Bank Directors Seminar, Coeur d'Alene, ID, September 15-17, 2019

Bank Directors Seminar Coeur D'Alene, Idaho September 15-17, 2019

ATTENDEES Pete Bansmer Kathy Bauska Lorilei Bruggink Sherry Cladouhos Ryan Clevidence Greg Deckard Charles Eble Tyler Ferguson Brad Fitterer Lewis Goodwin Jim Davis

Yakima Federal Savings and Loan Association

pbansmer@gmail.com kathybauska@gmail.com lorileib@statebanknw.com scladouhos@gmail.com ryanc@farmersebank.com GregD@statebanknw.com ceble@valleybankmt.com tferguson@coastalbank.com bcamfit@fairpoint.net lgoodwin@squareup.com groff@cybernet1.com fredhealey007@gmail.com karin.henion8@gmail.com mhensley@valleybankmt.com Kathy.l@rampartgroup.com larry@coldwellbankerwsa.com rmarshall@ireland-bank.com howard.reynolds1157@gmail.com rickriccobono@comcast.net mrsand@timberlandbank.com jd2tall@gmail.com lmarty@olyfed.com

509-248-2634 406-752-7123 509-252-6136 406-751-7708 406-273-4495 360-533-4747 509-789-1771 406-752-7375 425-367-2953 509-248-2634 801-953-4904 406-642-3431 801-545-6004 406-752-7123 406-253-4893 360-538-7850 406-273-4495 208-766-2254 360-754-3400 801-545-6004 425-254-2004 360-533-4747 360-533-4747 704-444-4470 208-528-3008 801-913-1687 406-273-4495 406-273-4495 406-642-2211 406-841-2920 206-639-6050 208-332-8030 801-538-8761

Valley Bank of Kalispell State Bank Northwest Glacier Bancorp, Inc. Farmers State Bank

Timberland Bank

State Bank Northwest

Valley Bank

Coastal Community Bank

Yakima Federal Savings and Loan Association

Square Financial Services

Ann Groff Fred Healey Karin Henion Mark Hensley Kathy Leodler

Farmers State Bank

FinWise Bank

Valley Bank of Kalispell Valley Bank of Kalispell Timberland Bank Farmers State Bank

Larry Lund

Randy Marshall John Maxwell Howard Reynolds Richard Riccobono

Ireland Bank

Olympia Federal Savings

FinWise Bank

First Financial Northwest Bank

Michael Sand Dave Smith Daniel Soto

Timberland Bank Timberland Bank

harbordrug@seanet.com gilda.harrison@ally.com stephensdlsc@gmail.com GSutton@joneswaldo.com saraw@farmersebank.com gregy@farmersebank.com thetads@gmail.com

Ally Financial Bank of Idaho

Denise Stephens George Sutton

Glacier Bancorp, Inc. Farmers State Bank Farmers State Bank Farmers State Bank

Jim Tadvick

Sara Waldbillig Greg Yockey REGULATORS Melanie Hall Mary Hughes Edward Leary Roberta Hollinshead SPEAKERS Thomas Chandler Edward A. Krei Brett Manning, CFA

Montana Division of Banking and Financial Institutions Washington Department of Financial Institutions

mghall@mt.gov

roberta.hollinshead@dfi.wa.gov mary.hughes@finance.idaho.gov

Idaho Department of Finance

Utah Department of Financial Institutions

eleary@utah.gov

Holland & Hart LLP

Southwestern Graduate School of Banking at SMU

Federal Home Loan Bank of Des Moines

Patricia Milon Alisha Sears

MacroFinancial Solutions, Inc.

Conference of State Bank Supervisors

Robert Siciliano, CSP Thomas F. Siem, Ph.D.

IDTheftSecurity.com LLC

Conference of State Bank Supervisors

CSBS STAFF Sebastien Monnet

Conference of State Bank Supervisors

smonnet@csbs.org

202-549-2017

Bank Directors Seminar Coeur d’Alene, Idaho September 15-17, 2019

Sunday, September 15, 2019 3:00 PM

Welcome Remarks Sebastien Monnet

Vice President, Learning & Development Conference of State Bank Supervisors

Characteristics and Strategies of High-Performing Banks Edward A. Krei Independent Bank Consultant & Faculty Member Southwestern Graduate School of Banking at SMU Graduate School of Banking at Colorado

3:15 PM

Adjourn

4:30 PM

Happy Hour Networking Reception All registered attendees and guests welcome

5:00 PM

Monday, September 16, 2019 8:00 AM

Breakfast

U.S. Economic Outlook & Community Banking Thomas F. Siems, Ph.D. Senior Economist & Director of Research Conference of State Bank Supervisors

8:30 AM

Break

9:45 AM

The Future of Compliance: What Directors Should Know Patricia Milon Senior Advisor MacroFinancial Solutions, Inc.

10:00 AM

Break

11:00 AM

Regulatory Policy & Legislative Update from Inside the Beltway Alisha Sears

11:15 AM

Senior Analyst, Policy Development Conference of State Bank Supervisors

Lunch

12:15 PM

Critical Elements of Effective Corporate Governance in Community Banks Thomas Chandler Partner Holland & Hart LLP

1:30 PM

Break

2:45 PM

Current and Emerging Trends in Liquidity Risk Management Brett Manning, CFA Senior Vice President, Director Funding Product Group Federal Home Loan Bank of Des Moines

3:00 PM

Open Forum

4:15 PM

Adjourn

4:30 PM

Networking Reception & Dinner Dinner Cruise on Lake Coeur d'Alene

5:30 PM

Tuesday, September 17, 2019 8:00 AM

Breakfast

Protecting Your Bank from Security Risks Robert Siciliano, CSP #1 Best Selling Author IDTheftSecurity.com LLC

8:30 AM

Break

9:45 AM

The State Regulators Roundtable Melanie Hall Commissioner Montana Division of Banking & Financial Institutions

10:00 AM

Mary Hughes Deputy Director Idaho Department of Finance

Roberta Hollinshead Director of Banks Washington Department of Financial Institutions Ed Leary Commissioner Utah Department of Financial Institutions

Open Forum & Closing Remarks Sebastien Monnet Vice President, Learning & Development Conference of State Bank Supervisors

11:15 AM

Adjourn

11:30 AM

Conference of State Bank Supervisors ĂŶŬ ŝƌĞĐƚŽƌƐ ^ĞŵŝŶĂƌ

^ƚƌĂƚĞŐŝĞƐ ŽĨ ,ŝŐŚ WĞƌĨŽƌŵŝŶŐ ĂŶŬƐ Ͳ dŚĞ ĐŽŶŽŵŝĐ ,ĞĂĚǁŝŶĚƐ ŚĞĂĚ ^ĞƉƚĞŵďĞƌ ϭϱ͕ ϮϬϭϵ

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&ŝǀĞ ƐƐĞŶƚŝĂůƐ ƚŽ zŽƵƌ ĂŶŬ͛Ɛ ^ƵĐĐĞƐƐ

ϭ͘ ĞĞƉĞŶ ĐƵƐƚŽŵĞƌ ƌĞůĂƚŝŽŶƐŚŝƉƐ

Ϯ͘ dĂƌŐĞƚĞĚ ƌŝƐŬ ŵĂŶĂŐĞŵĞŶƚ

ϯ͘ ZĞƐŝƐƚ ƉĞƌĨŽƌŵĂŶĐĞ ĐŽŵƉůĂĐĞŶĐLJ

ϰ͘ /ŶǀĞƐƚŵĞŶƚ ŝŶ ƚĂůĞŶƚ

ϱ͘ ŶƚĞƌƉƌŝƐĞ ƐĞůĨͲĚĞƚĞƌŵŝŶĂƚŝŽŶ

Ϯϵ

&ŝǀĞ ƐƐĞŶƚŝĂůƐ͙͘

ϭ͘ ĞĞƉĞŶ ĐƵƐƚŽŵĞƌ ƌĞůĂƚŝŽŶƐŚŝƉƐ

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Conference of State Bank Supervisors

Strategies of High Performing Banks

presented to

Conference of State Bank Supervisors

Bank Directors Seminar

September 15, 2019

presented by:

Edward A. Krei FBBS, Inc. 1-405-627-7989 ekrei@outlook.com

WHAT HIGH PERFORMING FINANCIAL INSTITUTIONS DO WELL

I

Clearly define their markets and listen to their customers

2.

Think, plan and act with a long term focus

3.

Build effective processes and an efficient balance sheet

Understand their "bets"

4.

5. Invest in employees and an organization structure that demands accountability and promotes success

6.

"Ask- for the business"

7 Resist complacency and the status quo — they embrace and manage change with a "sense of urgency"

-1-

Strategic Issues — 2020-2022

1. "Business Governance" Issues (Board level) • Ownership succession • Board succession • Management succession

• Organization structure including effectiveness of committees • Board member expectations and lob descriptions" • Board meeting effectiveness and productivity

• Strategic business units, targeted customer segments and geographic scope • Regulatory environment, compliance and relationship with regulators • Risk identification, policy limits, measurement and reporting • IT planning, management and security • Compensation programs and incentive plans • External factors including the economy and interest rates • Capital formation, leverage and dividends • Growth and performance expectations • Tax planning including maximizing the Sub S election • Core values and code of conduct 2. Tactical and Operational Issues (Management level) • External factors including the economy and interest rates • Earnings, growth and performance -- measurements and goals • Risk identification, policy limits, measurement and reporting • Customer segmentation • Products • Marketing plan development • Image, reputation and competitive assessment • Branch delivery and geographic footprint • Non-branch and technology based delivery • Core systems and technology planning • People —training, retention, compensation, performance, communication • Customer service standards

• Processes including approvals and committees • Financial strategies and financial reporting • Regulatory change, relationships and compliance 3. Implementing the Strategic Plan (Managing Change)

• Keep it simple — and remember, implementation starts at the top • Have confidence you've identified your critical "impact areas" • Know what success looks like — begin with the end in mind a Have clear accountability and timelines • Know when you're making progress — have clear measurement criteria • Know how you will report progress and periodically update the plan • Develop a "bias for action" • Communicate —where we're headed, what's changing and how we're doing

-2-

Five Essentials to Your Bank's Success

1. Deepen customer relationships

Who will my customers be in 5 years and what will they want?

2. Targeted risk management

Liquidity risk is a hot button Capital planning

3. Resisting performance complacency

Capital utilization Operational accuracy and efficiency/productivity and Branch performance

4. Investment in talent

Begin with developing first level supervisors and mid-level managers Intellectual and emotional investment

5. Enterprise self-determination

Communications with shareholders and knowing their expectations Strong financial management and modeling Succession planning (management, board, ownership) Strategic planning

-3-

Financial Management Processes in Community Banks

1. Have good, useable reports and analytic tools that are appropriate for the size and complexity of our institution.., and available on a timely basis. Have confidence in the inputs, methodologies, assumptions and outputs of our models.

2. Use these tools in developing and documenting our financial strategies including capital planning, noncore funding, asset allocation, investment portfolio management, and more.

3. Have confidence that we are measuring and managing what's really important to our institution's success.

4. Spend sufficient time identifying and focusing on our "impact areas" ...don't be distracted by minutiae.

5. Periodically back away from the day-to day stuff and ask "what creates risk in my business?" Are my risks changing due to external factors or internal factors or both? Have we looked at trends in our risk positions? Have we established clear risk limits in our policies that effectively address all significant risks we face and do we report policy compliance in timely, clear reports? Do we have a good understanding of key concepts such as effective duration, convexity, value at risk, etc.

6. Ask "are we in compliance with our policies?" But don't stop there. Also ask "Do we like how we're positioned today?"

7. Ask "What are our current strategies? Are they working? Have they been documented? What can we do now to improve our risk position and our long term performance?"

8. Run simulations to model the impact of alternate strategies and large transactions — understand our risks and quantify our downside. In our simulations and stress tests have we examined possible "black swan" worst case scenarios that could impact our risk profile, capital and performance?

9. Don't let our Committees become stale. Develop a "call to action" mindset in our committees.

10. Don't ALCO turn into a "profit prevention committee." Make balance sheet management an active process in our institution. If necessary, reconstitute or rename our ALCO (eg "Strategic Financial Management Committee") to remove any stigma. Make sure our ALCO composition is sufficiently broad to engage all key areas of the organization that are involved in designing and implementing strategies (real estate lending, consumer lending, branch management, marketing). Let's take time to educate our committee members and our Board.

-4-

Risk Profile Assessment

Quality of Risk Management

Net Level of Risk Exposure

Quantity of Risk

Direction of Risk

Risk Category

Credit

..

Interest Rate

Liquidity

Price

Operational

Compliance

Strategic

Reputation

Note: Risk assessments in italics reflect a change since the last assessment. Assessments that are also in bold reflect an increase since the last assessment.

Sample Risk Exposure Matrix

Foreign Exchange Liquidity Transaction Compliance Strategic .. ..... .... .... .. .. .. ... .... .. .. .. .. ....... ........... ................... .......... ..... ................ ..... .... ..... .. ... . ..... .....

Function

Credit

Interest Rate

Price

....... .. ..... ... ... ....

....

.......

...

..

..

... ...........

......

..

Commercial Lending

... ..

.............

....

.....

............

...

............

.....................................

Personal Lending

........... .... •

..... ..

........... ..................

.......... ....................

................. ............

............................ .....

...........

.. .

• ........................ .......

............

................. ............... ......... • • ................. • ......

.......

Agricultural Lending

........................ • .........

..............

...................

..

.....

.

...

...

.. a'

...

..............

.....

.........

...

..

.......

.....

Fundin / Mone Desk

..

........ .......

..... ...........

....

......

....

...

.........

......

..... ..... .. ... ... ...

.....

.....

.....

... ..

....

...........

..............

Investments

.............

............... ...............

.....

.................

......

...

... ...

.... ....

.......

.. ...

• • • ............

.....

Retail / Branch Banking

...

....... • ............

.......

..........

...............

.....

....

......................

......... ..........................

...

......

..... •

...

........

.........

....

...

........... • .....................

... ..

......

.. ...

Trust

...

....

.....

.....

...... ... .. ..

.........

.....

........

.....

• ............

....

.......... ..............

..........

.....

.......

.....

............

....

. .............

..

.....

. ....

....

.............

.. ... . ........... ... . .. ..

...

..

.....

.... .. Operational / Data Processing .............. ......

.. .

..... ..

....... .. ..

............

................

...... ..

.....

. ..• ..........

..

......... ...

....

.................. . ............. ..•

.....

...

....

„.. ............

.. .. ..

....

...........

...............

.. ... .. ... .. ....

..

. .........

..

....

...

.....

...

......

....

..........

.....

....

Composite Direction (3)

.. ..

......

...............

...

.. ..

......

......

.....

.....

....

.....

.....

.......

...............

.....

....

...... ..

...............

...

..................................

......

..............

.............

.....

...... ..

(1) Inherent Risk (High, Moderate, Low) (2) Level of Management Control (Good, Moderate, Weak) (3) Anticipated to Increase (I); Remain Stable (S); Decrease (D) over the next 12 months (4) "Reputation" risk will be evaluated and documented separately In light of the Bank's financial condition and operating results, (historical & projected), capital position, the Bank's CRA rating, our Professional Code of Conduct Policy, level of customers complaints, new product offerings, our involvement in the communities we serve and other relevant factors.

(1)

................................... • ....... .... .................

(2)

LOAN QUALITY REPORTING

RATIOS

1. ALLL to total Loans 2. ALLL to nonperforming loans

3. ALLL to criticized loans 4. Criticized loans to Equity 5. LL Reserve to annualized charge-offs 6. Provision to average total loans 7. Charge-offs to total loans 8. $ weighted overall risk grading of portfolio

9. $ weighted overall risk grading by department/loan type/industry sector 10.$ weighted risk grading of newly approved loans by department 11.Recoveries to charge-offs 12.Nonperforming loans plus OREO to loans plus OREO 13.Nonperforming assets to equity plus LL Reserve

REPORTS

1. $ Level of nonaccrual loans by month 2. $ Level of watch list credits by month

3. Past due trends by officer, location and sector (30-59, 60-89 & >90) 4. $ and # of loans with collateral exceptions (30-59,60-89 & >90) 5. $ and # of loans with credit exceptions (>90) 6. Renewals of criticized loans 7. Charge-offs by loan type 8. Loans for which interest accrued and not paid last 90 days 9. Loans renewed 3 times in last 18 months 10.OREO activity 11.Changes in balances criticized assets 12.Overdrafts (>7 days and >14 days) 13.Loans past due > 3 times in past 6 months 14.$ and # loans approved with exception to policy 15.New loans funded with exceptions (# and $) by officer 16.Borrowing base compliance report 17.Collateral deficiencies in loans secured by marketable securities 18.Loan covenant compliance report 19.Appraisals over 12 months old 20. Real estate loans showing declines in appraised values

21 Interest capitalized 22. Legal/House Limit 23. Funding of criticized loan commitments 24. Collections of charged-off loans 25. Loans to officers, directors, insiders

-7-

26. OREO

a.Carrying value vs. Appraised value b.In-substance c.Large Expenses d. Income recognized e.Most recent appraised value vs. preceding appraised value

27. Interest reversals on new nonaccruals 28. Volume trends by officer or location 29. Loan portfolio concentration analysis and trends 30. Heightened risk relating to: a.New products b.New officers or responsibilities c.New or revised policies d.Changes in lending authorities e. New locations

31. Loan officer confirmation of risk grades for his/her portfolio on a quarterly basis 32. Monthly/quarterly action plans for nonperforming assets including cashflow projections

-8-

LOAN PRICING FORM

Customer

Officer

Note Number

Maturity Date

(A) Proposed line/loan amount

(B) Projected average loan outstanding

Projected average collected demand deposits, net of reserves

Projected time deposits net of reserves

(C)

Net bank funds employed

Cost of funds (C x Rate)

Administrative cost factor (B x percentage)

▪

Risk cost factor (B x percentage)

▪

•

Projected interest expense on time deposits

Activity charges on deposits

▪

•

Bank's profit objective pretax (B x percentage)

(D)

= Gross income required

-Fee (if any)

= Net interest income required

) Projected average loan outstanding

= Interest rate required

Rate proposed by officer

-9-

Asset/Liability and Investment Committee AGENDA -- xx/xx/1 9

I.

Review and Approve Minutes of Last Meeting

II.

Review of Current Environnzent, Risk Profile, Financial Structure and Trends

1. Net Interest Margin

1. Interest Margin Analysis Report 2. Selected Ratios and Financial Highlights -- Actual versus Budgeted

3. Interest Income and Expense Analysis ($ and %) 4. Peer Comparisons, Trend analysis and Projections

2.

Interest Rate Sensitivity 1. Interest Rate Sensitivity - Earnings and Capital at Risk 2. Interest Rate Risk Exposure - Trends and Analysis 3. Policy Risk Limits and Compliance

3. Investment Portfolio 1. Market and Sector Analysis -- Performance Trends and Market Values 2. Projected Cashflows/Shocks and Maturity Distribution 3. Portfolio Duration Analysis and Value at Risk 4. Cash flow, pledging and liquidity adequacy 5. Credit Quality -- Municipal and Corporate Securities 6. Mortgage and Callable Security Analysis 7. Quarterly Strategy - Current Position, Purchases and Sales 8. Policy Compliance 4. Capital, Liquidity Position and Funding Alternatives 1. Balance Sheet and Funding Mix - Current and Projected 2. Liquidity Analysis, Projections, Ratios and Trends 3. Deposit and Loan Maturities -- Growth/Depletion Trends 4. Capital Position/Utilization and Leverage Alternatives 5. Policy Compliance

5. Loan and Deposit Pricing

I. Competitive Environment - Loans and Deposits 2. Market and Interest Rate Environment 3. Repricing Opportunities 4. Overall Funding Needs and Alternatives

III. Analysis of External Factors and Strategy Development

1. Economic and Interest Rate Outlook and Competitive/Peer Analysis 2. Expected Loan Demand, Deposit Grovvtliffrends, Risk Profile and Capital Needs 3. Assessment of Prior Strategies compared to Expectations 4. Opportunities: Investments, Loan Terms and Pricing, Deposit Pricing and Funding Alternatives 5. Alternative Strategies to be Evaluated and Modeled - Rewards vs Risk 6. Formalize Strategies -- Actions to be Taken

IV. Meeting Calendar for 2019 - 2020 and Adjournment

-10-

Margin Capacity Balance Sheet ABC Bank Somewhere, USA 2017Q3

Assets:

Liabilities & Equity:

Thousands

Thousands

%

Non Earning Assets 9%

9%

Cash & NIBD Goodwill & Other

11,634 24,774

Equity

3% 6%

37,775

"Free" Funds 33%

NonInt. Bearing Deposits

103,741

24%

•

.Intipeallinge,DepOSitS

•10,020

Real Estate Agricultural Commercial Consumer

202,203, 17,437 •26;831 10,046 21,779 274,383

!Int Bearing DDA & IVIIVI Acct* Other Savings (ex MIVIDA's) Time Deposits < $250,000 Time Deposits > $250,000 Other Deposits (Inc! Now) Total Dom Deposits

48% ,

143,446 32,088 57,395 26,044 12,855 128,382

:340/0 a% 14%

4% . 6% .

2% 5%

Interest Paying

3% 30%

Interest Other

65%.

Earning Net Loans

Liab 67%

Assets 91%

Investment Securities

FHLB Borrowings

7,424

2%

,!'.92;6211•,.

Fed Funds Sold

10,858

3,521

Other

3%i

Total Assets

Total Liabilities & Equity

424,289

100%

424,289

100%

*net of NonInt Bearing Deposits

Community Bank Cash Flow & Liquidity Worksheet

indicates Manual Input (000's)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 10/31/08 $10,148

Today's Date (00/00/00) Beginning Fed Funds Sold Balance

Deposit Activity Expected

MaturedIVVithdraw Deposits are (-) for outflow of money & Renewed/New Deposits are (+) for inflow of money) $300 $300 $300 $300 $400 $400 $300 $300 $300 $300

Net Demand Deposit Accounts Net NOW Accounts Net Money Market Accounts

$300

$300

100 200

100 100

100 150

200 300

100 300

200 300

200 300

200 300

200 300

200 300

200 300

200 300

Net Savings Accounts Net CDs <100K (Small) Net CDs >100K (Jumbo) Net Public Deposits Net Deposit Activity Expected

50

50

50

50

50

50

50

50

50

50

50

50

1,000 2,500

2,000 2,000

1,500 1,500

1,500 1,500

1,500 1,500

1,500 1,500

1,500 2,000

1,250 2,000

1,500 1,500

2,000 1,500

1,500 1,500

1,500 1,500

O

0

0

0

0

0

0

0

0

0 0 $4,150 $4,550 $3,600 $3,750 $4,450 $4,200 $4,350 $3,850 $3,850 $3,850 $3,850 $3,850 0

Lending Activity Expected All Loans New Loans Matured/Paid Loans

(New Loans are (-) for outflow of money & Matured/Sold/Paid Loans are (+) for inflow of money) (S2.000) ($3,500) ($2,000) (52,500) ($3.000) ($3,000) ($3,000) ($3,000) ($3.000) 50 50 100 150 50 250 400 200 100 O 0 0 275 0 0 500 0 2.000 ($1,950) ($3,450) ($1,900) ($2,075) ($2,950) ($2,750) ($2,100) ($2,800) ($900)

($4,000) ($3,000) 150 150 500 1,500 ($3,350) ($1,350)

($3.500) 50 300 (S3,150)

Proceeds from Sale of Loans

Net Lending Activity

Securities Activities Expected All Securities Securities Purchases Securities Maturities Securities Calls Securities Prepayments Proceeds from Securities Sales Interest Bearing Balances Purchases Interest Bearing Balances Maturities Net Securities Activities

(Purchased are (-) for outflow of money & Matured/Called/Prepay/Paid are (+) for inflow of money) $0 $0 $0 ($1,000) SO ($1,500) SO $0 $0 O 0 0 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 50 50 100 50 100 50 100 50 100 O 0 0 0 0 0 0 0 0 O (500) (500) 0 0 0 0 0 0 O 0 0 0 0 0 0 0 0 $50 ($450) ($400) ($950) $100 ($1,450) $100 $50 $100

(S2,000) 0 0 50 0 0 0 ($1,950)

$0

$0

0 0

0 0

50

50

0 0 0

0 0 0

$50

$50

Funding and Cash Activities Expected Maturing Brokered Deposits Maturing Internet Deposits Maturing FHLB Borrowings

(Maturing (-) for outflow of money & Payments (+) for Inflow of money) $0 $0 $0 $0 ($2,831) $0 ($2,075) ($198) (S776) ($1,520) ($5,207) ($4492) O 0 0 0 2,000 0 O 0 0 0 0 0 O 0 0 0 0 0 (500) (500) (250) 0 0 0 O 0 0 0 0 0 (50) (50) (50) (50) (50) (50) ($2,625) ($748) ($1,076) ($1,570) ($6,088) ($542)

SO

$0

$0 ($250) 0 0 0 0 0 (50) ($300)

$0

$0 $0

$0 $0

($86)

(S198)

($393)

0 0 0

O O O O

0 0 0 0

0 0 0 0 0

0 0 0 0

Maturing REPO Maturing FFLOC Major Fixed Asset Purchases Dividend Payments Other Cash Activities Total Funding & Cash Activities

0 0

O

0

0

(50)

(50)

(50)

(50)

(50)

($136)

($50)

($248)

($443)

($50)

On Balance Sheet Liquidity Balance Sheet Liquidity Cash (Net)

$1,500 $0 $3,192 $72,469

$1,500

$1,500

$1,500

$1,500

$1,500

$1,500

$1,500 $1,500 $1,500 $1,500 $1,500

Interest Bearing Bank Balances Securities Total Assets

$3,092 $2,992 $2,942 $2,842 $2,792 $2,692

$2,642 $2,542 $2,492 $2,492 $2,392

Off Balance Sheet Liquidity Additional Available Sources Unpledged Securities

$3,192 $3,092 $2,992 $2,942 $2,842 $2,792 $2,692

$2,642 $2,542 $2,492 $2,492 $2,392

Dollars of Available (3) (Total Amount x

Percentage for Available (%)

Remaining Available Capacity

Total Amount Available

Current Capacity Used (5)

Percentage)

Brokered Deposits Capacity FHLB Borrowing*Capacity

$8,870 $2,400

75% 75%

$6,653 $1,800

$2,831 $0

$3,822 $1,800

Contingency Sources

Fed Funds Line of Credit

$9,000

$0

-12-

idity Forecast Cash Flow and Liqu

March 31, 2018

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Beginning Fed Funds Balance

$30,975 $23,764 $22,186 $21,074 $18,520 $15,899 $12,640

$8,537

$5,079

$2,613

$1,846

$2,180

Deposit Activity Expected Deposit Account Runoff Deposit Accounts Retained CDs <2501< Matured CDs >250K Matured CDs Renewed/Repurchased Net Deposit Activity Expected Lending Activity Expected New Loans Renewed/Extended Loans Matured/Paid Loans Funding of Warehouse Loans Proceeds from Sale of Loans Net Lending Activity Securities/IBB Activities Expected Securities Purchases Securities Maturities/Calls/Prepayments Net Securities//BB Activities Expected Funding and Cash Activities Expected Maturing FHLB Borrowings Dividend Payments Total Funding & Cash Activities Total Cash Increase/Decrease Forecast Ending Fed Funds Balance Total Liquidity (On-balance sheet sources) Cash interest Bearing Balances Fed Funds Sold Securities Total Liquidity TOTAL LIQUIDITY/ TOTAL ASSETS Available Liquidity (Off-balance sheet sources) TOTAL ASSETS

$0

$0

$0 ($8,632) ($8,632) ($8,632) ($8,632) ($8,632) ($8,632) ($8,632) ($8,632) ($8,632)

o

o

0

6,906

6,906

6,906

6,906

6,906

6,906

6,906

6,906

6,906

(2,914) (7,896) 8,648

(2,447) (4,330)

(2,918) (2,504) 4,338

(2,640)

(4,376) (1,242)

(2,596)

(2,865) (2,164) 4,023

(3,897) (1,003)

(3,002) (1,680)

(2,007) (1,010)

(3,075)

(2,984)

(617)

0

(401)

(804)

5,422 2,606 2,077 3,920 3,030 ($2,162) ($1,355) ($1,084) ($2,378) ($2,850) ($2,246) ($2,732) ($2,706) ($2,663) ($2,330) ($2,422) ($2,484) 3,746 2,414 2,781 4,494

($4,367) ($300) ($300) ($300) ($300) ($10,072) ($8,310) ($11,673) ($10,377) ($10,114) ($7,548) ($3,716) ($6,193) ($4,386) ($5,257) ($6,758) ($3,660) 12,590 10,388 14,591 12,971 12,643 9,435 4,645 7,741 5,483 6,571 8,448 4,575 (3,333) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) 3,333 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 3,500 ($1,849) $1,778 $2,618 $2,294 $2,229 $1,587 $629 $1,248 $797 $1,014 $1,390 $615 ($300) ($300) ($300) ($300) ($300) ($300) ($300)

($3,558) ($3,541) ($2,985) ($6,279) ($3,828) ($4,275) ($3,776) ($5,566) ($2,200)

$0

$0

$0

1,558

1,541

985

4,279

1,828

2,275

1,776

3,566

2,200

1,353 $1,353

698

2,867 $2,867

($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)

$0

$698

o o

(1,000)

o o

o

o o

o o

(46)

o

o 0

(470)

o o

(470)

o

(200)

(600) ($646)

o

(600) ($600)

(600) ($600)

($1,200)

$0

($470)

$0

($470)

$0

$0

$0

$0

($7,211) ($1,578) ($1,112) ($2,554) ($2,621) ($3,259) ($4,103) ($3,458) ($2,466)

($433)

($334)

$998

$23,764 $22,186 $21,074 $18,520 $15,899 $12,640 $2,844 $445,696 $444,341 $443,210 $440,362 $437,512 $435,267 $432,535 $429,828 $427,165 $424,366 $421,944 $419,460 $8,537 $5,079 $2,613 $2,180 $1,846

$6,294 12,369 23,764 90,615

$6,294 12,369 22,186 92,615

$6,294 12,369 21,074 94,615

$6,294 12,369 18,520 96,615

$6,294 12,369 15,899

$6,294 12,369 12,640

$6,294 12,369 8,537

$6,294 12,369 5,079

$6,294 12,369 2,613

$6,294 12,369 2,180

$6,294 12,369 1,846

$6,294 12,369 2,844

98,615 100,615 102,615 104,615 104,615 103,262 102,564 99,697 $133,042 $133,464 $134,352 $133,798 $133,177 $131,918 $129,815 $128,357 $125,891 $124,105 $123,073 $121,204 30% 30% 30% 30% 30% 30% 30% 30% 29% 29% 29% 29%

Unpledged Securities Overpledged Securities Brokered Deposit Capacity FHLB Capacity Bankers Bank Fed Funds Correspondent Bank LOC Total Available Liquidity

$18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $18,186 $6,812 12,000 $0 12,000 $0 12,000 SO 12,000 SO 12,000 SO 12,000 $0 12,000 $0 12,000 $0 12,000 $0 12,000 $0 12,000 $0 12,000 16,640 16,640 16,686 17,156 17,156 17,156 17,155 17,155 17,156 17,626 17,626 17,626 13,105 13,105 13,105 13,105 13,105 13,105 13,105 13,105 13,105 13,105 13,105 13,105 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5.000 5,000 $71,743 $64,931 $64,977 $65,447 $65,447 $65,447 $65,447 $65,447 $65,447 $65,917 $65,917 $65,917 16% 15% 15% 15% 15% 15% 15% 15% 15% 16% 16% 16% 46% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45%

TOTAL AVAILABLE LIQUIDITY/TOTAL ASSETS TTL CURR & AVAILABLE LIQUIDITY/TTL ASSTS

SENSITIVITY TO MARKET RISK

Section 7.1

balance sheet and an immediate, sustained interest rate shift.

Duration Analysis

Gap analysis has several advantages. Specifically, it:

Duration analysis measures the change in the economic value of a financial instrument or position that may occur given a small change in interest rates. It considers the timing and size of cash flows that occur before the instrument's contractual maturity. Additional information on different types of duration analysis is included below and in the glossary. Macaulay duration calculates the weighted average term to maturity of a security's cash flows. Duration, stated in months or years, always: • Equals maturity for zero-coupon instruments, • Equals less than maturity for instruments with payments prior to maturity, • Declines as time elapses, • Is lower for amortizing instruments, and • Is lower for instruments with higher coupons. Modified duration, calculated from Macaulay duration, estimates price sensitivity for small interest rate changes. An instrument's modified duration represents its percentage price change given a small change in interest rates. Modified duration assumes that interest rate shifts will not change an instrument's cash flows. As a result, it does not estimate price sensitivity with an acceptable level of precision for instruments with embedded options (e.g., callable bonds or mortgages). Institutions with significant option risk should not rely solely upon modified duration to measure IRR. Effective duration estimates price sensitivity more accurately than modified duration for instruments with embedded options and is calculated using valuation models that contain option pricing components. First, the user must determine the instrument's current value. Next, the valuation model assumes an interest rate change (usually 100 basis points) and estimates the instrument's new value based on that assumption. The percentage change between the current and forecasted values represents the instrument's effective duration. All duration measures assume a linear price/yield relationship. However, that relationship actually is curvilinear, which means that large shifts in rates have a greater effect than smaller changes. Therefore, duration may only accurately estimate price sensitivity for rather small (up to 100 basis point) interest rate changes. Convexity-adjusted duration should be used to more

• Identifies repricing mismatches, • Does not require sophisticated technology, • Is relatively simple to develop and use, and • Can provide clear, easily interpreted results.

However, the weaknesses of gap analysis often overshadow its strengths, particularly for a majority of financial institutions. For example, gap analysis: • Generally captures only repricing risk, • Assumes parallel rate movements in assets and liabilities, • Generally does not adequately capture embedded options or complex instruments, • May not identify material intra-period repricing risks, and • Does not measure changes in the economic value of capital. Some gap systems attempt to capture basis, yield curve, and option risk. Multiple schedules (dynamic or scenario gap analysis) can show effects from non-parallel yield curve shifts. Additionally, sensitivity factors may be applied to account categories. These factors assume that coupon rates will change by a certain percentage for a given change in a market index. The market index is designated as the driver rate (sophisticated systems may use multiple driver rates). These sensitivity percentages, also called beta factors, may dramatically change the results. Institutions can also use sensitivity factors in their gap analysis to refine non-maturity deposit assumptions. For example, management may determine that the cost of funds for money market deposit accounts (M1VIDA) will increase by 75 basis points whenever the six-month Treasury bill rate increases by one percent. Thus, management might consider only 75 percent of MMDA balances as rate sensitive for gap analysis. Management may expand its analysis by preparing gap schedules that assume different market rate movements and changing customer behaviors. As noted above, gap analysis is generally not suitable as the sole measurement of 1RR for the large majority of institutions. Only institutions with very simple balance sheet structures, limited assets and liabilities with embedded options, and limited derivative instruments and off-balance sheet items should consider relying solely on gap analysis for IRR measurements.

RMS Manual of Examination Policies Federal Deposit Insurance Corporation

7.1-7

Sensitivity to Market Risk (7/18)

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SENSITIVITY TO MARKET RISK

Section 7.1

accurately estimate price sensitivity for larger interest rate changes (over 100 basis points).

years five, six, and seven), whereas EVE models aggregate the effect of such mismatches. Institutions may vary their simulation rate scenarios based on factors such as pricing strategies, balance sheet compositions, hedging activities, etc. Simulation may also measure risks presented by non-parallel yield curve shifts. Institutions can run static or dynamic simulations. Static models are based on current exposures and assume a constant balance sheet with no new growth. The models can also include replacement-growth assumptions where replacement growth is used to offset reductions in the balance sheet during the simulation period. Dynamic simulation models may assume asset growth, changes in existing business lines, new business, or changes in management or customer behaviors. Dynamic simulation models can be useful for business planning and budgeting purposes. However, these simulations are highly dependent on key variables and assumptions that are difficult to project with accuracy over an extended period. Also, when management changes simulation scenarios, it may lose insights on the bank's current IRR positions. Dynamic simulations can provide beneficial information but, due to their complexity and multitude of assumptions, can be difficult to use effectively and may mask significant risks. Projected growth assumptions in dynamic modeling often alter the balance sheet in a manner that reflects reduced IRR exposure. For example, if a liability-sensitive bank assumes significant growth in one-year adjustable rate mortgages or long-term liabilities and the growth targets are not met, management may have underestimated exposures to changing interest rates. Therefore, when performing dynamic simulations, institutions should also run static or no-growth simulations to ensure they produce an accurate, comparative description of the bank's IRR exposure. Despite their benefits, both static and dynamic earnings simulations have limitations in quantifying IRR exposure. As a result, economic value methodologies should also be used to broaden the assessment of IRR exposures, particularly to capital. Economic value methodologies attempt to estimate the changes in a bank's economic value of capital caused by changes in interest rates. A bank's economic value of equity represents the present value of the expected cash flows on assets minus the present value of the expected cash flows on liabilities, plus or minus the present value of the expected cash flows on off-balance sheet instruments. Economic Value of Equity

Duration analysis contains significant weaknesses. Accurate duration calculations require significant analysis and complex management information systems. Further, duration only measures value changes accurately for relatively small interest rate fluctuations. Therefore, institutions must frequently update duration measures when interest rates are volatile or when any significant change occurs in economic conditions, market conditions, or underlying assumptions. Earnings simulation models (such as pro-forma income statements and balance sheets) estimate the effect of interest rate changes on net interest income, net income, and capital for a range of scenarios and exposures. Historically, comprehensive simulation models (both long- and short-term) were primarily used by larger, more complex institutions. Current technology allows less complex institutions to perform cost effective, comprehensive simulations of the potential impact of changes in market rates on earnings and capital. A simulation model's accuracy depends on the use of accurate assumptions and data. Like any model, inaccurate data or unreasonable assumptions lead to inaccurate or unreasonable results. A key aspect of IRR simulation modeling involves selecting an appropriate time horizon(s) for assessing IRR exposures. Simulations can be performed over any period and are often used to analyze multiple horizons identifying short-, intermediate-, and long-term risks. When using earnings simulation models, IRR exposures are often more accurate when projected over at least a two-year period. Using a two-year time frame better captures the fill impact of important transactions, tactics, and strategies, which may be hidden by only viewing projections over shorter time horizons. Management should be encouraged to measure earnings at risk for each one-year period over their simulation horizon to better understand how risks evolve over time. For example, if the bank runs a two year simulation, one- and two-year simulation reports should be generated. Longer-term earnings simulations of up to five to seven years may be recommended for institutions with material holdings of products with embedded options. Such extended simulations can be helpful for IRR analysis and economic value measurements. It is usually easier for an extended simulation model to identify when long-term mismatches occur (e.g., it can show that a bank is liability sensitive in years two, three, and four, but asset sensitive in Earnings Simulation Analysis

Sensitivity to Market Risk (7/18)

7.1-8

RMS Manual of Examination Policies Federal Deposit Insurance Corporation

-15-