Lecture Materials LOAN PORTFOLIO MANAGEMENT – YEAR 1 …...capacity of the obligor or the collateral pledged. Loans so classified must have a well -defined weakness or weaknesses

Lecture Materials

LOAN PORTFOLIO MANAGEMENT – YEAR 1

Rob Newberry SVP & Client Management Specialist FARIN Financial Risk Management

Madison, Wisconsin [email protected]

608-661-4251

August 8, 2017

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Rob Newberry

STRESS TESTING THE LOAN PORTFOLIO

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I. Loan GradingII. Stress TestingIII. Reserve Calculations

Credit Risk

Mgmt.

Loan Grading

Stress Testing

ALLL Reserve

Three Main Components

Credit Risk Management

Stress Testing the Loan Portfolio

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Stress Testing the Loan PortfolioThe Three Inherent Risks to all Financial Intermediaries

All financial intermediaries rent money from depositors (Liabilities) who then expect it back on demand or at maturity dates rarely more than a few years in the future. Banks then lend or invest that money in variety of instruments (Assets) with maturity dates as long as 30 years.

1. Credit Risk – The obligation to pay back depositors regardless of whether loans are repaid

2. Interest Rate Risk – The timing and size of changes in the rates that they receive from their “Assets” rarely match the timing and size of rate changes for their “Liabilities”

3. Liquidity Risk – Not enough cash will be generated from “Assets” to meet deposit withdrawals or contractual loan fundings

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Should the Financial Manager Care?


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Loan Grading System

Interagency Policy Statement on the Allowance for Loan and Lease Losses

srletters/2006/SR0617

Loan Classification or Credit Grading Systems

The foundation for any loan review system is accurate and timely loan classification or credit grading, which involves an assessment of credit quality and leads to the identification of problem loans. An effective loan classification or credit grading system provides important information on the collectability of the portfolio for use in the determination of an appropriate level for the ALLL.


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Loan Grading SystemContinued …… srletters/2006/SR0617

Because accurate and timely loan classification or credit grading is a critical component of an effective loan review system, each institution should ensure that its loan review system includes the following attributes:

1. To promptly identify loans with potential credit weaknesses. 2. To appropriately grade or adversely classify loans, especially those

with well-defined credit weaknesses that jeopardize repayment, so that timely action can be taken and credit losses can be minimized.

3. To provide management with accurate and timely credit quality information for financial and regulatory reporting purposes, including the determination of an appropriate ALLL.”


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Underwriting Risk Scoring Loan Grading

What is the relationship between Underwriting and Loan Grading ?

1. Approval2. Covenants3. Pricing

1. Performance2. Reserves

Loan Grading System


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Understanding Pay vs Save Strategies

Loan Grading System

Pay Strategies assess the borrowers ability to make the agreed upon loan obligations

Save Strategies try to limit losses if the borrower stops making payments


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Loan Grading SystemLoan Quality Death Spiral

Self Actualization: Perceived Property Values dropped below amount owed, customers lost motivation to pay and walked away.

Created excessive shadow inventory, dropped all property values via comparables.

Based on tighter guidelines, customers couldn’t qualify to refinance to lower interest rates. Further degrading loan portfolio quality.

More Losses - Higher Reserves Required


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Loan Grading SystemWhy do we spread financials ?


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Loan Grading SystemGlobal Cash Flows

Understanding related entities

How does risk from one participant impact total Entity ?

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Turning the 5c’s into a science

What factors should be used :

Dual Loan Grading System

Comparative Analysis

Objective Analysis

Subjective Analysis

I. Objective Analysis

II. Comparative Analysis

III. Subjective Analysis

Loan Grading System


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Objective Analysis

Loan Grading System


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Objective Measurements include

1. Current/Quick Ratios2. Debt to Net Worth3. Debt Service Coverage4. LTV5. Credit Scores

Objective Analysis

How to weigh ratios?

Loan Grading System


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Objective Analysis

Ratio'sAssigned

Grade WeightingRisk

GradeCurrent Ratio 5.0 12.5% 0.63 Quick Ratio 4.0 12.5% 0.50 Debt to Net Income 3.0 15.0% 0.45 EBITA 4.0 25.0% 1.00 LTV 5.0 20.0% 1.00 Credit Score 2.0 15.0% 0.30

100.0% 3.88

Can use different ratios and weightings for different

industries/loan types

Loan Grading System


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Subjective Measurements might include

1. Strength of Guarantors

2. Management Evaluation

3. Other Credit Quality Adjustments (5c’s)

Subjective Analysis

Loan Grading System


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What is the true value of a guarantee?

Subjective Analysis

Loan Grading System


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Management/Customer Evaluation

Subjective Analysis

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed.

Loan Grading System


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Objective Subjective

Black Box Flexibility

Key – Finding the balance

Loan Grading System


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Things to consider when developing a Loan Grading System

How to pick a loan grading scale

5 6 7 8 9 10

Requires Split Classifications

Typically includes a Pass/Watch Category

Diminishing returns

Examiners are looking for more definition in the quality of the loan portfolio

Loan Grading System


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Can you identify the Top 1/3, Middle 1/3, and Bottom 1/3 of these cans?

Impact of a compressed scale

Loan Grading System


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1. Pass - Extremely high quality, excellent financial condition and collateral coverage. No identifiable risk of loss.

2. Pass - Very strong quality, excellent financial condition, no identifiable risk of loss but lower in one or two aspects than loans graded as 1.

3. Pass - Mid-Grade loans showing good financial condition with few, if any, below average characteristics. Most loans in this category, if measured purely on a risk-of-loss basis, would be considered above average.

4. Pass - Mid-Grade loans showing average financial condition. Most loans in this category, if measured purely on a risk-of-loss basis, would be considered above average. This is due to “average” financial condition but strong collateral coverage.

5. Pass/Watch - Mid-Grade loans showing average financial condition but may be susceptible to changing economic conditions that would raise risk to a minor concern. Normal comfort levels can be achieved through monitoring financial statements & collateral coverage

Loan Grading System


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Regulatory Classified Loan Definitions:

A uniform agreement on the classification of assets and appraisal of securities in bank examinations was issued jointly on June 15, 2004, by the Office of the Comptroller of the Currency, the FDIC, the Federal Reserve Board, and the Office of Thrift Supervision.

6.Special Mention - A Special Mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

7. Substandard - Substandard loans are inadequately protected by the current sound worth and repayment capacity of the obligor or the collateral pledged. Loans so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

8.Doubtful - Loans classified Doubtful possess all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

9. Loss - Loans classified Loss are considered uncollectible and of such little value that continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future.

Loan Grading SystemStress Testing the Loan Portfolio

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Loan Grading System

1 2 3 4 5 6 7 8 9

Pass

Portfolio Grade Curve Shifted to Left


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Lenders mitigate credit risk using several methods:

1. Risk Based Pricing Models – Charging higher interest rates to customers more likely to default

2. Covenants – Stipulations on the borrower that are written into the loan agreements

3. Tightening – Reducing the amount of credit extended4. Diversification – Expanding the borrower pool to mitigate

concentration risks

Loan Grading System


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I. Loan GradingII. Stress TestingIII. Reserve Calculations Loan

Portfolio Mgmt.

Loan Grading

Stress Testing

ALLL Reserve


Defining Stress Testing

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Wikipedia Definition:Instead of doing financial projection on a "best estimate" basis, a company may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under, for example, the following stresses:

1.What happens if equity markets crash by more than x% this year?

2.What happens if interest rates go up by at least y%?

3.What if half the instruments in the portfolio terminate their contracts in the fifth year?

4.What happens if oil prices rise by 200%?

This type of analysis has become increasingly widespread, and has been taken up by various governmental bodies (such as the FSA in the UK) as a regulatory requirement on certain financial institutions to ensure adequate capital allocation levels to cover potential losses incurred during extreme, but plausible, events. This emphasis on adequate, risk adjusted determination of capital has been further enhanced by modifications to banking regulations such as Basel II. Stress testing models typically allow not only the testing of individual stressors, but also combinations of different events.

Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of Use for details.Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization.



http://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/FSAhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Wikipedia:Text_of_Creative_Commons_Attribution-ShareAlike_3.0_Unported_Licensehttp://wikimediafoundation.org/wiki/Terms_of_Usehttp://www.wikimediafoundation.org/

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Stress test definition:The term stress testing describes a range of techniques used to assess the vulnerability of a portfolio to major changes in the economic environment or to exceptional but plausible events. Stress tests make risks more transparent by estimating the potential losses on a portfolio in abnormal markets. (1)

A simplified definition would be:Stress testing is a way to perform sensitivity analysis using “What if” alternative scenarios

(1) Blaschke, Jones, Majnoni, and Peria, 2001, "Stress Testing of Financial Systems: An Overview of Issues, Methodologies, and FSAP Experiences," IMF Working Paper WP/01/88.


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Preparing for Mayhem

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Stre

ss T

ests

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What is the risk if you are wrong or slip up

What is your margin for error



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Defining Stress Testing - Mayhem

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We can mitigate risk that we see and identify, it is what we don’t see coming that gets us.


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Defining Stress Testing - Mayhem

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Asset Growth & Mix

Credit Quality

Rates

Liquidity sources

Funding sources & costs

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Base forecast assumes multiple “planning” variables but tends to assume 100% compliance/performance

What is the cost of being wrong?


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Its all about connecting Silos, not tearing them down



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Dodd Frank Act Signed• July 21, 2010

Basel IIINovember 2010

SR 12-7Statement to Clarify Stress Testing by Community Banks • 5/14/2012

OCC 2012-33 Supervisory GuidanceCommunity Bank Stress Testing• 10/18/2012

FIL-49-2013Annual Stress-Test Reporting Template• 10/21/2013

Guidelines Issued to Community banks on Stress Testing



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Stress Testing and Capital PlanningThe OCC expects every bank, regardless of size or risk profile, to have an effective internal process to (1) assess its capital adequacy in relation to its overall risks, and (2) to plan for maintaining appropriate capital levels. Stress testing can be a prudent way for a community bank to identify its key vulnerabilities to market forces and assess how to effectively manage those risks should they emerge.

If the results of a stress test indicate that capital ratios could fall below the level needed to adequately support the bank’s overall risk profile, the bank’s board and management should take appropriate steps to protect the bank from such an occurrence. This may include establishing a plan that requires closer monitoring of market information, adjusting strategic and capital plans to mitigate risk, changing risk appetite and risk tolerance levels, limiting or stopping loan growth or adjusting the portfolio mix, adjusting underwriting standards, raising more capital, and selling or hedging loans to reduce the potential impact from such stress events.

John C. Lyons Jr.Senior Deputy Comptroller and Chief National Bank Examiner

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Stress Testing the Loan PortfolioRegulatory Landscape

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Sound risk management practices should include an understanding of the key vulnerabilities facing banks. For several years, supervisors have used the term “stress testing” in guidance and handbooks to refer to and encourage banks to incorporate this practice.1 Well-managed community banks routinely conduct interest rate risk sensitivity analysis to understand and manage the risk from changes in interest rates. Many community banks, however, do not have similar processes in place to quantify risk in loan portfolios, which often are the largest, riskiest, and highest earning assets.

The OCC, however, does consider some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis to be a key part of sound risk management for community banks. Community banks that have incorporated such concepts and analyses into their credit risk management and strategic and capital planning processes have demonstrated the ability to minimize the impact of negative market developments more effectively than those that did not use stress testing.

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Regulatory Landscape


http://www.occ.gov/news-issuances/bulletins/2012/bulletin-2012-33.html

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New Guidance on Stress Testing – 10/18/2012

Stress Testing Methods and Approaches

Transaction stress testing is a method that estimates potential losses at the loan level by assessing the impact of changing economic conditions on a borrower’s ability to service debt.

Portfolio stress testing is a method that helps identify current and emerging risks and vulnerabilities within the loan portfolio by assessing the impact of changing economic9conditions on borrower performance, identifying credit concentrations, measuring the resulting change in overall portfolio credit quality, and ultimately determining the potential financial impact on earnings and capital.

The Changing Regulatory Landscape

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http://occ.treas.gov/news-issuances/bulletins/2012/bulletin-2012-33.html

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New Guidance on Stress Testing – 10/18/2012

Stress Testing Methods and Approaches

Enterprise-level stress testing is a method that considers multiple types of risk and their interrelated effects on the overall financial impact under a given economic scenario. These risks include, but are not limited to, credit risk within loan and security portfolios, counter-party credit risk, interest rate risk, and changes in the bank’s liquidity position.

Reverse stress testing is a method under which the bank assumes a specific adverse outcome, such as suffering credit losses sufficient to cause a breach in regulatory capital ratios, and then deduces the types of events that could lead to such an outcome. This type of analysis (e.g. a “break the bank” scenario) can help a bank consider scenarios beyond normal business expectations and challenge common assumptions about performance and risk mitigation strategies.

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New Guidance on Stress Testing – 10/18/2012Regardless of the testing method used, an effective stress test has common elements that a community bank should consider. These include

asking plausible “what if” questions about key vulnerabilities; making a reasonable determination of how much impact the stress event

or factor might have on earnings and capital; and incorporating the resulting analysis into the bank’s overall risk

management process, asset/liability strategies, and strategic and capital planning processes.

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New Guidance on Stress Testing – 10/18/2012Appendix B - Constructing a Basic Portfolio Level Stress Test into three

sections:

Section 1 Estimated Loan Portfolio Stress Losses

Objective: This section estimates the potential loan losses over a two-year stress test horizon for the entire loan portfolio. There are four components in this section.

Loan Portfolio Categories Quarter-End Loan Portfolio Balances Stress Period Loss Rates Stress Period Losses

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New Guidance on Stress Testing – 10/18/2012Section 2 Estimated Impact on Earnings

Objective: This section estimates the potential impact to net income from the stress scenario over the two-year period. There are five components in this section.

Pre-provision Net Income Provision Expense to Cover Stress Losses Provision to Maintain an Adequate ALLL Income Tax Expense (Benefit) Net Income

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New Guidance on Stress Testing – 10/18/2012Section 3 Estimated Impact of Stress on Capital

Objective: This section estimates the hypothetical impact on capital of the stressed environment. The example uses Tier 1 capital and the Tier 1 leverage ratios to help analyze the potential change in capital caused by a stress scenario. Banks can also review the changes in other relevant capital measures, such as the potential change in the common equity ratio, to assess the results of the stress test. This section has five components.

Tier 1 Capital Net Change in Tier 1 Capital Adjusted Tier 1 Capital Quarterly Average Assets Tier 1 Leverage Ratio

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1. Estimated Loan Portfolio Stress Losses

Loan Portfolios from Call Report Schedule RC-G

Quarter End as of Date $ Balances

Two – Year Stress Period Loss Rate %

Two – Year Stress Period $ Losses

Loans Secured by type of Real Estate

a. Construction and Development 100 20% 20

b. Farmland 50 8% 4

c. 1 – 4 Family Housing 100 4% 4

d. Multifamily Housing 75 16% 12

e. Nonfarm Nonresidential Property 100 8% 8

Agriculture Production and Farmer Loans 40 6% 2.4

Consumer Loans 60 14% 8.4

Commercial and Industrial 50 4% 2

All Other Loans 25 4% 1

Total 600 61.8

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2. Estimated Impact of Stress on Earnings

Descriptions Previous Two Years Actual Pro Forma Stress Period

Pre-Provision Net Income 34.5 30

Less Provision to Cover Two-Year Losses 12 61.8

Less Provision to Maintain Adequate ALLL 0 10

Income Tax Expenses (Benefit) 5.5 (14.6)

Net Income 16.5 (27.2)

3. Estimated Impact of Stress on Capital

Descriptions Previous Two Years Actual Pro Forma Stress Period

Tier 1 Capital $ 88 88

Net Change in Tier 1 Capital from Stress Period (Net Income from Step 2) N/A (27.2)

Adjusted Tier 1 Capital $ 88 60.8

Quarterly Average Assets $ 800 738

Tier 1 Leverage Ratio % 11% 8.2%

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Why should I care about DFAST Scenarios?

Focus on what is keeping you up at night


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Using the DFAST ingredients

To create your own stress testing recipes

Your unique flavoring


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Dodd-Frank Act Stress Test = DFASTQuarterly required stress tests for $10-$50 billion banksProjects multiple variables• GDP• Interest rates• Housing growth• Employment

Sets baseline forecast for comparisonEstablishes 2 potential stress events• Adverse event• Severely adverse event

Scenario - DFAST Example

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Baseline Scenario:Moderate expansion in economic activity. Real GDP growth accelerates while the unemployment rate edges down to 5.25% by the fourth quarter of 2017. CPI inflation averages just over 2% per year.Short term Treasury rates begin to increase in the second quarter of 2015 and rise steadily thereafter reaching over 3% by year-end 2017. Both equity and property prices would appreciate, albeit at a modest rate, through 2016. Equity prices, nominal house prices, and commercial property prices all rise steadily throughout the scenario.The outlook for international variables features an expansion in activity, albeit one that proceeds at different rates across the four countries or country blocks being considered

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Stress Testing the Loan PortfolioScenario - DFAST Example

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Adverse Scenario:Weakening in economic activity combined with an increase in U.S. inflationary pressures that cause rapid increase in both short- and long-term U.S. Treasury rates.Bank funding costs react strongly to rising short-term rates. Commercial deposits should be viewed as being unusually drawn to institutional money funds, which re-price promptly. Consumer deposits should also be assumed to be drawn to higher-yielding alternatives.House prices and commercial real estate prices decline by approximately 13% and 16%, respectively to their level in the third quarter of 2014

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Severely Adverse Scenario:Substantial weakening in economic activity, characterized by a deep and prolonged recessionUnemployment rate increases by 4% from its level in third quarter 2014 peaking at 10% in the middle of 2016.Short-term interest rates remain near zero through 2017; long-term Treasury yields drop to 1% in fourth quarter of 2014 and then edge up slowly over the remainder of the scenario periodSignificant reversal of recent improvements to the U.S. housing market. House prices decline by 25% during the scenario period relative to their level in the third quarter of 2014, while commercial real estate prices are more than 30% lower during the scenario periodCorporate financial conditions tighten significantly in 2015 and the yield on investment grade corporate bonds is higher than the baseline until the fourth quarter of 2016.U.S. corporate credit quality deteriorates sharply.

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Two Approaches to Stress TestingSensitivity Analysis: refers to assessment of risk when certain variables, parameters, and inputs are "stressed" or "shocked." • Unlike scenario analysis, this is performed without an explicit

underlying reason or narrative in order to explore what occurs under a range of inputs and at extreme or highly adverse levels.

Scenario Analysis: apply a historical or hypothetical scenario to assess the impact of various events and circumstances, including the most extreme situations.• Examples include severe recession, failure of a major counterparty,

loss of major clients, localized economic downturn, or a sudden change in interest rates brought about by unfavorable inflation developments.

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Credit Factors Liquidity Factors Interest Rate Factors

Debt service coverage Large depositor runoff Non-maturity deposit repricing betas

Portfolio loss rates Loss of wholesale\non-core funding Higher levels of surge balances”

Geographic valuation changes Reduction in loan repayments Changes in loan prepayments

Credit score changes Devaluation of investment portfolio Parallel vs. Twisting yield curves

Portfolio loan rates vs. market rates Freezing of markets (loan sales) Early withdrawal of CDs

Credit migration Loan growth > Deposit growth Changes in asset mix

• What factors have highest impact on results - sensitivity testing purpose!• Develop your list of top 5-6 assumptions by impact risk area• Take highest impact factors and model in base plan with 1-2 standard deviations from original assumption.

Compare results to goals.

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Historcial Losses by CategoryCalculated Input

Jun-15 1.00

oan PortfoliosCurrent Balance

2 Yr Avg Balance

3 Yr Avg Balance

Net Losses Prev 8 Qtrs

Net Losses Prev 12 Qtrs

Losses Prev 8 Qtr %

Losses Prev 12 Qtr %

Current ALLL %

Stress Adj

1 Loans Secured by type of Real Estate 110,674$ 101,946$ 97,423$ -$ -$ 0.00% 0.00% 0.50% 100%

a. Construction Loans 3,537$ 7,240$ 6,953$ -$ -$ 0.00% 0.00% 0.50% 100%

1-4 Construction Loans 983$ 437$ 313$ -$ -$ 0.00% 0.00% 0.50% 100%

Oth Con, Dev, & Land Loans 2,554$ 6,804$ 6,641$ -$ -$ 0.00% 0.00% 0.50% 100%

b. Farmland 12,197$ 9,862$ 9,483$ -$ -$ 0.00% 0.00% 0.50% 100%

c. 1 - 4 Family Housing 56,579$ 55,145$ 54,425$ 39$ 200$ 0.07% 0.37% 1.00% 100%

HE Lines 2,148$ 2,111$ 2,136$ (18)$ 12$ -0.85% 0.56% 1.75% 100%

Cl-end First Lien 53,653$ 52,044$ 51,187$ 45$ 176$ 0.09% 0.34% 0.75% 100%

Cl-end Jr Lien 778$ 990$ 1,102$ 12$ 12$ 1.21% 1.09% 1.00% 100%

d. Multifamily Housing 2,253$ 2,366$ 2,451$ -$ -$ 0.00% 0.00% 1.00% 100%

e. Nonfarm Nonresidential Property 36,108$ 27,333$ 24,111$ (50)$ 17$ -0.18% 0.07% 2.25% 100%

Owner Occupied RE 8,942$ 6,411$ 6,159$ (44)$ (4)$ -0.69% -0.06% 2.25% 100%

Other Property Loans 27,166$ 20,922$ 17,952$ (6)$ 21$ -0.03% 0.12% 2.25% 100%

2 Loans to Depository -$ -$ -$ -$ -$ 0.00% 0.00% 0.00% 100%

3 Agriculture Production and Farmer loans 5,541$ 3,353$ 2,973$ -$ -$ 0.00% 0.00% 0.75% 100%

4 Commercial and Industrial 6,674$ 5,603$ 5,097$ (6)$ (9)$ -0.11% -0.18% 1.25% 100%

6 Consumer Loans 2,367$ 2,102$ 1,900$ 2$ (13)$ 0.10% -0.68% 1.50% 100%

8 State & Political -$ 2$ 5$ -$ -$ 0.00% 0.00% 0.00% 100%

9 All Other Loans 20$ 15$ 11$ -$ -$ 0.00% 0.00% 1.36% 100%

125,276$ 113,020$ 107,409$ (15)$ 195$ -0.01% 0.18%

Sample Credit Risk Sensitivity Test

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Historcial Losses by Category To Base Line Scenario2.00 4.00

Jun-15

an PortfoliosCurrent Balance

Rolling 8 Qtrs

Rolling 12 Qtrs

Based on ALLL ASC

Base Line

AdverseSeverly Adverse

1 Loans Secured by type of Real Estate 110,674$ 0.00% 0.00% 0.50% 0.00% 0.00% 0.00%

a. Construction Loans 3,537$ 5.00% 0.00% 0.50% 5.00% 10.00% 20.00%

1-4 Construction Loans 983$ 0.00% 0.00% 0.50% 0.00% 0.00% 0.00%

Oth Con, Dev, & Land Loans 2,554$ 0.00% 0.00% 0.50% 0.00% 0.00% 0.00%

b. Farmland 12,197$ 0.00% 0.00% 0.50% 0.00% 0.00% 0.00%

c. 1 - 4 Family Housing 56,579$ 0.07% 0.37% 1.00% 0.07% 0.14% 0.28%

HE Lines 2,148$ -0.85% 0.56% 1.75% -0.85% -1.71% -3.41%

Cl-end First Lien 53,653$ 0.09% 0.34% 0.75% 0.09% 0.17% 0.35%

Cl-end Jr Lien 778$ 1.21% 1.09% 1.00% 1.21% 2.43% 4.85%

d. Multifamily Housing 2,253$ 0.00% 0.00% 1.00% 0.00% 0.00% 0.00%

e. Nonfarm Nonresidential Property 36,108$ -0.18% 0.07% 2.25% -0.18% -0.37% -0.73%

Owner Occupied RE 8,942$ -0.69% -0.06% 2.25% -0.69% -1.37% -2.75%

Other Property Loans 27,166$ -0.03% 0.12% 2.25% -0.03% -0.06% -0.11%

2 Loans to Depository -$ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

3 Agriculture Production and Farmer loans 5,541$ 0.00% 0.00% 0.75% 0.00% 0.00% 0.00%

4 Commercial and Industrial 6,674$ -0.11% -0.18% 1.25% -0.11% -0.21% -0.43%

6 Consumer Loans 2,367$ 0.10% -0.68% 1.50% 0.10% 0.19% 0.38%

8 State & Political -$ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

9 All Other Loans 20$ 0.00% 0.00% 1.36% 0.00% 0.00% 0.00%

125,276$

2 Yr Projected Losses Stress Test Scenario

Copy Copy Copy

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Sensitivity assumptions

!


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Projected Balances by Category 1Year 2 YearBasel ine Growth Rate % 3.00% 3.00%

Adverse Growth Adj % 1.50% 1.50%Severely Adverse Growth Adj % 0.00% 1.00%

Jun-15

Loan PortfoliosCurrent Balance

Projected Balance 1 yr

Projected Balance 2yr





1 Loans Secured by type of Real Estate 110,674$ 113,994$ 117,414$ 112,334$ 114,019$ 110,674$ 111,781$

a. Construction Loans 3,537$ 3,643$ 3,752$ 3,590$ 3,644$ 3,537$ 3,572$

1-4 Construction Loans 983$ 1,012$ 1,043$ 998$ 1,013$ 983$ 993$

Oth Con, Dev, & Land Loans 2,554$ 2,631$ 2,710$ 2,592$ 2,631$ 2,554$ 2,580$

b. Farmland 12,197$ 12,563$ 12,940$ 12,380$ 12,566$ 12,197$ 12,319$

c. 1 - 4 Family Housing 56,579$ 58,276$ 60,025$ 57,428$ 58,289$ 56,579$ 57,145$

HE Lines 2,148$ 2,212$ 2,279$ 2,180$ 2,213$ 2,148$ 2,169$

Cl-end First Lien 53,653$ 55,263$ 56,920$ 54,458$ 55,275$ 53,653$ 54,190$

Cl-end Jr Lien 778$ 801$ 825$ 790$ 802$ 778$ 786$

d. Multifamily Housing 2,253$ 2,321$ 2,390$ 2,287$ 2,321$ 2,253$ 2,276$

e. Nonfarm Nonresidential Property 36,108$ 37,191$ 38,307$ 36,650$ 37,199$ 36,108$ 36,469$

Owner Occupied RE 8,942$ 9,210$ 9,487$ 9,076$ 9,212$ 8,942$ 9,031$

Other Property Loans 27,166$ 27,981$ 28,820$ 27,573$ 27,987$ 27,166$ 27,438$

2 Loans to Depository -$ -$ -$ -$ -$ -$ -$

3 Agriculture Production and Farmer loans 5,541$ 5,707$ 5,878$ 5,624$ 5,708$ 5,541$ 5,596$

4 Commercial and Industrial 6,674$ 6,874$ 7,080$ 6,774$ 6,876$ 6,674$ 6,741$

6 Consumer Loans 2,367$ 2,438$ 2,511$ 2,403$ 2,439$ 2,367$ 2,391$

8 State & Political -$ -$ -$ -$ -$ -$ -$

9 All Other Loans 20$ 21$ 21$ 20$ 21$ 20$ 20$

125,276$ 129,034$ 132,905$ 127,155$ 129,062$ 125,276$ 126,529$

BaseLine Adverse Severely Adv

57

This should align with forecast

assumptions in budget/interest rate

risk modeling

Sensitivity assumptions!


© 2017

Projected Income ImpactIncome 75.0% 50.0%

Provis ions 150.0% 300.0%

Base Line Adverse Severely Adv

Pre-Provision Net Income 1,114$ 1,715$ 1,286$ 858$ Less Provision to Cover Two-Year Losses -$ Less Provision to Maintain Adequate ALLL 28$ 245$ 368$ 735$ Income Tax Expense (Benefit) 1$

Tier 1 Capital 16,614$ Tier 2 Capital 1,536$

LESS: Deductions for Total Risk-based Capita -$ Total Risk-Based Capital 18,150$ Average Assets for Leverage Capital Purposes 199,438$ Risk Wieghted Assets 121,455$

2013 2014 2015 2016 Total Total Interest Income 6,073$ 6,267$ 12,340$ 6,170$ 6,640$ 7,304$ 13,944$

Total Interest Expense 1,174$ 1,050$ 2,224$ 1,112$ 1,084$ 1,100$ 2,184$ Net Income before provisions 4,899$ 5,217$ 10,116$ 5,058$ 5,556$ 6,204$ 11,760$

Provision Expense -$ 28$ 28$ 14$ 120$ 125$ 245$ Net Income after Provisions 4,899$ 5,189$ 10,088$ 5,044$ 5,436$ 6,079$ 11,515$

Total Non-Interest Income 993$ 1,019$ 2,012$ 1,006$ 882$ 900$ 1,782$ Total Non-Interest Expense 5,336$ 5,678$ 11,014$ 5,507$ 5,632$ 6,195$ 11,827$

Net Income before Taxes 556$ 530$ 1,086$ 543$ 686$ 784$ 1,470$ Taxes 1$ -$ 1$ 1$ -$ 274$ 274$

555$ 530$ 1,085$ 543$ 686$ 510$ 1,196$

ProjectionPrevious 2 Year Actuals

Actuals Forecast Base Policy(ALM) 2 yr Actual

58

Sensitivity assumptions!

Source options • ALM model with

changes in mix/growth

• Guess


© 2017 59

% $ % $ Est Balance % $Loans Secured by type of Real Es tate $111,781

a. Construction Loans $3,572

1 - 4 Construction Lns 0.00% 0.0 0.00% 0.0 $993 0.00% 0.0

Other Con, Dev, & Land Lns 0.00% 0.0 0.00% 0.0 $2,580 0.00% 0.0

b. Farmland 0.00% 0.0 0.00% 0.0 $12,319 0.00% 0.0

c. 1 - 4 Fami ly Hous ing $57,145

HE Lines -0.85% (19.4) -1.71% (37.7) $2,169 -3.41% -74.0

Cl -end Fi rs t Lien 0.09% 49.2 0.17% 95.6 $54,190 0.35% 187.4

Cl -end Jr Lien 1.21% 10.0 2.43% 19.4 $786 4.85% 38.1

d. Multi fami ly Hous ing 0.00% 0.0 0.00% 0.0 $2,276 0.00% 0.0

e. Nonfarm Nonres identia l Propert $36,469

Owner Occupied RE -0.69% (65.1) -1.37% (126.5) $9,031 -2.75% -248.0

Other Property Loans -0.03% (8.3) -0.06% 0.0 $27,438 -0.11% -31.5

Agricul ture Production and Farmer loa 0.00% 0.0 0.00% 0.0 $5,596 0.00% 0.0

Commercia l and Industria l -0.11% (7.6) -0.21% (14.7) $6,741 -0.43% -28.9

Consumer Loans 0.10% 2.4 0.19% 4.6 $2,391 0.38% 9.1

State & Pol i tica l 0.00% 0.0 0.00% 0.0 $0 0.00% 0.0

Al l Other Loans 0.00% 0.0 0.00% 0.0 $20 0.00% 0.0

Totals $126,528.7

$117,414 $114,019

$3,644

$1,013

$2,631

$12,566

-$38.8 $101,075.4 -$147.7

$5,878

$7,080

$2,511

$0

$21

$132,905.3

$21

$5,708

$6,876

$2,439

$0

$9,487

$28,820

$3,752

$1,043

$2,710

$12,940

$56,579

$2,279

-$59.3

$9,212

$0

$58,289

$2,213

$55,275

$802

$2,321

$37,199

Step 1. Estimated Loan Portfolio Stress Losses (Dollar Amounts in Thousands) Dynamic

Loan Porfolios from Call Report Schedule RC-C

Est Balance

2 Yr Stress Losses Baseline

Est Balance

$56,920

$825

$2,390

$38,307

2 Yr Stress Losses Adverse2 Yr Stress Losses Severely

Adverse


© 2017


60

Pre-Provis ion Net Income

Less Provis ion to Cover Two-Year Losse

Less Provis ion to Mainta in Adequate A

Net Income before Tax

Income Tax Expense (Benefi t)

Net Income after Taxes

857.5

(147.7)

735.0

270.2

94.6

175.6

1,286.3

(59.3)

367.5

1.0

1,085.0

528.1

980.7

342.3

635.7

28.0

1,086.0

245.0

1,508.8

1,114.0

0.0

1,715.0

(38.8)

Pro forma Baseline

978.0

Step 2. Estimated Impact of Stress on Earnings

Descriptions 2 Yr Actual Pro forma Adverse Pro forma Severely Adverse

Tier 1 Capita l $

Net Change in Tier 1 Capita l - (NI F

Adjusted Tier 1 Capita l $

Tier 2 Capita l $

Tota l Risk-Based Capita l

Quarterly Avg Assets $ - (Less Losses S

Risk Wieghted Assets - (Less Losses S

Tier 1 Leverage Ratio %

Tier 1 Risk Based Capita l Ratio

Tota l Risk Based Capita l Ratio

121,602.7

8.41%

13.81%

15.07%

121,514.3

8.65%

14.20%

15.46%

16,614.0

175.6

16,789.6

1,536.0

18,325.6

199,585.7

16,614.0

635.7

17,249.7

1,536.0

16,614.0

1,536.0

17,594.7

1,536.0

16,614.0

NA

16,614.0

18,785.7

199,497.3

980.7

13.68%

14.94%

14.48%

15.75%

121,455.0

8.33%

121,493.8

8.82%

18,150.0

199,438.0

19,130.7

199,476.8

Step 3. Estimated Impact of Stress on Capital

Descriptions 2 Yr Actual Pro forma Baseline Pro forma Adverse Pro forma Severely Adverse

© 2017

• Understanding available data and data sources

• Normalizing data into useable format

• Capture/update missing data

• Define Scenario variables

Data

• Create and document “What if” scenarios.

• Adjust grading inputs with scenario changes

• Grade portfolio based on new criteria

System• Reports generated that

highlight differences• Analyze and incorporate

results into processes• Proactively manage loan

portfolio

Results


© 2017


62

Subjective

Accuracy

ObjectiveG

radi

ng M

odel

Industry Verticals

OCC Model

Objective Risk Score Model

© 2017

ALLL Methodology – Building the Reserve

63

I. Loan GradingII. Stress TestingIII. Reserve Calculations Loan

Portfolio Mgmt.

Loan Grading

Stress Testing

ALLL Reserve

© 2017

Current Baseline Forecast of PV of Future LossesRolling Loss History

CECL Method

ASC 450 (FAS 5)

Assi

gned

at L

oan

Pool

leve

l

1. Economic/External Conditionsa. Local / National Economic conditionsb. Collateral Valuationc. Impact of Competition / Legal

2. Portfolio Performancea. Impacts/Effects of Concentrationsb. Changes in Loan Quality, PDs, NPAsc. Change in Portfolio Volume or Nature

3. Internal Processesa. Changes in Lending/Underwriting Policiesb. Changes in Loan Review Processc. Changes in Staff Depth/Experience

ASC 310 (FAS 114)

Qualitative Factors

New Supportable Forecasting Requirement

PV Future Losses

1. Loan Pool Performance2. Projected Loan Performance

a. Economic Conditionsb. Borrower Financials

3. Time Value of Money a. Discounted Cash Flowb. Fair Market Value of Collateral


65

© 2017 67

Mitigate Interest Rate Risk by Variable rate productsShort term balloonsAvoiding any longer term fixed products

Maximize ProfitabilityIncorporating pricing floorsTightened credit standards to minimize charge offs

67

Common Loan Practices Impacting CECL Model


© 2017


68

Additional data that need to be captured for CECL model:

1. Loan Grade Dimensions2. Loan Age Dimensions3. Loan Level History/ Charge off Dates and Amounts4. Loan Terms5. Loan Pricing compared to Market Rates

© 2017


69

Accomodation and Food ServicesRisk Grade < 6 6 < 12 12 < 18 18 < 24 24 < 30 30 < 36 36 < 42 42 < 48 > 48

1 Pass - - - - - - - - - - 2 Pass - 200,000 - - - - - - 500,000 700,000 3 Pass 500,000 400,000 150,000 500,000 600,000 250,000 150,000 375,000 850,000 3,775,000 4 Pass 125,000 - 400,000 250,000 750,000 100,000 600,000 450,000 100,000 2,775,000 5 Special Mention - - - 250,000 - - - 300,000 500,000 1,050,000 6 Substandard - - - - - 500,000 - - 350,000 850,000 7 Doubtful - - 150,000 - - - - - 125,000 275,000 8 Loss - - - - - - - - - -

Totals 625,000 600,000 700,000 1,000,000 1,350,000 850,000 750,000 1,125,000 2,425,000 9,425,000

C&I $ Balances

Age of Loan in Months Grand Totals


1 Pass - - - - - - - - - - 2 Pass - - - - - - - - - - 3 Pass - - - - 50,000 - - - - 50,000 4 Pass - - 15,000 - - - - - 25,000 40,000 5 Special Mention - - - - - - - - 10,000 10,000 6 Substandard - - - - - - - - 15,000 15,000 7 Doubtful - - - - - - - - - - 8 Loss - - - - - - - - - -

Totals - - 15,000 - 50,000 - - - 50,000 115,000

C&I $ Losses



1 Pass 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% - 2 Pass 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% - 3 Pass 0.00000% 0.00000% 0.00000% 0.00000% 8.33333% 0.00000% 0.00000% 0.00000% 0.00000% 1.325%4 Pass 0.00000% 0.00000% 3.75000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 25.00000% 1.441%5 Special Mention 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 2.00000% 0.952%6 Substandard 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 4.28571% 1.765%7 Doubtful 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% - 8 Loss 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% 0.00000% -

Totals 0.00000% 0.00000% 2.14286% 0.00000% 3.70370% 0.00000% 0.00000% 0.00000% 2.06186% 1.220%

C&I Loss Rate


Pool Segmentation

Description of Loan PoolsCur BalLoss RateQ FactorsTotal FactorsReserve

1.aConstruction, land development, and other land loans$ 5,200,0002.500%-0.500%2.000%$ 104,000

1.bSecured by farmland$ 6,500,0000.000%0.750%0.750%$ 48,750

1.c.1Revolving, open-end loans secured by 1-4 family $ 750,0001.000%1.000%2.000%$ 15,000

1.c.2.aSecured by first liens$ 18,500,0000.250%0.750%1.000%$ 185,000

1.c.2.bSecured by junior liens$ 1,500,0000.750%1.500%2.250%$ 33,750

1.dSecured by multifamily (5 or more) residential$ 14,250,0001.125%1.000%2.125%$ 302,813

1.eSecured by nonfarm nonresidential properties$ 37,000,0000.875%1.250%2.125%$ 786,250

3Loans to finance agricultural production $ 7,000,0000.125%0.500%0.625%$ 43,750

4Commercial and industrial loan$ 23,250,0001.500%0.500%2.000%$ 465,000

6.aCredit cards$ 600,0002.000%1.000%3.000%$ 18,000

6.bOther revolving credit plans$ 1,500,0002.000%1.000%3.000%$ 45,000

6.cOther consumer loans$ 2,450,0002.000%1.000%3.000%$ 73,500

8Obligations of states and political subdivisions in U.S$ 2,500,0000.000%0.250%0.250%$ 6,250

9Other loans$ - 00.000%1.500%1.500%$ - 0

10Lease financing receivables (net of unearned income)$ - 00.000%1.500%1.500%$ - 0

Totals$ 121,000,000$ 2,127,063

Reserve to Total Outstanding Loans1.76%

Outstanding Loan Balances20112012201320142015

Entertainment and Recreation$ 4,710,087$ 4,485,797$ 4,272,188$ 4,068,750$ 3,875,000

Health Care Services$ 2,000,000$ 3,000,000$ 5,189,375$ 5,462,500$ 5,750,000

Professional Services$ 3,000,000$ 3,875,000$ 4,000,000$ 3,875,000$ 5,000,000

Restaurant and Lodging$ 5,000,000$ 4,250,000$ 3,750,000$ 3,000,000$ 2,000,000

Retail$ 2,850,000$ 3,063,750$ 3,293,531$ 3,540,546$ 2,750,000

Transportation$ 2,750,000$ 3,000,000$ 2,750,000$ 3,250,000$ 3,875,000

Totals$ 20,310,087$ 21,674,547$ 23,255,094$ 23,196,796$ 23,250,000

Net Losses20112012201320142015

Entertainment and Recreation$ - 0$ 100,000$ 150,000$ 50,000$ - 0

Health Care Services$ - 0$ - 0$ - 0$ - 0$ - 0

Professional Services$ - 0$ - 0$ - 0$ 50,000$ - 0

Restaurant and Lodging$ 500,000$ 200,000$ 300,000$ 70,000$ - 0

Retail$ - 0$ 50,000$ - 0$ - 0$ - 0

Transportation$ - 0$ - 0$ - 0$ 50,000$ - 0

Totals$ 500,000$ 350,000$ 450,000$ 220,000$ - 0

Loss Rates20112012201320142015

Entertainment and Recreation0.00%2.23%3.51%1.23%0.00%

Health Care Services0.00%0.00%0.00%0.00%0.00%

Professional Services0.00%0.00%0.00%1.29%0.00%

Restaurant and Lodging10.00%4.71%8.00%2.33%0.00%

Retail0.00%1.63%0.00%0.00%0.00%

Transportation0.00%0.00%0.00%1.54%0.00%

Gross Loss Rate2.46%1.61%1.94%0.95%0.00%

Weighted Avg 33.33%0.81%0.54%0.64%0.32%

Rolling Loss Rate2.05%2.00%1.50%

Segmented Loan PoolsCur BalLoss RateQ FactorsTotal FactorsReserve

Entertainment and Recreation$ 3,875,0002.323%0.500%2.823%$ 109,385

Health Care Services$ 5,750,0000.000%0.500%0.500%$ 28,750

Professional Services$ 5,000,0000.430%0.500%0.930%$ 46,503

Restaurant and Lodging$ 2,000,0005.013%0.500%5.513%$ 110,251

Retail$ 2,750,0000.544%0.500%1.044%$ 28,708

Transportation$ 3,875,0000.513%0.500%1.013%$ 39,245

$ 23,250,000$ 362,843

Loan Migration

Migration Analysis

Orig Dt

Q1 2011Q2 2011Q3 2011Q4 2011Q1 2012Q2 2012Q3 2012Q4 2012Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015

C & I

Accomodation and Food Services

Risk Grade

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

3Pass500,000485,000470,000200,000195,000190,000185,000180,000175,000- 0- 0- 0

4Pass- 0- 0- 0255,000- 0- 0- 0- 0- 0- 0- 0- 0

5Special Mention- 0- 0- 0- 0245,000235,000- 0- 0- 0- 0- 0- 0

6Substandard- 0- 0- 0- 0- 0- 0225,00065,00060,000- 0- 0- 0

7Doubtful- 0- 0- 0- 0- 0- 0- 0150,000- 0- 0- 0- 0

8Loss- 0- 0- 0- 0- 0- 0- 0- 0150,000- 0- 0- 0

500,000485,000470,000455,000440,000425,000410,000395,000235,000- 0- 0- 0

C&I $ Balances

Accomodation and Food ServicesAge of Loan in MonthsGrand Totals

Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0200,000- 0- 0- 0- 0- 0- 0500,000700,000

3Pass500,000400,000150,000500,000600,000250,000150,000375,000850,0003,775,000

4Pass125,000- 0400,000250,000750,000100,000600,000450,000100,0002,775,000

5Special Mention- 0- 0- 0250,000- 0- 0- 0300,000500,0001,050,000

6Substandard- 0- 0- 0- 0- 0500,000- 0- 0350,000850,000

7Doubtful- 0- 0150,000- 0- 0- 0- 0- 0125,000275,000

8Loss- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

Totals625,000600,000700,0001,000,0001,350,000850,000750,0001,125,0002,425,0009,425,000

C&I $ Losses


Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

3Pass- 0- 0- 0- 050,000- 0- 0- 0- 050,000

4Pass- 0- 015,000- 0- 0- 0- 0- 025,00040,000

5Special Mention- 0- 0- 0- 0- 0- 0- 0- 010,00010,000

6Substandard- 0- 0- 0- 0- 0- 0- 0- 015,00015,000

7Doubtful- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

8Loss- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

Totals- 0- 015,000- 050,000- 0- 0- 050,000115,000

C&I Loss Rate


Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

2Pass0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

3Pass0.00000%0.00000%0.00000%0.00000%8.33333%0.00000%0.00000%0.00000%0.00000%1.325%

4Pass0.00000%0.00000%3.75000%0.00000%0.00000%0.00000%0.00000%0.00000%25.00000%1.441%

5Special Mention0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%2.00000%0.952%

6Substandard0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%4.28571%1.765%

7Doubtful0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

8Loss0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

Totals0.00000%0.00000%2.14286%0.00000%3.70370%0.00000%0.00000%0.00000%2.06186%1.220%

Pool Segmentation

Description of Loan PoolsCur BalLoss RateQ FactorsTotal FactorsReserve

1.aConstruction, land development, and other land loans$ 5,200,0002.500%-0.500%2.000%$ 104,000

1.bSecured by farmland$ 6,500,0000.000%0.750%0.750%$ 48,750

1.c.1Revolving, open-end loans secured by 1-4 family $ 750,0001.000%1.000%2.000%$ 15,000

1.c.2.aSecured by first liens$ 18,500,0000.250%0.750%1.000%$ 185,000

1.c.2.bSecured by junior liens$ 1,500,0000.750%1.500%2.250%$ 33,750

1.dSecured by multifamily (5 or more) residential$ 14,250,0001.125%1.000%2.125%$ 302,813

1.eSecured by nonfarm nonresidential properties$ 37,000,0000.875%1.250%2.125%$ 786,250

3Loans to finance agricultural production $ 7,000,0000.125%0.500%0.625%$ 43,750

4Commercial and industrial loan$ 23,250,0001.500%0.500%2.000%$ 465,000

6.aCredit cards$ 600,0002.000%1.000%3.000%$ 18,000

6.bOther revolving credit plans$ 1,500,0002.000%1.000%3.000%$ 45,000

6.cOther consumer loans$ 2,450,0002.000%1.000%3.000%$ 73,500

8Obligations of states and political subdivisions in U.S$ 2,500,0000.000%0.250%0.250%$ 6,250

9Other loans$ - 00.000%1.500%1.500%$ - 0

10Lease financing receivables (net of unearned income)$ - 00.000%1.500%1.500%$ - 0

Totals$ 121,000,000$ 2,127,063

Reserve to Total Outstanding Loans1.76%

Outstanding Loan Balances20112012201320142015

Entertainment and Recreation$ 4,710,087$ 4,485,797$ 4,272,188$ 4,068,750$ 3,875,000

Health Care Services$ 2,000,000$ 3,000,000$ 5,189,375$ 5,462,500$ 5,750,000

Professional Services$ 3,000,000$ 3,875,000$ 4,000,000$ 3,875,000$ 5,000,000

Restaurant and Lodging$ 5,000,000$ 4,250,000$ 3,750,000$ 3,000,000$ 2,000,000

Retail$ 2,850,000$ 3,063,750$ 3,293,531$ 3,540,546$ 2,750,000

Transportation$ 2,750,000$ 3,000,000$ 2,750,000$ 3,250,000$ 3,875,000

Totals$ 20,310,087$ 21,674,547$ 23,255,094$ 23,196,796$ 23,250,000

Net Losses20112012201320142015

Entertainment and Recreation$ - 0$ 100,000$ 150,000$ 50,000$ - 0

Health Care Services$ - 0$ - 0$ - 0$ - 0$ - 0

Professional Services$ - 0$ - 0$ - 0$ 50,000$ - 0

Restaurant and Lodging$ 500,000$ 200,000$ 300,000$ 70,000$ - 0

Retail$ - 0$ 50,000$ - 0$ - 0$ - 0

Transportation$ - 0$ - 0$ - 0$ 50,000$ - 0

Totals$ 500,000$ 350,000$ 450,000$ 220,000$ - 0

Loss Rates20112012201320142015

Entertainment and Recreation0.00%2.23%3.51%1.23%0.00%

Health Care Services0.00%0.00%0.00%0.00%0.00%

Professional Services0.00%0.00%0.00%1.29%0.00%

Restaurant and Lodging10.00%4.71%8.00%2.33%0.00%

Retail0.00%1.63%0.00%0.00%0.00%

Transportation0.00%0.00%0.00%1.54%0.00%

Gross Loss Rate2.46%1.61%1.94%0.95%0.00%

Weighted Avg 33.33%0.81%0.54%0.64%0.32%

Rolling Loss Rate2.05%2.00%1.50%

Segmented Loan PoolsCur BalLoss RateQ FactorsTotal FactorsReserve

Entertainment and Recreation$ 3,875,0002.323%0.500%2.823%$ 109,385

Health Care Services$ 5,750,0000.000%0.500%0.500%$ 28,750

Professional Services$ 5,000,0000.430%0.500%0.930%$ 46,503

Restaurant and Lodging$ 2,000,0005.013%0.500%5.513%$ 110,251

Retail$ 2,750,0000.544%0.500%1.044%$ 28,708

Transportation$ 3,875,0000.513%0.500%1.013%$ 39,245

$ 23,250,000$ 362,843

Loan Migration

Migration Analysis

Orig Dt

Q1 2011Q2 2011Q3 2011Q4 2011Q1 2012Q2 2012Q3 2012Q4 2012Q1 2013Q2 2013Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015

C & I

Accomodation and Food Services

Risk Grade

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

3Pass500,000485,000470,000200,000195,000190,000185,000180,000175,000- 0- 0- 0

4Pass- 0- 0- 0255,000- 0- 0- 0- 0- 0- 0- 0- 0

5Special Mention- 0- 0- 0- 0245,000235,000- 0- 0- 0- 0- 0- 0

6Substandard- 0- 0- 0- 0- 0- 0225,00065,00060,000- 0- 0- 0

7Doubtful- 0- 0- 0- 0- 0- 0- 0150,000- 0- 0- 0- 0

8Loss- 0- 0- 0- 0- 0- 0- 0- 0150,000- 0- 0- 0

500,000485,000470,000455,000440,000425,000410,000395,000235,000- 0- 0- 0

C&I $ Balances


Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0200,000- 0- 0- 0- 0- 0- 0500,000700,000

3Pass500,000400,000150,000500,000600,000250,000150,000375,000850,0003,775,000

4Pass125,000- 0400,000250,000750,000100,000600,000450,000100,0002,775,000

5Special Mention- 0- 0- 0250,000- 0- 0- 0300,000500,0001,050,000

6Substandard- 0- 0- 0- 0- 0500,000- 0- 0350,000850,000

7Doubtful- 0- 0150,000- 0- 0- 0- 0- 0125,000275,000

8Loss- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

Totals625,000600,000700,0001,000,0001,350,000850,000750,0001,125,0002,425,0009,425,000

C&I $ Losses


Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

2Pass- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

3Pass- 0- 0- 0- 050,000- 0- 0- 0- 050,000

4Pass- 0- 015,000- 0- 0- 0- 0- 025,00040,000

5Special Mention- 0- 0- 0- 0- 0- 0- 0- 010,00010,000

6Substandard- 0- 0- 0- 0- 0- 0- 0- 015,00015,000

7Doubtful- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

8Loss- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0

Totals- 0- 015,000- 050,000- 0- 0- 050,000115,000

C&I Loss Rate


Risk Grade< 66 < 1212 < 18 18 < 2424 < 3030 < 3636 < 4242 < 48> 48

1Pass0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

2Pass0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

3Pass0.00000%0.00000%0.00000%0.00000%8.33333%0.00000%0.00000%0.00000%0.00000%1.325%

4Pass0.00000%0.00000%3.75000%0.00000%0.00000%0.00000%0.00000%0.00000%25.00000%1.441%

5Special Mention0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%2.00000%0.952%

6Substandard0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%4.28571%1.765%

7Doubtful0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

8Loss0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%0.00000%- 0

Totals0.00000%0.00000%2.14286%0.00000%3.70370%0.00000%0.00000%0.00000%2.06186%1.220%

© 2017 70


Vintage Prepayment & Loan Migration Analysis• Understanding how loans are behaving• parked loans vs loans in the money

Concentration Analysis• Can drive marketing strategy. • Natural hedging allows organic changes in product mix and industry

concentrations.

Pooling MethodologiesCan be leveraged to mitigate increases in reserve requirements based on new CECL guidelines

© 2017

Good Credits Bad Credits

71

Good credits evaporate out of your portfolio

Look for best deal structure, can move anywhere, anytime

Bad credits stick in your portfolio like gum on your shoe.


© 2017 72

Loan Portfolio Stress Testing – Intersession ProjectData Sources need to complete OCC Stress Testing Model

GSB Student Website• OCC Stress Test Model (Excel Version)

SNL Data Sources (Calculating 2 & 3 Yr Loss Rates)• Summary Income Statement• RI-B Charge Off and Recoveries• RC-C Loans and Leases• RC-R Capital Ratios

Data you need from CFO• Current ALLL Reserve• Asset Liability Forecast (Two year forecast of Income / Loan

Balances)

Stress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioSlide Number 11Stress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan Portfolio��Stress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioPreparing for MayhemStress Testing the Loan PortfolioDefining Stress Testing - Mayhem�Defining Stress Testing - MayhemDefining Stress TestingStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioThe Changing Regulatory LandscapeStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioSlide Number 44Slide Number 45Stress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioStress Testing the Loan PortfolioTwo Approaches to Stress TestingStress Testing the Loan PortfolioSample Credit Risk Sensitivity TestSample Credit Risk Sensitivity TestSample Credit Risk Sensitivity TestSample Credit Risk Sensitivity TestSample Credit Risk Sensitivity TestSample Credit Risk Sensitivity TestStress Testing the Loan PortfolioStress Testing the Loan PortfolioALLL Methodology – Building the ReserveALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?ALLL Methodology / Impact of CECL?�Loan Portfolio Stress Testing – Intersession Project

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Lecture Materials LOAN PORTFOLIO MANAGEMENT – YEAR 1 …...capacity of the obligor or the collateral pledged. Loans so classified must have a well -defined weakness or weaknesses