liquidity analysis and reportingeoplugin.commpartners.com/fms/liquidity analysis and...

Liquidity Analysis and Reporting

February 25, 2010

Quick | Convenient | Cost-Effective | Online Learning

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www.fmsinc.org | 800-ASK-4FMS


Jerry Boebel, CFAProfitStars

[email protected]

Quick | Convenient | Cost-Effective | Online Learning www.fmsinc.org | 800-ASK-4FMS

Objectives• Define liquidity

• Current trends

• Evaluate traditional liquidity analysis

• Consider a new approach

– Better liquidity and NIM management

– Meet changing examiner expectations


February 25, 2010


Liquidity

• Essential to compensate for expected and unexpected balance sheet fluctuations and provide funds for growth

• Liquidity risk occurs when you are not able to obtain funds at the optimal price within a reasonable time period to meet obligations as they become due


Current Trends

• In Q2 2008, the securitization market froze

• Finance units that used to sell commercial paper to fund their lending started going after your deposits

• GMAC (now Ally Bank)

• ING

• Brokered deposits became more expensive (relative to asset yields)


February 25, 2010


Fed Funds Target vs. COFI

Source: Thompson Reuters

0.000%

1.000%

2.000%

3.000%

4.000%

5.000%

6.000%

Au

g-0

7

Se

p-0

7

Oct-

07

No

v-0

7

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct-

08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct-

09

No

v-0

9

De

c-0

9

COFI

FF Target Rate


Current Trends

Source: CUNA and Affiliates Research and Statistics

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Jun

-07

Jul-

07

Au

g-0

7

Se

p-0

7

Oc

t-0

7

No

v-0

7

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oc

t-0

8

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oc

t-0

9

No

v-0

9

De

c-0

9

1yr UST

CU Avg 1yr CD


February 25, 2010


Current Trends

Source: FHLB Combined Financial Reports


Current Trends• Q1 2010- Liability-side liquidity sources have stabilized somewhat

– Brokered CD Spreads have decreased

– Net non-core funding dependency peer ratios are down from peak

– FHLB system capital has stabilized

• Commercial banks have become less dependant on liability-based liquidity strategies than Q1 2009


February 25, 2010


Current Trends• US Consumer savings 4.7% in 11/2009*

• US Consumer debt decreased $17.5 billion during 11/2009 (8.5%) (CNBC 1/08/2010)

• Economists predicting savings rate returning to 8-9% within 2 years

• US Consumer is paying down debt AND depositing to savings

• Concentration of wealth with the Boomers changes historic trends

* Source: US Department of Commerce


Loans/Deposits Ratio

Source: CUNA and Affiliates Research and Statistics, FDIC Statistical Releases

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

95.00%

100.00%

105.00%

110.00%

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct-

08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct-

09

No

v-0

9

De

c-0

9

NCUA L/D

FDIC L/D


February 25, 2010


Current Trends

• Will the funding always be there?– Retail deposit growth is very competitive

– Wholesale funds have regulatory stigma

• Regulation is pointing towards bringing back the traditional depository structure

• Failure to consider long-term liquidity will compress NIM


Traditional Liquidity Analysis

• Asset Liquidity

– Investment sales

– Loan securitizations

– Collateral for borrowings

• Liability Liquidity

– Borrowing capabilities


February 25, 2010


Liquidity: Funding Needs:

Cash & Due 23,591$ Overnight Borrowings 27,122$ Interest Bearing Balances 1,486 Other Borrowings Due <30 Days -

Fed Funds Sold - 10% of CDs Maturing <30 Days 22,016 Investment Securities 216,061 10% of Jumbo CDs Maturing <30 Days 6,400 Less Pledged to Borrowings (131,664) 5% NMD Runoff (Worst Case) 19,545

Residential Mortgages 165,858 Total Needs 75,084

Less Pledged to Borrowings (127,880) Loans Held for Sale 28,355 Basic Surplus 120,770

Saleable Loans (cc, student) 20,047 Total Surplus (w/borrowings) 235,770

Brokered CD Capacity 75,000 Total Assets 1,053,690

Lines of Credit 40,000 Liquidity Ratio 11%

Liquidity Sources 310,854 Liquidity Ratio (incl. borr. cap.) 22%




• Liquidity is usually only a major concern at problem institutions

• “Pass / Fail” threshold was the default

• Regulators developed standard analysis methods– Geared towards identifying failure threats

– Focused on liquidation view


February 25, 2010



• Focus had historically been on static measures– Short-Term Assets to Short-Term Liabilities

– Pledged Securities to Total Securities

– Brokered Deposits to Deposits

– Core Deposits to Total Liabilities

– Net Loans and Leases to Deposits

– Net Loans and Leases to Total Assets


Current Liquidity Analysis

• Focus has evolved to evaluate broader measures and trends– Net Short-Term Non Core Funding Dependence

– Net Non-Core Funding Dependence Ratio


February 25, 2010


Weaknesses of Traditional Analysis

• Static view

• Dated financials

• Does not account for:– Asset growth

– Deposit behavior

• No consideration of broader ALM impact


Improved Liquidity Analysis

• Approach liquidity measurement like IRR

• Incorporate strategic plan and budget

• Measure results for distinct time horizons

• Evaluate scenarios

– Interest rate changes may only be an element

– Consider best / worst / most likely

• Dynamic cash flows


February 25, 2010


Step 1: Compile Realistic Numbers

• Separate internal liquidity sources from external sources– Makes it easier to do scenario testing– Examiners wish to focus on your internal capabilities

• Use your budget projections that are built into your ALM model


Step 1: Compile Realistic Numbers• Cash & Due is not completely liquid• Determine true asset sale/pledge values– Show at current market values– Haircuts often apply for pledging– Many loan types require time to liquidate

• Accurately reflect borrowing capacity– FHLB or Corporate CU lines should be questioned– FHLB-required stock purchases should be netted– Brokered deposits take several days to settle


February 25, 2010


Step 2: Forecast• Project asset and deposit growth

• Forecast realistic deposit volatility

• Remember other key funding needs

– Dividend payments

– Debt service

– Derivative contracts

– Anticipated acquisitions

• Apply assumption shocks to identify risks


Step 3: Report & Analyze


February 25, 2010






February 25, 2010




Step 3: Report & AnalyzeFunding Coverage Forecast:

Risk Limit Compliance:Current Limit Result

Primary Surplus Coverage 5760.1% > 150.0% Pass �

Total Surplus Coverage 5760.1% > 250.0% Pass �

Primary Surplus / Assets 9.8% > 5.0% Pass �

Total Surplus / Assets 9.8% > 10.0% Fail �

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

09/30/04 1 month 3 months 6 months 12 months

Mill

ions Total Secondary Liquidity

Total Primary Liquidity

Forecasted Funding Needs

Current


February 25, 2010


Examiner Expectations

• What if:

– Lines of credit are reduced or closed

– Brokered market is unavailable

– Retail deposits runoff

• What if all of the above occur?


Benefits• Integrates liquidity management into ALM program

• Forward-looking and dynamic

• Enables evaluation of impact on NIM from funding options

• Helps ALCO members see choices more clearly

• Demonstrates more sophisticated approach to liquidity management


February 25, 2010


Resources Needed

• Reasonable budget process

– Includes input from functional areas

– Includes identification of key cash flow issues

• Effective forecasting model


Jerry Boebel, CFA

Profitstars (a Jack Henry Company)

800-356-9099

[email protected]


February 25, 2010


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