1. Evaluating Financial Institution Financial Condition NCLGIA Summer Conference 2014 The NC Capital Management Trust K. Lee Carter Gary Porter

2. Background Government is making a loan to the depository Insurance and collateralization are backup systems See discussion from Policies Manual – Some risks of under-collateralization (although slight) – Reputational risk – May take time to fully recover insured and collateralized funds – government may have liquidity problems – Make sure that accounts are coded as public funds accounts – No brokered deposits – File INV-91

3. Background (cont.) Government should select a sound financial institution as a depository – Should be evaluated during selection process – Ongoing evaluation of financial condition required – Note: see slide on continuous monitoring

4. b. Financial Criteria Periodically, concern is raised by units of government concerning the financial soundness of banks and savings institutions. This concern may arise because of changes in economic conditions or from unsound banking practices. It is important that the units assess the financial strength of the institutions with which they regularly transact business. To that end, the staff of the Department of State Treasurer has outlined various methods of analysis to help units obtain a better understanding of the financial position of banks and savings institutions. The areas that will be covered are merely guidelines and do not represent an all-inclusive analysis of a particular institution. These are presented in Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution. Department of State Treasurer – Policy Manual for Local Governments Section 30: Cash and Investments Part II – Procurement of Banking Services

5. One may ask why a financial institution should be analyzed if the local government is properly insured or collateralized with respect to its deposits and investments. The staff of the Department of State Treasurer strongly urges units to place the soundness of a financial institution ahead of collateralization or insurance. Even when deposits of a unit are adequately protected by insurance or collateralization, a significant amount of time may be required before public funds are completely recovered; consequently, a unit may have liquidity problems if it needs immediate access to funds. This means that first level of protection for having funds available when needed is to place public funds only with financially-sound institutions. A unit is making a loan to a financial institution when it deposits funds and should ensure that all financial institutions utilized are financially sound. Department of State Treasurer – Policy Manual for Local Governments Section 30: Cash and Investments Part II – Procurement of Banking Services

6. Department of State Treasurer – Policy Manual for Local Governments Section 30: Cash and Investments Part II – Procurement of Banking Services 6. Continuous Monitoring of Safety and Soundness of Financial Partners After a bank is selected, the contract awarded and transition completed, it is important to continue to monitor both performance under the terms of the contract and the safety and soundness of banks and other financial institutions transacting business with the unit. An evaluation of the financial condition should be performed no less frequently than annually and quarterly evaluation is encouraged.

7. Sources of Information FDIC (fdic.gov) – for individual credit analysis – Can access Uniform Bank Performance Reports from the Federal Financial Institutions Examinations Council (www.ffiec.gov) Comptroller of the Currency, NC Commissioner of Banks, etc. Rating agencies (Moody’s, S&P, Fitch) Independent agencies – Bauer Financial Star ratings – Bank Rate.com Star ratings Financial statement statistics See Policies Manual for contact information

8. LGC’s Recommended Objectives Capital adequacy Earnings Problem loan experience Liquidity Look at trend analysis over a multi-year period

9. Trend Analysis Growth in equity (hopefully from profit) Earnings growth Growth in problem loans Asset Growth

10. Ratio Analysis Capital Adequacy – Banks are highly levered – Tier One Risk-Based Capital to Risk-Weighted Assets① Adequately-capitalized - >= 6% Well-capitalized - >=8% – Total Risk-Based Capital to Risk-Weighted Assets② Adequately-capitalized - >= 8% Well-capitalized - >=10% – Tier One Leverage Ratio③ Adequately-capitalized - >=4% Well-capitalized - >=5% – Common Equity Tier One Risk-Based Capital Ratio Adequately-capitalized - >=4.5% Well-capitalized - >= 6.5% – Cash Dividends to Net Income – Dividend Payout Ratio④

17. Ratio Analysis(cont.) Profitability – Net Interest Margin as Percent of Average Assets⑤ – Net Operating Income as Percent of Average Assets (1%)⑥ – Earnings Assets as Percent of Average Assets (>90%)⑦ Asset and Earnings Quality – Non-current Loans to Total Loans (~.5%)⑧ – Provision for Loan Losses as Percent of Average Assets (<.5%)⑨ – Allowance for Loan Losses as Percent of Total Loans (1.25%-1.5%) ⑩ Liquidity – Net Non-Core Fund Dependence (~25%)⑪ – Net Loans and Leases to Assets (70%-75%, should not exceed 80%) ⑫

18. Asset Size# InstAvg Earn AssetsNet InterestNIM % >1 Trillion45,677,811,356,00042,069,178,0002.96 100-999 Billion172,858,197,679,50019,726,744,0002.76 50-99 Billion14955,004,266,0008,586,348,0003.60 5-49 Billion1371,634,689,681,00015,400,488,0003.77 1-4.9 Billion475850,510,362,5007,679,953,0003.61 500-999 Million647411,995,712,0003,766,168,0003.66 250-499 Million1,157371,667,184,5003,350,328,0003.61 100-249 Million2,003298,154,419,0002,746,933,0003.69 50-99 Million1,09474,475,532,500675,142,0003.63 0-49 Million69620,820,097,500185,876,0003.57 6,24413,153,326,290,500104,187,158,0003.17 Source: BankRegData.com Net Interest Margins by Bank Size

19. FDIC Certificate # 27476FRB District 1386251BANCFIRSTOKLAHOMA CITY, OK Capital Analysis-a OCC Charter # 0County: OKLAHOMACapital Analysis--Page 117/9/14 Public Report 12/31/1312/31/1212/31/11 Capital RatiosPG 1PCTBANKPG 1PCTBANKPG 1PCT Percent of Bank Equity: Net Loans & Leases (x)5.49676.335.28736.035.2766 Subord Notes & Debentures1.47102.036602.7261 Long Term Debt1.47102.036602.7261 Com RE & Related Ventures173.5878264.55164.6778243.37174.7770 Risk-Based Capital Tier One RBC to Risk-Wgt Assets ①13.434712.3813.973412.914.1240 Total RBC to Risk-Weight Assets ②14.734213.4315.442914.0515.730 Tier One Leverage Capital ③9.86157.849.76168.079.5919 Other Capital Ratio: Def Tax Asset to T1 Cap3.85321.232.77430.792.5542 Uniform Bank Performance Report from FFIEC

20. Uniform Bank Performance Report FDIC Certificate # 27476 FRB District/ID_RSSD 10 / 1386251BANCFIRSTOKLAHOMA CITY, OKSummary Ratios OCC Charter # 0County: OKLAHOMASummary Ratios--Page 17/2/2014 Public Report 12/31/1312/31/1212/31/11 Earnings and ProfitabilityBANKPG 1PCTBANKPG 1PCTBANKPG 1PCT Percent of Average Assets: Interest Income (TE)3.063.61193.213.82203.484.0224 - Interest Expense0.20.36240.280.46270.430.6227 Net Interest Income (TE) ⑤2.853.22232.943.33253.053.3631 + Noninterest Income1.331.05731.251.13651.281.167 - Noninterest Expense2.772.72492.812.75492.872.7855 - Provision: Loan & Lease Losses ⑨0.020.14260.050.32210.090.4716 Pretax Operating Income (TE)1.391.43481.331.42441.371.2258 + Realized Gains/Losses Sec00.02450.090.04800.040.0556 Pretax Net Operating Income (TE)1.41.45471.421.47481.411.2656 Net Operating Income ⑥0.931.01430.921.03400.90.8752 Adjusted Net Operating Income0.930.96490.940.96510.930.7161 Net Inc Attrib to Min Ints008100 0080 Net Income Adjusted Sub S0.931440.921.02410.90.8553 Net Income0.931.01440.921.03410.90.8753 Margin Analysis: Avg Earning Assets to Avg Assets ⑦92.992.055892.9691.895993.2391.5162 Avg Int-Bearing Funds to Avg Assets57.0277.39559.0977.8761.7478.597 Int Inc (TE) to Avg Earn Assets3.293.93183.464.16213.734.421 Int Expense to Avg Earn Assets0.220.39240.30.5260.460.6826 Net Int Inc-TE to Avg Earn Assets3.073.5233.163.63233.273.6727

21. Uniform Bank Performance Report Loan & Lease Analysis: Net Loss to Average Total LN&LS0.030.3140.070.61110.090.9310 Earnings Coverage of Net Losses (X)85.7116.759138.2910.289028.485.5893 LN&LS Allowance to LN&LS Not HFS1.151.44301.21.73231.31.9919 LN&LS Allowance to Net Losses (X)41.138.839219.0759214.552.9195 LN&LS Allowance to Total LN&LS ⑩1.151.43301.191.68231.291.9120 Total LN&LS-90+ Days Past Due0.030.29440.020.47300.030.6132 -Nonaccrual0.421.05160.631.54200.622.2116 -Total ⑪0.461.46120.652.22150.653.1611 Liquidity Net Non Core Fund Dep New $250M ⑪-47.8512.891-47.9711.892-44.6415.091 Net Loans & Leases to Assets ⑫55.6163.362653.3560.792953.0360.3427 Capitalization Tier One Leverage Capital8.249.86157.849.76168.079.5919 Cash Dividends to Net Income ④39.0843.084537.2245.694538.8929.7859 Retained Earnings to Avg Total Equity6.294.24726.683.71756.123.8569 Rest+Nonac+RE Acq to Eqcap+ALLL6.9711.48328.7414.8316.3819.7518 Growth Rates Total Assets0.265.92811.047.87012.467.9373 Tier One Capital7.757.82587.697.43595.7811.0735 Net Loans & Leases4.519.474211.729.19636.268.5560 Short Term Investments-0.444.885515.5323.33579.9224.1653 Short Term Non Core Funding-26.6310.681316.94-2.2776-69-23.668 Average Total Assets5,815,3815,707,2275,138,140 Total Equity Capital536,926506,187475,448 Net Income53,87352,32146,137

22. BankRate™ Memo Example

32. Bauer Financial Star Ratings