This pandemic has tested the foundation of banks and the strength of the dollar. With all of us facing the same crisis, we are left with the same key questions, "Where are we now?" "Where are we going?" "How are we going to get there?" and "What impediments must we overcome?" Join Steve Andrews, President & CEO of the Western Bankers Association, for CBB's groundbreaking webinar! This exclusive webinar will go over the insider information your bank needs for level setting and peering around the corner. Steve will provide actionable insights, best practices, and real-world examples of the changing landscape of community banking.

1. Level Setting & Peering Around the
Corner
By: Stephen G. Andrews
WesternBankers.com
November 2020

2. Stephen G. Andrews
• Lead Four Banks as CEO
• De novo
• Turn around
• Liquidation
• Banking Advocate
• Western Bankers Association
• American Bankers Association & Independent Community Bankers of America
• California & Oregon
• Industry Witness
• Educator
• Pacific Coast Banking School
• University of California State University – East Bay

3. Disclosure
• The views expressed on this presentation or posted on social media and other platforms
(including posts, podcasts, videos, and other content) are my own, and should not be
construed as the views of Western Bankers Association or its respective affiliates
irrespective if some of the content is shared. All information contained here is for
disclosure and informational purposes only. It is not intended to be investment advice,
the opinion of my employer, or an endorsement of others. These posts are not directed
to investors or potential investors, and do not constitute an offer to sell, or a solicitation
of an offer to buy any securities. Nothing within this post constitutes investment, legal, tax
or other advice.
• Although content displayed is produced with reasonable care and skill, no
representation should be taken as having been given. The opinions, estimates,
forecasts, targets, and other analysis expressed in these materials is subject to change
without notice. Some information has been obtained from third-party sources, and while
I use sources that I feel are reliable, I have not independently verified any of the
referenced information and make no representations as to the accuracy of this
information. All postings and content fairly represents my own opinions and sentiments
at the date of publishing, but my opinions and sentiments may be revised from time to
time, for example in light of experience and further developments, and this presentation
may not necessarily be updated to reflect the same. Opinions expressed may differ or
be contrary to those expressed by other documents or in other contexts.

4. Nods and
Inspiration
• Piper Sandler & Co.
• Caspar Bentinck, Peter Buck,
Johnathan Doyle and Dave
Sandler
• Keefe, Bruyette & Woods
• Jeff Wishner and Aaron Axton
• Hunton Andrews Kurth LLP
• Peter Weinstock
• Bankers
• Regulators
• KPMG

5. Typical
Business
Plan – Key
Questions
Where are we now?
Where are we going?
How are we going to get there?
What impediments must we
overcome?

6. Industry Headwinds Amplify with Pandemic
1 Institute for Supply
Management
2 Federal Reserve Bank of
New York
3 Bureau of Labor Statistics
4 Survey of FED Officials CNN
National manufacturing plunges to lowest level in a decade 1
Fed Funds drop from 2.5% late 2018 to 9 to 25 bps 2
Unemployment rate hangs between 14.7% to 8.4% 3
Country is down 11.5 million jobs 4
FED says rates to stay low through 2023 4
Biden Tax Plan – raising corporate taxes, local wealth taxes like San
Francisco

7. This chart includes gig workers, the
self-employed, people who have
exhausted their state benefits, etc.
SOURCE – MIKE SHEDLOCK /
WEINSTOCK

8. Net
Interest
Margins
Shrink

9. When will valuations Improve?
(33.1%)
8.7%
(30.1%)
(32.2%)
(60.0%)
(50.0%)
(40.0%)
(30.0%)
(20.0%)
(10.0%)
–
10.0%
20.0%
1/1/2020 2/1/2020 3/1/2020 4/1/2020 5/1/2020 6/1/2020 7/1/2020 8/1/2020 9/1/2020 10/1/2020 11/1/2020
Central Coast Banks (-33.1%) S&P 500 (8.7%) Money Center (-30.1%) Top 200 Exchange-Traded Banks (-32.2%)

10. COVID-19
Provisions
Explode
Q1

11. Cares Act – Banker Perspective
• Payment Protection Program
• Rough start – not even a promissory note
• Political nightmare for some as to funding
approach
• Uncertainty out the gate with documentation
• Hassle to get into and through the gateway
• Volume issues
• Need to check fraud and new users
• Original intent was for loans to act like grants
that cover payroll costs to keep people
working – this intent got lost to a degree
• Forgiveness thresholds require congressional
approval, and now forgiveness is unnecessarily
a political issue

12. Cares Act – Banker Perspective Cont.
• Community Banks benefit in the short run
• Take customers from money center banks
• Balloon balance sheet by upwards of 30%
• Garner fee income boost
• Unknow is to what extent community banks can hang onto
deposits
• Dilemma is where to allocate excess liquidity

13. Bankers Step Up Big Time:
August 8, 2020
• Approved Loans – 5,212,128
• Approved Dollars - $525,012,201,124 ($525 billion)
• Average size about $100K
• Number of Participating Lenders – 5,460
• Streamline forgiveness set at $50K
• Bankers deciding when to process fees and take in fee income

14. The Industry Steps Up and Modifies Loans
1
The Federal Housing Agency
(FHFA) introduced deferral
options for Fannie and Freddie
loans
•Pause payments up to 180
Days
•Request another 180 Days
•Lump sum at the end of loan
2
Non-GSE loans generally
deferred for 6 months
3
Lot’s of public pressure to
“work with the borrower”
•Congressional pressure
•Regulators encourage
•Public opinion

15. So what does a modification look like?
Forbearance
•Interest always
occurs when you
are in forbearance
Deferment
•Interest is free in
some cases
Most loans are in
some form of
forbearance
Mortgage Loans per
OCC
•91.1% of first-lien
mortgages current at
6/30/20 (compared to
96.1% at 6/30/19).
•At June 30, 2020, 6.8% of
mortgages are ˃ 30 days
past due (up from 1.4%
at 3/31/20).

16. What’s Happening with Credit Allocation?
Small Business Lending Plunged Post Pandemic

17. Small Bank Concerns Shift Post-Pandemic

18. Buckle Up! We are the Government, and We Are
Here to Help You. Read our guidance.
• All regulatory agencies are mostly remote – OCC will
come on site if requested
• Exams are running smoothly
• Reports of Examination still focus on CAMELS
components
• Capital – can’t have too much …..the industry is
generally in a good spot
• Assets Quality (Loans) seem to be garnering the
most attention
• Board engagement should be heightened
• Stress testing and plans should be tuned up

19. Regulatory Expectations
✓ Focus on existing business continuity and pandemic plans and the
execution of these plans.
✓ Focus on key risks including constraints on staffing, technology, and
operations/facilities as well as supervision of remote work.
✓ Attention paid to employees/locations, call center capacity,
customer/investor forbearance, cybersecurity/fraud threats, and
market volatility.
✓ Congress and regulators are preaching banks should try to minimize
adverse impacts to customers/investors through forbearance and
disclosure.
Source KPMG

20. Regulatory Expectations continued
✓ Board awareness and approval of the pandemic plan and its execution
➢ Updates related to operational changes, business continuity, and market volatility.
✓ Specific plans for and response for:
➢ Technology, including increased demand for online banking, customer/investor
complaints/inquiries, employee remote access (capacity constraints, available tools,
authentication mechanisms, infrastructure limitations, surveillance), and cybersecurity
threats
✓ Operational capacity, including on- and off-site staffing,
supervision/oversight/surveillance, facilities
✓ Business continuity, including facilities, remote locations, shared locations, third-
party providers, product and service offerings
✓ Employee health and safety, including re-entering employees
✓ Customer/investor protection and relief, including communication (direct and
through social media), forbearance (e.g., interest rate reductions, payment
relief)
Source KPMG

21. Miscellaneous Regulatory Issues
• Requested loan deferrals
• Deferrals granted as a percent of capital and portfolio
• Monitoring
• Softening credit underwriting and covenant lite loans
• Exceptions or deviations from loan policy
• Concentrations
• Depository
• Loan
• Commercial Real Estate trends
• Coverage ratio with respect to global financial crises
• National, State, regional issues
• PPP risk assessments, policies and procedures

22. Miscellaneous Regulatory Issues continued
• How are C&I and owner occupied CRE loans performing?
• Sector analysis
• Cash flow coverage ratio of ˂ 1:1.25 on a reoccurring basis
• Reporting of troubled debt restructurings (TDRs)
• Impairment testing
• Stress testing – consider a more sever method than 2008/09
• Funding and deposit mix; brokered deposits and FHLB advances have
moved to listing services, noncore/volatile on balance sheet liquidity
and CFP – funding clearly taking a back seat
• Impact of prompt corrective action rules on funding

23. Regulators & Pandemic Planning
Business Continuity
• Board-approved plans across all functional, business, and products areas
(administration, HR, Legal, IT, key product lines)
• Ongoing program to monitor potential outbreaks, educate employees, and
communicate and coordinate with critical service providers and suppliers
• A comprehensive framework of facilities, systems, and procedures to ensure the
continuance of critical operations, including minimizing staff contact, providing
telecommuting options, establishing visitor procedures, providing customer support
(redirecting to electronic banking services, ATMs, call support). The framework
should be incorporated in ongoing business impact analysis and the risk assessment
process (including projections of employee absenteeism, third party disruptions,
trigger events, remote controls)
• A testing program that assesses the effectiveness of the planning practices,
including roles and responsibilities, key assumptions, increased reliance on online
banking, telephone banking/investor call center services, remote access and
telecommuting, and supervision of remote employees and activities
• An oversight program to ensure the plan is reviewed regularly and updated based
on the monitoring program and direct experience.Source KPMG

24. Regulators have not moved away
from CAMELS to summarize findings
• Capital – can never have enough
• Assets – with a lack of stimulus how will
the loan portfolio hold up?
• Earnings – are you stretching during an
environment of margin
compression?
• Management – are your plans shared
with the board and in writing?
• Earnings – are you stretching to
achieve earnings?
• Sensitivity to Interest rate risk – where is
excess liquidity going?

25. CAMELS continued
Let’s take a deeper dive into
CAMELS components

26. Capital
•Sufficient for risk profile, drive the business plan, provide cushion for issues should they arise.
•Triggers in the policy if you fall below board approved thresholds
•Avoid just in time capital – peer around the corner and plan for contingencies
•Capital plans are required for all banks – troubled and healthy
Tune-up your capital plan
•More long-term debt is a component of capital in many larger banks
•Can you issue debt? – If so at what price?
•What would a stock offering look like? – Pricing and dilution issues
•Can you afford dilution at this point in the cycle?
Composition of Capital
•Prey – run thin on capital levels
•Predator – run with more capital to assist in acquisition
•Where are you trading per share? What can you do to increase price per share?
Consolidation is coming – consider if you are prey or predator

27. Capital Plan continued
Healthy Banks
Plans should exist for all banks
especially for growing
organizations or unique
operating environments
Capital plans should be
prepared in ordinary course of
business along with budget,
strategic plan and compliance
risk management plan
Capital plan should reflect
condition and plans of the
bank, current and projected
economic conditions and
should work in tandem with the
bank’s strategic plan and
compliance risk management
plan
Risk tolerances and triggers for
additional capital or other
action to be taken
An assessment of interest rate
risk and its impact on capital
No “just-in-time” capital

28. Capital continued
Capital is evaluated relative to the nature and extent of the institution’s risk
Capital planning is evaluated with respect to capital projections, assessing capital
needs and vulnerabilities related to the pandemic and consistent with the
institution’s risks
In assessing capital adequacy, consideration is given to the institution’s regulatory
capital ratios, capital planning and distribution plans, risk management practices,
and whether an institution maintains a fundamentally sound financial condition

29. Capital continued
Components of the Capital
Plan
Capital alternatives and sources of funds (Preferred stock and sub debt)
Details and timeframes
Tolerances and triggers
Three-year to five-year projections
Projected key asset quality ratios
Include interest rate risk analysis and BASEL III analysis
Post-stress test estimates of potential losses and their impact on ALLL

30. Common Equity Issuances – Prior Five Years

31. Historical Sub-Debt Issuance – Last Five Years

32. Capital – Strategic Decisions
Analyze capital dynamically – educate potential capital
needs with the board of directors – memorialize in minutes
and business plan updates
Consider issuance of subordinated debt to lower weighted
cost of capital

33. Historical Sub-Debt Issues by Number and Amount - $B
Issuance Dollar Amount in billions
20
12 16
23 21
40
7
10
12
9 10
28
10 19
15 6 12
46
1
3 5
8
17
38
44 43 43
51
131
0
20
40
60
80
100
120
140
2015 2016 2017 2018 2019 2020 YTD
< $1B $1B - $2B $2B - $10B > $10B
$0.2 $0.2 $0.2 $0.3 $0.3
$0.2 $0.3 $0.3 $0.2 $0.3
$0.4
$1.2 $1.1
$0.2
$0.7
$2.8
$0.3
$0.4
$1.0
$1.4
$2.5
$1.1
$2.1
$1.6 $1.7
$2.7
$6.4
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
2015 2016 2017 2018 2019 2020 YTD
< $1B $1B - $2B $2B - $10B > $10B

34. Assets
Securities – tough to get yield. Many are
staying short with respect to duration as
the yield curve is not very appetizing
Are some securities impaired due to weaknesses?
Loans – yields are anemic and not
necessarily covering risk
How are you measuring for impairment?
Loan reserves – may as well build the
reserves now as it may be tougher later
with respect to your auditors
The market may not be rewarding earnings either
at his time

35. Vulnerable Loan Sectors
Reserve & Stress Test
• Customer Facing
• Hospitality, hotels, motels,
• Restaurants, Bars, coffee houses (sit down)
• Nursing homes
• Health Clubs
• Theaters
• Transpiration
• Bus, trains, airlines
• Dental, non-frontline medical
• Retail
• Malls, strip centers, big box

36. ALLL
• Methodology during COVID-19
• Consider increased segmentation for troubled
sectors
• Hospitality
• Restaurants
• Gyms
• Current Expected Credit Losses (CECL)
Adoption
• Parallel Modeling if non-adopter

37. Asset Strategic Considerations
Pricing – when you pass?
Pre-payment penalties – waiver to retain customer?
Opportunity to re-balance
portfolio away from
concentrations?
Reprice for diversification enhancement
Let concentrations exit for competitive
pricing you are unwilling to match

38. Management
• Minutes – reflect director engagement
• Director Questions to Ask of Management.
• Loan stress test, capital stress test. Adequacy of
ALLL, loan sector focus
• Liquidity issues
• Business plan for Covid not going away
• Business plan post Covid
• Board approved plans across all functional, business,
and products areas (administration, HR, Legal, IT, key
product lines)
• Internal Management – answers to all the above

39. Strategic Considerations for Management
Consider
Consider a covid review portion of the board meetings covering both operational and
credit risk
* Memorialize
Increase Increase review frequency of third-party reviews
Ramp up Ramp up minutes related to loan exposure
Ramp up Ramp up review of risk policies

40. Earnings
• How are core earnings performing?
• With the PPP spike stripped away what do
earnings look like?
• What will earnings look like without the effect
of excess provisioning?
• What if anything will you do with dividends?
• Do you have a policy? It is integrated in your
capital plan?
• If credit is not a concern will you buy back stock?
• Where is the margin headed in your bank?
• Have you performed a sensitivity analysis to the
economic value of equity with loans repricing?

41. Earnings Strategic Consideration
Be
prepared
to report
earnings
without a
covid
effect
Be
prepared
to report
earnings
without
excess
provisioning
Be
prepared
to engage
in
additional
provisions
Be
prepared
to project
earnings
with an
increased
tax load
Be
prepared
to project
earnings
with PPP
fees
stripped
out
Board transparency and investor transparency

42. Liquidity
• What to do with all the excess liquidity from
the PPP lending program?
• Have you run models with respect to
run-off?
• What is your funding and deposit mix?
• Brokered deposits and FHLB advances
• Noncore/volatile on balance sheet
liquidity
• Correspondent lines – tested and
available? What happened in
2008/2009?
• Excess liquidity plays a part in keeping rates
depressed

43. Liquidity Strategic Consideration
Strategy should be driven by the likelihood that
low interest rates will continue
Seize the opportunity to build valuable low-cost
deposits
Anticipate the potential that liquidity – especially
from PPP loan runoff will need to be deployed

44. Sensitivity to Interest Rate Risk
Market risk of financial loss resulting from movements in market prices.
The sensitivity of the financial institution's earnings or the economic value of its capital to
adverse changes in interest rates, foreign exchanges rates, commodity prices, or equity
prices.
The ability of management to identify, measure, monitor, and control exposure to
market risk given the institution's size, complexity, and risk profile.
The nature and complexity of interest rate risk exposure arising from nontrading positions.

45. Sensitivity to Interest Rate Risk
Securities
•Callable bonds
Real Estate Repricing
•Waive floors and reprice
•Compete
•Roll over and let the loan walk

46. Consider if you are better combining
with another financial institution.
There maybe little ability or opportunity to influence adding
more topline revenue
Profitability on a go-forward basis my be more driven by cost
reduction than adding topline revenue
A merger may provide scale, cut out redundant cost
structure, and lead to an investor holding a more valuable
stock

47. Limited M & A Activity in the West

48. Merger Acquisition Market
14,496
14,417
14,210
13,723
13,137
12,715
12,347
11,927
11,467
10,961
10,453
9,943
9,530
9,144
8,777
8,582
8,315
8,082
7,887
7,767
7,628
7,523
7,397
7,279
7,077
6,829
6,519
6,275
6,072
5,847
5,607
5,338
5,112
4,918
4,715
4,518
3,418
3,626
3,677
3,622
3,437
3,087
2,815
2,561
2,390
2,262
2,152
2,030
1,926
1,780
1,690
1,642
1,589
1,534
1,467
1,414
1,348
1,310
1,283
1,255
1,229
1,183
1,139
1,082
1,011
965
902
844
801
752
691
659
18,043
17,345
15,802
14,488
13,223
11,973
10,924
10,224
9,616
9,181
8,833
8,534
8,012
7,357
6,812
6,182
5,670
5,177
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
12,000
13,500
15,000
16,500
18,000
19,500
'84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Commercial Banks Savings Institutions

49. U.S. Bank Consolidation Trends
Change in FDIC insured FI 1985 to present
(850)
(650)
(450)
(250)
(50)
150
350
550
'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
New Banks Failed Banks Merged Banks Net Change in # of Banks

50. 50
Q&A
Rebecca Komathy
With: Moderated by:
CEO, Western Bankers Association
LinkedIn page: /in/steve-andrews-1b43a23
Website: stephengandrews.com
Steve Andrews
Webinar Coordinator, Community Banking Brief
LinkedIn page: /in/rebeccakomathy/
Website: communitybankingbrief.com