How to Improve Liquidity

Transcription

1 How to Improve Liquidity As Economic Conditions Change June 26, :15 am Presented by: Joe Kennerson Managing Director Darling Consulting Group 260 Merrimac Street Newburyport, MA P: E:

2 A Look Back at the Past 10 years What s to come?

3 Today s Takeaways: Liquidity levels are tightening Regulators are expecting more Balance sheet decisions are critical with flat curve Every basis point counts Establish a liquidity process that: 1. Exceeds regulatory expectations 2. Provides the most flexibility to manage the balance sheet

4 Agenda Industry Headwinds What ALCOs Are Doing Today The Evolution of Stress Testing What s Next?

5 Industry Headwinds: Perfect Storm Brewing Loans/Deposits (Community Banks) Loan growth is outpacing deposit growth Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 Fed Dot Plot Loans/Deposits Deposit pricing pressures are real

6 Industry Headwinds: Funding the Shortfall Loans/Assets (Community Banks) 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 Loans/Assets 25.0% Borrowings/Assets (%) 20.0% 15.0%??? 10.0% 5.0% 0.0%

7 Regulatory Feedback Funding concentrations Single source concentrations Other potentially volatile deposits Uninsured deposits Large depositors Dynamic pro-forma projections Institution-specific stress tests Documented and supported assumptions Rising rate impact on liquidity

8 Concerns on the Front Lines LCR & the large bank threat Rising rate preparedness Deposit stability Liquid asset cushion Wholesale funding preparation Public deposit collateral/insurance Policies

9 Industry Headwinds What ALCOs Are Doing Today The Evolution of Stress Testing What s Next?

10 So What Are ALCOs Doing Today? With the recent rate hikes, liquidity is at the forefront of ALCO discussions Key discussion/action items: How much liquidity do we have how much will we need? Forecasting potential funding gaps Revisiting policies Diversifying & testing lines Optimizing deposit insurance Stress testing beyond regulatory guidelines

11 Liquid Assets I. LIQUID ASSETS Overnight Funds Sold & Short-Term Investments (avg. balance, if if wide daily fluctuations) 25,0000 TOTAL ASSETS = 1,500,000 UST & Agency MBS / CMOs Security Collateral Agency Backed Private Label Collateral Value 100% 95% 90% Total Market Value of Securities Less Securities Pledged to: 35, , ,000 0 FHLB Fed Discount/Other Secured Wholesale Repos Retail Repos/Sweeps Municipal Deposits Other Available / Unencumbered Security Collateral , , ,500 99, Over Collateralized Securities Pledging Position Government Guaranteed Loans Cash flow (< 30 Days) from Securities not listed above Other Liquid Assets 134, , What is the ideal liquid asset cushion? Pct. Of Assets TOTAL LIQUID ASSETS 159, , % 10.6%

12 II. SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES Maturing Unsecured Liabilities (< 30 Days) Total Liquidity 0 Deposit Coverages 25% of CDs Maturing < 30 Days 3,000 30% of Jumbo CDs Maturing < 30 Days 1,000 10% of Other Deposits 75,000 TOTAL SHORT TERM / POTENTIALLY VOLATILE LIABILITIES & COVERAGES 79,000 BASIC SURPLUS 80, % III. QUALIFYING FHLB LOAN COLLATERAL A. Maximum Borrowing Line at FHLB (Up to 50% of Assets) B. Qualifying Loan Collateral at the FHLB (net of haircut) C. Excess Loan Collateral (if A < B) Maximum Borrowing Capacity (Lesser of A or B) Collateral Currently Encumbered by Outstanding Advances/Letters of Credit REMAINING FHLB LOAN BASED BORROWING CAPACITY 750, , , , ,000 BASIC SURPLUS W/ FHLB 280, % IV. BROKERED DEPOSIT ACCESS Maximum Board Authorized Brokered Deposit Capacity (15% of Total Assets) Current Brokered Deposit Balances REMAINING CAPACITY TO UTILIZE BROKERED DEPOSITS 225,000 30, ,000 BASIC SURPLUS W/ FHLB & BROKERED DEPOSITS 475, %

13 Case Study: Utilizing Excess Liquidity

14 90-Day Forecast Net Loan Growth Net Deposit Flows Net Cash Flow Cash/Investment Cash Flow Due Wholesale Funding Maturities $XX $XX $XX $XX $XX Cash Surplus? Hold more liquidity? Wait to fund loan growth? Extend into securities? Cash Deficit? How do we fund loan growth? Raise deposit rates? Wholesale alternatives? Extend or stay short?

15 Forward Looking Analysis Change in collateral values Sources & Uses Other funding sources Trend analysis (better than point-in-time)

16 Case Study: Managing Tighter Liquidity Levels The Profile: Loan/Deposits: 113% Loan/Assets: 83% Wholesale funding $$$ increasing Strong loan pipeline Focus: Maintain/improve earnings The Defense: Identify change in collateral values Dynamic cash flow forecast analysis Higher wholesale funding levels Stress test!

17 Case Study: Managing Tighter Liquidity Levels $40MM Loan Growth Funded by: $18MM deposits $22MM loans Change in collateral values Regulatory pressures?

18 Case Study: Managing Tighter Liquidity Levels

19 Thoughts on Wholesale Funding Prepare for higher levels of wholesale Strengthen alternatives FHLB Brokered Unsecured lines National CDs FRB Revisit policies Board education Overcoming borrowing stigma Benefit of dividend rate Least expensive funding at the margin No cannibalization or operating costs

20 Marginal Cost of Funds BALANCE: $75,000 CURRENT RATE: 0.25% MMDA/Savings RUNOFF PROTECTED RATE INCREASE 0.20% 0.40% 10.00% 2.25% 4.25% 20.00% 1.25% 2.25% 30.00% 0.92% 1.58% Annualized NII Impact (000s) ($150) ($300)

21 Industry Headwinds What ALCOs Are Doing Today The Evolution of Stress Testing What s Next?

22 Economic Rising Rates Institution Specific Industry/Company Specific Regional Environmental Worst Case Stress Testing Scenarios

23 What to Evaluate? Changing collateral values Deposit flows Loan growth LOC utilization Local market disruption Loss of funding lines Large deposit concentration risk Etc.

24 Credit Stress Example: Below Well-Capitalized Increased haircuts (last crisis) Deposit runoff (from study) Remove unsecured funding lines How long until we feel the pressure?

25 Remediation Plan

26 Case Study (continued)

27 Developing a Risk Monitor Customize based on your business model Triggers should be based on policies, historical trends, and comfort levels Qualitative & quantitative early warning indicators Should incorporate liquidity metrics, credit quality, concentration risk, and capital levels Response mechanism

28 Liquidity Risk Monitor

29 Management Response Loan/Deposit ratio tripped Risk Level 2 and currently measures 113%. This has increased over time not because deposits have been leaving but because loan growth has increased greater than expected. Management has applied a low stress level response as the total liquidity position (on-balance sheet as well as access to wholesale funding) remains strong. Additionally, credit quality trends continue to stay positive. Management will closely monitor changes to liquidity levels moving forward.

30 Industry Headwinds What ALCOs Are Doing Today The Evolution of Stress Testing What s Next?

31 Liquidity Concerns Today: Deposit Stability What to watch out for: Identify At-Risk customers Large deposit concentrations Single source concentrations Insured deposit balances (e.g. ICS)

32 Minimizing Deposit Attrition

33 Identifying At Risk Customers

34 Deposit Early Warning System

35 Final Thoughts Liquidity levels are tightening Identify minimum liquid cushion levels Run institution-specific scenarios Understand deposit stability & impact on liquidity Every basis point counts!

36 Thank You