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LIQUIDITY AND FUNDS MANAGEMENT Karl R. Nelson Founder & CEO KPN Consulting Roswell, GA [email protected] 770-262-8446 August 6 & 7, 2018
LIQUIDITY AND FUNDS MANAGEMENT
Karl R. Nelson Founder & CEO KPN Consulting
Roswell, GA [email protected]
770-262-8446
August 6 & 7, 2018
NATIONAL PERSPECTIVE
2009 2010 2011 2012 2013 2014 2015 2016 2017
INSTITUTIONS 8,012 7,658 7,357 7,083 6,812 6,509 6,182 5,913 5670
ASSETS $13.1 T $13.3 T $13.9 T $14.5 T $14.7 T $15.6 T $16 T $16.8 T $17.4 T
LOANS $7.05 T $7.1 T $7.3 T $7.5 T $7.8 T $8.2 T $8.7 T $9.2 T $9.6 T
EQUITY $1.4 T $1.5 T $1.57 T $1.63 T $1.65 T $1.74 T $1.8 T $1.87 T $1.96 T
P(L) ($9.9 B) $85.5 B $120 B $141 B $154 B $152 B $163 B $171 B $165 B
OREO $41.4 B $52.7 B $46.2 B $38.5 B $30.2 B $22.0 B $14.7 B $10.9 B $8.5 B
NC LOANS $396 B $359 B $305 B $277 B $207 B $163 B $138 B $131 B $116 B
FAILURES 140 157 92 51 24 18 8 5 8
A WORD ABOUT ERM
• Banking crises create regulator response …
• We believe that Enterprise Risk Management (ERM) is the response to the latest banking crisis.
• But, we also think ERM really started in 1996 with the change from GAP to Simulation for measuring Interest Rate Risk. • That change was set in stone in January 2010.
• The Second risk to see this proactive look was Liquidity.
• P.S. – Credit Risk is Next.
LIQUIDITY RATING MUST READ
Summer 2017 FDIC Supervisory Insights …
– Community Bank Liquidity Risk: Trends and Observations from Recent Examinations.
LIQUIDITY RATING
Liquidity is rated based upon, but not limited to, an assessment of the following:
• The adequacy of liquidity sources compared to present and future needs and the ability of the institution to meet liquidity needs without adversely affecting its operations or condition.
• The availability of assets readily convertible to cash without undo loss.• Access to money markets and other sources of funding.• The level of diversification of funding sources, both on-and off-balance sheet.• The degree of reliance on short-term, volatile sources of funds, including borrowings
and brokered deposits, to fund longer term assets.• The trend and stability of deposits.• The ability to securitize and sell certain pools of assets.• The capability of management to properly identify, measure, monitor, and control the
institution’s liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans.
LIQUIDITY RATING
1Indicates strong liquidity levels and well-developed funds management practices. The institution has reliable access to sufficient sources of funds on favorable terms to meet present and anticipated liquidity needs.
2Indicates satisfactory liquidity levels and funds management practices. The institution has access to sufficient sources of funds on acceptable terms to meet present and anticipated liquidity needs. Modest weaknesses may be evident in funds management practices.
3Indicates deficient liquidity levels or funds management practices in need of improvement. Institutions rated 3 may lack ready access to funds on reasonable terms or may evidence significant weaknesses in funds management practices.
4Indicates deficient liquidity levels or inadequate funds management practices. Institutions rated 4 may not have or be able to obtain a sufficient volume of funds on reasonable terms to meet liquidity needs.
5Indicates liquidity levels or funds management practices so critically deficient that continued viability of the institution is threatened. Institutions rated 5 require immediate external financial assistance to meet maturing obligations/other liquidity needs.
LIQUIDITY RISK - DEFINITION
The risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations.
• These obligations include:• Funding Mismatches• Market constraints on the ability to convert assets into cash or in
accessing sources of funds• Contingent liquidity events
PAST REGULATORY OVERSIGHT
• Much of the existing supervisory guidance on liquidity dates back to 1979 when the CAMELS ratings system was created
• In the past, examiners tended to focus more on balance sheet position than liquidity management
• Liquidity measures focused on assets as the liquidity source• Investments-liquid and Loans-illiquid
• Deposits were considered the only stable source of funding:• Skepticism related to other sources of funding• Significant Memory of Thrift Crisis
MODERN PERSPECTIVE
• Traditional funding sources are still well regarded, but:
DIVERSIFIED FUNDING IS
CONSIDERED A POSITIVE
HIGH QUALITY LIQUID ASSETS ARE ESSENTIAL
BOTH LIQUIDITY POSITION &
RISK MANAGEMENT
ARE IMPORTANT
“WHAT IF ?” PLANNING IS
ESSENTIAL
CURRENT REGULATORY FOCUS
• Reliance on Core Deposits vs. Wholesale Funding• Holdings of liquid assets• What is the bank’s borrowing capacity?• How stable are large depositors’ funds?
– Analyze with respect to:• Location• Tiered Pricing Breaks• Number of Products / Services Held• Existence of Surge Balances (Parked Funds)
• Does the bank have a written Contingency Funding Plan?• Has the bank tested its Contingency Funding Plan?• What access does the bank have to alternate sources of funds?• Conduct dynamic cash flow analysis
MEASUREMENT TOOLS
• Since the need for a formal CFP came into being in April 2010, all of us now have a plan. The key then is to continuously update that plan to reflect the current environment.
• On the topic of Ratios, these indicators are still important to examiners as they can be used to determine Liquidity “outliers” – our advice is to reduce these ratios to those that are important and can be reviewed on a monthly basis.
• It is our belief that Liquidity has become an easier issue for community banks especially if they have a vibrant wholesale or non-core funding strategy.
Static Balance Sheet Ratios• Net Non-Core Funding Dependence• Large Depositors/Total Deposits• Loans/Deposits• Pledged/Total Securities• Loans/Assets
Contingency Funding Plans• Cash Flow Modeling• Scenarios Analysis• Pro Forma Cash Flows
CONTINGENCY FUNDING PLAN (CFP)
• Contingent liquidity events arise from unexpected situations
• ALL institutions should have a formal CFP that clearly identifies the strategies for addressing liquidity shortfalls in emergency situations
• The Plan should:– Delineate policies to manage a range of stress environments– Establish clear lines of responsibility– Articulate clear implementation and escalation procedures– Be regularly tested and updated to ensure that it is operationally
sound
CONTINGENCY FUNDING PLAN (CFP)
IDENTIFY STRESS EVENTS
ASSESS LEVELS OF SEVERITY & TIMING
IDENTIFY POTENTIAL FUNDING SOURCES
ESTABLISH LIQUIDITY EVENT MANAGEMENT
PROCESSES
ASSESS FUNDING SOURCES & NEEDS
ESTABLISH A MONITORING FRAMEWORK FOR
CONTINGENT EVENTS
CONTINGENCY FUNDING PLAN (CFP)
• Your plan will have to include solutions other than simply replacing lost retail deposits with wholesale funding
• Your should mention such solutions as shrinking the balance sheet, selling loans, liquidating securities, and any other that might help you manage the loss of deposits
• In our view, the “Stress” is an unexpected loss of retail deposits brought on by either internal or external events
THE DEPOSIT MARKET IS CHANGING
WHAT YOU CAN DO TO SUCCEED IN THIS MARKET
• The deposit landscape has changed and competition is heating up• The Fed continues to raise rates and reverse QE.• Banks balance sheet positions continue to tighten.• Regulatory changes are impacting how certain banks view different
types of deposits.• Large banks are spending substantial amounts of money on technology
and marketing.
• What history tells us• Deposit betas in previous rate cycles.• Non-maturity/time deposit mix converges after years of divergence.• Wholesale funding continues to be significantly more expensive than
retail.
THE DEPOSIT MARKET IS CHANGING FAST
• Recent Federal Reserve decisions• Interest rates increased by another 25 basis points in December 2017 and
March 2018 and are projected to increase two more times this year.• The Fed has also initiated a balance sheet normalization process that began in
October 2017.• In the most recent FOMC meeting, the Fed confirmed that it would accelerate
the balance sheet reduction from $10 billion per month to $20 billion per month beginning in January.
• This move is one step closer to the Fed’s plan to increase the pace of balance sheet normalization until it reaches $50 billion a month.
• J.P. Morgan estimates that $1.5 trillion in deposits will eventually leave banks.1
• This could result in loan growth exceeding deposit growth by $200 billion to $300 billion a year.
[1] Monks, Matthew. May 8, 2017. “JPMorgan Tells Bankers to Partner Up as U.S. Deposit Drain Looms.” Bloomberg.com. https://www.bloomberg.com/news/articles/2017-05-08/jpmorgan-tells-banks-to-partner-up-as-u-s-deposit-drain-looms.
RECENT CALL REPORT DATA
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Loan
s/De
posit
s (%
)
Liqu
idity
Rat
io (%
)
Median Liquidity and LTD Ratio2012 Q4 – 2017 Q3
Liquidity Ratio - National LTD - National
Source: S&P Global Intelligence. Quarterly data from Q4 2012 to Q3 2017.
SHOWING CONTINUED TIGHTENING ON BANK LIQUIDITY
WHOLESALE VS. RETAIL
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Rate
(%)
Average Short-term Funding Rate: Wholesale vs. Retail12/31/2012 – 12/27/2017
Average 1Mo FHLB Advances
ICS Reciprocal
MMDAs (
SUMMARY
• Core will always be key to franchise value and we should always try to obtain relationship-driven core depositors…
• We should also have a vibrant non-core or wholesale funding strategy to handle those opportunities where price, availability, or maturity issues are important…
• Liquidity Risk Management will always be key to a successful franchise
• But, Non-Core or Wholesale Funding is also a key issue – why has this become so?
YEAR END BOND/HYBRID EQUITY MMA TOTAL2005 1.979 4.886 2.026 8.891
2006 2.227 5.833 2.338 10.398
2007 2.501 6.414 3.085 12.000
2008 2.097 3.637 3.832 9.566
2009 2.924 4.873 3.315 11.112
2010 3.432 5.596 2.803 11.831
2011 3.727 5.213 2.691 11.631
2012 4.420 5.939 2.693 13.052
2013 4.553 7.762 2.718 15.033
2014 4.812 8.314 2.725 15.851
2015 4.749 8.147 2.754 15.650
2016 5.038 8.578 2.728 16.344
2017 5.593 10.306 2.847 18.746
MUTUAL FUND ASSETS ($TN)
ROLE OF WHOLESALE FUNDING
2009 2010 2011 2012 2013 2014 2015 2016 2017
Deposits(Millions) $9,227 $9,423 $10,186 $10,817 $11,192 $11,764 $12,190 $12,895 $13,399
MutualFunds $11,112 $11,833 $11,632 $13,052 $15,034 $15,852 $15,651 $16,344 $18,746
Total WholesaleFunding
$2,507 $2,398 $2,104 $2,073 $2,083 $2,242 $2,332 $2,298 $2,429
Total Assets $13,087 $13,319 $13,891 $14,451 $14,731 $15,554 $15,968 $16,780 $17,416
WF/TA 19.2% 18.0% 15.1% 14.3% 14.1% 14.1% 14.6% 13.7% 13.9%
NON-CORE FUNDING STRATEGY
• Though we would all prefer to fund completely from the core, for many, particularly those that wish to grow assets by more than 5.5%, this is not possible.
• As can be seen from the prior slide, non-core is a major part of the funding for our industry and having a strategy can make life easier. The keys to this strategy are simple enough – place an overall limit on the use of this funding, place individual limits on those sources you use, and measure/monitor the use of these sources.
• Once this strategy is embedded in your ALCO Policy, you, your Board, and your Regulator will know how to manage the issue.
REMEMBER THE MANTRA
• Strategic Plan
• Policies and Procedures
• Measure and Monitor
FUNDS MANAGEMENT
• The ALCO policy should describe the various funding sources you will use.
• The policy should also indicate the limit you will place on the use of wholesale funding sources – I would suggest using % of assets.
• And, your policy should indicate limits for each specific source of funding - % of assets.
• Remember that the two largest sources of wholesale funding for community banks are FHLB advances and brokered deposits.
WHOLESALE FUNDING REPORT
As of Date Total Assets Total Policy LimitDecember 31,2017 $100,000,000 $40,000,000 (40% of Assets)
Source (Policy Limit) Availability Usage Rate/TermFHLB Advances (25%) $25,000,000$5,000,000 2.45% / FRC 5Brokered Deposits (25%) $25,000,000$4,000,000 2.25% - 2CDARS (15%) $15,000,000$2,000,000 2.40% - 3QwickRate (15%) $15,000,000$4,000,000 2.00% - 1Fed Funds Purchased (15%) $15,000,0000 N/AFed Discount Window (20%) $20,000,0000 N/A
Totals $115,000,000 $15,000,000
Total Policy Limit = $40,000,000 Usage = $15,000,000% Usage=15%
CREATING A NON-CORE FUNDING STRATEGY
• Non-Core funding is simply too dominant a player in the funding arena to be ignored.
• At its peak in 2008, non-core funding represented 25% of the total funding for our industry and it is difficult to see where this $3.5 trillion in funding will come from as we exit this economic malaise, especially as “surge deposits” get reinvested as the economy improves.
• We see three fundamental reasons for needing a good non-core funding concept:
• Availability• Pricing/Efficiency• Interest Rate Risk Management
AVAILABILITY
2010 2011 2012 2013 2014 2015 2016 2017
Deposits ($Trillion) $9.423 $10.186 $10.817 $11.192 $11.764 $12.190 $12.895 $13.399
BrokeredDeposits $.625 $.634 $.703 $.765 $.840 $.936 $.893 $.969
Core Deposits $8.798 $9.552 $10.114 $10.427 $10.924 $11.254 $12.002 $12.430
Growth Rate 3.8% 8.6% 5.9% 3.1% 4.8% 3.0% 6.6% 3.6%
PRICING
1 YEAR 3 YEAR 5 YEAR
FHLB ATLANTA 2.52% 2.90% 3.06%
BROKERED 2.30% 2.99% 3.25%
Pricing comparisons between core and non-core are difficult due to the many pricing concepts in play today, so compare these rates with yours:
5/14/18
MATURITY ISSUES
• The period from January 2008 through today has been marked by significant loan problems coupled with fewer opportunities for loan growth.
• This has resulted in an unusual expansion of “liquid” assets as well as securities portfolios. At 12/31/06, this combination of assets comprised 27% of the industry balance sheet and we showed a 91% L/D ratio. At 12/31/17, over 44% of our assets were in this combination and our L/D ratio was 72%.
• As a result, we have a significantly longer asset structure supported by the same short-term liability structure – are you comfortable with your EVE calculation in an up 400 bps simulation?
MATURITY ISSUES
• On the asset side, low loan demand coupled with low rates created a demand from borrowers for fixed rate loan structures. The Commercial Mini-Perm Conundrum and this same weak loan demand also led to a much larger securities portfolio – by its nature, a fixed rate concept.
• On the liability side, depositors were faced with historically low term yields and that led to a move away from time to money market or DDA choices. At 12/31/2006, time deposits represented 31% of bank deposits. By 12/31/17, 13% of total deposits were in the Time category.
• It is hard for me to imagine that our industry does not have a serious IRR problem in a rising rate environment.
FUNDS MANAGEMENT
We should find our strategy embedded in three different concepts:
1.ALCO Policy
2.Contingency Funding Plan (CFP)
3.Wholesale Funding Report
FUNDS MANAGEMENT
• The ALCO policy should describe the various funding sources you will use.
• The policy should also indicate the limit you will place on the use of wholesale funding sources – I would suggest using % of assets.
• And, your policy should indicate limits for each specific source of funding -% of assets.
• Remember that the two largest sources of wholesale funding for community banks are FHLB advances and brokered deposits.
NON-CORE WHOLESALE FUNDING REPORTS
• When we think about non-core funding, we may want to consider those sources that require no collateral and those that do.
• Generally speaking, the requirement of collateral will result in less expensive pricing as the lender has a more secure “loan”.
• Also, generally speaking the unsecured sources are actually dependent on the use of the FDIC “Shield”.
• Nearly all of these sources were developed after the year 1985 which means that for most sources, their first real test as it relates to dependency just occurred.
WHOLESALE FUNDING SOURCES
① Fed Funds Purchased
② Brokered Deposits
③ CDARS
④ QwickRate (Internet Listed CD)
⑤ Charity Deposits Corp
⑥ Municipal Deposits
FUNDING WITHOUT COLLATERAL
FED FUNDS
• Excess Liquidity in the Banking System.• Large Institutions Tend To be Short While Community-Based Institutions
Tend to be Long.• Buyers / Sellers Trade All Day to Settle the Following Day (though there is
also a term market as well)• Pricing is set by direction of the Federal Reserve and trades (typically
within a range of that concept)• What is today’s concept from the Fed?
FED FUNDS
• Federal Open Market Committee – Responsible for Open Markets Operations.
• Structure – 12 Members:– Seven Board of Governors– President of Federal Reserve Bank of New York– Four Presidents of the Remaining 11 Federal Reserve Banks
These seats are on a one-year rotating basis.
The FOMC Minutes Are Closely Watched For Hints of Rate Movements.
FED FUNDS: COMMITTEE MEETINGS
• Prime = Target + 300 bps• Defines your loan business
• Ten-Year Treasury = 3.05%• Defines your investment
business plus your fixed rate loan business.
2018 Meeting Schedule8 per year
January 30-31
March 20-21
May 1-2
June 12-13
July 31-August 1
September 25-26
November 7-8
December 18-19
FED has changed the target 6 times since December 2008
Dec 2015 25 bps
Dec 2016 25 bps
Mar 2017 25 bps
Jun 2017 25 bps
Dec 2017 25 bps
Mar 2018 25 bps
HISTORY OF FED FUNDS RATES - FOMC
JAN 1996 – MAR 1997 5.25%
MAR 1997 – NOV 1998 5.50% - 4.75%
NOV 1998 – MAY 2000 4.75% - 6.50%
JAN 2001 – JUN 2003 6.50% - 1.00%
JUN 2004 – SEP 2007 1.00% - 5.25%
SEP 2007 – NOV 2015 5.25% - .25%
NOV 2015 – MAR 2018 .25% - 1.75%
BROKERED DEPOSITS
“The FDIC, in its manual of examinations, states that the use of brokered deposits should not be discouraged, and it should not have any stigma attached to it, provided that the bank uses it in a prudent
manner and as part of an overall liability management program.”
- American Banker
BROKERED CD HISTORY
YEAR END INSTITUTIONS DEPOSITS (BILLIONS)2005 2,850 $4822006 3,341 $5402007 3,339 $5862008 3,938 $8292009 3,659 $6292010 3,758 $4972011 3,038 $6342012 2,790 $7032013 2,624 $7652014 2,569 $8402015 2,542 $9362016 2,526 $8932017 2,519 $969
WHOLESALE BROKERED DEPOSITS
• In 1985, Chase Manhattan Bank Was Looking For a Solution To a more Efficient CD Issuance…
• Merrill Lynch Was Looking For a Solution To Risk-Free Investment Product for Their Clients…
• The FDIC Had The Solution…
• Chase Issues A $50 Million CD …
• Merrill Breaks It Into $100,000 CDs …
• Question – Would FDIC Allow “Pass Through” of Coverage To Each Investor?
• Answer – Yes, But Only If The Issuer Was “Well Capitalized”
WHOLESALE BROKERED DEPOSITS
• From 1985 Through The Early 1990’s, Brokered CDs Were For Large issuers only …
• Wall Street Just Wanted Large Profitable Deals …
• But, Regional Players Began To Spring Up in 1992 and Their Market Was Community Banks …
• At 12/31/17, 44% of the Banks were using Brokered Deposits.
BROKERED DEPOSITS
MOVING FROM WHOLESALE TO RETAIL ARENA
REICH&
TANG
CDARS
Charity Deposits
EXPANDED FDIC COVERAGE & FLOW OF FUNDS
BOTTOM LINE FOR THE CUSTOMER: ALL FUNDS ARE 100% INSURED
ABOUT PROMONTORY INTERFINANCIAL NETWORK
• Founded in 2002, the company:• Has established relationships with more than
3,000 financial institutions across the nation over the past decade
• Offers unique services that bring institutions together in a way that enables each to benefit from the power of many—and to offer services that otherwise might be too difficult or too costly to offer on its own
• Leads the industry in FDIC-insured deposit allocation services
• Has an operating committee that includes leading banking experts from the most senior levels of policy-making and practice
• Eugene Ludwig, Chairman; former Comptroller of the Currency
• Alan Blinder, Vice Chairman; former Vice Chairman, Federal Reserve Board
• Mark Jacobsen, President & CEO; former Chief of Staff, Comptroller of the Currency and FDIC
ABOUT ICS & CDARS
ICS®, the Insured Cash Sweep
®service, and CDARS
®
enable Promontory Network members to offer customers access to multi-million-dollar FDIC insurance through a single relationship. Members use the services to:
• Build valuable relationships and better serve their customers—all while enhancing their profitability
• Manage liquidity• Replace higher-cost funding (e.g., repurchase
sweeps and letters of credit) and reduce collateralization requirements
With ICS, your customers can place their funds into demand deposit accounts (using the ICS demand option), money market deposit accounts (using the ICS savings option), or both.
With CDARS, your customers can place their funds into CDs. Use of the CDARS and ICS services is subject to the terms, conditions, and disclosures set forth in the applicable program agreements, including the applicable Participating Institution Agreement and Deposit Placement Agreement. Limits apply, and customer eligibility criteria may apply. ICS program withdrawals are limited to six per month when using the ICS savings option.
CDARS, ICS, Insured Cash Sweep, One-Way Buy, and One-Way Sell are registered service marks of Promontory Interfinancial Network, LLC. Reciprocal and Floating-Rate Funding are service marks of Promontory Interfinancial Network, LLC.
ABOUT ICS & CDARS
BUILD RELATIONSHIPS, MANAGE LIQUIDITY, LOWER COSTS, REDUCE COLLATERAL NEEDS
• With Insured Cash Sweep and CDARS, your bank can:• Attract loyal, large-dollar relationships that generate cross-selling opportunities• Keep the full amount of customer funds on balance sheet, enabling your bank to
replace higher-cost funding, or sell the excess and earn fee income• Repurpose funds invested in collateral into higher-earning assets, which should
increase asset liquidity and decrease collateral-tracking expenses• Reduce the risk of collateral shortfall due to value deterioration• Better manage interest rate risk
ABOUT ICS & CDARS
ICS Principal Balances byCustomer Type1
CDARS Principal Balances by Customer Type1
Public Entities30%
Businesses33%
Banks & Credit Unions 2%
Individuals23%
Nonprofits12%
Chart1
Public Entities
Businesses
Banks & Credit Unions
Individuals
Nonprofits
Public Entities33%
Businesses 37%
Banks & Credit Unions 3%
Individuals12%
Nonprofits15%
33
37
3
12
15
Sheet1
Public Entities33
Businesses37
Banks & Credit Unions3
Individuals12
Nonprofits15
Sheet1
Public Entities35%
Businesses [VALUE]%
Banks & Credit Unions 1%
Individuals15%
Nonprofits15%
ABOUT ICS & CDARS – HOW IT WORKS
When your bank places a customer’s deposit using either service, that deposit is divided into amounts under the standard FDIC insurance maximum of $250,000 and is placed in deposit accounts at other Promontory Network banks.1 By working directly with just one bank, yours, the customer can access FDIC coverage from many. And the customer enjoys the convenience of working with and receiving communications and statements (only one monthly statement per service or service option) from your bank—a bank they know and trust.
1 Deposits are placed in demand deposit accounts when using the ICS demand option, money market deposit accounts when using the ICS savings option, or CDs when using CDARS.
ABOUT ICS & CDARS – HOW IT WORKS
Your bank can receive dollar-for-dollar reciprocal funding (through ICS®
ReciprocalSM
and CDARS®
ReciprocalSM
). Or, if it’s flush with cash, it can sell the excess funds to banks that need funding and earn fee income (through ICS
®One-
Way Sell®
and CDARS®
One-Way Sell®). And, your bank can switch back and forth
between Reciprocal and One-Way Sell as its funding needs dictate.
ABOUT ICS & CDARS – YOU RETAIN CONTROL
Your bank establishes the interest rates for funds placed through ICS and CDARS
• Confidential information is protected
• Customer communicates only with your bank’s service team
• Customer receives a monthly statement from your bank
YOUR BANK OWNS
THE CUSTOMER RELATIONSHIP
RETAIL BROKERED DEPOSITS
• In 2000, IDC Deposits was Formed to Provide an FDIC-Enhanced Money Market Product …
• Form Most of Their early years, They Worked Through Bankers Banks, Particularly, the Pacific Coast Bankers Bank.
• As the First to Market With an MMA Product, They were able To Grow their Business Without Competition Until Promontory Created Their MMA Product.
• In 2010, IDC Changed it’s Name to Charity Deposits Corp To Recognize Their Product’s use with Charitable Organizations.
RETAIL BROKERED DEPOSITS
• Charity Deposits Corp Has Several Product Forms …• For Funding, Banks Are Able to Take MMA’s on Their Books Simply By
Requesting Funding From the Network …• The Network Custodian is Wells Fargo and Their Role Is To Match Investors
With Borrowers …• With This Arrangement, Called Target Account, The Funds Stay With You But
Are Subject To Withdrawal Should the Network Need The Funds …• Charity Deposits Corp Also Assists Financial Institutions Support Community
Non-Profits By Rewarding Organizations You Choose with Part of the Profit They Receive By Providing Funding To Your Bank …
• Additionally, CDC Provides Grant Assistance To Non-Profits and Offers Your Bank a Partnership That Can Enhance Your Own Community Support Effort …
RETAIL BROKERED DEPOSITS
• Reich & Tang is Another MMA Provider That Works in Much The Same Way as Charity Deposits Corp.
• Other Players in This Arena Include StoneCastle Partners with both an MMA and CD Solution, Anova Financial Corp, and PMA Funding.
• The Key To a Sound Funds Management Policy is to Understand Who These Players Are and How They Can Help You With Your Plan For Wholesale Funding.
• The FDIC Shield …
INTERNET LISTED CD’S
• This business model was created in 1985 and was designed to compete with the wholesale brokered deposit marketplace.
• But, this model desired to created a process that would not be considered brokered so it used a process that provided for buyers of deposits to access data on sellers and transact directly avoiding the problem of a “middle-man”.
• Also, it was designed to work off of an annual fee as opposed to a per transaction fee … again avoiding the brokered tag.
• Let’s see how this model works by examining the leading player – QwickRate.
ACTIVITY
QWICKRATE MARKETPLACE
Profile
• Premier, non-brokered marketplace• 32 years serving community banks • 3,000+ institutions in 50 states• Billion dollar institutions to de novos• Unbiased, nationwide CD rates• No transaction fees • Automated QwickTools™ speed
the process
PROFILE
Robust marketplace activity• Average $1+ billion dollars monthly• 50,000+ average monthly log-ins
Customers validate value• 92% subscription renewal rate• 94% rate experience a 9 or 10• 100% say expectations exceeded
QWICKRATE – HELPING BOTH SIDES OF YOUR BALANCE SHEET
Need more funds
Have excess funds
FUNDINGQwickRate
Non-brokered Marketplace
INVESTING
• All FDIC-insured institutions are welcome• Primary and contingency non-brokered funding source that will never be
eliminated by regulatory restrictions or the bank’s financial status• Perfect way to augment local deposits and replace brokered funds• Opportunity to earn additional yield over Fed Funds
QWICKRATE – ALL LISTING SERVICES ARE NOT THE SAME
Public Internet Websites / Networks (Consumer)
QwickRate Non-Brokered Marketplace (Institutional)
• Uncontrolled audience open to all investors including consumers and third parties
• Do not identify participants or users or ask for their information
• Smaller deposits• CIP (Customer Identification Program)
rules apply
• Controls audience - financial institutions and corporations. No INDIVIDUALS
• Participants pre-screened prior to granting access
• Tools (eContact) help confirm direct investors
• Larger deposits ($250K)• CIP minimized – institution readily
identifiable
QWICKRATE – CHARACTERISTICS DIFFER
Consumers managing only a few CDs
Interest income often a primary component of overall income
Highly rate sensitive: will move deposits at maturity if able to earn an additional 5 BP in yield
Managing large CD portfolios -hundreds of individual FDIC insured deposits
Primary goal - to secure deposit insurance for each individual deposit
Require access to hundreds of financial institutions
Less rate sensitive due to market saturation
Public Website Depositors QwickRate Depositors
QWICKRATE
Represents a specific institution looking for CD investments
QWICKRATE
Review Activity by Position or Term
QWICKRATE
• Meet FDIC classification as a non-brokered deposit listing service ◦ Charge subscription fees only◦ Do not charge fee on number
or dollar value of CDs placed◦ Perform no services except gathering and
transmission of information◦ Is not involved in placing deposits
YES - DEPOSITS GENERATED IN QWICKRATE ARE NON-BROKERED
https://www.qwickrate.com/qrweb/documents/QwickRate_fdic_opinion.pdf
WHOLESALE FUNDING SOURCES
① FHLB Advances
② Federal Reserve Discount Window
③ Repurchase Agreements
FUNDING WITH COLLATERAL
FHLB DISTRICTS
FHLB SYSTEM FINANCIAL METRICS
12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
Advances $929 $631 $479 $418 $426 $499 $571 $634 $705
Investments $306 $284 $330 $271 $266 $243 $270 $273 $292
Mortgages $87 $72 $61 $54 $49 $45 $44 $45 $48
Total Assets $1,349 $1,016 $878 $766 $762 $834 $913 $969 $1,057
Capital-to-Asset Ratio 3.81% 4.22 5.00 5.20 5.58 5.40 5.10 4.95 4.96
Net Income $1.2 $1.9 $2.1 $1.6 $2.6 $2.5 $2.26 $2.86 $3.41
$ BILLIONS
FHLB SYSTEM – HOW IT WORKS
Homes CommunityInvestmentMember Institution
InvestorsFHLBanksOffice of Finance
FHLB BORROWING STRUCTURE
• Credit Line:• Percent of assets (adjusts with changes in balance sheet)
• Collateral:• Collateral type (SFR, MF, CRE, Securities, etc.)• Collateral arrangement (Blanket, Physical, Custody)• Collateral classes are fungible
• Stock:• Membership stock + activity-based stock• Class A or Class B stock• Membership requirement = .50% of qualifying mortgage assets• Activity requirement currently = 4.50%
THREE PART BORROWING FACILITY
REPURCHASE AGREEMENTS
• A repurchase agreement, also known as a Repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date.
• The repurchase price should be greater than the sale price, the difference effectively representing interest, sometimes called the repo rate.
• The party that is buying the security effectively acts as the lender while the seller of the security is the borrower, using the security as collateral for a loan with a fixed rate of interest.
• A Reverse Repo transaction is essentially just the other side of the repo transaction. The label is determined by the dealer’s viewpoint, i.e. If the dealer borrows money, it is a repo (lends money – reverse repo).
REPURCHASE AGREEMENTS
• In many ways, this transaction is much like a fed funds purchased borrowing except that it is collateralized.
• There are three types of repurchase agreements use in the markets:
① Tri-party agreements② Deliverable③ Held-in-Custody
• Tri-party agreements are by far the dominant form.
FEDERAL RESERVE DISCOUNT WINDOW
LENDING PROGRAMS• PRIMARY CREDIT
• Lend funds (‘no questions asked’) on a short-term basis to institutions in generally sound condition
• SECONDARY CREDIT• Lend funds (‘questions asked’) on a short-term basis to institutions
that do not qualify for primary credit
• SEASONAL CREDIT• Lend funds to institutions that can demonstrate seasonality in the
lending and deposit-taking activities (limited to DI’s
WIDE RANGE OF COLLATERAL
SECURITIES LOANS
TREASURY 1-4 FAMILY
AGENCY CONSUMER
MUNICIPAL COMMERCIAL & INDUSTRIAL
CMO COMMERCIAL REAL ESTATE
ABS CONSTRUCTION
CMBS AGRICULTURE
CORPORATE BONDS RAW LAND
DISCOUNT WINDOW WEBSITE
www.frbdiscountwindow.org• Summary of Credit programs & Collateral Information
• Federal Reserve Board Press Releases
• Frequently Asked Questions (FAQs)
• Acceptable Collateral and Margin Table
• List of Reserve Bank contacts & phone numbers
www.federalreserve.gov/monetarypolicy/bst.htm
• Detailed explanation of Credit & Liquidity Programs & balance sheet
http://www.frbdiscountwindow.org/http://www.federalreserve.gov/monetarypolicy/bst.htm
FUNDS MANAGEMENT SUMMARY
• We think liquidity and funds management should be viewed as connected concepts.
• We have no doubt that core deposits are the key to your franchise value.
• But, we also believe that growth will require the use of non-core or wholesale funding techniques.
• Spell It Out for Board and Regulators!
Questions?
Karl NelsonFounder & CEO, KPN Consulting
Email: [email protected]: (770) 262-8446
Web: www.kpnconsulting.net
mailto:[email protected]://www.kpnconsulting.net
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