1. Portfolio Stress Testing One Size Doesn’t Fit All Panel: Bob Koch Dave Kampff

2. History & background Initial focus on CRE Reg. requirements emerge with issuance of 2006 guidelines

3. Obtain current valuation data by portfolio segment Request updated financials, P&L’s, Schedule E’s, etc. Obtain debt service data (or NOI) by portfolio segment Data requirements

4. Consider valuation sources other than appraisals Update financial info for C&I/SBA Update credit reports for consumers Update NOI data for multi-family borrowers Update appraisals where appropriate Data requirements

5. Consider a high level segmentation Multi-family residential Land & construction Consumer mortgages & HELOC’s SBA owner occupied business properties Commercial real estate High level portfolio segmentation

6. Type of property Loan type Industry Ownership/occupancy Property location Examine the demographics…

7. Valuation and LTV (e.g., cap rates, etc.) Impacts on debt service requirement (e.g., interest rates, etc.) Impacts on NOI/Debt service capacity (e.g. rents, op exp, etc.) Possible stress points

8. Economic conditions, trends Consider the portfolio’s stressed performance as it affects bank earnings and capital Stressed portfolio trends based on prior stress tests – Ratings migration analysis Other considerations…

9. Quantifies risk levels under changing market conditions Provides critical analysis for capital and strategic planning Encourages management’s focus on a range of possible future scenarios How stress testing benefits the Bank

10. Develop & run stress test(s) Impact on strategic plansImpact on nonaccruals Impact on Interest Income Impact on debt service capacity Impact on loan (risk) grades Impact on profitability Impact on capital Impact on DSC, LTV ALLL impact The process

11. The Bank’s corporate culture Current Management Information Systems Perception that the portfolio is sound Hurdles Too complex, requires staffing and expertise you don’t have Systems don’t support the ability to work on aggregated/disaggregated data

12. Start simple Breaking down the barriers What are the Bank’s primary concerns Create simple models Thinking about the issues may be as important as the actual stress models Stress one or two variables to start

13. Create the methods and practices to be used Establish the portfolio segments to stress Getting started Decide which variables to stress Create relevant scenarios – BC, WC, MLC Decide which variables to stress Implement systems so you can repeat and improve the process Establish a framework to analyze results

14. Determining the factors to stress Macroeconomic Microeconomic Interest rates NOI Unemployment Vacancy rates Changes in cap rates Appraised value Evaluate Macro influences at the Micro level

15. Stress testing fundamentals Each variable stressed can & likely will result in a number of measurable impacts

16. For example… Stressing a variety of changes in cap rates will yield insight into changes in property value, LTV and more

17. For example… Whereas stressing Gross Rents yields other insights…

18. Stressing entities vs. portfolios Models should work at the entity and portfolio levels Design models to stress independent variables to determine impacts on dependent variables To stress the CRE portfolio, models need to support stressing individual properties/projects Stress Rents for impact on NOI, Cap Rates for impact on LTV, Interest Rates for impact on DSC…

19. Stressing “single” variables Stressing a single variable simplifies testing a broad range of possible outcomes: For C&I deals, evaluate how a 5%, 10%, 15%, 20% reduction in revenue affects profit, EBITDA, UCA Cash Flow, etc. For CRE deals, evaluate how a 5%, 10%, 15%, 20% increase in vacancies affects NOI, DSC, etc.

20. Stress testing fundamentals Stress tests should be constructed to consider a range of possible future outcomes

21. Single variable entity stress testing Analyze the full range of outcomes at the property, business or individual level CRE Example

22. Single variable portfolio testing Stress portfolio segments that operate in a similar space to enhance the test’s relevance

23. Stressing multiple variables Concurrently stressing several variables enhances the ability to test combined impacts on performance For CRE, concurrently stress changes in Rents, Op Exp, Interest and Cap Rates to determine impacts on NOI, DSC, LTV and more For C&I, stress changes in Revenues, Margins, Op Exp, etc. to determine impacts on Profits, EBITDA, UCA Cash Flow and more

24. Stressing multiple variables C&I Example

25. Stressing multiple variables Assess the impact of changes in interrelated drivers on performance. C&I “Entity” Example

26. Stressing multiple variables C&I Portfolio Example Anticipate the impact of changes in key areas affect the capacity of the portfolio or any segment of it.

27. In the final analysis… More effective capital planning Better risk management Improved portfolio performance Effective stress testing at the entity and portfolio level provides substantial benefits: