Bank Liquidity andBank Liquidity andWholesale Funding Part IWholesale Funding Part I

Bank Liquidity andBank Liquidity andWholesale Funding Part IWholesale Funding Part I

Bank Funding and Bank Funding and Liquidity TrendsLiquidity Trends

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In this section, we will look at:

Definition of liquidity FHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?

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Liquidity - Definition Prior to 2001

“The ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund new assets.”

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Liquidity – Current Definition

“The ability to fund assets and meet obligations as they become due.”

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Liquidity – Definition in Action

Ability to manage assets and liabilities to meet obligations that are:– Foreseen– Unforeseen

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Liquidity – The Complete Picture

Tendency to focus on funding capabilities Primarily resident as assets on balance

sheet

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Cash-Producing Assets

Assets maturing within one year Readily saleable short term assets Longer term assets Loan participations

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Where Does Liquidity Reside?

Does not solely reside in a bank’s ability to:– Borrow funds in the marketplace– Generate deposits

Many banks produce additional liquidity from sources other than: – Core deposits– Existing balance sheet

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Sense of Loyalty?

There is a sense of loyalty for customers with:– Passbook savings accounts– CD’s under $100,000

There is no sense of loyalty with alternative sources of funding.

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In this section, we will look at:

Definition of liquidity FHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?

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History of FHLB Advances

Significant source of funding for thrifts for many years

Until 1999, FHLB membership was required for:– Federally chartered savings banks– OTS regulated savings banks

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History of FHLB Advances (Continued)

Thrift FHLB membership stable over past 10 years

Currently, FHLB membership is voluntary for all financial institutions.

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History of FHLB Advances (Continued)

Commercial banks gained access to FHLB in 1989.– Strong growth in membership and borrowing

levels has occurred.– FHLB membership and advance usage more

than doubled over the past 10 years.

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In this section, we will look at:

Definition of liquidityFHLB advances and community banks Deposits versus mutual funds Funding changes What’s next?

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Deposits vs. Mutual Funds

Deposits have lost ground since the 1990’s From 1995 to 2003:

– Deposits as a percent of household financial assets decreased from 42% to 21%

– Mutual funds as a percent of household financial assets increased from 19% to 34%

– Overall, mutual fund assets increased from $2.8 to $7.4 trillion (164%).

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In this section, we will look at:

Definition of liquidityFHLB advances and community banksDeposits versus mutual funds Funding changes What’s next?

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Funding Trends in Community Banks

Core deposits Non-core deposits Borrowings

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Core vs. Non-Core Funding

Four points in time: 12/31/99 12/31/01 9/30/02 9/30/04

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Changing Economy

Time periods demonstrate depositor behavior during:– Economic prosperity– Recession– Recovery

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Core vs. Non-core Funding

Billions Source:Call Report Data

12/31/1999 12/31/2001% of total funding Δ

9/30/2002 9/30/2004% of total funding Δ

DDAs $68,857 $72,477 7.08% $73,246 $79,988 14.11%NOW Accounts $57,269 $61,301 7.89% $60,574 $65,899 11.20%Savings Accounts $63,494 $68,560 9.91% $77,711 $93,095 32.20%MMDAs $75,202 $90,270 29.49% $98,838 $110,309 24.00%CDs < $100M $184,608 $187,453 5.57% $184,400 $167,775 -34.79%Total Core Funding $449,430 $480,061 59.94% $494,742 $517,066 46.72%

12/31/1999 12/31/2001% of total funding Δ

9/30/2002 9/30/2004% of total funding Δ

CDs $100M or More $70,790 $82,739 23.38% $85,212 $88,159 6.17%Brokered Depos its $6,314 $8,937 5.13% $12,773 $19,215 13.48%Foreign Depos its $898 $1,066 0.34% $1,408 $850 -1.17%FHLB Advances $31,565 $33,302 2.40% $37,076 $44,600 15.75%Other Borrowings $32,021 $36,013 7.81% $52,091 $61,198 19.05%Total Non-Core Funding $141,588 $162,057 40.06% $188,560 $214,022 53.28%

Total Funding $591,018 $642,118 100.00% $683,302 $731,088 100.00%

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Core vs. Non-core Funding

Billions Source:Call Report Data

12/31/1999 12/31/2001% of total funding Δ

9/30/2002 9/30/2004% of total funding Δ

DDAs $68,857 $72,477 7.08% $73,246 $79,988 14.11%NOW Accounts $57,269 $61,301 7.89% $60,574 $65,899 11.20%Savings Accounts $63,494 $68,560 9.91% $77,711 $93,095 32.20%MMDAs $75,202 $90,270 29.49% $98,838 $110,309 24.00%CDs < $100M $184,608 $187,453 5.57% $184,400 $167,775 -34.79%Total Core Funding $449,430 $480,061 59.94% $494,742 $517,066 46.72%

12/31/1999 12/31/2001% of total funding Δ

9/30/2002 9/30/2004% of total funding Δ

CDs $100M or More $70,790 $82,739 23.38% $85,212 $88,159 6.17%Brokered Depos its $6,314 $8,937 5.13% $12,773 $19,215 13.48%Foreign Depos its $898 $1,066 0.34% $1,408 $850 -1.17%FHLB Advances $31,565 $33,302 2.40% $37,076 $44,600 15.75%Other Borrowings $32,021 $36,013 7.81% $52,091 $61,198 19.05%Total Non-Core Funding $141,588 $162,057 40.06% $188,560 $214,022 53.28%

Total Funding $591,018 $642,118 100.00% $683,302 $731,088 100.00%

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Brokered Deposits ($100M +)

Date Total

12/31/99 $3,253MM

12/31/01 $5,409MM

9/30/02 $8,030MM

9/30/04 $12,198MM

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Other Borrowings

Date Total

12/31/99 $32,021MM

12/31/01 $36,013MM

9/30/02 $52,091MM

9/30/04 $81,198MM

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In this section, we will look at:

Definition of liquidityFHLB advances and community banksDeposits versus mutual fundsFunding changes What’s next?

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Changes in Rates

Between 9/30/04 and 3/31/05 The Federal Reserve increased rates.

1.75%

2.75%

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Short-term Rates

Increased in March 2005 Stock Market appeared to stumble Downward pressure on NIM as funding

costs rose

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Banks’ Dilemma:Sources and Uses of FundingFDIC-Supervised Community Banks

(Billions) Source: Call Report Data

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Banks’ Response

Innovatively priced time deposit products Borrowings FHLB advances Repurchase agreements

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An Interesting Trend

Community banks favor keeping securities portfolios available for sale

Trend indicates community banks frequently use securities portfolio as source of liquidity

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Balancing Act

Contributing factors to continued and increasing reliance on non-core funding sources:– Strong asset growth– Stagnant core deposit growth

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Possible Reasons for Shift

Changes in the Fed Funds rate Rebound in the economy Consumer concerns about the job market Refinancing boom

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Changes in the Fed Funds Rate

Influence returns on bank deposit products: Certificates of deposit Savings accounts Money market accounts

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Historical Fed Funds Rates

Date New Rate05/16/2000 6.50%

12/11/2001 1.75%

11/06/2002 1.25%

06/25/2003 1.00%

06/30/2004 1.25%

09/21/2004 1.75%

11/10/2004 2.00%

02/01/2005 2.50%

03/21/2005 2.75%

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Rebound in the Economy

Investor confidence returns Sophisticated investors more likely to:

– Place funds in liquid, non-maturity deposit accounts

– Move them to higher yielding mutual funds and/or stocks

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Concerns about Job Market

Consumers worried about: Future income Labor markets Business conditions

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Refinancing Boom

Significant amount of escrow deposit funds Overall elevation of core deposits Non-maturity deposits realize gains from

short term funds

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Bank Liquidity and Wholesale Funding Part I

Select the next section, Federal Home Loan Bank Advance Trends, to continue.