1. Bank Liquidity and Wholesale Funding Part I Bank Funding and Liquidity Trends

2. 2 In this section, we will look at:  Definition of liquidity  FHLB advances and community banks  Deposits versus mutual funds  Funding changes  What’s next?

3. 3 Liquidity - Definition Prior to 2001 “The ability to efficiently and economically accommodate decreases in deposits and other liabilities, as well as fund new assets.”

4. 4 Liquidity – Current Definition “The ability to fund assets and meet obligations as they become due.”

5. 5 Liquidity – Definition in Action Ability to manage assets and liabilities to meet obligations that are: – Foreseen – Unforeseen

6. 6 Liquidity – The Complete Picture  Tendency to focus on funding capabilities  Primarily resident as assets on balance sheet

7. 7 Cash-Producing Assets  Assets maturing within one year  Readily saleable short term assets  Longer term assets  Loan participations

8. 8 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

9. 9 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.

10. 10 In this section, we will look at:  Definition of liquidity  FHLB advances and community banks  Deposits versus mutual funds  Funding changes  What’s next?

11. 11 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

12. 12 History of FHLB Advances (Continued)  Thrift FHLB membership stable over past 10 years  Currently, FHLB membership is voluntary for all financial institutions.

13. 13 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.

14. 14 In this section, we will look at:  Definition of liquidity  FHLB advances and community banks  Deposits versus mutual funds  Funding changes  What’s next?

15. 15 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%).

16. 16 In this section, we will look at:  Definition of liquidity  FHLB advances and community banks  Deposits versus mutual funds  Funding changes  What’s next?

17. 17 Funding Trends in Community Banks  Core deposits  Non-core deposits  Borrowings

18. 18 Core vs. Non-Core Funding Four points in time:  12/31/99  12/31/01  9/30/02  9/30/04

19. 19 Changing Economy Time periods demonstrate depositor behavior during: – Economic prosperity – Recession – Recovery

20. 20 Core vs. Non-core Funding

21. 21 Core vs. Non-core Funding

22. 22 Brokered Deposits ($100M +) DateTotal 12/31/99$3,253MM 12/31/01$5,409MM 9/30/02$8,030MM 9/30/04$12,198MM

23. 23 Other Borrowings DateTotal 12/31/99$32,021MM 12/31/01$36,013MM 9/30/02$52,091MM 9/30/04$81,198MM

24. 24 In this section, we will look at:  Definition of liquidity  FHLB advances and community banks  Deposits versus mutual funds  Funding changes  What’s next?

25. 25 Changes in Rates Between 9/30/04 and 3/31/05 The Federal Reserve increased rates. 1.75 % 2.75 %

26. 26 Short-term Rates  Increased in March 2005  Stock Market appeared to stumble  Downward pressure on NIM as funding costs rose

27. 27 Banks’ Dilemma: Sources and Uses of Funding FDIC-Supervised Community Banks (Billions)Source: Call Report Data

28. 28 Banks’ Response  Innovatively priced time deposit products  Borrowings  FHLB advances  Repurchase agreements

29. 29 An Interesting Trend  Community banks favor keeping securities portfolios available for sale  Trend indicates community banks frequently use securities portfolio as source of liquidity

30. 30 Balancing Act Contributing factors to continued and increasing reliance on non-core funding sources: – Strong asset growth – Stagnant core deposit growth

31. 31 Possible Reasons for Shift  Changes in the Fed Funds rate  Rebound in the economy  Consumer concerns about the job market  Refinancing boom

32. 32 Changes in the Fed Funds Rate Influence returns on bank deposit products:  Certificates of deposit  Savings accounts  Money market accounts

33. 33 Historical Fed Funds Rates DateNew Rate 05/16/20006.50% 12/11/20011.75% 11/06/20021.25% 06/25/20031.00% 06/30/20041.25% 09/21/20041.75% 11/10/20042.00% 02/01/20052.50% 03/21/20052.75%

34. 34 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

35. 35 Concerns about Job Market Consumers worried about:  Future income  Labor markets  Business conditions

36. 36 Refinancing Boom  Significant amount of escrow deposit funds  Overall elevation of core deposits  Non-maturity deposits realize gains from short term funds

37. 37 Bank Liquidity and Wholesale Funding Part I Select the next section, Federal Home Loan Bank Advance Trends, to continue.