BALANCE SHEET OPTIMIZATION: DRIVING PROFITABILITY

11

BALANCE SHEET OPTIMIZATION:

DRIVING PROFITABILITY

22

33

44

55

5

Improved ALCO

Process (NII)

Higher Profitability

(NIM)

Maximizing Shareholder Value

>

>

BENEFITS OF A STRONG ALCO PROCESS

66

Risk management practices with strategy formation to improve/protect margin- not one-size fits all

Improve understanding of your Bank’s balance sheet to make better decisions

How to manage your Bank’s balance sheet through FHLB Products & other ALCO strategies

KEY HOW-TO… TAKEAWAYS FROM TODAY’S PRESENTATION

The importance of learning through case studies by a third party

Why is ALCO/Balance Management important to overall profitability

77

Balance Sheet Optimization : Profit Improvement Workshop for CEOs and CFOs

Part I

• Why Balance Sheet and NIM Management is Important for Community Banking?

• Benefits of a Strong ALCO Process: The Evolution of ALCO from the 1970’s to Today

• Review different Asset Liability Management Packets and Facilitation Techniques (Best and Worst Practices)

• Process Improvement: Position Assessment and Strategy Formation

Break

Part II

• Capital Management: Credit Cycle and Interest Rates (Case Study)

• Liquidity Assessment: Liability Management & Deposit Pricing (Strategy/Case study to improve margin/manage liquidity)

• Interest Rates: Best Practices (Strategy/Case Study to improve/protect earnings in different rate environments)

Break

Part III

• Investment: Relative Value Analysis and Sector/Yield Improvement Ideas (Case Studies)

• Review Various Balance Sheet Strategies: It’s not always about rate (Loan pricing and Case study)

• Conclusion/Questions

Lunch

88

POLLING

QUESTIONS

CASE STUDIES

99

WASHINGTON—The Federal Reserve moved to cut interest rates by a quarter-percentage point—the first reduction since 2008—in a pre-emptive strike to cushion the economy from a global slowdown and continuing trade tensions.

Stock markets sold off and the dollar strengthened Wednesday afternoon after Fed Chairman Jerome Powell disappointed investors in his post-decision news conference when he didn’t more explicitly ratify expectations of additional stimulus in the months ahead.

1010

1111

1

1.5

2

2.5

3

3.5

4

2018 2019 2020 2021 2022 Long Term

Imp

lied

Fe

d F

un

ds

Targ

et

Ra

te

Projection Year End

DEC 2018 FOMC MEDIAN DEC 2019 FOMC MEDIAN DEC 2018 FOMC DOTS DEC 2019 FOMC DOTS Fed Funds Futures

-125bps -150bps

-125bps-50bps

11

Fed Funds Futures

Source: Bloomberg

FED DOT PLOT & IMPLIED FED FUNDS TARGET RATE

1212

FEDERAL FUNDS RATE – IMPLIED PROBABILITY

1313

IF FED FUNDS IS 1.50-1.75 TODAY, WHERE DO YOU THINK RATES WILL BE IN 2 YEARS?

A. HigherB. LowerC. Unchanged

0

1414

March 2019

March 2020

TREASURY RATES

1515

M&A Strategy Is Working to Maintain ROA Despite Rate Challenges

– The First Bancshares, Inc.

A Good Quarter, but Further NIM Pressure Remains a Headwind

– Capstar Financial Holdings, Inc.

Strong Fees Offset NIM Contraction for a Beat as Dividend Increased: 1st Look

– Bank of Hawaii Corp.

NIM Slip Drives 3Q19 EPS Miss, First Look

– Southside Bancshares, Inc.

NII Pressure Outweighs New Expense Cuts; Trimming Estimates

– Associated Banc-Corp

NII Pressure Tough to Outrun; Lowering Estimates

– PacWest Bancorp

15

EQUITY RESEARCH HEADLINES

1616

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1984 1989 1994 1999 2004 2009 2014 2019

Assets > $250 Billion

Assets $10 Billion - $250 Billion


Assets $100 Million - $1 Billion

Assets < $100 Million

16

Source: FDIC

QUARTERLY EARNING ASSET YIELDS

1717

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1984 1989 1994 1999 2004 2009 2014 2019

Assets > $250 Billion



Assets $100 Million - $1 Billion

Assets < $100 Million

17

Source: FDIC

QUARTERLY COST OF FUNDS

1818

NIM/Growth Headwinds Continue to See Offsets

– United Bankshares, Inc.

Weaker NIM Helped by Lower LLP and Higher Loan Sale Fees

– BankUnited, Inc.

3Q19 1st Look: Added Wholesale Leverage to BS, NIM Guide Moves Lower

– Webster Financial Corp.

NIM Pressure Unavoidable, Expenses and Fee Income Support Higher EPS

– 1st Source Corporation

Lower NIM and Larger LLP Offset Strong Fee Revenues

– First Guaranty Bancshares

3Q19 results Mostly Good, but Trimming estimates on Margin Pressure

– Cathay General Bancorp

18


1919

Interest Income (Earning Asset Yields)

Interest Expense (Cost of Funds)

Net Interest Income (NII) Balance Sheet Management:Primary Focus

Other Income

Operating Expense

Taxes

Net Income ROE vs. ROA Focus

19

Net Income Before Taxes

BASIC INCOME STATEMENT

202020

Non-Interest Income

Net Interest Income (NII)

Net Interest Income (NII) +

NET INTEREST INCOME DEPENDENCY

2121

A. >95%B. 85%-95%C. 75%-85%D. <75%

0

WHAT IS THE AVERAGE NII DEPENDENCY

RATIO FOR COMMUNITY BANKS?

2222

Source: S&P Global Market Intelligence, Data for all banks Nationally <$15B as of 12/31/19

22

0.71

0.87

0.95

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

NII Dependency

10th Percentile Median 90th Percentile

NII DEPENDENCY AMONG ALL BANKS NATIONALLY

2323

The more net interest income dependent your institution, the more

NIM will drive earnings

23

2424

3Q19 Growth Overpowers Margin Pressure; Fine-Tuning Estimates Higher

– First Republic Bank

EPS Miss on Credit Costs, Lower Margin and Weaker Growth

– East West Bancorp

Strong Loan and Deposit Growth Offsets Core NIM Compression

– F.N.B Corporation

EPS Beat Driven by Mortgage Revenue but Core Margin Drops

– Great Southern Bancorp, Inc.

Good Growth and Mortgage Help Neutralize Margin Pressures

– Umpqua Bank

Mortgage & Lower Provision Offset NIM Compression/Weaker Growth

– Eagle Bancorp, Inc.

24


2525


25

NET INTEREST MARGIN AMONG ALL BANKS NATIONALLY

The more net interest income dependent your institution, the more NIM will drive earnings

2.92

3.86

4.64

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

Net Interest Margin


2626

WHAT IS YOUR INSTITUTION’S

NET INTEREST INCOME DEPENDENCY?

NET INTEREST MARGIN?

26

2727

Strategize Prosperity

700 N. Hurstbourne ParkwayLouisville, KY 40222

Performance Rankings www.tayloradvisor.com

Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank

Yield on Investments (FTE) 2.06 2.60 8%

Yield on Total Loans 4.08 4.71 11%

Earning Asset Yield 3.24 4.18 6%

Interest Expense to Avg. Earning Assets 0.99 1.03 48%

Net Interest Margin (FTE) 2.25 3.17 9%

Net Interest Income Dependency Ratio 0.92 0.84 77%

Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank







Earning Asset Mix and Balance Sheet Positions

Asset Size ($000) 871,367 Pledged Securities (% of Portfolio) 0%

Net Loans ($000) 514,879 59% Liquidity Ratio 50%

Security Portfolio ($000) 256,800 29% FHLB Advances and Brokered CDs ($000) 10,343

Cash and FFS ($000) 63,564 7% Cost of Funds (% of Average Liabilities) 1.29%

Municipals (% of Portfolio) 0 0% Tier 1 Capital 232,737

MBS (% of Portfolio) 100,878 39% Tier-1 Leverage Ratio (%) 26.21

CMO (% of Portfolio) 0 0% Total Risk Based Capital 233,772

Agencies (% of Portfolio) 156,073 61% Total Risk-Based Capital Ratio (%) 69.97

Other Securities (% of Portfolio) 0 0% Municipals (% of Total RBC) 0%

Net

Interest

Margin

Dissection

Under Performer Savings Bank versus State Banks

Net

Interest

Margin

Dissection

Earning Asset Mix

Performance and Balance Sheet Snapshot - 2019Q4

Under Performer Savings Bank (UPSB)

Under Performer Savings Bank versus UBPR Peer Group

Liquidity and Funding

Investment Portfolio Capital

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Yield on Investments (FTE) Earning Asset Yield Net Interest Margin (FTE)

Performance Rankings

Under Performer Savings Bank UBPR Peer Group Avg. State Bank Average




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




2828

28

Improved ALCO

Process (NII)

Higher Profitability

(NIM)

Maximizing

Shareholder Value

>

>

BENEFITS OF A STRONG ALCO PROCESS

2929

1st IRR Model Created 1977

1970’s 1980’s

1st CMO Created 1983

1990’sS&L Banking Crisis 1986-

1995

Pre CrisisDot-Com Bubble & Collapse

1997-2000

Post CrisisSubprime Mortgage Crisis

2007-2009

Current & Future

29

3030

THE EVOLUTION OF ALCO

Rate Sensitive Assets ToRate Sensitive Liabilities

(GAP Analysis)


1970’s

3131


(GAP Analysis)

Earning At Risk

1980’s

1st CMO Created 1983 Year 1 Net Interest Income, 6%

Year 2 Net Interest Income, 9%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-400 -300 -200 -100 BASE +100 +200 +300 +400


Investments

3232


(GAP Analysis)

Earning At Risk

Interest Income StressTesting Economic Value

Of Equity


1995



Economic Value of Equity, 4%

-30%

-20%

-10%

0%

10%

20%

30%

-400 -300 -200 -100 BASE +100 +200 +300 +400


Market Value Shocks

Investments

3333

On BalanceSheet Liquidity

Amount in

'000s

Short-term Liquid Assets

Fed Funds Sold 25,000

Cash & due from banks 25,000

Loans Held for Sale -

Total US Govt and Agency Bonds (market value) 250,000

Pledged US Gov't, GSE, Agency MBS / CMO Securities (220,000)

Total Liquid US Gov't, GSE, Agency MBS / CMO Securities 30,000

AFS Municipal Securities, Corporates, Muni, ABS 120,000

Pledged Muni's, Corporates, Muni, ABS

Total Liquid Municipal Securities, Corporates & Bank CD's 120,000

Total Short-term Liquid Funds 200,000

Asset Liquidity Ratio (Guideline > 10%) 16.67%

Short-term Uses of Funds

20% of CD's maturing in 90 days 50,000 20.0% 10,000

Other volatile liablities (5% of DDA, Now, MMDA, Sav.) 900,000 5.0% 45,000

Total Short-term Uses of Funds and Potential Deposit Decay 55,000

Net Short-term Liquid Funds and Potential Uses of Funds 145,000

POTENTIAL SOURCES AND USES OF FUNDS

Capacity

Outstanding

(negative)

Available

Operational

Available

Strategic

Available

Contingency

Additional Sources of Funds

Unsecured Federal Funds Purchased 10,000 - 10,000

FHLB Borrowings - capacity restricted by collateral (incl. LOC) 150,000 (90,000) 60,000

Additional FHLB Borrowings from CRE collateral (not in place) 350,000 - 175,000

Brokered CD's (5% of assets) 60,000 - 60,000

Reciprocol CDARS/ICS (5% of assets) 60,000 - 60,000

National Market Deposits (10% of assets) 120,000 - 120,000

FRB Borrowings from other loans (not in Place) 200,000 - 100,000

Loan P&I Payments next 90 days 60,000 - 60,000

Total Additional Sources of Funds 70,000 240,000 335,000

Potential Uses of Funds

Unused Loan Commitments @ 30% 250,000 75,000

Holding Company Dividends next 3 months -

Fixed Asset Purchases next 3 months -

Total Additional Uses of Funds - 75,000 -

Net Potential Sources/Uses of Funds 70,000 165,000 335,000

Operational Strategic* Contingency**

Amount in '000s 215,000 380,000 715,000

% of Assets 17.9% 31.7% 59.6%

Guideline > 10% > 15% > 20%

LIQUIDITY POSITION SUMMARY


Total Liquidity

Off BalanceSheet Liquidity


1995

Liquidity Assessment

3434

2,000

4,000

6,000

8,000

10,000

12,000


Less Focus On GAP Analysis

Earning At Risk


Of Equity

Industry Default Loan &Deposit Assumptions

Pre-Crisis

Investments

Market Value Shocks

Cash Flow Shocks

Dot-Com Bubble & Collapse1997-2000

3535

BASE Scenario #1 Scenario #2 Scenario #3

On-Balance Sheet Liquidity 200,000 200,000 185,000 170,000

Off-Balance Sheet Liquidity 585,000 521,250 409,500 198,750

Cash Outflows $ (130,000) (162,500) (195,000) (227,500)

Cash Outflows % of Assets -11% -14% -16% -19%

Net New Loans (75,000) (93,750) (112,500) (131,250) Multiple of Base Case Assumption 1.00 1.25 1.50 1.75

Additional Deposit Run-Off (55,000) (68,750) (82,500) (96,250)

Percentage of Total Deposits 5.5% 6.9% 8.3% 9.6%

Multiple of Base Case Assumption 1.00 1.25 1.50 1.75

Stressed Liquidity Position 655,000 558,750 399,500 141,250

Change from Base - (96,250) (255,500) (513,750)

% of Assets (Guideline > 5%) 54.6% 46.6% 33.3% 11.8%

Conditions: - - Haircut on InvSec Haircut on InvSec

- - No FFP Lines No FFP Lines

- - - No Brokered CDs

- - - No CDARS/ICS

- - Lower Nat'l Mkt Lower Nat'l Mkt

- - Lower FHLB/FRB Lower FHLB/FRB

Loan Fundings Loan Fundings Loan Fundings Loan Fundings

Deposit Run-Off Deposit Run-Off Deposit Run-Off Deposit Run-Off

PCA CAPITAL CATEGORY

Designation Abbreviation

Total

Risk-

Based

Ratio

Tier 1

Risk-

Based

Ratio

Tier 1

Leverage

Ratio

Tangible

Equity

Ratio

Bank Internal Limits (BI) ≥ 12.0% ≥ 10.0% ≥ 8.0% NA

Well Capitalized (WCB) ≥ 10.0% ≥ 8.0% ≥5.0% NA

Adequately Capitalized (ACB) ≥ 8.0% ≥ 6.0% ≥4.0% NA

Undercapitalized (UB) < 8.0% < 6.0% < 4.0% NA

Significantly Undercapitalized (SUB) < 6.0% < 4.0% < 3.0% NA

Critically Undercapitalized (CUB) NA NA NA ≤ 2.0%

Liquidity Stress Testing

Capital Adequacy Assessment

THE EVOLUTION OF ALCOPre-Crisis




Dot-Com Bubble & Collapse1997-2000

3636


Earning At Risk

Bank Specific Loan &Deposit Assumptions


2007-2009


3737

EVE fluctuates in a wide range when using default assumptions. Is this the bank’s true risk profile?



Earning At Risk



2007-2009

3838

Original Default Assumptions

Assumptions Developed from Decay Study

Deposit durations are longer for every category



Earning At Risk



2007-2009

3939

EVE is more stable and representative of the bank’s true risk profile.

EVE with Original Default

Assumptions

EVE with Assumptions Developed from Decay

Study



Earning At Risk



2007-2009

4040

THE EVOLUTION OF ALCOPost Crisis

Subprime Mortgage Crisis 2007-2009

Investments

Market Value Shocks

Cash Flow Shocks

Independent Municipal Credit Analysis

4141





Contingency Funding Plans

4242

Available Liquidity SourcesRisk of Reduction in Availability

Low Moderate High

FHLB * *

Repo/Secured Funds Lines * *

Federal Discount Window * *

Unsecured Fed Funds Lines * *

National Market Deposits * *

Brokered Deposits * *

Reciprocal Deposits * *

?

Year 1 Year 2 Year 3 Year 4 Year 5

Non Performing/Classified Assets 6,921 5,201 3,601 3,001 2,501

Equity 17,491 19,417 21,275 22,483 23,691

Goodwill 1,645 1,645 1,645 1,645 1,645

Tier 1 Capital 15,846 17,772 19,630 20,838 22,046

Tier 2 Capital 2,092 1,976 1,976 1,976 1,976

Total Capital 17,938 19,748 21,606 22,814 24,023

Total Average Assets 239,408 237,013 237,013 237,013 237,013

Risk Weighted Assets 167,090 158,090 158,090 158,090 158,090

Non Performing Assets/T1+ALLL 37.9% 25.8% 16.3% 12.9% 10.2%

Dividends to Tier 1 Capital 0.0% 0.0% 2.5% 7.2% 6.8%

Tier 1 Leverage Ratio 6.62% 7.50% 8.28% 8.79% 9.30%

Common Capital Ratio (CET1) 9.48% 11.24% 12.42% 13.18% 13.95%

Tier 1 Capital Ratio 9.48% 11.24% 12.42% 13.18% 13.95%

Total Capital Ratio 10.74% 12.49% 13.67% 14.43% 15.20%






Contingency Funding Plans

Capital Plan

4343

GAP Analysis Dropped

Earning At Risk


Stress Test Loan &Deposit Assumptions

Surge Balances

Credit Deterioration fromRising Interest Rates

Current & Future

Year 1 Net Interest Income, 6% in +400 bps

STRESSED Year 1 Net Interest Income, -6%

-30%

-20%

-10%

0%

10%

20%

30%

-400 -300 -200 -100 BASE +100 +200 +300 +400

Earnings at RiskBASE & STRESSED


4444

Loan Sector 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2015Y 2016Y 2017Y 2018Y

Construction & Land 0.00% 0.00% 0.08% 0.15% 4.59% 4.48% 0.00% 0.00% 0.00% 0.27%

Farm Land 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -1.79%

Agriculture Production 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

1-4 Family Closed-end 1st 0.01% 0.25% 0.10% 0.19% 0.02% 0.01% 0.09% 0.00% 0.01% 0.05%

1-4 Family Closed-end 2nd 0.00% 0.00% 0.00% 4.71% 0.00% 0.00% 0.00% 0.00% 0.00% -0.05%

1-4 Family Revolving HE-Line 0.84% 0.00% 0.18% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Multifamily 0.00% 0.00% 0.00% 0.41% -0.03% 0.00% 0.00% 0.00% 0.00% 0.00%

CRE Owner Occupied 0.00% 0.71% 1.39% 0.00% -0.02% 0.04% 0.00% 0.00% 0.06% -0.03%

CRE Non-owner Occupied 0.00% 0.00% 0.00% 0.00% 3.66% 0.00% 0.00% 0.00% 0.00% 0.00%

Commercial & Industrial 0.00% -0.32% 0.06% -0.03% 0.47% 0.06% 0.16% -0.09% -0.07% -0.06%

Consumer 0.41% 0.46% 0.37% -0.59% -0.13% 0.27% 1.16% -0.11% 0.41% 0.95%

Leases 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Loans -1.69% 0.00% 0.00% 2.99% 2.94% 1.30% 0.00% 0.68% 0.00% 0.00%

Total Loans 0.03% 0.27% 0.41% 0.11% 0.94% 0.65% 0.07% 0.00% 0.02% 0.07%

Loss Rate as a % of Loan Category

Current

2016Q1 Mild Recession Major Recession2016Q1 Non-Current Loans/Loans

1.25

Allowance for Loan Loss 10,000 11,250 33,750

Additional Reserves 1,250 23,750 4.8 X vs. last financial crisis

Real Estate Owned 1,000

Non-Current Loans 5,000 15,000 45,000 3.3 X vs. last financial crisis

8

10,000 9,188 (5,438)

Common Equity Tier 1 (CET1) 50,000 59,188 44,563

Tier 1 Capital 50,000 59,188 44,563

Total Risk Based Capital 55,000 64,188 49,563

Average Adjusted Assets 500,000 498,750 476,250

Risk Weighted Assets 400,000 398,750 376,250

Non-Current Loans / Total RB Capital 9% 23% 91% 2.6 X vs. last financial crisis

Common Equity Tier 1 12.50% 14.84% 11.84%

Tier 1 Leverage 10.00% 11.87% 9.36%

Tier 1 Risk-Based Capital 12.50% 14.84% 11.84%

Total Risk-Based Capital 13.75% 16.10% 13.17%Sub Chapter-S Status No

0% /YR increase in NCLs

75%ALLL/NCL Coverage

Ratio + Custom NCL



Ratio + Custom NCL

RE

GU

LA

TO

RY

RA

TIO

SA

SS

ET

S

Quarters of Retained Earnings

Net of Additional Reserves

AS

SE

T Q

UA

LIT

YIN

CO

ME

CA

PIT

AL

Current


1.25





8

10,000 9,188 (5,438)


Tier 1 Capital 50,000 59,188 44,563






Tier 1 Leverage 10.00% 11.87% 9.36%





Ratio + Custom NCL



Ratio + Custom NCL

RE

GU

LA

TO

RY

RA

TIO

SA

SS

ET

S

Quarters of Retained Earnings


AS

SE

T Q

UA

LIT

YIN

CO

ME

CA

PIT

AL

Current


1.25





8

10,000 9,188 (5,438)


Tier 1 Capital 50,000 59,188 44,563






Tier 1 Leverage 10.00% 11.87% 9.36%





Ratio + Custom NCL



Ratio + Custom NCL

RE

GU

LA

TO

RY

RA

TIO

SA

SS

ET

SQuarters of Retained Earnings


AS

SE

T Q

UA

LIT

YIN

CO

ME

CA

PIT

AL

Compare deterioration to a historically stressful period

Measure impact on retained earnings &

capital

QuantifyCapital

Adequacy

THE EVOLUTION OF ALCOCurrent & Future


Asset Quality Trends

Capital Stress Testing

Capital Plan

4545


(GAP Analysis)

Earning At Risk


(GAP Analysis)

Earning At Risk


Of Equity


Earning At Risk


Of Equity

Industry Default Loan &Deposit Assumptions


Earning At Risk


Of Equity


GAP Analysis Dropped

Earning At Risk


Of Equity



Credit Deterioration fromRising Interest Rates


(GAP Analysis)


1970’s 1980’s

1st CMO Created 1983


1995

Pre CrisisDot-Com Bubble & Collapse

1997-2000


2007-2009

Current & Future

45

Capital Adequacy Assessment Capital Adequacy Assessment Capital Adequacy Assessment

Asset Quality Trends

Capital Stress Testing

Capital Plan

Investments Investments Investments Investments Investments

Market Value Shocks Market Value Shocks Market Value Shocks Market Value Shocks

Cash Flow Shocks Cash Flow Shocks Cash Flow Shocks



Liquidity Assessment Liquidity Assessment Liquidity Assessment Liquidity Assessment

Liquidity Stress Testing Liquidity Stress Testing Liquidity Stress Testing

Contingency Funding Plans Contingency Funding Plans

Interest Rate Risk

Investments

Liquidity

Capital

4646

A. Regulatory Appeasement

B. Profit Improvement

C. Setting Deposit Rates

D. Meet Audit Requirements

0

WHAT IS THE PRIMARY OBJECTIVE OF YOUR ALCO MEETING?

4747

From a Best Practice Standpoint the main focus should be to

drive profitability, the secondary focus should be satisfying

auditors and regulators.

B. Profit ImprovementA. Regulatory Appeasement

C. Setting Deposit Rates D. Meet Audit Requirements

47

ANSWER:

4848

WHAT ARE COMMON

APPROACHES

TO THE ALCO PROCESS?

48

4949

APPROACHES TO ALCO

505050

Fed Chairman

2018-Current

Jerome Powell

Fed Chairman

2014-2018

Janet Yellen

Fed Chairman

2006-2014

Ben Bernanke

Fed Chairman

1987-2006

Alan

Greenspan

Fed Chairman

1979-1987

Paul Volcker

Father of

Economics

Adam Smith

1976 Nobel Prize

Lecture on Inflation

and Unemployment

Milton

Friedman

Popularized

Laffer Curve

Arthur Laffer

Keynesian

economics

John M.

Keynes

Rules of

Production and

Exchange

Karl Marx

ECONOMISTS VS. FED RESERVE

5151

APPROACHES TO ALCO

Economist

Approach

5252

APPROACHES TO ALCO

5353

Loan Committee

Board Meeting

Email

ProspectingDeposit Pricing

Meeting

ALCO

Proposals

Water Cooler

Phone

Customer Match Requests

Customer Match Requests

Water Cooler

5454

APPROACHES TO ALCO

Pricing

Approach

5555

APPROACHES TO ALCO

56

…Page 2 of 1466

5757

1 Ream = 500 Sheets 1500 Sheets = 3 Reams

57

HOW MUCH PAPER IS 1466 PAGES?

5858

APPROACHES TO ALCO

Interest Rate Risk

Approach

5959

APPROACHES TO ALCO

Broker

Approach

606060

6161

WHICH AREA IN YOUR ALCO MEETINGS DO YOU OVERWEIGHT?

A. Economy

B. Product Pricing

C. Interest Rate Risk

D. Investments

0

6262

WHAT SHOULD AN ALCO

PROCESS AND PACKET LOOK

LIKE?

62

636363

Position Assessment

6464

BREAK

6565

WHAT SHOULD AN ALCO

PROCESS AND PACKET LOOK

LIKE?

65

666666

Position Assessment

6767

Capital Liquidity

Interest Rate Sensitivity

Investments

ALCO BEST PRACTICES

6868

Asset Liability Management

Balance Sheet Management

68

WHAT’S THE DIFFERENCE?

Interest Rate Risk Management

6969

Loans

Deposits

Investments

Capital

Liquidity

Funding

Strategies

OBJECTIVES AND STRATEGIES

7070

A. Above AverageB. AverageC. Below Average

0

HOW WOULD YOU RATE YOUR ALCO PROCESS WHEN IT

COMES TO DRIVING PROFITABILITY AND STRATEGIES?

7171

Balance Sheet MixCashInvestmentsLoans

Loan Mix1-4 FamilyCommercialConsumerFixedFloatLoan Marketplace

Liquidity PositionFHLB Borrowing CapacityCore Deposit StabilityPledging Requirements

Tax PositionNet Operating LossAMT

Interest Rate Risk PositionAsset/Liability Sensitivity

Bank 1

10%30%60%

80%10%10%90%10%Flat

HighStableHigh

YesNo

Liability

Bank 2

5%50%45%

20%40%40%20%80%Flat

ModerateStableNone

NoNo

Asset

Bank 3

0%20%80%

35%45%20%50%50%

Strong Growth

NoneVolatileNone

NoYes

Neutral71

HOW ARE BANKS DIFFERENT?

7272


72

2.92

3.86

4.64

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

Net Interest Margin

10th Percentile Median

90th Percentile

0.71

0.87

0.95

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

NII Dependency

10th Percentile Median

90th Percentile

The more net interest income dependent your institution, the more NIM will drive earnings

NII DEPENDENCY AND NIM AMONG ALL BANKS NATIONALLY

7373

Earning Asset

Size

Net Interest Income Change in thousands of dollars

(due to Yield change in basis points)

(in $000) 5 10 15 20 25 30

50,000 25 50 75 100 125 150

100,000 50 100 150 200 250 300

250,000 125 250 375 500 625 750

500,000 250 500 750 1,000 1,250 1,500

750,000 375 750 1,125 1,500 1,875 2,250

1,000,000 500 1,000 1,500 2,000 2,500 3,000

ONE YEAR NIM DOLLAR IMPACT

7474

74

▪ Study the Past

▪ Monitor the Present

▪ Prepare for the Future

ALCO BEST PRACTICES

7575

75

▪ Where were we?‒ Trend Analysis

‒ Historical Ratios

‒ Peer Comparison

‒ Balance Sheet Mix

‒ Rate Movements

‒ Spread Changes

▪ Reflect‒ What did we do right?

‒ What did we do wrong?

‒ Were our strategies effective?

‒ How did environment change?

STUDY THE PAST

7676

76

▪ Where are we?‒ Position Assessment

‒ Net Interest Margin Dissection

‒ Competition Analysis

‒ Word-Problem Approach

‒ Re-focus on Objectives

▪ Reflect‒ Loan Demand vs. Deposit Growth

‒ Rate Climate

‒ Current Profitability (or not!)

‒ Resources: Loan/Deposit Officers

MONITOR THE PRESENT

7777

77

▪ Where could we go?‒ Accountability

‒ Review Minutes: Action Items, Strategies

‒ Tactical Forecasting‒ Loans vs. Deposit Projection

‒ Liquidity Flows

‒ Stress Testing‒ Capital: Credit Deterioration

‒ Interest Rate Risk: Higher/Different Betas

‒ Liquidity: Reduced Access to Funding

‒ Securities: Cash Flow Volatility, Duration

‒ Strategic Forecasting

PREPARE FOR THE FUTURE

7878

Capital Liquidity


Investments

• Formation• Adequacy• Planning• Stress Testing• Contingency Plan

BALANCE SHEET MANAGEMENT - CAPITAL

7979

Loan Sector 2007Y 2008Y 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2015Y 2016Y 2017Y 2018Y 2019YConstruction & Land 129% 107% 106% 85% 54% 67% 94% 84% 84% 122% 133% 205% 200%

Mortgages

1st Lien 255% 328% 364% 334% 313% 337% 333% 327% 314% 286% 284% 260% 224%

2nd Lien 24% 27% 56% 29% 29% 29% 29% 34% 36% 27% 26% 23% 24%

Home Equity 34% 43% 9% 37% 39% 43% 42% 48% 48% 46% 53% 49% 45%

Multifamily 32% 45% 53% 58% 56% 62% 58% 36% 30% 38% 48% 50% 65%

Commercial Real Estate

Owner Occupied 0% 139% 153% 124% 129% 113% 110% 121% 115% 110% 112% 111% 108%

Non-owner Occupied 288% 195% 152% 119% 84% 88% 70% 74% 48% 44% 46% 80% 84%

Commercial & Industrial 83% 80% 93% 72% 71% 78% 69% 56% 60% 57% 57% 84% 80%

Farm Land 13% 12% 14% 16% 17% 14% 14% 14% 13% 10% 21% 21% 20%

Agriculture Production 1% 1% 1% 1% 0% 0% 1% 0% 1% 0% 1% 1% 2%

Consumer 44% 38% 36% 29% 27% 27% 23% 23% 23% 21% 19% 17% 12%

Total Loans 903% 1016% 1037% 903% 820% 859% 844% 817% 772% 762% 798% 901% 864%

Loan Concentration Expressed as a % of Capital

79

STUDY THE PAST

8080

Loan Sector 2007Y 2008Y 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2015Y 2016Y 2017Y 2018Y 2019YConstruction & Land 0.00% 0.00% 0.00% 0.01% 0.11% 0.00% 0.00% 0.19% 0.60% -0.02% 0.00% 0.00% 0.00%

Mortgages

1st Lien 0.00% -0.01% 0.05% 0.16% 0.21% 0.04% 0.15% 0.05% 0.18% 0.26% 0.14% 0.13% -0.02%

2nd Lien 0.00% 0.34% 0.25% 2.57% 1.80% -0.59% 0.53% 0.00% 2.95% 0.29% 2.31% -1.57% 0.00%

Home Equity 0.00% 0.00% 0.00% 1.42% 0.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.79%

Multifamily 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Commercial Real Estate

Owner Occupied 0.00% 0.00% -0.04% 0.12% 0.20% 0.01% 0.00% 0.53% 0.00% 0.30% 0.00% 0.00% 0.22%

Non-owner Occupied 0.00% 0.33% 0.09% 0.76% 0.17% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Commercial & Industrial 0.29% 0.73% 0.52% 1.37% 0.07% 0.13% 6.93% -0.04% 0.04% 0.37% 1.60% 0.10% 0.45%

Farm Land 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Agriculture Production 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Consumer 1.53% 1.32% 0.98% 0.89% 0.81% 0.54% 3.10% 0.36% 0.73% -0.05% 1.23% 0.16% -0.27%

Total Loans 0.18% 0.22% 0.11% 0.46% 0.24% 0.02% 0.75% 0.12% 0.29% 0.18% 0.28% 0.01% 0.10%

Loss Rate Expressed as a % of Loan Category

80

STUDY THE PAST

8181

TAYLOR ADVISORS EBRIEF – OCTOBER 2016

8282

0

2

4

6

8

10

12

14

16

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

Charge Off Rate on Loans Recession

NATIONAL CHARGE-OFF RATES: 1985-PRESENT

Source: FDIC, NCUA, FOMC

8383

0

2

4

6

8

10

12

14

16

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

Charge Off Rate on Loans Recession Federal Funds Target Rate 2 per. Mov. Avg. (Charge Off Rate on Loans)

Source: FDIC, NCUA, FOMC

FED’S REACTION TO CHARGE-OFF RATES:

1985-PRESENT

8484

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Max Min Median

Source: 12/31/19 Call Report data from all Banks Under $15 Billion in Assets.


High 13.85 16.45 20.90 693.37

Median 12.70 15.06 18.25 26.90

Low 2.99 13.85 16.45 20.90

MONITOR THE PRESENT RISK BASED CAPITAL RATIO

8585




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank












Municipals (% of Portfolio) 0 0% Tier-1 Leverage Ratio (%) 26.21

MBS (% of Portfolio) 100,878 39% Total Risk-Based Capital Ratio (%) 69.97

CMO (% of Portfolio) 0 0% NPA/Total RBC (%) 0.20

Agencies (% of Portfolio) 156,073 61% ALL/Total RBC (%) 0.44

Other Securities (% of Portfolio) 0 0% NCO/Total RBC (%) 0.00



Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




MONITOR THE PRESENT SNAPSHOT – SAMPLE INSTITUTION




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00



Under Performer Savings Bank UBPR Peer Group Avg. State Bank AverageStrategize Prosperity



Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




8686

▪ How would your institution react if…‒ Loan concentrations in high risk sectors exceed guidelines

‒ Asset quality deteriorates to historically stressful levels

‒ Charge-offs increase

‒ Dividends become restricted

‒ Retained earnings fall (or become negative!)

‒ Capital levels decline, leading to regulatory criticism

86

▪ What tools do you have at your institution?‒ Quantify and discuss capital adequacy

‒ Growth Stress Testing

‒ Credit Stress Testing

‒ Comparison versus a historically stressful period (and higher)

‒ Measuring the impact of credit loss on capital

‒ Scenario Analysis – mild and major recession

PREPARE FOR THE FUTURE CAPITAL STRESS TEST

8787

87

8888

LENDER RISK ACCOUNTSRisk Management / Unintended Consequences to Regulatory Capital

8989

MORTGAGE PROGRAM PARTICIPATION (MPF & MPP)

9090

1. Allows your institution to manage risk and capital while enhancing non-interest income

2. FHLB holds liquidity, interest rate, and prepayment risk for all loans purchased from member institutions

3. Provides Multiple Sources of non-interest income

• Gain on sale on a flow basis• Option to retain servicing for recurring income• Lender Risk Account (LRA) provides opportunity for additional

income based on performance of sold loans over time

4. Terms generally more advantageous than Fannie Mae or Freddie Mac

5. Satisfy customer demands for products that may not fit your interest rate risk profile

MORTGAGE PURCHASE PROGRAM (MPF & MPP) BENEFITS:

9191

0.689

0.693

0.546

HIGH PERFORMING MPP INSTITUTIONS

Source: FFIEC UBPR

9292

Some examiners have required banks to risk-weight

the LRA at 1,250%

LESS meaningful for banks with small commercial & consumer loan portfolios.

Typically have higher risk-based capital ratios

MORE meaningful for banks with large commercial & consumer loan portfolios.

Typically have lower risk-based capital ratios

Source: S&P Global Market Intelligence

RISK-BASED CAPITAL IMPLICATIONS

9393

Capital Liquidity


Investments

• On Balance Sheet• Off Balance Sheet• Stressed Liquidity• Contingency Funding• Profit Center

BALANCE SHEET MANAGEMENT - LIQUIDITY

9494

2016Y 2017Y 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Loans to Deposits 55.4 55.9 57.7 60.1 58.9 60.2 63.0

Liquidity Ratio 41.1 42.0 40.7 40.4 39.3 38.9 36.6

Liquid Assets to Total Assets 36.6 37.4 36.3 36.0 35.0 34.3 32.3

Pledged Securities to Securities 25.8 23.2 25.7 23.6 28.6 28.4 32.1

Core Deposits to Total Deposits 99.2 98.7 98.1 98.2 98.9 98.9 98.8

Non-maturity Deposits to Total Deposits 88.9 89.7 89.7 90.5 91.1 91.2 91.7

Volatile Liabilities to Total Assets 1.4 1.7 2.5 2.4 1.9 1.8 2.0

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2016Y 2017Y 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Hu

nd

red

s

Liquidity Ratio Liquid Assets to Total Assets

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2016Y 2017Y 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3H

un

dre

ds

Loans to Deposits

Non-maturity Deposits to Total Deposits

STUDY THE PAST

9595

95

▪ On Balance Sheet Liquidity

‒ Cash & Fed Funds Sold

‒ Unencumbered Securities

‒ Pledging Needs

▪ Off Balance Sheet Liquidity

‒ FHLB Borrowings

‒ Brokered Deposits

‒ National Market CDs

▪ Total Liquidity

‒ Operational

‒ Strategic

‒ Contingency

How does your institution monitor its liquidity position?

MONITOR THE PRESENT

9696

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00


Min Max Median

4.50%

4.25%

5.00%

4.75%

Average Earning Asset Yield 5.02 4.92 4.60 4.14

Source: 12/31/19 Call Report data from all Banks Under $15 Billion in Assets.


High 14.55 21.53 33.00 488.09

Median 11.16 17.93 26.14 45.29

Low 0.00 14.56 21.53 33.00

MONITOR THE PRESENT LIQUIDITY RATIO DISTRIBUTION

4.00%

9797




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




MONITOR THE PRESENT SNAPSHOT – SAMPLE INSTITUTION




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




9898

98

▪ How would your institution react if…‒ FHLB Capacity was significantly reduced

‒ Brokered CD lines were shut off

‒ Deposit run-off exceeded historical norms

‒ The institution became subject to deposit rate caps

▪ What tools do you have at your institution?‒ Quantify and monitor liquidity position

‒ Contingency Funding Plan: How would you cure a

shortfall?

‒ Early Warning Indicators

‒ Prevent liquidity crisis before being subject to

restrictions

PREPARE FOR THE FUTURE LIQUIDITY STRESS TEST

9999

Marginal Cost of Funds / FHLB Supplementing Retail Deposits

FUNDING THE BALANCE SHEET

100100

LIABILITY MIX TREND ANALYSIS


101101

New MMDA Tier

Balance Rate

Tier 1 $0-$1,000 No Rate

Tier 2 $1,001 -$249,999

2.25%

Tier 3 $250,000 + 0.75%

Created New Money Market Product to Grow Deposits


102102

LIABILITY MIX TREND ANALYSIS


103103

.61 .60

.74

.68

.98

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Cost of Funds with Conversion

SAMPLE BANK COF BY QUARTER


104104

MARGINAL COST OF FUNDS RESULTS

105105

106106

.61 .60

.74

.68

.98

.83

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

Cost of Funds with Conversion Cost of Funds w FHLB

SAMPLE BANK COF BY QUARTERCost of Total Liabilities 0.83

Ranking 3

Cost of Int Bearing Dep 0.862

Cost of Non Jumbo 1.02

Retail CDs/Liabilities 6%

Brokered CDs/Liabilities 0%

Internet CDs/Liabilities 0%

Cost of Jumbo CDs NA

Jumbo CDs/Liabilities 0%

Cost of Svgs Deps [Incl MMDAs] 0.17

Savings/Liabilities 18%

MMDAs/Liabilities 10%

Cost of NOW 1.21

NOW/Liabilities 54%

Cost of DDAs NA

DDAs/Liabilities 8%

Cost of Borrowings 2.33

Fed Funds & Repos/Liabilities 2%

Other Borrowed Funds/Liabilities 0%

Total Liabilities 100%

Wholesale Funding Balances

FHLB Borrowings 3,000

Brokered Deposits -

Internet Deposits -

Reciprocal Deposits -

Repurchase Agreements -

Source: S&P Global Market Intelligence ✓

107107

FHLB Advances (overnight, term, or putable) can:

• Eliminate conversion risk – FHLB Advances are 100% new money

• Accommodates seasonal funding fluctuations with flexible terms

• Provides just in-time stable liquidity while deposit strategies are evaluated

KEY TAKEAWAYS

108108

FHLB Letter of Credit / Unpledge the Investment Portfolio

Improving The Liquidity Ratio

109109

2018Q3 2018Q4 2019Q1 2019Q2

Loans to Deposits 93.2 93.7 91.6 91.6

Liquidity Ratio 15.9 16.0 18.2 18.8

Liquid Assets to Total Assets 13.8 13.8 15.8 16.3

Pledged Securities to Securities 56.7 51.6 55.3 51.1

KEY LIQUIDITY RATIOS


0%

5%

10%

15%

20%

25%

30%

2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Hu

nd

red

s


110110

111111

✓

OPTIONS FOR COLLATERALIZING PUBLIC FUNDS

112112

0%

5%

10%

15%

20%

25%

30%

2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Hu

nd

red

s


2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Loans to Deposits 93.2 93.7 91.6 91.6 92.8

Liquidity Ratio 15.9 16.0 18.2 18.8 24.1

Liquid Assets to Total Assets 13.8 13.8 15.8 16.3 21.6

Pledged Securities to Securities 56.7 51.6 55.3 51.1 15.4

KEY LIQUIDITY RATIOS


2018Q3 2018Q4 2019Q1 2019Q2

Loans to Deposits 93.2 93.7 91.6 91.6

Liquidity Ratio 15.9 16.0 18.2 18.8

Liquid Assets to Total Assets 13.8 13.8 15.8 16.3

Pledged Securities to Securities 56.7 51.6 55.3 51.1

0%

5%

10%

15%

20%

25%

30%

2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Hu

nd

red

s


113113

• Free Up the Bank’s Investment Portfolio

• Improve On-Balance Sheet Liquidity

• Sell low yielding investments and make more real estate loans

• Earning Asset Yield improvement can exceed 200bps in most cases!

FHLB LETTER OF CREDIT BENEFITS

114114

Capital Liquidity


Investments

• Static/Dynamic Modeling• Non-Parallel Shock/Ramp• Impact on Asset Quality• Assumption Development• Assumption Stress Testing• What-If Simulations

BALANCE SHEET MANAGEMENT – INTEREST RATE RISK

115115

115

Policy

Guideline

Current Results

4Q2018

W/in Guideline

(Y/N) 3Q2018 2Q2018 1Q2018

Interest Rate Risk

Net Interest Income at Risk (1 Yr): NII Max. Change

Shocked up 400 bpts -25% 5.24% Y 6.60% 3.95% 5.90%

Shocked up 300 bpts -20% 4.72% Y 5.60% 3.75% 5.23%

Shocked up 200 bpts -12% 3.71% Y 4.51% 3.04% 4.02%

Shocked up 100 bpts -6% 2.09% Y 2.83% 1.72% 2.16%

Shocked down 100 bpts -6% -2.92% Y -4.12% -2.71% -2.93%




Net Interest Income at Risk (2 Yr): NII Max. Change

Shocked up 400 bpts -30% 13.85% Y 11.73% 13.09% 15.62%

Shocked up 300 bpts -25% 12.19% Y 10.23% 11.69% 13.56%

Shocked up 200 bpts -20% 9.16% Y 8.33% 8.95% 10.15%

Shocked up 100 bpts -10% 4.92% Y 5.26% 4.89% 5.41%





Economic Value of Equity: EVE Max. Change

Shocked up 400 bpts -35% 3.58% Y 0.71% 6.37% 8.95%

Shocked up 300 bpts -30% 4.94% Y 2.67% 7.19% 9.23%

Shocked up 200 bpts -20% 4.36% Y 3.52% 6.40% 7.87%

Shocked up 100 bpts -10% 2.71% Y 3.06% 3.99% 4.73%





STUDY THE PAST

116116

.26 .26.29

.34.40 .42

.46

.56

.65

.76

.83.89

.83

.69

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4

Kentucky Commercial Banks Indiana Commercial Banks Michigan Commercial Banks

Pennsylvania Commercial Banks West Virginia Commercial Banks Ohio Commercial Banks

STUDY THE PAST PEER COF TREND ANALYSIS

117117

0.001.002.003.004.005.006.007.00

20

19

Q2

20

18

Q3

20

17

Q4

20

17

Q1

20

16

Q2

20

15

Q3

20

14

Q4

20

14

Q1

20

13

Q2

20

12

Q3

20

11

Q4

20

11

Q1

20

10

Q2

20

09

Q3

20

08

Q4

20

08

Q1

20

07

Q2

20

06

Q3

20

05

Q4

20

05

Q1

20

04

Q2

20

03

Q3

20

02

Q4

20

02

Q1

20

01

Q2

20

00

Q3

19

99

Q4

19

99

Q1

19

98

Q2

19

97

Q3

19

96

Q4

19

96

Q1

19

95

Q2

19

94

Q3

19

93

Q4

Fed Funds Target Rate (%)


CORRELATION BETWEEN FED RATE

INCREASES AND DEPOSIT BETAS

118118

01234567

Fed Funds Target Rate (%)


CORRELATION BETWEEN FED RATE

DECREASES AND DEPOSIT BETAS

119119

PREPARE FOR THE FUTURE

120120

DEVELOPING BANK SPECIFIC ASSUMPTIONS: LOAN FLOORS

121121

Original Default Assumptions

Assumptions with Loan Floors


122122

Implementing loan floor assumptions improves the accuracy

of the model, showing less exposure to declining net interest income in rates down scenarios.


123123

123

Source: Stifel Analytics Interest Rate Risk Model

PREPARE FOR THE FUTURE INTEREST RATE RISK STRESS TEST

124124

124

0.00

0.50

1.00

1.50

2.00

2.50

3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 30 Yr

Current Yield Curve New Curve

0.00

0.50

1.00

1.50

2.00

2.50

3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 30 Yr

Current Yield Curve New Curve

New Curve represents lows from 2010-2013New Curve represents market expectations

Slight Steepening Aggressive Steepening

PREPARE FOR THE FUTURE NONPARALLEL SHIFTS

125125

FHLB Putable Advance / Risk/Reward Trade-Off

Getting Paid for Interest Rate Risk

126126

.91.96

.99

1.06

1.20

1.41

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2



127127

CD AND FHLB MATURITY/REPRICING

Short-term FHLB Advances:

$14MM @ 1.7%

Brokered Deposit Maturities:

$2.1MM 11/12/19 @ 2.3%


128128

Recommended client request

pricing on 10 year NP 1 year

129129

130130

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 Yr or less 1-3yr 3 yrs +

FHLB Maturity/Repricing

9/30/2019 6/30/2019

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

3 Mos or less 3 Mos - 12Mos

1 Yr - 3 Yrs 3 Yrs+

CD Maturity/Repricing

9/30/2019 6/30/2019

CD AND FHLB MATURITY/REPRICING


131131

.91.96

.99

1.06

1.20

1.41

1.59 1.57

0.50

0.70

0.90

1.10

1.30

1.50

1.70

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4



132132

BREAK

133133

Capital Liquidity


Investments

POSITION ASSESSMENT

134134

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00


Max Min Median

Source: 12/31/19 Call Report data from all Banks Nationally <$15B


High 7.92 15.55 26.13 93.37

Median 3.56 11.65 20.17 35.32

Low 0.00 7.93 15.56 26.15

INVESTMENTS AS A PERCENT OF ASSETS DISTRIBUTION

135135

Low, or below peer portfolio yields

OR…

Identify and monitor “risks” in the investment portfolio

MAJOR INVESTMENT MANAGEMENT

CHALLENGES FACING BANKS

136136

ECONOMIC RISKS ASSOCIATED WITH FIXED

INCOME INVESTING

136

Interest Rate Risk

Credit Risk

Yesterday

Today

Call Risk

Prepayment Risk

Reinvestment Risk

137137

Call Option

PrepaymentRisk

Reinvestment Risk

Call Risk

137

OPTIONALITY RISK

138138

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

Agencies MBSs CMOs Munis Other

Total 69,674,070 182,001,523 81,324,316 122,419,203 46,049,064

Total Securities ($000s)

138

TOTAL SECURITY ALLOCATIONS


139139

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5


2.01

2.57

3.39

2.19

2.64

3.24

<$1B $1B - $15B

139

Source: S&P Global Market Intelligence.

INVESTMENT YIELD STATISTICS – GRAPHICAL

PERSPECTIVE

140140

WHAT IS YOUR INSTITUTION’S

PORTFOLIO YIELD?

INVESTMENT MIX?

140

141141




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




142142

A. Liquidity

B. Interest Rate Risk management

C. Earnings

D. Pledging

0

WHAT IS THE PRIMARY OBJECTIVE OF YOUR INVESTMENT PORTFOLIO?

143143

Strategy

• Independent expert advice on portfolio

strategies with regular review

• Whole-Bank perspective approach to portfolio

positioning

Investment Mix

• Diversification among investment sectors,

risk/reward & relative value analysis

• Expanded range of bank-permissible investment

products

Security Selection

• Market knowledge and expertise helps optimal

security selection

• Monitor policy compliance with security purchases

Trade Execution

• Poor trade execution can impact investment returns

• Fiduciary vs. Broker

INVESTMENT MANAGEMENT BEST PRACTICES

144144

CASE STUDY 1: INVESTMENT MANAGEMENT FROM A WHOLE BANK PERSPECTIVE

145145

2016Y 2017Y 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3

Cash & due from depository institutions 42,294 35,891 48,156 50,769 50,256 42,290 52,621

Federal funds sold and Repos - - - - - - -

Total securities 132,247 148,929 134,529 133,149 139,459 141,948 127,889

Net loans and leases 184,506 194,879 204,013 220,428 218,439 215,602 232,788

Bank premises and fixed assets 7,843 8,067 8,280 8,696 9,122 9,316 9,356

Intangibles - - - - - - -

All other assets 16,900 13,527 13,097 10,651 10,934 10,119 9,746

Total assets 383,790 401,293 408,075 423,693 428,210 419,275 432,400

52,621 42,290 50,256 50,769 48,156 35,891 42,294

127,889 141,948 139,459 133,149 134,529 148,929 132,247

232,788 215,602 218,439 220,428 204,013 194,879 184,506

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

3Q192Q191Q194Q183Q182017Y2016Y

Repo + FFS + Cash & Due Total securities Net loans and leases


146146




Metric Sample Savings Bank

UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank










Security Portfolio ($000) 117,890 27% FHLB Advances and Brokered CDs ($000) 0




CMO (% of Portfolio) 7,221 6% Total Risk Based Capital 55,302


Other Securities (% of Portfolio) 4,994 4% Municipals (% of Total RBC) 0%

Net

Interest

Margin

Dissection

Sample Savings Bank versus State Banks

Net

Interest

Margin

Dissection

Earning Asset Mix


Sample Savings Bank (SSB)

Sample Savings Bank versus UBPR Peer Group



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00



Sample Savings Bank UBPR Peer Group Avg. State Bank Average

SNAPSHOT – SAMPLE INSTITUTION





UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








UBPR Peer

Group Average

Percentile

Rank








State Bank

Average

Percentile

Rank

















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix






1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




147147

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Govt. Agency MBS CMO U.S. Treasury Municipal

10

8,0

67

2,2

70

16

,45

7

4,9

41

52

9

12

3,5

29

1,9

66

13

,06

5

4,9

38

5,4

46

11

6,0

84

1,6

26

10

,46

8

4,8

95

85

11

4,7

14

5,5

67

14

,17

8

4,9

25

85

10

8,0

00

14

,99

8

13

,90

6

4,9

79

85

10

0,9

51

14

,40

9

7,5

13

4,9

79

61

91

,96

8

13

,64

6

7,2

21

4,9

94

61

2016Y 2017Y 2018Y 2019Q1 2019Q2 2019Q3 2019Q4

CASE STUDY 1: SECURITIES MIX ANALYSIS

148148

Qtr. Last Year Percent Current Qtr. Percent

2018Q4 Loans 2019Q4 Loans

3 Mos or less 48,777 21.9% 42,543 17.0%

3 Mos - 12 Mos 37,937 17.0% 64,788 25.9%

1 Yr - 3 Yrs 102,524 46.0% 69,956 28.0%

3 Yrs - 5 Yrs 27,079 12.1% 21,665 8.7%

5 Yrs - 15 Yrs 6,438 2.9% 21,817 8.7%

15+ Yrs 355 0.2% 29,442 11.8%

CASE STUDY 1: SHORTER LOAN MATURITY/REPRICING

Qtr. Last Year Percent Current Qtr. Percent

2018Q4 Securities 2019Q4 Securities

Total Debt and Mortgage Pass-Through Securities

3 Mos or less 7,990 6.5% 3,017 2.7%

3 Mos - 12 Mos 24,173 19.7% 29,564 26.7%

1 Yr - 3 Yrs 60,661 49.4% 57,230 51.7%

3 Yrs - 5 Yrs 28,240 23.0% 7,212 6.5%

5 Yrs - 15 Yrs 1,431 1.2% 10,859 9.8%

15+ Yrs 186 0.2% 2,754 2.5%

CASE STUDY 1: SHORTER INVESTMENT CASHFLOW

149149

.07 .07 .07 .08 .08 .08 .08 .08 .08 .08 .08 .07 .07 .06

0.00

0.50

1.00

1.50

2.00

2.50

0.00

0.50

1.00

1.50

2.00

2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4

Sample Bank Fed Funds Rate

CASE STUDY 1: STABLE FUNDING COSTS

Is the Bank Asset Sensitive or Liability Sensitive, and why?

Banks can add asset duration to reduce asset sensitivity

COF

FEDFUNDS

150150

▪ Asset Sensitive Balance Sheet‒ Low and Stable Cost of Funds

‒ 70% of the Loan Portfolio Reprices within 3 Years

‒ 81% of the Security Portfolio Reprices within 3 Years

▪ What Investments to own?‒ Longer Duration Portfolio is a Risk-Reduction Strategy

‒ Call and Prepayment Protection is Key

‒ Municipal Product Curve Offers Significant Spreads beyond 10 years


151151

Strategy




positioning

Investment Mix




products

Security Selection


security selection

• Monitor policy compliance with security

purchases

Trade Execution

• Poor trade execution can impact investment

returns



152152

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Municipal Govt. Agency Other Securities MBS CMBS

1,2

52

38

,51

3

- - --

44

,95

9

- - -

2016Y 2017Y

CASE STUDY 2: INVESTMENT MIX ANALYSIS

153153

▪ Peer group is comprised of 4606 banks with under $15bln in assets.


Average TEY 3.62% 2.74% 2.43% 1.98%

MunicipalAllocation %

49% 35% 26% 16%

# of banks inQuartile

1151 1152 1152 1151

Source: S&P Global Market Intelligence, 12/31/19.

CASE STUDY 2: INVESTMENT YIELD AND MUNICIPAL ALLOCATION

154154

Institution Tot. Assets Tot. Securities Securities/Assets Inv. Yield (FTE) US Tsy Agency MBSs CMOs Munis Other

Institution 1 990,721 84,220 9% 3.14 0% 0% 43% 7% 50% 0%

Institution 2 257,181 81,896 32% 3.12 0% 0% 0% 0% 100% 0%

Institution 3 568,889 183,266 32% 2.94 0% 1% 56% 0% 43% 0%

Institution 4 422,859 65,773 16% 2.92 0% 0% 23% 0% 77% 0%

Institution 5 545,482 166,386 31% 2.92 0% 0% 10% 1% 89% 0%

Institution 6 176,873 26,916 15% 2.91 0% 16% 58% 0% 26% 0%

Institution 7 368,047 68,741 19% 2.81 0% 0% 1% 0% 99% 0%

Institution 8 282,331 26,424 9% 2.76 0% 0% 33% 62% 5% 0%

Institution 9 3,156,040 929,432 29% 2.75 10% 1% 37% 14% 35% 4%

Institution 10 1,823,484 465,193 26% 2.63 0% 0% 78% 2% 12% 8%

Institution 11 761,475 70,642 9% 2.55 0% 0% 50% 40% 10% 1%

Institution 12 1,027,574 253,515 25% 2.55 0% 32% 7% 0% 60% 0%

Institution 13 246,588 148,492 60% 2.49 0% 1% 64% 11% 23% 0%

Institution 14 487,235 66,465 14% 2.49 0% 0% 48% 0% 52% 0%

Institution 15 114,980 9,963 9% 2.43 40% 12% 41% 0% 8% 0%

Institution 16 231,356 31,522 14% 2.36 0% 8% 77% 0% 15% 0%

Institution 17 377,005 60,848 16% 2.35 49% 0% 7% 9% 34% 0%

Institution 18 1,905,588 449,827 24% 2.34 0% 18% 45% 20% 15% 2%

Institution 19 405,478 44,568 11% 2.33 0% 59% 0% 20% 21% 0%

Institution 20 157,622 41,645 26% 2.31 0% 36% 19% 10% 36% 0%

Institution 21 303,646 44,221 15% 2.31 78% 20% 0% 0% 2% 0%

Institution 22 54,737 26,485 48% 2.26 0% 26% 8% 55% 7% 4%

Institution 23 432,090 69,729 16% 2.24 10% 0% 75% 0% 15% 0%

Institution 24 377,346 50,791 13% 2.20 4% 39% 23% 0% 34% 0%

Institution 25 4,367,991 291,197 7% 2.19 25% 68% 2% 0% 3% 1%

Institution 26 315,679 59,549 19% 2.17 0% 0% 92% 0% 8% 0%

Institution 27 598,650 222,090 37% 2.12 2% 50% 0% 0% 48% 0%

Institution 28 996,832 302,767 30% 2.10 21% 61% 14% 0% 4% 0%

Institution 29 298,798 5,365 2% 2.07 0% 0% 37% 33% 29% 0%

Institution 30 410,783 0 0% 0.00 - - - - - -

12/31/2018

CASE STUDY 2: INVESTMENT MIX ANALYSIS

155155

Senior Deal

Manager

Bank Portfolio

Taylor Advisors

(on behalf of clients)

Broker/ Dealer

“Flipper” Non B/D Account

Order Priority: HighPrice: 100

Order Priority: MediumPrice: 100

Order Priority: LowPrice: Near 100

Price: 100

Price: ~100.5

Price: ~101.5 - 102

Deals are almost always oversubscribed, and Dealer orders do not get filled.Also, there is very little commission for the dealer to split on new issue deals.

SOURCING NEW ISSUE INVESTMENTS

156156

1.30 1.261.12 1.14

1.23

1.43

1.75

2.74 2.79

3.463.57

3.70 3.65 3.69

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4

CASE STUDY 2: INVESTMENT YIELD TREND

157157

Strategy




positioning

Investment Mix




products

Security Selection


security selection


purchases

Trade Execution


returns



158158

SECURITIES / SECTORS IN THE MARKETPLACE

What should I buy this week?

Fed FundsGNMA ARM(Different CPNs)

FNMA Teaser ARM

LIBOR Floaters(CMO & AGY)

COFI Floaters(CMO & AGY)

1-10 Yr Treasury

AGY Step Ups

AGY StructuredNotes

AGY Callable

MBS (DifferentMaturities)

CMO

5-30 Yr Munis

Asset-backed Securities

Corporate Bonds

Taxable Munis

Index AmortizingNotes

Covered Bonds

GNMA ARM(Different Caps)

FNMA Fully Indexed ARM

MBS (DifferentCoupons)

MBS (New vs. Seasoned)

Index AmortizedNotes

Hey Broker Bob!Hey Banker Bill!

159159

SAMPLE PORTFOLIO – DATA VS. INFORMATION

R AT E S A R E D O W N !

1 Yr Treasury Note

2 Yr Agency NC 3 Mo

3 Yr WAL Premium Agency CMO (Jumbo Collateral)

4 Yr Floating Rate SBA Pool

5 Yr Agency Step Up NC 6 Mo Bermuda

159

Matured

Called

Fast Prepayments Yield Drops

Coupon Resets Lower

Called

160160

INVESTMENT STRATEGY FORMATION

INVESTMENT STRATEGY

Rates Down PerformanceRates Up

Performance

160

Call

Prepayment

Reinvestment

OFFENSIVE SECURITIES

Hedges The Following Risks:

Interest Rate

Extension

Cash Flow Volatility

DEFENSIVE SECURITIES

Hedges The Following Risks:

161161

DIFFERENCE BETWEEN ASSET CLASS & SECTORS

A G E N C I E S M B S C M O

161

Treasuries

Bills

Notes

TIPS

Agencies

Bullet

Callable

Step-up

MBS

Amortization

Seasoning

Collateral Stips

CMO

Structure

Collateral

Cash Flow

Municipal

Maturity

Tax Provision

Credit Quality

Other

Corporate

Structured Credit

Non-Agency ABS

162162

SECTORED PORTFOLIO 1

Sector % of Port. Mkt Value G/L Bk Px Cpn TEY Mk Yld Eff Dur WAL Lots

DTC CDs 3.2% 8,945 (75) 100.0 1.59 1.59 2.24 1.2 1.2 37

Short Agency Bullet 12.6% 35,866 (140) 100.0 1.35 1.33 1.98 0.6 0.6 12

1-3 Yr Agency Bullet 10.4% 29,425 (695) 100.4 1.64 1.52 2.41 2.5 2.6 10

4-6 Yr Agency Bullet 6.4% 18,251 (502) 99.9 1.82 1.85 2.56 3.9 4.1 7

1-3 Yr Callable Agency 25.9% 73,525 (1,795) 99.9 1.53 1.55 2.50 2.4 2.6 26

4-6 Yr Callable Agency 19.8% 56,121 (1,418) 99.9 2.14 2.15 2.77 3.5 4.4 18

15 Yr MBS (New) 5.6% 15,854 (715) 102.4 2.31 1.79 2.78 4.2 4.9 7

15 Yr MBS (Seasoned) 7.7% 21,966 (828) 102.2 2.51 1.84 2.96 3.2 3.5 11

30 Yr MBS (New) 1.7% 4,843 (330) 103.4 2.74 2.17 3.34 5.6 6.6 2

30 Yr MBS (Seasoned) 6.7% 18,880 333 101.6 4.08 3.84 3.13 4.1 4.8 56

Totals 100.0% 283,676 (6,165) 100.5 1.97 1.85 2.58 2.8 3.2 186

162

163163

SECTORED PORTFOLIO 2

163

Sector % of Port. Mkt Value G/L Bk Px Cpn TEY Mk Yld Eff Dur WAL WAM Lots

Pre-Refunded BQ Munis 3.7% 5,069 150 100.2 4.59 5.60 2.25 1.2 1.2 8.4 9

5 Yr BQ Munis 5.8% 7,957 181 100.7 3.77 4.38 2.87 2.5 2.6 4.5 22

10 Yr BQ Munis 2.8% 3,882 (4) 101.0 3.70 4.36 3.55 3.6 3.7 10.1 10

15 Yr BQ Munis 3.6% 4,965 4 101.9 3.48 4.04 3.84 8.2 6.0 14.4 8

Pre-Refunded GM Munis 3.2% 4,445 195 105.1 5.00 4.52 2.54 3.2 3.6 13.1 6

5 Yr GM Munis 2.1% 2,898 (0) 106.6 3.78 3.34 3.33 5.4 6.0 6.5 11

10 Yr GM Munis 11.7% 16,097 542 102.4 4.00 4.30 3.57 6.4 6.5 10.6 22

15 Yr GM Munis 31.4% 43,063 598 105.5 4.26 4.22 3.85 7.8 7.7 14.4 58

20 Yr GM Munis 6.6% 9,063 (108) 102.4 3.78 4.31 4.44 11.1 12.9 18.6 15

5 Yr Taxable Munis 3.4% 4,671 253 100.0 5.83 5.83 3.56 2.6 2.7 6.1 9

10 Yr Taxable Munis 6.0% 8,262 320 100.2 5.90 5.78 4.15 3.1 3.2 10.0 16

15 Yr Taxable Munis 0.9% 1,233 30 103.8 5.80 4.22 3.38 3.5 3.1 13.7 2

5 Yr DUS MBS 4.2% 5,694 (77) 100.2 2.15 1.92 2.78 1.4 1.5 1.4 4

15 Yr MBS (Seasoned) 3.9% 5,323 (149) 102.5 3.04 2.19 3.07 2.9 3.2 8.7 11

30 Yr MBS (Seasoned) 2.2% 3,014 33 106.3 5.39 3.85 3.49 3.4 4.6 19.3 23

1-3 Yr Agency CMO 1.2% 1,662 (53) 101.3 2.75 1.98 3.73 2.1 1.9 16.6 2

Short Agency CMBS 1.7% 2,368 (19) 100.1 2.06 1.86 2.71 1.0 0.9 1.8 2

4-6 Yr Agency CMBS 2.1% 2,872 (131) 100.3 2.37 2.27 3.22 4.7 5.1 12.3 2

Totals 100.0% 137,191 1,666 103.0 4.06 4.06 3.54 5.5 5.7 11.9 242

Sector % of Port. Mkt Value G/L Bk Px Cpn TEY Mk Yld Eff Dur WAL WAM Lots

Pre-Refunded BQ Munis 3.7% 5,069 150 100.2 4.59 5.60 2.25 1.2 1.2 8.4 9

5 Yr BQ Munis 5.8% 7,957 181 100.7 3.77 4.38 2.87 2.5 2.6 4.5 22

10 Yr BQ Munis 2.8% 3,882 (4) 101.0 3.70 4.36 3.55 3.6 3.7 10.1 10

15 Yr BQ Munis 3.6% 4,965 4 101.9 3.48 4.04 3.84 8.2 6.0 14.4 8

Pre-Refunded GM Munis 3.2% 4,445 195 105.1 5.00 4.52 2.54 3.2 3.6 13.1 6

5 Yr GM Munis 2.1% 2,898 (0) 106.6 3.78 3.34 3.33 5.4 6.0 6.5 11

10 Yr GM Munis 11.7% 16,097 542 102.4 4.00 4.30 3.57 6.4 6.5 10.6 22

15 Yr GM Munis 31.4% 43,063 598 105.5 4.26 4.22 3.85 7.8 7.7 14.4 58

20 Yr GM Munis 6.6% 9,063 (108) 102.4 3.78 4.31 4.44 11.1 12.9 18.6 15

5 Yr Taxable Munis 3.4% 4,671 253 100.0 5.83 5.83 3.56 2.6 2.7 6.1 9

10 Yr Taxable Munis 6.0% 8,262 320 100.2 5.90 5.78 4.15 3.1 3.2 10.0 16

15 Yr Taxable Munis 0.9% 1,233 30 103.8 5.80 4.22 3.38 3.5 3.1 13.7 2

5 Yr DUS MBS 4.2% 5,694 (77) 100.2 2.15 1.92 2.78 1.4 1.5 1.4 4

15 Yr MBS (Seasoned) 3.9% 5,323 (149) 102.5 3.04 2.19 3.07 2.9 3.2 8.7 11

30 Yr MBS (Seasoned) 2.2% 3,014 33 106.3 5.39 3.85 3.49 3.4 4.6 19.3 23

1-3 Yr Agency CMO 1.2% 1,662 (53) 101.3 2.75 1.98 3.73 2.1 1.9 16.6 2

Short Agency CMBS 1.7% 2,368 (19) 100.1 2.06 1.86 2.71 1.0 0.9 1.8 2

4-6 Yr Agency CMBS 2.1% 2,872 (131) 100.3 2.37 2.27 3.22 4.7 5.1 12.3 2

Totals 100.0% 137,191 1,666 103.0 4.06 4.06 3.54 5.5 5.7 11.9 242

The Bond Accounting report is inadequate to manage your portfolio, the way securities are grouped does not provide enough information

164164

Strategy




positioning

Investment Mix




products

Security Selection


security selection


purchases

Trade Execution


returns



165165

120.4 Cost to Broker

121.9 Bank Paid to Broker

One Year later Bonds Called at Par (100) because of Extraordinary

Redemption Trigger!!!Investors lost ~$200,000 per $1mm

-----------------------------

1.5 Point Execution Cost

$15,000 per $1mm

0.22% lower yield to Bank

BAD TRADE EXECUTION EXAMPLE

166166

105.8 New Issue Price

105.8 Bank Price (via Advisor)

GOOD TRADE EXECUTION EXAMPLE

Bonds traded as high as 108.1 just 12 days after issue.

Investors WIN!

--------------------------

0.0 Point Execution Cost

$0 per $1mm

0.0% lower yield to Bank

Weekly New Issuance is approximately $8-10 Billion with an Average of 150 Deals

167167

Cash Drag

Reduce Interest Rate Risk

Improve or leverage Capital

Tax Mitigations Strategies

Asset Diversification

Improve and Reduce Liquidity

167

STRATEGY OBJECTIVES

168168

168

▪ How would you describe your investment process?

‒ Committee, Approach

▪ How do you measure the performance of the portfolio?

‒ UBPR - Benchmark, peer institution

▪ How many basis points do you think you could improve portfolio

yield from a proactive investment strategy?

Portfolio Size

(in $000) 10 25 50 100

25,000 25 63 125 250

50,000 50 125 250 500

100,000 100 250 500 1,000

Investment Income Change ($000s)

(due to Yield change in basis points)

ASSESSING YOUR INSTITUTION’S INVESTMENT PROCESS

169169

Loans

Deposits

Investments

Capital

169

Liquidity

Funding

Strategies


170170

BAD STRATEGIES

171171

Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Net

Interest

Margin

Dissection


171

Source: S&P Global Market Intelligence.

BAD STRATEGIES

172172

‒ Liquidity Ratio: 53% ($700mm in assets)

‒ ~$60 million in Fed Funds Sold

‒ Projected 12 Month Investment Portfolio Cash Flow: ~$58

million

‒ FHLB Borrowing Capacity: Very High

172

MISCONCEPTION – LIQUIDITY RISK

173173

173

stacked

MISCONCEPTION – CREDIT QUALITY

174174

174

Sector % of Port. Mkt Value G/L Bk Px Cpn TEY Mk Yld G-Spr OAS Conv Eff Dur WAL WAM Lots

DTC CDs 3.2% 8,945 (75) 100.0 1.59 1.59 2.24 12 11 0.0 1.2 1.2 1.2 37

Short Agency Bullet 12.6% 35,866 (140) 100.0 1.35 1.33 1.98 6 0 0.0 0.6 0.6 0.6 12

1-3 Yr Agency Bullet 10.4% 29,425 (695) 100.4 1.64 1.52 2.41 6 6 0.0 2.5 2.6 2.6 10

4-6 Yr Agency Bullet 6.4% 18,251 (502) 99.9 1.82 1.85 2.56 7 6 0.1 3.9 4.1 4.1 7

1-3 Yr Callable Agency 25.9% 73,525 (1,795) 99.9 1.53 1.55 2.50 14 14 (0.1) 2.4 2.6 2.6 26

4-6 Yr Callable Agency 19.8% 56,121 (1,418) 99.9 2.14 2.15 2.77 26 21 (0.6) 3.5 4.4 4.6 18

15 Yr MBS (New) 5.6% 15,854 (715) 102.4 2.31 1.79 2.78 22 14 (0.1) 4.2 4.9 13.4 7

15 Yr MBS (Seasoned) 7.7% 21,966 (828) 102.2 2.51 1.84 2.96 52 42 (0.0) 3.2 3.5 9.6 11

30 Yr MBS (New) 1.7% 4,843 (330) 103.4 2.74 2.17 3.34 68 51 (0.5) 5.6 6.6 28.2 2

30 Yr MBS (Seasoned) 6.7% 18,880 333 101.6 4.08 3.84 3.13 58 45 (0.2) 4.1 4.8 21.1 56

Totals 100.0% 283,676 (6,165) 100.5 1.97 1.85 2.58 21 17 (0.2) 2.8 3.2 5.6 186

Source: Sample portfolio as of 3/31/2018

• Balance Sheet Risk Profile: Asset Sensitive

• Investment Portfolio amplifies asset sensitivity• Short duration • 45% in callable agencies• Little in call-protected assets

• The institution is not monetizing its favorable funding mix – foregone income and capital

INVESTMENT MIX ANALYSIS

175175

Source: UBPR

above/below peer

above/below peer

-61

bps

-54

bps

+97

bps

+86

bps

Institution A

Institution B

UBPR – INVESTMENT YIELDS

176176

BAD STRATEGIES

177177

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y

Tsy Yields (Nov 2018) Tsy Yields (Dec 2016)

December 2016

November 2018

TREASURY RATES (DECEMBER 2016 – NOVEMBER 2018)

Source: Bloomberg

178178

Condensed Sector Analysis – Comparison as of 3/31/2018

Sector % MV MV Gain/Loss TEY Eff Dur WAL

Agency/Govt./CD 78.3% 222,134 (4,625) 1.69 2.5 2.8

MBS 21.7% 61,543 (1,540) 2.46 3.9 4.5

CMO - - - - - -

Agency CMBS - - - - - -

Tax-Free Muni - - - - - -

Taxable Muni - - - - - -

Total 100.0% 283,676 (6,165) 1.85 2.8 3.2

Sector % MV MV Gain/Loss TEY Eff Dur WAL

Agency/Govt. 13.3% 29,796 (192) 1.70 1.3 1.8

MBS 23.3% 52,231 (747) 2.73 3.9 5.0

CMO 3.3% 7,330 (75) 2.44 2.3 3.0

Agency CMBS 10.1% 22,742 (404) 2.00 2.8 3.0

Tax-Free Muni 43.1% 96,676 1,117 4.29 6.1 5.3

Taxable Muni 6.8% 15,346 742 5.10 2.9 3.2

Total 100.0% 224,122 440 3.32 4.3 4.3

Taylor Advisors Client Portfolio

North Carolina Bank Portfolio

179179

Investment Article - November 2018 Release

TAYLOR ADVISORS EBRIEF – NOVEMBER 2018

180180

+150bps

0.0

2.0

4.0

6.0

2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2015Y 2016Y 2017Y 2018Y 2019Q3

Yie

ld

Mortgage Weighted Portfolio Diversified Call Protected Portfolio Florida Commerical Banks

Prepayments

High & Stable

Florida Commercial Banks +200bps

RISK MISCONCEPTIONS


181181

181

GOOD STRATEGIES

182182

182

TAYLOR ADVISORS EBRIEF – MARCH 2018

183183




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




SNAPSHOT – SAMPLE INSTITUTION




Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00







Metric

Under Performer

Savings Bank

UBPR Peer

Group Average

Percentile

Rank







Metric

Under Performer

Savings Bank

State Bank

Average

Percentile

Rank



















Net

Interest

Margin

Dissection


Net

Interest

Margin

Dissection

Earning Asset Mix




1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




184184

Prime Swap -100 -75 -50 -25 0 50 75 100 125 150 175 200 300

Current Prime/ Floating Rate 4.75% 3.75% 4.00% 4.25% 4.500% 4.75% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50% 6.75% 7.75%

Current Prime Swap Rates

1YEAR 4.08% 3.08% 3.33% 3.58% 3.83% 4.08% 4.58% 4.83% 5.08% 5.33% 5.58% 5.83% 6.08% 7.08%

2YEAR 3.90% 2.90% 3.15% 3.40% 3.65% 3.90% 4.40% 4.65% 4.90% 5.15% 5.40% 5.65% 5.90% 6.90%

3YEAR 3.85% 2.85% 3.10% 3.35% 3.60% 3.85% 4.35% 4.60% 4.85% 5.10% 5.35% 5.60% 5.85% 6.85%

4YEAR 3.85% 2.85% 3.10% 3.35% 3.60% 3.85% 4.35% 4.60% 4.85% 5.10% 5.35% 5.60% 5.85% 6.85%

5YEAR 3.84% 2.84% 3.09% 3.34% 3.59% 3.84% 4.34% 4.59% 4.84% 5.09% 5.34% 5.59% 5.84% 6.84%

7YEAR 3.86% 2.86% 3.11% 3.36% 3.61% 3.86% 4.36% 4.61% 4.86% 5.11% 5.36% 5.61% 5.86% 6.86%

10YEAR 3.93% 2.93% 3.18% 3.43% 3.68% 3.93% 4.43% 4.68% 4.93% 5.18% 5.43% 5.68% 5.93% 6.93%

BALLOON / RESET AMORTIZATION AVG LIFE RATE

3.00 3.00 1.60 3.97%

3.00 10.00 2.65 3.87%

3.00 15.00 2.80 3.86%

3.00 20.00 2.85 3.86%

3.00 25.00 2.90 3.86%

3.00 30.00 2.95 3.85%

5.00 5.00 2.65 3.87%

5.00 10.00 3.95 3.85%

5.00 15.00 4.40 3.85%

5.00 20.00 4.60 3.84%

5.00 25.00 4.70 3.84%

5.00 30.00 4.80 3.84%

7.00 7.00 3.70 3.85%

7.00 10.00 4.85 3.84%

7.00 15.00 5.70 3.85%

7.00 20.00 6.15 3.85%

7.00 25.00 6.40 3.85%

7.00 30.00 6.55 3.86%

10.00 10.00 5.40 3.84%

10.00 15.00 7.25 3.87%

10.00 20.00 8.15 3.89%

10.00 25.00 8.70 3.90%

10.00 30.00 9.05 3.91%

15.00 15.00 8.30 3.89%

15.00 25.00 12.60 3.99%

Loan Credit Spectrum & Implied Fixed Loan Rates Based on Current Swap Curve

2/28/2020

Taylor AdvisorsCommercial Loan Pricing Matrix

4.00%

4.50%

5.00%

5.50%

6.00%

Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

CML Loan PX Matrix

5 yr Prime Swap Rate

184

LOAN PRICING CONSIDERATIONS

185185

✓Credit Quality✓ FICO

✓ Collateral Type/Liquidity

✓ LTV

✓ Cash Flow

✓ Recourse vs Non-recourse

✓ Terms✓ Repricing Frequency

✓ Repricing Rate Index

✓ Duration

✓ Caps/Floors

✓ Prepayment

Penalties

✓Relationship ✓ Deposits/Operating

Accounts

✓ Other Services

✓ Inertia185

FACTORS IMPACTING LOAN PRICING

186186

TAYLOR ADVISORS EBRIEF – OCTOBER 2019

187187

TAYLOR ADVISORS EBRIEF – AUGUST 2018 & AUGUST 2019

AUGUST 2018 AUGUST 2019

12 MONTHS

LATER…

188188

✓ Deposit Pricing Strategies for a declining rate cycle

✓ Long-term organic growth focus

✓ Market-specific deposit pricing and product strategies

✓ Deposit rate benchmarking vs. wholesale funding indices

✓ Product mix and fee income considerations

✓ Marginal cost of funds analysis and relationship-based

pricing approach

188

DEPOSIT PRICING CONSIDERATIONS

189189

Term Fixed

Rate

Federal

Home Loan

Bank

Brokered

Deposits

FDIC National

Average

FDIC Rate

CapSample Bank CD Specials

Bank vs. FDIC

Rate Cap

CD Specials

vs. FDIC Rate

Cap

1 MONTH 1.84 1.60 0.10 0.85 - - - -

2 MONTH 1.84 1.60 0.15 0.90 - - - -

3 MONTH 1.84 1.60 0.19 0.94 0.03 - (0.91) -

4 MONTH 1.82 1.60 0.24 0.99 - - - -

5 MONTH 1.81 1.60 0.28 1.03 - - - -

6 MONTH 1.79 1.60 0.33 1.08 0.10 - (0.98) -

1 YEAR 1.62 1.70 0.48 1.23 0.15 - (1.08) -

2 YEAR 1.64 1.70 0.62 1.37 0.25 - (1.12) -

3 YEAR 1.62 1.75 0.74 1.49 0.35 - (1.14) -

4 YEAR 1.63 1.78 0.81 1.56 0.45 - (1.11) -

5 YEAR 1.65 1.80 0.94 1.69 0.65 - (1.04) -

6 YEAR 1.82 - - - - - - -

7 YEAR 1.87 - - - - - - -

8 YEAR 1.98 - - - - - - -

9 YEAR 2.03 - - - - - - -

10 YEAR 2.07 - - - - - - -

189

Benchmarking Deposits

Term

Fixed Rate

Federal

Home Loan

Bank

Brokered

Deposits

FDIC National

Average

FDIC Rate

CapSample Bank CD Specials

1 MONTH 2.73 2.35 0.11 0.86 - -

2 MONTH 2.73 2.35 0.16 0.91 - -

3 MONTH 2.75 2.35 0.20 0.95 0.10 -

4 MONTH 2.77 2.37 0.25 1.00 - -

5 MONTH 2.78 2.38 0.28 1.03 - -

6 MONTH 2.8 2.40 0.34 1.09 0.25 -

1 YEAR 2.83 2.60 0.61 1.36 0.50 1.50

2 YEAR 2.94 2.90 0.82 1.57 1.50 -

3 YEAR 2.97 3.10 0.96 1.71 1.75 -

4 YEAR 3.03 3.25 1.06 1.81 2.00 -

5 YEAR 3.11 3.40 1.25 2.00 2.25 -

6 YEAR 3.23 - - - - -

7 YEAR 3.35 - - - - -

8 YEAR 3.44 - - - - -

9 YEAR 3.54 - - - - -

10 YEAR 3.6 - - - - -

8/13/20182/24/2020

BENCHARKING DEPOSITS

190190

Economy and Rates

Strategies

ALCO BEST PRACTICES

191191

Loans

Deposits

Investments

Capital

191

Liquidity

Funding

Strategies


192192

Earning Asset

Size

Net Interest Income Change in thousands of dollars

(due to portfolio yield change in basis points)

(in $000) 1 5 10 15 20 25

100,000 10 50 100 150 200 250

200,000 20 100 200 300 400 500

300,000 30 150 300 450 600 750

400,000 40 200 400 600 800 1,000

500,000 50 250 500 750 1,000 1,250

600,000 60 300 600 900 1,200 1,500

EARNING ASSET DOLLAR IMPACT

193193

193

194194

Attendees will be added to our eBriefs, be on the lookout for our publications

If you are interested in a Free Sector Analysis for your institution, please contact us

We will be sending the Performance Snapshot for March at the beginning of April

FOLLOW UP ITEMS

195195

QUESTIONS OR COMMENTS?

195

196196

T

Todd Taylor, CPA, CFA

E-mail: [email protected]

Website: www.TaylorAdvisor.com

Phone: 502 412-2524

Omar Hinojosa, CFA

E-mail: [email protected]

Website: www.TaylorAdvisor.com

Phone: 502 814-5656

Thank You!

Documents

BALANCE SHEET OPTIMIZATION: DRIVING PROFITABILITY