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Case Study

             Creation of Business Checking with Interest
                         XYZ BD/ ABC Bank

                            October 25 2007

       A High Level economic analysis and description of a product innovation
           To gain market share in the profitable Small Business Market

                                               Richard Heitman
                                   Heitman Financial Services Consulting
                                            tele 612 590 8634

H  R
                                              Case Study:

•   Bank XYZ is a hypothetical bank of 20 billion in assets , with an affiliated Broker Dealer
    ABC Securities with 2 billion assets under management , principally in its Private Client
    Services arm.
•   XYX to date has largely been a consumer bank with little market share in the small
    business marketplace.
•   XYZ desires to increase revenue through expansion into the small business segment
•   ABC desires to increase aum and revenue from existing and new customers.
•   This case study predicts XYX can generate $1 billion in new Business Deposits thru the
    product innovation of Business Checking with Interest and
     –   Provides supporting economic assumptions
     –   Relevant research into the nature and financial services consumption of small business owners.

    Using Business Interest Checking as a lead product to gain market share in the
            highly profitable and ultra competitive Small Business Market


•     The Small Business is a very profitable high margin segment . XYZ Weath Management and ABC Bank its
      affiated bank can team up to capitalize on opportunities to gain share in this market
•     The Small Business Owner is an ideal Private Banking and Investment Management customer as an
•     The segment will undergo tremendous ownership change in the next 5 years. Banking and Advisory
      relationships will be gained by Institutions who demonstrate a willingness and ability to create value in new
•     Business Interest Checking is a breakthrough product that simplifies the life of the Small Business Owner
       –    would demonstrate / ABC Bank’s willingness to reinvent the business model in favor of the younger owners now emerging
•     ABC Bank can quickly create a product that:
       – Pays a tiered rate of interest based on combined business and personal assets
       – FDIC Insured up to $1 million
       – Unlimited check , debit and deposit transactions
•     Product design will gather new cash from existing SMB’s and accelerate the acquisition of new
      clients for both ABC Bank and XYZ BD

     H  R
                                                            Complies with all regulations. Many smaller
                                                            banks have this capability , and 3 large banks
                 A simple plan worth nearly 100 million in new revenues

1.   ABC Bank creates the Cash Optimization Account for Business
      –   Implementation can be quick and inexpensive leveraging exisitng ABC Bank products
2.   ABC Bank and XYZ BD market the new banking product to new and existing customers
     nation wide
      –   Unique product design will gather 5000 new customers in 2years or less
3.   XYZ BD adds product and service capabilities to appeal to the personal financial interests
     of the owner
      –   Ownership transfer financing
      –   Business valuation services
4.   XYZ BD captures a significant portion of the personal balance sheet of the old and new
     owners as these SMB’s go thru expected transition in ownership

    A Small Business Owner may generate as much as $21000/ yr revenue.
     A typical bank or broker will capture probably captures less than 20%

                                    Small Business Relationship View

                                               $21,000/ yr
P                                                                                                       B
E                                                                                                       U
R                                                                                                       S
S                  Advice                                                             Owners            I
O                                                                                     Equity            N
N                                                                                                       E
A                                                                                                       S
L                                                                                                       S
        Liabilities     Assets                                              Liabilities   Assets
B                                                                                                       B
A                       Brokerage                                                                       A
                                                                             Comm.             Corp
L                       & Ins                                                                           L
           Loans                                                             Loans             Cash
A                       $4,825                                                                          A
           $1,883                                                            $7,500            Mgmt
N                                                                                              $750     N
C                                                                                                       C
E                       $635                                                                            E
           Cards                                                                               401k
           $200                                                                                Invest
S                                                                                              Mgmt     S
H                                          Initial Dain/ ABC BankFocus:                        $5,000   H
E                                          -Small commercial loans                                      E
E                                          - Commercial deposits                                        E
T          $7,500/ yr                                                        $13,250/ yr                T

H   R
    H                       + Transition Planning Fees , Re Investment of
                            Owners Equity after liquidation/ sale $ ????
Most Small Business Owners also qualify as Wealth Management clients

  H R
XYZ BD/ ABC Bank can become the trusted primary advisor to a client segment
entering into an emotional and risky phase

  H R
An ABA survey of HNW individuals and Small Business owners
Reported that 70-75 % of both segments think FDIC Insurance is very important or important

    H R
The same survey indicated that roughly 40% of respondents indicated existing limits
Of FDIC coverage were too low for their needs

     H   R
 HRH Note: In other words they value more FDIC insurance for some reason. Whether the reason is
 That they are uninsured , or would like relief from sprinkling deposits over 100 k amongst multiple banks
 Does not really matter
The ABA study also illustrates that 45 to 60% of both segments would take one of
the following actions if given an opportunity for an additional 100k of FDIC protection

    H  R
Cash Optimization Account: Key Concepts
A new product design for banks that want to do business with businesses

The Old Product Construct
1) Business owners could not be paid interest on demand deposits
2) Interest could be paid on Savings accounts , but limits placed on how many transfers from
   savings to checking could take place
3) Business depositors Insured by FDIC up to 100k only ( statutory limit for the bank holding
   the account)

The New Product Construct
1) Business accounts can be paid interest on all balances
2) No practical limit on numbers of checks , debits or other transactions
3) FDIC Insurance available up to 1 million , with the sponsoring bank taking revenue on the
    entire program

   H  R
Banks and their related Broker dealers have created products for different segments of
Clients , leaving business clients with serious gaps in product capabilities

       Cant pay interest or:

       a) Must limit number of transactions       c) The cash is uninsured ( in a Money Fund)
       b) Must pay the same rate to all           d) Account ownerships limited ( no corps or LLC’s)

             Business Savings                                           Uninsured Sweep
           And Sweep Accounts                                         Vehicles for business
           with transaction limits                                        ownerships

                                     Asset Management Accounts
                                      for individuals , sole props
                                            and non profits

       H  R
Major competitive weapon: A tiered interest paying FDIC Insured checking account with
unlimited transactions and no restrictions on ownership types

       Provider functionality can cheaply and quickly forge ABC Bank capabilities into this product

                Business Savings                                          Uninsured Sweep
              And Sweep Accounts                                        Vehicles for business
              with transaction limits
                                                  Provider                  ownerships

       Unlimited                                                             Tiered FDIC
       Transactions                                                          Sweep
                                        Asset Management Accounts
               All ownership             for individuals , sole props
                                                                         Complies with all regulations.
               Types                           and non profits
                                                                         Many smaller banks have

       H  R
                                                                         this capability , and 3 large banks
  Cash Optimization Account: Economics
  Superior profitability coupled with exceptional customer value

The Banks P and L                                                              Wealth Management P and L
1)150 basis points on the first $100k that stays on the banks                  1) Cross sell to 2500 new customers with $1 mill or > in
balance sheet                                                                  assets
2) Average of 100 basis points for the remaining balances                      2) 4 billion in new AUM
3) Gain 1.5 billion in new assets                                              3) 72 million in new revenue
4) $24 million in new revenue                                                  4) Opportunity to advise SMB owners on how to liquify
5) Treated for regulatory purposes as core deposits for the                    and transfer their wealth as they retire over next 5 years
entire $1 million                                                              5) Bring a strong focus on this customer segment
                                                                               unmatched by other large BD’s

                                 The Customer Value Proposition
                                 1) Customer gets paid an average of 4% instead of zero
                                 2) Customers with large balances of up to $1 million can be paid
                                 as much as 5.0% fully insured and fully liquid
                                 3) Unlimited transactions for all ownerships

                                 4) Fully FDIC Insured
          R                      5) as contrasted to jumbo CD’s paying 5.2% but uninsured and
                                 without any liquidity
XYZ Bank and affiliate BD ABC will collectively improve revenue by $96 million thru the
Acquisition of $7 billion in investment , cash and lending assets from 5000 new clients

                                                        New Assets/       Incremental
      Strategy Element                                  Loans             Revenue

      Revenue on $1 billion of cash from 11k new SMBC    $1,000,000,000   $    11,937,500

      Revenue on $5 bill non cash aum from new SMBC      $5,484,523,810   $    72,482,143

      Loan revenue $ 500 mill loans to new SMBC's          $525,803,571   $    12,137,500

                                                         $7,010,327,381   $    96,557,143

        H   R
/ ABC Bank might expect to gain $1 billion in new Business Checking balances
 and earn $ 12 mill/yr in new revenues within 2 years
                    And gain @2500 new customers with $1 mill in assets to invest
                                                                                     New Tiered
                                                                                    Cash Optima

Convertible Cash Assumption *                                                         1,000,000,000

Gross Yield (Comparative) / Interest Payment**                                         5.18%          FF+17.5

additional expenses                                                                    0.00%
Bank revenue                                                                           1.19%
Total                                                                                  1.19%
Net Yield to Client                                                                    3.98%

Bank revenue $                                                                      $11,937,500

                                                                                    Percentage of
     Tiering Model Based On Average Cash Balances         Cash Amounts by Tier       Total Cash       Yield to Client

10 mill and more                                               $25,000,000               2.5%             5.50%

1 mill to 10 mill                                             $250,000,000              25.0%             5.00%
250k to 1 mill                                                $375,000,000              37.5%             4.25%
100k to 250k                                                  $250,000,000              25.0%             3.00%
less than 100k                                                $100,000,000              10.0%             2.50%
Total    H                                                   $1,000,000,000            100.0%

Average Yield to Client                                          3.98%
Average Spread to bank                                           1.19%
Net Annual Revenue Increase to Bank                            $11,937,500
        XYZ Weath Management will have over 2500 new HNW prospects in the form of the owners
        of The ABC Bank business client ownership. Major new revenue opportunities exist

 Tiering Model Based                                                                              Average
  On Average Cash         SMB Cash        Number of New     Investment           Investment      Revenue / $       Annual New
       Balances         Amounts by Tier   SMB Customers   Assets/ customer         Assets        assets (%)         Revenue

10 mill and more          $25,000,000           3         $     15,000,000   $      50,000,000      0.005      $        250,000

1 mill to 10 mill        $250,000,000          100        $      7,500,000   $     750,000,000     0.0075      $      5,625,000

250k to 1 mill           $375,000,000          938        $      2,000,000   $ 1,875,000,000        0.01       $     18,750,000

100k to 250k             $250,000,000         1,667       $      1,000,000   $ 1,666,666,667        0.015      $     25,000,000

less than 100k           $100,000,000         2,857       $       400,000    $ 1,142,857,143        0.02       $     22,857,143

Total                   $1,000,000,000        5,565       $     25,900,000   $ 5,484,523,810                   $     72,482,143

               H    R
                    H                       Cumulative # clients with Assets > $1,000,000 = 2708
                                            Cumulative Assets                            $ 4.4 billion
                                            Cumulative Revenue                           $49.6 mill / year
                 New loan balances of $500 million could contribute 12 million in revenue

 Tiering Model Based                                                                                Average
  On Average Cash           SMB Cash        Number of New   Loan Balances/        Total Loan      Revenue / $       Annual New
       Balances           Amounts by Tier   SMB Customers     customer             Balances        loans (%)         Revenue

10 mill and more            $25,000,000           3         $     1,000,000   $       3,333,333      0.01       $         33,333

1 mill to 10 mill          $250,000,000          100        $      500,000    $      50,000,000      0.015      $        750,000

250k to 1 mill             $375,000,000          938        $      250,000    $     234,375,000      0.02       $      4,687,500

100k to 250k               $250,000,000         1,667       $      100,000    $     166,666,667      0.025      $      4,166,667

less than 100k             $100,000,000         2,857       $       25,000    $      71,428,571      0.035      $      2,500,000

Total                      $1,000,000,000       5,565                         $     525,803,571                 $     12,137,500

           H     R
Cash Optimization Account: Process Overview
Outsourced product provider provides patented solution and warrants regulatory compliance

                                                                                         Statement Vendor
                                                                                              -- Statements
                                                                                                                       FDIC Insurance
                                                                                                                       For amounts >100k
                  New accts and trade settlement debits

                                                          Daily debit details                                                 banks

         Bank                                                                            Product Provider
                                                                     Books and records

                                                                                                - Accounting and records
                         - Check , debit , bill pay processing                                  -- Interest accrual for tiers
                         -- Accepts deposits                                                    -- marketing and product support

                         - Pays interest                                                        - External bank interface >100k
              R          - - Provides FDIC Insurance on first                                   - External bank interest settlement
                         - 100k
                         - Sets pricing and tier structure
Merrill Lynch focuses on both sides of the business owners balance sheet

Merrill’s WCMA combines all elements of an AMA account for Business owners

  H R
Product Innovation can combine lending to the business with meeting
The Wealth Management needs of the business owner ( our client)

    H R
Bank Of Montreal has utilized lending in Succession Mgmt

B of A and Wachovia embrace the concept of integrating Wealth Management
with Small Business Banking

      H R
BONY Business Insured Sweep has been adopted by Chase

About Heitman Financial Services Consulting

CV Highlights

A broad and diverse experience in Banking , Asset Management ,
Brokerage and Cash Management                                                      Clients Past and Present
 Executive positions with premier organizations
• Citigroup – Operations                                                           • Morgan Stanley – 401k and Brokerage
• WFB – CFO Consumer Lending Subsidiary
                                                                                   • Australia New Zealand Bank – Lending Efficiency
• US Bank – SVP and COO Asset Management
                                                                                   • Central bank of Malaysia – Industry Consolidation / M&A
• KPMG Consulting – Senior Manager and Practice leader
                                                                                   • Ameriprise – Creation of Asset Mgmt Account
• Ameriprise – VP Brokerage and Cash Management
                                                                                   • XYZ BD Rauscher – Cash Strategy
• The Reserve – Senior Business Consultant , Cash Management Solutions
                                                                                   • AG Edwards – FDIC Sweep Implementation
                                                                                   • Thrivent Financial Bank – Insured Deposit / Brokerage Sweeps

                           Current Practice Concentrations

                           • Brokerage Sweep Implementation and Cash Strategy

        H   R
                           • Bank liability management and utilization of non traditional liquidity sources
                           • Bank Deposit Product design – Business Client Interest bearing sweep accounts
                           • Asset Management Accounts and Asset Gathering strategies

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