MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued The Corporation places its greatest credence in net interest income simulation modeling. The above GAP/Interest Rate Sensitivity Report is believed by the Corporation's management to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices, nor is it able to measure the magnitude of potential future rate movements. Net interest income simulation modeling, or earnings-at-risk, measures the sensitivity of net interest income to various interest rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; base, rising and falling. Estimated net interest income for each scenario is calculated over a 12-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather, these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation. The base scenario is highly dependent on numerous assumptions embedded in the model, including assumptions related to future interest rates. While the base sensitivity analysis incorporates management's best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact will likely differ from that projected. For mortgage-related assets, the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate (dollars in thousands) At December 31, 2003 ----------------------------------------------------------------------------------------------------------------------------------- 1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL =================================================================================================================================== Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits ........ $ 40,556 $ 40,556 Investment securities ................................... 36,876 $ 24,045 $ 136,084 $ 159,792 356,797 Loans ................................................... 1,012,808 326,043 870,082 147,613 2,356,546 Federal Reserve and Federal Home Loan Bank stock ........ 15,502 15,502 ---------- ---------- ---------- ---------- ---------- Total rate-sensitive assets ........................ 1,105,742 350,088 1,006,166 307,405 2,769,401 ---------- ---------- ---------- ---------- ---------- Rate-Sensitive Liabilities: Interest-bearing deposits ............................... 1,411,925 224,461 383,135 4,379 2,023,900 Securities sold under repurchase agreements ............. 71,095 71,095 Federal Home Loan Bank advances ......................... 7,750 15,000 80,341 109,688 212,779 Trust preferred securities .............................. 57,188 57,188 Other short-term borrowings ............................. 1,514 1,514 Other borrowed funds .................................... 10,594 30,000 40,594 ---------- ---------- ---------- ---------- ---------- Total rate-sensitive liabilities ................... 1,502,878 239,461 463,476 201,255 2,407,070 ---------- ---------- ---------- ---------- ---------- Interest rate sensitivity gap by period .................... $ (397,136) $ 110,627 $ 542,690 $ 106,150 Cumulative rate sensitivity gap ............................ (397,136) (286,509) 256,181 362,331 Cumulative rate sensitivity gap ratio at December 31, 2003 .................................... 73.6% 83.6% 111.6% 115.1% at December 31, 2002 .................................... 111.8% 85.2% 98.2% 113.8% The Corporation had a cumulative negative gap of $286,509,000 in the one-year horizon at December 31, 2003, just over 9.3 percent of total assets. 13