Capital Markets School - Case Study

Capital Markets School

Case Study

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CSBS Capital Markets School Cloyd Bank and Trust Case Study 1. ALCO Minutes

1.1. November 2020 Minutes and Package 1.2. February 2021 Minutes and Package 1.3. May 2021 Minutes and Package 1.4. August 2021 Minutes and Package 1.5. November 2021 Minutes and Package 1.6. February 2022 Minutes

2. Audit

2.1. EPRA Risk Assessment 2.2. Audit Policy

3. Investments

3.1. Investment Policy 3.2. Investment Portfolio Report 12/31/2021

3.3. Securities Transactions 2020 3.4. Securities Transactions 2021 4. Liquidity and Funds Management

4.1. Basic Short Term Liquidity Feb 2022 4.2. Contingency Funding Plan 4.3. Credit Lines 4.4. Large Depositors December 2021 4.5. Liquidity Basic Surplus Feb 2022 4.6. Balance Sheet Liquidity Feb 2022 4.7. Public Deposits December 31, 2021

5. Mortgage Banking 5.1. Secondary Mortgage Loans in Underwriting April 2022 5.2. Sold Secondary Mortgage Loans 6. Sensitivity to Market Risk 6.1. ALM Report 2021-12-31 6.2. Asset-Liability Management Policy

6.3. Deposit Study Engagement Letter DCG 6.4. Independent Review of IRR Program 7. December 31, 2021 Financial Documents 7.1. Call Report

7.2. UBPR Annual Periods 7.3. UBPR Quarterly Periods

7.4. 2022 Budget 7.5. Balance Sheet 7.6. Income Statement 7.7. 2020-2022 Strategic Plan 7.8. Deposit Market Share S&P Global

Investment/ALCO Committee Meeting Minutes 11/19/2020

ALCO Committee Meeting November 19,2020

The ALCO/Investment Committee meeting was held on November 19, 2020. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer , Secretary , and Frank of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the two significant events that had occurred since the last meeting that could shape the markets in the coming months are the change in the presidency and the announcement of the COVID vaccines. There are many uncertainties, and many businesses are still suffering the effects of the pandemic, and cases have been surging again. Treasuries have been rallying as the cases have been on the rise and Fed Chairman Powell stated, “We have got new cases at a record level, we have seen a number of states begin to reimpose limited activity restrictions, and people may lose confidence that it is safe to go out”. Though Powell has stated negative rates are not a tool the committee is looking to use, the FOMC expects rates to stay near zero through 2023. The committee discussed the importance of understanding the implications of this on investments and longer-term loans as well as deposit pricing. The committee also discussed the importance of the lenders staying closely engaged their borrowers to ensure they are well informed about the potential impact of economic conditions Mr. Frank presented the Bank’s Balance Sheet changes for the quarter, which showed a contraction of almost $6 million, but a slight increase in overall spread of about .04%. The expiration of a CD special, the reduction in the CD Board Rates in May, and the outflow of a single large CD customer had contributed to a positive impact on CD Cost of funds by .42% quarter over quarter. Mr. Frank confirmed that management had done an excellent job of lowering deposit rates, and the Bank’s opportunity for improvement now lies on the asset side. Given the ongoing pressure on asset yields, the Committee discussed ways to offset future pressure on NII which included dropping NMD rates, significant loan growth at +3% spread, or $40-80MM bond leverage at 1.50% spread. For the quarter, there had been $38MM loan originations at an average yield of 4.20%, net growth in residential mortgage loans of $4.7MM, and outstanding PPP loan balances at quarter end were $40MM. Mr. Frank continued to stress that the Bank has ample room to add longer term assets and reiterated the emphasized on retaining some of residential mortgage loans the mortgage division originates. Mrs. CFO stated that the Bank had retained over $17 MM since last quarter again in a variety of maturities (5/1 & 7/1 Arms, and 10, 15, 20, 30 fixed) As previously discussed, Mrs. CFO also stated that the investment portfolio prepayment speeds were being monitored to assess the need to sell any that indicated significant acceleration that may result in negative yields. Raymond James was currently working on an in-depth analysis that could result in several sales and purchases. The committee also discussed that the Bank is still sitting on a large amount of excess liquidity and that deposits do not show any sign of rolling

Investment/ALCO Committee Meeting Minutes 11/19/2020

off. The committee agreed the opportunity cost of sitting on so much excess is substantial and that investment purchases should be increased to supplement residential mortgage loan retention if other loan demand is not sufficient to use up some of the excess liquidity. Mr. Frank presented the EVE calculation and that the Committee noted that although the calculation in the -100 bps scenario had improved from -26.5 to -22.2 for the quarter, the Bank is still outside of the policy of -10 in this one scenario. The Committee agreed that no corrective action was necessary in this regard and that the calculation would continue to be monitored but is comfortable with the position and will continue to monitor changes that may warrant aggressive, but not desirable, actions previously discussed such as: o Aggressive deposit rate reductions o Extend assets after a strong bond market rally o Push depositors out the door and replace funds with lower “all in cost” wholesale alternatives. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $40+MM PPP loans, was adequate at 9.00%, and above the regulatory minimum. As previously stated, Management continues to actively projecting capital needs for future growth and exploring capital options to support it with one being a Holding Company Sub Debt Issue.

The ALCO committee adjourned at 10:00 am.

Investment/ALCO Committee Meeting Minutes 2/18/21

ALCO Committee Meeting February 18, 2021

The ALCO/Investment Committee meeting was held on February 18, 2021. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer , and Frank of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the industry-wide concerns in the current environment: • Deposit balances are still growing • Impact of additional Stimulus rounds is unknown • Acceleration of asset cash flows and continued increase in cash at 5-10 bps • Slowing loan pipelines and very competitive pricing given liquidity • Residential volume/Refi demand • Diminishing impact of deposit rate reductions resulting in NII sloping downward • Questions about credit quality and capital resiliency • Many preparing for potential losses to develop in 2021 or 2022 The Committee discussed that regardless of current market concerns, the Bank is still experiencing tremendous growth and excellent credit quality. While many businesses are struggling, others are doing very well. Management is cautiously optimistic about the year ahead and continues to impress upon lenders to stay in front of their borrowers in order to stay informed on how their business are adapting and progressing. Mr. Frank presented the Bank’s Balance Sheet changes, which showed significant growth for the quarter of $33MM, but a decline in spread of about .15%. Net loans were up $4MM, Fided Residential up $5MM, and CRE up $6MM. PPP loan paydowns amount to $14MM. Deposits were up $37MM with the growth in NMD inflows of $39MM. Repurchase agreements experienced normal fluctuations and were down $4MM. The impact of the quarterly Balance Sheet changes were higher levels of liquidity; similar starting NII with more pressure over time; increased asset sensitivity with higher NMDs, and a CD shift to Cloyd NOW with lower beta assumption to rising rates. Mrs. CFO stated that the Bank had grown another $50MM since 12/31, with all growth in NMD. The Committee discussed the Bank’s appetite/capacity for longer term loans and held the same opinion of continuing to hold high credit quality residential mortgage loans originated by mortgage department if the Refi wave continues. Mrs. CFO stated that the Bank had retained >$16MM for the quarter, and a total of $26MM for the year. Mr. Frank presented an alternative investment strategy comparing investing $40MM in discounted bonds – 10yr DUS & 30yr MBS vs $35MM of 15 yr. MBS at Premiums. The simulation assumed the discounted bond purchases at a weighted average yield of 1.50% and the premium 15 yr MBS at .85% and all purchases funded with cash. The impact in the base and down 100bps

Investment/ALCO Committee Meeting Minutes 2/18/21

cases was ~$300-350k in each of the 5 years modeled, and less but positive impacts in the first two years of the other scenarios (up 200bps, Yield Curve Twist, Delayed Yield Curve Twist). The Committee agreed it was prudent to continue with bond purchases to deploy excess cash and understood the time sensitive nature of bond purchases and sales along with market conditions and expressed the authority to make those purchases within policy guidelines resides with Management. As follow up to last quarter’s meeting discussion, Mrs. CFO stated that Management had followed through with a portfolio restructuring strategy analyzed and presented by Raymond James (attached). The strategy was primarily to sell ~$11MM of low/negative yielding accelerated prepayment sensitive MBS bonds and reinvest at higher yielding MBS. The impact of the strategy was an improvement in book yield of .70 and an increase in average life of 5.20 years. Mr. Frank presented the EVE calculation and the Committee acknowledged that the calculation is still below the policy guideline in the -100 bps scenario. The result had only changed slightly from -22.2% to -23.7% for the quarter. The Committee agreed that corrective action was still not necessary and will continue to monitor and discuss. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $22+MM PPP loans, was adequate at 9.00%, and above the regulatory minimum. Management continues to discuss capital needs for future growth and expects to have an official offering ready in 1Q or 2Q. The ALCO committee adjourned at 10:00 am.

Investment/ALCO Committee Meeting Minutes 05/27/21

ALCO Committee Meeting May 27, 2021

The ALCO/Investment Committee meeting was held on May 27, 2021. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer , Mr. Smith, and Mr. Mitchell of Darling Consulting Group. . Mr. Chairman called the meeting to order. The committee discussed the following Industry Outlook for 2021: o Funding cost reduction opportunities remain limited o Yield curve slop will help, it it remains and if loan rate increase • Loan Volumes/Rates o Elevated liquidity in the system and more coming, increasing competitive pressures o Will higher market rates translate to higher origination rates? • Deposits o Do rates matter? o Deposit Surge extremely important variable to understand with impacts on liquidity, IRR and earnings • Investments o Bond market sell-off has changed the current picture • Credit Quality o Will all the stimulus/programs provide enough runway for economic take-off? All of these are also constant topics of discussions, but Management remains optimistic about the months ahead. Mr. Mitchell presented the Bank’s Balance Sheet changes, which showed even more significant growth than last quarter at $70MM for the quarter, but a decline in spread of about .25%. Though there were ~$43MM in loan originations, net loans were down $9MM, with PPP paydowns representing $4MM. Deposit inflows were up $71MM with a mix of NMD inflows and CDs down $5MM. Public Funds represented $24MM of the growth. Management acknowledged that the growth was sure to have been affected by stimulus funds, but also that several new accounts had been opened and the Bank had won some significant customers due to the goodwill earned in how we served our community during the crisis. The BS Activity impact was higher levels of liquidity with deposit inflows supporting investments/cash; higher NII due to investment purchases and PPP Fee Income; and slight dampening on asset sensitivity. Mrs. CFO stated that the~$10MM of originated Residential Mortgages (5/1 & 7/1 Arms, and 5,15,20,25,30 fixed products) were retained, and $52MM of DUS & MBS Investments in a variety of coupons (1.5 – 2.5) and maturities (10,15, 20, 30). She further stated that $82MM of • NIM Pressure

Investment/ALCO Committee Meeting Minutes 05/27/21

similar investment products had been purchased in April & May up to the date of the meeting, and the Bank was till sitting on ~$110MM excess cash. The Committee agreed that the elevated level of cash and lack of net loan growth warranted continued investment purchases to improve NII. Mr. Mitchell also presented an illustration of the impact of subsequent investment purchases that reflected a $1MM difference in annual earnings each of 5 years if $75MM in investments were not initiated. Mrs. CFO stated that upon consideration of current market rates along with the deposit growth the Bank was continuing to experience, Management had reduced CD Board rates effective April 20 th , and the Cloyd Prime, Cloyd Money Market & Business Money Market account rates would be reduced in June after adequate required notification to customers. Therefore, NII should show the positive impact of these in the next couple quarters. Due to competitive loan offerings, Management had requested Mr. Mitchell run a simulation of the impact of $50MM in loan originations made up of $10MM Res 30Y Fixed @ 2.875%; $15MM 5Y Commercial @ 4.00%; and 10Y Commercial @ 4.00%. He presented the simulation which showed a significant positive impact to earnings in all scenarios and in every year for 5 years. The Committee agreed it was prudent use these loan buckets to help generate net loan volume. Mr. Mitchell presented the EVE calculation and the Committee acknowledged that the calculation is still below the policy guideline in the -100 bps scenario. However, the calculation show improvement to -19.2% from -23.7%. The Committee agreed that corrective action was still not necessary and will continue to monitor and discuss. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $22MM PPP loans, was low at 8.51%, but above the regulatory minimum. Mrs. CFO stated the capital ratios would improve in June. The $30MM HC Sub Debt Issue settled in April, and ~$10MM would be contributed to the Bank in May. The ALCO committee adjourned at 10:00 am.

Investment/ALCO Committee Meeting Minutes 08/19/21

ALCO Committee Meeting August 19, 2021

The ALCO/Investment Committee meeting was held on August 19,2021. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO, Senior Loan Officer , Mr. Smith, Mr. Frank and Mr. Mitchell of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the following Industry Outlook for 2021:

• NIM Pressure

o 2021 Earnings masked by PPP fees/forgiveness o Concerns mounting for many banks in terms of 2022 and 2023 o Inconsistent volume & low pricing given excess liquidity o Payoffs limiting growth outlook

• Loan Volumes/Rates

• Deposits

o Where did growth come from? o How long will it last?

• Investments

o Tight spreads across most sectors o Opportunity cost of sitting on excess cash

• Credit Quality

o Holding up for most in the industry These points continue to dominate discussions, and Management remains optimistic. Mr. Frank presented the Bank’s Balance Sheet changes, which showed quarter over quarter growth of $40MM, and an unchanged spread. The Bank had been able to overcome the negative effects of NIM compression with volume, and the committee agreed that diligent efforts to produce quality volume in earning assets and low-cost funding, plus improvements in non interest income/expenses were all necessary to support future earnings. Mr. Frank stated that CB&T wasn’t under as much pressure as many of their other clients. He showed that the Bank was $1.4MM better off than the simulation showed a year ago, due to volume. There was ~$38 MM in loan originations for the quarter at a weighted average yield of 3.63%, but a net decrease of $6 MM, due to paydowns. The Bank continues to have a strong loan pipeline which helped to offset routine paydowns, as well as paydowns due to both customer cashflow availability and industry competition. The Bank continued to see deposit growth amounting to $30MM across all NMDA product categories while keeping rates low to mid-market; and only $6MM of that growth was in Public Funds. Mrs. CFO stated that ~$4MM of originated Residential Mortgages (5/1 & 7/1 Arms, and 5,15,20,30 fixed products) were retained for the quarter ($14MM YTD). She further stated that

Investment/ALCO Committee Meeting Minutes 08/19/21

Management had continued with the same investment strategy previously agreed of deploying excess liquidity into a variety of products (MBS, CMBS Pools, Munis, SBAs, and UST), terms (7 30 years), and coupons (1-2.875). The portfolio had net growth of $100MM for the quarter resulting in a portfolio book value of $293MM and yields of 1.79/1.44 (accounting/market). Mr. Frank continued to stress that the Bank’s overall ALM position still supports longer duration assets. The Committee agreed to continue deploying excess liquidity of at least $10MM/weekly with the goal of investing excess liquidity not needed to fund loans or replace any potential deposit outflows. Mrs. CFO also stated due to recent purchases, agency passthroughs were at 28.6% of assets as of 7/31, and purchases have been made in block sizes up to $5MM. Given the size of the Bank today and the level of capital growth, larger block sizes are warranted for better pricing, salability, and efficient execution. As such, most MBS purchases have been executed in $2-3MM blocks and two US Treasury blocks have been executed at $3MM and $5 MM. The Committee acknowledged that the amount of excess liquidity needing to be deployed, and the time sensitive nature of purchasing securities that will complement the Bank’s portfolio justify larger block purchases without prior approval on an individual transaction basis. Mrs. CFO presented those exceptions and a policy revision to the full Board that afternoon. Mrs. CFO reminded the committee that the Cloyd Prime, Cloyd Money Market & Business Money Market account rate reductions previously report had become effective in June 2,2021, and only slight relief in COF of 1 bps had been experienced for the month due the mix in balances. Mr. Frank presented the Executive Summary noting that the Earnings at Risk Shock Scenarios and the EVE calculation are both outside of policy guidelines in the -100 bp scenario, in both YR1 & YR2 simulations. IRR showed Yr1 -6, and Yr2 -21.2, versus policy guidelines of -5 & -10 respectively. EVE showed Yr1-14.3, and Yr2 6.3, versus policy of -10.0, and 6.0 respectively. While the bank’s greatest risk is to the current and falling rate scenarios, the Y2 metrics are currently skewed due to the inclusion of PPP fee income in Y1. If the fee income were removed from the simulation, both the Yr2 metrics would be compliant (Yr2 shock down 100bp and ramp down 100bp). The Yr1 shock down 100bp scenario essentially knocks another 100bp from our investment and loan yields with minimal offsets on deposit rates. If this were to occur, aggressive reduction of cost of funds would bring the numbers back into policy. However, outside of taking rates negative, there is no way to hedge against a simulation that further pressures rates on the asset side. The entire industry has exposure to rates at the zero bound. In terms of Balance Sheet strategy, the reality of margin pressure is not only resulting in continued emphasis on lowering the rates on deposits, but also on re-evaluating all fee structures to offset some of the lost income. The Committee accepted the policy exceptions, agreeing that corrective action was still not necessary, but ongoing monitoring and discussion was necessary. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $22MM PPP loans, had increase to 9.26%, a result of the $10MM capital injection from the HC that was noted last quarter. The ALCO committee adjourned at 9:45 am.

Investment/ALCO Committee Meeting Minutes 11/18/2021

ALCO Committee Meeting November 18, 2021

The ALCO/Investment Committee meeting was held on November 18, 2021. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer, Mr. Frank and Mr. Mitchell of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the following Industry Outlook for 2021: • Short term rates to remain low. o The FOMC remains patient and most Fed officials are projecting rate hikes in 2023. o The markets expect the Fed to act sooner given inflation. o Inflation / CPI numbers will remain elevated for longer largely due to COVID related supply shortages, bottlenecks, elevated energy costs and labor market dislocations. o FOMC continues to push for inflation >2% AND maximum employment (dual mandate). o The economy is still well below maximum employment…the employment picture should be closely watched. o The unemployment vs. participation rate • Taper will come first, set to begin in this month. o Officially announced at the most recent November FOMC meeting. o Providing lots of notice so as not to surprise the markets or public and making clear that Tapering is not Tightening. o Flatter curve at belly of the yield curve; the 2‐to‐5‐year points, moving higher while longer end lower. • Global growth forecasts have shifted lower. o US Q3 GDP of 2%. o COVID is an ongoing global disruptor. o Competition for loans remain s intense with loan‐to‐deposit ratios at historical lows. o Funding costs will remain low, and many expect lower for longer coming out of this cycle Mr. Frank presented the Bank’s Balance Sheet changes, which reflected growth of $66MM. Mrs. CFO mentioned that $49MM was due to one Public Depositor who is an existing significant relationship. The entity had contacted the Bank beforehand to ensure that the Bank could accept the deposits due to the amount. Management made a deliberate decision to accommodate the request due to the relationship, but at the rate of .05%. The f unds were proceeds from a bond issue for the purpose of new construction and expectation of rolling off over a 2 year period. Mrs. CFO also expressed that the Bank had more than adequate securities to provide for pledging. Mr. Frank also pointed out that not only had the Bank’s balance size grown, but that the spread had improved .02% for the quarter.

Investment/ALCO Committee Meeting Minutes 11/18/2021

There was ~$43 MM in loan originations for the quarter at a weighted average yield of 3.84%, which was an improvement over 3Qs 3.63%. Net loan growth was % 5.5MM for the quarter, but PPP paydowns were $12.5MM ; therefore, core net loan growth for the quarter was $18MM. The Bank’s loan pipeline continues to be strong with p otential 45 day fundings of $5 2MM as of 5/18. Mr. Frank also present a Deposit Analytics report to quantify the deposit surge that had taken place since March of 2020. The report outlined NMD growth by product and tier and the number of accounts. NMDS were up $285MM and CDS down $25MM for the period. $150MM of the NMD growth was in accounts $1MM and over, and the bank opened over 2000 new accounts for the same timeframe. Many of Darling’s clients showed flat or down for the same period with NMD up slightly, but CDs closed to a much greater extent than CB&Ts. Mrs. CFO reported that ~$6MM of originated Residential Mortgages (5/1 Arms, and 10, 15, 30 fixed products) were retained for the quarter ($20MM YTD). She also stated that in keeping with previous strategy discussions of deploying excess liquidity, $117MM of securities had been purchased, again in a variety of products (MBS, CMBS Pools, Munis, SBAs, UST, and Sub Debt), terms ( 5 -30 years), coupons ( .5 -3.00), with limited premium risk. She also reiterated that the $2MM Bank of OZK Sub Debt investment, approved via email on 9/10, had settled on 9/16. The portfolio book balance at quarter end was $396MM , with yields of 1.65/1.33 (accounting/market). She also noted that with the significant purchase at low premiums as suggested, the Bank’s price risk had shifted from 10.49% to 17% in the +300 environment. Mr. Frank continued to stress avoiding premium risk should take priority at this time. The Committee also discussed that the projected existing investment portfolio cashflow for was $12MM/90 days and $62 MM/12 mths. In addition, normal loan paydowns had been averaging ~$11MM/month. The Committee agreed that continuing to deploy excess liquidity not needed to fund loans or potential deposit roll-off was prudent. Mr. Frank continued to stress that the Bank’s overall ALM position still supports longer duration assets. Mrs. CFO summarized the email communication sent to the Board and approved on 11/12 to 1) downstream up to $7MM immediately to the Bank for growth via deposits or inexpensive wholesale funding opportunities; and 2) t ake down wholesale funding up to $25 MM immediately and proceed with current investment strategy if not needed to fund loans or replace deposit roll off. She stated that Management was able to execute on the FHLB callable advance structure (10yr final/3mth call) offered at .01%. It settled on 11/12 and the $7MM capital would be downstreamed in November. Mr. Frank presented the Executive Summary noting that the Earnings at Risk Shock Scenarios and the EVE calculation are both still outside of policy guidelines in the -100 bp scenario, in both YR1 & YR2 simulations. IRR showed Yr1 -7 and Yr2 -17.0, versus policy guidelines of - 5 & -10 respectively. The Bank’s greatest risk continues to be in the current and falling rate scenarios. The Committee was reminded of previous discussions that t he Y2 metrics are currently skewed due to the inclusion of PPP fee income in Y1. If the fee income were removed from the simulation, both the Yr2 metrics would be compliant (Yr2 shock down 100bp and ramp down 100bp). The Yr1 shock down 100bp scenario essentially knocks another 100bp from our investment and loan yields with minimal offsets on deposit rates. If this were to occur, aggressive reduction of cost of funds would

Investment/ALCO Committee Meeting Minutes 11/18/2021

bring the numbers back into policy. However, outside of taking rates negative, there is no way to hedge against a simulation that further pressures rates on the asset side. The entire industry has exposure to rates at the zero bound. In terms of Balance Sheet strategy, the reality of margin pressure is not only resulting in continued emphasis on lowering the rates on deposits, but also on re-evaluating all fee structures to offset some of the lost income. EVE showed an improvement at Yr1-12.3, and Yr2 6.6 in the -100bps scenario, versus policy of - 10.0, and 6.0 respectively. However, the +200, +300, and +400 bp scenarios changed such that they are outside of the policy guidelines as a direct result of the significant investment purchases made that are funded by NMDA with an “assumed” average life of 5 years. The Committee accepted the policy exceptions, agreeing that corrective action was still not necessary, but ongoing monitoring and discussion was necessary. As of quarter-end, the Bank’s Tier 1 Leverage Ratio including the $ 9.5 MM PPP loans, was unchanged at 9.26% The ALCO committee adjourned at 9:45 am.

Investment/ALCO Committee Meeting Minutes 02/17/2022

ALCO Committee Meeting February 17, 2022

The ALCO/Investment Committee meeting was held on February 17, 2022. Those in attendance were: Chairman of the Board , Four outside Directors , President/CEO , COO , CFO , Senior Loan Officer , a nd Mr. Mitchell of Darling Consulting Group. Mr. Chairman called the meeting to order. The committee discussed the following related to the current economic environment:

• Margins are Under Pressure

o Asset yields still moving lower while funding costs “bottoming” o Can we quantify the potential NII decline? o How much growth will be needed to offset? o Loan growth expectations are modest, and pay-offs persistent o Asset extension fears are out there o Investment strategy dependent upon loan and deposit outlooks

• Excess Cash Still Searching for a Home

• Deposit Uncertainty Remains o With multiple years' worth of growth pulled forward, the most prepared groups are:  Quantifying the magnitude of potential “surge”  Identifying the sources  Forecasting outcome bands  Continuing efforts to bring in more core deposit accounts • Many financial institutions planning to “lag” on increasing deposit rates in next rising rate cycle and accept and account for potential deposit outflows. Will contract the swollen bond portfolio or borrow to offset. • Current vs. future credit quality, things look improved but are still uncertain. UPDATE FROM THE FED: • November o Jerome Powell Re-nominated as Fed Chair o $15B/mo. Taper Announcement (ending in June) o Consensus 1 Rate Hike in 2022 (25bp) • December o Inflation is Transitory

o $30B/mo. Taper (ending in March) o Consensus 3 Rate Hikes in 2022 o Targeting first hike in March

• January

Investment/ALCO Committee Meeting Minutes 02/17/2022

Mr. Mitchell presented the Bank’s Balance Sheet changes: • Loans up $30MM Growth in CRE and C&I PPP down $7MM • Deposits up $45MM, with a mix of NMD growth • Cash down $11MM

• Investment purchases primarily MBS ($65MM @ 1.55%) • $15MM FHLB at 1bp (since called and renewed at 28 bps) • Slight Reduction in Liquidity - Public deposits requiring collateral increased • NII Higher • Loan growth and investment purchases funded with low-cost deposits and zero cost borrowings • NII trends higher due to higher investment residential loan replacement rates

o Additional Liability Sensitivity o $360k Lower PPP Fee Income • Slightly higher capital ratios – capital down-streamed from HC

The committee discussed using Promontory’s Insured Cash Sweep product as a liquidity management tool for Public Depositors. Mrs. CFO stated that the Bank currently had one customer utilizing the network and that we need to ensure the interface with the new DNA core system is seamless before actively marketing the service to other customers. She will provide an update at the next ALCO meeting. The committee also discussed engaging Darling Consulting to do a comprehensive Deposit study. Mrs. CFO will work with Darling’s team to kick the process off. According to Darling, the study will take several weeks to complete. Mrs. CFO reported that ~$5MM of originated Residential Mortgages (7,10,15,30 fixed products) were retained for the quarter ($25MM YTD). She also stated that in keeping with previous strategy discussions of deploying excess liquidity, $65MM of securities had been purchased, again in a variety of products (MBS, CMBS Pools, Munis, UST), terms (5-30 years), coupons (.75-3.00), with limited premium risk. The portfolio book balance at quarter end was $447MM, with yields of 1.65/1.60 (accounting/market). Mr. Mitchell reminded the group avoiding investment premium risk was prudent. The Committee also discussed that the projected existing investment portfolio cashflow for was $17MM/90 days and $56 MM/12 mths, and normal loan paydowns had been averaging ~$10MM/month. The Committee agreed that continuing to deploy excess liquidity not needed to fund loans or potential deposit roll-off was prudent. Mr. Mitchell reiterated that that the Bank’s overall ALM position still supports longer duration assets. Mr. Mitchell presented the Executive Summary noting Liquidity was up YoY, NII up $4MMYoY, and more earnings at risk as a tradeoff for higher earnings today. Earnings at Risk Shock Scenarios continue to be outside of the stated policy guideline and the EVE calculation is outside of the stated policy guideline in +200/300/400 bp scenarios. The Bank’s greatest risk continues to be in the current and falling rate scenarios. The Committee discussed again the impact of the significant investment purchases funded by NMDA with an “assumed” average life of 5 years. Mr. Mitchell indicated that of the 100s of deposit studies they’ve performed, a 6.5 yr average life is a more

Investment/ALCO Committee Meeting Minutes 02/17/2022

realistic assumption. The committee discussed the functional cost element included in the calculation that accounts for operational drag and seems to result in too much of a penalty. For comparison purposes, the Committee requested that Darling model an alternative scenario removing the functional cost element and use a more bank specific average life once results of the comprehensive Deposit Study are received. The Committee accepted the policy exceptions and

agreed that ongoing monitoring and discussion was necessary. As of quarter-end, the Bank’s Tier 1 Leverage Ratio was 9.39%. The ALCO committee adjourned at 9:50 am.

C loyd Bank & Trust Policy Manual

Subject:

Audit Policy

Date: 2.21.19

Section:

Management

Reviewed: 5.27.21

I. PURPOSE

The primary responsibility of the internal audit is to examine periodically the records of every bank function to ensure that (1) generally accepted accounting practices are being followed, (2) internal controls and safeguards are adequate, effective and efficient, (3) regulatory and legal requirements are being followed, and (4) to provide management with an independent evaluation of ongoing operations.

Key components of fulfilling this charge include:

• Facilitating and maintaining an open avenue of communication among the Board of Directors, Audit/Compliance/Identity Theft Committee (ACIT), Senior Management, the independent external accountants, the 3 rd party internal auditors, and the Internal Audit Officer.

• Serving as an independent and objective party to help monitor the corporation’s financial reporting process and internal control system.

• Reviewing and appraising the efforts of the Internal and External Auditors, or independent accountants.

• Providing direction to and oversight of the Internal Audit function.

An effective audit program consists of periodic examinations of all functions of the Bank. This policy cons ists of guidelines that reflect the Bank’s functions, operations and accounting methods, and takes into consideration the structure, lines of authority and responsibility, and the internal controls in effect. This audit policy also takes into account the objectives and parameters of the subject, including the size of the function or unit being examined and the controls that exist or need to be established in order for an audit to take place.

Other factors considered in planning audits are:

1. Risk factors;

2. Length of time between reviews;

3. Effectiveness of management;

Reviewed by Board of Directors on 5.27.21

4. Findings in earlier reviews; and

5. Degree and methods of testing used.

It is the policy of the Bank to subject itself to periodic independent internal audit reviews through management, externally through independent auditors and various state and federal regulators. Management’s internal review is to involve various certification procedures, periodic internal audits of operational areas and internal loan reviews. External audit coverage will consist of financial statement audits, loan reviews and operational audits performed by independent auditors. Such audit reviews are necessary to ensure safety and soundness and compliance with Bank policies, state and federal laws, and generally accepted accounting principles. The Board of Directors (via the Audit Committee or its Chairperson) may determine the frequency of audit reviews and may order special reviews as deemed necessary. The Audit Officer is responsible for coordinating all audit activities, and reports d irectly to the Directors’ Audit Committee of the Board of Directors, and administratively to the Chief Operating Officer. The authority of the internal audit is derived from the Board of Directors. The Chairman of the Audit/Compliance/Identity Theft Committee (ACIT) will engage an Internal Audit Firm as a consultant to perform certain audit functions of the bank. The Board of Directors gives the ACIT Committee the authority to retain the services of outside legal counsel and/or an accountant as deemed appropriate. The Committee is responsible for ensuring the audits adhere to the guidelines of this policy; that management provides expected follow-up to corrective actions in a timely manner; and for determining if audit procedures beyond the normal scope are warranted. The ACIT Committee is comprised of four outside Directors (one shall be designated as the Chairman), and four Non-voting members of the Committee. The Non-voting members shall be the Chairman of the Board, the President/CEO, the Compliance Officer/Internal Audit Officer, and the Committee Secretary ( a designated member of the Bank’s IT Department ). Minutes of all meetings shall be taken and retained by the Secretary of the Committee. A copy of each meeting shall be provided to the Board Secretary as soon after the meeting as is feasible for presentation at the next full Board meeting. The voting members of the Committee will be free from any financial, family or other material personal relationship that, in the opinion of the Board or Audit Committee members, would interfere with the exercise of his or her independence from management and the company. All members of the Audit Committee should have a working familiarity with basic finance and accounting practices, and the laws and regulations governing banking. II. AUTHORITY DERIVED FROM THE BOARD

III. RESPONSIBILITIES AND DUTIES

The Audit Committee believes that its policies and procedures should remain flexible to best react to changing conditions. It should also provide reasonable assurance to the Board that the accounting and reporting practices of the corporation are in accordance with regulatory audit standards and that an effective legal, compliance and business ethics program exists.

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The Audit Committee will fulfill its duties and responsibilities as follows:

A. General

• Adopt a formal written Audit Policy that is approved by the full Board of Directors that specifies scope of responsibility, process, membership, etc. The Policy will be reviewed as necessary, but at least annually. • Maintain minutes or other records of meetings and activities. • Report ACIT Committee actions to the Board with such recommendations as the Committee may deem appropriate. • As part of executing the responsibility to foster open communications, the ACIT Committee will meet in separate executive sessions without members of senior management present with the Independent Accountants and the Chief Audit Officer to discuss matters that the Audit Committee believes should be discussed privately. • Conduct or authorize investigations into matters within the Audit Committee’s scope of responsibilities. The Audit Committee shall be empowered and funded to retain independent counsel, accountants, or others to advise the Audit Committee in the conduct of any investigation.

B. Audit Engagement

Engage Internal Auditors that specify the scope of work for each audit. Audit scope will be based on Risk and will include recommendations when areas of weakness have been noted. The Regulatory and Legal Compliance Audits and Reviews to be performed include the following:

● ●

Internal Audit

Internal Controls and Safeguards

● Bank Secrecy Act (BSA / AML / SAR / Identity Theft) ● Automated Clearing House (ACH) Audit ● Deposit/Operations Compliance Review ● Lending Compliance Review ● Safe Act ● Fair Lending Review ● HMDA Data Verification Review ● Information Technology Audit ● Network Vulnerability Assessment ● The Interest Rate Risk Review ● Liquidity and Fund Management Review

The Internal Audit Firm shall act as a consultant and have no Bank staff employees. It does not have the authority to initiate or approve accounting transactions of any nature, nor does the Internal Audit Firm administer or supervise any bank operational functions. The Internal Audit Firm will operate in complete independence from the rest of the bank. It is responsible to the Audit & Compliance Committee for conducting an effective audit program. The Internal Auditors will maintain adequate training and proficiency in their areas of audit responsibility and in generally accepted auditing standards. They will maintain the confidentiality of information acquired through audits and examinations. They will not

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engage in activities or relationships that will impair the independence or objectivity of audits, or conflict with the interest of the bank.

Internal Auditors will evaluate the adequacy, effectiveness, and efficiency of the internal bank controls. Our bank’s internal control system has been designed to provide reasonable assurance that the bank’s assets are being safeguarded. The Internal Audit reports will be prepared regarding the scope and results of each audit performed by the internal audit. These reports will include corrective actions recommendations regarding significant (1) internal control deficiencies and weaknesses and (2) deviations from legal, regulatory, and bank policy requirements. Audits will be tentatively scheduled quarterly, and then finalized by the 1 st day of the second month following the month-end being audited. The Internal Audit Firm will provide internal audits or reports to the Internal Audit Officer who will forward them to the Chairman of the ACIT Committee and Executive Management upon receipt of the Final report. The Internal Audit firm will meet with the ACIT Committee, and/or the Board as the Chairman of the Committee deems appropriate. It will be the responsibility of the management of the Bank to follow up on recommended corrective actions within a timely manner. C. Internal Audit Review • Review and approve the annual internal audit plan. • Review completed audit reports. • Approve the Audit Charter. • Review the Internal Audit function of the Company including its independence and the authority of its reporting relationships. • Review and concur in the appointment, replacement, reassignment, or dismissal of the Internal Audit Officer. • The Board of Directors of the Bank shall select, engage and if necessary, discharge independent public accountants to perform an audit of the books and affairs at least once a year. These audits shall be full scope audits sufficient to meet the minimum requirements for compliance under Section 7-1-487 of the Code. Where customer confirmations and other third-party involvements are a part of a procedure, these confirmati ons must be under audit’s control from the time they are pre pared and mailed until the returned replies have been evaluated. • Annually, the Audit Committee will ensure a formal statement delineating all relationships between the independent accountants and the Company, which is consistent with Independent Standards Board Standard 1, is received from the independent accountants. The Audit Committee will discuss with the independent accountants all significant relationships the independent accountants have with the Company to determine the accountants’ independence. D. Independent External Audit Policy

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• Immediately following the review, the independent auditors shall present the audit report to the Audit & Compliance Committee and the Board of Directors. It is the responsibility of bank management to follow up on recommended corrective actions within 30 days of receipt of the independent audit report.

E. Financial Statements/Internal Controls

• Review annual financial statements with management and the independent accountants to determine that the independent auditors are satisfied with the disclosure and content of the financial statements, including the nature and extent of any significant changes in accounting principles, and approve release of the annual earnings. • Consider external auditors’ judgments regarding the quality and appropriateness of financial statements. • Make inquiries of management and external auditors concerning the adequacy of the company’s system of internal controls. • Advise management and the independent auditor that they are expected to provide a timely analysis of significant current financial reporting issues and practices. • Advise financial management and the independent auditor to discuss with the Audit Committee their qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and financial disclosure practices used or proposed to be adopted by the Company.

IV. IT Internal Audit Program

T he Bank’s Information Technology Audit Program include s risk-based information technology audit procedures based on the Bank’s formal risk assessment methodology to determine the appropriate frequency and extent of work, and includes the following key elements:

1. Manual testing processes or utilizing a computer assisted audit program (CAAT).

2. Ensuring work papers and related documentation are well organized, clearly written, and address all areas in the scope of the audit. In addition, they are to contain sufficient evidence of the tasks performed and support the conclusions reached. 3. Senior Management and the Audit Committee are to receive summarized audit findings that effectively communicate the results of the audit. The Audit Committee is to be provided with a full audit report.

4. Establishing appropriate time frames related to the Bank’s doc ument retention strategies; and

5. Conducting audit activities in accordance with professional auditing standards in conformance with Institute for Internal Auditors (IIA) guidelines, and those issued by the Standards Board of the Information Systems Audit and Control Association (ISACA).

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Risk Assessment and Risk Based Auditing

The Bank’s Information Technology Audit Program is a risk-based system that:

1. Identifies the Bank’s data, application and operating systems, technology, facilities, and personnel.

2. Identifies the business activities and processes within each of those categories.

3. Include profiles of significant business units, departments and product lines, or systems, and their associated business risks and control features, resulting in a document describing the structure of risk and controls throughout the Bank.

4. Uses a measurement or scoring system that ranks and evaluates business and control risks for significant business units, departments, and products.

5. Includes Audit Committee approval of risk assessments and annual risk-based audit plans that establish audit schedules, audit cycles, work program scope, and resource allocation for each area audited.

6. Implements the audit plan through planning, execution, reporting and follow-up; and

7. Includes a process that regularly monitors the risk assessment and updates it at least annually for all significant business units, departments and products or systems.

The Bank uses an effective scoring system that is easily understandable, considers all relevant risk factors, and to the extent possible, avoids subjectivity by including the:

1. Adequacy of internal controls.

2. Nature of transactions (for example, the number and dollar volumes and the complexity).

3. Age of the system or application.

4. Nature of the operating environment (for example, changes in volume, degree of system and reporting centralization, sensitivity of resident or processed data, the impact on critical business processes, potential financial impact, planned conversions, and economic and regulatory environment).

5. Physical and logical security of information, equipment, and premises.

6. Adequacy of the Technology Committee, oversight, and monitoring.

7. Previous regulatory and audit results and management’s responsiveness in addressing issues.

8. Human Resources Department, including the experience of management and staff, turnover, technical competence, management’s succession pla n, and the degree of delegation; and

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9. Senior Management oversight.

The Bank’s audit guidelines are based o n the use of risk assessment tools and risk factors and reviewed by the Audit Committee. These guidelines are used to grade or assess major risk areas and to define the range of scores or assessments (defined as Low, Medium, or High). It is the responsibility of the Audit Committee and Technology Committee to work together in evaluating the risk in all departments and functions by reviewing risk assessments to determine their reasonableness. It is the responsibility of the Information Security Officer and the Technology Committee to keep the Audit Officer and the Committee up to date on all major changes in departments or functions, such as the introduction of a new product, implementation of a new system, application conversions, or significant changes in organization or staff.

V. MEETINGS

The Audit Committee will meet at least four times annually. Additional meetings may occur more frequently as needed. The committee may invite members of management and may hold private meetings with auditors.

VI. FUNDING

The Company shall provide for appropriate funding of the Audit Committee, as determined by the Audit Committee, for payment of:

• Compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services for the Company. • Compensation to any advisors employed by the Company as authorized under this Charter. • Ordinary administrative expenses of the Audit Committee that are necessary and appropriate to carry out its duties. • Adequate compensation for the Internal Audit Officer and Internal Audit staff, coverage of sufficient Internal Audit departmental operating expenses, and fees to maintain various professional certifications and association dues, including continuing education requirements.

VII.

RECORD RETENTION

The Institution shall retain any records as may be required to demonstrate compliance with this policy and the flood regulatory requirements.

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