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LIQUIDITY AND FUNDS MANAGEMENT Karl R. Nelson CEO KPN Consulting Roswell, Georgia [email protected] 770-262-8446 August 5 & 6, 2019
LIQUIDITY AND FUNDS MANAGEMENT
Karl R. Nelson CEO
KPN Consulting Roswell, Georgia
[email protected] 770-262-8446
August 5 & 6, 2019
LIQUIDITY & FUNDS MANAGEMENTGRADUATE SCHOOL OF BANKING
August 5 & 6, 2019
NATIONAL PERSPECTIVE
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2010 2011 2012 2013 2014 2015 2016 2017 2018
INSTITUTIONS 7,658 7,357 7,083 6,812 6,509 6,182 5,913 5,670 5,406
ASSETS $13.3 T $13.9 T $14.5 T $14.7 T $15.6 T $16.0 T $16.8 T $17.4 T $17.9 T
LOANS $7.1 T $7.3 T $7.5 T $7.8 T $8.2 T $8.7 T $9.2 T $9.6 T $10.0 T
EQUITY $1.5 T $1.57 T $1.63 T $1.65 T $1.74 T $1.8 T $1.87 T $1.96 T $2.02 T
P(L) 85.5 B $120 B $141 B $154 B $152 B $163 B $171 B $164 B $237 B
OREO $52.7 B $46.2 B $38.5 B $30.2 B $22.0 B $14.7 B $10.9 B $8.5 B $6.7 B
NC LOANS $359 B $305 B $277 B $207 B $163 B $138 B $131 B $116 B $100 B
FAILURES 157 92 51 24 18 8 5 8 0
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.
3
LIQUIDITY RATING MUST READ
Summer 2017 FDIC Supervisory Insights …
• Community Bank Liquidity Risk: Trends and Observations from
Recent Examinations.
4
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.
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LIQUIDITY RATING
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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 RATING 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
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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
8
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 and risk management are important
• “What If” Planning is essential
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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)
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CURRENT REGULATORY FOCUSCONTINUED
• 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
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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.
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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
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CONTINGENCY FUNDING PLAN (CFP)
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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
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THE DEPOSIT MARKET IS CHANGINGWHAT YOU CAN DO TO SUCCEED IN THIS MARKET
• The deposit landscape has changed and competition is heating up
• The Fed appears to be on hold with rate increases and is slowing 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 (Board Rates).
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THE DEPOSIT MARKET IS CHANGING
• Recent Federal Reserve decisions
• Interest rates increased by 25 basis points in March, June, Sept, and December 2018
and are projected to remain at this level of 2.50% for some time .
• The Fed has also initiated a balance sheet normalization process that began in
October 2017 and that now appears to be slowing as well.
• The Banking Industry did very little in deposit rate increases in 2017 even with three
FOMC increases, however, behavior did change in 2018 with four rate increases.
• This did lead to some aggressive deposit rate increases in 2018, but with the FOMC
posture, some of this activity has slowed as well.
• There are clear strategic differences between large and community banks as to the
kinds of deposit promotions that are marketed.
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2019 DEPOSIT STRATEGIES
JPMorgan Chase: Cash Bonus … Headline on Mailer – “Enjoy Up to $600 on Us”
• Open a new Chase checking account and set up direct deposit … then the small print:
• No service fee if you either have a monthly direct deposit totaling $500 or more made to this account OR keep a balance at the beginning of each day of $1,500 or more OR keep an average beginning day balance of $5,000 or more in any combination of this account and linked qualifying Chase checking, savings, and other balances. Otherwise a $12 monthly fee will apply. $300 Bonus.
• Open a Chase savings account, deposit a total of $15,000 or more in new money within 20 business days and maintain a $15,000 balance for 90 days … small print: no monthly fee when you do at least one of the following each statement period – keep a balance at the beginning of each day of $300 or more in your savings account OR have at least one repeating automatic transfer of $25 or more from your Chase personal checking account or Chase Liquid Card OR have an account owner who is an individual younger than 18 OR have a linked Chase Premier Plus Checking, Chase Sapphire Checking, or Chase Private Client Checking account. Otherwise a $5 monthly fee will apply. $200 Bonus.
• $600 – qualify for both of the above. Savings yield is .01% and offer is not available to existing Chase depositors. If either account is closed within 6 months the bonus will be deducted from proceeds of closing. Pushing on-line app.
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2019 DEPOSIT STRATEGIES
• Citibank – “A Smarter Way to Save is Here” … Citi Accelerate Savings Account at 2.36%. Offered in select markets and sent to existing Citi credit card members. Indicating their rate is 13X the national average for savings account (.17%). No Minimums.
• American Express – “Save More Today. Take on Tomorrow” … offering CD’s from 6 months to 60 months with the only actual offer in the mailer for 3.10% for their 60-month product. On-line opening.
• Synovus Bank – Selective mailing in Georgia. Offering both a 23 month CD at 2.85% and a 13 month CD at 2.55%. Interesting aspect of these specials was that the FHLB Advance rate at 2 years was 2.55%. What is the thinking behind offering a higher rate than could be obtained through the FHLB?
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2019 DEPOSIT STRATEGIES
• “Best Rate, Not Best Rates” … whenever you want to raise new money, never use a “popular” maturity (6 months, 12 months, 24 months) – why attract depositors to a special by focusing on their normal habits. Instead, use “off-maturity” specials which focus on “abnormal” maturities such as 7, 13, 17, 23, 34, etc. months. This may attract a new depositor and new money. At maturity, have the funds automatically placed in your 6-month CD unless told otherwise. Hopefully, this will attract higher priced new money but will turn into lower priced funding at maturity. Why would someone not respond to maturity issue?
• The “special” rate should be just under the cost of wholesale borrowing to be most effective and you will want to analyze how much was new money vs. cannibalized from existing depositors. The higher the ratio of new money to cannibalized the better – as opposed to simply moving a deposit tier to a higher yield.
• Have your strategy for existing money in place for the special.
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2019 DEPOSIT STRATEGIES
• What are we doing to entice less “free” checking …
• The largest banks have simply done away with “free” checking as we know it and are moving to placing conditions on your account in order to avoid a monthly fee. These fees range from $5 to $25 depending on the bank and it appears that these institutions are executing this strategy without regard for lost accounts.
• They are likely looking at their DDA business and coming to conclusions about how much of that business is actually profitable – losing unprofitable business is not a problem for them but too many community banks still see a loss of an account as a negative – even if the account is not profitable.
• Some other strategies we see for moving away from “free” checking as we now practice it.
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2019 DEPOSIT STRATEGIES
• “Rewards” Checking (now KASASA) – idea is to provide rewards for depositor
behavior based on achieving certain goals – electronic statement, debits/month,
automatic debit or credit.
• “Haberfeld” Marketing System – provides banks with focused deposit marketing
concept that uses traditional rewards for increasing balances.
• StrategyCorps – BaZing is their mobile app product that ties to checking accounts
and offers over 360,000 “deals” (coupons) nationwide – idea is to provide depositors
with a service that will make a monthly fee more acceptable.
• NXG Strategies – providing our industry with rewards more geared to younger clients
such as identity theft, insurance of devices, etc… making the move from “free” to
$5/month fee structure.
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THE DEPOSIT BUSINESS TODAY
• Banking behavior in 2016 – 2018…
• Recent trends in deposit pricing…
• Pricing against the competition…
• Pricing against a benchmark …
• That gap – wholesale to retail – NIM issue in 2018 - 2019.
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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?
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MUTUAL FUND ASSETS(IN TRILLIONS)
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YEAR END BOND/HYBRID EQUITY MMA TOTAL
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 3.433 5.596 2.804 11.833
2011 3.727 5.214 2.691 11.632
2012 4.420 5.939 2.693 13.052
2013 4.553 7.763 2.718 15.034
2014 4.812 8.315 2.725 15.852
2015 4.749 8.148 2.754 15.651
2016 5.038 8.578 2.728 16.344
2017 5.593 10.306 2.847 18.746
2018 5.445 9.225 3.037 17.707
EQUITY RETURNS
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YEAR END DOW S&P 500 NASDAQ RUSSELL 2000
2006 16.30% 13.60% 9.50% 17.00%
2007 6.40% 3.50% 9.80% (2.70%)
2008 (33.80%) (38.50%) (40.50%) (34.80%)
2009 18.80% 23.50% 43.90% 25.20%
2010 11.02% 12.80% 16.90% 25.30%
2011 5.50% 0.00% (1.80%) (4.20%)
2012 7.30% 13.40% 15.90% 14.60%
2013 26.50% 29.60% 38.30% 37.00%
2014 7.50% 11.40% 13.40% 3.50%
2015 (2.20%) (.70%) 5.70% (5.70%)
2016 13.40% 9.50% 7.50% 19.50%
2017 25.10% 19.40% 28.20% 13.10%
2018 (5.63%) (6.24%) (3.88%) (1.04%)
ROLE OF WHOLESALE FUNDING
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2010 2011 2012 2013 2014 2015 2016 2017 2018
Deposits(Millions)
$9,423 $10,186 $10,817 $11,192 $11,764 $12,190 $12,895 $13,399 $13,866
MutualFunds
$11,833 $11,632 $13,052 $15,034 $15,852 $15,651 $16,344 $18,746 $17.707
Total WholesaleFunding
$2,398 $2,104 $2,073 $2,083 $2,242 $2,332 $2,298 $2,429 $2,508
Total Assets
$13,319 $13,891 $14,451 $14,731 $15,554 $15,968 $16,780 $17,416 $17,943
WF/TA 18.0% 15.1% 14.3% 14.1% 14.4% 14.6% 13.7% 13.9% 14.0%
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.
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REMEMBER THE MANTRA
• Strategic Plan
• Policies and Procedures
• Measure and Monitor
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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.
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WHOLESALE FUNDING REPORT
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As of Date Total Assets Total Policy LimitDecember 31, 2018 $100,000,000 $40,000,000 (40% of Assets)
Source (Policy Limit) Availability Usage Rate/TermFHLB Advances (25%) $25,000,000 $5,000,000 2.52% / FRC 5
Brokered Deposits (25%) $25,000,000 $4,000,000 2.25% - 2
CDARS (15%) $15,000,000 $2,000,000 2.40% - 3
QwickRate (15%) $15,000,000 $4,000,000 2.00% - 1
Fed Funds Purch. (15%) $15,000,000 0 N/A
Fed Disc. Window (20%) $20,000,000 0 N/A
Totals $115,000,000 $15,000,000
Total Policy Limit = $40,000,000 Usage = $15,000,000% Usage=15%
CREATING A NON-CORE FUNDING STRATEGY
• Non-Core funding is simply too dominant a player in the funding arena to be ignored.
• At its peak in 2008, non-core funding represented 25% of the total funding for our industry and it is difficult to see how we will meet all of our funding requirements from the core deposit marketplace.
• We see three fundamental reasons for needing a good non-core funding concept:
• Availability
• Pricing/Efficiency
• Interest Rate Risk Management
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AVAILABILITY
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2011 2012 2013 2014 2015 2016 2017 2018
Deposits ($Trillion)
$10.186 $10.817 $11.192 $11.764 $12.190 $12.895 $13.399 $13.866
BrokeredDeposits
$.610 $.704 $.760 $.823 $.930 $.890 $.972 $1.071
Core Deposits
$9.576 $10.113 $10.432 $10.941 $11.260 $12.005 $12.427 $12.795
Growth Rate
8.6% 5.8% 3.2% 4.9% 2.9% 6.6% 3.5% 3.0%
PRICING
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1 YEAR 3 YEAR 5 YEAR
FHLB ATLANTA 2.40% 2.38% 2.41%
BROKERED 2.55% 2.65% 2.70%
• Pricing comparisons between core and non-core are difficult due to the many pricing concepts in play today, so compare these rates with yours:
5/20/19
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 12/31/18, over 38% 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?
35
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 12/31/18, 16% of total deposits were in the Time category.
• Though we have avoided IRR problems to date, funding long term assets with short term liabilities does represent a risk to our business especially if our non-maturity depositors move out of banking.
36
FUNDS MANAGEMENT
We should find our strategy embedded in three different concepts:
1. ALCO Policy
2. Contingency Funding Plan (CFP)
3. Wholesale Funding Report
37
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.
38
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.
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WHOLESALE FUNDING SOURCESFUNDING WITHOUT COLLATERAL
① Fed Funds Purchased
② Brokered Deposits
③ CDARS
④ QwickRate (Internet Listed CD)
⑤ Charity Deposits Corp
⑥ Municipal Deposits
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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?
41
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.
42
FED FUNDS: COMMITTEE MEETINGS
• The normal schedule of meetings is for 8 each year.
• 2019 Meeting Schedule includes sessions for:
• Jan 29-30
• March 19-20
• April 30-May 1
• June 18-19
• July 30-31
• Sept 17-18
• Oct 29-30
• Dec 10-11
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FED FUNDS
• The Fed has changed the Target nine times since December 2008 (0-25 bps) and that was in December 2015 (up 25 bps), December 2016 (up 25 bps), March 2017 (up 25 bps), June 2017 (up 25 bps), December 2017 (up 25 bps), and March 2018 (up 25 bps), June 2018 (up 25 bps), Sept 2018 (up 25 bps), and December 2018 (up 25 bps).
• Prime = Target + 300 bps
• This defines your loan business.
• Ten-Year Treasury = 2.41%
• This defines your investment business plus your fixed rate loan business.
44
HISTORY OF FED FUNDS - FOMC
45
JAN 1996 – MAR 1997 5.25%
MAR 1997 – NOV 1998 5.50% - 4.75%
NOV 1998 – JAN 2001 4.75% - 6.50%
JAN 2001 – JUN 2004 6.50% - 1.00%
JUN 2004 – SEP 2007 1.00% - 5.25%
SEP 2007 – DEC 2015 5.25% - .25%
DEC 2015 – DEC 2018 .25% - 2.50%
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
46
BROKERED CD HISTORY
47
YEAR END INSTITUTIONS DEPOSITS (BILLIONS)
2006 3,341 $540
2007 3,339 $586
2008 3,938 $829
2009 3,659 $629
2010 3,758 $497
2011 3,038 $610
2012 2,790 $704
2013 2,624 $760
2014 2,569 $823
2015 2,542 $930
2016 2,526 $890
2017 2,539 $972
2018 2,228 $1,071
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”
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WHOLESALE BROKERED DEPOSITS
• From 1985 through the early 1990s, 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 12/31/18, 44% of the Banks were using Brokered Deposits.
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BROKERED DEPOSITSMOVING FROM WHOLESALE TO RETAIL ARENA
• CDARS (Promontory Interfinancial Network
• Reich & Tang
• Charity Deposits Corporation
• StoneCastle Partners
50
EXPANDED FDIC COVERAGE & FLOW OF FUNDS
51
BOTTOM LINE FOR THE CUSTOMER: ALL FUNDS ARE 100% INSURED
PROMONTORY INTERFINANCIAL NETWORKFOUNDED IN 2002
52
• 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
53
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 InterfinancialNetwork, LLC.
ABOUT ICS & CDARS
54
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 – HOW IT WORKS
55
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
56
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
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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
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• 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 its Name to Charity Deposits Corp To Recognize Their Products use with Charitable Organizations.
RETAIL BROKERED DEPOSITS
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• 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
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• Reich & Tang is Another MMA Provider That Works in Much The Same Way as Charity Deposits Corp. Demand Deposit Marketplace (DDM) is their branding.
• 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.
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QWICKRATE MARKETPLACE
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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
ACTIVITY
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
QWICKRATEHELPING BOTH SIDES OF YOUR BALANCE SHEET
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Need more funds
Have excess funds
QwickRate Non-brokered Marketplace
• 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
FUNDING INVESTING
QWICKRATECHARACTERISTICS DIFFER
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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
QWICKRATEREPRESENTS A SPECIFIC INSTITUTION LOOKING FOR CD INVESTMENTS
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QWICKRATEREVIEW ACTIVITY BY POSITION OR TERM
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QWICKRATEYES – DEPOSITS GENERATED IN QWICKRATE ARE NON-BROKERED
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• 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
WHOLESALE FUNDING SOURCESFUNDING WITH COLLATERAL
① FHLB Advances
② Federal Reserve Discount Window
③ Repurchase Agreements
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FHLB DISTRICTS
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FHLB SYSTEM METRICS12/31/18
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BOS NY PGH ATL CIN IND CHI DSM DAL TOP SF
TA $64 $144 $107 $154 $99 $65 $93 $147 $73 $48 $109
MEM 439 328 291 848 646 379 705 1365 810 721 331
EMP 197 314 220 319 225 246 462 355 197 231 279
NET $217 $560 $347 $416 $339 $199 $309 $460 $199 $170 $360
FHLB SYSTEM FINANCIAL METRICSIN $ BILLIONS
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12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18
Advances $479 $418 $426 $499 $571 $634 $705 $732 $729
Investments $330 $271 $266 $243 $270 $273 $292 $307 $307
Mortgages $61 $54 $49 $45 $44 $45 $48 $54 $63
Total Assets $878 $766 $762 $834 $913 $969 $1,057 $1,103 $1,103
Capital-to-Asset Ratio 5.00% 5.20% 5.58% 5.40% 5.10% 4.95% 4.96% 5.12% 5.29%
Net Income $2.1 $1.6 $2.6 $2.5 $2.26 $2.86 $3.4 $3.4 $3.56
FHLB SYSTEM HOW IT WORKS
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Homes CommunityInvestmentMember Institution
InvestorsFHLBanksOffice of Finance
FHLB BORROWING STRUCTURETHREE PART BORROWING FACILITY
• 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%73
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).
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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 agreements
② Deliverable
③ Held-in-Custody
• Tri-party agreements are by far the dominant form.
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FEDERAL RESERVE DISCOUNT WINDOWCLOSER LOOK – LENDING TO FINANCIAL INSTITUTIONS
• 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 <$500MM total deposits)
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FEDERAL RESERVE DISCOUNT WINDOWWIDE RANGE OF COLLATERAL
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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
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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
FUNDS MANAGEMENT SUMMARY
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• 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 & CEOKPN Consulting
Email: [email protected]: 770.262.8446
Web: www.kpnconsulting.net
