|
Tuesday, September 25, 2018 |
||||||||
|---|---|---|---|---|---|---|---|---|
|
MANAGING DIRECTOR: |
|
US Treasury Market |
|||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 9/18/18 | 2.05 | 2.17 | 2.36 | 2.58 | 2.81 | 2.88 | 2.94 | 3.01 | 3.05 | 3.14 | 3.20 |
| 9/19/18 | 2.03 | 2.16 | 2.36 | 2.58 | 2.81 | 2.89 | 2.96 | 3.04 | 3.08 | 3.16 | 3.23 |
| 9/20/18 | 2.03 | 2.17 | 2.37 | 2.58 | 2.81 | 2.89 | 2.96 | 3.03 | 3.07 | 3.15 | 3.21 |
| 9/21/18 | 2.05 | 2.18 | 2.38 | 2.58 | 2.81 | 2.89 | 2.95 | 3.03 | 3.07 | 3.14 | 3.20 |
| 9/24/18 | 2.07 | 2.22 | 2.38 | 2.60 | 2.83 | 2.89 | 2.96 | 3.04 | 3.08 | 3.15 | 3.21 |
Source: U.S. Department of the Treasury, as of 09/24/2018
Where Have All the Deposits Gone?
Community banks have a long list of critical concerns, including credit quality in the loan case, the health of the local economy, I.T. security, as well as many other issues. Currently, liquidity should be included near the top of this list. As the loan/deposit (L/D) ratio continues to increase in most banks, deposit balances have stagnated, making liquidity a major concern. Interestingly, some banks have not increased their loan portfolio year-over-year, yet they still have a higher L/D ratio now because of deposit run-off.
The stark reality for most community bankers is that it’s very expensive to maintain and grow deposits in the current environment. Keeping deposits means increasing the banks Cost of Funds (COF) while most likely decreasing the Spread and Net Interest Margin. We say “most likely” because it is and will be difficult to increase the Yield on Earning Assets (YEA) at the same pace as the COF.
No surprise, but banks with highest Loan/Deposit ratios (and especially those with substantial AG exposure) face heightened scrutiny. As we have cautioned previously: Be prepared, regardless of how much liquidity you think is appropriate, as it might not be enough to secure the treatment you think you deserve. Keep in mind, wholesale funds are far easier to secure and maybe even cheaper than retail growth, but there is a limit. Funding with wholesale resources that are greater than 25% of total assets will be questioned. Plus, any wholesale source that is greater than 10% of total assets will most likely be reviewed.
Another increasing point of emphasis is the Severe Liquidity Stress Test. This exercise reduces retail CD’s and transaction accounts by 20% and all brokered deposits by 100%. Plus, borrowing lines from correspondent banks and the FHLB are curtailed 75% and 50%, respectively. Not surprisingly, many wholesale funded banks that have acceptable liquidity ratios early on, show negative results (balances) in the longest time period of 181-365 days.
Even a positive cash flow post-stress still requires an updated and viable Contingency Funding Policy that specifically outlines the ability to raise funds. Typically, funding steps would include the sale of unpledged securities without taking a loss, FHLB borrowing lines, and the availability of brokered CD’s. There are of course other sources available to some banks.
In conclusion, bankers should review liquidity in the “big picture” by identifying cash flow needs and sources of funds in the context of “normal”, as well as stressed situations. If non-core funding is an issue try to develop a long-term plan to reduce wholesale dependence (easier said than done). Lastly, identify some “alarm bells” that might signal funding issues going forward and formulate responses. Thinking ahead is the key to comprehensive liquidity management.
If we can help, call AMG at 800.226.1923.
This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.
•Not FDIC Insured •No Bank Guarantee •May Lose Value