While this has had very obvious regulatory implications for former thrifts, it has also had an indirect effect on all community banks and credit unions. For the past 20 years, the OTS NPV model has been used as a standard for both banks and credit unions. After the collection of the call report data for the period ending 12/31/2011, the OTS NPV model will no longer be updated. This includes the OTS prepayment assumptions for residential mortgages, decay assumptions and A/L pricing tables. Based on historical updates, the resulting prepayment/decay tables for the 12/31/2011 period should be available on or around 3/31/2012. After this date, the data will no longer be supported by the OCC and ProfitStars can no longer make the tables available to clients.

Regulatory pronouncements have remained consistent over the past several weeks regarding prepayment and decay assumptions. The written guidelines from all regulators have historically stated that institutions should strive to use assumptions that reflect your own unique customer behaviors and generally that you should avoid reliance on industry estimates. Industry averages can be used as a starting point until your own data sets can be fully developed. In practice, this guidance was rarely enforced for institutions under $1 billion in assets. Anecdotal evidence tells us that eventual sun-setting of the OTS data has caused field examiners to change their permissive practices and follow the exact language in the guidance more closely.

ProfitStars is committed to supporting our clients. We are researching the different third-party solutions that are available to our clients. We are interested in providing our clients with guidance that meets all of our objectives:

• Solutions that improve your decision-making ability• Solutions that make economic sense• Solutions that are accepted by the regulatory community

We look forward to assisting our clients in navigating this regulatory environment.

Update on the Use of oTS Prepayment Tables and Decay Speeds in PRoFITstar AlM Software

ProfitStarS Client Bulletin PS Update | October 2011 3

Strategies for an Organizational Profitability CultureDo you have an organizational profitability culture within your institution?

Understanding and focusing on the profitability of your institution as a whole has never been more important! We’ll discuss the following steps to creating a more focused profitability strategy:

• Gain a better understanding of your current profitability;• Set profitability goals;• Develop strategies to improve profitability; and,• Monitor profitability results.

You’ll also learn the importance of integrating your profitability goals into your budgeting process.

Join us for this insight-packed webinar dedicated to exploring strategies to help you achieve your organizational profitability goals. You won’t want to miss this event!

Tuesday, october 11th 10:00 a.m. – 11:00 a.m. Central Time

Register Today!

Creating Strategies for Client & Product ProfitabilityDoes your current profitability strategy allow you to answer these key questions?

1. Do you know where your profits come from and where they are drained?2. Can you identify your most profitable products, customers/members, and relationships?3. What might the impact of regulatory changes be on the profitability of your products?

Having answers to these questions and managing your institution with profitability in mind has never been more important. In recent months, regulators have been expecting that you would know which customers/members and products are contributing to your bottom line and which are not. They are also starting to expect that this information be shared and incorporated into your strategic plan.

Join us for this insight-packed webinar dedicated to exploring strategies to help you achieve your product and customer/member profitability goals. You won’t want to miss this event!

Thursday, october 13th 10:00 a.m. – 11:00 a.m. Central Time

Register Today!

ProfitStarS Client Bulletin

STAY on ToP of Budgets, Risk, Profitability, and Reporting with our Industry-leading Solutions

PS Update | October 2011

Make Better Decisions Faster with optimizer

Today, with rates, volumes, and margins at all-time lows, knowing where you’re making money is rivaled only by knowing where you’re losing it, and being able to act on this knowledge instantly can be a matter of survival. Optimizer from ProfitStars provides a comprehensive dashboard view that enables the financial institution to monitor performance, centralize reporting, and connect the right people to the right information to collaborate on challenges and opportunities in real-time, all of which help financial institutions make better decisions faster.

Join us for our informative, upcoming webinar, Make Better Decisions Faster with optimizer, presented at no cost to you. We’ll help you discover how to seamlessly integrate information to improve reporting and analysis capabilities, drive profitability, and provide insight into solving business problems.

Need help managing vital performance indicators? Want to unlock value by arming your decision makers with the information that will enhance profitability and overall operational efficiency?

Don’t miss all the valuable information in this complimentary webinar!

Set aside some time on your calendar now to join us on Tuesday, october 25th at 10:00 a.m. (Central).

Register today while slots are still available!

4

ProfitStarS Client Bulletin PS Update | October 2011 5

What’s Your PRoFITABIlITY RISk? Not sure because you’re short on resources, experience, or both? We can help!

Reliable information is the key to successful risk management. By using a strategic approach to managing risk and closely integrating your initiatives with your asset liability management (ALM) and profitability programs you’ll gain a better insight into making effective decisions and growing your bottom line.

“Why should we consider doing something new/different?”

Do your current profitability and ALM monitoring measures allow you to answer a few key questions below? If you can answer these four questions accurately, your financial institution is likely well-positioned moving forward. If not, it may be time for a new approach.

1. Are your products adding or draining profits from your bottom line?

2. Do you know who your most (and least) profitable customers/members are?

3. Can you accurately measure the performance of each individual branch?

4. Does your ALM approach leave you prepared for your next exam?

Read More here

Visit our Knowledge Center at http://discover.profitstars.com/Profitability or contact your ProfitStars Sales Executive at 800.356.9099 to find out how to maximize your chance of profitability!

ProfitStarS Client Bulletin PS Update | October 2011 6

Measuring lending Profitability at the loan level

Part 3 in a 3 part series

In this article, we look at the remaining components of a loan-level net income calculation and the calculation of loan-level ROE.

Risk premiums: There are various elements of operational risk that may be considered in the profitability calculation; among the more significant are:

Prepayment risk – the risk that the loan will be paid off prior to the maturity of the matching debt, necessitating reinvestment of the loan principal at a reduced or negative spread to the matching debt for the duration of its term. This risk increases with the term of the loan and its matching debt.

Cap risk – the risk associated with not maintaining the targeted net interest margin due to the effects of periodic and lifetime caps on floating or adjustable rate loans. Cap risk rises as the cap level declines, the term of the cap protection extends and/or the loan rate reset frequency is shortened.

Pipeline risk – the risk associated with loan commitments failing to close; also, the negative cost of carry involved in acquiring funding for a loan prior to closing. Pipeline risk increases in a falling rate environment, while negative cost of carry increases when the yield curve steepens.

While pipeline risk is often small enough to be deemed immaterial, prepayment and cap risk are perhaps the most challenging variables in the profitability equation, due to their materiality and difficulties presented in quantifying them. As both of these risks arise from embedded options in the loan terms, the only conceptually sound means of quantifying these risk premiums is through some variation of option pricing theory (typically Monte Carlo simulation using stochastic methods). Applying such techniques to every loan pricing decision is beyond the resource and cost/benefit constraints of most banks and thus, necessarily, these values are arrived at through processes ranging between an “educated guess” and a “swag”. Most bankers will intuitively price a longer-term fixed rate credit at a higher spread to the cost of funds than he/she would an adjustable rate credit, tacitly acknowledging the greater prepayment risk. The same goes for an adjustable rate credit with restrictive rate caps versus one with no limitations on rate adjustment. ProfitStars has built into Margin Maximizer capabilities to measure the variation in a loan’s return in different hypothetical interest rate paths, but does not assign specific premiums for these risks.

non-interest (operating) expenses: The bank must of course ensure that its operating costs, from the electric bill to lender incentive pay, are fully recovered in its lending activities. A simplified way to account for this is to charge an amount equal to the average loan balance times an efficiency ratio representative of industry norms for a high-performing institution (approximately 55 basis points is a good estimation). While simple to apply, this approach assumes costs rise and fall proportional to the loan size; a tenuous assumption at best. A better approach (and the one used by Margin Maximizer) is to assign unit-level costs to originate and service loans of different types and sizes. By tiering assigned costs based on loan size we can acknowledge that a $100,000 loan costs less to originate and service than a $1 million dollar loan, but not one-tenth as much. We can also assign different costs to different types of loans that are the same size, based on their presumed level of relative effort. The unit costs themselves should be based on industry norms. Unfortunately, publically available industry data is insufficient to make these cost allocations with a high degree of confidence. Therefore the “rational, reasonable and consistently applied” maxim should apply.

Margin Maximizer™ Minute

ProfitStarS Client Bulletin PS Update | October 2011 7

Heard about the new and improved Margin Maximizer Interactive (MMi) but haven’t had time to attend a Client webinar yet? We understand.

That’s why ProfitStars has recorded a 14 minute demonstration for you - our valued customer - that will show you the power of MMi - on your own time. MMi takes ProfitStars proven Margin Maximizer Suite™ and amplifies it to a whole new level - offering your FI a tailored solution that’s hosted, online and at your fingertips 24/7.

Click here for the quick demo.

Achieving your growth and loan profitability goals just got easier (and quicker) with ProfitStars and Margin Maximizer Interactive!

Check Out Key MMi Benefits in less than 15 minutes

Income taxes: When all income and expenses are considered you have determined a pre-tax income. An income tax expense on these earnings can then be applied, typically at the combined (federal/state/local) effective marginal rate. Rates, like other assumptions, should be an average among local competitors. Tax-exempt credit unions will normally price at after-tax levels, to avoid systemic under-pricing of loan products. To the extent they seek to “beat the banks” this would normally be accomplished through a lower targeted rate of return than a taxable entity would typically find acceptable.

Capital allocation: Once the loan’s average annual contribution to the bank’s bottom line has been determined, the result can be divided by allocated capital to calculate a return on equity. Numerous approaches to capital allocation exist, with the simplest one being to allocate capital at a consistent ratio to the average loan balance across all loan types. This ratio should, like other assumptions, reflect industry norms for a high-performing bank. “High-performing” in this context means “ROE maximizing”, so the value should reflect as high a leverage ratio as possible while remaining well-capitalized by all regulatory standards; 8%-10% of book equity is a reasonable range. More complex methodologies will adjust the allocation ratio based on one or more variables, such as the type of loan, its risk rating, its expected life or maturity and possibly others. If capital allocations are not adjusted, rate of return expectations and goals normally will, as higher returns should be demanded for assuming risk in any form.

Following this methodology will result in putting all lending decisions on a “level playing field”, i.e., distilling the profitability conclusion down to a single number (return on allocated equity) under a set of reasonable assumptions that are consistently applied. This will be true whether the loan in question is a 30-year mortgage, a 90-day single pay note, or anything in between.

For more information about loan pricing and profitability, and to review the article in its entirety, please visit our online knowledge Center at: http://discover.profitstars.com/commerciallending/home/

ProfitStarS Client Bulletin PS Update | October 2011 8

Development UpdateJust as many of you are preparing for a deep dive into your budgeting process, the PROFITstar® Development Team is also focused on budgeting, and specifically working on the new Budget Manager module for PROFITstar.

For those that are not aware, PROFITstar ALM/Budgeting has a distributed budgeting add-on product, called Budget Manager, to assist you in distributing your budgeting responsibility across the relevant organizations within your institution. The current Budget Manager version that is available today is a traditional client/server application, requiring a software installation for each PC that is using the software. The new Budget Manager application that Development is now working on for the 2012 release is a browser-based version of Budget Manager. What this means is that, besides an opportunity for us to redesign the software to make it easier and more efficient for you to use, your IT department will not have to install the software on every user’s PC since it is now “browser-based”. Your users (or budgeteers) will simply access the software through their Internet browser.

More information about the new Budget Manager distributed budgeting product will be available at our March 2012 Education Conference. Make sure to join us at Caesars Palace in Las Vegas, NV this spring to get a sneak peak of the new Budget Manager application to see how it may improve your budgeting process.

The current release version for PROFITstar ALM/Budgeting and PROFITability is 2011a and is available for download from the Release & Upgrades page. Please review the “What’s New in the 2011 edition” documentation also posted on the Release & Upgrades page to review the details of this maintenance release.

Current Software Version: 2011a.79

ProfitStarS Client Bulletin PS Update | October 2011 9

Classroom TrainingThe PROFITstar Classic Basic Training course is a two day training class on the PROFITstar Asset/Liability Management system. The key areas of focus will be on understanding the asset/liability management (ALM) process and the model’s role in effective risk management; and learning the models basic functions to provide reasonable forecasts and risk measurement reports for the ALM function. This course is available for 11.5 CPE credit hours. PRoFITstar Classic Basic TrainingOctober 17-18 November 14-15 December 12-13

elearning CoursesIs your daily planner overflowing with appointments and meetings? Are you looking for some “fast-food” training? Do you retain information better when you’re wearing your fuzzy, bunny slippers? Then take advantage of our self-paced, web-based eLearning training sessions at your convenience – even if that is at 2 a.m. These eLearning sessions are pre-recorded, topic-specific, on-demand training sessions that you can attend when your schedule allows you.

Click here to register for eLearning.

Jack Henry and Associates (#109042) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding

registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.

eSeries ScheduleModeling Advanced Assumptionsoctober 19th, 10:00 a.m. – 11:30 a.m. CentralIn this session we will be looking at some of the advanced options the model has to offer. We will look at how to make your results more accurate with the use of key rate ties and prepayment options. We will look at making the projection process more efficient and accurate with the use of user defined quick projections and the projected instrument sales feature. We will also discuss fair value discounting using the different yield curves.

Chart of Accounts Setup: Validating your PRoFITstar® AlM Model for Better Resultsnovember 16th 2:00 p.m. – 3:30 p.m. CentralThis session is designed for all PROFITstar ALM users, whether you are new or advanced. It will go through, in detail, every section of the chart of accounts. It will also discuss how the chart effects results throughout the model, whether it be reporting, projections, budgeting, IRSA or Fair Value.

Financial Analysis - key Ratios: What key Ratios Should a Financial Institution Incorporate in Their AlCo Reports?December 14th, 10:00 a.m. – 11:30 a.m. Central This session will demonstrate the Ratio Analyzer feature within PROFITstar ALM and identify the key ratios that Asset Liability Committees and Regulators evaluate.

To view the entire 2011 eSeries schedule please Click here.

To register for eSeries webinars please use the following link: online Course list. If you have questions or would like more information please call: 1.800.356.9099. Each session is $150.00 or 3 KIA credits.

Margin Maximizer UniversityProfitStars offers a variety of quarterly complimentary training sessions for our Margin Maximizer clients. To view the details and to register, click here.

• CommercialLoanPricingTrainingfor Commercial Lenders• CommercialLoanAdministrationTraining for Model Administrators • IntermediateUseofMarginMaximizerSuite’s Commercial Loan Model for the Commercial Lending Team• ManagementReportsforCommercialLoansfor Senior Management

For dates, times and registration, Click here.

ProfitStars UNIVERSITY

ProfitStarS Client Bulletin PS Update | October 2011 10

U.S. key Interest Rates:Monthly Averages – September 2011

91 Day T-Bill 0.01 Discount Rate 0.75

182 Day T-Bill 0.04 B.A. 30 day 0.23

1 Year T-Bill 0.10 FNMA 3.61

2 Year T-Notes 0.21 FRDMAC 3.53

3 Year T-Notes 0.35 1 Month LIBOR 0.23

5 Year T-Notes .90 3 Month LIBOR 0.35

7 Year T-Notes 1.42 6 Month LIBOR 0.52

10 Year T-Bond 1.98 1 Year LIBOR 0.83

20 Year T-Bond 2.83 Repurchase Rate 0.12

30 Year T-Bond 3.18 AAA Municipal 4.14

Fed Funds 0.09 City n/A

National Prime 3.25 State 4.03

Canadian key RatesMonthly Averages – September 2011

Chartered Bank Prime 3.00

Bank Rate (official) 1.25

Overnight Money Market 1.00

3 Month T-Bill Daily Series 0.87

6 Month T-Bill Daily Series 0.88

1 Year T-Bill Daily Series 0.88

Gov't of Canada 2-yr Bond Yields (daily) 0.92

Gov't of Canada 3-yr Bond Yields (daily) 1.07

Gov't of Canada 5-yr Bond Yields (daily) 1.43

Gov't of Canada 7-year Bond Yields (daily) 1.74

Gov't of Canada 10-year Bond Yields (daily) 2.20

Gov't of Canada Long Term Bond Yields (daily) 2.85

To see the key rates from the client portal, please follow the steps below:

1. Go to https://forclients.jackhenry.com/

2. Select the client login page by clicking on the link PROFITstar® ALM or PROFITability® under products and services

3. Key in your username and password to enter the Client Portal for the key rates. (link located in client resources section)

We’re here for YoU: ProfitStars ServicesBack-test your projections with ProfitStars In response to recent regulatory pressures and client requests, ProfitStars is now offering our ALM clients a service to back-test their model projections. Back-testing is a component of the model validation process that performs an attribution analysis on the variance of projected results from actual results. ProfitStars can show you how much of your model variance was caused by rates, how much was caused by mix and how much was caused by balances. Reviewing the back-test analysis will help our software users gain insight into some of the more subtle changes on net interest margin and become more accurate in projection results. Call your ProfitStars Sales Executive for more details.

AlM Reporting Service – Are you considering outsourcing your ALM? Don’t have time to run your model yourself? Look no further. ProfitStars offers a Service Bureau option which allows you to relax because we do the work for you. This ALM analysis focuses on interest rate risk for our bank and credit union clients. ProfitStars retains and updates your model and provides you with quarterly ALM reports. The Service Bureau is an alternative method for obtaining the information you need, without all the hassle.

Technical Model Validation– Have a Technical Model Validation performed to ensure accurate assumptions and forecasts for Interest Rate Risk Management. Let our experts guide you on the recommended model assumptions to gain precision with this year’s forecast.

We’re here for YoU: Forecast with Confidence! With the current increase in bank failures, regulatory scrutiny of risk models has greatly increased. Asset Liability Management models have been relied upon for years to measure the interest rate risk of financial institutions, but in the current environment, regulators are also using ALM model results to properly determine the valuation of financial institutions.

CUPRo Users: Having trouble updating your model every month? Need a quarterly Asset/Liability Management package that incorporates the following into a concise but detailed report?

•Fouryearsofhistoricalinformationtotrackyourgrowth •Twoyearsofuser-definedprojections •AllcommonlyusedRatios

A complete Risk-Analysis section that includes GAP, Income Simulations, and NEV

We can do the work for you! CUPRO Express is our quarterly ALM reporting package geared towards CUPRO users. There are no setup or installation fees either. Many clients use it to supplement CUPRO or use it exclusively as their ALM reporting tool.

Please email us at dataservices@profitstar.com for more information!