abc bank enterprise risk management policy...the enterprise risk management program (or erm) is a...

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ABC BANK ENTERPRISE RISK MANAGEMENT POLICY ______________________________________________________________________________ Policy for: Enterprise Risk Management Organizational Functional Area: All Board Approved: Department/Individual Responsible for Maintaining/Updating Policy: Chief Risk/Regulatory Officer Policy: It is the Board’s policy to manage the risks facing the Bank by maintaining a risk-based culture consisting of an active Board and management team, a comprehensive set of internal controls, and a formal body of policies and procedures. For the purpose of this policy, the term “risk” refers to the potential that events, expected or unanticipated, may have an adverse impact on the Bank’s capital or earnings. The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal is to identify and manage potential risks, both external and internal, that will most likely impact the Bank’s ability to achieve its financial objectives and/or align with its strategic goals. To accomplish this, the impact of risks will be estimated, and mitigating strategies developed and implemented when necessary. Finally, the information will be communicated to the Audit Committee and incorporated into the Board’s strategic planning process. The primary risks facing ABC Bank are common to most community banks, and are as follows: Internal Risks - Credit Risk - Operational Risk - Interest Rate Risk - Compliance Risk - Liquidity Risk - Strategic Risk External Risks - Reputational Risk - Regulatory Risk - Economic Risk CBA - ERM Page 1

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Page 1: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ABC BANK ENTERPRISE RISK MANAGEMENT POLICY

______________________________________________________________________________ Policy for: Enterprise Risk Management Organizational Functional Area: All Board Approved: Department/Individual Responsible for Maintaining/Updating Policy: Chief Risk/Regulatory Officer

Policy: It is the Board’s policy to manage the risks facing the Bank by maintaining a risk-based culture consisting of an active Board and management team, a comprehensive set of internal controls, and a formal body of policies and procedures. For the purpose of this policy, the term “risk” refers to the potential that events, expected or unanticipated, may have an adverse impact on the Bank’s capital or earnings. The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal is to identify and manage potential risks, both external and internal, that will most likely impact the Bank’s ability to achieve its financial objectives and/or align with its strategic goals. To accomplish this, the impact of risks will be estimated, and mitigating strategies developed and implemented when necessary. Finally, the information will be communicated to the Audit Committee and incorporated into the Board’s strategic planning process. The primary risks facing ABC Bank are common to most community banks, and are as follows: Internal Risks

- Credit Risk - Operational Risk - Interest Rate Risk - Compliance Risk - Liquidity Risk - Strategic Risk

External Risks - Reputational Risk - Regulatory Risk - Economic Risk

CBA - ERM Page 1

Page 2: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ABC BANK ENTERPRISE RISK MANAGEMENT POLICY

Specific Responsibilities Under ERM: The Chief Risk/Regulatory Officer (CRO) – Working with the Audit Committee Chair and the CEO, the CRO is responsible for the development and implementation of an effective ERM program. The CRO Chairs the Management Risk Committee and provides ERM reporting to all levels of the organization – Board-level Committees, senior management, Bank staff, auditors and regulators. The Management Risk Committee (MRC) – Chaired by the CRO, the MRC will report to the Audit Committee. The MRC will consist of the CEO, CRO, CCO, and the CFO. The Audit Committee Chair will be invited to, and welcome at, all MRC meetings. The Committee may meet periodically during the year; however, it must meet at least annually. The MRC is responsible for:

• Identifying potential risks • Establishing the severity and likelihood of risk events • Estimating the impact of events severe or likely enough to warrant consideration • Determining feasible mitigating strategies and/or setting monitoring metrics • Reporting the results of its risk management activities to the Audit Committee • Keeping minutes, and submitting those minutes to the Audit Committee

The Audit Committee – The Audit Committee is generally1 responsible for establishing a comprehensive audit schedule for all areas of the Bank’s operations, engaging auditors, and reviewing their findings. This includes the annual financial statement audit, periodic loan and credit quality reviews, required regulatory reviews (BSA, IRR, ACH, and Wire Transfers), and any other operational audits deemed necessary. The Audit Committee is also responsible for monitoring and guiding the MRC’s activities, and reporting its results to the Board. The Board – To support the ERM program, the Board is responsible for establishing the Bank’s risk appetite. While a formal risk appetite statement is not required, risk tolerances should be established over time, and incorporated into ERM analyses. Finally, the Board should incorporate the RMC’s findings into its strategic planning process.

1 The Audit Committee’s comprehensive responsibilities are detailed in the Audit Charter.

CBA - ERM Page 2

Page 3: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

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ket

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tern

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Agg

rega

te R

isk

17

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to im

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ne

goti

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ans

and

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RE.

Ris

k in

th

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LT 1

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GT

40

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Med

ium

CB

A -

ER

M P

age

3

Page 4: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

Risk Management Alignment GuideMitigated Risk Level 1 2 3 4 5

Risk Categories Key Risk Indicators Low HighChange

(PriorQ)Comments

Credit Risk

Classified Assets, PD,

Concentrations, Large

Borrowers

2.2 (0.4)

Classified loans are down to 8.0% of capital & reserves, OREO is

reduced to 4.6%, and non-accrual loans are $0.5M. Concentra-

tions in CRE are relatively high and rising, and regulators have

hinted more capital may be required. Recent stress test on the loan

portfolio for drought, and an analysis of the CRE "Office" portfolio

show inherent risk is low (little to no impact on capital when

stressed). Results of June AQ audit were fully Satisfactory,

consistent with 2.2 rating.

Interest Rate Risk

Projected Impact of

RSA/RLS on Earnings &

MVE, Market Volatility

2.2 (0.2)

Market rates remain very low and stable with little change expected.

All indicators suggest rates may rise eventually; however, only a

slight increase is foreseen by mid-2015. Only negative is NIM,

which is low and falling. IRR modeling shows the Bank is now asset-

sensitive, benefiting slightly should rates rise. June audit findings

indicate the IRR management program is "Satisfactory."

LiquidityLiquidity Ratio, LTD Ratio,

Access to LOC1.4 (0.2)

The B/S remains very liquid (liquid assets are 22% of deposits) and

external LOC's are healthy. Large depositor concentra-tions are

significant, but shocks show risk is mitigated.

[Liquidity Ratio] GT 20% 15%-20% 10%-15% 5%-10% LT 5% June audit finding is "Satisfactory" program mgt.

OperationalRisk

Audit Findings; New

Products, Branches or

key personel

0.9 (0.6)

Most operational audits for 2014 are complete, with no material

findings. Recently completed audits for IRR, Liquidity, Wires,

Safeguarding Customer Info and E-banking. Outsourced IT continues

to reduce IT-related risk, Mortgage Dept closure reduces operational

and compliance risk, and critical vendors are strong. "Cyber

terrorism" concerns are high, but mitigated by strong network

security controls. No changes to staff or products.

Compliance Risk

Pace & Scope of Reg

Change, Increasing

Complexity

2.0 0.0

Low risk as FDIC Compliance rating is "SAT"(2Q'13). New regulations

required by Dodd-Frank Act are implemented, but will require some

"seasoning" as staff and systems adjust to the changes. Outsourcing

mortgage lending also reduced risk here.

Strategic RiskProgress toward Strategic

Goals, Growth Rates2.3 0.3

Bank is generally on track to achieve LT financial goals: YTD 2014

asset growth rate results in $1B asset goal in 10 years, but NIM is

below target . Asset growth (5-yr avg is 7.9%) is outpacing capital

growth (6.6% including years with capital raises), resulting in a

7.65% capital ratio at $1B. Bank will need to raise $52M by 2025 to

reach 9% equity goal. Capital plan is under revision to increase

earnings retention for goal, and to incorporate Basel III limits. New

branch planned for NOV'14.

Reputation RiskVolume and Nature of

Publicity1.0 0.0

Limited mention of Bank in media (printed and electronic), with no

derogatory mentions. Additional direction may become appropriate

as FSB's social media profile grows.

Regulatory Risk

CAMELS Components

and Compliance

Programs

2.3 0.0

The Bank's overall regulatory standing is satisfactory, but some

pressure to increase capital given CRE concentration and growth.

Also, new FDIC guidance is expected for concentrations (loans &

deposits), stress testing in ERM, brokered deposits, BSA, consumer

lending and flood insurance limits. Bank has incorporated most, but

must demonstrate compliance at its next exam.

Economic Risk

Global, National, State

and Local Economies

(no risk tolerance)

3.0 (0.5)

Employment and CRE markets continue slow improvement, and

FOMC continues to accomodate. The Stock market is improving, but

also reacting to international issues (Russia/Ukraine and

Israel/Hamas). For CA, wild fires and drought are problems. Most

economists agree recovery is underway, but it wouldn't take much

to stall it.

Aggregate Risk 17.2 (1.6)

Overall risk is within the Board's tolerance level and decreasing.

Management is working to improve AQ by renegotiating

underperforming loans and selling ORE. Risk in the CRE "Office"

concentration appears low, yet loan stress testing will continue.

Other regulatory initiatives must be addressed, including captial,

cyber terrorism, and vendor management. Liquidity is strong, and

operational audits are good for 2014. Mildly improving economic

conditions may enhance efforts to grow towards strategic

initiatives.

LT 13.5 13.6-22.5 22.6-31.5 31.6-40.5 GT 40.6

Acceptable Risk Range

X.X Perceived "Actual" Risk

Directional tendancies

1 2 3 4 5

Low High

Acc'ble Range 3.2

Example: While still out-of-toerance, the risk is moderate (3) and the

trend is improving and expected to be in an acceptable range soon;

therfore of moderate concern.

Medium

Medium

CBA - ERM Page 4

Page 5: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM

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CB

A -

ER

M P

age

5

Page 6: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM - IRR Support

Jul-13 Sep-13 Dec-13 Mar-14 Jun-14 Score

Change in Net Interest Income 2

+400bps for 1 year -10.0% -7.0% -4.0% 2.0% 5.0% Decreasing (risk)

-400bps for 1 year NA NA NA NA NA

+400bps for 2 years -13.0% -10.0% -6.0% 3.0% 8.0% Decreasing (risk)

-400bps for 2 years NA NA NA NA NA

Change in MV Equity 2

+400bps for 1 year -25% -15% -5% -3% 2% Decreasing (risk)

Adjusted Capital Ratio 6.50% 7.00% 7.50% 7.80% 8.90% (* see comment)

Other Factors

Net Interest Margin (Bank F/S) 3.50% 3.40% 3.45% 3.48% 3.51% Below goal 3

Rate Forecast (FOMC Comment) Low Low Low Low Low Low, Stable 3

IRR Audit Findings EXC SAT EXC Low, Stable 1

* assumes mgt doesn't adjust (FDIC) Score 2.2

the B/S while rates increase 400bps over a 1-year period.

Supporting Policies (Board Approved): Score Level Trend

ALCO Policy 1 Well Below Policy Decreasing

1 Well Below Policy Stable

2 Well Below Policy Increasing

2 Below Policy Decreasing

2 Below Policy Stable

3 Below Policy Increasing

2 At Policy Decreasing

3 At Policy Stable

4 At Policy Increasing

4 Outside Policy Decreasing

5 Outside Policy Stable

5 Outside Policy Increasing

PCBB August ALCO Package FOMC – There was a meeting ending July 30 with no real changes in the tone or content of the policy statement. QE3 purchases were reduced by another $10B to $25B and will most likely end later this year with a final $15B reduction announced at the October meeting of the Federal Reserve. General Economy – Most indicators are pointing to modest growth and GDP posted a healthy rebound from the negative Q1 number. Q2 GDP grew by 4% with the economy finally waking up from winter hibernation. The housing market is showing some weakness with the Case Shiller Home Price Index showing a decline, the first since February of 2012. At the same time, consumer confidence rose and reached the highest level since October of 2007, with gains in the stock market and jobs driving a more optimistic outlook. Retail sales rose but were less than expected. Housing starts also grew less than expected, as did building permits. Existing home sales topped 5mm and were slightly better than expected. New home sales fell short at 406K with expectations for an increase of 475K. Durable Goods orders were strong and capital goods orders shrank. Finally vehicle sales posted a modest decline to 16.4 million units, but this comes after a couple of banner months and overall sales are 16% above the level of a year ago.

CBA - ERM Page 6

Page 7: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM

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CB

A -

ER

M P

age

7

Page 8: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM - Operations Risk Support

2012 2013 2014

AUDIT FINDINGS Date Rating Date Rating Date Rating

Network Penatration Test & Social Engineering 1/16/12 S 2/11/13 M 2/25/14 S

Network Penatration Test & Social Engineering 8/8/12 S 9/25/13 S

Affiliated Party Transactions - Regulation W

Accounting and Financial Reporting 11/20/12 E 3/20/14 E

Automated Clearing House (ACH) 11/20/12 E-S 11/25/13 E

BSA / CIP / OFAC / USA PATRIOT 1/21/12 S 4/25/13 E-S 5/15/14 S

Branch and Teller Operations:

Sacramento 4/25/13 S

El Dorado Hills 4/25/12 S 6/10/14 E

Carmichael 7/25/12 E 6/5/14 E

Citrus Heights 5/15/12 E

Red Bluff 3/14/12 S

Central Operations and Support Services 4/25/13 S

Deposit Operations Compliance 12/16/13 E

Electronic Banking & Retail Payment Systems 3/26/12 S 7/25/14 E

Human Resources - Payroll and Personnel 8/8/12 E 4/9/14 S

Identity Theft/Red Flags Program 4/25/13 E

Information Technology 2/21/12 E-S 6/21/13 E-S

IRR/Liquidity/Reg F Management 12/19/12 E 1/4/13 E 7/11/14 ESS

Investment Securities 7/2/12 E

Loan File and Servicing Compliance 11/18/13 S

Loan Operations (Note Department)

Loan Participations Purchase and/or Sold

Loans to Insiders/Regulation O

Mortgage Loan Compliance 6/11/12 S 2/22/13 M 1/30/14 S

Safeguarding of Customer Information (GLBA) 2/21/12 E-S 6/21/13 S 7/28/14 E-S

Wire Funds Transfer (Wholesale Payments System) 5/9/12 E 4/26/13 S 7/18/14 E

CSI/HEIT Control Assessment S S

Ratings: E=Excellent; S=Sat; M=Marginal; U=Unsat

# Pts # Pts # Pts

Excellent (.5 pt) 6 3.0 5 2.5 7 3.5

Excellent/Satisfactory (.5 pts) 3 3.0 2 2.0 1 1.0

Satisfactory (1.5 pts) 7 10.5 8 12.0 4 6.0

Marginal (2 pts) 1 2.0 1 2.0 0.0

Unsatisfactory (3 pts)

Audit Score Average 17 1.1 16 1.2 12 0.9

New Products:

Supporting Policies (Board Approved):

ACH Policy Privacy Policy

Affiliate Policy Reg GG Internet Gambling

Audit Policy Reg R Policy

Bank Security Policy Reg W Policy

Branch Closure Policy Vital Records Policy

BSA Policy Wire Policy

Code of Ethics

Complaint Policy

Correspondent Bank Policy

Elder Abuse Policy

Electronic Banking Policy

Changes in Key Management: Mortgage operations outsourced in 4Q'13 reduced risk. Changes in Products/Services: Ag loan portfolio is growing . Vendor Management: Critical vendors are strong and stable.

CBA - ERM Page 8

Page 9: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

Exam Ratings JUN'06 (Joint) JUN'10 (FDIC) JUN'13 (FDIC)

Compliance * * *

CRA SAT SAT SAT

Mortgage Reforms issued by CFBP Jan'13 - see memo

Outsourced mortgage lending reduces impact.

Supporting Policies (Board Approved):

Compliance Policy

Dodd-Frank Implementation JAN'14

Flood Regulations Revisions - Multifamily from $250K to $500K

Cyber Threat Alerts

CBA - ERM Page 9

Page 10: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM

- S

tate

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nt

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l Ass

ets

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o $

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ange

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67

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reas

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20

24

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't G

oal

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le

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ach

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al2

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97

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%5

Can

't G

oal

Incr

easi

ng

Ass

et G

row

th A

ssu

mp

tio

n7

.9%

(5-y

ear

aver

age)

Cap

ital

Gro

wth

Ass

um

pti

on

6.6

%(5

-yea

r av

erag

e)

Cap

ital

rai

se t

o $

90

M:

$5

2,0

00

Sup

po

rtin

g P

olic

ies

(Bo

ard

Ap

pro

ved

):

ERM

Po

licy

Cap

ital

Po

licy

(un

der

rev

isio

n)

Cap

ital

Str

ess

Test

- F

DIC

mo

del

CB

A -

ER

M P

age

10

Page 11: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM - Reputational Support

Traditional Media 2Q 2014 1Q 2014 4Q 2013 3Q 2013 2Q 2013 1Q 2013 4Q 2012

Print Media Mentions 6 8 5 0 2 9 3

Online Mentions 4 5 2 6 2 7 1

Broadcast Media Mentions 1 1

Social Media

Website Visits 24,475 23,690 21,750 19,000 18,250 17,085 15,500

Twitter (tweets/followers) 24/681 11/650 11/616 14/589 30/556 40/530 41/503

Facebook "Likes" 304 287 273 257 258 251 244

YouTube Views 314 371 337 378 392 445 463

Yelp Views:

Sacramento 45 68 31 48 36 152 168

El Dorado Hills 28 18 35 14 41 50 42

Carmichael 4 21 12 34 6 11 14

Citrus Heights 3 5 11 4 9 15 7

Red Bluff 8 21 12 5 7 9 10

Adverse Mentions? No No No No No No No

FFIEC Social Media Guidance revised, approved by Board and accepted by employees

Events/Sponsorships (Sponsorships in BOLD)

• 4/13/13 – 4/17/13 – Metro Chamber Cap-to-Cap

• 4/23/13 – ICBA Washington Policy Summit

• 4/25/13 – CSUS Distinguished Alumni Awards

• 5/2/13 – Cristo Rey Scholarship Dinner

• 5/3/13 – Next Ed Convergence

• 5/4/13 – Les Miz Gala

• 5/7/13 – Sac State CBA Awards Banquet

• 5/9/13 – St. Francis Golf Tournament

• 5/9/13 – California Bountiful Event

• 5/14/13 – SARTA Med Tech Showcase

• 5/15/13 - The Intersection of Mayor Johnson's Year of Food & our Region's Ag Economy

• 5/16/13 – Annual Shareholders Meeting

• 5/16/13 – UCP Humanitarian of the Year Awards

• 5/16/13 – Valley Vision Legacy Feast

• 5/22/13 – Sacramento Host Breakfast

• 5/22/13 – Sacramento Tree Foundation Tree Hero Awards

• 5/22/13 – Way Up Sacramento Reception

• 5/31/13 – Roseville 2013

• 6/4/13 - Hispanic Chamber Small Biz Symposium

• 6/5/13 – Sacramento Zoo Annual Benefactor Reception

• 6/5/13 – Center for Fathers and Families Father of the Year Awards

• 6/7/13 – Sac Regional Conservation Corps Breakfast on the River

• 6/23/13 – Ronald McDonald House Red Shoe Crawl

• 6/24/13 – KVIE Golf Tournament

• 6/29 & 30/13 – Celebrate America

CBA - ERM Page 11

Page 12: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM - Regulatory Support

Exam Ratings JUN'11(DFI) JUN'12(FDIC) JUL'12 FRB JUN'13(DBO) JUL'13 FRB

Capital 2 2 (Bancorp) 2 (Bancorp)

Asset Quality 2 2 2

Management 2 2 2 2 2

Earnings 2 2 2

Liquidity 2 2 2

Sensitivity 2 2 2

IT 2

Composite 2 2 2 2 2

Compliance FEB'13 (2)

CRA SAT

Numeric AVG 2.00 2.00 2.00 2.00 2.00

Updates Updates

7/7/2010 6/30/2013 Initial Response to Exam

11/1/2010 8/30/2013 Update & Meet FDIC/DBO

11/30/2010 1/20/2014 Qtrly update to Exam

1/31/2011 4/15/2014 Heartbleed Response to FDIC

4/5/2011 5/15/2014 Initial Response to Exam

7/5/2011 6/4/2014 Application for new Branch

10/4/2011 10/13/2014 Update to Exam

1/27/2012

5/4/2012

8/6/2012

Capital Ratios 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 Basel III + B New Capital Ratios (Buffer) effective 1-1-15

Leverage 8.90% 8.75% 8.80% 9.02% 9.00% 8.74% 7.00% Stable

Tier 1 RBC 10.20% 10.10% 10.15% 10.20% 10.05% 10.10% 8.50% Stable

Total RBC 11.90% 12.00% 12.10% 11.85% 11.75% 11.60% 10.50% Stable

New Regulations

o Now perform Capital Stress Tests for new Basel III ratios and buffer

o Developing a Capital Plan, consistent with new environment

Exam Ratings Risk 2 AQ is SAT, Earns SAT, Composit SAT and avg 2.0

Communication w/Regs 2 Regular updates to FDIC/DBO

Capital Risk 2 Regulators suggested more capital needed

New Regulations Risk 3 Additional FDIC guidance in several areas

Overall Risk 2.3

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014

Leverage Tier 1 RBC Total RBC

CBA - ERM Page 12

Page 13: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM - Economic Support

ECONOMIC CYCLE

1 Current 4

2

2

3

3

4 3.5

4

5

Rating Description

1 Strong and stable, with no significant threats on the horizon

2 Good fundamentals, but peak of the cycle

3 Decent fundamentals, but some uncertanty or signals of down cycle

4 Unstable, poor & flat, or declining; or unsustainable growth (bubble?)

5 Economy in recession or crisis, stock market crashing

Fundamentals: 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 LT Proj Source:

GDP 2.7% 1.8% 4.5% 3.5% -2.1% 4.0% 3.0% Low, improving http://online.wsj.com/mdc/public/page/2_3024-ecocharts.html

Annual Inflation (12 mos all items) 1.7% 1.4% 1.6% 1.2% 1.4% 2.1% 2.0% low & flux http://online.wsj.com/mdc/public/page/2_3024-ecocharts.html

National Unemployment 7.7% 7.5% 7.2% 7.0% 6.7% 6.2% 6.1% Mod & falling http://online.wsj.com/mdc/public/page/2_3024-ecocharts.html

Sacramento Unemployment 9.2% 8.4% 7.9% 7.5% 8.1% 6.9% 7.6% Mod & flux http://www.bls.gov/eag/eag.ca_sacramento_msa.htm

Redding Unemployment 12.5% 10.9% 9.5% 9.6% 11.0% 8.6% High & flux http://www.bls.gov/eag/eag.ca_redding_msa.htm

2014 2Q RE Market Forecast

Vacancy Lease RatesAbsorp-

tionNew Const Vacancy

Lease

Rates

Absorp-

tionNew Const

Office 14.8%-19.5% $1.68-$1.69 259,449 62,440 Decrease Increase Increase Decrease Colliers/CBRE

Industrial 11.1%-11.7% $0.40-$0.43 697,659 448,744 Decrease Increase Increase Increase Colliers/CBRE

Retail 10.9%-12.3% $1.40-$1.50 17,074 176,347 Decrease Increase Increase Increase Colliers/CBRE

Apartmnt 3.6% $995/mos 888 units 320 units 4.4% Stable Stable 350-500 u Marcus & Millichap

Vasco Curdia, senior economist at the Federal Reserve Bank of San Francisco FedViews - February 2014 "Recent data continue to indicate a strengthening recovery" and "...we expect more solid [GDP] growth overall for 2014."

Sacramento Regional Business Forecast - Center for Economic Research (full report attached) "The first quarter 2014 update to the Sacramento Region Business Forecast shows that annual job growth in the six-county Sacramento Region will slow over the next 12 months. On average during the forecast period covering April 2014 to March 2015, the Region will see 1.8 percent annual job growth, which equates to a gain of approximately 16,400 jobs. In the previous 12 months, Sacramento experienced annual average job growth of 2.2 percent, adding over 19,000 jobs to payrolls. Banking Sector" PCBB June 2014- Steve Brown "General Economy – Q1 GDP disappointed with a decline of -1.0% but expectations were for -0.5% so that is the silver lining. Pending home sales also declined and were weaker than expected. The CaseShiller Home Price Index rose more than expected, rising 12.4% from the level of 1Y ago. Durable goods increased by 0.8% (a decline was expected) and some strong numbers were seen in housing—new home sales increased by 433K, the most in 6 months; existing home sales, building permits and housing starts rose as well. The index of leading indicators rose in April for the fourth straight month. Finally, motor vehicle sales in May rose to 16.7 million units, the best level since Feb. 2007 and 15.7% above the level of 1Y ago. While economic news is still mixed, there are a number of indicators that have reached levels not seen since before the recession and this is good news."

LA Times - 8/5/2014 "California gets an "F" for friendliness to small businesses, one of the worst grades in the country, according to a survey of 12,632 businesses nationwide." "Among the 82 cities included in the final data, Sacramento was voted the worst for small businesses. San Diego was 78th, Oxnard was 76th and Los Angeles was 74th." "Overall, California received the lowest grade possible for small businesses’ experiences with labor and hiring, health and safety, regulations and ease of starting a company."

CBA - ERM Page 13

Page 14: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM

Goa

ls an

d Ev

ents

Rep

ort

Risk

Eve

nt

Con

cern

s, Po

tent

ial I

mpa

ct

Mon

itori

ng, C

ontin

genc

y Pl

ans

Prot

ract

ed E

cono

mic

Re

cove

ry

Glo

bal,

Nat

iona

l and

Cal

iforn

ia fi

nanc

ial w

oes r

emai

n sig

nific

ant.

Alth

ough

June

201

1 m

arke

d th

e 2-y

ear

anni

vers

ary

of th

e “re

cove

ry,”

the m

etric

s bar

ely

supp

ort i

t. G

DP

grow

th an

d em

ploy

men

t are

impr

ovin

g sli

ghtly

in 2

012,

with

littl

e inf

latio

nary

pre

ssur

e. H

ousin

g m

arke

ts, h

owev

er, a

re n

ot re

cove

ring.

The C

RO w

ill m

onito

r eco

nom

ic fu

ndam

enta

ls an

d re

liabl

e new

s sou

rces

(WSJ

, The

Eco

nom

ist),

and

upda

te

the E

RM R

isk A

sses

smen

t. U

pdat

es w

ill b

e rep

orte

d to

th

e Aud

it Co

mm

ittee

.

Floo

d ev

ent i

n To

wns

hip

Bank

ope

ratio

ns w

ould

be i

mpa

cted

, as w

ould

RE

colla

tera

l in

that

area

. M

anag

emen

t is r

evisi

ng co

ntin

genc

y pl

ans n

ow to

ens

ure

oper

atio

nal c

once

rns a

re a

ddre

ssed

. Flo

od in

sura

nce a

nd

third

-par

ty p

olic

y m

onito

ring

are i

n pl

ace f

or al

l RE

loan

s w

ith st

ruct

ures

. Co

ntin

ued

low

inte

rest

rate

s N

et in

tere

st m

argi

n w

ill co

ntra

ct as

VR

loan

s re-

pric

e do

wnw

ard.

In

tere

st ex

pens

e mus

t be r

educ

ed as

muc

h as

pos

sible

, by

elim

inat

ing

high

er co

st de

posit

s (br

oker

ed d

epos

its),

gene

ratin

g m

ore D

DA

bal

ance

s, an

d re

duci

ng ra

tes p

aid

on ti

me a

nd M

MD

As.

Poss

ible

Rec

omm

enda

tions

:

• Pr

otra

cted

Eco

nom

ic R

ecov

ery

– th

e inv

estm

ent p

ortfo

lio w

as re

-alig

ned

for p

oten

tial e

xpos

ure t

o a d

efau

lt by

the U

S go

vern

men

t in

AU

G’1

1. C

redi

t Adm

inist

ratio

n is

deve

lopi

ng an

adva

nced

war

ning

syste

m fo

r lar

ge C

RE d

efau

lts.

Floo

d Ev

ent i

n To

wns

hip

– Id

entif

y RE

colla

tera

l in

the T

owns

hip

flood

area

as a

perc

enta

ge o

f the

por

tfolio

, and

revi

ew th

e flo

od

insu

ranc

e cov

erag

e an

all p

rope

rties

abov

e a ce

rtain

dol

lar t

hres

hold

(say

$25

0,00

0).

Cont

inue

d lo

w in

tere

st ra

te en

viro

nmen

t – M

anag

emen

t and

the A

LM C

omm

ittee

will

focu

s on

redu

cing

inte

rest

expe

nse a

nd

gene

ratin

g m

ore D

DA

acco

unts.

CB

A -

ER

M P

age

14

Page 15: ABC BANK ENTERPRISE RISK MANAGEMENT POLICY...The Enterprise Risk Management program (or ERM) is a formal representation of the Board’s risk management efforts. The program’s goal

ERM

Goa

ls an

d Ev

ents

Rep

ort

LT F

inan

cial

Goa

ls Co

mm

ent

Risk

Eve

nts

Miti

gatin

g St

rate

gy

Tota

l Ass

ets o

f $1

Billi

on in

10

year

s.

Curre

ntly

$43

5 m

illio

n (J

une

2014

) Pr

otra

cted

econ

omic

reco

very

, flo

od, a

nd/o

r mar

gin

com

pres

sion

Re-a

lign

inve

stmen

t por

tfolio

, en

sure

floo

d in

sura

nce m

onito

ring

is so

und,

and

redu

ce in

tere

st ex

pens

e.

Inve

sted

Capi

tal o

f $90

Mill

ion

in

10 y

ears

.

Curre

ntly

$38

mill

ion

(Jun

e 201

4)

Una

ntic

ipat

ed g

row

th o

r loa

n lo

sses

Revi

se ca

pita

l pla

n to

reta

in

earn

ings

nee

ded,

com

mun

icat

e po

tent

ial f

or ad

ditio

nal c

apita

l ra

ise w

ith S

/H b

ase

Effic

ienc

y Ra

tio L

ess T

han

60%

June

YTD

58%

. Sp

ike i

n pr

oble

m lo

ans c

ould

re

quire

addi

tiona

l res

ourc

es.

CRE

unde

rwrit

ing

stand

ards

are

bein

g tig

hten

ed, a

nd p

robl

em lo

ans

are b

eing

redu

ced.

Non

-Per

form

ing

Ass

ets <

1%

June

201

4 is

0.57

% (N

PA o

f $2

.5M

is $

0.5M

non

-acc

rual

loan

s +

$2.0

ORE

O o

n as

sets

of

$435

,000

M)

Prot

ract

ed E

con

Reco

very

, can

’t re

solv

e exi

sting

NPA

s or n

ew

NPA

’s ar

e boo

ked

Tigh

ten

U/W

stan

dard

s to

avoi

d ta

king

on

new

risk

. Con

tinuo

usly

m

onito

r exi

sting

loan

por

tfolio

for

wea

knes

s, an

d w

ork

with

bo

rrow

ers s

trugg

ling

due t

o ec

onom

y. A

ggre

ssiv

ely

mar

k do

wn

ORE

O an

d se

ll.

Net

Inte

rest

Mar

gin

> 4.

0%

June

NIM

is 3

.51%

; Y

TD N

IM is

3.6

0%

Prot

ract

ed E

con

Reco

very

and

low

ra

te en

viro

nmen

t

Wor

k to

achi

eve t

he b

est i

nter

est

rate

s on

loan

s and

dep

osits

, whi

le

depl

oyin

g ex

cess

liqu

idity

as

prof

itabl

y as

can

be d

one s

afel

y.

CB

A -

ER

M P

age

15