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A presentation on TriNovus' stress testing product.

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- 1. Your Bank Loan Risk & Stress Test Demonstration Date Designed For:
- 2. What Is A BankRisk Stress Test? <ul><li>A means of shocking your bank’s loan portfolio using different sets of assumptions and 20 years of historical loan loss data </li></ul><ul><li>A portfolio is “shocked” using various macroeconomic scenarios to determine how it affects your capital position and overall financial health </li></ul><ul><li>Estimates portfolio value in response to exceptional, but plausible underlying risk factors such as interest rate fluctuation, unemployment, inflation, natural disaster, etc. </li></ul>
- 3. Stress Testing Enables You To <ul><li>Evaluate capital and liquidity needs under adverse scenarios </li></ul><ul><li>Spotlight inherent risk exposure </li></ul><ul><li>Determine risk tolerance </li></ul><ul><li>Form appropriate contingency plans </li></ul><ul><li>Meet regulatory approval </li></ul>
- 4. How Do You Determine Shock Values?
- 5. How Does It Work? <ul><li>Historical loan loss data from 1991 to 2009 </li></ul><ul><li>State specific loan loss data </li></ul><ul><li>Portfolio categories shocked based on worst case loan loss scenarios </li></ul>
- 6. How Does It Work - Inputs <ul><li>Projected Balance Sheet growth rate for future periods is input by user </li></ul><ul><li>All other inputs are from Regulatory Reports </li></ul><ul><li>Dividend Payout ratio and Securities/Unusual Gains or Losses can be specified to adjust for any anticipated changes or to eliminate a one-time events from recurring in projections </li></ul>
- 7. How Does It Work - Methodology <ul><li>Loans are segregated into nine categories. </li></ul><ul><li>Each category is individually stressed or "shocked" from its current loan loss (charge off) rate to a specified elevated level of losses </li></ul><ul><li>Based on historical data each of the other loan categories will respond by experiencing some change in its individual loss rate. Different loans types will respond differently to the "shocked" loan category based on observed historical loan loss rate correlations. </li></ul>
- 8. How Does It Work - Methodology
- 9. Example Data Input
- 10. Assumptions For This Demo <ul><li>Year: 2009 </li></ul><ul><li>Quarter: 3 </li></ul><ul><li>Upper and Lower Confidence Bound Interval: 95.0% </li></ul><ul><li>Asset Growth Rate: 4.0% </li></ul><ul><li>Shocked Loan Sector: CLD </li></ul><ul><li>Loss Rates Shocked from: 3.5% to 7.4% Shock equates to a 99th percentile "worst case" scenario based on state specific loss data from 1991 to 2009 </li></ul><ul><li>(Above assumptions will be customized to your bank) </li></ul>
- 11. Current Loan Share Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% This depicts the institution's current dollar amount of loans by major category as a percentage of all loans. Explanation
- 12. CRE Loan Share Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% This depicts the institution's current dollar amount of CRE loans by major category as a percentage of all CRE loans. Explanation
- 13. CLD Red Flag Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Regulators of financial institutions have communicated certain criteria ("Red Flags") that, if exceeded, may cause concern about the institution's financial health and viability Explanation
- 14. Red Flag – CRE Loans/Capital & CRE Loan Growth Inputs: Confidence Interval 80% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Regulators of financial institutions have communicated certain criteria ("Red Flags") that, if exceeded, may cause concern about the institution's financial health and viability Explanation
- 15. Return On Equity Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Return on Equity = Net Income / Shareholder's Equity. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE begins in the base period within the normal range that we would see at a community bank. Due to the shock, it falls dramatically in year one. Since overall profitability (net income) is negative in year one, ROE must also be negative. Explanation Analysis
- 16. Return On Assets Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Return on Assets = Net Income / Total Assets. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. ROA begins in the base period within the normal range that we would see at a community bank. Due to the shock, it falls dramatically in year one. Since overall profitability (net income) is negative in year one, ROA must also be negative. Explanation Analysis
- 17. Equity to Asset Ratio Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% This presents the total equity of the institution as a percentage of total assets. This is a measure of the relative amount of capital resources available to maintain and grow the institution. Capital is not particularly strong to begin with, then gets compromised by the shock period where they experience negative net income. Equity drops by the amount of the negative net income in period one, but begins to recover slowly once loan loss levels return to normal. This bank has a fairly high dividend payout ratio at 50%, but if they were to lower their dividend after the shock, their equity ratio would recover more quickly. Explanation Analysis
- 18. Efficiency Ratio (Note: ratio is not impacted by provision or charge offs) Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Efficiency Ratio is used to evaluate the overhead structure of a financial institution. Banking is no different from any mature industry - the surviving companies are those that keep costs down. The efficiency ratio provides a measure of how effectively a bank is operating. Efficiency is also a good measure of profitability. Efficiency Ratio is used to evaluate the overhead structure of a financial institution. Banking is no different from any mature industry - the surviving companies are those that keep costs down. The efficiency ratio provides a measure of how effectively a bank is operating. Efficiency is also a good measure of profitability. Explanation Analysis
- 19. Net Chargeoffs to Total Loans Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Measure of defaulted and charged off loans, net of recovery, as a percentage of loans. The example bank here shows charge offs going from fairly normal or maybe somewhat elevated levels into the "stressed" period and then back to pre-stress levels. The inter-relationships of loan data from the past 25+ years informs us of how the different loan types respond to stress events for each of the other loan types. Notable here is that CLD is stressed to a 99% "bad case" scenario. That is, this level of loan loss would place it in the worst 1% of loan loss in your state over a 20 year observation period. The rest of the loans will respond accordingly based on the observed loss correlations from the historical data. Explanation Analysis
- 20. Net Losses By Loan Category Inputs: Confidence Interval 95% Asset Growth Rate 4% CLD Loan Rates Shocked From 3.5% to 7.4% Charge Offs by Loan Type / Loan Balance by Loan Type Measure of defaulted and charged off loans, net of recovery, as a percentage of loans. The example bank here shows charge offs going from fairly normal or maybe somewhat elevated levels into the "stressed" period and then back to pre-stress levels. The inter-relationships of loan data from the past 25+ years informs us of how the different loan types respond to stress events for each of the other loan types. Notable here is that CLD is stressed to a 99% "bad case" scenario. That is, this level of loan loss would place it in the worst 1% of loan loss in your state over a 25+ year observation period. The rest of the loans will respond accordingly based on the observed loss correlations from the historical data. Explanation Analysis
- 21. Sample Projected Income Statement
- 22. Sample Projected Balance Sheet
- 23. What Do You Get? <ul><li>Comprehensive BankRisk reporting providing an in-depth perspective on the health of your loan portfolio </li></ul><ul><li>Modeling and reporting handled as a service by TriNovus and delivered electronically each quarter </li></ul><ul><li>Management team training on BankRisk reporting </li></ul><ul><li>Extensive documentation that is beneficial to show regulators during your examination </li></ul>
- 24. So, What Do You Know? <ul><li>Where your significant concentrations are and how the bank should diversify </li></ul><ul><li>How to monitor and project your capital position </li></ul><ul><li>You have valuable data to use to educate your board and management team </li></ul><ul><li>That you are being proactive, not reactive! </li></ul><ul><li>BankRisk will help you tell your story to regulators </li></ul>
- 25. THANK YOU!

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