Financial Oxygen an electronic marketplace

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Disclaimer

• Information contained herein is based on sources
  Banc Investment Group believe to be reliable, but
  its accuracy is not guaranteed. Customers should
  rely on their own outside council or accounting
  firm to address specific circumstances. Banc
  Investment Group is a broker-dealer registered
  with the National Association of Securities
  Dealers.
• These investments are not guaranteed by the
  Federal Deposit Insurance Corporation (FDIC) and
  are not bank deposits.

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Goal of Presentation

• More attention in 2004 to the ALCO process to
  control risk in a volatile interest rate
  environment
• More accurate loan pricing to reflect risk
• Better deposit pricing to maintain margins
• More focus on portfolio liquidity management

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The Rise of Risk in 2004

• State Federal Deficits
• Unemployment the Consumer
• Healthcare Insurance Costs
• Production capacity foreign outsourcing
• Commercial real estate exposure
• Mutual fund indictments
• FNMA / FHLMC
• Terrorism
• Election year politics

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A More Volatile Environment
90bp
65bp
35bp
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Earnings Volatility
Source FDIC
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ALCO Drives the Process

• Senior managers drive process
• All key units represented
• Emphasis on future strategy
• Run as a profit center

CEO Sets the tone
Lending
Finance
Marketing
Retail
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ALCO Is Strategic Thinking
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Benefits Of ALCO Management
100 Fixed
R E T U R N
Less risk, More return
Current Asset Mix predominately floating
100 Floating
RISK

• By incorporating portfolio management techniques
  and proper ALCO management, a bank can more
  efficiently generate returns for a given level of
  risk.

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Pricing Fixed Rate Loans
Many banks still do not take into account the
futures market.
Source Prime swaps curve as of 11/3/03
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Components of Loan Pricing
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It is all about cash flows
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Loan Spreads and Default Rates
Source Moodys Investor Services, Global Credit
Research, Historical Default Rates (Rated
Borrowers).
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Default Rates Continue to Change

• Source Trepp

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Funding Cost Changes

• Funding cost is not a static number
• Prime will lag in a rising rate environment

Source FHLB Des Moines
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Other Loan Pricing Strategies

• Tie more pricing to Libor, as it will move ahead
  of Prime by 5bp to 40bp.
• Develop loan liquidity
• Get proactive with loan pricing
• Sometimes, the best priced loan is the one not
  made.

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Focus on Core Deposits

• Stop at nothing to gain core, non-maturity
  deposits.
• Witness
• Increase in the number of deposit officers (up
  21 for 2003)
• MA activity
• Citigroup purchase of Golden State
• Increase focus on branching
• Bank of America
• Washington Mutual

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Deposit Pricing

• Customer Segmentation
• Product Attributes
• Price
• Service
• Customer relationship
• Channel Preferences
• High-touch or high-tech
• Loyalty Value
• Family or commodity shopper

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Determinants of Performance
Source Determinants of Portfolio Performance
II, by Brinson, Singer and Beebower, Financial
Analysts Journal
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Total Return of Bank Investment Sectors
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Liquidity

• Banks sitting on high liquidity.

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Breakeven of Investment
Depending on amount of rate increase, coupon
usually overwhelms potential mark-to-market.
Note Model 10mm mortgage portfolio on a total
return basis versus Cumulative Fed Funds sold
invested overnight. All cash flow is reinvested a
the then prevailing rate assuming a constant
spread.
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Conclusion

• 2004 will be a volatile year. Successful banks
  will
• Adopt a more disciplined approach to loan and
  deposit pricing.
• Drive portfolio liquidity management
• Set the standard for the competition

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Banc Investment Group Products

• Banc Investment Group maintains specialized bank
  products and services to enhance bank
  performance.
• These include
• Funding lines
• Brokered and non-brokered CD issuance
• Overnight Money market alternatives
• ATM Funding at Federal Funds 50bp
• Secured Federal Funds at Fed Funds 35p
• FDIC Portfolio Deposits at Federal Funds 20bp
• Loan brokerage (Performing and non-performing)
• Portfolio accounting and analytics
• Tax reduction products
• Tax preferred issuance (Reduced Fee)
• CRA loan and investment products
• Performance, Risk and ALM consulting