BAS Sept 2022 Case Study

Examination Conclusions and Comments (Continued)

Management uses the Interest Rate Risk Monitor from The Baker Group Software Solutions, Inc. (Baker), Oklahoma City, OkJahoma, for IRRmodeling. Model results are consistent with those from the prior two examinations and are largely within the Board's IRR policy limits, with the exception of changes to Economic Value ofEquity (EVE) in the +400 basis point (bp) scenario. The December 31, 2017 report indicates 96 percent of securities and 85 percent of loans are fixed-rate. A portion of these securities and loans may actually be variable-rate, but they remain at contractual pricing floors. Also, as interest rates have risen, some extension is occurring in both loans and securities that may have otherwise been called or prepaid. Simulations ofnet interest income (NII) given various immediate and parallel interest rate shocks indicate shorter-term IRR is more reasonable. Current IRRmodel results, as ofDecember 3 l, 2017, are as follows:

Basis Point Shift +400 +300 +200 +100 -100

12-Month 12-Month 24-Month 24-Month NII

EVE% change

EVE

NII% Policy Limit

Policy Limit

NII% NII Policy

change

Limit

change

-35.00%

-3.72% -35.00% 2.49% -35.00%

-46.39%

1.09% -25.00% -2.68% -25.00% -27.48% -30.00% 1.02% -15.00% -1.05% -15.00% -15.27% -25.00% 1.20% -10.00% 1.41% -10.00% -4.44% -15.00% -2.01% -10.00% -3.65% -10.00% -6.41 % -15.00%

Deposit and loan assumptions in the model are regularly updated with bank-specific Call Report data, and such data is sufficiently granular. Due to the high level of NMDs, deposit assumptions are particularly critical in IRR modeling. Beta assumptions in the model show little anticipated changes in deposit rates in relation Federal funds rate increases. This has proved true in the most recent rate envirorunent of the past two years; however, depositors may demand higher rates on their NMD accounts or shift to higher rate time deposits as interest rates continue to rise. Baker performed a stress scenario report as ofDecember 31, 2017, in which 20 percent ofNMDs migrated to 1-, 2-, and 3-year CDs. The results showed little change in NII; however, EVEshowed a significant negative impact in this scenario with a 23 percent decline in EVE with a +200 bp shock and 62 percent with a +400 bp shock. Management and the Board should continue to periodically review models with stressed NMD assumptions.

Although deposit pricing is generally accurately captured in the model, one large NMD to

t Local School

District is priced to be competitive with the Star program. This deposit averages $4 to $5 million, with a current balance of$4,135M and represents 6.1 percent of deposits. The current pricing of 1.55 percent far exceeds that of other NMDs. Given the size and separate pricing structure of this deposit, it should be separately captured in the bank's IRRmodeling in future time periods.

CEO

agreed to contact Baker about segregating this large deposit account and incorporating accurate

pricing assumptions.

Zeno, Pockl, Lilly and Copeland, A.C. (Zeno), Wheeling, West Virginia, completed an independent review of management's IRRmanagement process. Zeno reviewed model output from all four quarters in 2016 during April, May and June 2017. Zeno had no .findings or recommendations. Zeno also noted backtests performed by Baker are satisfactory.

I