Risk Management at Wellfleet Bank (1)

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Group 4 Risk Management at Wellfleet Bank: Deciding about Megadeals

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Risk Management at Wellfleet Bank: Deciding about Megadeals

MSF 2013 SummerCase Study

Group 4

Bar Brieman

Vincent Zann

Carlos Castillo

Kevin Johnson

Kelin Xiang

Min Chen

Professor Dandapani

July 26th2013


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Table of content:

Abstract------------------------------------------------------------------------------------------------3

Part One: Strategy and Risks----------------------------------------------------------------------4-5

Different Types of Risks Regarding Wellfleet Bank-------------------------------------4

How did those risks affect Wellfleet----------------------------------------------------------4-5

Part Two: Risk Metrics-------------------------------------------------------------------------------6

Part Three: Proposals and Decisions---------------------------------------------------------------7-11

Proposal 1----------------------------------------------------------------------------------------7-8

Proposal 2----------------------------------------------------------------------------------------9-10

Final Decision-----------------------------------------------------------------------------------11

Part Four: Risk Management and Process------------------------------------------------------12-14

Appendix--------------------------------------------------------------------------------------------15-21


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Abstract

Wellfleet Bank was founded in London in 1847 and used to be the bank that provides its services

to Asian and African colony. During the period of 1960 to 1990, the bank made major decisions

and decided to go global and focus in North American and Europe. After the European

property/credit crisis in 1989-1992, the bank switched its core markets in emerging economies.

Corporate Banking and Consumer Banking were the two main businesses the bank had

undertaken. It had 58% and 42% of its Pre-Tax profits respectively. In 2007, the bank operated

in 55 countries with total assets of $329 billion and market cap of $51 billion. The bank focused

more on the syndicated and leveraged loans segment to its large corporate clients. Syndicated

and Leveraged loans are carried through by Investment Banking division and Wellfleet had its

own IB decision. In this paper, we examined the kind of risks that were associated with Wellfleet

and analyzed the impact of those risks. We also compared the two major proposals and made

relative decisions.


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Part One: Strategy and Risk

1.1Given its strategy, what kind of risk does Wellfleet bank face?

In 2004, Wellfleets management had identified both syndicated and leveraged loans to

large corporate clients as areas of significant future growth for its corporate banking business,

and they strategically intended to pursue large transformational deals through its corporate

banking segment. They also formed a decision making forum consisting of three major members:

the group chief credit officer, deputy group chief risk officer and group head of client

relationships. Since the deals pursued by the bank were of large scale, these large scale credit

applicants itself could bring mega-risk to Wellfleet. Firstly, we can identify the first possible risk

would be the operational risk. In this case, it is mentioned that the chief credit officer can make

the final decision. The authority of this chief credit officer was unlimited as long as it is within

the bank regulatory limits. Further, the CEO/Board of Directors only reviews the corporate loan

portfolio and do not have any direct involvement with the process. If the deputy group chief risk

officer and group head of client relationship disagreed over a proposal, then the chief credit

officer can make the final decision. Industries with higher human interaction are likely to have

higher operational risk. Also, the bank had identified leveraged loans and syndicated loans as the

future growth segments. But those leveraged loans are provided to borrowers with existing high

debt risk of default. This could affect Wellfleet tremendously.

The second risk that Wellfleet is facing is the regulatory riskwhich is in compliance with

the Basel II standards and credit risks. Wellfleet should set aside and manage capital reserve to

be balanced with the riskiness of their activity. It defines as the risk that a change in laws and

regulations will materially impact a security, business, sector or market. A change in laws or

regulations made by the government or a regulatory body can increase the costs of operating a

business, reduce the attractiveness of investment and/or change the competitive landscape. 1

Wellfleet has a very high concentration on its Corporate Banking Group, which can be led

to concentration risk. In the case, Wellfleet corporate banking group constituted 58% of profit

before taxes and 72% of banks assets in 2007 while the remaining portion is attributed to its

consumer banking group. The consumer banking group accounted for bad debt provisions of

1http://www.investopedia.com/terms/r/regulatory_risk.asp
http://www.investopedia.com/terms/r/regulatory_risk.asphttp://www.investopedia.com/terms/r/regulatory_risk.asphttp://www.investopedia.com/terms/r/regulatory_risk.asphttp://www.investopedia.com/terms/r/regulatory_risk.asp


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$611 million in 2006 as compared to $214 million in 2004. 2If the bank concentrated too much

on corporate banking, the probability of loss would be higher from heavy lopsided exposure.

Wellfleet could also risk its own reputation. Reputational riskis defined as a threat or

danger to the good name or standing of a business or entity.3 As mentioned in the case, Wellfleet

has two proposals to be reviewed. This two proposals concerns with large amount of money that

is around 2 billion. If the bank rejects, then the trustworthiness of this bank would drop.

Wellfleet is also associated with country risk:A collection of risks associated with investing in

a foreign country4. These risks include political risk, exchange rate risk, economic risk,

sovereign risk and transfer risk.

1.2 Given Wellfleets new focuson large corporate deals and its need to recruit relationship

managers from investment banks, what are the challenges for the risk culture of the

organization, and its style of risk management in particular?

According to the case, we have already known that Wellfleet concentrated on corporate

banking. Although it is very profitable for the bank to focus on enlarging transformational deals

with clients, it involves a lot of challenges and risks. Risk culture can be defined as the system of

values and behaviors present throughout an organization that shape risk decisions 5. Risk culture

of the organization at Wellfleet focuses on the interaction between credit committee, clients and

client relationships managers. It can influence the decision making and relationship between

managers and employees. Client relationships managers are who directly contact each other and

understand their needs to find better profitable solution for both sides. Then the bank offers their

proposal via client relationship manager. However, most of the times, chief risk officer and head

of client relationship disagree over the proposals. In Wellfleet, it has a hierarchical work process

in credit officers. The credit committee has the ultimate authority on decisions.

2Harvard Case: Risk Management at Wellfleet Bank3http://www.investopedia.com/terms/r/reputational-risk.asp4http://www.investopedia.com/terms/c/countryrisk.asp5http://www.businessweek.com/managing/content/may2009/ca20090512_720476.htm


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Part Two: Risk Metrics

2.1 Calculate the Expected Loss, Economic Revenue and Economic Profit for both proposals?

Wellfleets credit risk management had taken a holistic picture of the risks associated with

the proposals. As importance was shined on their expected loss, economic revenue, andeconomic profit, risk models associated with each exposure had been used for the risk-adjustedrevenues.

The following describes the metrics used in internal risk assessment methodologies:

Exhibit 3Internal Risk Assessment: MethodologyThe risk-adjusted revenue measures revenues adjusted to the expected losses. This

measurement must be positive for it to be approved and any exceptions are must be reviewed bythe head of client relationship. The economic revenue measures revenues adjusted for expectedloss and capital charge. Lastly, the economic profit measures profits after accounting for

overhead costs from the finance department and taxes.6

The expected loss calculates a borrowers default and equals to: the Probability of Default (PD)

Loss Given Default (LGD%) Exposure at Default (EAD$). The probability of defaultmeasures the likelihood the borrower would default in the next twelve months; thus, the lowerthe better quality loan. Internal grades were developed based on internal loan ratings rangingfrom 1A to 11B, from least likely to most likely to default, respectively. The LGD is thepercentage of the loan exposure that cant be recovered in the event of default. Lastly, the EAD

measured the total current outstanding credit to the borrower and the estimated future drawdownon the account prior to default7. Additionally, the credit officers accounted for corporate ratingsfrom Moodys, Standard & Poors, and other rating agencies.

6Anette Mikes,Risk Management at Wellfleet Bank: Deciding about Megadeals, (Harvard Business School 9-109-071), 22.7Mikes, 6.

Risk-AdjustedRevenue (RAR)

Economic Profit(EP)

EconomicResearch (ER)


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Part Three: Proposals and Decisions

Proposal 1:

Ashar Business Credit Proposal - Zellmont Acquisition

Counterparty: Ashar Industries Date: April 7, 2006Wellfleet Rating 5A Market Cap: UDS 25.2 billion

Probability of Default(PD) 0.22%Loss Given Default(LGD) 56.86%

Exposure at Default (EAD$) $850,000,000

Expected Loss PD*LDG*EAD = $1,063,282

Interest Income, based on draw amount 0.525% $4,462,500

Plus Fee Income:

Underwriting Fee 0.20% $1,700,000Participation Fee 0.20% $1,700,000

Total Revenue $7,862,500

Risk Adjusted Revenue Total Revenue - Total Expected Loss = $6,799,218

Net Capital Charge $2,200,000

Economic Revenue Risk Adjusted Revenue - Net Capital Charge = $4,599,218

Transaction Cost less $825,713

Tax less $1,500,000

Economic Profit $2,273,505

3.1 Decision on Ashar-Zellmont acquisition:Ashar Industries decision to aquire Zellmontwill maintain its global position as the largest

steel producer to lead the competition. Its diversified revenue streams allow it to pull growthwithin competitive markets like North America and Europe, 40% sales and 33% salesrespectively. Zellmonts peer analysis is considered to have fairly lower risk to its currentcompetitors at 0.09 asset volatility. In contrast, Ashars ratings are considered to have a higher

asset volatility at 0.16. Moodys grade considers Zellmont Baa2/positive and S&P with

BBB/watch developments, yet Ashars with Moodys grade level at Baa3/review for downgradeand S&P ratings are BBB+/watch negative. Given these conditions, Ashar is performing well incomparison its industry and strong fundamental growth is expected from this acquisition.Their highly leveraged complex debt structure in the past created credit challenges to pin point

their sensitivity to interest rates and cost of debt or equity during acquisitions. On the contrary,Ashar Indistries has a strong track record from deleveraging. Their highly acquisitive historybrings integration risk, yet their ability to have high EBITDA margins and consistently maintainpositive free cash flows create strong sentiment to its spending flexibilities. From the


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fundamental standpoint their three-year revenue CAGR provides insight to their growth storyand reflects strong at 79.20%, year ended 2005.

Its bottom line net income has improved since 2003 and reinforces trust that managementled by Amit Ashar and two sons have a positive effect on its earnings. Revenue diversificationthrough this acquisition will allow it to further expand their pallet into European jurisdictions andfurther deepen their positions in North America, Western Europe, Africa, and South America.Most of their sales within these markets will be mostly affected by new car sales, constructionand appliance & packaging. As their management team expects pre-tax cost synergies of $1billion to be realized within the first three years from takeover, Ashar Industries will hold astrong global market share position of 10% by volume.In conclusion, the Zellmont acquisition provided Wellfleets risk management assumption of

Amit Ashars full control of management and relaxed their sensitivity assumptions to determineif the Zellmont deal were unsuccessful. This provided positive free cash flows in both testedscenarios apart from analyzing their credit risk and broader risk issues which were reviewed bythe Group Credit Committee.8

8Mikes, 9.

0

2

4

68

10

12

14

2002 2003 2004 2005

D&A EBITDA Net income

0

500

1000

15002000

2500

3000

3500

2002 2003 2004 2005

Free Cash Flow


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Proposal 2

Gatwick Gold Corporation (GGC) Business Credit Proposal

Counterparty: GGC Date: October 10, 2008

Wellfleet Rating 5B Market Cap: UDS 25.2 billion

Probability of Default (PD) 0.39%Loss Given Default (LGD) 52.25%

Exposure at Default (EAD$) $1,000,000,000

Expected Loss PD*LDG*EAD = $2,037,750

Interest Income, based on draw amount:

EAD*Rate*0.5=

1st sixmo. 0.425% $2,125,000

EAD*Rate*0.5=

2nd sixmo. 0.525% $2,625,000

Plus Up-front Fee Income 0.30% $3,000,000

Total Revenue $7,750,000Risk Adjusted Revenue Total Revenue - Total Expected Loss = $5,712,250

Net Capital Charge $3,800,000

Economic Revenue Risk Adjusted Revenue - Net Capital Charge = $1,912,250

Transaction Cost less $300,000

Tax less $920,000

Economic Profit (year 1) $692,250

GGC Convertible Bond Expiration

Due February 27, 2009

Conversion Price $65

Out of the money $18.40Convertible BondsOutstanding 15,384,615 estimated

3.2 Decisions on GGC

GGCs exposure to political risk in South Africa with about 72% of its current productionbrings uncertainty of consistent future growth. In accounting for the three main components formining costs, including electricity, labor, and equipment costs, mining inflationary costs aresetting pressures in the rising competitive industry. The macro-economic agenda must beconsidered to forecast future growth of GGC. Fundamentally, GGCs revenues have maintained

consistent over the prior years. Gold prices have fluctuated in most recent months during 2008due to volatile uncertain markets. The greater issue stemming from bailouts, the more US Fed


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and global systemic risks will arise. The estimated convertible bond expiration GGC has torefinance will bring sustainability through this facility request.

Wellfleets economic profits will be less than a percent: .069%, in economic profits within atwo year time frame, in comparison to the Zellmont acquisition at .26%. GGCshighlyleveraged environment has increased its debt to equity to 82% thus decreasing its interest

coverage ratio. Highly reliant on future financing and interest repayment, its ability to sustainrelies heavily on demand and gold price sentiments. Given their decreasing rates due to marketconditions, this deal becomes highly speculative in times of uncertainty and as Wellfleetsinitiative to unwind its hedge book from losses. Its position had been affected due to the creditcrunch unfolding and should star considering reassessing its dividend payouts of 20%.

On the positive note, considering they are the worlds third largest gold producer with 7%global production, low-cost production levels in comparison to the lower 50% of global costs onaverage, and their long term arena for safe investor exposures. This deal may be considered ifWellfleet feels their holdings on precious metals percentage needs additional exposure toincrease their risk weighted asset consideration.

0

2

4

6

8

2003 2004 2005 2006 2007

Net debt to EBITDA

Total debt to common equity

-50.00%

0.00%

50.00%

100.00%

150.00%

2003 2004 2005 2006 2007

Net margin ROE Efficiency Ratio


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3.3 Closing Statement

From the Economic and Financial perspective, the Proposal 1 (Ashar Industries) holds a

stronger position in finance, such as growing at a rate thats higher than industry standards. It is

the worlds largest steel producer (high volume) and they specialize in low-end commodity steel(low risk) with high level of raw material integration. Overall, they have good financial

performance, high EBITDA margins. From the managerial perspective, Ashar Industries run by

family for a long time and have been in the hands of experienced management that succeed in

turning around unproductive assets in the history. They also have abundant experience in

acquisitions and mergers. However, they have taken a huge amount of debt, which puts the

company at a risky financial position. Plus, the complexity of the financial structure has made it

harder to solve the current problem.

In Proposal 2, Gatwick Gold Corporation has had negative growth over the past 3 years and

was unable to service its present debt. Even though, the future outlook must be considered with

respect to the industry it operates in, we suggest that Wellfleet stay away from GGC until it

makes profit.


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Part Four: Risk Management Process

4.1 Analyze the risk management process at Wellfleet Bank. What suggestions might you make to

the CEP about improving the process?

Risk management and internal control have crucial importance in banking activities. Asrequired by the Basel Committee of International Settlements, Wellfleet Bank implementedBasel II Accord and guidelines and formalized their risk-management practices. The reservecapital is monitored and managed to match the riskiness of their activities.

The internal control system within Wellfleet Bank is a balance of functions betweenrelationship managers and risk officers. Relationship managers court clients and bring inbusiness and revenues with margins and fee that the bank would earn. They would like to havetheir proposals approved so that they could get their incentives. Meanwhile, risk officers wouldundertake independent risk analysis to identify the internal risk within the proposal and makereward characteristics transparent. Risk officers would hold or disapprove those proposals whosebuilt-in risk is beyond criteria and policies.

Within the risk-management function, a hierarchy structure exists on bases of individualexperience of credit officers. The lowest level is credit officer who is authorized to sign offcertain types of business proposals. The more experienced a credit officer is, the risker and largerloans could be signed off. If a loan exceeds the credit officers limit, it should be passed forward

to regional credit officer for decision. At the paramount of this hierarchy is the Group CreditCommittee who obtains unlimited decision power on any loans within the banks regulatorylimits.

The Group Credit Committee consists of three senior members in the bank: the group chiefcredit officer, who serves as chair, the deputy chief risk officer, and the group head of clientrelationships, who represents the business viewpoint. This committee structure guarantees thedecision process is a balancing mechanism between credit function and relationship function.

Therefore, any credit proposal which is too big is required not signed-off before it gets the GroupCredit Committee.

Credit Officer

Regional Credit Officer

GroupCredit

Committe

Chief Credit Officer

Deputy Chief Risk Officer

Head of Client Relationship

Graph 1: Hierarchy Structure


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Besides the Group Credit Committee, there are another seven risk committees operatingseparately on additional sources of risks, covering market risk, operational risk, compliance risk,country risk, reputation risk and business risk. These eight risk committees work under theGroup Risk Committee and deliver risk report quarterly. The chief risk officer report to theboard-level Audit and Risk Committee.

4.2 Problems and Improvements

The first problem stems from the hierarchy structure within the credit function. Torelationship managers, the Alpine Pass approach is time-consuming and reduces their serviceefficiency to their clients. If a proposal with known characteristics should go through the basiclevels to reach Group Credit Committee for final approval, it will take more time than necessaryto seal a deal. This inefficiency will reduce the attractiveness to potential clients and make thebank lose competitiveness to other banks.

A solution would be to develop a flat decision structure based proposal characteristics, suchas loan size, applicant company size, applicant history records. While small loans by smallcompany with good records could be signed off by credit officers, big loan by large companywith spot records could directly go to the Group Credit Committee. The graph belowdemonstrates how it works.

Loan

AssessmentLoan Size Company Size History Record

Credit Regional Credit

Officer

Group Credit

Committee

Graph 3: Flat Structure

GroupCredit

Committee

MarketRisk

Committee

CountryRisk

Committee

ReputationRisk

Committee

BusinessRisk

Committee

(Consumer)

BusinessRisk

Committee

(Corporate)

OperationalRisk

Committee

ComplianceRisk

Committee

Group Risk Committee

Board Audit and Risk Committee

Graph 2: Committee Structure


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Another main problem is due to the committee structure. The eight subordinate committeescould specialize in risk assessment by focusing on the risk of their individual field. However,risk management is not particle physics. Risks of different types interact with each other. Defectin reputation could impair credit risk and business risk. A recessional market would widen credit

spread. The analysis independence of different risks would lead to an inaccurate result, thusimpair the preciseness of interest rate for loan.It would be not wise to merge all eight committees into one to manage all risk which will

take away the benefit of independence and balance between committees. However, consideringfinancial risks could be divided into micro and macro categories. It would be practical to mergethe eight committees into two functional committees (Graph 4). The systematic efficiency can beimproved by facilitating interaction between the two committees.

Macro Risk Committee

Group Risk Committee

Board Audit and Risk Committee

Micro Risk Committee

Market Risk

Country Risk

Business Risk (Corporate)

Business Risk (Consumer)

Credit Risk

Reputation Risk

Operational Risk

Compliance Risk

Graph 4: Committee Merge


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Appendix:Table 1.1

ASHAR INDUSTRIES

Income Statement 2002 2003 2004 2005

Revenue 4889 9567 22197 28132

yoy% 96% 132% 27%

D&A 177 331 553 829

yoy% 87% 67% 50%

EBITDA 395 1700 6827 5575

yoy% 330% 302% -18%

EBIT 218 1369 6274 4746

yoy% 528% 358% -24%

Profit before tax -24 1400 6133 4703

yoy% 5733% 338% -23%

Interest Expense -208 -200 -265 -339

yoy% -4% 33% 28%

Net income 49 1182 4701 3365

yoy% 2312% 298% -28%

Minorities 0 35 615 520

Revenue CAGR,year ended 2005 79.20%

Cash Flow

Funds from Operations (FFO) 150 1413 5784 4511

Change in Working Capital 18 -93 -1171 -537Cash from Operations (CFO) 168 1320 4613 3974

Gross CAPEX -108 -421 -898 -1181

Other investment/acquisitions 28 -275 95 -6431

Cash from investing activities -80 -696 -803 -7612

Cash dividend 0 -164 -736 -2092

Free Cash Flow 136 999 3185 2476

Balance Sheet

Cash and equivalents 77 760 2495 2035

Marketable Securities 0 0 1 14

Fixed assets 3035 4654 7562 15539

Total assets 5512 10137 19153 31190


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Short-term debt 262 780 341 252

Long-term debt 2022 2287 1639 8056

Gross debt 2284 3067 1980 8308

Net debt/(cash) 2207 2307 -516 6259

Common equity 1280 2561 5846 10150

Minority interests 0 261 1743 1834

Shareholder's equity 128 2822 7589 11984

Profitability

EBITDA margin 8.10% 17.80% 30.80% 19.80%

yoy% 119.75% 73.03% -35.71%

EBIT margin 4.50% 14.30% 28.30% 16.90%

yoy% 217.78% 97.90% -40.28%

Net margin 1.00% 12.40% 21.20% 12.00%

yoy% 1140.00% 70.97% -43.40%ROE 21.00% 87.90% 111.80% 42.10%

yoy% 318.57% 27.19% -62.34%

Return on capital employed -0.80% 3.40% 7.20% 2.80%

yoy% -525.00% 111.76% -61.11%

Efficiency Ratio 89% 122% 152% 112%

yoy% 37.85% 23.96% -26.26%

Capital Structure

Total debt to common equity 17.84 1.2 0.34 0.82

Net debt to common equity 17.24 0.9 -0.09 0.62Total debt to total assets 41% 30% 10% 27%

Total debt to EBITDA 5.78 1.8 0.29 1.49

Net debt to EBITDA 5.59 1.36 -0.08 1.12

Historic market cap 267 5679 23708 18879

Debt Protection

EBIT to interest expense 1 6.8 23.7 14EBITDA to interest expense(Coverage) 1.9 8.5 25.8 16.4

EBITDA - CAPEX to interest expense 1.4 6.4 22.4 13

Sources of Business Risk

Degree of Operating Leverage 9.11 4.16 4.57


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Degree of Financial Leverage 0.59 0.69 0.65

Degree of Total Leverage 5.35 2.87 2.97

Table 2.2

GATWICK GOLD CORP.

Income Statement 2003 2004 2005 2006 2007

Revenue 2109 2297 2632 2975 3269

yoy% 9% 15% 13% 10%

D&A 260 409 505 602 590

yoy% 57% 23% 19% -2%

EBITDA 878 642 682 820 235

yoy% -27% 6% 20% -71%

EBIT 618 233 177 219 -354

yoy% -62% -24% 24% -262%

Profit before tax 676 116 -175 127 -428

yoy% -83% -251% -173% -437%

Interest Expense 48 80 99 117 113

yoy% 67% 24% 18% -3%

Net income 515 113 -198 -87 -605

yoy% -78% -275% -56% 595%

Minorities 18 19 23 30 31

CAGR,year ended 2007 11.58%

Cash FlowFunds from Operations (FFO) 525 579 667 1224 1027

Change in Working Capital -64 -121 -112 -129 -176

Cash from Operations (CFO) 461 458 555 1095 851

Gross CAPEX -363 -585 -725 -818 -1021

Other investment/acquisitions 55 -231 -63 57 -38

Cash from investing activities -308 -816 -785 -761 -1059

Cash dividend -328 -205 -165 -135 -149

Free Cash Flow 348 -184 -530 -432 -1212

Balance Sheet

Cash and equivalents 503 288 210 496 493

Marketable Securities 0 26 8 0 0

Fixed assets 2753 5870 5911 6065 6672

Total assets 4838 8176 8303 8961 9747


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Short-term debt 350 318 188 59 337

Long-term debt 804 1282 1708 1426 1522

Gross debt 1154 1600 1896 1485 1858

Net debt/(cash) 651 1286 1678 989 1365

Common equity 1621 3142 2617 2990 2362

Minority interests 53 58 59 62 63

Shareholder's equity 1674 3199 2676 3053 2424

Profitability

EBITDA margin 41.60% 27.90% 25.90% 27.60% 7.20%

-32.93% -7.17% 6.56% -73.91%

EBIT margin 29.30% 10.10% 6.70% 7.30% -10.80%

-65.53% -33.66% 8.96% -247.95%

Net margin 24.40% 4.90% -7.50% -2.90% -18.50%

-79.92% -253.06% -61.33% 537.93%ROE 33.50% 5.10% -7.30% -3.10% -23.00%

-84.78% -243.14% -57.53% 641.94%

Efficiency Ratio 43.59% 35.30% 31.94% 34.46% 34.95%

-19.02% -9.51% 7.89% 1.40%

Capital Structure

Total debt to common equity 0.71 0.51 0.72 0.5 0.79

Net debt to common equity 0.4 0.41 0.64 0.33 0.58

Total debt to total assets 23.85% 19.57% 22.84% 16.57% 19.06%

Total debt to EBITDA 1.31 2.49 2.78 1.81 7.89

Net debt to EBITDA 0.74 2 2.46 1.21 5.8

Historic market cap 10467 9311 13103 13045 11848

Debt Protection

EBIT to interest expense 12.9 2.9 1.8 1.9 -3.1

EBITDA to interest expense (Coverage) 18.3 8.1 6.9 7 2.1

EBITDA - CAPEX to interest expense 10.7 0.7 -0.4 0 -7

Sources of Business Risk

Degree of Operating Leverage 5.18 12.02 14.16 -46.25

Degree of Financial Leverage 0.41 -0.06 -0.19 -0.66

Degree of Total Leverage 2.14 -0.77 -2.69 30.34


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Exhibit 2 Internal Credit Grades (by Probability of Default, PD)9

CorporateGrades

Mid-Point PD PD Range S&P mapping:

(Basis points) Lower Upper Corporate

1A 1 0 1.5 AAA

1B 2 1.5 2.5 AA+

2A 3 2.5 3.5 AA

2B 4 3.5 4.5 AA-

3A 5 4.5 6 A+

3B 7 6 8 A

4A 9 8 11 A-

4B 13 11 17 BBB+

5A 22 17 30 BBB+

5B 39 30 43 BBB-

6A 51 43 59 BB+6B 67 59 77

7A 89 77 102 BB

7B 117 102 135

8A 154 135 175 BB-

8B 203 175 235

9A 267 235 305 B+

9B 361 305 400

10A 462 400 530 B

10B 606 530 700

11A 801 700 920 B-

11B 1054 920 1200

9Mikes, 22.


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Exhibit 1a Wellfleet Bank - Segmentation by Business Line ($million)

2004 2005 2006

$ % $ % $ %Pre-tax Profit

Consumer Banking 1,058 47 1,273 47.5 1,322 41.5

Wholesale Banking 1,175 52.2 1,444 53.9 1,849 58.1

Corporate Items Not Allowed 18 0.8 (36) -1.3 7 0.2

TOTAL 2,251 100% 2,681 100% 3,178 100%Assets Employed

Consumer Banking 38,094 25.9 74,134 34.5 86,902 32.6

Wholesale Banking 108,712 73.9 140,464 65.3 178,688 67.1

Items Not Allocated 318 0.2 498 0.2 512 0.1

TOTAL 147,124 100% 215,096 100% 266,102 100%

Exhibit 1b Wellfleet Bank - Balance Sheet ($million)

2004 2005 2006

Tot Adv to Customers 73899.06 113522 141508Loans & Mortgages 72017.12 117791 139330Total Assets 147120.2 215096 266047


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Total Deposits 85090.78 119931 147382Total Liabilities 137051.4 202763 248650Total Shareholder's Equity 10068.74 12333 17397Shares Outstanding 1179 1316 1384Book Value per Share 7.4 9.03 12.18Tangible Book Value per Share 5.41 5.74 7.74

Exhibit 1c Wellfleet Bank - Income Statement ($million)

2004 2005 2006

Net Interest Income Loss Provisions 2966.12 4078 4776Operating Profit (Loss) 2317.53 2731 3195Pre-tax income 2249 2681 3178Income before XO Items 1619 1971 2354Net Profit (Loss) 1577 1946 2278Basic EPS before Abnormal Item 1.3 1.51 1.1Diluted EPS 1.27 1.47 1.67Dividends per Share 0.57 0.64 0.71

Return on Common Equity 19.63 18.6 15.86

Documents

Risk Management at Wellfleet Bank (1)