PNC Bank, NA. Board Report. June 30, Pittsburgh, PA. A/L BENCHMARKS Standards for Asset/Liability Management
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1 A/L BENCHMARKS Standards for Asset/Liability Management Board Report PNC Bank, NA June 30, 2006 Olson Research Associates, Inc Old Columbia Road, Columbia, MD Phone: Web: Copyright 2005 Olson Research Associates, Inc. All Rights Reserved
2 About your A/L BENCHMARKS service Table of Contents: Executive Summary... 3 Balance Sheet Mix... 4 Earnings Performance... 6 Asset Quality... 8 Capital & Growth...10 Liquidity Interest Rate Risk Summary...14 Interest Rate Risk Reports Features Summary Full Inputs Custom Full Detailed Porfolio Characteristics x x x FHLB advance detail x x Forecast Capabilities x x Investment download x x Loan download x Budget download x Deposit download x Analysis 100, 200, 300 bps parallel shock analysis x x x Earnings at Risk (EAR) x x x Economic Value of Equity at Risk (EVE) x x x Industry Peer Analysis x x x What-If Capabilities x x Preliminary forecast review x Ramped rate shock analysis x Reports Board Report x x x Executive Report x x Fair Value (SFAS 107) x x Supporting Detail Report x x Model Validation Guidelines x x Back Test x x ALCO Policy Guidance x x x Which A/L BENCHMARKS is right for your bank? With A/L BENCHMARKS you can concentrate on managing your bank, and not your model. Get the service you need to appropriately identify, measure, monitor, and control your financial risks. 10/16/2006
3 Executive Summary Year-to-date results for June 30, 2006 Year-to-date Interest Income for 2006 grew by 28.0% to $2,075,050 from $1,621,380 one year ago. Year-todate Interest Expense for 2006 grew by 58.3% to $999,309 from $631,152 one year ago. The bank's year-todate Total Revenue for 2006 was $2,046,455. This represents an increase of 17.6% from one year ago. Yearto-date Net Income for 2006 was $499,720, up from $423,465 one year ago. This represents an increase of $76,255, or 18.0%. 2nd Quarter Income Statement (Actual YTD, $ in thousands) Current YTD Prior YTD 2nd nd-2005 Difference % Chg Interest Income 2,075,050 1,621, , Interest Expense 999, , , Net Interest Income 1,075, ,228 85, Non-Interest Income 970, , , Total Bank Revenue 2,046,455 1,739, , Non-Interest Expense 1,237,061 1,162,020 75, Loan & Lease Provision 65,510-1,057 66,567 > 999 Security Gains & Losses -8,860-29,015 20, Net Income Before Taxes 735, , , Income Tax 235, , , Net Income 499, ,465 76, Yield and Cost Comparison Current YTD 2nd-2006 Yield on Earning Assets Prior YTD 2nd-2005 Cost of Funds End-of-period Condition as of June 30, 2006 Securities grew 4.9% from one year ago, to end the quarter at $20.8 billion. Net Loans grew 3.1% from one year ago, to end the quarter at $50.3 billion. At the end of the second quarter of 2006, the bank's Total Assets were $85.9 billion. This represents a growth of 3.9% from one year ago. Non-Maturity Deposits grew 7.0% from one year ago, to end the quarter at $43.6 billion. The bank's Total Equity shrank -6.4% from last year. 2nd Quarter Balance Sheet (Actual end-of-period, $ in thousands) Current YTD Prior YTD 2nd nd-2005 Difference % Chg Cash & Due From 3,282,357 3,319,607-37, Fed Funds Sold & Repos 1,058, , , Securities 20,797,967 19,831, , Net Loans 50,277,749 48,786,089 1,491, Other Assets 8,633,042 8,519, , Total Assets 85,946,560 82,691,094 3,255, Loans 58% Balance Sheet Mix End-of-Period 2nd-2006 (% of Total Assets) Securities 25% Borrowed & Other 20% Non-Maturity Deposits 43,616,386 40,749,441 2,866, Certificates of Deposit 18,941,551 16,785,108 2,156, Borrowed Money 12,848,701 15,509,558-2,660, Other Liabilities 4,107,073 2,771,829 1,335, Total Equity 6,432,849 6,875, , Total Liabilities & Equity 85,946,560 82,691,094 3,255, Other Assets 17% Equity 7% Deposits 73% 10/16/2006 3
4 Balance Sheet Mix Managing Your Balance Sheet Mix Diversification remains the most fundamental of all principles in the world of risk management. The Balance Sheet Mix information identifies five categories of assets. How do you compare to peer group averages? Have you decisively established your asset mix, or is your allocation a result of competition and your marketplace? Are you comfortable with your asset allocation? Assets Prior Year Current Year (actual EOP as a % of Total Assets) 2nd nd-2006 Cash and Int Brg Due From Average for Banks over $10B Asset Mix End-of-Period 2nd-2006 (% of Total Assets) FF Sold & Repos 3.4% Fed Funds Sold & Repos Average for Banks over $10B Investment Securities Average for Banks over $10B Loans 59.2% Securities 24.2% Loans Average for Banks over $10B Other Assets Average for Banks over $10B Other 10.0% Cash 3.8% The mix percentages also identify five categories of funding. All sources of funding are expressed as a percentage of Total Assets to give comparability to asset mix percentages. Does the majority of your funding come from core deposits, purchased funds, or equity? How does your overall mix affect your cost of funds? Can you easily change your funding mix if necessary? Are you comfortable with your funding mix? Funding Prior Year Current Year (actual EOP as a % of Total Assets) 2nd nd-2006 Non-Maturity Deposits Average for Banks over $10B Certificates of Deposit Average for Banks over $10B Borrowed Money Average for Banks over $10B Borrowed Money, 14.9% Funding Mix End-of-Period 2nd-2006 (% of Total Assets) Certificates, 22.0% Other, 4.8% Equity, 7.5% Other Liabilities Average for Banks over $10B Equity Average for Banks over $10B NonMaturity Deposits, 50.7% 10/16/2006 4
5 Earning Asset Mix (Securities & Loans) Securities mix as of June 30, 2006 The size of the bank's investment securities portfolio is $20.8 billion. Mortgage & Asset-Backed securities are $17.6 billion which is 20.4% of total assets, or 84.5% of total securities. It is the bank's largest securities concentration and is relatively high compared to other banks of similar size. The bank's next largest securities concentration is US Treasury & Agency securities at $2.8 billion. This represents 3.2% of total assets, or 13.2% of total securities and is typical compared to other banks of similar size. Securities Prior Year Current Year (actual EOP as a % of Total Assets) 2nd nd-2006 U.S. Treasury & Agency Securities Average for Banks over $10B State & Municipal Securities Average for Banks over $10B Securities Mix End-of-Period 2nd-2006 (% of Total Assets) Mortgage & Asset-Backed Securities Average for Banks over $10B Other Securities Average for Banks over $10B US Treas/Agy Municipal Mtg Backed Other Typical Range for Banks over $10B Bank Loan mix as of June 30, 2006 The size of the bank's gross loan portfolio is $50.9 billion. Commercial & Industrial loans are $21.5 billion which is 25.0% of total assets, or 42.3% of gross loans. It is the bank's largest loan concentration and is relatively high compared to other banks of similar size. The bank's next largest loan concentration is Consumer Real Estate loans at $20.6 billion. This represents 24.0% of total assets, or 40.5% of gross loans and is typical compared to other banks of similar size. Loans Prior Year Current Year (actual EOP as a % of Total Assets) 2nd nd-2006 Commercial Loans (includes C & I, Agricultural, and Unspecified) Average for Banks over $10B Commercial Real Estate (includes Construction, Farm, & Commercial) Average for Banks over $10B Consumer Real Estate (includes Residential, Home Eq, and Multifamily) Average for Banks over $10B Consumer Loans (includes Installment, Credit Card, and Other) Average for Banks over $10B Loan Mix End-of-Period 2nd-2006 (% of Total Assets) Commercial Commercial Real Estate Consumer Real Estate Typical Range for Banks over $10B Consumer Bank 10/16/2006 5
6 Earnings Performance Earnings performance ratios measure the compensation to the bank and its investors for successfully managing bank operations and banking risks over time. Generally, earnings performance is evaluated by looking at measures of return & leverage, interest margin, and overhead. Return & Leverage Two primary measures of return are Return on Assets (ROA) and Return on Equity (ROE). The bank's ROA is calculated by taking annualized net income divided by average total assets. As of June 30, 2006 the bank had a below average ROA of 1.19% compared to peers. More efficient use of assets will yield a higher ROA and also contribute to a higher ROE. The bank's ROE is calculated by taking annualized net income divided by average total equity. As of June 30, 2006 the bank had a relatively normal ROE of 14.86% compared to peers. Return is also a function of leverage. Higher capital leverage means more dollars of assets per dollars of capital. Greater leverage contibutes to higher ROE. The bank has $13.37 of assets for every one dollar of equity as of June 30, Compared to peers, the bank is more highly leveraged Yield & Cost versus Average Fed Funds Rate 1st nd rd th st nd-2006 Asset Yields Funding Costs Avg Fed Funds Rate Interest Margin Net interest margin is the net interest income yield on earnings assets. It is the total tax-equivalent yield on earning assets less the interest cost of all types of funding which support earning assets. As of June 30, 2006 the bank's yield on earning assets was 5.70% which is significantly lower than the peer average, and is below the typical range (5.96 to 6.65%) for banks this size. In contrast the bank's cost of funds at 3.04% is within the typical range (2.65 to 3.32%) and close to the peer average for banks this size. The bank's earning assets yield combined with its cost of funds give it a net interest margin that is much lower than other banks its size. Overhead With increased competition from outside the industry, banks continue to experience interest margin pressures. Banks are striving to find greater efficiencies in their day-to-day operations. Efficiency gains can be achieved by controlling costs and generating more diverse and higher levels of noninterest revenues. A key measure of overhead is the Operating Efficiency Ratio. It is created by dividing non-interest expense by net bank revenue on a tax equalized basis. Net bank revenue is defined as the sum of tax equivalent interest income plus non-interest income less interest expense. A lower efficiency ratio demonstrates the institution's ability to support its net revenue stream with as little overhead expense as possible. As of June 30, 2006 the bank's operating efficiency ratio was 60.14%. A typical range is to 61.00%, and the average for the peer group is 55.63%. This means that the bank's overhead is higher than average but still within the typical range. Another way to interpret this measure is that for every dollar the bank earns, it is spending approximately 60 cents. 10/16/2006 6
7 Earnings Performance Return & Leverage 1st nd rd th st nd-2006 Return on Assets (ROA) Average for Banks over $10B Return on Equity (ROE) Average for Banks over $10B Leverage (Assets to Equity) Average for Banks over $10B Interest Margin Net Interest Margin Average for Banks over $10B Yield on Earning Assets Average for Banks over $10B Cost of Funds Average for Banks over $10B Overhead Operating Efficiency Ratio Average for Banks over $10B Non-Interest Income to Non-Interest Expense Average for Banks over $10B Provision & Taxes Loan Loss Provision to Total Loans Average for Banks over $10B Income Taxes to NIBT Average for Banks over $10B Net Interest Margin The bank's earning assets yield combined with its cost of funds give it a net interest margin that is much lower than other banks its size. 1st nd rd th-2005 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 1st nd-2006 Operating Efficiency Ratio The operating efficiency ratio shows that the bank's overhead is higher than average but still within the typical range st nd rd th st nd-2006 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 10/16/2006 7
8 Asset Quality Asset Quality risk is the potential loss of cash flows due to poor quality borrowers or counterparties, low investment grades of securities, or excessive concentration of similar assets or financial contracts. Credit Quality The credit quality of investment securities is significant. Financial markets independently establish credit quality for the various investment securities. In contrast, credit quality issues within the loan portfolio are usually larger and the credit standards may be unique to each bank. Nonperforming assets are loans which are nonaccruing, renegotiated, and/or past due for 90 days or more. Also included are other real estate owned and foreclosed loan collateral. Such assets reflect a real loss of current income and a potential loss of principal. The Allowance for Loan Losses (ALL) represents losses which have already been charged against earnings. Based upon experience, such losses are real in dollar amount and timing. However, such losses are presented as a reserve "fund" (contra-asset) because the losses have not yet been identified by individual loan. The relationship between nonperforming assets and the ALL is a reflection of management philosophy. Concentrations & Yield Another common way to look at asset quality risk is to examine the bank's asset concentrations. While these ratios do not directly capture the credit quality of the particular portfolio, they can help reveal how a bank's earnings and/or capital may be disproportionately affected by events that may have adverse impacts on credit quality such as industry conditions, or global, national, and local economic weaknesses. Portfolio yield also provides insight into the bank's overall asset quality risk. Ideally in a market economy, the yield a bank receives on its loans should reflect the level of expected risk of default and loss in the underlying loans. Compared to peer banks, a bank with high yielding loan portfolios may be exposed to higher credit risk. A bank with high yielding securities portfolios may be exposed to increased option risk or extension risk. The bank's Loan Yield of 6.24% is lower than the peer average and is lower than the typical range (6.40 to 7.17%) for banks this size. In contrast, the bank's Securities Yield of 4.82% is within the typical range (4.55 to 5.32%) and close to the peer average for banks this size Noncurrent Loans Prior Year 2nd-2005 Current Year 2nd-2006 Past Due less than 90 days Past Due more than 90 days Nonaccrual Loans Fair Market Values The prices of securities in financial markets reflect such things as current supply and demand, interest rate expectations, credit quality of the borrower, and any market efficiencies or inefficiencies. Differences between the current market price and a bank's cost are represented by a market premium or discount. Fair or present value premiums and discounts are meant to convey the same notions as market value premiums and discounts. Accounting driven "fair" values for loans are proxies for market values. Fair value may be market value if a loan market exists; it may be negotiated at arms-length; it may be by reference to the market value for a similar financial instrument; or it may be calculated using expected cash flows discounted by a rate that reflects interest rate expectations, credit quality, and transaction costs. 10/16/2006 8
9 Asset Quality Credit Quality 1st nd rd th st nd-2006 Non-Performing Assets to Total Loans Average for Banks over $10B Allowance for Loan Losses to Total Loans Average for Banks over $10B Net Charge-Offs to Total Loans Average for Banks over $10B Concentrations Total Securities to Total Assets Average for Banks over $10B Total Loans to Total Assets Average for Banks over $10B Yields Yield on Total Securities (YTD) Average for Banks over $10B Yield on Total Loans (YTD) Average for Banks over $10B Portfolio Fair Market Values Total Securities Market Value Premium Average for Banks over $10B Total Loans Present Value Premium Average for Banks over $10B Non-Performing Assets to Total Loans The bank's level of Non-performers is within the typical range and close to the peer average for banks this size. Allowance for Loan Losses to Total Loans The bank's Allowance for Loan Losses is within the typical range and close to the peer average for banks this size st nd rd th st nd st nd rd th st nd-2006 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 10/16/2006 9
10 Capital & Growth Capital is necessary to protect the bank and all interested parties against the possibility of loss (or risk). Capital adequacy is usually expressed as a ratio of capital to total assets. As of June 30, 2006 the bank's equity to assets ratio of 7.5% was below average compared to peers. Regulatory capital requirements Bank regulators are charged with the responsibility to assure the safety and soundness of the financial system. One way they do this is to closely examine the bank's capital adequacy. Current regulation defines adequate capital using the guidelines defined in the 1991 FDIC Improvement Act (FDICIA). These guidelines are referred to as the Risk-Based Capital (RBC) standard. This standard assigns different risk weights to various assets depending on assumed credit risk. The four classes of risk weights are 0%, 20%, 50% and 100% which define the percentage of portfolio book value that must be supported by capital. The bank's RBC ratios measure the relationship of the bank's capital to its total risk-weighted assets. As of June 30, 2006 the bank's Total RBC ratio was 11.4% which is considered "well capitalized" from a regulatory perspective. Banks this size typically have a Total RBC ratio between 10.8 and 12.2%. Growth Growth in balance sheet size is necessary for banks to meet the growing needs of customers, to offset inflationary pressures on operating costs, and to increase returns to investors. Evaluation of growth has several components. First, asset growth compared to the rate of inflation indicates whether the bank is growing in real terms or slipping in relation to changes in the economy. Asset growth can also indicate how well the management team is doing compared to other banks in its peer group. The bank's asset growth of 3.9% is below the peer average but still within the typical range (3.5 to 14.0%) for banks this size. Another way to analyze growth is to compare net income growth to asset growth to learn if the bank is sacrificing profitability to achieve rapid asset growth. As of June 30, 2006 the bank's YTD net income growth was 18.0% which is higher than the peer average, but is still within the typical range (0.4 to 19.8%) for banks this size. Finally, consistency among the growth rates of loans, deposits, assets, and equity indicates how well management has balanced diverse pressures. The balanced growth measure captures this level of consistency Income Growth versus Asset Growth 1st nd rd th st nd-2006 Net Income Growth Asset Growth The balanced growth measure is calculated by taking the highest growth measure (of loans, deposits, assets, and equity) and subtracting the lowest growth measure. For the bank the highest measure is deposit growth at 8.7%. The lowest measure is equity growth at -6.4%. The difference or balanced growth measure is 15.1%. The lower this measure, the more consistent balance sheet growth has been. Maintaining a balance of growth, especially between loans and deposits, is sometimes difficult especially if there are increased competitive pressures from other financial institutions and non-bank entities. 10/16/
11 Capital & Growth Shareholder's Equity 1st nd rd th st nd-2006 Equity to Total Assets Average for Banks over $10B Tier 1 Risk-Based Capital Average for Banks over $10B Total Risk-Based Capital Average for Banks over $10B Economic Values Deposit Present Value Premium Average for Banks over $10B Economic Value of Equity (EVE) to Book Average for Banks over $10B Growth (compared to prior year) Net Income (YTD) Growth Average for Banks over $10B Loan Growth Average for Banks over $10B Deposit Growth Average for Banks over $10B Asset Growth Average for Banks over $10B Equity Growth Average for Banks over $10B Balanced Growth Measure (zero is perfect balance) Average for Banks over $10B Loan Growth The bank's loan growth is much lower than average and below the typical range. Deposit Growth The bank's deposit growth is comparable to other banks and is within the typical range st nd rd th st nd st nd rd th st nd-2006 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 10/16/
12 Liquidity Liquidity Risk is the potential shortage of cash funds needed to meet deposit withdrawals, loan disbursements, and other obligations in a timely fashion. Three perspectives of liquidity are asset liquidity, funding liquidity, and contingent liquidity. Asset Liquidity Assets held by the bank generate future cash inflows. Expected inflows occur from loan principal repayments, loan interest payments, and securities maturing. Unexpected inflows may occur from situations such as loan and securities prepayment, or securities calling. Most asset liquidity ratios are presented as a class of assets stated as a percentage of total assets. The various classifications indicate (1) how quickly the assets will mature or (2) the relative degree of certainty by which the assets can be converted into cash. As of June 30, 2006 the bank had $6.2 billion in cash, fed funds purchased, repos, and other similarly liquid assets. This represents 7.3% of total assets. The measure normally ranges from 2.7 to 7.8% which means that while the bank is above the average, it is still inline with the majority of peers. Funding Liquidity Liabilities of the bank, typically deposits and borrowed funds, will require future cash payments in the form of deposit withdrawals, principal payments or interest expense payments Non-Int Deposits (DDA) Funding Mix End-of-Period 2nd-2006 (% of Total Assets) NOW, Svgs, & Mny Mkt Small CDs Large CDs ST Brwd Funds LT Debt Typical Range Bank Brokered CDs Most funding liquidity ratios are presented as a type of liability stated as a percentage of total assets. The various liability classifications indicate how quickly cash payments will be required. Contingency Liquidity Contingency liquidity ratios indicate the extent to which the bank has already used available resources to acquire various assets or liabilities. Contingency liquidity also reflects the capacity available to acquire additional assets and liabilities. The Non-Core Funding Dependency Ratio (NCFD) is a typical measure of contingency liquidity. This ratio measures the relationship between long-term earning assets and net short-term funds. Long-term earning assets are securities which mature beyond one year and all loans. Net short-term funds are large CDs, brokered deposits less than $100K, foreign deposits, fed funds purchased, repos, and other borrowings maturing within one year, net of short-term investments. A rule of thumb is that the lower this ratio the better. When the bank's short-term investments exceed its short-term borrowings this ratio will be negative and is usually considered a good thing since it reflects a greater capacity to acquire additional assets and liabilities. This snapshot ratio exposes the reliance on "non-core" sources to fund the bank's long-term asset base. It indicates the level the bank has already tapped readily available funding sources, therefore limiting their ability to do so in the future. As of June 30, 2006 the bank's NCFD ratio was 26.9%. This level of non-core funding dependence is lower than average, but still inline than with the majority of its peers. Banks in this peer group commonly have an NCFD ratio between 19.9 and 43.6%. With an NCFD ratio of 26.9% the bank still has the ability to tap into additional non-core funding sources. 10/16/
13 Liquidity Asset Liquidity 1st nd rd th st nd-2006 Loans to Total Assets (EOP) Average for Banks over $10B Cash, Fed Funds, & Repos to Total Assets (EOP) Average for Banks over $10B AFS Securities to Total Assets (EOP) Average for Banks over $10B Pledged Securities (HTM & AFS) to Total Securities (EOP) Average for Banks over $10B Unrealized Gain/Loss on AFS Securities Average for Banks over $10B Funding Liquidity Deposits To Total Assets (EOP) Average for Banks over $10B Short-Term Borrowings to Total Assets (EOP) Average for Banks over $10B Purchased Funds to Earning Assets (AVG) Average for Banks over $10B Contingency Liquidity Loans to Deposits (AVG) Average for Banks over $10B Net Short-Term Brwd Funds to Equity (AVG) Average for Banks over $10B Non-Core Funding Dependence (EOP) Average for Banks over $10B Purchased Funds to Earning Assets The bank's Purchased Funds to Earning Assets is within the typical range and close to the peer average for banks this size. Unrealized Gain/Loss on AFS Securities The bank's Unrealized Gain/Loss on AFS Securities is lower than the peer average, but is still within the typical range for banks this size st nd rd th st nd st nd rd th st nd-2006 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 10/16/
14 Interest Rate Risk Interest rate risk (IRR) is the risk to earnings or capital arising from movements in interest rates. Practically, IRR can be viewed from both a short-term and longterm perspective. To examine short-term IRR we look at earnings at risk. Conversely, we use equity at risk and duration to measure long-term IRR. There are two significant characteristics of the earnings at risk measurement the bank should review. First, what rate shock, up or down, produces the worst case change? Is the bank exposed to rising or falling rates? Second, what is the amount of projected change or magnitude of risk? How much exposure is there? Earnings at risk: short-term IRR By most definitions, accounting or otherwise, when we communicate something as short-term, we usually refer to a time frame of one year or less. When measuring IRR from an earnings perspective, this same concept applies. Short-term interest rate risk is measured by initially establishing a one year earnings forecast which may include a dynamic market rate forecast, earnings growth, and balance mix & volume changes. Since IRR is a measure of possible loss caused by interest rate changes, the model then introduces two instantaneous, parallel "shocks" to the base set of rates and then re-computes the expected earnings. Common practice is to use +/-200bp movements. The earnings at risk is the largest negative change between the base forecast and one of the "shock" scenarios. The measure is usually stated as a percentage change from the base income. Securities Loans Deposits Borrowings Modified Duration (Years) Current Year 2nd-2006 Prior Year 2nd-2005 Economic Value of Equity (EVE) at risk As a means for evaluating long-term IRR, an economic perspective is necessary. This approach focuses on the value of the bank in today's interest rate environment and that value's sensitivity to changes in interest rates. This concept is known as Economic Value of Equity (or EVE) at Risk. It requires a complete present value balance sheet to be constructed. This is done by scheduling the cash flows of all assets and liabilities and applying a set of discount rates to develop the present values. The economic value of equity (EVE) is the difference between the present value of assets and liabilities. (Equity = Assets - Liabilities). Similar to earnings at risk, two interest rate shocks are applied to the base set of rates and all present values are re-computed. EVE at risk is the largest negative change in value between the base and one of the shock scenarios. This is usually stated as a percentage change from the base EVE. Duration IRR can also be implied from measures of interest rate elasticity or modified duration. Duration is defined as the present value weighted term until cash flows will be reinvested at current market rates. Modified duration is the percentage decline in market value given a +100bp increase in market rates. Modified duration is often interpreted as "duration years" by dropping the negative sign from the number. The bank's Total Asset duration is 1.35 years which is within the typical range (1.19 to 1.70 years) and close to the peer average for banks of similar size. The bank's Total Liabilities duration is 1.02 years which is shorter than the peer average but still within the typical range (1.01 to 1.17 years) for banks of similar size. 10/16/
15 Interest Rate Risk Earnings at Risk (Short-term risk, ±200bp shock) 1st nd rd th st nd-2006 Net Interest Earnings at Risk Average for Banks over $10B Net Income at Risk Average for Banks over $10B EVE at Risk (Long-term risk, ±200bp shock) Economic Value of Equity (EVE) at Risk Average for Banks over $10B Economic Value of Equity (EVE) at Risk as a % of Assets Average for Banks over $10B * Additional results for ±100bp and ±300bp shocks are shown on page 22 of this report. Interest Rate Elasticity (Modified Duration) Total Asset Duration Average for Banks over $10B Total Liability Duration Average for Banks over $10B Total Securities Duration Average for Banks over $10B Total Loan Duration Average for Banks over $10B Total Deposit Duration Average for Banks over $10B Total Borrowing Duration Average for Banks over $10B Net Interest Earnings at Risk The bank is exposed to rising rates in the short-term (as noted by the "UP" on the graph). The bank's risk is -9.16% which is within the typical range and close to the peer average for banks this size Economic Value of Equity (EVE) at Risk The bank is exposed to rising rates in the long-term (as noted by the "UP" on the graph). The bank's risk is % which is higher than the peer average, but is still within the typical range for banks this size UP UP UP UP UP UP 1st nd rd th st nd UP UP UP UP UP UP 1st nd rd th st nd-2006 Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B Typical Range for Banks over $10B PNC Bank, NA Average for Banks over $10B 10/16/
16 Performance Trends (This page is intentionally blank) 10/16/
17 Interest Rate Risk FFIEC - Joint Policy Statement on Interest Rate Risk, July 1996 "Board and senior management are responsible for ensuring that interest rate risk is managed on both a day-to-day and long range basis. In managing the bank's activities, management should identify, measure, monitor, and control the bank's interest rate risk..." Interest rate risk is the possibility that market rates will change in the future and that such changes will cause economic losses that were unexpected. Losses will be reflected as losses of income or losses of value; or both. The reports in this section highlight the risk to future earnings and to economic value of equity (EVE) that may occur when the treasury yield curve is subjected to a +/- 200 basis point parallel shock. Current regulatory practice requires every bank's board of directors to establish and approve risk limits for net interest earnings at risk and EVE at risk. Bank management is required to produce these measurements and present it to the board on at least a quarterly basis. Interest Rate Risk Balance Sheet Gap 18 Income Shock Simulation 19 Present Value & Duration 20 Balance Sheet Shock Simulation 21 Multi-Shock Simulation 22 10/16/
18 Gap Report: June 30, 2006 Less than 3 3 to 12 1 to 3 3 to 5 5 to 15 Over 15 Total Earning Assets: Months Months Years Years Years Years Amort. Cost Int Brg Due From 2, ,922 Fed Funds, Repos, & Other 1,188, , ,200 1,100, ,955,445 Securities 9,591,889 1,859,497 3,286,119 2,823,175 3,910, ,470,917 Loans 29,659,957 3,735,202 5,374,891 4,225,097 7,753, ,393 50,864,765 Total Earning Assets 40,443,606 5,985,306 8,936,210 8,149,073 11,663, ,393 75,294,049 Interest Bearing Liabilities: NOW Accounts 402, ,208, ,611,822 Savings Accounts 518, ,556, ,074,874 Money Market Deposits 32,053, ,053,969 Small CDs 2,209,273 4,510,922 1,483,347 1,080, ,284,069 Large CDs 2,027,196 2,018, , , ,234,350 Fed Funds, Repos, & Other 10,145, ,145,509 Short-Term Borrowings 1,542,125 1,832, ,375,119 Long-Term Debt 0 0 1,587,999 2,163, ,751,205 Total Interest Bearing Liabilities 48,899,746 8,362,167 6,477,607 3,791, ,530,917 Gap -8,456,140-2,376,861 2,458,604 4,357,676 11,663, ,393 Cumulative Gap -8,456,140-10,833,001-8,374,397-4,016,722 7,646,739 7,763,132 Cm. Gap Ratio (RSA/RSL) 83% 81% 87% 94% 111% 111% Gap analysis The gap report shows the maturity and repricing schedules for all of the earning assets and interest-bearing liabilities at a bank. Comparing the value of assets that mature or reprice at each point in time with the value of the liabilities that mature or reprice may reveal the exposure of earnings to changes in interest rates. The bank's gap measure is constructed by summing the dollar value of assets that come due over a given time interval and comparing it to the liabilities that come due during the same interval. The cash-flows shown represent potential dollars of earning assets and interest-bearing liabilities that mature, reprice, amortize, prepay, call, and/or (in the case of deposits) withdrawal early. When using gap analysis it is common practice to label all such cash-flows "repricings" because the dollars in a given bucket are assumed to be re-invested or repriced to current market rates. Core Deposit Repricing (betas) Core deposit rate adjustments for every 100 basis points move in Fed Funds: NOW accounts Savings accounts Money Market Change in Fed Funds: -100 bp / +100 bp -25 bp -25 bp -100 bp Balance Sheet Gap +25 bp +25 bp +100 bp The bank's one year cumulative gap ratio is 81%, which means the bank has more liabilities repricing than it does assets within one year. Generally speaking, net interest income at liability sensitive banks will benefit from falling rates and be negatively impacted by rising rates. Under 3 months 3 to 12 months Assets 1 to 3 years 3 to 5 years 5 to 15 years Liabilities Over 15 years 10/16/
19 Income Shock: July 1, June 30, 2007 Base Forecast Rates -200bp Rates +200bp Interest Income: Amount Amount % Change Amount % Change Int Brg Due From Fed Funds, Repos, & Other 92,804 69, , HTM Securities AFS Securities 1,241,247 1,058, ,418, Total Securities 1,241,247 1,058, ,418, Commercial Loans 1,557,053 1,306, ,807, Agricultural Loans Real Estate Loans 1,798,573 1,567, ,024, Consumer Loans 258, , , Other Loans 43,786 34, , Lease Financing Recv 162, , , Total Loans 3,820,945 3,271, ,365, Total Interest Income 5,155,140 4,399, ,896, Interest Expense: NOW Accounts 35,366 27, , Savings Accounts 37,881 27, , Money Market Accounts 650,438 48, ,291, Small CDs 378, , , Large CDs 222, , , Other Deposits 225, , , Total Deposits 1,550, , ,414, Fed Funds, Repos, & Other 257, , , Short-term Borrowings 177, , , Long-term Debt 236, , , Total Interest Expense 2,221,342 1,255, ,230, Net Interest Income 2,933,798 3,143, ,665, Provision Expense 119, , , Non-Interest Income 1,863,224 1,863, ,863, Non-Interest Expense 2,479,611 2,479, ,479, Net Income Before Taxes (NIBT) 2,198,116 2,408, ,929, Income Tax & After Tax Items 744, , , Net Income 1,453,682 1,592, ,276, Net Interest Income (FTE) 2,938,230 3,148, ,669, Average Balance of Earning Assets 75,280,447 75,365, ,177, Net Interest Margin % 3.90% 4.18% 3.55% Income shock analysis This stress-test shows the bank is exposed to rising rates in the short-term. The shock down shows a potential increase of 7.16% in the bank's net interest earnings; the shock up shows a potential decrease of 9.16%. The base forecast shows a projected net interest margin of 3.90%. The rate shock down shows a margin of 4.18%, while the rate shock up shows a margin of 3.55%. When rates shock up the bank's cost of funding increases faster than its yield on earning assets. The cost of funds moves up 150 basis points while the yield on earning assets only moves up 100 basis points Projected Change in Margin % -200bp Base +200bp 10/16/
20 Present Value & Duration Report: June 30, 2006 Reported Present Duration Int Rate Elasticity Disc CF Yield Assets: EOP Balance Value (Months) (Years) (Avg Disc Rate) Cash & Int Brg Due From 3,282,357 3,282, Fed Funds, Repos, & Other 2,955,445 2,955, HTM Securities AFS Securities 20,797,967 20,797, Total Securities 20,797,967 20,797, Commercial Loans 16,891,864 16,994, Agricultural Loans 1,177 1, Real Estate Loans 25,672,859 25,361, Consumer Loans 3,677,782 3,432, Other Loans 2,207,358 1,617, Lease Financing Recv 2,413,725 2,370, Loan & Lease Reserves -587, Net Loans & Leases 50,277,749 49,779, Fixed & Other Assets 8,633,042 8,496, Total Assets 85,946,560 85,311, Liabilities & Equity Non-Interest Deposits 7,875,721 7,195, NOW Accounts 1,611,822 1,523, Savings Accounts 2,074,874 1,930, Money Market Deposits 32,053,969 31,021, Small CDs 9,284,069 9,205, Large CDs & Other Deposits 9,657,482 9,607, Total Deposits 62,557,937 60,484, Fed Funds, Repos, & Other Int Brg Liab. 5,722,377 5,722, Short-Term Borrowings 3,375,119 3,375, Long-Term Debt 3,751,205 3,848, Other Liabilities 4,107,073 4,107, Total Liabilities 79,513,711 77,537, Total Equity 6,432,849 7,774,247 2nd st th rd nd-2005 Duration of Assets vs. Liabilities Total Assets Total Liabilities Core Deposit PV Treatment x FDICIA 305 Defaults Custom provided by bank Effective decay assumptions: Bucket < 3 mo 3-12 mo 1-3 yrs 3-5 yrs 5-10 yrs > 10 yrs OTS NPV (TB-13a) Other 3rd party data DDA NOW Savings Mny Mkt 17.0% 50.0% 16.5% 16.5% 0.0% 0.0% 8.0% 25.0% 33.5% 33.5% 0.0% 0.0% 8.0% 25.0% 33.5% 33.5% 0.0% 0.0% 17.0% 50.0% 16.5% 16.5% 0.0% 0.0% 10/16/
21 Balance Sheet Shock Report: June 30, 2006 Reported EOP Base Present Rates -200bp Rates +200bp Assets: Balance Value Value % Change Value % Change Cash & Int Brg Due From 3,282,357 3,282,357 3,282, ,282, Fed Funds, Repos, & Other EA 2,955,445 2,955,445 3,060, ,857, HTM Securities AFS Securities 20,797,967 20,797,967 21,575, ,007, Total Securities 20,797,967 20,797,967 21,575, ,007, Commercial Loans 16,891,864 16,994,888 17,251, ,762, Agricultural Loans 1,177 1,376 1, , Real Estate Loans 25,672,859 25,361,831 26,321, ,401, Consumer Loans 3,677,782 3,432,804 3,591, ,288, Other Loans 2,207,358 1,617,973 1,742, ,508, Lease Financing Recv 2,413,725 2,370,521 2,404, ,339, Loan & Lease Reserves -587, Net Loans & Leases 50,277,749 49,779,393 51,314, ,301, Fixed & Other Assets 8,633,042 8,496,452 8,496, ,496, Total Assets 85,946,560 85,311,614 87,728, ,945, Liabilities & Equity Non-Interest Deposits 7,875,721 7,195,399 7,345, ,116, NOW Accounts 1,611,822 1,523,748 1,570, ,491, Savings Accounts 2,074,874 1,930,713 1,988, ,893, Money Market Deposits 32,053,969 31,021,371 31,401, ,763, Small CDs 9,284,069 9,205,102 9,405, ,033, Large CDs & Other Deposits 9,657,482 9,607,990 9,714, ,516, Total Deposits 62,557,937 60,484,322 61,425, ,815, Fed Funds, Repos, & Other Int Brg Liab. 5,722,377 5,722,377 5,726, ,717, Short-Term Borrowings 3,375,119 3,375,119 3,399, ,350, Long-Term Debt 3,751,205 3,848,475 4,076, ,635, Other Liabilities 4,107,073 4,107,073 4,356, ,751, Total Liabilities 79,513,711 77,537,367 78,985, ,271, Economic Value of Equity (EVE) 6,432,849 7,774,247 8,743, ,674, EVE Ratio (equity value to asset value) 9.11% 9.97% +85 bp 8.05% -107 bp Balance sheet shock analysis This stress-test shows the bank is exposed to rising rates over the long-term. This report also shows the value of equity compared to the value of assets (EVE Ratio). In the base case the bank's EVE ratio is 9.11% which indicates an adequate level of capital. In the up shock the bank maintains an adequate level of capital at 8.05%. It also shows only a small change of 107 basis points in the EVE Ratio compared to base. These two factors, the up shock EVE Ratio and the change in the EVE ratio from base, combine to give the bank a minimal level of risk. * Table adapted from the OTS NPV model Minimal Risk under 100bp bp bp over 400bp Change from the base EVE Ratio 10/16/ less capital Worst case EVE Ratio more capital 4 to 6% under 4% 6 to 10% over 10% lower risk less volatile higher risk more volatile
22 Additional Shock Results Down Down Down Base Up Up Up Income Shock: -300bp -200bp -100bp Forecast +100bp +200bp +300bp IBDF, Fed Funds, Repos, & Other 54,217 69,285 81,821 92, , , ,685 Securities 961,749 1,058,799 1,150,679 1,241,247 1,331,270 1,418,753 1,504,621 Loans 2,990,946 3,271,153 3,547,713 3,820,945 4,093,796 4,365,455 4,635,986 Total Interest Income 4,006,912 4,399,237 4,780,213 5,155,140 5,528,109 5,896,180 6,260,293 Int Bearing Trans. Deposits 93, , , ,685 1,053,441 1,383,198 1,712,954 Certificates & Other Deposits 526, , , , ,866 1,031,253 1,139,667 Borrowed Money & Other 452, , , , , , ,276 Total Interest Expense 1,073,391 1,255,247 1,718,921 2,221,342 2,724,088 3,230,978 3,741,897 Net Interest Income 2,933,521 3,143,990 3,061,292 2,933,798 2,804,021 2,665,201 2,518,396 $ Chg from base , , , , ,402 % Chg from base (NII at Risk) -0.01% 7.16% 4.35% -4.42% -9.16% % Net Interest Margin % 3.90% 4.18% 4.07% 3.90% 3.73% 3.55% 3.36% Projected Change in Margin % Projected Change in EVE Ratio bp -200bp -100bp Base +100bp +200bp +300bp bp -200bp -100bp Base +100bp +200bp +300bp Down Down Down Base Up Up Up Balance Sheet Shock: -300bp -200bp -100bp Forecast +100bp +200bp +300bp Cash, Fed Funds, Repos & Other EA 6,399,302 6,343,477 6,289,670 6,237,802 6,187,797 6,139,582 6,093,088 Securities 21,893,346 21,575,058 21,188,972 20,797,967 20,416,389 20,007,869 19,589,300 Net Loans 52,047,134 51,314,011 50,556,608 49,779,393 49,036,120 48,301,981 47,580,271 Other Assets 8,496,452 8,496,452 8,496,452 8,496,452 8,496,452 8,496,452 8,496,452 Total Assets 88,836,234 87,728,997 86,531,702 85,311,614 84,136,758 82,945,885 81,759,111 Transaction Deposits 42,642,198 42,305,602 41,977,691 41,671,230 41,376,665 41,265,734 41,186,710 Certificates & Other Deposits 19,279,531 19,120,111 18,964,421 18,813,092 18,666,911 18,550,122 18,451,311 Borrowed Money 13,338,611 13,203,636 13,072,806 12,945,971 12,822,986 12,703,710 12,588,010 Other Liabilities 4,484,478 4,356,607 4,206,372 4,107,073 3,907,717 3,751,759 3,592,970 Total Liabilities 79,744,818 78,985,956 78,221,291 77,537,367 76,774,279 76,271,326 75,819,001 Economic Value of Equity (EVE) 9,091,417 8,743,042 8,310,411 7,774,247 7,362,479 6,674,559 5,940,110 $ Chg from base 1,317, , , ,768-1,099,688-1,834,137 % Chg from base (EVE at Risk) 16.94% 12.46% 6.90% -5.30% % % EVE Ratio (equity value to asset value) 10.23% 9.97% 9.60% 9.11% 8.75% 8.05% 7.27% 10/16/
23 Summary of Assumptions Summary of Assumptions Your A/L BENCHMARKS model is capable of accepting many additional inputs. These inputs help to more accurately model your institution's structure and performance. To insure the most accurate analysis of your bank, we strongly recommend you provide us with as much detail as possible about your institution. Description of Input Provided By Bank Benefits Investment cash flow characteristics No Identifies fixed and variable rate portions of the portfolio. Detailed investment maturity & repricing data No Breaks out specific portfolio dollars in appropriate gap buckets Loan cash flow characteristics No Identifies fixed and variable rate portions of the portfolio. Detailed loan maturity & repricing data No Breaks out specific portfolio dollars in appropriate gap buckets Identify historical unusual non-interest items No Removes these items from the forecast and the overhead calculations used for presents value Common shares outstanding No Allows for additional ratio calculations showing per share data State tax rate No Provides an accurate forecast of state income taxes Detailed CD maturity & repricing data No Breaks out specific portfolio dollars in appropriate gap buckets Detailed breakout of MMDA & Savings No Models each account using more accurate individual end-of-period, average balance and expense levels Core deposit repricing factors Yes Defines behavior of core deposit expenses for income simulation & shock Core deposit present value information No Defines behavior of core deposit intangible value for EVE simulation & shock Detailed FHLB Advance data No Models each advance individually capturing unique pricing, maturity, call and conversion parameters Market & Internal Rate forecast No Includes in the forecast your projection of market rates, yield curve shape, and administered rates Forecast of minimum Fed Funds No Honors minimum balances held in reserve Equity Transactions No Forecasts the impact of future equity capital Forecast of unusual non-interest items No Refines forecast to include anticipated but non-recurring non-interest items Provision & Charge-off forecast No Refines forecast to include anticipated changes in loan loss reserves Number of Employees (FTEs) No Allows for additional ratio calculations showing per employee data Loan growth projections No Models anticipated changes in loan portfolio balances Loan pricing spreads No Allows for more accurate modeling of loan income Deposit growth projections No Models anticipated changes in deposit portfolio balances Deposit pricing No Allows for more accurate modeling of deposit expense Other asset & liability growth projections No Refines forecast to include anticipated changes in other balance sheet items Repurchase agreement detail No Models repos using more accurate individual end-of-period, average balance and expense levels Forecast of non-interest items No Models anticipated level of non-interest income and non-interest expense Investment growth projection No Models anticipated changes in investment portfolio balances Long-term debt projection No Models anticipated changes in FHLB advances portfolio balances Detailed Investment data download No Models each CUSIP individually to capture specific behavior including maturity, pricing spreads, calls, step-up, prepayments, etc. Detailed Loan data download No Models each loan individually to capture specific behavior including maturity, pricing spreads, cap & floors, etc. Detailed Deposit data download No Models unique characteristics of your bank's deposit portfolio Detailed Budget data download No Models targeted end-of-period balances to match your bank's internal budget Other custom modifications No Model any unique characteristics your institution may have. Additional details about model methodologies & assumptions may be found in the online version of this report. Access the electronic version via our secure website at 10/16/
24 manage your bank...not your model A/L BENCHMARKS Standards for Asset/Liability Management Get additional information, documentation, and support online via our web site Access current reports, report archives, regulatory benchmarks, industry data, detailed information and more. 24 Olson Research Associates, Inc Old Columbia Road, Columbia, MD Phone: Web: Copyright 2005 Olson Research Associates, Inc. All Rights Reserved
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