FHLB Des Moines Regional Member Meetings Profiting from a Rising Rate Environment

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1 Risk Management Strategy & Solutions FHLB Des Moines Regional Member Meetings Profiting from a Rising Rate Environment Joseph Kennerson, Managing Director jkennerson@darlingconsulting.com Mark A. Haberland, Managing Director mhaberland@darlingconsulting.com 2017 Darling Consulting Group, Inc. 260 Merrimac Street Newburyport, MA Tel: DarlingConsulting.com Page 1

2 Key Focus/Takeaways Develop a Deposit Gameplan Brace for Tighter Liquidity Levels Understanding Your True Interest Rate Risk Position Profiting From Rising Rates 2017 Darling Consulting Group, Inc. Page 2

3 Margin Compression What the current environment and future expectations mean to your institution 2017 Darling Consulting Group, Inc. Page 3

4 Current Environment Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 4

5 Long (Strange) Journey in 12 Months Happy New Year 2016! ECB taper rumor: FOMC convince market rate rise likely before year end China slows, Japan goes negative Brexit 2017 Darling Consulting Group, Inc. Page 5

6 Opportunity Knocks at Year End More slope means more opportunity Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 6

7 What Does It Mean for Financial Institutions? Growth to offset margin compression Loan portfolios priced down 10-15bps on average Lack of yield in securities exacerbated thirst for loans Stable funding costs for most part New challenges Will decline in loan portfolio yields continue? Wholesale-like funding pricing up as market rates move CD rates will likely begin to move again How soon before MMDA/premium savings rates rise? Retail/wholesale balance will be the wildcard! Liquidity levels challenged throughout industry 2017 Darling Consulting Group, Inc. Page 7

8 Asset Yields Have Been Under Pressure Yield on Earning Assets (%) ($100mm-$10B) ??? Yield on Earning Assets (%) Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 8

9 Loan Pricing Challenges May 15, 2017 October 31, Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 9

10 Higher Funding Costs Have Arrived 0.9 Cost of Funds (%) $100MM-$10B Cost of Funds (%) 2017 Darling Consulting Group, Inc. Page 10

11 Consider Rate Cycle Patterns: 10 Year vs. FFs Long Rates Tend to Move Ahead of Short Rates (Both Ways) 2017 Darling Consulting Group, Inc. Page 11

12 What Was Your Reaction to the March Fed Hike? 1. Raise MMDA rates 2. Introduce CD Special 3. Wait and Pray My Competitors Don t Raise Rates 2017 Darling Consulting Group, Inc. Page 12

13 Perfect Storm Brewing Loans/Deposits - FHLB Des Moines Loan growth is outpacing deposit growth Fed Dot Plot Rates expected to move higher in the near future 2017 Darling Consulting Group, Inc. Page 13

14 Key Deposit Issues Entering our first rising rate environment in 11+ years Emerging from a rate scenario we have never lived through before Deposit mix has changed drastically since 2009 Deposit migration a key concern as rates rise New products and customers that have never been through a rising rate cycle Managing funding costs in 2017 will be critical to meet earnings goals 2017 Darling Consulting Group, Inc. Page 14

15 Deposit Trends (Banks Under $10B) 80 Non-Maturity and Time Deposits as a % of Total Deposits 70 NMD :1 3:1 NMDs NMDs to to CDs CDs Time Darling Consulting Group, Inc. Page 15

16 Deposit Checklist Develop a deposit pricing game plan Lag? Products on the shelf? CD Special? MMDA timing? Track rate sensitivities in this rate cycle vs. model Compare betas vs cycle Understand MCOF of raising rates What is the cost of potential cannibalization? Track the cannibalization of existing deposits Track new relationships vs. existing migration on premium products Identify at risk deposits Profitable vs. non-profitable customers Identify concentration risk Large deposit relationships 2017 Darling Consulting Group, Inc. Page 16

17 Understand NII Impact of Next Fed Hike Implies Breakeven Average Rate Increase on MMDAs = 15bp (60% Beta) 2017 Darling Consulting Group, Inc. Page 17

18 Deposit Game Plan & Key Issues Lag vs. market leader If lagging on first 75 bps will the next bps be more rate sensitive than model assumes? Pricing will depend on pace of fed hikes Public fund balances growing (LCR fallout/opportunity)? Impact of collateralization and interest rate risk MMDA when do we say uncle? Promotional products Hurdles, minimum balance, active checking account, etc. Minimum balance Deposit pricing vs. wholesale funding alternatives 2017 Darling Consulting Group, Inc. Page 18

19 Deposit Assumptions Quantitative Analysis Full Rising Beta R^2 MMDA - Premium Checking ## 78% 98% Qualitative Analysis 85% 2017 Darling Consulting Group, Inc. Page 19

20 Track Sensitivities in This Cycle: Average Life Data, data, data! Analyze account activity as well as balance volatility Multiple looks can only help Collect stress data as well 2017 Darling Consulting Group, Inc. Page 20

21 Understand MCOF of Raising Rates MMDA BALANCE: $100,000 CURRENT RATE: 0.40% UP 100bp BETA: 0.75% FED RATE INCREASE RUNOFF PROTECTED RATE INCREASE 0.19% 0.56% 5.00% 4.15% 11.65% 15.00% 1.65% 4.15% 25.00% 1.15% 2.65% Annualized NII Impact (000s) ($188) ($563) 2017 Darling Consulting Group, Inc. Page 21

22 Understand Cost of Conversion in Raising Rates Marginal Cost of Conversion of Existing Deposit Base to Promotional / Defensive Deposit Product & Required Growth Offset The table below illustrates the cost of conversion of current deposits to a new product that is designed to either be a promotional lead or defensive mechanism against rate competition as interest rates begin to rise. To provide a point of reference on the magnitude of the conversion cost, the "Required Growth Offset" table shows (at a range of spreads) the amount of balance sheet growth that would be required to increase revenue enough to offset the added interest expense. Balance Rate Ann. Int. Expense Cost of Conversion Required Growth Offset Existing Savings & MMDA base: 100, % 400 Spread Assumed on Growth Promotional / Defensive Product Rate: 1.250% 2% 3% 4% % Converted Cost of Conversion: 5% 0.443% ,125 1,417 1,063 15% 0.528% ,375 4,250 3,188 25% 0.613% ,625 7,083 5,313 30% 0.655% ,750 8,500 6,375 40% 0.740% ,000 11,333 8, Darling Consulting Group, Inc. Page 22

23 Track Migration Effect 2017 Darling Consulting Group, Inc. Page 23

24 Identifying At-Risk Depositors 2017 Darling Consulting Group, Inc. Page 24

25 Tracking At-Risk Relationships 2017 Darling Consulting Group, Inc. Page 25

26 Large Relationship Concentrations 2017 Darling Consulting Group, Inc. Page 26

27 Buildup of NMD Accounts 2017 Darling Consulting Group, Inc. Page 27

28 Liquidity Management What to Watch for in Darling Consulting Group, Inc. Page 28

29 Liquidity Levels Are Tightening FHLB Des Moines District Loans/Deposits - FHLB Des Moines Loan growth is outpacing deposit growth 68 Loans/Assets - FHLB Des Moines Loans are becoming a bigger piece of total assets Darling Consulting Group, Inc. Page 29

30 Liquidity Checklist Focus on Total Liquidity Take a Forward-Looking Approach Regain Comfort with Higher Levels of Wholesale Funding Stress Test Your Plan Robust Contingency Funding Plan 2017 Darling Consulting Group, Inc. Page 30

31 Liquid Assets I. LIQUID ASSETS Overnight Funds Sold & Short-Term Investments (avg. balance, if wide daily fluctuations) 25,0000 TOTAL ASSETS = 1,500,000 UST & Agency MBS / CMOs Security Collateral Agency Backed Private Label Collateral Value 100% 95% 90% Total Market Value of Securities Less Securities Pledged to: 35, , ,000 0 FHLB Fed Discount/Other Secured Wholesale Repos Retail Repos/Sweeps Municipal Deposits Other Available / Unencumbered Security Collateral , , ,500 99, Over Collateralized Securities Pledging Position Government Guaranteed Loans Cash flow (< 30 Days) from Securities not listed above Other Liquid Assets 134, , Pct. Of Assets TOTAL LIQUID ASSETS 159, , % 10.6% 2017 Darling Consulting Group, Inc. Page 31

32 Total Liquidity II. SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES Maturing Unsecured Liabilities (< 30 Days) 0 Deposit Coverages 25% of CDs Maturing < 30 Days 3,000 30% of Jumbo CDs Maturing < 30 Days 1,000 10% of Other Deposits 75,000 TOTAL SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES 79,000 BASIC SURPLUS 79, % III. QUALIFYING FHLB LOAN COLLATERAL A. Maximum Borrowing Line at FHLB (Up to 50% of Assets) B. Qualifying Loan Collateral at the FHLB (net of haircut) C. Excess Loan Collateral (if A < B) Maximum Borrowing Capacity (Lesser of A or B) Collateral Currently Encumbered by Outstanding Advances/Letters of Credit REMAINING FHLB LOAN BASED BORROWING CAPACITY 750, , , , ,000 BASIC SURPLUS W/ FHLB 404, % IV. BROKERED DEPOSIT ACCESS Maximum Board Authorized Brokered Deposit Capacity (15% of Total Assets) Current Brokered Deposit Balances REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS 225,000 30, ,000 BASIC SURPLUS W/ FHLB & BROKERED DEPOSITS 599, % 2017 Darling Consulting Group, Inc. Page 32

33 90-Day Liquidity Forecast Net Loan Growth Net Deposit Flows Net Cash Flow Cash/Investment Cash Flow Due Wholesale Funding Maturities $XX $XX $XX $XX $XX Full ALCO involvement How will you support funding shortfall? What will you do with excess cash? 2017 Darling Consulting Group, Inc. Page 33

34 360-Day Liquidity Forecast: Liquidity Darling Consulting Group, Inc. Page 34

35 Wholesale Funding Trends 25.0% Borrowings/Assets (%) 20.0% 15.0%??? 10.0% 5.0% 0.0% Source: FDIC Bank Data and Statistics (Commercial Banks and Savings Institutions) 2017 Darling Consulting Group, Inc. Page 35

36 Wholesale Funding Initiatives Shore up alternatives FHLB Brokered Unsecured lines National CDs Update policies Board education Overcoming borrowing stigma Benefit of dividend rate Least expensive funding at the margin No cannibalization or operating costs 2017 Darling Consulting Group, Inc. Page 36

37 5 Steps to an Effective CFP 1. Develop a 1-2Y Cash Flow Forecast 2. Stress Test 3. The Solution 4. Formulate The Plan 5. Risk Monitoring System 2017 Darling Consulting Group, Inc. Page 37

38 Risk Monitoring The Early Warning System 2017 Darling Consulting Group, Inc. Page 38

39 Liquidity Stress Testing Start with the story What happens if Recession Local economic crisis Rates rise Institution-specific event Identify assumptions that fit with your business model Document the assumptions Forecast out 1-2 years to identify potential points of weakness 2017 Darling Consulting Group, Inc. Page 39

40 Stress Test: Credit Deterioration 2017 Darling Consulting Group, Inc. Page 40

41 What to Evaluate? Changing collateral values Tightening collateral standards/reduced funding access Deposit flows LOC utilization Capital hits that affect the ability to access alternative funding such as the brokered market The need to securitize and sell assets at severe losses Etc Darling Consulting Group, Inc. Page 41

42 Solution Action plan Stress vs. Relief Strategically focused 2017 Darling Consulting Group, Inc. Page 42

43 Understanding Your True IRR Position Focus on the Most Plausible Scenarios and have Defensible Assumptions 2017 Darling Consulting Group, Inc. Page 43

44 Interest Rate Risk Earnings at Risk Economic Value at Risk What if Modeling Ramps (12mo and 24 mo) & Shocks Parallel & Non-parallel Stress Testing Net Interest Income & Net Income Economic Value of Equity Stress Testing Model strategies before execution Understand impact under key scenarios Other Gap Reporting Core Funding Utilization Backtesting Upwards of scenarios each quarter 2017 Darling Consulting Group, Inc. Inc. Page 44

45 Economic Value of Equity (EVE) RATE SHOCK SCENARIOS Economic Value of Equity ($000s) ASSETS Investments Book Value -100BP 0 Shock +100BP +200BP +300BP +400BP 289, , , , , , , , ,000 Loans 1,656,447 1,665,666 1,623,380 1,576,183 1,524,914 1,482,795 1,442, ,000 Other Assets 144, , , , , , , ,000 TOTAL ASSETS (EVA) % Chg from 0 Shock 2,091,106 2,103,707 2,055,796 2,002,774 1,945,562 1,897,571 1,851, % 2.33% -2.58% -5.36% -7.70% -9.92% 150, ,000 LIABILITIES Non Maturity Deposits 1,641,568 1,649,426 1,560,289 1,490,567 1,427,003 1,368,959 1,315,869 50,000 0 Time Deposits 196, , , , , , ,892 Borrowings 15,000 15,393 14,898 14,419 13,957 13,509 13,077 Other Liabilities TOTAL LIABILITIES (EVL) % Chg from 0 Shock 23,099 23,099 23,099 23,099 23,099 23,099 23,099 1,876,370 1,885,016 1,794,366 1,723,083 1,657,998 1,598,472 1,543, % 5.05% -3.97% -7.60% % % 20.0% 15.0% EVE ($) - Pct. Chg from 0 Shock 10.0% ECONOMIC VALUE OF EQUITY (EVE) 214, , , , , , , % % Chg from 0 Shock Policy Limits -16.3% 7.0% 10.0% 14.4% 17.8% -15.0% -15.0% -25.0% -30.0% -40.0% 0.0% -5.0% -10.0% EVE Ratio (EVE/EVA) 10.27% 10.40% 12.72% 13.97% 14.78% 15.76% 16.63% -15.0% BP Chg from 0 Shock % Risk Summary Grid* 18.0% 16.0% EVE Ratio (EVE/EVA) Post Shock EVE/EVA Ratio 0 to 100bp 100 to 200bp 200 to 400bp Over 400bp 14.0% Over 10% 6.00% to 10.00% 4.00% to 6.00% Below 4.00% Min. Risk -1 Min. Risk -1 MIN. RISK (1) Mod. Risk -2 Min. Risk -1 Min. Risk -1 Mod. Risk -2 Sig. Risk -3 Min. Risk -1 Mod. Risk -2 Sig. Risk -3 High Risk -4 Mod. Risk -2 Sig. Risk -3 High Risk -4 High Risk -4 *Included for discussion purposes only. Grid evaluates +200/-100 scenarios for risk assessment. *Current risk assessment for Risk Summary Grid is based on -100 scenario. Note: Average lives of non-maturity deposits are based upon DCG deposit study with exception of below accts. The aggregate average life based upon the current deposit mix is 6.5Ys. Savings - Super & MMDA Big Deal & Premium Business accounts are assumed to have a 5Y Average Life. Please refer to the Deposit Study Tear Sheet for additional documentation. 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2017 Darling Consulting Group, Inc. Page 45

46 Stress Test: Alt. EVE Simulation Decreased Avg. Life on NMDs RATE SHOCK SCENARIOS Economic Value of Equity ($000s) ASSETS Investments Loans ASSETS Investments Other Assets Loans TOTAL ASSETS (EVA) Other Assets % Chg from 0 Shock TOTAL ASSETS (EVA) % Chg from 0 Shock LIABILITIES Non Maturity Deposits LIABILITIES Time Non Deposits Maturity Deposits Book Value -100BP 0 Shock +100BP +200BP +300BP +400BP RATE SHOCK SCENARIOS 289, , , , , , ,972 Book Value -100BP 0 Shock +100BP +200BP +300BP +400BP 1,656,447 1,665,666 1,623,380 1,576,183 1,524,914 1,482,795 1,442, , , , , , , , , , , , , , ,109 1,656,447 1,665,666 1,623,380 1,576,183 1,524,914 1,482,795 1,442,835 2,091,106 2,103,707 2,055,796 2,002,774 1,945,562 1,897,571 1,851, , , , , , , , % 2.33% -2.58% -5.36% -7.70% -9.92% 2,091,106 2,103,707 2,055,796 2,002,774 1,945,562 1,897,571 1,851, % 2.33% -2.58% -5.36% -7.70% -9.92% 5-6 ½ Yr 1,641,568 1,649,426 1,560,289 1,490,567 1,427,003 1,368,959 1,315,869 2 ½ Yr 1,641, ,703 1,675, ,097 1,637, ,080 1,606, ,998 1,576, ,939 1,547, ,905 1,520, , , , , , , , , , ,000 50,000 50, Economic Value of Equity ($000s) Time Deposits Borrowings 196, , , , , , ,892 15,000 15,393 14,898 14,419 13,957 13,509 13,077 Borrowings Other Liabilities Other Liabilities TOTAL LIABILITIES (EVL) TOTAL % Chg LIABILITIES from 0 Shock(EVL) % Chg from 0 Shock 15,000 15,393 14,898 14,419 13,957 13,509 13,077 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 23,099 1,876,370 1,885,016 1,794,366 1,723,083 1,657,998 1,598,472 1,543,937 1,876, % 1,910, % 1,871,600 1,838, % 1,807, % 1,777, % 1,748, % 0.25% 2.09% -1.76% -3.44% -5.05% -6.59% 20.0% 10.0% 15.0% 0.0% 10.0% EVE ($) - Pct. Chg from 0 Shock EVE ($) - Pct. Chg from 0 Shock ECONOMIC VALUE ECONOMIC VALUE OF OF EQUITY EQUITY (EVE) (EVE) % Chg Chg from from 0 Shock 0 Shock Policy Limits 214, , , , , , , , , , , , , , % 4.7% -10.9% 7.0% -24.9% 10.0% -34.6% 14.4% -43.8% 17.8% -15.0% -15.0% -25.0% -30.0% -40.0% -10.0% 5.0% -20.0% -5.0% -30.0% -10.0% EVE Ratio (EVE/EVA) EVE Ratio (EVE/EVA) 10.27% 9.17% 8.96% 8.20% 7.11% 6.35% 5.59% 10.27% 10.40% 12.72% 13.97% 14.78% 15.76% 16.63% -40.0% -15.0% BP Chg from 0 Shock BP Chg from 0 Shock % -20.0% Post Shock EVE/EVA Ratio Risk Summary Grid* Risk Summary Grid* 0 to 100bp 100 to 200bp 200 to 400bp Over 400bp Post Over Shock 10% EVE/EVA Ratio 6.00% to 10.00% Over 4.00% 10% to 6.00% 6.00% Below to 4.00% 10.00% Min. 0 to 100bp Risk -1 Min. Risk -1 Min. Risk -1-1 Mod. Min. Risk Min. to Risk 200bp -1 MIN. RISK (1) Mod. Min. Risk -1-2 Min. Sig. Risk Min. to Risk 400bp -1 Mod. Risk -2 MIN. Sig. RISK Risk (1) -3 Mod. High Risk -2-4 Over Mod. Risk 400bp-2 Sig. Risk -3 Mod. High Risk -2-4 High Sig. Risk % to 6.00% Min. Risk -1 Mod. Risk -2 Sig. Risk -3 High Risk -4 Below *Included 4.00% for discussion purposes only. Grid Mod. evaluates Risk /-100 Sig. Risk scenarios -3 for High risk assessment. Risk -4 High Risk -4 *Current risk assessment for Risk Summary Grid is based on 200 scenario. *Included for discussion purposes only. Grid evaluates +200/-100 scenarios for risk assessment. NOTE: The average life on non-maturity deposits is assumed to be 2.5 years. *Current risk assessment for Risk Summary Grid is based on -100 scenario. Note: Average lives of non-maturity deposits are based upon DCG deposit study with exception of below accts. The aggregate average life based upon the current deposit mix is 6.5Ys. Savings - Super & MMDA Big Deal & Premium Business accounts are assumed to have a 5Y Average Life. Please refer to the Deposit Study Tear Sheet for additional documentation. 10.0% 18.0% 9.0% 16.0% 8.0% 7.0% 14.0% 6.0% 12.0% 5.0% 10.0% 4.0% 8.0% 3.0% 6.0% 2.0% 1.0% 4.0% 0.0% 2.0% 0.0% EVE Ratio (EVE/EVA) EVE Ratio (EVE/EVA) 2017 Darling Consulting Group, Inc. Page 46

47 Shocks Can be Misleading Asset Sensitive 2017 Darling Consulting Group, Inc. Page 47

48 Shocks Can be Misleading Liability Sensitive 2017 Darling Consulting Group, Inc. Page 48

49 MONTHLY Changes in Fed Funds Since 1970 Avg. Monthly Change in Fed Funds ( ) = 26bps 2017 Darling Consulting Group, Inc. Page 49

50 Net Interest Income Simulation 2 Year 00 Net Interest Income ($000) BASE SIMULATION AS OF 12/31/ Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Base Down 100BP Up 200BP NII SUMMARY 2017 Darling Consulting Group, Inc. Page 50

51 Net Interest Income Simulation 5 Year 00 Net Interest Income ($000) BASE SIMULATION AS OF 12/31/ Managing Horizon Planning Horizon Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Base Down 100BP Up 200BP NII SUMMARY 2017 Darling Consulting Group, Inc. Page 51

52 Why is a 5-Year Simulation So Important? Leverage Strategy: $15MM MBS funded w/ FHLB Advance but what term? 2 Yr Advance 1.67% ($250,500/yr) 3 Yr Advance 1.89% ($283,500/yr) 4 Yr Advance 2.11% ($316,500/yr) 5 Yr Advance 2.30% ($345,000/yr) as of 3/29/17 Choose 2 Yr Advance funding based upon long-term IRR profile 2017 Darling Consulting Group, Inc. Page 52

53 Importance of Scenario Analysis 14,150 Net Interest Income ($000) All Up 200BP Scenarios +200bps/Flat+200bps, Over 24 Months 13,075 Pace Matters 12,000 More Aggressive Fed (+200bp 1 Year) More Gradual Fed (+200bp 2 Years) 10,925 9,850 8,775 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Base Up 200BP 12M Up 200BP 24M Flat Up 200BP 12M Flat Up 200BP 24M NII SUMMARY Base Up 200BP 12M Up 200BP 24M Flat Up 200BP 12M Flat Up 200BP 24M Year-1 NII Year-2 NII Year-3 NII Year-4 NII 43,992 41,984 43,615 41,085 43,175 43,999 42,537 43,583 39,194 41,310 44,504 46,317 46,244 40,568 41,309 45,017 49,547 49,391 41,670 42,291 Year-5 NII 45,242 52,243 52,290 42,514 43, Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 53

54 Performance vs. Compliance Financial Performance Regulatory Compliance Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 54

55 Case Studies 2017 Darling Consulting Group, Inc. Page 55

56 Case Study 1: Deposit pricing as rates begin to rise 2017 Darling Consulting Group, Inc. Page 56

57 Case Study: Deposit Pricing ALCO Discussions As rates rise, ALCO must decide when and how much to increase deposit rates Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 57

58 Case Study: Deposit Pricing Institution A Institution B Loans/Deposits = 108% Wholesale Funds = 15% Loans/Deposits = 110% Wholesale Funds = 12% 2017 Darling Consulting Group, Inc. Page 58

59 Case Study: Deposit Pricing ALCO Discussions As rates rise, ALCO must decide when and how much to increase deposit rates Considerations Consider liquidity levels and needs when making decisions on pricing deposits 2017 Darling Consulting Group, Inc. Page 59

60 Case Study: Deposit Pricing Institution A Loans/Deposits = 108% Wholesale Funds = 15% Liquid Assets = 4% Total Basic Surplus = 6% Deposit Strategy: More of an offensive pricing stance Institution B Loans/Deposits = 110% Wholesale Funds = 12% Liquid Assets = 11% Total Basic Surplus = 16% Deposit Strategy: More of a defensive posture and can rely more on wholesale funding/cash 2017 Darling Consulting Group, Inc. Page 60

61 Case Study 2: Loan Growth with Liquidity Constraints 2017 Darling Consulting Group, Inc. Page 61

62 Case Study: Loan Growth with Liquidity Constraints ALCO Discussions Strong loan pipeline Tight liquidity Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 62

63 Case Study: Loan Growth with Liquidity Constraints $40MM Loan Growth, Funded with: - $22MM wholesale funding (1 & 3 Yr terms) - $18MM deposit inflows 2017 Darling Consulting Group, Inc. Page 63

64 Case Study: Loan Growth with Liquidity Constraints ALCO Discussions Strong loan pipeline Tight liquidity Considerations Utilize wholesale funding with deposits to help fund growth Use loan growth to replenish liquidity by pledging to FHLB 2017 Darling Consulting Group, Inc. Page 64

65 Case Study: Loan Growth with Liquidity Constraints 2017 Darling Consulting Group, Inc. Page 65

66 Case Study 3: Loan Portfolio Strategy to Increase Margin 2017 Darling Consulting Group, Inc. Page 66

67 Case Study: Loan Portfolio Strategy to Increase Margin ALCO Discussions Excess liquidity Margin pressure Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 67

68 Case Study: Loan Portfolio Strategy to Increase Margin 2017 Darling Consulting Group, Inc. Page 68

69 Case Study: Loan Portfolio Strategy to Increase Margin ALCO Discussions Excess liquidity Margin pressure Considerations Hold fixed rate commercial loans and fund with bond cash flow Utilize excess liquidity to increase margin without sacrificing IRR 2017 Darling Consulting Group, Inc. Page 69

70 Case Study: Loan Portfolio Strategy to Increase Margin 2017 Darling Consulting Group, Inc. Page 70

71 Case Study: Loan Portfolio Strategy to Increase Margin 2017 Darling Consulting Group, Inc. Page 71

72 Case Study 4: Asset Sensitive IRR Position Protect Worst Case 2017 Darling Consulting Group, Inc. Page 72

73 Case Study: Well-matched Protect Against Worst Case ALCO Discussions Asset sensitive IRR position Positioned to benefit from rising rate environment Greatest exposure to continued falling rates Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 73

74 Case Study: Well-matched Protect Against Worst Case ALCO Discussions Asset sensitive IRR position Positioned to benefit from rising rate environment Greatest exposure to continued falling rates Considerations Exposure of concern to ALCO Purchase longer-term investments with extension of overnight cash 2017 Darling Consulting Group, Inc. Page 74

75 Case Study: Well-matched Protect Against Worst Case Base Model as of 12/31/2016 $100M Cash Extension 26,850 Net Interest Income ($000) 26,850 Net Interest Income ($000) 23,825 23,825 20,800 20,800 17,775 17,775 14,750 14,750 11,725 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 11,725 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M NII SUMMARY NII SUMMARY Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII Year-2 NII Year-3 NII 63,460 64,897 68,362 67,714 68,384 Year-1 NII 65,314 66,462 68,947 68,298 68,968 61,265 65,670 72,030 69,267 76,256 Year-2 NII 62,734 66,973 71,775 69,012 75,132 59,509 66,136 75,827 71,295 82,302 Year-3 NII 60,453 67,215 75,604 71,072 80,654 Year-4 NII 58,502 66,657 79,457 73,603 89,512 Year-4 NII 59,104 67,543 79,258 73,405 88,072 Year-5 NII 57,543 66,844 82,123 75,187 95,298 Year-5 NII 57,924 67,569 81,956 75,020 94,064 CHANGE / DIFFERENCE IN RESULTS Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII Year-2 NII 1,854 1,565 1,469 1, ,124 Year-3 NII 944 1, ,648 Year-4 NII , Darling Consulting Group, Inc. Page 75

76 Case Study 5: Asset Sensitive with Near Term Exposure to Rising Rates 2017 Darling Consulting Group, Inc. Page 76

77 Case Study: Long-term Asset Sensitivity ALCO Discussions Long-term asset sensitive IRR position Some near-term exposure to rising rates Strong loan pipeline of fixed rate product Liquidity and capital (earnings) are of concern and must be closely monitored Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 77

78 Case Study: Long-term Asset Sensitivity ALCO Discussions Long-term asset sensitive IRR position Some near-term exposure to rising rates Strong loan pipeline of fixed rate product Liquidity and capital (earnings) are of concern and must be closely monitored Considerations Consider use of investment cashflow to help fund loan growth Look at wholesale funding alternatives and determine right mix of term 2017 Darling Consulting Group, Inc. Page 78

79 16,825 15,150 Net Interest Income ($000) Base Simulation as of 03/31/ Loan Growth - Funded w/ Investment CF and ST Borrowings $80MM Loan Growth Net (Fixed Interest Income ($000) Rate Mortgage and CRE) 16,825 Option 1: Funded with $15MM Inv C/F, $65MM 1 Mo FHLB Advance 15,150 13,475 Base Simulation as of 03/31/ , Loan Growth - Funded w/ Investment CF and ST Borrowings 16,825 Net Interest Income ($000) 16,825 Net Interest Income ($000) 11,800 11,800 15,150 15,150 10,125 10,125 13,475 13,475 8,450 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 8,450 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 11,800 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M 11,800 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M NII SUMMARY NII SUMMARY 10,125 Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M 10,125 Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII 44,759 45,071 44,564 44,359 43,836 Year-1 NII 46,290 46,594 45,947 45,669 45,082 Year-2 NII 43,183 45,155 44,634 43,476 42,954 Year-2 NII 45,599 47,570 46,368 45,025 44,005 8,450 Year-3 NII 8,450 Q1 41,876 Q2 Q3 Q4 Q1 45,513 Q2 Q3 Q4 Q1 Q2 46,966Q3 Q4 Q1 Q244,418 Q3 Q4 Q1 Q2 47,325 Q3 Q4 Year-3 NII 44,276 47,928 48,487 45,696 47,946 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Year-4 NII 40,919 Base 45,575 Down 100BP 49,938 Up 200BP 46,365 Flat Up 200BP 53,208 Up 400BP 24M Year-4 NII 43,302 Base 47,989 Down 100BP 51,546 Up 200BP 47,687 Flat Up 200BP 54,002 Up 400BP 24M Year-5 NII 39,928 45,455 52,824 48,295 59,073 Year-5 NII 42,293 47,871 54,528 49,675 60,052 NII SUMMARY NII SUMMARY Down 100BP Base Up 200BP Flat Up 200BP Up 400BP CHANGE 24M/ DIFFERENCE IN RESULTS Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII 44,759 45,071 44,564 Down 100BP 44,359 Base43,836 Up 200BP Year-1 NII 46,290 Flat Up 200BP 46,594 Up 400BP 24M 45,947 45,669 45,082 Year-2 NII 43,183 45,155 44,634 Year-1 NII 1,53143,476 1,52342,954 1,383 Year-2 NII 45,599 1,310 47,570 1,246 46,368 45,025 44,005 Yr 2 Year-3 Sensitivity NII 41, : 45,513 46,966 Year-2 NII 2,41644,418 2,41547,325 1,734 Year-3 NII 44,276 1,549 47,928 1,052 48,487 45,696 47,946 Year-4 NII Year-5 NII -4.9% 40,919 45,575 49,938 Year-3 NII 2,40046,365 2,41553,208 1,520 Year-4 NII 43,302 1,277 47, ,546 47,687 54,002 39,928 45,455 52,824 Year-4 NII 2,38348,295 2,41459,073 1,608 Year-5 NII 42,293 1,323 47, ,528 49,675 Year-5 NII 2,366 2,415 1,703 1, CHANGE / DIFFERENCE IN RESULTS Yr 2 Sensitivity +400: -7.5% 60,052 Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Assumes that $15MM of investment cash flow and $65MM of 1M FHLB 0.54% are used to fund loan growth evenly over the first 9 months of the simulaitons. Loan growth includes: $30MM of 30Y (@ 3.95%) and $10MM of 15Y (@ Year %) NII residential 1,531 mortgages; $25MM of 5/20 1,523CRE 4.00% 1,383 (w/ floor = 4.00%); and $15MM 1,310of 15/15 CRE 1, %. Market rates in the U200 and FU200 move over 24 months. This simulaiton is for discussion purposes based upon client proposed strategy. On-balance sheet Liquidity: -1.5% Year-2 NII Year-3 NII Year-4 NII 2,416 2,415 3% Spread 1,734 1,549 1,052 2,400 2,415 1,520 1, ,383 2,414 1,608 1, Total Liquidity: -4.0% Year-5 NII 2,366 2,415 1,703 1, Assumes that $15MM of investment cash flow and $65MM of 1M FHLB 0.54% are used to fund loan growth evenly over the first 9 months of the simulaitons Darling Consulting Group, Inc. Page 79 Loan growth includes: $30MM of 30Y (@ 3.95%) and $10MM of 15Y (@ 3.125%) residential mortgages; $25MM of 5/20 CRE 4.00% (w/ floor = 4.00%); and $15MM of 15/15 CRE 3.50%.

80 16,725 15,075 Net Interest Income ($000) Base Simulation as of 03/31/ Loan Growth - 3 & 4 Year FHLB Funding $80MM Loan Growth (Fixed Rate Mortgage and CRE) Net Interest Income ($000) 16,725 Option 2: Fund L-T (2/3 3 Yr FHLB Advance, 1/3 4 Yr FHLB Advance) 15,075 13,425 Base Simulation as of 03/31/ , Loan Growth - 3 & 4 Year FHLB Funding 16,725 Net Interest Income ($000) 16,725 Net Interest Income ($000) 11,775 11,775 15,075 15,075 10,125 10,125 13,425 13,425 8,475 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 8,475 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 11,775 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M 11,775 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M NII SUMMARY NII SUMMARY Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M 10,125 10,125 Year-1 NII 44,759 45,071 44,564 44,359 43,836 Year-1 NII 46,006 46,330 45,799 45,582 45,066 Year-2 NII 43,183 45,155 44,634 43,476 42,954 Year-2 NII 45,144 47,204 46,705 45,472 45,072 Year-3 8,475 NII 41,876 45,513 46,966 44,418 47,325 Year-3 8,475 NII 43,799 47,562 49,204 46,522 49,773 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Year-4 NII 40,919 45,575 49,938 46,365 53,208 Year-4 NII 43,023 47,622 51,652 48,087 54,608 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M Year-5 NII 39,928 45,455 52,824 48,295 59,073 Year-5 NII 42,174 47,506 54,159 49,772 59,707 NII SUMMARY NII SUMMARY CHANGE / DIFFERENCE IN RESULTS Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII 44,759 45,071 44,564 44,359 43,836 Year-1 NII 46,006 46,330 45,799 45,582 45,066 Year-1 NII 1,246 1,259 1,236 1,223 1,229 Year-2 NII 43,183 45,155 44,634 43,476 42,954 Year-2 NII 45,144 47,204 46,705 45,472 45,072 Year-2 NII 1,961 2,049 2,071 1,996 2,118 Year-3 NII 41,876 45,513 46,966 44,418 47,325 Year-3 NII 43,799 47,562 49,204 46,522 49,773 Year-3 NII 1,923 2,049 2,238 2,103 2,448 Year-4 NII -4.9% 40,919 45,575 49,938 46,365 53,208 Year-4 NII 43,023 47,622 51,652 48, % 54,608 Year-4 NII 2,104 2,047 1,714 1,722 1,400 Year-5 NII 39,928 45,455 52,824 48,295 59,073 Year-5 NII 42,174 47,506 54,159 49,772 59,707 Year-5 NII 2,247 2,051 1,335 1, Yr 2 Sensitivity +400: CHANGE / DIFFERENCE IN RESULTS Yr 2 Sensitivity +400: Assumes that $80MM of FHLB advances ($53.3MM of 1.15%; and $26.7MM Down of 100BP 1.35%) are used to fund Base loan growth evenly over Up 200BP the first 9 months of Flat the Up simulaitons. 200BP Up 400BP 24M Loan growth includes: $30MM of 30Y (@ 3.95%) and $10MM of 15Y (@ 3.125%) residential mortgages; $25MM of 5/20 CRE 4.00% (w/ floor = 4.00%); and $15MM of 15/15 CRE 3.50%. Market rates in the U200 and FU200 move over 24 months. This simulaiton Year-1 NII is for discussion 1,246 purposes based upon 1,259 client proposed strategy. 1,236 1,223 1,229 On-balance sheet Liquidity: Neutral Year-2 NII Year-3 NII Year-4 NII 1,961 2, % Spread 2,071 1,996 2,118 1,923 2,049 2,238 2,103 2,448 2,104 2,047 1,714 1,722 1,400 Total Liquidity: -4.0% Year-5 NII 2,247 2,051 1,335 1, Assumes Darling that $80MM Consulting of FHLB advances Group, ($53.3MM Inc. of 1.15%; and $26.7MM of 1.35%) are used to fund loan growth evenly over the first 9 months of the simulaitons. Page 80 Loan growth includes: $30MM of 30Y (@ 3.95%) and $10MM of 15Y (@ 3.125%) residential mortgages; $25MM of 5/20 CRE 4.00% (w/ floor = 4.00%); and $15MM of 15/15 CRE 3.50%.

81 16,825 15,150 Net Interest Income ($000) Base Simulation as of $80MM 03/31/2016 Loan Growth (Fixed 2016 Loan Rate Growth - Ladder Mortgage FHLB Funding and CRE) Net Interest Income ($000) 16,825 Option 3: Fund S-T Ladder (1/3 each: 1 Mo, 2 Yr, 3 Yr FHLB Advances) 15,150 13,475 Base Simulation as of 03/31/ , Loan Growth - Ladder FHLB Funding 16,825 Net Interest Income ($000) 16,825 Net Interest Income ($000) 11,800 11,800 15,150 15,150 10,125 10,125 8,450 13,475 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 8,450 13,475 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 11,800 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M 11,800 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M NII SUMMARY NII SUMMARY Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M 10,125 10,125 Year-1 NII 44,759 45,071 44,564 44,359 43,836 Year-1 NII 46,220 46,504 45,945 45,710 45,167 Year-2 NII 43,183 45,155 44,634 43,476 42,954 Year-2 NII 45,527 47,466 46,718 45,468 44,809 Year-3 8,450 NII 41,876 45,513 46,966 44,418 47,325 Year-3 8,450 NII 44,256 47,824 48,741 46,118 48,560 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Year-4 NII 40,919 45,575 49,938 46,365 53,208 Year-4 NII 43,383 47,884 51,425 47,846 53,867 Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M Base Down 100BP Up 200BP Flat Up 200BP Up 400BP 24M Year-5 NII 39,928 45,455 52,824 48,295 59,073 Year-5 NII 42,384 47,767 54,348 49,803 59,799 NII SUMMARY NII SUMMARY Down 100BP Base Up 200BP Flat Up 200BP CHANGE / DIFFERENCE IN RESULTS Up 400BP 24M Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Year-1 NII 44,759 45,071 44,564 Down 100BP 44,359 Base 43,836 Up 200BP Year-1 NII Flat Up 200BP 46,220 Up 400BP 24M 46,504 45,945 45,710 45,167 Year-1 NII 1,461 1,433 1,382 1,351 1,331 Year-2 NII 43,183 45,155 44,634 43,476 42,954 Year-2 NII 45,527 47,466 46,718 45,468 44,809 Yr 2 Sensitivity +400: Year-2 NII 2,344 2,311 2,084 1,992 1,856 Year-3 NII 41,876 45,513 46,966 44,418 47,325 Year-3 NII 44,256 47,824 48,741 46,118 48,560 Year-4 NII Year-5 NII -4.9% Year-3 NII 2,380 2,311 1,775 1,700 1,236 40,919 45,575 49,938 46,365 53,208 Year-4 NII 43,383 47,884 51,425 47,846 53,867 Year-4 NII 2,464 2,309 1,487 1, ,928 45,455 52,824 48,295 59,073 Year-5 NII 42,384 47,767 54,348 49,803 Year-5 NII 2,457 2,312 1,524 1, CHANGE / DIFFERENCE IN RESULTS Yr 2 Sensitivity +400: -5.5% 59,799 Down 100BP Base Up 200BP Flat Up 200BP Up 400BP 24M Assumes that $80MM of FHLB advances ($26.7MM of 0.54%; $26.7MM of 0.98%; and $26.7MM of 1.15%) are used to fund loan growth evenly over the first 9 months of the simulaitons. Loan growth includes: $30MM of 30Y (@ 3.95%) and $10MM of 15Y (@ 3.125%) residential mortgages; $25MM of 5/20 CRE 4.00% (w/ floor = 4.00%); and $15MM of 15/15 CRE 3.50%. Year-1 NII 1,461 1,433 1,382 1,351 1,331 Market rates in the U200 and FU200 move over 24 months. This simulaiton is for discussion purposes based upon client proposed strategy. On-balance sheet Liquidity: Neutral Year-2 NII Year-3 NII 2,344 2, % Spread 2,084 1,992 1,856 2,380 2,311 1,775 1,700 1,236 Total Liquidity: -4.0% Year-4 NII 2,464 2,309 1,487 1, Year-5 NII 2,457 2,312 1,524 1, Darling Consulting Group, Inc. Page 81 Assumes that $80MM of FHLB advances ($26.7MM of 0.54%; $26.7MM of 0.98%; and $26.7MM of 1.15%) are used to fund loan growth evenly over the first 9 months of the simulaitons.

82 Case Study 6: Liability Sensitive IRR Profile 2017 Darling Consulting Group, Inc. Page 82

83 Case Study: Liability Sensitive IRR Profile ALCO Discussions Concerned about liability sensitivity with expectation for rising rates Sizeable short-term funding base Concerned cost to extend is too high Considerations As rates rise, ALCO must decide when and how much to increase deposit rates 2017 Darling Consulting Group, Inc. Page 83

84 Case Study: Liability Sensitive IRR Profile Roll Funding into Wholesale Ladder Reduces exposure, but is cost too much? 2017 Darling Consulting Group, Inc. Page 84

85 Case Study: Liability Sensitive IRR Profile ALCO Discussions Concerned about liability sensitivity with expectation for rising rates Sizeable short-term funding base Concerned cost to extend is too high Considerations With strong loan pipeline, add loan leverage to help offset cost of extending borrowing 2017 Darling Consulting Group, Inc. Page 85

86 Case Study: Liability Sensitive IRR Profile Impact of adding leverage to funding extension 2017 Darling Consulting Group, Inc. Page 86

87 Key Focus/Takeaways Develop a Deposit Gameplan Brace for Tighter Liquidity Levels Understanding Your True Interest Rate Risk Position Profiting From Rising Rates 2017 Darling Consulting Group, Inc. Page 87

88 Thank You! Darling Darling Consulting Group, Group, Inc. Inc. Inc. Page 88

89 DCG Services Core Business: Balance Sheet Management 350+ ALCO meetings every quarter Policy review, Board education, exam preparation Project Work ALM Model Validations, DFAST Validations, Liquidity Reviews Cloud-Based Business Intelligence Solutions Deposits360, Liquidity360, Prepayments360 Other Capital Planning, Credit Stress Testing, Budgeting, Software 2017 Darling Consulting Group, Inc. Page 89