Monthly Alco Package September 2010

www.pcbb.com www.bancinvestment.com

MONTHLY ALCO PACKAGESeptember 2010

Thefallingofas

Performancebehaviorcontinue

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Economic and Banking Summary In a blink of an eye, summer and the month of August has come to an end. It was yet another month of surprising momentum shifts and unpredictable headwinds, making ALCO more eventful than this year’s summer vacation. Wall Street continues to whimper and wail. S&P was down -6.83% and the Dow followed by -6.23%. Fixed income yields continue to slide with 10yr Tres. dropping 43bps for the month. Consumer confidence surprised market expectations by posting a higher than expected 2.5 point increase to 53.5% in late August. Despite this positive surprise, consumer sentiment incurred a downward revision by .7 points the very same day. GDP was revised down by 0.8% points to 1.6% indicating an economic recovery that is losing steam. To counter that, the employment report came out and was more positive than expected. Non-farm payroll employment changed little (-54k) in August despite the runoff of Census workers. The headline Unemployment Rate went from 9.5% to 9.6%. The real positive in the data was that the past month was revised upward, private-sector payroll employment continued to trend up modestly (+67k) and temporary Help workers increased by 16.8k, a sign of potential future hiring. August 10th’s FOMC minutes were similar as the previous with inflation subdued, financial markets more supportive of growth, and agreed to maintain the target range of 0 to ¼ percent Fed Funds rate. The quantitative easing discussion picked up steam and the FOMC decided to reinvest their mortgage prepayments into Treasuries. While this will help lower intermediate yields, the real significance is that this is really the first time we have seen a long term concerted effort to utilize the Fed’s balance sheet. Normally, economists have not considered the balance sheet as a long-term tool of monetary policy. In terms of our industry, we are getting more of a “middle class.” While the problem bank list has increased to 829, it has been the slowest increase in new banks added since the crisis began. Except for those banks, the majority of community banks are starting to get back on their feet with 2Q showing an improvement in earnings and a slow down in asset quality problems. Loan growth has been next to non-existent, so the last several months have been marked by more resources devoted to generating earnings. Capital has become more plentiful with several notable deals in the market giving other bank groups hope. As we head into September, it is strategic planning time with many banks working on trying to generate more fee income, being opportunistic when it comes to M&A and working on raising capital. Other common projects include reducing the size of the branch network, increasing the online banking platform, getting on a profitability system, customer segmentation and joint venturing in order to generate quality loan growth. Finally, it is worth noting that a significant number of banks are taking a look at how to restructure their depository line up. Retail account types such as high-yield checking and even free checking cost banks money that are hurting earnings. Most major banks have now instituted minimum service charges, have transitioned account to an all electronic channel or have required other activity in which to make a profit. In addition, many banks are trying to prepare for what to with their business checking now that many banks will start to pay interest on this account type by mid-2011. While we are not sure where profitability heads next year, we can tell you that we cannot remember a time when the basic banking business model was so much in question. If there was ever a need to think strategically in the history of banking, it would be now. Chris Nichols President & CEO

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Lending Activity The most recent Fed survey had positive news for banks seeking loan volume: “On balance, demand for C&I loans from large and middle-market firms and from small firms changed little in the July survey.” The Fed’s senior lending officer survey in July represents the first time in three years that demand has stopped falling. However, the news is not all good for community banks. The problem is that national and large regional banks are rolling out the red carpet for qualified borrowers, lowering rates and offering 5 to 25-year fixed rate loans. In this rate environment, community banks are finding it difficult to commit funds at historically low rates, or taking interest rate risk by extending duration. We can help banks better understand the market and price their loans on a floating equivalency. If you want to price loans on our hedge platform we can permission you on our model without costs -let us know and we’ll set you up. We also offer a hedging program designed for community banks (no derivative accounting and easy to deliver to the borrower) to allow our banks to compete against national and larger regional competitors. The benefit of using our hedge pricing platform is that bankers can see why/how Bank of America intends to make money offering 20-year fully amortizing loans at 5.00% fixed. Ed Kofman Managing Director - Derivatives Desk

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Certificate of Deposit Issuance Overall bank activity in the brokered deposit market was down for the month of August, but this is a historically light month for issuance. Though volumes were down, issuance was steady throughout most of the month. Treasuries continue to rally, and yields are hitting historic lows. Funding costs are following the markets lead, and banks are able to raise deposits at historic lows as well. The short end did not move much as rates have pretty much bottomed out in this area of the curve. Short term funds are still trading at all in cost levels lower than the traditional standard fees for these terms. There has been an extreme lack of issuance inside of one year as the majority of issuers are taking advantage of these extreme lows and locking in longer term funding. With the summer coming to an end and the month being a quarter-end month, we anticipate issuance to increase in September. There isn’t much room for rates to fall further, and rates should begin to stabilize on the long end. Now is a good time to lock in funding as the lack of names in the market brings less competition for deposits, thus cheaper funding. Don Saunders Managing Director - Brokered CD's

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Fixed Income Historical and current spreads vs. Treasuries for MBS and Agencies are listed below.

MBS Agencies 15Y 30Y 2Y 5Y 10Y 30Y 5YR High 312 238 182 159 175 168 5YR Low 72 54 -16 2 -5 25 5YR Avg 133 124 37 46 46 51 1YR High 143 105 31 38 47 50 1YR Low 97 54 -16 2 -5 25 1YR Avg 118 76 13 25 29 40 90 Day High 128 91 27 37 36 50 90 Day Low 106 54 9 9 16 25 90 Day Avg 117 74 19 25 27 37 30 Day High 129 91 17 30 31 30 30 Day Low 111 54 10 18 16 25 30 Day Avg 118 76 13 24 22 27 Last 121 82 17 25 27 28 Data Source: Bloomberg

Fixed Income: Trading activity picked up in August as bankers took advantage of near historic low yield levels selling short maturing bonds to book gains and reinvested funds in longer duration bonds. Investors focused primarily on well - structured 2-5Y duration agency CMOs, preferring locked-out structures which were hard to come by. 10Y and 15Y MBS continued to see good demand despite the lofty premium dollar prices. Treasury yields continued to decline with the 2Y reaching an all-time intra-day low 0.45% on 8/24/10. By the close of the month the 2Y fell 8bp vs. the previous month. The 5Y, 10Y and 30Y fell 26bp, 44bp and 48bp respectively. Agency spreads did not give up too much ground with the 2Y widening 2bp, 5Y +6bp, 10Y +7bp and 30Y nearly unchanged. Agency MBS had mixed results. The 15Y sector did well and widened only 2bp, while the 30Y sector suffered amid growing speculation that a government induced refi wave may occur and concerns that lower yield levels in general may spark greater re-fi activity. 30Y MBS spreads widened out 30bp. Looking ahead, MBS prepayments are expected to increase as the refi index jumped for a 4th consecutive week and reached levels not seen since early 2009. However, the impact should be lessened due to many mortgage originators experiencing constrained capacity, extending loan lock-out periods to 90 days and instituting tighter underwriting standards. Additionally, with approximately 25% of mortgage holders underwater on their existing home loans, a weak jobs market and high fees and points associated with refinancing should dissuade some folks from doing so. Maxine Lew Director - Fixed Income

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Credit & Risk Management When evaluating this decade’s rate experience, we can see 3 times where market rates have changed by at least 4 points (over a 2 year time horizon). Two of these changes have been to the down side (falling rates) and we are now awaiting the uptick in market rates. As we can see from history, this uptick has the potential to be in the range of 4+ points (over a 2 year time horizon).

‐6.00 ‐4.00 ‐2.00 0.00 2.00 4.00 6.00

Fed Effective

5Y Swap

10Y Swap

Rolling 2 Year Change in Index(July ‐ to ‐ July)

2002 2003 2004 2005 2006 2007 2008 2009 2010

This uptick has the potential to impact bank earnings from three perspectives. First on the funding side, banks will need to be diligent in holding the line on deposit pricing which may prove difficult. Many banks are currently flush with customer excess liquidity and that excess liquidity will tend to cycle out of the bank as alternative instrument options (non-bank) will become more prevalent as rates start to rise. Second on the loan side, earnings will be restrained by existing loan floors that are embedded in adjustable and/or variable rate loans. Short-term market rates will need to move upwards by at least 2 points to return these assets to an upward adjusting rate loan. Third and most importantly, as rates rise (especially over the next 3 points), there will be a significant and negative impact on rate risk assumed by individual borrowers. Unfortunately, as rates rise (which is good for bank earnings as adjustable rate produce additional interest income) credit quality will likely fall. Higher debt service payments (due to rising rates) will place additional strain/stress on credit quality by increasing debt service on borrowers and forcing some borrowers into default at a time where secondary sources of loan repayment (collateral) will still be suffering from the lingering impact of declining collateral values, all of which will increase loan losses. Prudently managed banks will incorporate note level ALM results (derived from their up 3 & 4 point rate shocks) into their note level Loan Stress Testing models to determine both expected levels of non-accrual loans as well as charge-offs/provisions associated with these loans. Once the value of non-accrual loans and loss/provision has been determined, these values need to be incorporated back into ALM models to determine the impact on; earnings, earnings sensitivity and capital. If these integration steps are not incorporated into bank risk assessment processes, then capital plans will be material distorted as significant amounts of risk will not be measured. Doug Hensley Managing Director

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Funding The following are some items that are frequent concerns today when we talk with bankers:

1. The bank is liquid 2. Investment and lending opportunities are difficult 3. The bank needs to earn more money

The first item is becoming more of an issue for banks in general. One reason is related to regulatory and operational pressures as banks are typically carrying more on-balance sheet liquidity than in the past. Another reason is the difficult economic climate of today which affects both assets and liabilities – excess liquidity is not just an asset driven event. The results are clearly seen as the average loans to assets ratio has fallen below 70% of TA. Several years ago it was not uncommon to see banks with ratios over 80%. Not today. The reality is banks will likely have more conservative loans to assets ratios going forward, and this will affect the asset yields of banks, perhaps permanently. The second item is similar to the dilemma banks were facing in 1992-1995 when we were in a recession and interest rates were low. Holding fed funds sold as an asset typically resulted in a negative spread vs. the funding held against it, and pursuing investment and lending activity to boost yields was not without risks. Unlike the last time when interest rate risk was the primary concern, many banks today are also contending with capital, asset quality, and underwriting issues or concerns. Some banks are choosing to make or purchase loans, while others are not. This brings us to the third item - making more money. For most bankers, this traditionally means finding ways to move forward with lending and/or investing activity. This is a strategy that comes naturally to bankers, but banks must carefully manage the risks that come with this, especially in today’s environment. One of the most overlooked ways for a bank to increase its income (in any banking environment) is to make improvements in funding performance. Banking is rather simple at its core, as banks buy money on one side of the balance sheet and sell it on the other. How banks do this is important, as a characteristic of banks that fail or experience difficulty is often an elevated cost of funds. If your money selling activity is constrained, or if it results in elevated risk, then doesn’t it make sense to reduce your cost of buying money? For the banks that make funding performance a priority, the results can be dramatic. Over the last 18 quarters, one of our Liability and Strategic Coach clients in a competitive market was able to save (increase revenue) a cumulative $76 million due to it having lower funding costs than its national $1-3 billion TA peer group average. Currently, the bank is saving about $5.6 million per quarter compared to this peer group. The bank works very hard to ensure that its superior funding performance continues, and is careful not to take its eye off the ball which can be so easy to do. By having lower funding costs, the bank has been able to maintain a less intensive asset risk profile historically which is paying huge dividends today. Whether your bank is able to achieve results like this, or if it simply moves from the 70th COF percentile to the 50th, the performance improvements go directly to your bottom line, and can help reduce the overall risk profile of your bank. If you are interested in learning about your bank’s potential, or better yet, getting started on improving your bank’s performance, please give us a call. Greg Judge Liability and Strategic Consulting

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Loan Pricing and Customer Profitability Data mining to find profits While the primary purpose of our Relationship Profitability services is to identify the profitability of every customer, product and relationship officer at the bank, a side benefit is our ability mine the customer data for additional profit opportunities. The following are a few items we routinely look at. Waivers on deposit service charges – Is the bank waiving fees to its best or worst customers? It is common to find that over half of the customers who have had their fees waived are not profitable to the bank. While having the customer’s profitability certainly makes this analysis easier, it is also possible to simply view the customer’s overall relationship and make a high level judgment about the worthiness of waiving these fees. Deposit fee structure – With the changes in the overdraft fee assessments combined with the current low rate environment, free checking account products currently ranked toward the bottom of the list. As such, we routinely analyze the cost / benefit of applying service charges on these accounts. For the average $500 million commercial bank we estimated that there is a $.5 million to $1.5 million annual income opportunity to implementing service charges while not incurring significant attrition risk. Cross Sell opportunities – Cross sell ratios generally range between 2.1 and 2.7. However this number alone doesn’t readily show the underlying opportunities. Consider that over 50% of the customers have only one account with bank and that 20% - 25% of the customers did not have a checking account. Effective cross selling is essential in retaining more customers as studies show that the more products a customer uses, the lower the likelihood they are to leave and there are numerous opportunities. Data mining for cross sell opportunities should be a top priority at every bank. Utilization of floors - While we are normally strong proponents of utilizing floors in loan pricing strategy, we believe that in this interest rate environment the strategy of setting the initial rate to the floor will erode long term profitability. For example, take a loan priced at Prime + 1% with a floor of 5.5%. With Prime at 3.25%, the computed interest rate of that loan is 4.25%. However, with the floor, the initial rate for that borrower is at 5.5%. In doing so, the bank has placed a credit premium on this loan of 2.25% (5.5% floor less Prime of 3.25%). As market interest rates increase, the implied credit premium decreases to 1%. Yet the borrower’s actual credit risk profile may or may not have changed. In addition, the bank’s net interest margin will suffer when market interest rates start to rise. Not only will this loan act as a fixed rate loan for the first 125bp point increase, it will continue to be priced at only 1% over Prime for the life of the loan. The bank would have been better off pricing that loan at 2.25% over Prime, thus holding the credit premium constant over the life of the loan. Should that borrower’s credit quality change at some later date, the bank and the borrower can renegotiate terms at that time. At a minimum, an analysis should be performed to understanding the bank’s utilization of floors and how much of an increase in rates is required for these loans to move off of their floors. Loan renewals – How many loans are coming up for renewal in the next 6 months? With a tight credit market and deteriorating credit quality, an increase in loan rates may be warranted. Simply quantifying and understanding the impact of increasing spreads by 25bps – 100 bps on upcoming maturities is a worthy exercise for any ALCO group. For the average $500 million community bank, it is not unusual to see 10% - 20% of the portfolio renewing on annual basis, thus resulting in significant opportunities to reprice the portfolio in a short amount of time.

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Loan Pricing and Customer Profitability While overlaying customer profitability data on all of these analysis increases the power of the analytics, these analysis can still be done without the profit calculations. Doing so may yield significant profit opportunities. Probabilities of Default Month in Review – PD’s have remained mostly unchanged from the previous month. However, as we will be incorporating a recent review of cure rates and vintage performance, users can expect to see PD’s come down in BIG’s model in the near future. Kim Jackson Managing Director Mike Middleton Managing Director

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Loan Pricing and Customer Profitability

Prime 2yrswap 5yrswap 10yr swap3.25% 0.69% 1.64% 2.62%

YieldsLending Class Prime 2yr 5yr 10yrAg - farm land 5.02% 5.33% 6.02% 6.26%Ag - production 4.86% 5.17% 5.83% 6.07%Construction -Commercial 6.12% 6.64%Construction multifamily 6.12% 6.69%Construction Residential 6.12% 6.79%Construction Other 6.12% 6.94%Consumer 5.02% 5.33% 6.02% 6.26%Hotel 5.63% 5.98% 6.75% 7.03%Industrial 5.07% 5.39% 6.08% 6.33%Manufactured Housing 5.07% 5.39% 6.08% 6.33%Mixed Use 5.07% 5.39% 6.08% 6.33%Multifamily 5.12% 5.46% 6.16% 6.41%Office 5.12% 5.44% 6.14% 6.39%Retail 5.12% 5.44% 6.14% 6.39%Self Storage 5.02% 5.33% 6.02% 6.26%Other 5.12% 5.44% 6.14% 6.39%

SpreadsLending Class Prime 2yr 5yr 10yrAg - farm land 1.77% 4.64% 4.38% 3.64%Ag - production 1.61% 4.48% 4.19% 3.45%Construction -Commercial 2.87% 5.95%Construction multifamily 2.87% 6.00%Construction Residential 2.87% 6.10%Construction Other 2.87% 6.25%Consumer 1.77% 4.64% 4.38% 3.64%Hotel 2.38% 5.29% 5.11% 4.41%Industrial 1.82% 4.70% 4.44% 3.71%Manufactured Housing 1.82% 4.70% 4.44% 3.71%Mixed Use 1.82% 4.70% 4.44% 3.71%Multifamily 1.87% 4.77% 4.52% 3.79%Office 1.87% 4.75% 4.50% 3.77%Retail 1.87% 4.75% 4.50% 3.77%Self Storage 1.77% 4.64% 4.38% 3.64%Other 1.87% 4.75% 4.50% 3.77%

For information regarding our Loan Pricing Model or Customer Profitability Services, please contact Kim Jackson, Mike Middleton or Janet Leung at 877-777-0412, [email protected]

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BIG Metrics Texas ratio trend lines for Q2 leveled off slightly from Q1 as the nationwide Texas ratio average fell to 39.4% from 41.1% a quarter ago. The state of Washington had the highest Texas ratio but even there, the level declined slightly from Q1.The state of Michigan, last quarter’s Texas ratio “leader,” improved to 5th place, while the lowest Texas ratio in the nation was found in Massachusetts, which has had the lowest ratio for the past 5 quarters. For the record, Texas’ Texas ratio was 30.7% in Q2, putting the Lone Star state in 35th place overall. If you like data, you’ll love BIG Metrics. Give us a call today for your free tour.

Michael Stinson Vice President – BIG Metrics

Real Estate Market Trends - Special Report

Overview

Mutifamily Market

Quarterly Cap Rates 2006-2010 National Quarterly Conditions

Period Cap Rate Rent % Δ Vacancy Rate

Present Qtr 2Q 10 7.30% Q3 09 $971 -2.0% 7.9%Market Low 1Q 06 6.14 Q4 09 964 -0.7 8.0Market High 3Q 09 7.60 Q1 10 967 0.3 8.0

Q2 10 973 0.6 7.8Top Markets Bottom Markets Y 09 964 -2.9 8.0Charleston 4.8% Las Vegas -3.9% Y 10 978 1.5 7.8Colorado Springs 4.4 Tacoma -3.0 Y 11 995 1.7 7.2Columbia 4.3 Westchester -2.3 Y 12 1,021 2.6 6.7US Aggregate Revenue Growth -0.1 Y 13 1,052 3.0 6.4

Source: Reis, Inc.

According to the Bureau of Economic Analysis, for the first time in 4Y growth was generated in consumption, fixedinvestments, exports, inventories and government expenditures. Wrapping up the 1H, GDP grew an annualized 2.4%in the 2Q down from 3.7% in the 1Q. Real estate properties performance continued mixed, with multifamily propertiesleading the pack and retail still languishing. The 2H of 2010 may not look as brightly as the economy wanes.

The multifamily sector surfaced from its bottom, following a 2nd quarter of rising rents and posting the 1st quarter offalling vacancies in over 2Y. Net absorption totaled over 46k units, the largest quarterly gain in occupied space in 10Yof which 70% stemmed from existing buildings. However, completions remained 57% vacant, up from 53% in the 1Q,as asking rents topped existing properties by 15%. 1 in 10 new properties were at least 30% vacant.

Performance may not grow in a linear fashion as long as job growth remains questionable. NY exemplified thisbehavior this quarter, with both vacancy and rents rising. As for the next several years, expect net absorption tocontinue around 100k units and annual completions to remain well below 100k units.

Office1gainreportedproperties

Netandcompletionsvacancieswitnessed

Regionalasking

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Office Market


Period Cap Rate Net Absorption Rent % Δ Vacancy Rate

Present Qtr 2Q 10 7.37% Q3 09 -19.2 $22.87 -2.2% 16.6%

Market Low 2Q 07 6.22 Q4 09 -13.9 22.43 -1.9 17.0Market High 1Q 10 8.23 Q1 10 -10.8 22.25 -0.8 17.3

Q2 10 -1.4 22.07 -0.8 17.4Top Markets Bottom Markets Y 09 -79.0 22.43 -8.9 17.0Pittsburgh 2.2% Orange County -13.9% Y 10 -14.3 22.01 -1.9 17.7New Haven 0.4 San Jose -13.7 Y 11 29.6 22.18 0.8 17.3Charleston -0.2 Phoenix -12.6 Y 12 48.5 22.63 2.0 16.8US Aggregate Revenue Growth -6.9 Y 13 59.5 23.29 2.9 16.1Retail Market

Regional & Super Regional

Vacancy Rate

3Q 09 8.6%4Q 09 8.81Q 10 8.92Q 10 9


Period Cap Rate Net AbsorptionRent Rent % Δ Vacancy Rate

Present Qtr 2Q 10 8.58% Q3 09 -4.4 $16.89 -7.0% 10.3%Market Low 2Q 07 7.74 Q4 09 -2.5 16.75 -0.8 10.6Market High 2Q 09 9.97 Q1 10 -2.5 16.62 -0.8 10.8

Q2 10 -2.2 16.53 -0.5 10.9

Top Markets Bottom Markets Y 09 -22.1 16.75 -3.7 10.6Louisville 1.1% Providence -7.8% Y 10 -6.9 16.42 -2.0 11.3Memphis -0.3 Orlando -7.6 Y 11 -1.6 16.30 -0.7 12.0Denver -0.9 Rochester -7.5 Y 12 17.9 16.37 0.4 11.9

-3.7 Y 13 32.2 16.62 1.5 11.3

Source: Reis, Inc.

US Aggregate Revenue Growth

fixed%

properties

ofY

Q,

thisto

Office vacancies rose in 49 of 82 markets, falling from 60 in the 1Q and 67 at the end of 2009. The market dropped1.4mm sq. ft in occupied space in the quarter. However, submarkets with business districts posted a net absorptiongain of 2.6mm sq. ft. as some businesses attempt to catch the bottom and lock in lower rent prices. Only Pittsburghreported a YOY rise in revenue / sq. ft, although some submarkets reeled in growth over 10%. Overall, nearly half of allproperties saw asking rents drop with effective rents falling another 80bp. 65 of 82 markets took on declines.

Overall,benefitnet

Net absorption continued in the negative, dropping 2.2mm sq.ft. for neighborhoodand community shopping centers as demand remained muted. With this in mind,completions totaled only 355k sq. ft. (the lowest quarterly addition in 10Y) leavingvacancies up only 10bp, the lowest rise since the end of 2007. 31 of 80 marketswitnessed a rise in vacancies in the quarter while rents dropped in 67.

Regional and super regional malls hit the 7th consecutive quarter of both fallingasking rents and yet another record vacancy rate (9%).

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Industrial Market

Top Markets 2009

Baltimore -1.1% Net Absorption Rent % Δ Vacancy Rate

Jacksonville -1.5 Y08 -1.7 $4.65 -1.1% 10.2%Pittsburgh -1.9 Y09 -72.7 4.35 -6.5 11.4US Aggregate Rent Growth -6.5 Y10 -16.7 4.18 -3.9 11.8

Bottom Markets 2009 Y11 43.9 4.19 0.2 11.5Miami -9.6% Y12 71.8 4.28 2.1 11.1Palm Beach -9.4 Y13 82.4 4.39 2.6 10.9Tampa - St. Petersburg -8.8 Y14 109.3 4.52 3 10.6

Source: Reis, Inc.

National Quarterly Conditions

droppedabsorptionPittsburgh

all

Overall, industrial performance will gain from growth in the global economy and port cities will be among the first tobenefit. For some markets, like Dallas and Houston, the turn around will begin in the latter half of this year with positivenet absorption. As for the rest, the 2H will slow compared to the first half as the domestic economy wanes.

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INTEREST RATE RECAP08/31/10 07/30/10 06/30/10 08/31/09

SHORT RATES Now Now Change Prior Change Now Change

Fed Funds 0.25% 0.25% 0.00% 0.25% 0.00% 0.25% 0.00%Prime 3.25% 3.25% 0.00% 3.25% 0.00% 3.25% 0.00%1M Libor 0.26% 0.31% -0.05% 0.35% -0.09% 0.26% 0.00%2M Libor 0.27% 0.37% -0.10% 0.43% -0.16% 0.28% -0.01%3M Libor 0.30% 0.45% -0.16% 0.53% -0.24% 0.35% -0.05%4M Libor 0.36% 0.52% -0.16% 0.60% -0.24% 0.52% -0.16%5M Libor 0.43% 0.59% -0.16% 0.67% -0.24% 0.67% -0.24%6M Libor 0.50% 0.67% -0.17% 0.75% -0.25% 0.76% -0.26%1Y Libor 0.84% 1.04% -0.19% 1.17% -0.33% 1.33% -0.49%

TREASURY RATES

2Y Note 0.47% 0.55% -0.08% 0.61% -0.14% 1.33% -0.86%3Y Note 0.70% 0.82% -0.13% 0.97% -0.27% 1.95% -1.25%4Y Note 1.03% 1.20% -0.17% 1.43% -0.40% 2.41% -1.38%5Y Note 1.33% 1.60% -0.27% 1.78% -0.44% 2.76% -1.43%7Y Note 1.92% 2.30% -0.38% 2.41% -0.50% 3.23% -1.31%10Y Note 2.47% 2.91% -0.44% 2.93% -0.47% 3.62% -1.15%30Y Bond 3.52% 3.99% -0.47% 3.89% -0.37% 4.09% -0.58%

SWAPS FIX VS. 3M LIBOR

2Y Swap 0.66% 0.73% -0.07% 0.97% -0.31% 1.33% -0.67%3Y Swap 0.95% 1.07% -0.12% 1.33% -0.38% 1.95% -0.99%4Y Swap 1.26% 1.43% -0.16% 1.71% -0.44% 2.41% -1.15%5Y Swap 1.56% 1.78% -0.21% 2.05% -0.49% 2.76% -1.20%7Y Swap 2.05% 2.36% -0.32% 2.56% -0.51% 3.23% -1.18%10Y Swap 2.49% 2.89% -0.41% 3.00% -0.51% 3.62% -1.13%15Y Swap 2.87% 3.37% -0.50% 3.42% -0.55% 3.91% -1.04%

-0.08%

-0.13%-0.17%

-0.27%

-0.38%

-0.44%-0.47%-0.50%

-0.41%

-0.32%

-0.23%

-0.14%

-0.05%

2Y Note 3Y Note 4Y Note 5Y Note 7Y Note 10Y Note 30Y Bond

Month to Month Treasury Yield Change

topositive

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PROJECTED FEDERAL FUNDSSurvey Date: 8/10/2010

Dealer Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011

Action Economics 0.25% 0.25% 0.25% 0.25% 1.00% 1.50%Barclays Capital * 0.25% 0.25% 0.25% 0.25% 0.50% 1.00%BBVA 0.25% 0.25% 0.25% 0.25% 0.50% 0.75%BMO Financial 0.25% 0.25% 0.25% 0.25% 0.50% 1.00%BOT - Mitsubishi 0.25% 0.50% 1.00% 1.50% 2.00% 2.50%Commerzbank AG 0.25% 0.25% 0.25% 0.25% 0.50% 1.00%Credit Suisse FB * 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%Deutsche Bank * 0.25% 0.25% 0.50% 1.00% 1.50% 2.00%Fannie Mae 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%First Trust Adv. 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%Goldman Sachs 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%Janney Montgomery 0.25% 0.25% 0.25% 0.75% 0.75% 1.00%JP Morgan Chase * 0.25% 0.25% 0.25% 0.25% n/a n/aMoodys Capital Markets 0.25% 0.25% 0.25% 0.25% 0.75% 1.00%Morgan Keegan 0.25% 0.25% 0.25% 0.25% 0.25% 1.25%Morgan Stanley * 0.25% 0.25% 0.25% 0.25% 0.50% 1.00%Nomura Securities* 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%Nord LB 0.25% 0.25% 0.50% 1.00% 1.50% 2.00%Scotia Capital 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%Societe Generale 0.25% 0.25% 0.25% 0.50% 1.25% 2.00%Standard Chartered 0.25% 0.25% 0.25% 0.25% 0.75% 1.00%State Street Global 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%UBS* 0.25% 0.25% n/a n/a n/a n/aWells Fargo & Co 0.25% 0.25% 0.25% 0.25% 0.50% 0.50%

Median 0.25% 0.25% 0.25% 0.25% 0.50% 1.00%

Average 0.25% 0.26% 0.30% 0.40% 0.66% 0.97%

High 0.25% 0.50% 1.00% 1.50% 2.00% 2.50%

Low 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

*Primary Dealers

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SHORT TERM MARKET EXPECTATIONS

FEDERAL FUNDS FUTURES

Sep-10 0.25Oct-10 0.25Nov-10 0.25Dec-10 0.25Jan-11 0.25Feb-11 0.25Mar-11 0.25Apr-11 0.25

May-11 0.25Jun-11 0.25Jul-11 0.25

EURODOLLAR FUTURES

Sep-10 0.32Dec-10 0.42Mar-11 0.47Jun-11 0.55Sep-11 0.66Dec-11 0.82Mar-12 0.98Jun-12 1.16Sep-12 1.33Dec-12 1.51Mar-13 1.68Jun-13 1.86

PRIME RATE FUTURES

Sep-10 3.02Dec-10 3.12Mar-11 3.17Jun-11 3.25Sep-11 3.36Dec-11 3.52Mar-12 3.68Jun-12 3.86Sep-12 4.03Dec-12 4.21Mar-13 4.38Jun-13 4.56

3.02

3.52

4.03

4.38

3.00

3.50

4.00

4.50

5.00

Sep

-10 Dec

-10 Mar

-11 Ju

n- 11 Sep

-11 Dec

-11 Mar

-12 Ju

n- 12 Sep

-12 Dec

-12 Mar

-13

Prime Rate Futures

0.25 0.25 0.25 0.25

0.00

0.25

0.50

0.75

1.00

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Federal Funds Futures

0.320.47

0.66

1.33

1.68

0.25

0.75

1.25

1.75

2.25

Sep

-10 Dec

-10

Mar

-11

Jun-

11

Sep

-11 Dec

-11

Mar

-12

Jun-

12

Sep

-12 Dec

-12

Mar

-13

Eurodollar Futures

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LONG TERM MARKET EXPECTATIONS

TREASURIES NOW as of 8/31/2010

1YR 0.242YR 0.48 3.303YR 0.705YR 1.3310YR 2.47

TREASURIES 1Y FORWARD as of 8/31/2010

1YR 0.722YR 0.933YR 1.285YR 1.9110YR 2.75

TREASURIES 2Y FORWARD as of 8/31/2010

1YR 1.152YR 1.563YR 1.915YR 2.5010YR 3.00

0.24 0.48

0.70

1.33

2.47

0.20

0.95

1.70

2.45

3.20

1YR 2YR 3YR 5YR 10YR

Current Treasury Curve

0.24

0.48 0.70

1.33

2.47

0.72

0.931.28

1.91

2.75

0.20

0.95

1.70

2.45

3.20


1Y Forward vs. Now

1.15

1.561.91

2.50

3.00

0.240.48 0.70

1.33

2.47

0.20

0.95

1.70

2.45

3.20


2Y Forward vs. Now

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OTHER IMPORTANT DATA


LIBOR 6M Forward 0.60 1.07 1.82 3.03 3.14LIBOR 1Y Forward 0.72 1.19 1.98 3.19 3.18LIBOR 2Y Forward 0.95 1.58 2.31 3.51 3.24

LIBOR MARKET EXPECTATIONS

BALTIC DRY INDEX - 1 YEAR HISTORY

0.60

1.82

3.14

0.72

1.98

3.18

0.95

2.31

3.24

0.25

1.25

2.25

3.25

4.25


2Y Forward vs. 1Y Forward vs. 6M Forward LIBOR 6M Forward

LIBOR 1Y Forward

LIBOR 2Y Forward

Last Price High 11/19/09Average Low 7/15/10

2713466129791700

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OIL PRICES (INFLATION) - 5 YEAR HISTORY

UNEMPLOYMENT RATE (JOBS PICTURE) - 5 YEAR HISTORY


9.610.16.54.4


71.84145.2974.6133.87

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GDP (UNDERLYING ECONOMIC GROWTH) - 5Y HISTORY

1 MONTH LIBOR (APPROX. BANK FUNDING COSTS) - 5Y HISTORY

Last Price High 3/31/08 Average Low 12/31/08

1.65.41.0-6.8

Ask price High 9/07/07 Average Low 3/01/10

0.257815.823752.983300.22813

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BOND YIELD FORECAST

Market Yield Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011

US 3 M Libor 0.30 0.48 0.56 0.76 1.14 1.52


Fed Funds Target 0.25 0.25 0.25 0.25 0.75 1.00


US 10Y 2.47 3.01 3.20 3.44 3.73 3.93US 2Y 0.47 0.78 0.97 1.24 1.61 1.95spread 2.36 2.36 2.28 2.23 2.08 1.98

2.47

3.013.44

3.93

0.47 0.971.61

1.95

0.40

1.40

2.40

3.40

4.40


10Y VS 2YUS 10Y US 2Y

0.30 0.56

1.14

1.52

0.30

0.65

1.00

1.35

1.70


US 3M Libor

0.25 0.25

0.75

1.00

0.25

0.50

0.75

1.00

1.25


Fed Funds Rate

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KEY UPCOMING DATES

01/28/09 0.00- 0.25% Risk to Growth 1 Ben Bernanke (Chairman)03/18/09 0.00- 0.25% Risk to Growth 2 James Bullard04/29/09 0.00- 0.25% Risk to Growth 3 William Dudley06/24/09 0.00- 0.25% Risk to Growth 4 Elizabeth Duke08/12/09 0.00- 0.25% Risk to Growth 5 Thomas Hoenig09/23/09 0.00- 0.25% Risk to Growth 6 Donald Kohn11/04/09 0.00- 0.25% Risk to Growth 7 Sandra Pianalto12/16/09 0.00- 0.25% Risk to Growth 8 Eric Rosengren01/27/10 0.00- 0.25% Risk to Growth 9 Daniel Tarullo03/16/10 0.00- 0.25% Risk to Growth 10 Kevin Warsh04/29/10 0.00- 0.25% Risk to Growth06/24/10 0.00- 0.25% Risk to Growth08/12/10 0.00- 0.25% Risk to Growth 1 Christine Cumming09/23/10 2 Charles Evans11/04/10 3 Richard Fisher12/16/10 4 Narayana Kocherlakota01/26/11 5 Charles Plosser

Date Indicator Date Indicator

9/1/2010 Construction Spending MoM 9/17/2010 Consumer Price Index9/1/2010 ISM Manufacturing & Prices Paid 9/20/2010 NAHB Housing Market Index9/1/2010 Vehicle Sales 9/21/2010 Building Permits & Housing Starts9/2/2010 Pending Home Sales 9/22/2010 House Price Index9/3/2010 Employment Report 9/23/2010 Leading Indicators9/8/2010 Consumer Credit 9/23/2010 Existing Home Sales9/9/2010 Trade Balance 9/24/2010 Durable Goods Orders

9/10/2010 Wholesale Inventories 9/24/2010 New Home Sales9/13/2010 Monthly Budget Statement 9/27/2010 Chicago Fed Nat Activity Index9/14/2010 Business Inventories 9/28/2010 Consumer Confidence9/14/2010 Advance Retail Sales 9/28/2010 S&P/ Case Shiller Home Price Ind9/15/2010 Capacity Utilization 9/28/2010 Richmond Fed Manufact. Index9/15/2010 Empire Manufacturing 9/30/2010 Personal Consumption9/15/2010 Industrial Production 9/30/2010 GDP Price Index9/15/2010 Import Price Index 9/30/2010 Core PCE QoQ9/16/2010 Producer Price Index 9/30/2010 Chicago Purchasing Manager9/17/2010 U. of Michigan Confidence 9/30/2010 NAPM-Milwaukee

FOMC ALTERNATE MEMBERS

KEY UPCOMING ECONOMIC DATA

FOMC VOTING MEMBERSFOMC MEETING DATES

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DISCLAIMER

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Source for data is Bloomberg, dealer provided documents and proprietary calculations or research. Thispackage is created specifically for independent banks as an added monthly service and provided bySteve Brown, Chris Nichols and the rest of the team at Banc Investment Group.

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Documents

Monthly Alco Package September 2010