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Dave WicklundDirector of ALM Advisory ServicesPlansmith Corporationdwicklund@plansmith.com

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Dave Wicklund• DirectorofALMAdvisoryServices(6+years)Ø Specializeininstitution-specificassumptiondevelopmentØ OverseeallPlansmithoutsourcingØ LeadALCO&BoardmeetingsØ RepresentclientsinregulatorymattersØ Providetrainingforregulatoryagencies,financialinstitutions,&tradegroups• FDICSeniorBankExaminer(20+years)Ø CapitalMarketsSubjectMatterExpert&ALMSpecialistØ Examiner-in-Chargeof75+examinations&visitsØ Developednation-wideIRRtrainingmaterialsØ AuthoredarticlesonIRR,IndependentReviewRequirements,&LiquidityRiskManagement

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• 40+YearsinBusiness• Schaumburg,Illinois(ChicagoSuburb)

• 1200+FinancialInstitutionClients• ALM,Budgeting/Forecasting,PeerAnalysis,&StrategicPlanning

• Educational&AdvisoryServices

Plansmith

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• BankersGPSØ CallReportData– UpdatedQuarterlyØ Web-BasedSystem(canbeoutsourced)

• FinancialCompassØ Instrument-levelInputsØ MonthlyUpdatesØ Client-HostedSoftware(canbeoutsourced)

• BudgetCompass• EducationalandAdvisoryServices

Plansmith Products & Services

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• CorporateGovernanceStructure• IRRMeasurements• IRRModelAssumptions• IndependentReviewProcess

The Four Pillars

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The Four Pillars of an Effective IRR Management Program

IRRDefinedInterestRateRiskistheriskthatCHANGING interestratesadversely

impactbothshort-termEARNINGS and theinstitution’slonger-termCAPITALPOSITION.

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BlackSwansandFatTailsRiskManagement-LowProbability/HighImpactEvents

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• CorporateGovernanceStructure• IRRMeasurementsandModeling• IRRModelAssumptions• IndependentReviewProcess

The Four Pillars

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• BoardandManagementOversight• IRRPoliciesandLimits• InternalControls

Corporate Governance Structure

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BoardandManagementOversight• Board

Ø Strategy,Policy,andLimitsØ ReviewModelResults(atleastquarterly)Ø ReviewAssumptions,Scenarios,andIndep.Rev.Findings(annually)

• Asset/LiabilityManagementCommittee(ALCO)• SeniorManagement

Ø ImplementStrategyØ RunModelandAdministerProgramØ ReportFindingstoBoard

Corporate Governance Structure

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PoliciesandRiskLimits• Responsibilities• EstablishParameters

Ø EarningsSimulations(12- and24-month)Ø CapitalValuation(NEV)Ø Non-parallelYieldCurveRisk

• ReportingRequirements• IndependentReview(audit)• PolicyExceptionProcedures

Corporate Governance Structure

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InternalControls• ModelControls• ReportingProcedures• PolicyExceptions• IndependentReview

Corporate Governance Structure

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üCorporateGovernanceStructure

• IRRMeasurements• IRRModelAssumptions• IndependentReviewProcess

The Four Pillars

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• EarningsSimulations• CapitalValuation(NEV)• Non-ParallelShiftsintheYieldCurve• ModelSensitivityTesting

IRR Measurements

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IRRMeasurements/Models

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IRRModels– EarningsSimulation- NII

The Four Pillars of an Effective IRR Management Program

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IRRModels– EarningsSimulation -NI

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IRRModels– CapitalValuation(NEV)

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IRRModeling- Scenarios• Static/No-Growth(NOT Dynamic/Budget)• Immediate/Shock(NOT Ramp/GradualRateChanges)•MaterialStressLevels(parallelupto+/-400bps)Ø -300/-400bps???Ø +500bps???

• 12- AND24-MonthSimulationPeriods• Non-ParallelChangesinMarketRatesØMeaningful ShiftsØ EarningsSimulationANDCapitalValuation(NEV)

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IRRModeling- YieldCurveRiskDefinition:Theriskarisingfromchangesintheslopeandshapeoftheyieldcurve,asshort-,intermediate-,andlong-terminterestratesusuallymoveindifferentways.

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YieldCurveRiskModeling

Source:FDICDirectors’ResourceCenter– TechnicalAssistanceVideoProgram“InterestRateRisk”

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YieldCurveRiskModeling– Plansmith’sCompass

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• StressTestKeyAssumptionsØ PrepaymentsØ Deposit/SharePricingØ DecayTerms

• TestEachIndependently

IRR Models – Sensitivity Testing

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üCorporateGovernanceStructureü IRRMeasurements

• IRRModelAssumptions• IndependentReviewProcess

The Four Pillars

The Four Pillars of an Effective IRR Management Program

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• Prepayments• Deposit/ShareRepricing• Non-maturityDeposit/ShareDecayRates

Key IRR Model Assumptions

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• PrepaymentsØ LoansandMortgageBackedSecuritiesØ Dynamicvs.StaticØ InstitutionSpecific

Key IRR Model Assumptions

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• Deposit/ShareRepricingØ ConsiderHistoricalData(FullRateCycle)Ø IncludeQualitativeAnalysiso RateEnvironmento Competitiono MemberDemographics/FundingConcentrationso PricingLagso “Surge”Growth

Key IRR Model Assumptions

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• Deposit/ShareDecayRatesØ AccountDurations(openandclosedaccounts)Ø Run-OffRates(volumeandbalance)Ø“Surge”Deposits/Shares

Key IRR Model Assumptions

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üCorporateGovernanceStructureü IRRMeasurementsü IRRModelAssumptions

• IndependentReviewProcess

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Independent Review Program (IRR Audit)

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1. Adequacyoftheinternalcontrolsystem2. Appropriatenessoftheriskmeasurementsystem3. Accuracyandcompletenessofdatainputs4. Reasonablenessandvalidityofscenarios5. Validityoftheriskmeasurementcalculations

***ASSESSMENT,NOTJUSTDESCRIPTION***

Independent Review Program

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Validityofriskmeasurementcalculations• Software/formulas/programmingcode• Resultsandassumptions

Ø Oftentestedbycomparingactualversusforecastedresults(a/k/aBacktesting)

Ø Benchmarking

Independent Review Program

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The Four Pillars of an Effective IRR Management Program

IndependentReview- Backtesting• Depthdependsoninstitution’ssizeandcomplexity• Onlyforearningsatrisk,notcapitalvaluation• Shouldcoveratleasta12-monthperiod(not3)• Includebothmodelresultsandkeyassumptions

Ø StartwithdirectionalconsistencyofmodelresultsØ Focusonkeymodelassumptions(loan/depositrepricingandassetprepayments)

• Whoshoulddoit?

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üCorporateGovernanceStructureü IRRMeasurementsü IRRModelAssumptionsü IndependentReviewProcess

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Plansmith’sALMAdvisoryServices•ModelAssumptionAssessment/Development• IRRandLiquidity(CashFlow)ModelOperation/Outsourcing• Backtesting• SensitivityTesting• ALMPolicy&CFPReview/Development• ALCOAssistance/Participation• Boardand/orSeniorManagementTraining• CapitalPlanningandStressTesting

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ThankYouforAttending

TheFourPillarsofanEffectiveIRRManagementProgram

DaveWicklundDirectorofALMAdvisoryServices

PlansmithCorporationdwicklund@plansmith.com

800-323-3281

The Four Pillars of an Effective IRR Management Program