Portfolio Managers Report 03/31/2023

Friday, March 31, 2023
MANAGING DIRECTOR: Scott Carrithers PORTFOLIO SALES AND SERVICE: George Morris • Chris Thompson • Sean Doherty • Kevin Doyle • Mark Tranckino Nicole Burczyk • Natalie Regan • Aaron Stoffer • David Farris • Lonnie Harris • Brian Schaff Josh Kiefer • Robert Schuyler • Tom Toburen • Aaron Hemphill • Jeff Macy • Todd Czinege

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
03/24/23	4.03	4.65	4.70	4.27	3.77	3.58	3.41	3.40	3.37	3.77	3.64
03/27/23	4.10	4.68	4.82	4.49	3.99	3.78	3.59	3.57	3.53	3.89	3.76
03/28/23	4.13	4.69	4.84	4.54	4.08	3.88	3.67	3.63	3.57	3.91	3.77
03/29/23	4.17	4.75	4.85	4.54	4.10	3.90	3.68	3.65	3.57	3.91	3.76
03/30/23	4.57	4.82	4.88	4.62	4.12	3.90	3.69	3.62	3.55	3.88	3.74

The data in the table above is static as of the time it was pulled, so rates may have changed. Treat all data in this table and PMR as indications only and availability is always subject to change.
This information was pulled manually from sources we believe to be reliable. New source, as of 12/12/2022, Bloomberg, L.L.P. As of: close of business 03/30/2023

Structured Adjustable-Rate Mortgage “SARM”

At Country Club Bank we have historically been an advocate of single family hybrid mortgage ARM pools (initial lockout of 3-10yrs then floating rate with semi-annual reset) as they are typically a good fit for a bank balance sheet. A very similar structure exists in the multi-family mortgage market within the FNMA DUS (delegated underwriting service) program. SARMs issued by FNMA are floating rate pools that reset monthly and are generally backed by one multifamily investment property.

Key Characteristics

Pros:

Capless (vs a lot of CMO floaters currently have busted caps)
Monthly reset (much quicker than SBA quarterly reset)
Under 101 dollar price (sometimes even trade a discounts)
Initial lockout period of 6-24 months (generally 12 months)

Cons:

Limited price appreciation above high 100s
Tend to have a higher propensity to prepay vs fixed rate DUS pools (but this is largely mitigated by limited premiums or discounted prices)
Supply is more limited (tends to trade at new issue only)

Value / Case Study

Over the last 12-24 months, floaters have garnered the attention of bank portfolio managers as the fed hiking process commenced. This hiking cycle has impacted fixed rate pools generally by:

Extending WAL vs base case at time of purchase [negative convexity]
Spreads widen on MBS
Higher nominal yields as UST rates went higher across the curve.

So how did floaters perform? Take this example from one of our customers who purchased a SARM that drastically outperformed fixed rate 10yr or 15yr final maturity pools and even a plain vanilla 5yr UST. Spreads did widen on floaters from historical lows in discount margins which has caused some minor MTM losses, but holding period returns are still positive (virtually every other investment purchased in 2020/2021 has a negative return). This customer has the option to bring back 10mm of liquidity with a minimal loss relative to other investments.

Positive Total Return of 0.04%

Source: Bloomberg L.L.P.

5yr UST Total Return -2.59%

Source: Bloomberg L.L.P.

If you would like to learn more about current SARM offerings or characteristics of this structure please reach out to your CCB representative.

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

•Not FDIC Insured •No Bank Guarantee •May Lose Value