#1South Dakota Banking Commission Meeting THE SOUTH STATE OF DAKOTA SOUTH DAKOT STATE UBB First for Your Success™ GREAT MOUNT 1889 SEAL MORE Ben Eskierka-EVP United Bankers' Bank December 15, 2022#2Agenda • The Volatility Vortex and Bond Price Destruction • Trust Me: It Will Be Enough - Federal Reserve Monetary Policy A Shifting Liquidity Landscape UBB First for Your Success™#3The Volatility Vortex and Bond Price Destruction. The MOVE Index Global Financial Crisis 250 200 150 Covid Crisis 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 UBB First for Your Success™ 118.6200 100 74.7571 50#4How it Started a Year Ago! • Rates will remain lower for longer Unlikely to raise rates until 2024 • We believe a recession is unlikely • Inflation is transitory and not a problem Inflation should fall back to 2% in 2022 UBB First for Your Success™#5Traditional Fed Dual Mandate Stable Prices Full Employment UBB First for Your Success™#6Current Fed Mandate • Kill Inflation! Kill Inflation! Kill Inflation! UBB First for Your Success™#7The Chairman Says: Trust Me, It Will Be Enough! PAINIS COMING UBB First for Your Success™#8Fed tightening cycles 2022 3.75 pct. pts. in nine months UBB First for Your Success™ 1994-95 2004-06 2016-18 1999-2000#9Positive Real Yields Needed FRED - Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) -Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity, Quoted on an Investment Basis -Federal Funds Effective Rate Percent Change from Year Ago, Percent 0 3 2 6 Core PCE 2 Year Treasury Fed Funds Effective Rate 2013 2014 2015 2016 1960 Shaded areas indicate U.S. recessions. UBB First for Your Success™ 1980 2017 2018 2019 Sources: BEA; Board of Governors 2000 2020 2021 2022 2010 fred.stlouisfed.org#10FRED Percent 5 4 3 2 = O -1 -2 Yield Curve Inversions 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity -10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity -3 1980 1985 1990 1995 2000 2005 2010 Shaded areas indicate U.S. recessions. UBB First for Your Success™ Source: Federal Reserve Bank of St. Louis 2010 2015 2020 fred.stlouisfed.org#11Current Monetary Policy in a Nutshell UBB First for Your Success™ the fed is raising rates just so i WILL NOT buy this stupid t-shirt!#12Pricing Date United States Target Rate Effective Rate Cur. Imp. O/N Rate Meeting 12/14/2022 Fed Funds Futures 12/02/22 Fed Funds Futures 4 3.83 3.835 #Hikes/Cuts %Hike/Cut Implied Rate 2.07 207 4.353 02/01/2023 03/22/2023 05/03/2023 06/14/2023 07/26/2023 09/20/2023 11/01/2023 3.51 144 4.712 4.11 60 4.862 4.332 22.1 4.918 4.233 -9.9 4.893 4.01 -22.2 4.838 3.655 -35.5 4.749 3.06 -59.5 4.6 12/13/2023 01/31/2024 2.367 -69.3 4.427 1.64 -72.7 4.245 (UBB First for Your Success™#13A Shifting Liquidity Landscape 9/21 9/22 High Tangible Capital Ratio 20.7% 8.0% 10.7% 21.0% Low Med. High Low 2.3% 8.5% Med. Cash/Total Assets 67.3% 1.3% 12.7% 47.6% 1.3% 7.2% • Unrealized Loss % -1.0% 2.9% .4% -15.8% 0.0% -9.2% • Banks purchasing Fed Funds 3 7 Banks with Brokered CD's 19 19 UBB First for Your Success™#149M- 8.585M 8M- Bank Reserves 7M- QT Begins Total Fed Balance Sheet 6M- 5M- 4M 3.169M 3M 2.116M ZM Overnight Reverse REPO-1M 4M- Mar Jun 2020 Sep Dec Mar Jun 2021 Sep Dec Mar Jun 2022 Sep Dec UBB First for Your Success™ 0#15MMT Wasn't So Far Fetched MONOPOLY 11. What if the Bank runs out of money? - Some players think the Bank is bankrupt if it runs out of money. The Bank never goes bankrupt. To continue playing, use slips of paper to keep track of each player's banking transactions until the Bank has enough paper money to operate again. The banker may also issue "new" money on slips of ordinary paper. UBB First for Your Success™#16Questions?? Ben Eskierka [email protected] • 952-885-9489 UBB First for Your Success™