Everything you ever wanted to know about Wholesale Funding options

(But were afraid to ask)

Presented at: FHLB Systemwide Marketing Conference February 27, 2017

Presented By: Raymond E. Chandonnet Managing Principal (908) 206-4581 [email protected]

1 Goals of this presentation

• Review 9 situations in which wholesale funding is useful for , and where things stand in TODAY’S market

• Provide a primer on the different wholesale funding options banks have at their disposal today

• Review each product’s strengths and weaknesses

• Provide perspective on how each competing product is “sold” and/or “bought”, including against FHLB advances

• Differentiate between approaches to wholesale funding at small, mid-sized and large banks

• Get through all this in one hour! Yikes….

2 They call me the “funding whisperer”….

• I’ve bought or sold pretty much every wholesale funding product there is, either directly or indirectly:

Company Time Period Direct Indirect

Malden Trust 1987-1992 • Issued brokered CD’s

FHLB Boston 1993-1997 • Sold advances on Funding Desk • Designed funding strategies for members • Sold short-term repo to banks First Union 1997-2000 • Created mechanism for transferring FHLB • Designed leverage strategies that incorporated FHLB advances Securities advances from member to member • Designed leverage strategies that incorporated FHLB advances

Lehman Bros 2001-2005 • Referred banks to CD brokers to issue callable CD’s we swapped • Sold structured repo to banks JPMorgan 2005-2007 • Helped desk work with FHLB’s to create new structured advance products • Created “funding desk” which advised banks on all sources of wholesale funding and developed strategy for them • Sold structured repo to banks • Designed leverage strategies that incorporated FHLB advances • Launched brokered CD desk Sandler O'Neill 2007-2014 • Introduced banks to “sweep” deposit products in order to sell swaps • Created mechanism for transferring against them brokered deposits from bank to bank • Launched FHLB restructuring advisory service

• I’ve been on the leading edge of driving new funding strategies / product design for 20 years (e.g. embedding derivatives, debt modification under EITF 96-19, symmetrical prepayment, use of rate locks)

• I serve on the board (and chair the board ALCO committee) of a large community bank that uses every available wholesale funding source (and lots of it!) 3 When do banks use wholesale funding?

• Funding growth in excess of deposit growth (when is less than 5% of assets)

• Managing deposit costs and impact on net interest margin: • Funding deposit outflows without having to “pay up” excessively • Controlling marginal cost of funds by minimizing use of CD “specials”

• Funding temporary cash shortfalls • Funding seasonal liquidity needs (e.g. tied to agricultural calendar) • Funding fixed rate lending initiatives, both residential and commercial • Managing overall interest rate risk, particularly to reduce liability sensitivity (exposure to rising rates) • Funding wholesale leverage strategies especially involving securities • Hedging potential future deposit runoff if interest rates rise • Using caps or floors without doing a derivative 4 Relative importance of each strategy today

Use of Funding Importance Comments • Many parts of the country seeing loan growth outstrip deposit growth Funding excess loan growth and may resort to deposit “specials” or increasing MMDA rates • Little evidence of deposit outflows (yet), but upward pressure on Managing deposit costs pricing in some markets leads to CD specials, price wars, and need to manage marginal cost of funds Temporary cash shortfalls • Always a possibility

Seasonal liquidity needs • Always a possibility • Increasing emphasis on fixed rate lending as borrowers worry about Fixed rate lending initiatives rising rates; • Increased retention of fixed rate mortgages at asset-hungry banks • More focus on rising rate risk now that rates are actually rising; Managing interest rate risk • Many banks though are asset-sensitive and seeing margin expansion • Still a lot of excess capital raised during the financial crisis needing to Leverage strategies be levered, but banks more cautious about adding bonds in a rising rate environment Hedging future deposit • Banks with “surge deposit” balances SHOULD be doing this, but most runoff are not • Embedded caps starting to work again with higher rates to play with, Embedding caps or floors but need to restart bank education process 5 What did we learn from the last Fed tightening cycle?

Borrowings as % of Deposits • After the Fed started raising rates in mid-2004, (By Asset Size) borrowed money (predominantly FHLB advances)

10.0% approached 6%-10% of assets by the end of 2006,

8.0% • And, banks further supplemented their funding by nearly 6.0% doubling their use of brokered deposits between mid- 4.0% 2004 and late 2006

2.0% • Today, borrowing levels are MUCH lower than they 0.0% <$500MM $500MM-$2B $2B-$10B $10B-$50B were then….

2006Y 2016Y • …while brokered deposit levels are close to where they were BEFORE the Fed started raising rates in 2004 Brokered Deposits as % of Deposits (By Asset Size) • Given this, and the regulatory bias against brokered 6.0% deposits, a strong argument can be made for ramping 5.0% up borrowings back to these levels BEFORE increasing 4.0% brokered deposits

3.0%

2.0% 1.0% Source: Regulatory filings, all banks 0.0% <$500MM $500MM-$2B $2B-$10B $10B-$50B below $10 billion in assets

2004Q2 2006Y 2016Y Major sources of Wholesale Funding

• Federal Home Loan Bank advances • Brokered CD’s • Listing Service CD’s • Corporate sweep deposits • Broker/clearing company sweep deposits • Reciprocal CD’s (One-way buy) • Short-term repo • Structured / term repo • Fed funds

Note: I am ignoring the Fed intentionally since it’s use is STILL viewed by most Feds and banks as a sign of weakness, despite new guidance to the contrary issued by the Fed during the financial crisis 7 Pricing Comparison

Product 3 Months 1 Year 2 Years 3 Years 5 Years 10 Years FHLB advances1 0.85% 1.20% 1.57% 1.80% 2.30% 3.15% Brokered CDs2 0.80% 1.15% 1.55% 1.85% 2.25% 3.15% Listing Service CDs3 0.95% 1.30% 1.55% 1.75% 2.25% 2.56% Corporate Sweep4 0.90% N/A N/A N/A N/A N/A Broker Sweep5 0.95% 1.25% 1.50% 1.75% 2.05% N/A Repo6 1.10%% 1.35% 1.80% 2.05% 2.40% 2.90% Fed Funds7 0.75% N/A N/A N/A N/A N/A Libor / Swap 1.05% 1.30% 1.55% 1.73% 2.00% 2.37% Benchmark All pricing as of 2/23/2017. Comments: 1) “Regular” advance rates 2) High end of quoted range; rates lower for small amounts or new issuers 3) Highest offered rate for each maturity 4) MMDA account, no long-term commitments, no index so not swappable 5) “90 day” rate = nominal floating rate, unswapped; 1-5 year rates assumes funding is swapped to fixed although fixed rate agreements are sometimes available at the same pricing 6) Assumes Agency Passthrough collateral – Rate will be lower using “Type 1”securities (GNMA / UST), Higher 8 using less liquidity securities 7) Source: Federal Reserve Basic Product Information: FHLB Advances

Basic Form: • Secured borrowing

Collateralized: • Yes – Qualifying and securities

Collateral Delivery: • Sometimes, depending on product type and bank

Margin Calls: • Generally not

Brokered? • No

Deposit? • No • Fixed terms across most maturities, amortizing, putable, callable, structured with embedded Terms / Structures derivatives, spot and (limited) forward starts Prepayment • Any time, subject to prepayment penalty Symmetrical • Depends on the FHLB and product type; Prepayment? • Generally limited to no more than 10% gain when offered Can be • Some FHLB’s offer limited “blend and extend” Restructured? • Can be ‘cash settle’ restructured subject to debt modification • Borrowers are “members” (cooperative) Other Notable • Borrowing requires investment in capital , which pays healthy dividend Features: • Array of lower cost products to fund affordable housing / community development

9 Basic Product Information: Brokered CD’s

Basic Form: • Certificate of deposits

Collateralized: • No

Collateral Delivery: • No

Margin Calls: • No

Brokered? • Yes

Deposit? • Yes

Terms / Structures • Fixed terms across most maturities, plus callables (which are typically swapped to floating)

Prepayment • No Symmetrical • N/A Prepayment? Can be • No Restructured? • Underwritten deals are funded immediately (broker takes the risk of not selling it) Other Notable • “Best efforts” deals have no commited issuance amount, but are typically 5-10bp cheaper Features: • “Death Put”: Terminates early upon death of depositor

10 Basic Product Information: Listing Service CD’s

Basic Form: • CD

Collateralized: • No

Collateral Delivery: • No

Margin Calls: • No

Brokered? • No

Deposit? • Yes

Terms / Structures • Fixed terms across most maturities

Prepayment • None Symmetrical • No Prepayment? Can be • No Restructured? Other Notable • Both issuers and buyers pay a flat fee to access an online marketplace Features:

11 Basic Product Information: Corporate Sweep Deposits

Basic Form: • MMDA / DDA from corporate cash managers and syndicated out to banks in $250k blocks

Collateralized: • No

Collateral Delivery: • No

Margin Calls: • No

Brokered? • Maybe – grey area – empirically, 50/50 split on how banks characterize them

Deposit? • Yes

Terms / Structures • Terms up to 5-7 years, “floating” rate but not always pegged to an index

Prepayment • None Symmetrical • No Prepayment? Can be • No Restructured? • In some products, bank must bid for the rate and amount they want Other Notable • In other products, the rate is set at a spread to Libor, and bank agrees to an upper and Features: lower band of amounts they will accept

12 Basic Product Information: Broker/clearing company sweep deposits

• MMDA / DDA from brokerage accounts or clearing companies syndicated out to banks in Basic Form: $250k blocks Collateralized: • No

Collateral Delivery: • No

Margin Calls: • No

Brokered? • YES (unless bank ignores standard practice, which happens)

Deposit? • Yes

Terms / Structures • Terms up to 5-7 years, floating rate pegged to an index

Prepayment • None Symmetrical • No Prepayment? Can be • No Restructured? Other Notable • Bank agrees to an upper and lower band of amounts they will accept Features:

13 Basic Product Information: Reciprocal CD’s – One-way buy

Basic Form: • CD

Collateralized: • No

Collateral Delivery: • No

Margin Calls: • No

Brokered? • YES (Unless bank ignores standard practice)

Deposit? • Yes

Terms / Structures • Fixed terms across most maturities

Prepayment • None Symmetrical • No Prepayment? Can be • No Restructured? Other Notable • Real customers, opening up real CD’s over FDIC limit at participating banks, with excess Features: amounts syndicated out to “buyers”

14 Basic Product Information: Short-term repo

Basic Form: • (separate area in liabilities on Call Report)

Collateralized: • Yes – Securities, typically UST, agencies, and agency MBS / CMO’s

Collateral Delivery: • Yes

Margin Calls: • Yes, if collateral loses value must deliver more

Brokered? • No

Deposit? • No

Terms / Structures • Overnight to 12 months

Prepayment • Yes, subject to make-whole Symmetrical • Generally not relevant since short term Prepayment? Can be • No Restructured? Other Notable • Rates are dependent on collateral: the higher quality / less risky the collateral, the lower the Features: rate and vice versa

15 Basic Product Information: Structured / term Repo

Basic Form: • Repurchase agreement (Separate section in liabilities on call report

Collateralized: • Yes – , typically UST, agencies, and agency MBS / CMO’s

Collateral Delivery: • Yes • YES – If collateral loses value, must deliver more; If market value of repo declines (e.g fixed Margin Calls: rate, and market rates fall), may need to post collateral against the market value decline Brokered? • No

Deposit? • No • Fixed terms across most maturities, amortizing, putable, callable, structured with embedded Terms / Structures derivatives, spot and (limited) forward starts, ANYTHING GOES Prepayment • Any time, subject to mark-to-market Symmetrical • Yes Prepayment? Can be • ANYTHING GOES, as long as it passes accounting and suitability rules Restructured? Other Notable • Rates are dependent on type of collateral, just like in short-term repo Features:

16 Basic Product Information: Fed Funds

Basic Form: • Fed Funds purchased (separate line in liability section of call report)

Collateralized: • Short-term, no; Term – maybe

Collateral Delivery: • Yes

Margin Calls: • Sometimes

Brokered? • No

Deposit? • No

Terms / Structures • Mostly overnight, but terms out to 6-12 months out there but infrequently used

Prepayment • Yes, maybe subject to make-whole on term Symmetrical • Not generally applicable since short-term Prepayment? Can be • No Restructured? Other Notable • Must set up a line with a Fed Funds broker / bank dealer Features:

17 Strengths and Weaknesses: FHLB Advances

• As a cooperative, always acts in the member’s best interest • Dividend on stock attractive and reduces marginal cost of borrowing • Only lender who takes whole mortgage loans as collateral • Blanket lien often means not having to identify / deliver collateral • Especially friendly to small banks - Size of bank doesn’t matter / handholding • Decent variety of product structures STRENGTHS • CIP programs = lower rates • No margin calls or mark-to-market margin (usually) • Can always be prepaid – not stuck with it • Committed term funding valuable especially for banks over $10B with regulatory stress tests / liquidity ratios • History of at least rolling over existing funding even if bank winds up in financial difficulty • Historically has almost always been able to provide funding in almost any size / maturity

• Wide spreads on longer-term advances are a deterrent / easily sold against especially if banks can do swaps • It’s secured, which is a disadvantage versus unsecured funding • Limited symmetrical prepayment a deterrent, especially for larger banks • Shrinking list of product structure flexibility especially in the last ten years WEAKNESSES • Limited restructuring capabilities • “Double dip” when restructuring – spread baked into prepayment penalty on old advance and then added

again to new advance 18 • Sometimes seen (especially by larger banks) as inflexible and / or inefficient relative to “street” counterparties Strengths & Weaknesses: Brokered CD’s

• Unsecured STRENGTHS • Very easy to issue even in small sizes • Pricing can be compelling because it’s a product and will often lag the market as rates rise

• “Brokered” tag – Regulatory pendulum has swung pretty far against brokered deposits since the crisis • Reinforced with punitive action (higher FDIC premiums) if exceed 10% of deposits and bad CAMELS rating • Lose access to them if fall below well capitalized – must get a waiver even just to roll over existing ones – can create a liquidity problem • Cannot be prepaid or restructured. EVER. • For best efforts deals, it can be very tough to get an order filled for size, especially in longer maturities – could take weeks and ultimately only get half-filled WEAKNESSES • “Bait and switch” – unscrupulous brokers quote unrealistic “best efforts” rates then can’t fill them – particularly bad today because if a month later you’re only half-filled, you have to put a new order in at a higher rate if rates are rising • “Name fatigue” – the more you issue, the harder it is to do more because fill up (FDIC protection) • In active markets, may need to “pay up” to get your issue noticed and sold • “Death put” is a problem on longer-term, higher rate CD’s because they are often sold to senior citizens who reach for the income – PARTICULARLY problematic on high rate callable CD’s that are swapped to sub-Libor floating rates, because death puts create accounting problems with the swap

19 Strengths & Weaknesses: Listing Service CD’s

• Unsecured • Avoids the “brokered” tag (issuers and investors just pay a flat rate to join an online marketplace) STRENGTHS • Indistinguishable from “regular” CD’s on the call report • Pricing can be pretty attractive, much like brokered CD’s • Investors are mostly credit unions which is nice relative to individual investors

• It’s a free-for-all – you post a rate and hope you get filled • Cannot be prepaid or restructured. EVER. • To really get attention, you have to post one of the highest rates on the board for your maturity • Can be supply issues – no guarantee you can get funded on the maturity you want WEAKNESSES • Despite note being technically “brokered”, functions much like the brokered market – some regulators realize that – access at a fair price is not guaranteed and thus could create liquidity issues later • “Name fatigue” – the more you issue, the harder it is to do more because investors fill up (FDIC protection) • In active markets, may need to “pay up” to get your issue noticed and sold • No guarantee it’s available if bank’s financial condition declines

20 Strengths & Weaknesses: Corporate Sweep Deposits

• Unsecured • Large diversified pool of underlying depositors, many of them household names like Boeing, GE, etc • Virtually unlimited supply at attractive spreads / pricing STRENGTHS • Grey area on “brokered” classification leads many banks to classify as non-brokered, so they show up on call report as core deposits • In rising rate environment, perform like regular deposits – beta < 100% (Don’t always need to raise rates 1- for-1 with the market to keep the funds

• Could be classified as brokered • Supply and rate is never guaranteed, so stability and predictability could be a concern • No fixed rate versions available, and if rate is not tied to an index cannot really be “fixed” with a swap, so only useful for banks who can handle floating rate funding from an IRR perspective WEAKNESSES • If economic conditions (Trump bump?) continue to evolve, corporations may invest their cash rather than sit on it – leaving banks under / unfunded • No guarantee it’s available if bank’s financial condition declines – may even require putback

21 Strengths & Weaknesses: Broker/clearing company sweep deposits

• Unsecured • Large, diversified, stable pool of underlying cash sources (millions of individual brokerage accounts) STRENGTHS • Virtually unlimited supply at attractive spreads / pricing • Floating rate tied directly to an index, which makes it easily modeled, and easily hedged • Very little difference in spreads on longer versus shorter terms

• “Brokered” classification • While there is tremendous supply, it isn’t TRULY guaranteed (large banks typically put 80% in long-term bucket and the rest in short-term for Basel III liquidity) • Must agree to a “band” of funding between a min and max – so can fluctuate and cause headaches WEAKNESSES • Generally floating rate (there are exceptions) so if bank wants fixed rate funding must fix with a swap, which isn’t for everyone (especially smaller banks) • Major liquidity risk problem if bank falls below well-capitalized as funding typically can be clawed back immediately (may be contractual, PLUS since it is a “sweep”, each day it is technically a “new” deposit, and under-capitalized banks can’t take on new brokered deposits)

22 Strengths & Weaknesses: Reciprocal CD’s – One-way buy

• Unsecured • Very easy to issue even in small sizes STRENGTHS • Pricing can be more compelling than brokered CD’s

• It’s “brokered” • It’s a free-for-all – very hard to know what you can get in a given structure WEAKNESSES • Cannot be prepaid or restructured. EVER. • “Name fatigue” – the more you take, the harder it is to do more because investors fill up (FDIC protection) • No guarantee it’s available if bank’s financial condition declines, and shut out if fall below well-capitalized

23 Strengths & Weaknesses: Short-term repo

STRENGTHS • Can be cheap if using highest quality collateral

• Counterparty risk – if dealer fails, they own your bonds – tricky to get them back • Have to deliver collateral WEAKNESSES • Daily margin calls on collateral are a MAJOR nuisance • Tough to see the reason to use it versus Fed Funds (unsecured) or FHLB advances (no delivery / margin calls) unless rate is sufficiently lower

24 Strengths & Weaknesses: Structured / term Repo

• Can be cheap if using highest quality collateral, ESPECIALLY if using “Type 1” securities (UST / GNMA) • Flexibility for creating unique structures limited only by accounting rules and suitability STRENGTHS • Can ALWAYS be restructured, subject to accounting rules • Prepayment is always symmetrical

• Many fewer market participants than pre-crisis • Counterparty risk - if dealer goes bankrupt, you lose your bonds, AND might need to replace the funding at a higher rate if rates have risen • Have to deliver collateral • Daily margin calls on collateral are a major nuisance • Dealers have the right to collect margin against the MARKET VALUE OF THE REPO (think, implied prepayment penalty) • The math becomes complicated because the market value of the repo is netted against the market value of the collateral (which typically move in opposite directions), with a net margin call calculated • When rates fall, if MBS are used as collateral, there will be a big negative mark-to-market on the repo, but the MBS prepay so limited gains – so, a big margin call must be met (post more collateral) WEAKNESSES • Since big rate declines happen in a bad economy, the bank is giving up liquidity when they should be INCREASING it – we call this “pro-cyclicality” • Dealer may demand the right to terminate the repo, AT MARKET, if credit terms are breached. This could FORCE the bank to recognize a prepayment penalty at a time when their capital is already pressured - OUCH • Because dealers book revenue on term / structured repo UP FRONT (present valued), it’s very profitable – this can lead to bad behavior and dealers putting unsophisticated banks into very risky structures • You are forced to always own the exact type of collateral specified in the repo, even if you don’t want to • Because fewer dealers are in the business, those that are left may demand other services from the bank (e.g. trades, cash management, correspondent banking) in order to commit balance sheet to funding the bank – CAVEAT EMPTOR • Dealers historical are TERRIBLE at managing bank’s collateral properly, delivering P&I, etc • Dealer is sole “valuation agent” for market value of collateral AND repo; it is worth whatever they say it’s 25worth Strengths & Weaknesses: Fed Funds

• Cheap and easy to access STRENGTHS • Unsecured (short-term) • Can often settle very late same-day so good for managing cash position

• Availability relies on having credit line from a commercial bank, which could be yanked in a crisis • Secured (long-term) WEAKNESSES • May need to provide bank other business in order to be granted a • Really only generally used for short-term funding, particularly overnight

26 Summarizing the Big bank vs Small bank issues TOPIC BIG BANKS SMALL BANKS • Can access the entire array of funding • May not be able to access repo and broker sweep Market Access options available deposit programs due to small volume • Can and do use derivatives to manage • May not be able to use, either due to small size or Derivatives funding costs lack of knowledge • These markets are ESPECIALLY efficient to access Brokered / listing / • Cannot generally access these markets in for small banks, especially if they are new to the enough size to make it worthwhile reciprocal CD’s market (“name fatigue) • Important to many if not all of them; will use Focus on “symmetry” “symmetrical prepay” advances or use • Usually not a big focus swaps instead • Will use swaps and short-term borrowings • May not be aware of wider spreads for long-term Focus on FHLB swap to avoid paying term credit spread, advances spread structure UNLESS they need the term funding (See: • Even if aware, may not have an alternative if they Regulatory Issues) can’t do swaps • Not subject to Dodd Frank stress testing or Basel III • Once banks exceed $10 billion, may start liquidit ratios using more TERM funding as it looks good in DFAST and CCAR stress tests • However, may still need term funding for growing Regulatory Issues liquidity stress-testing requirements • Very large banks NEED term funding to satisfy Basel III liquidity ratio requirements • Small-bank regulators often have stronger bias against brokered deposits, or against wholesale funding overall What advice am I giving to banks today with regard to using FHLB advances?

• Always always always use symmetrical prepayment advances when available. Only cost a few bp more, and you NEVER KNOW when having gains might come in handy!

• You REALLY need to learn the basic “debt modification” accounting concept that allows you to “blend and extend” prepayment penalties and lower cost of funds, even if FHLB forces you to pay the prepayment penalty in cash

• Maximize your use of CIP and Community Development advances – DO THE WORK to qualify

• Rates are low enough that convertible advances look attractive – just don’t think of them as sticking around to maturity – use longer lockouts

• Advances with embedded caps are beginning to look attractive as rates rise since you can embed more protection without violating accounting rules than you could pre-rate rise

• Use forward rate commitments while the curve is still relatively flat to lock in rollover rate of new borrowings, and protect against deposit outflows if rates continue climbing

• For larger banks who can handle it, use swaps and short-term advances as a cheaper alternative to long-term advances, both regular and forward-starting, but be mindful of liquidity risk of running a big rolling short-term advance book

28 APPENDIX: Marginal Cost of Funds analysis

29 Understanding the concept of marginal cost of funds

• Banks historically have LOVED the use of CD “specials”

• These have historically been used for three reasons: • Grow funding when needed to fund loans • Retain deposits that might otherwise leave (often previous specials!!) • Attract funding on a specific part of the curve for ALM purposes

• Generally impossible to avoid “cannibalization” of existing deposits when offering specials

• Important to track and measure the “new money” (YAY!) vs “transfers” (BOO!) and their impact on overall cost of funds

• Marginal cost calculations often prove out that the bank would have been far better of borrowing money than disrupting

30 Marginal Cost of Funds: How to calculate

ACTUAL BREAK-EVEN CD Special Rate: 1.10% 1.10% CD Special Term: 3 Years 3 Years Two questions: Total "Special" CD's Put On Books: 10,000,000 10,000,000 % New Money Raised : 50% 79% Average Rate On Cannibalized Deposits: 0.35% 0.35% 1) Are you willing to Cost of Cannibalization (New - Old Rate) 0.75% 1.00% pay up by 55bp to get deposits? WHAT IS THE IMPACT ON EARNINGS?

Description Principal Cost (%) Cost ($) Principal Cost (%) Cost ($) 2) If not, can you be New Money Raised 5,000,000 1.10% 55,000 7,894,737 1.10% 86,842 certain you will get Cannibalized Deposits 5,000,000 0.75% 37,500 2,105,263 0.75% 15,789 almost 80% NEW TOTAL IMPACT 10,000,000 92,500 10,000,000 102,632 MONEY when you MARGINAL COST OF FUNDS run the CD special?

Total Incremental Interest Expense: 92,500 102,632 ÷ Total Net New Funding Raised: 5,000,000 7,894,737 = Marginal Cost of Funds 1.85% 1.30% - FHLB advance rate for same maturity 1.30% 1.30% PAYUP OVER WHOLESALE FUNDING 0.55% 0.00% Notes: (1) This calculation ignores the cost of FDIC , which makes the marginal deposit cost higher (2) The calculation also ignores the impact of dividends on FHLB stock held against the borrowing, which could raise or lower the marginal cost of borrowing somewhat depending on the dividend rate 31 Here is the analysis you should run BEFORE you run that special

How much are you willing to "Pay Up" for a customer deposit versus a borrowing? 0.20%

% New "Payup" for new money versus borrowing from FHLB Money Old Rate on Cannibalized Deposits 0.65% 0.25% 0.35% 0.45% 0.55% 0.65% 0.75% 0.85% 0.95% 1.05% 100% -0.20% -0.20% -0.20% -0.20% -0.20% -0.20% -0.20% -0.20% -0.20% 90% -0.11% -0.12% -0.13% -0.14% -0.15% -0.16% -0.17% -0.18% -0.19% 80% 0.01% -0.01% -0.04% -0.06% -0.09% -0.11% -0.14% -0.16% -0.19% 70% 0.16% 0.12% 0.08% 0.04% -0.01% -0.05% -0.09% -0.14% -0.18% 60% 0.37% 0.30% 0.23% 0.17% 0.10% 0.03% -0.03% -0.10% -0.17% 50% 0.65% 0.55% 0.45% 0.35% 0.25% 0.15% 0.05% -0.05% -0.15% 40% 1.08% 0.92% 0.77% 0.62% 0.48% 0.32% 0.18% 0.02% -0.13% 30% 1.78% 1.55% 1.32% 1.08% 0.85% 0.62% 0.38% 0.15% -0.08% 20% 3.20% 2.80% 2.40% 2.00% 1.60% 1.20% 0.80% 0.40% 0.00% 10% 7.45% 6.55% 5.65% 4.75% 3.85% 2.95% 2.05% 1.15% 0.25% The result? • Only run the special if you feel you can raise at least 70% new money. Anything less than that runs the risk of overpaying. • OR, go ahead and run the special, but track where the money is coming from and shut it down if new money is less than 70% Notes: (1) This calculation ignores the cost of FDIC insurance, which makes the marginal deposit cost higher (2) The calculation also ignores the impact of dividends on FHLB stock held against the borrowing, which could raise or lower the marginal cost of borrowing 32 somewhat depending on the dividend rate About the presenter

Ray Chandonnet is managing principal of Second Act Capital Partners, an advisory firm that provides balance sheet management and other consulting services to financial institutions, and provides business development services to companies seeking to develop and launch products designed to help financial institutions. Ray also serves as a member of the board of directors of Kearny Bank and Kearny Financial Corp., a publicly-traded $4+ billion banking company headquartered in Fairfield NJ.

Ray has been involved in the banking industry since 1986. Ray retired from Sandler O’Neill & Partners in early 2014, where he had served as a partner and Chief Balance Sheet Strategist since 2007. Prior to joining Sandler O’Neill, Ray was head of Bank Strategy for JPMorgan Securities, Lehman Brothers, and First Union Capital Markets. Ray also spent five years as a bank strategist and advances specialist at the Federal Home Loan Bank of Boston, and five years as asset/liability and financial analyst for a community bank in the Boston area.

Ray is a frequent publisher and speaker on a wide range of issues related to bank financial management. Ray holds a Master’s Degree in from Bentley College Graduate School of Business in Waltham, MA and a Bachelor’s Degree in Computer Science and Mathematics from Merrimack College in North Andover, MA

Ray also has professional chef training, having taken time off after retiring from investment banking to work and train in the kitchen of the Huntley Taverne, a farm-to-table restaurant in Summit NJ. So while you should never ask Ray for help in cooking your books – you CAN ask him for help in cooking your dinner! 33