CASH 2018 Annual Report

97 Earnings at risk and economic value analysis As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to monitor interest rate risk, the Board of Directors has created an Investment Committee whose principal responsibilities are to assess the Bank’s asset/ liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes in interest rates. The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value of Equity (“EVE analysis”). Under EAR analysis, net interest income is calculated for each interest rate scenario to the net interest income forecast in the base case. EAR analysis measures the sensitivity of interest-sensitive earnings over a one-year minimum time horizon. The results are affected by projected rates, prepayments, caps and floors. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricing, as well as events outside of management's control, such as customer behavior on lending and deposit activity and the effect that competition has on both lending and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing. Market-implied forward rates and various likely and extreme interest rate scenarios can be used for EAR analysis. These likely and extreme scenarios can include rapid and gradual interest rate ramps, rate shocks and yield curve twists. The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management. It models -100, +100, +200, +300 and +400 basis point parallel shifts in market interest rates over the next one-year period. Due to the current low level of interest rates, only a 100 basis point parallel shift is represented. The Company is within Board approved policy limits for all interest rate scenarios using the snapshot as of September 30, 2018. The tables below show the results of the scenarios as of September 30, 2018 and 2017: Net Sensitive Earnings at Risk Net Sensitive Earnings at Risk Balances as of September 30, 2018 Standard (Parallel Shift) Year 1 Net Interest Income at Risk% -100 +100 +200 +300 +400 Percent Change Scenario -3.0% 2.6% 5.1% 7.4% 9.9% Board Policy Limits -8.0% -8.0% -10.0% -15.0% -20.0% Net Sensitive Earnings at Risk Balances as of September 30, 2017 Standard (Parallel Shift) Year 1 Net Interest Income at Risk% -100 +100 +200 +300 +400 Percent Change Scenario -6.6% 3.7% 6.0% 8.4% 10.9% Board Policy Limits -8.0% -8.0% -10.0% -15.0% -20.0% The EAR analysis reported at September 30, 2018, shows that in an increasing +100, +200, +300, and +400 interest rate environment, more assets than liabilities will reprice over the modeled one-year period.