Supervisors Symposium - December 2023

Internal Use Only

Declining deposits and the rising cost of funds is the number one earnings issue. FinPro is seeing the following funding strategies . . .

• CD specials – especially short ‐ term CDs as the rate forecasts a declining rate environment • Utilizing CDARs and ICS to assist with uninsured deposit levels • New non maturity special accounts • Compensating deposit balances for small business loans • New market expansion (some with branches) • Adding business development staff to augment digital delivery • Geographic pricing and differentiation • Customer profitability analysis to achieve relationship pricing • Increased utilization of wholesale funding (brokered, listing, borrowings) • Utilizing investment cashflow to re ‐ invest into loans or cover deposit outflows • Utilize marginal cost of funds analysis +100 bps +100 bps +100 bps Total

Marginal Cost of Funds Analysis

Rate Environment

Balance

Rate Interest Expense

Beta Value Run Off

Option 1: Reprice Entire Portfolio Flat 100,000,000

3.00%

100%

3,000,000

0%

100,000,000

4.00%

4,000,000

100%

0%

Option 2: Don't Reprice and Replace with Higher Cost Money Flat 100,000,000 3.00% 3,000,000

25%

0%

75,000,000 25,000,000 100,000,000

3.00% 6.00% 3.75%

2,250,000 1,500,000 3,750,000

0% 0%

20% 20%

Savings $ Savings %

250,000

6.3%

7.00% @ 25% run off 33.3% @ 6% rate

Break ‐ Even Rate Break ‐ Even Run Off

25

© 2023 –FinPro, Inc.

25

Internal Use Only

Regulators have pre ‐ determined CRE to be the next huge problem. As such, we need to mitigate the problem now to hold value . . .

Qt 1: 2022

Qt 1: 2023

Change

EBITDA Cap Rate

$

2,000,000

$

2,000,000

4.00%

7.00%

3.00%

Value

$

50,000,000

$ 28,571,429

$

(21,428,571)

Loan to Value Loan Amount

70.00%

122.50%

$

35,000,000

$ 35,000,000

Underwater

$

(6,428,571)

According to Morgan Stanley, there is $1.5 trillion of CRE debt coming due in the next 3 years. They estimate that much of this won’t roll over and that that could cause prices to fall by 40%. That would be even worse than the financial crisis. And to add insult to injury, 67% of these loans are held by regional banks.

26

© 2023 –FinPro, Inc.

26