BASICS OF LIQUIDITY WHAT IS IT? WHAT RISKS DOES IT CONTRIBUTE TO YOUR CAPITAL PLAN & FUNDING NEEDS? David Koch. President\CEO FARIN & Associates, Inc.

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1 BASICS OF LIQUIDITY WHAT IS IT? WHAT RISKS DOES IT CONTRIBUTE TO YOUR CAPITAL PLAN & FUNDING NEEDS? David Koch President\CEO FARIN & Associates, Inc. Agenda Describe a functional definition of liquidity Discuss the difference between asset based & total liquidity Identify causes of liquidity risk in their institutions Review common regulatory measurements for liquidity Assess institutional risk using Define stress tests based on 1

2 Liquidity Defined FDIC/OCC/Federal Reserve Liquidity Definition: Liquidity Defined Common Liquidity Definition: Liquidity Risk is: ALM Process measures risks taken versus returns derived. 2

3 Liquidity Sources Pools or Reservoirs Flows Contingent Sources Differentiating Liquidity & Funding Liquidity Management Pools first then flows Funding Management Flows first, then pools 3

4 Liquidity Risk It s About to Get Real! Loans\Earning Assets by Asset Size 4

5 Liquidity Risk It s About to Get Real! 5

6 Liquidity Risk It s About to Get Real! Liquidity Risk It s About to Get Real! 6

7 Basic Liquidity Trap General rule: Regulatory pressure Impact Recent Regulatory Initiatives interagency policy statement funding and liquidity risk management Liquidity requirements More asset based liquidity (cash & securities) Less reliance on wholesale funding for core growth 7

8 Impact of 2010 Liquidity Guidance Liquidity requirements Cash flow based liquidity measurement Stress tests A view from the other side HOW DO REGULATOR S VIEW LIQUIDITY 8

9 Historical Measures of Liquidity Measurements based on balance sheet levels Examples: Historical Ratio Analysis CAMELS or CANARY ratings review past performance But, no weighting for institutional risk appetite and strategy A very basic litmus test 9

10 Regulatory Risk Assessments OCC Canary Ratios Canary Ratios 10

11 Canary Ratios Low Risk < 8 Liquidity Trigger Ratios - Canary Using the OCC Canary Ratios as a Guide helps pinpoint potential concern or deeper review The following ratios and trigger limits are regulatory guidelines Use historical trends to show past liquidity management process 11

12 UBPR/FPR Liquidity Ratios Bank UBPR ratios Net non-core funding ratio Loans/assets Projection of net cash flows Credit union FPR ratios Net long-term assets/total assets Total loans / total shares Cash & ST investments / total assets Total shares, deposits & borrowings / earning assets Regular shares & share drafts / total shares & borrowings Borrowings / total shares & net worth Regulatory Ratio Definitions Net non-core funding ratio: measures the extent to which the bank if funding longer term assets (> 1 yr.) With volatile funds. Loan/assets: measures the extent to which the bank is likely to have liquidity 12

13 Regulatory Ratio Definitions Long term assets / Total Assets: Measures the level of long term assets that are less liquid Loan/Share Measures extent to which the CU is relying on capital or borrowings to make loans which are less liquid Cash & ST Investments /Total Assets: Measures available short-term liquidity levels Regulatory Ratio Definitions Total Shares, Deposits & Borrowings / Earning Assets: This really measures the efficiency of use of funding to generate earnings Regular Shares & Share Drafts / Total Shares & Borrowings: Measures the level of core type funding that is considered less volatile 13

14 Regulatory Ratio Definitions Borrowings / Total Shares & Net Worth: Measures the reliance on non-member funding. Liquidity Examination Checklist Exam Considerations: So, we now have the scope of the examination process, what do we need to do to get an A? 14

15 Liquidity Definitions Asset Based or Core Liquidity: Cash and other financial assets that can be easily converted to cash for operational needs Total (Cash Flow Based) Liquidity : Does your projection maintain sufficient sources to meet financial obligations: withdrawals, loan demands and other commitments. A Practical Approach to Liquidity MEASURING ASSET BASED LIQUIDITY 15

16 Asset Based Liquidity Considered most reliable source of liquidity But, how much is enough? Requires: Calculating Asset Based Liquidity Sources of asset based liquidity Uses that you have to cover 16

17 Asset Based Measurement Options Regulatory Initiatives Liquidity Coverage Ratio (LCR) Institution Options Basic surplus ratio Net Stable Funding Ratio (NSFR) Basic Liquidity Ratio (BLR A FARIN ratio concept) Asset Based Liquidity: LCR Ratio Basel liquidity coverage ratio (LCR) 17

18 Deposit Definitions Stable/Less Stable Basel says stable is Less stable Bank regulators (likely) NCUA Liquidity Coverage Ratio Numerator (Basel Approach) High Quality Liquid Assets Cash Amount Available % Available $ Cash & Due Froms 2,168, % 1,301,311 Total Cash 2,168,852 1,301,311 Market Net Of Market Value Market Value < 1 Yr > 1 Yr Hair Cut Hair Cut Investments Value Pledged < 1 Yr > 1 Yr Net Of PledgedNet Of Pledged < 1 Yr % > 1 Yr % Available $ Other CDs 4,163,361 4,163,361 80,468 4,082,894 80,468 4,082, % % 0 FHLB Daily Time Savings % 0.00% 500 FHLB Demand 613, , , , % 0.00% 613,684 FHLB ACH Account % 0.00% 353 Midwest Independent Bank 5,169,870 5,169,870 5,169, ,169, % 0.00% 5,169,870 Great Southern Bank 331, , , , % 0.00% 331,747 MBS - 30 Yr Fixed 10,701,244 10,701, ,421 9,925, ,421 9,925, % 15.00% 9,096,058 MBS - 30 Yr Adj % 15.00% 0 CMOs - AFS 33,182,771 33,182,771 5,470,720 27,712,051 5,470,720 27,712, % 15.00% 28,205,356 Callable Agency - 10 Yr Fixed 5,275, ,135 5,150, % 15.00% 0 Agency - 5 Yr Fixed 2,000,911 2,000,911 42,473 1,958,438 42,473 1,958, % 15.00% 1,700,775 Municipal - AFS 563, ,397 15, ,087 15, , % 20.00% 450,718 FHLB Stock 716, , , , % % 0 Investment in Subsidiary 676, , , , % % 0 Total Investments 63,395,199 58,120,039 12,625,681 50,769,518 45,569,059 Total High Quality Liquid Assets 46,870,371 18

19 LCR Concept - Numerator Level 1 assets (0% haircut) Level 2 Assets (15% haircut) Non-Qualifying Liquidity Coverage Ratio Stable Funding Outflows Denominator Uses RunOff Stable Deposits Amount Net Amount Rate Used Use Corporate Checking 2,519,884 2,519, % 125,994 Business Checking 5,809,313 5,809, % 290,466 new bus % 0 Traditional Checking 6,363,569 6,363, % 318,178 Official Checks 611, , % 30,575 Business Plus Checking 2,525,413 2,525, % 126, Checking 24,665,269 24,665, % 1,233,263 VIP Checking % 0 1st Rate Checking 14,159,464 14,159, % 707,973 Money Market Checking - >$50K 7,107,308 7,107, % 355,365 Money Market Checking - $25-50K 1,608,882 1,608, % 80,444 Money Market Checking - <$25K 1,615,865 1,615, % 80,793 MM Savings - <$10K 363, , % 18,178 MM Savings - $10-25K 1,957,904 1,957, % 97,895 MM Savings - $25-50K 2,868,229 2,868, % 143,411 MM Savings - $50-100K 5,807,026 5,807, % 290,351 MM Savings - >$100k 20,919,607 20,919, % 1,045,980 1st Rate Savings 13,689,189 13,689, % 684,459 Total Stable Deposits 112,591, ,591,981 5,629,599 19

20 Liquidity Coverage Ratio Less Stable Outflows Denominator RunOff Less Stable Deposits Amount Net Amount Rate Used Use CD Day 268, , % 26,890 CD - 6 Mo 5,119,489 5,119, % 511,949 CD - 18 Mo 691, , % 69,193 CD - 1 Yr 12,102,304 12,102, % 1,210,230 CD - 2 Yr 10,929,535 10,929, % 1,092,953 CD - 3 Yr 4,723,614 4,723, % 472,361 CD - 4 Yr 3,951,069 3,951, % 395,107 CD - 5 Yr 6,469,779 6,469, % 646,978 IRA CD - 6 Mo 981, , % 98,191 IRA CD - 1 Yr 1,971,991 1,971, % 197,199 IRA CD - 18 Mo 209, , % 20,913 IRA CD - 2 Yr 2,055,010 2,055, % 205,501 IRA CD - 3 Yr 1,037,099 1,037, % 103,710 IRA CD - 4 Yr 5,642,349 5,642, % 564,235 IRA CD - 5 Yr 4,105,473 4,105, % 410,547 Total Less Stable Deposits 60,259,586 60,259,586 6,025,959 Liquidity Coverage Ratio Wholesale Funding Outflows Denominator Net Maturing RunOff Non Financial Wholesale Amount Amount Rate Used Use Total Non Financial Wholesale Fun Net Maturing RunOff Wholesale Fed Funds Purchased Amount Amount Rate Used Use Fed Funds Purchased % 0 Total Wholesale Fed Funds Purchased Net Maturing RunOff Wholesale With Relationships Amount Amount Rate Used Use Fixed Rate Advances 10,000, % 0 Overnight Advance 2,000,000 2,000, % 500,000 2 Yr. Advance - Fixed % 0 3 Yr Advance - Fixed % 0 10 Yr Amortizing Advance % 0 Total Wholesale With Relationships 12,000,000 2,000, ,000 Net Maturing RunOff Wholesale Funding w\out Relationships Amount Amount Rate Used Use Total Wholesale w\out Relationshi

21 Liquidity Coverage Ratio Off balance sheet commitments Conversion Unused Lines of Credit Amount Rate Used Use Unused Lines Of Credit 7,100, % 710,000 Total Unused Lines of Credit 7,100, ,000 Conversion Letters Of Credit Amount Rate Used Use Letters of Credit % 0 Total Letters Of Credit 0 0 Conversion Firm Commitments To Originate Amount Rate Used Use Firm Commitments to Originate 3,300, % 3,300,000 Total Firm Commitments To Origin 3,300,000 3,300,000 Conversion Other Unused Commitments Amount Rate Used Use Other Unused Commitments % 0 Total Other Unused Commitments 0 0 Total Uses 195,251, ,851,567 16,165,558 Liquidity Coverage Ratio Incoming loan cash flows Proj. RunOff Loans Contractual Projected Rate Used Source 1-4 Fam - Fixed 606,981 69, % 550, Fam - Variable 314, , % 520,697 HELOC 47,197 12, % 46,321 Land Loan - Fixed 193,202 4, % 166,325 OTHER LOANS HIDDEN FOR VIEW Mobile Home - Variable % 738 Unsecured 7, % 6,108 Overdraft Loans 19, % 16,989 Auto - Fixed 31,999 4, % 29,473 Auto Special - 5yr Fixed % 0 Total Loans 5,113,300 1,168,255 4,930,432 Total Sources 4,930,432 21

22 Liquidity Coverage Ratio Summary High Quality Liquid Assets 46,870,371 Uses 16,165,558 Sources 4,930,432 Excess Sources Subject to 75% Ca 0 Net Sources 4,930,432 Net Uses 11,235,125 Liquidity Coverage Ratio % Target Liquidity Coverage Ratio % HQLA / Uses % LCR Ratio: % HQLA\Assets: 23.05% Good coverage from both on balance sheet assets (investments) $46.8 million AND loan cash flows - $4.9 million HQLA / Total Assets 23.05% Total Assets 203,313,171 Basic Surplus or Basic Liquidity Ratio (BLR) FINDING BETTER SELECTIONS FOR MEASUREMENT AND MANAGEMENT 22

23 Basic Surplus vs. Basic Liquidity Ratio Basic Surplus Ratio: Long-time ratio measure of the cash a financial institution can cost-effectively raise within a thirtyday timeframe, without principal loss, adjusted for the estimated volatility of liabilities. Most community FI s largest source of liquidity at no principal loss is incoming cash flows from loan repayments! BLR extends the Basic Surplus framework to include this critical source for community FIs. Building the Basic Liquidity Ratio (BLR) Step 1: What is our stock of available liquid assets? Traditional sources PLUS: 30 day projected loan cash flows Step 2: What are our short-term volatile liabilities? $ 203,313, Short term investment (maturing in 30 days or less) + cash $ 2,168, % 1-2 Sum of market value of available securities $ 45,569, % 1-3 Other Liquid assets (MMDA, interest bearing deposits, etc) $ % 1-4 Projected 30 day cash flows from securities (not included in 1 or 2) $ % 1-5 $ 4,930, % 2-1 Wholesale funds maturing in 30 days or less (100% runoff) $ 2,000, % 2-2 Deposit runoff assumptions (30 days) $ 11,655, % 2-3 Brokered CD Maturities $ % 2-4 $ 3,300, % 2-5 $ 710, % 23

24 Building the Basic Liquidity Ratio (BLR) Step 3: Add contingent liability sources to the basic measure from step 2 Create a section for each source Limit source availability by: 3-1 Maximum FHLB Line of Credit $ 15,000, % 3-2a Qualifying collateral $ 75,000, % 3-2b Outstanding borowings $ 10,000, $ 65,000, % 3-5 $ 50,828,293 Building the Basic Liquidity Ratio (BLR) 4-1 Maximum Brokered Deposit Policy Limit $ 10,165, Current Balance Brokered Deposits $ % 5-1 Maximum Internet\Rate Board Deposit Policy Limit $ 10,165, Current Balance Internet & Rate Board Deposits $ % 6-1 Total Correspondent Lines $ % 6-2 Current Balance Correspondant Banks $ % 7-1 Maximum Internet\Rate Board Deposit Policy Limit $ 30,496, Current Balance Federral Reserve $ % 24

25 Basic Liquidity Ratio Summary Advantages Easy measure of real sources Provides a look at all sources and uses to date by type Provides a measure consistent with policy control limits Disadvantages Usually used on historical balance sheet Ignores primary source of most community FI liquidity Ignores Off Balance Sheet Risks A Practical Approach to Liquidity MEASURING CASH FLOW BASED LIQUIDITY 25

26 Liquidity Gap Report Pro forma cash flow analysis: Liquidity Gap Report Liquidity gap report 26

27 Asset Sources/Uses Liability Sources/Uses 27

28 Cash Flow Gap Sec 1 Sec 2 Sec 3 Total Liquidity Gap

29 Total Liquidity Gap Using Liquidity Gap Advantages Recommendation 29

30 Liquidity Liquidity Stress Testing Designing Liquidity Stress Tests 2 approaches to stress testing liquidity Each approach brings merit and value 30

31 Historical Liquidity Trends Steps for designing liquidity scenario tests Step 1: Review macro cash flow performance Step 2: Review major funding source trends Step 3: Pick worse case historical performance & build a scenario Step 4: Run catastrophic capital failure sensitivity test Historical Cash Flow Year Total Deposits Loans Net Liquidity Net Liquidity Ending Assets Ending Balance Net Change Ending Balance Net Change Excess (Needed) Avg Monthly (% of Assets) 1999 $ 179,798 $ 149,334 $ 121, $ 189,270 $ 143,405 $ (5,929) $ 131,361 $ 9,649 $ (15,578) $ (1,298) -8.23% 2001 $ 205,630 $ 162,377 $ 18,972 $ 138,617 $ 7,256 $ 11,716 $ % 2002 $ 211,635 $ 171,817 $ 9,440 $ 135,851 $ (2,766) $ 12,206 $ 1, % 2003 $ 205,503 $ 162,529 $ (9,288) $ 131,376 $ (4,475) $ (4,813) $ (401) -2.34% 2004 $ 210,898 $ 165,480 $ 2,951 $ 140,105 $ 8,729 $ (5,778) $ (482) -2.74% 2005 $ 213,904 $ 171,784 $ 6,304 $ 147,887 $ 7,782 $ (1,478) $ (123) -0.69% 2006 $ 221,442 $ 180,114 $ 8,330 $ 153,568 $ 5,681 $ 2,649 $ % 2007 $ 238,368 $ 189,043 $ 8,929 $ 157,404 $ 3,836 $ 5,093 $ % 2008 $ 249,720 $ 191,321 $ 2,278 $ 169,604 $ 12,200 $ (9,922) $ (827) -3.97% 2009 $ 406,046 $ 320,370 $ 129,049 $ 272,871 $ 103,267 $ 25,782 $ 2, % 2010 $ 426,625 $ 341,958 $ 21,588 $ 280,729 $ 7,858 $ 13,730 $ 1, % 2011 $ 430,723 $ 342,823 $ 865 $ 264,882 $ (15,847) $ 16,712 $ 1, % 2012 $ 457,434 $ 364,368 $ 21,545 $ 263,121 $ (1,761) $ 23,306 $ 1, % 2013 $ 456,597 $ 359,714 $ (4,654) $ 282,703 $ 19,582 $ (24,236) $ (2,020) -5.31% 2014 $ 456,330 $ 372,612 $ 12,898 $ 308,441 $ 25,738 $ (12,840) $ (1,070) -2.81% Avg $ 297,495 Total/Avg $ 236,816 Total/Avg $ 193,765 $ 36,549 $ 3, % 31

32 Deposit Trends Beginning Total Deposits Ending Net Growth Annual Year Ending Balance Q1 Q2 Q3 Q4 Balance Growth % 1999 $ 149,334 $ (46,774) $ 2,886 $ (7,449) $ 45,408 $ 143,405 $ (5,929) -3.97% 2000 $ 143,405 $ (46,717) $ 14,457 $ 5,976 $ 45,256 $ 162,377 $ 18, % 2001 $ 162,377 $ (36,029) $ (2,040) $ 18,228 $ 29,281 $ 171,817 $ 9, % 2002 $ 171,817 $ 5,504 $ (4,553) $ (8,541) $ (1,698) $ 162,529 $ (9,288) -5.41% 2003 $ 162,529 $ 1,029 $ 5,999 $ (9,969) $ 5,892 $ 165,480 $ 2, % 2004 $ 165,480 $ (988) $ 2,634 $ 867 $ 3,791 $ 171,784 $ 6, % 2005 $ 171,784 $ 2,492 $ 804 $ (386) $ 5,420 $ 180,114 $ 8, % 2006 $ 180,114 $ (1,149) $ 4,643 $ (2,254) $ 7,689 $ 189,043 $ 8, % 2007 $ 189,043 $ (2,902) $ 789 $ (4,493) $ 8,884 $ 191,321 $ 2, % 2008 $ 191,321 $ (662) $ 3,219 $ 3,532 $ 122,960 $ 320,370 $ 129, % 2009 $ 320,370 $ 9,252 $ 5,766 $ 2,676 $ 3,894 $ 341,958 $ 21, % 2010 $ 341,958 $ 716 $ 24 $ (6,491) $ 6,616 $ 342,823 $ % 2011 $ 342,823 $ 8,018 $ (5,464) $ 7,765 $ 11,226 $ 364,368 $ 21, % 2012 $ 364,368 $ 6,195 $ (8,778) $ 2,001 $ (4,072) $ 359,714 $ (4,654) -1.28% 2013 $ 359,714 $ 12,700 $ (1,295) $ (12,569) $ 14,062 $ 372,612 $ 12, % Total\Avg $ (89,315) $ 19,091 $ (11,107) $ 304, , % % Total Growth % 8.55% -4.97% % Avg of Negative -3.55% Time Deposit Trends Annual Beginning Time Deposits Ending Net Growth Growth % Year Ending Balance Q1 Q2 Q3 Q4 Balance 1999 $ 78,191 $ 371 $ 2,138 $ (7,302) $ 94 $ 73,492 $ (4,699) -6.01% 2000 $ 73,492 $ 2,891 $ 8,711 $ 5,445 $ (4,151) $ 86,388 $ 12, % 2001 $ 86,388 $ 12,283 $ (1,645) $ 1,885 $ (4,497) $ 94,414 $ 8, % 2002 $ 94,414 $ (369) $ (1,708) $ (1,622) $ (3,368) $ 87,347 $ (7,067) -7.49% 2003 $ 87,347 $ 197 $ 440 $ (2,962) $ 731 $ 85,753 $ (1,594) -1.82% 2004 $ 85,753 $ 1,104 $ (497) $ (5,445) $ 1,322 $ 82,237 $ (3,516) -4.10% 2005 $ 82,237 $ 7,748 $ 1,494 $ 3,124 $ 245 $ 94,848 $ 12, % 2006 $ 94,848 $ 426 $ 5,416 $ 2,469 $ 437 $ 103,596 $ 8, % 2007 $ 103,596 $ (2,932) $ (6,538) $ (8,719) $ (380) $ 85,027 $ (18,569) % 2008 $ 85,027 $ 5,531 $ 307 $ 588 $ 40,900 $ 132,353 $ 47, % 2009 $ 132,353 $ 12,271 $ (3,270) $ (7,436) $ (7,793) $ 126,125 $ (6,228) -4.71% 2010 $ 126,125 $ (5,101) $ (937) $ (3,870) $ (1,619) $ 114,598 $ (11,527) -9.14% 2011 $ 114,598 $ (6,412) $ (2,758) $ (1,049) $ (2,612) $ 101,767 $ (12,831) % 2012 $ 101,767 $ (4,479) $ (561) $ 902 $ 476 $ 98,105 $ (3,662) -3.60% 2013 $ 98,105 $ 2,507 $ 1,414 $ 1,845 $ 2,855 $ 106,726 $ 8, % Avg $ 26,036 $ 2,006 $ (22,147) $ 22,640 28, % % Total Growth 91.24% 7.03% % 79.34% Avg of Negative -7.33% 32

33 Brokered CD Trends Beginning Time Deposits: Brokered Ending Annual Net Growth Year Ending Balance Q1 Q2 Q3 Q4 Balance Growth % 1999 $ - $ - $ - $ - $ - $ - $ % 2000 $ - $ - $ - $ 4,305 $ (868) $ 3,437 $ 3, % 2001 $ 3,437 $ (1,644) $ (1,294) $ - $ - $ 499 $ (2,938) % 2002 $ 499 $ - $ 95 $ (399) $ 299 $ 494 $ (5) -1.00% 2003 $ 494 $ 400 $ (94) $ (299) $ (100) $ 401 $ (93) % 2004 $ 401 $ 196 $ 99 $ (197) $ 1,002 $ 1,501 $ 1, % 2005 $ 1,501 $ 93 $ 408 $ 6,121 $ (1,500) $ 6,623 $ 5, % 2006 $ 6,623 $ (1,118) $ 2,480 $ 1,246 $ 1,043 $ 10,274 $ 3, % 2007 $ 10,274 $ (1,048) $ 606 $ (7,505) $ (964) $ 1,363 $ (8,911) % 2008 $ 1,363 $ 834 $ - $ (1,248) $ 502 $ 1,451 $ % 2009 $ 1,451 $ (300) $ 2,385 $ (997) $ 2 $ 2,541 $ 1, % 2010 $ 2,541 $ (553) $ (248) $ (248) $ - $ 1,492 $ (1,049) % 2011 $ 1,492 $ (896) $ (348) $ - $ - $ 248 $ (1,244) % 2012 $ 248 $ (248) $ - $ - $ - $ - $ (248) % 2013 $ - $ - $ 2,009 $ 618 $ 216 $ 2,843 $ 2, % Avg $ (4,284) $ 6,098 $ 1,397 $ (368) 2, % % Total Growth % % 49.14% % Avg of Negative % Deposit Sector Trends Beginning Non-Maturity Deposits Ending Annual Net Growth Year Ending Balance Q1 Q2 Q3 Q4 Balance Growth % 1999 $ 71,143 $ (47,145) $ 748 $ (147) $ 45,314 $ 69,913 $ (1,230) -1.73% 2000 $ 69,913 $ (49,608) $ 5,746 $ 531 $ 49,407 $ 75,989 $ 6, % 2001 $ 75,989 $ (48,312) $ (395) $ 16,343 $ 33,778 $ 77,403 $ 1, % 2002 $ 77,403 $ 5,873 $ (2,845) $ (6,919) $ 1,670 $ 75,182 $ (2,221) -2.87% 2003 $ 75,182 $ 832 $ 5,559 $ (7,007) $ 5,161 $ 79,727 $ 4, % 2004 $ 79,727 $ (2,092) $ 3,131 $ 6,312 $ 2,469 $ 89,547 $ 9, % 2005 $ 89,547 $ (5,256) $ (690) $ (3,510) $ 5,175 $ 85,266 $ (4,281) -4.78% 2006 $ 85,266 $ (1,575) $ (773) $ (4,723) $ 7,252 $ 85,447 $ % 2007 $ 85,447 $ 30 $ 7,327 $ 4,226 $ 9,264 $ 106,294 $ 20, % 2008 $ 106,294 $ (6,193) $ 2,912 $ 2,944 $ 82,060 $ 188,017 $ 81, % 2009 $ 188,017 $ (3,019) $ 9,036 $ 10,112 $ 11,687 $ 215,833 $ 27, % 2010 $ 215,833 $ 5,817 $ 961 $ (2,621) $ 8,235 $ 228,225 $ 12, % 2011 $ 228,225 $ 14,430 $ (2,706) $ 8,814 $ 13,838 $ 262,601 $ 34, % 2012 $ 262,601 $ 10,674 $ (8,217) $ 1,099 $ (4,548) $ 261,609 $ (992) -0.38% 2013 $ 261,609 $ 10,193 $ (2,709) $ (14,414) $ 11,207 $ 265,886 $ 4, % Total\Avg $ (115,351) $ 17,085 $ 11,040 $ 281, , % % Total Growth % 8.77% 5.67% % Avg of Negative -2.44% 33

34 SITUATIONAL STRESS TESTS 5 Principles of Stress Tests 1. Should include activities and exercises tailored to institution and capture exposures, activities and risks 2. Employ multiple, conceptually sound activities and approaches 3. Is forward looking and flexible 4. Provide clear, actionable, well supported, data to inform decision making 5. Provide strong governance and effective internal controls What s that means for you 34

35 Stress Scenario Design Components Stress Testing Focus Regular assessment of high likelihood, high impact scenarios Periodic testing (annually) of low likelihood, high impact scenarios Ignore low impact, low severity scenarios 35

36 High Impact, Low Probability Scenario Define catastrophic event resulting in reduction in capital levels to below well capitalized status Examples of catastrophic events What do we do with this test if we fail? More Realistic Stress Tests Scenario Analysis Types of Stress Tests Developing Functional Stress Tests Developing Catastrophic Stress Tests 36

37 Liquidity Issues to Address Today! Economic recovery erodes cash flow What is ALCOs funding plan to raise deposits or, manage asset growth? What other risks are raised with this potential scenario? Stress Test and Borrowing Capacity Institutions total capacity to borrow offers 3 uses: Major question: how much capacity do we need to keep available in case of a liquidity need? 37

38 Determining Funding Needs Base Cash Flow Gap 1 Yr.: -1.1 Million + Unencumber Liquid Assets 1 Yr Million Stress Test Results: -50% Loan Repayments -50 Million -20% Deposit Runoff -35 Million -20% Increase in Line Draws - 6 Million Total Change in Stress Test -91 Million Net Position B4 Management Action -66 Million Determining Long Term Funding Needs Net position before management action -66 million Management actions: 25% decrease in loan origination +38 million Net need for long term liquidity - 28 million Total borrowing capacity $125 million Reserve between $28 & $66 mil for liquidity risks 22% 53% 38

39 Elements of an Effective Program 1. Solid measurement for Asset Based Liquidity Position and needs 2. Solid forecast of cash flows in your business plan 3. Effective Policy Limits 4. Defined Stress scenarios 5. Contingency Funding Plans FARIN Financial Risk Management Advisory Services Capital Planning Asset/Liability Management Core Deposit Analysis Credit Services Loan & Deposit Pricing Data Warehousing 39