asset/liability management - graduate school of banking...2018/08/01 · asset/liability management...

ASSET/LIABILITY MANAGEMENT - YEAR 2

“Bank Liquidity Management: Developing an Effective Liquidity Strategy”

John McQueen Senior Financial Analyst

UMB Bank, n.a. Kansas City, MO

[email protected] 816-860-7202

August 1, 2018

Investment Banking Division

Bank Liquidity ManagementDeveloping an Effective Liquidity Strategy

2

1.Definition of Liquidity2.Measuring Liquidity3.Static and Dynamic Liquidity Measures4.Liquidity Gap Analysis5.Contingency Funding Plans6.Liquidity Stress Testing7.Liquidity Management Strategies


Goals and Objectives

•OCC Definition of Liquidity:

• “Liquidity is a financial institution’s capacity to readily meet its cash and collateral obligations at a reasonable cost.”*

•Liquidity Risk is defined as:

• “the risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations.”*

• Liquidity Risk is inherent in banking.

• Liquidity Risk is managed, not eliminated.

• Cash Flows are key.

•Managing Liquidity is an integral part of Asset-Liability Management

• Liquidity Risk is impacted by Credit Risk, Interest Rate Risk, Operational Risk, Counter-Party Risk and Compliance Risk.

Definition of Liquidity

* = OCC Comptroller’s Handbook, June 2012, page 3.

Investment Banking Division3

Definition of Liquidity


•Operating versus Contingent Liquidity• Operating Liquidity includes available cash or cash-equivalent assets (i.e., assets that can be quickly and easily

converted to available cash).

• Contingent Liquidity includes lines of credit or other borrowing facilities

• The ability to meet financial obligations such as deposit withdrawals, loan originations, security purchases, and other commitments.

•Asset-Based Liquidity Sources:• Cash flows stemming from the bank’s asset base (e.g., principal and interest payments from loans and securities)

(Operating)

• Pledging of assets to secure borrowings or lines of credit (Contingent)

• Liquidation of assets (can be both Operating and Contingent)

• Securitization of assets (Contingent)

•Liability-Based Liquidity Sources:• Retail deposits (Operating)

• Borrowed funds (Contingent)

• Deposit Listing Services (Operating)

• Brokered Deposits (Operating)

• Funding from Financial Markets (Contingent)

Liquidity Risk

• Banks have a variety of ways to increase their liquidity position

• Shorten asset maturities• Improve the average liquidity of assets• Lengthen liability maturities• Issue more equity• Reduce contingent commitments (LOCs, etc)• Obtain liquidity protection


Liquidity Risk


•Lessons from the Financial Crisis• From 2008 to 2012, the FDIC closed 465 failed banks (there were only 10 bank failures in

the five years prior to 2008)

• Devaluation of asset base led to evaporation of bank liquidity

• Financial markets frozen, no bid side for bonds except U.S. Treasuries

• Unprecedented Federal Reserve Bank Intervention

• Unprecedented increase in bank regulation (Dodd-Frank, Basel III)

• Greater vigilance of bank liquidity management and risk

•Post-Financial Crisis• Banks remain highly liquid

• “Surge deposits” and lack of loan demand

• “Surge out”? Change in deposit mix?

• Effective Funds Management will be key to success

Measuring Liquidity


•Static Liquidity Measures (Traditional)• Liquidity Ratio

• Loans-to-Deposits Ratio

• Loans-to-Total Assets Ratio

• Investments-to-Total Assets Ratio

• Non-Core Funding Dependency Ratio

• Total Borrowing-to-Total Assets Ratio

• Volatile Funds Ratio

• Pledgable Investment Portfolio Collateral

• Funding Concentration

•Dynamic Liquidity Measures (Current Trend)• Scenario-Based Forecasting and Planning

• Stress Testing (e.g., unanticipated deposit runoff, credit deterioration, correspondent bank failure, rapid decline in market valuation of investment portfolio, etc.)

• Quantification of Contingency Funding Plan

Measuring Liquidity


Source: SNL Financial Data, 2018.

Measuring Liquidity



Measuring Liquidity


•Policy Guidelines: Limits vs. Ranges (“Triggers”)• In addition to Limits , ALCO sets up ranges for static liquidity measures that assign

levels of risk

• Risk levels act as warning signs or “triggers” for possible ALCO response

• Assess trends vs. short-term events or circumstance

Ratios Current Guideline RiskLiquidity Ratio 20.02% > 15% Low

Loans-to-Total Deposits 85.53% < 90% Moderate

Loans-to-Total Assets 68.68% < 80% Low

Investments-to-Total Assets 19.00% > 15% Moderate

Non-Core Funding Dependency 10.28% < 30% Low

Total Borrowings-to-Total Assets 7.02% < 20% Low

Volatile Funds 9.20% < 20% Low

Static versus Dynamic Liquidity Measures


•Static - Traditional Approach to Liquidity Management• Policy directives and Policy Limits based upon Static Liquidity Measures

• Liquidity monitoring based upon Static Liquidity Measures

• Many different ratios enable a bank to gain a broad perspective on liquidity

• Problems with Traditional Approach

• Backward-looking rather than Forward-Looking; relies on historical estimates not projections

• Does not give a complete picture of liquidity (Loans-to-Deposits vs. Loans-to-Total Funding Sources)

• Does not incorporate growth plans or business development

• Static Liquidity Measures may be insufficient in quantifying actual risks

• Does not incorporate potential impact of stress events

•Dynamic - Current Trend in Liquidity Management• Policy directives and Policy Limits based upon Dynamic Liquidity Measures

• Development of indicators or “triggers”

• Example: Loan-to-Deposits Ratio < 80%, no action required, continue to monitor; Loans-to-Deposits Ratio > 80% but < 90%, additional planning required; Loans-to-Deposits Ratio >90%, immediate action required

• Liquidity management based upon response to changes in indicators

Dynamic Liquidity Measures


Sources and Uses of Funds

•Sources and Uses of Funds Report:• Uses projected cash inflows and outflows to measure potential periodic gaps in liquidity.

•Sources of Funds:• Cash and Cash Equivalents (Fed Funds Sold, EBA, etc.)

• Unpledged Securities (at market value)

• Scheduled cash flows from the bank’s Investment Portfolio

• Scheduled cash flows from the bank’s Loan Portfolio

• Loans sold to FHLB, etc.

• Growth in Retail and Brokered Deposits

• Wholesale Funding

•Uses of Funds:• Loan commitments

• Matured borrowings (e.g., FHLB Advances)

• Matured CDs

• Non-Maturity Deposit runoff



SOURCES 3 Months 6 Months 9 Months 12 MonthsC&I Loan Paydowns Scheduled Principal 6,345,523 8,081,999 10,067,349 12,038,841 Prepaid Principal 22,508,301 20,439,766 11,186,401 13,933,825Mortgage Loan Paydowns Scheduled Principal 3,909,723 3,282,055 3,028,191 2,903,930 Prepaid Principal 2,615,490 2,548,286 3,146,377 2,263,531Construction Loan Paydowns Scheduled Principal 927,406 1,460,328 1,944,659 2,024,660 Prepaid Principal 4,133,086 4,755,552 2,887,901 1,072,935Consumer Loan Paydowns Scheduled Principal 1,343,349 1,404,968 1,461,497 1,526,655 Prepaid Principal 585,726 557,992 681,736 590,412All Other Loan Paydowns Scheduled Principal 21,596,092 17,295,773 16,768,256 15,712,854 Prepaid Principal 14,593,679 13,191,450 11,140,526 10,361,960 Interest Cash Flow 4,486,592 4,843,765 5,327,692 5,741,575 Total 83,044,967 77,861,934 67,640,584 68,171,177

Investment Paydowns Matured AFS Securities 11,720,000 5,780,000 970,000 4,225,000 Matured HTM Securities - - - - Interest-Earning Deposits 49,200,725 49,200,725 49,200,725 49,200,725 Prepaid Prin/Early Redemption 330,000 - - 650,000 Interest Cash Flow 526,660 443,505 486,404 422,578 Total 61,777,385 55,424,230 50,657,129 54,498,303



SOURCES 3 Months 6 Months 9 Months 12 Months

Estimated Deposit Growth Demand Deposits 5,054,207 5,054,207 5,054,207 5,054,207 Savings Deposits 1,892,483 1,888,549 1,884,834 1,881,326 NOW Deposits 9,652,504 9,636,715 9,623,750 9,613,118 MMDA Deposits 18,766,481 18,846,304 18,913,026 18,968,798 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Total 58,372,483 84,547,042 91,178,942 80,312,293

Borrowings FHLB - 1,947,000 600,000 1,938,283 Other 4,200,000 4,200,000 4,200,000 4,200,000 Total 4,200,000 6,147,000 4,800,000 6,138,283

Cash Interest: Overnight Investment 10,115 13,435 15,343 17,177Equity Adjustments - - - -Other Assets/Liabilities - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 209,059,513 225,648,204 215,946,561 210,791,796



3 Months 6 Months 9 Months 12 MonthsUSESLoan Funding C&I Loans 21,201,606 28,007,789 20,937,185 25,795,896 Mortgage Loans 5,225,389 5,744,528 6,102,418 5,104,368 Construction Loans 3,607,917 6,097,708 4,765,507 3,049,632 Consumer Loans 1,860,202 1,954,222 2,136,487 2,111,415 Other Loans 30,474,852 30,281,283 27,776,667 25,993,552 Total 62,369,965 72,085,530 61,718,264 62,054,862

Investment Purchases Available-For-Sale 12,312,596 6,001,269 1,176,048 5,066,346 Held-To-Maturity - - - - Interest-Earning Deposits 49,200,725 49,200,725 49,200,725 49,200,725 Total 61,513,321 55,201,994 50,376,773 54,267,071

Deposit Runoff Demand Deposits 5,054,207 5,054,207 5,054,207 5,054,207 Savings Deposits 1,892,483 1,888,549 1,884,834 1,881,326 NOW Deposits 9,652,504 9,636,715 9,623,750 9,613,118 MMDA Deposits 18,766,481 18,846,304 18,913,026 18,968,798 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Interest Cash Flow 642,156 633,590 595,741 556,951 Total 59,014,640 85,180,632 91,774,683 80,869,244



3 Months 6 Months 9 Months 12 MonthsBorrowing Paydowns FHLB - 1,947,000 600,000 1,938,283 Other 4,200,000 4,200,000 4,200,000 4,200,000 Interest Cash Flow 15,259 19,178 28,337 34,847 Total 4,215,259 6,166,178 4,828,337 6,173,130

Cash Interest: Overnight Borrowing - - - -Other Cash Outflows 4,161,291 4,161,291 4,161,291 4,161,291Total USES 191,274,476 222,795,625 212,859,349 207,525,598

LIQUIDITY GAP Excess (Need) 17,785,037 2,852,579 3,087,211 3,266,198 Cumulative 17,785,037 20,637,616 23,724,827 26,991,025

Cumulative Sources/Uses Ratio 109.30% 101.28% 101.45% 101.57%

Liquidity Gap/Total Assets Ratio 2.89% 3.36% 3.86% 4.39%

Liquidity Gap Analysis



•Uses pro-forma cash flow analysis to reveal periodic gaps in liquidity:• Sources and Uses of Funds can be projected over various interest rate, balance sheet growth or balance sheet mix

scenarios

• Exposes changes in cash flows and possible needs for liquidity over time

• Changes in cash flows need to be examined thoroughly (i.e., Did Sources change due to changes in imbedded options, deterioration in credit, etc.? Did Uses change due to changes in loan demand, deposit runoff, limitations in borrowing accessibility?)

• Should be presented to Board of Directors and ALCOs to establish contingencies

• Very assumption driven; assumptions should be measured and appropriate

• Should also consider impact to asset securitization and sales



SOURCES 3 Months 6 Months 9 Months 12 Months 15 Months 18 Months 21 Months 24 Months 27 Months 30 Months 33 Months 36 Months Total Loan Paydowns 83,044,967 77,861,934 67,640,584 68,171,177 51,373,391 53,921,444 57,565,096 60,067,967 61,948,122 62,088,561 60,086,561 61,210,867

Total investment Paydowns 61,777,385 55,424,230 50,657,129 54,498,303 52,328,311 49,700,121 50,751,297 58,335,655 51,244,376 49,859,180 55,939,114 54,846,023

Total Deposit Growth 58,372,483 84,547,042 91,178,942 80,312,293 73,515,748 92,440,403 96,789,534 104,137,406 80,825,213 95,136,724 107,863,494 98,918,392

Total Borrowings 4,200,000 6,147,000 4,800,000 6,138,283 5,110,000 4,495,000 4,200,000 4,731,000 4,200,000 4,200,000 4,200,000 4,200,000

Cash Interest: Overnight Investment 10,115 13,435 15,343 17,177 19,589 21,892 23,936 25,705 28,150 30,545 32,705 34,187Equity Adjustments - - - - - - - - - - - -Other Assets/Liabilities - - - - - - - - - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 209,059,513 225,648,204 215,946,561 210,791,796 184,001,603 202,233,422 210,984,426 228,952,296 199,900,423 212,969,573 229,776,437 220,864,033

USES Total Loan Funding 62,369,965 72,085,530 61,718,264 62,054,862 45,513,336 48,074,639 51,644,090 54,001,172 56,085,818 56,230,575 54,173,315 55,167,739

Total Investment Purchases 61,513,321 55,201,994 50,376,773 54,267,071 52,008,763 49,454,862 50,456,373 58,073,428 50,906,827 49,635,902 55,580,609 54,566,621

Total Deposit Runoff 59,014,640 85,180,632 91,774,683 80,869,244 74,061,162 92,974,285 97,305,140 104,634,248 81,320,666 95,633,881 108,357,331 99,406,328

Total Borrowing Paydowns 4,215,259 6,166,178 4,828,337 6,173,130 5,155,397 4,543,049 4,248,724 4,780,072 4,252,201 4,252,269 4,251,769 4,251,133

Cash Interest: Overnight Borrowing - - - - - - - - - - - -Other Cash Outflows 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291Total USES 191,274,476 222,795,625 212,859,349 207,525,598 180,899,949 199,208,126 207,815,618 225,650,212 196,726,803 209,913,919 226,524,314 217,553,112

LIQUIDITY GAP Excess (Need) 17,785,037 2,852,579 3,087,211 3,266,198 3,101,654 3,025,297 3,168,808 3,302,084 3,173,619 3,055,654 3,252,123 3,310,921 Cumulative 17,785,037 20,637,616 23,724,827 26,991,025 30,092,679 33,117,976 36,286,784 39,588,869 42,762,488 45,818,142 49,070,265 52,381,186

Cumulative Sources/Uses Ratio 109.30% 101.28% 101.45% 101.57% 101.71% 101.52% 101.52% 101.46% 101.61% 101.46% 101.44% 101.52%

Liquidity Gap/Total Assets Ratio 2.89% 3.36% 3.86% 4.39% 4.89% 5.38% 5.90% 6.44% 6.95% 7.45% 7.98% 8.52%




•Liquidity Gap Report:• Summarizes differences between cash inflows and cash out flows and impact on available liquidity

• Should be used in conjunction with projected balance sheet growth

• Should be used to measure impact of unanticipated changes in balance sheet growth and structure

• Useful for establishing “triggers”

• Useful for quantifying and assessing Contingency Funding Plan

• Use stress tests to identify the amount and timing of liquidity needs

• Stress tests should include unanticipated runoff or growth in deposits, changes in loan repayments, changes in MBS or CMO prepayments, changes in access to wholesale funding, etc.

Contingency Funding Plans


•All institutions should have a formal Contingency Funding Plan that defines strategies for addressing liquidity shortfalls in emergency situations.

•Contingency Funding Plans should:• Establish a liquidity event-management framework (including points of contact and public relation plans),

• Establish a monitoring framework (i.e., develop early-warning “triggers”),

• Identify potential contingent funding events,

• Identify potential funding sources,

• Require stress testing, and

• Require periodic testing of the CFP framework.

Contingency Funding Plans


•Possible Stress Events include:• Deterioration in asset quality;

• Downgrades in credit ratings;

• Deterioration in the liquidity management function;

• Widening of credit default spreads;

• Operating losses;

• Rapid growth;

• Inability to fund asset growth;

• Inability to renew or replace maturing funding liabilities;

• Price volatility or changes in the market value of various assets;

• Negative press coverage;

• Deterioration in economic conditions or market perceptions;

• Disruptions in the financial markets;

• General or sector-specific market disruptions (e.g., payment systems or capital markets);

• Funding concentrations exceeded and

• Significant decline in stock price.

Liquidity Stress Testing


After identifying stress events, institutions should implement stress tests to assess liquidity risk posed by such events.

•Stress Testing:• Helps an institution better understand the vulnerability of certain funding sources to various risks and helps identify

when and how alternative sources should be accessed;

• Helps institutions identify methods for rapid and effective responses, guide crisis management planning, and determine how large of a liquidity buffer should be maintained;

• Should be conducted on a frequent basis dependent upon the complexity of the institution and exposure to risk;

• Should be based on existing cash flow projections that are appropriately modified to reflect potential stress events;

• Should identify alternative funding sources and ensure ready access to funds.

•Cash Flow Projections used in Stress Tests should account for:• Customer behaviors (early deposit withdrawals, renewal/run-off of loans, exercising options);

• Prepayments on loans and mortgage-backed securities;

• Seasonality (public-fund fluctuations, agricultural credits, construction lending); and

• Various time horizons.



•Sensitivity Analysis:• Assesses the risk to changes in key variables or assumptions

• Applies stresses or shocks

• “What if” our assumptions are wrong

•Scenario Analysis:• Assesses the risk of various events or circumstances

• Exogenous shocks that impact cash flows

• Example: downturn in local economy, loss of large depositors,



Sensitivity Analysis

A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.

• Sensitivity analysis is an analysis that finds out how sensitive an output is to any change in an input while keeping other inputs constant.




•Sensitivity Analysis has the following purposes: • Testing the robustness of the results of a model or system in the presence of uncertainty.

• Increased understanding of the relationships between input and output variables in a system or model.

• Uncertainty reduction: identifying model inputs that cause significant uncertainty in the output and should therefore be the focus of attention if the robustness is to be increased (perhaps by further research).

• Searching for errors in the model (by encountering unexpected relationships between inputs and outputs).

• Model simplification – fixing model inputs that have no effect on the output, or identifying and removing redundant parts of the model structure.

• Enhancing communication from modelers to decision makers (e.g. by making recommendations more credible, understandable, compelling or persuasive).

• Test maximum and minimum levels to set boundaries for inputs.

Source: Pannell, D.J. (1997). Sensitivity analysis of normative economic models: Theoretical framework and practical strategies, Agricultural Economics 16: 139-152.[1]




•Using Sensitivity Analysis in Liquidity Stress Test: • Change prepayment speeds on loans, MBS and CMOs

• Change the rate sensitivity factors (betas) on Non-Maturity Deposits

• Change the decay rates on Non-Maturity Deposits

• Change early redemption assumptions on CD balances

• Change the draw-down assumptions on Lines of Credit




•Stress Testing Non-Maturity Deposit Assumptions:• Simulate unanticipated runoff of Non-Maturity Deposits: 10% runoff over 3 month period, 20% total runoff over 12

month period, 50% runoff over 36 month period, no replacement of funds

• No changes in loan and investment assumptions; static growth, maintain loan and investment balances

• No changes to other model assumptions



Sources and Uses of Funds – Before Change in NMD Assumptions

3 Months 6 Months 9 Months 12 MonthsEstimated Deposit Growth Demand Deposits 5,054,207 5,054,207 5,054,207 5,054,207 Savings Deposits 1,892,483 1,888,549 1,884,834 1,881,326 NOW Deposits 9,652,504 9,636,715 9,623,750 9,613,118 MMDA Deposits 18,766,481 18,846,304 18,913,026 18,968,798 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Total 58,372,483 84,547,042 91,178,942 80,312,293


Cash Interest: Overnight Investment 10,115 13,435 15,343 17,177Equity Adjustments - - - -Other Assets/Liabilities - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 209,059,513 225,648,204 215,946,561 210,791,796



Sources and Uses of Funds – Before Change in NMD Assumptions3 Months 6 Months 9 Months 12 Months

Deposit Runoff Demand Deposits 5,054,207 5,054,207 5,054,207 5,054,207 Savings Deposits 1,892,483 1,888,549 1,884,834 1,881,326 NOW Deposits 9,652,504 9,636,715 9,623,750 9,613,118 MMDA Deposits 18,766,481 18,846,304 18,913,026 18,968,798 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Interest Cash Flow 642,156 633,590 595,741 556,951 Total 59,014,640 85,180,632 91,774,683 80,869,244

Borrowing Paydowns FHLB - 1,947,000 600,000 1,938,283 Other 4,200,000 4,200,000 4,200,000 4,200,000 Interest Cash Flow 15,259 19,178 28,337 34,847 Total 4,215,259 6,166,178 4,828,337 6,173,130


LIQUIDITY GAP Excess (Need) 17,785,037 2,852,579 3,087,211 3,266,198 Cumulative 17,785,037 20,637,616 23,724,827 26,991,025





Sources and Uses of Funds – AFTER Change in NMD Assumptions3 Months 6 Months 9 Months 12 Months

Estimated Deposit Growth Demand Deposits - - - - Savings Deposits - - - - NOW Deposits - - - - MMDA Deposits - - - - Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Total 23,006,808 49,121,267 55,703,125 44,794,844


Cash Interest: Overnight Investment 2,276 - - -Equity Adjustments - - - -Other Assets/Liabilities - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 173,685,998 190,208,993 180,455,401 175,257,170



Sources and Uses of Funds – AFTER Change in NMD Assumptions3 Months 6 Months 9 Months 12 Months

Deposit Runoff Demand Deposits 8,661,056 4,330,528 2,598,317 1,732,211 Savings Deposits 3,335,249 1,667,624 1,000,575 667,050 NOW Deposits 9,529,062 4,764,531 2,858,719 1,905,812 MMDA Deposits 10,757,269 5,378,634 3,227,181 2,151,454 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Interest Cash Flow 638,070 623,885 583,867 545,153 Total 55,927,514 65,886,470 65,971,783 51,796,524

Borrowing Paydowns FHLB - 1,947,000 600,000 1,938,283 Other 4,200,000 4,200,000 4,200,000 4,200,000 Interest Cash Flow 15,259 19,178 28,337 34,847 Total 4,215,259 6,166,178 4,828,337 6,173,130

Cash Interest: Overnight Borrowing 1,987 16,258 27,145 31,534Other Cash Outflows 4,161,291 4,161,291 4,161,291 4,161,291Total USES 188,189,337 203,517,721 187,083,594 178,484,412



Sources and Uses of Funds – AFTER Change in NMD Assumptions


Cash Interest: Overnight Borrowing 1,987 16,258 27,145 31,534Other Cash Outflows 4,161,291 4,161,291 4,161,291 4,161,291Total USES 188,189,337 203,517,721 187,083,594 178,484,412

LIQUIDITY GAP Excess (Need) (14,503,338) (13,308,728) (6,628,193) (3,227,242) Cumulative (14,503,338) (27,812,066) (34,440,259) (37,667,501)


Liquidity Gap/Total Assets Ratio -2.36% -4.52% -5.60% -6.12%



Stress Test– Impact on Earnings

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

4.60%

4.80%

5.00%

-400+0 -300+0 -200+0 -100+0 Base 100+0 200+0 300+0 400+0

Net Interest Margin

Standard Deposit Runoff



Stress Test – Impact on Earnings

1.200%

1.400%

1.600%

1.800%

2.000%

2.200%

2.400%

2.600%

2.800%

3.000%

3.200%

-400+0 -300+0 -200+0 -100+0 Base 100+0 200+0 300+0 400+0

Return on Assets

Standard Deposit Runoff



Scenario Analysis

•Stress Testing and Contingency Funding Plan Example:• Simulate unanticipated runoff of Non-Maturity Deposits: 10% runoff over 3 month period, 20% total runoff over 12

month period, 50% runoff over 36 month period

• No changes in loan and investment assumptions; static growth, maintain loan and investment balances

• Simulate replacement of runoff via Contingency Funding Plan

• Use FFS and EBA to cover immediate needs, FHLB Advances for longer-term needs



Sources and Uses of Funds –with Contingency Funding Plan3 Months 6 Months 9 Months 12 Months

Estimated Deposit Growth Demand Deposits - - - - Savings Deposits - - - - NOW Deposits - - - - MMDA Deposits - - - - Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 Time Deposits Over $250,000 - - - - Brokered Deposits - - - - Brokered Deposits Over $250,000 - - - - Other Deposits - - - - Total 23,006,808 49,121,267 55,703,125 44,794,844

Borrowings FHLB 5,000,000 14,947,000 7,100,000 5,938,283 Other 4,200,000 4,200,000 4,200,000 4,200,000 Total 9,200,000 19,147,000 11,300,000 10,138,283

Cash Interest: Overnight Investment 3,230 1,252 914 1,335Equity Adjustments - - - -Other Assets/Liabilities - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 168,384,324 172,002,947 155,749,018 148,051,332



Sources and Uses of Funds – with Contingency Funding Plan



LIQUIDITY GAP Excess (Need) 897,699 (369,140) (271,404) 592,336 Cumulative 897,699 528,559 257,154 849,491





Stress Test with CFP – Impact on Earnings

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

4.60%

4.80%

5.00%

-400+0 -300+0 -200+0 -100+0 Base 100+0 200+0 300+0 400+0

Net Interest Margin

Standard Deposit Runoff w/ CFP Solution



Stress Test with CFP – Impact on Earnings

1.200%

1.400%

1.600%

1.800%

2.000%

2.200%

2.400%

2.600%

2.800%

3.000%

3.200%

-400+0 -300+0 -200+0 -100+0 Base 100+0 200+0 300+0 400+0

Return on Assets

Standard Deposit Runoff w/ CFP Solution



Scenario Analysis

•CFP Severe Stress Scenario:• Major employer in area shuts down causing wide-spread unemployment

• 10% of Loans become Non-Performing in 12 months, 20% in 24 months

• 10% of Non-Maturity Deposits Runoff in 12 months, 20% in 24 months

• Investment portfolio balances remain unchanged in order maintain collateral for borrowing

• CFP calls for use of available Cash and FFS to cover immediate needs

• CFP calls for use of FHLB Advances to cover intermediate needs (FHLB borrowings limited due to economic stress)

• CFP calls for use of Brokered CDs to cover longer-term needs (CDs issued at above-market rates)

• Yield Curve Steepening Scenario – simulate increase in Fed Funds Target over 12 months



Sources and Uses of Funds – Unanticipated Growth in NP Loans and Deposit Runoff

3 Months 6 Months 9 Months 12 Months 15 Months 18 Months 21 Months 24 MonthsEstimated Deposit Growth Demand Deposits - - - - - - - - Savings Deposits - - - - - - - - NOW Deposits - - - - - - - - MMDA Deposits - - - - - - - - Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 23,771,363 22,789,686 24,638,926 24,780,710 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 9,845,824 23,205,414 19,941,098 9,914,602 Time Deposits Over $250,000 - - - - - - - - Brokered Deposits - - - - - - - - Brokered Deposits Over $250,000 - - - - - - - - Other Deposits - - - - - - - - Total Deposit Growth 23,006,808 49,121,267 55,703,125 44,794,844 33,617,186 45,995,100 44,580,024 34,695,311

Borrowings FHLB - 1,947,000 600,000 1,938,283 5,410,000 6,203,717 6,100,000 6,931,000 Other - - - - - - - - Total Borrowings - 1,947,000 600,000 1,938,283 5,410,000 6,203,717 6,100,000 6,931,000

Cash Interest: Overnight Investment 16,808 21,985 19,865 14,116 7,754 7,116 7,097 7,758Equity Adjustments - - - - - - - -Other Assets/Liabilities - - - - - - - -Other Cash Inflows 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563 1,654,563Total SOURCES 152,180,894 160,217,923 151,038,179 147,035,915 121,187,178 136,249,513 141,012,100 143,703,416



Sources and Uses of Funds – Unanticipated Growth in NP Loans and Deposit Runoff3 Months 6 Months 9 Months 12 Months 15 Months 18 Months 21 Months 24 Months

Deposit Runoff Demand Deposits 2,165,264 2,165,264 2,165,264 2,165,264 2,165,264 2,165,264 2,165,264 2,165,264 Savings Deposits 833,812 833,812 833,812 833,812 833,812 833,812 833,812 833,812 NOW Deposits 2,382,266 2,382,266 2,382,266 2,382,266 2,382,266 2,382,266 2,382,266 2,382,266 MMDA Deposits 2,689,317 2,689,317 2,689,317 2,689,317 2,689,317 2,689,317 2,689,317 2,689,317 Time Deposits 18,172,876 23,210,393 29,139,210 30,320,825 23,771,363 22,789,686 24,638,926 24,780,710 Large Time Deposits 4,833,932 25,910,873 26,563,915 14,474,019 9,845,824 23,205,414 19,941,098 9,914,602 Time Deposits Over $250,000 - - - - - - - - Brokered Deposits - - - - - - - - Brokered Deposits Over $250,000 - - - - - - - - Other Deposits - - - - - - - - Interest Cash Flow 643,512 644,046 688,148 719,857 757,463 765,632 764,949 751,580 Total Deposit Runoff 31,720,979 57,835,972 64,461,932 53,585,360 42,445,308 54,831,390 53,415,632 43,517,550

Borrowing Paydowns FHLB - 1,947,000 600,000 1,938,283 910,000 295,000 - 531,000 Other 1,400,000 - - - - - - - Interest Cash Flow 14,396 18,045 27,620 34,792 58,009 107,588 160,989 211,271 Total Borrowing Paydowns 1,414,396 1,965,045 627,620 1,973,075 968,009 402,588 160,989 742,271

Cash Interest: Overnight Borrowing - - - - - - - -Other Cash Outflows 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291 4,161,291Total USES 135,005,318 165,593,526 156,341,501 152,295,451 122,216,837 136,126,550 140,739,131 143,157,579

LIQUIDITY GAP Excess (Need) 17,175,576 (5,375,603) (5,303,322) (5,259,536) (1,029,659) 122,963 272,969 545,837 Cumulative 17,175,576 11,799,974 6,496,652 1,237,116 207,457 330,420 603,389 1,149,227

Cumulative Sources/Uses Ratio 112.72% 96.75% 96.61% 96.55% 99.16% 100.09% 100.19% 100.38%

Liquidity Gap/Total Assets Ratio 2.79% 1.92% 1.06% 0.20% 0.03% 0.05% 0.10% 0.19%




2.75%

2.85%

2.95%

3.05%

3.15%

3.25%

3.35%

3.45%

3.55%

3.65%

3.75%

Steepening Flattening Most Likely -100+0 Base 100+0 200+0 300+0 400+0

Net Interest Margin

Year 1 Year 2 Year 3




0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

1.60%

1.70%

1.80%

Steepening Flattening Most Likely -100+0 Base 100+0 200+0 300+0 400+0

Return on Assets

Year 1 Year 2 Year 3



Scenario Analysis: Real Life Example

•Home Capital Group Inc.:• Home Capital Group Inc. (“HCG”) is a holding Company and operates through its principal subsidiary, Home Trust

Company. Home Trust is a federally regulated trust company offering deposit, mortgage lending, retail credit and credit card issuing services. Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British Columbia, Québec, Nova Scotia and Manitoba.

• On March 31, 2017, HCG has C$15.741 billion in Total Assets, C$12.184 billion in Total Deposits. High Interest Savings Account balances accounted for approximately C$2 billion of Total Deposits.

• On February 9, 2017, the Ontario Securities Commission (“OSC”) issued an enforcement notice against Home Capital Group. The notice covers the company's disclosure in 2014 and 2015 related to falsified income information on some loan applications. In 2015, the company suspended its relationships with several mortgage brokers after finding that they falsified income information.

• The agency noted in its preliminary conclusion that the company failed to make a proper disclosure during that period.

• On March 14, 2017, a class action suit is initiated against HCG and three of it’s officers by shareholders and depositors.

• On April 19, 2017, OSC issues a statement of Allegations and a Notice of Hearing, formally charging HCG with fraud.

• Enforcement action and class action suit triggered a run on HCG deposits and a severe decline in HCG’s stock price.

Source: “OSC issues enforcement notice to Home Capital Group”, Rabia Arif, SNL.com, February 10, 2017.



Source: “Home Capital Bank Run Accelerates As Company Scrambles To Find Additional Liquidity”, Tyler Durden, Zerohedge.com, May 8, 2017.



Source: Bloomberg Financial, May 30, 2017.

March 31, 2017 = 26.03

May 5, 2017 = 5.85



Scenario Analysis: Real Life Example

•Home Capital Group Inc.:• May 1, 2017: HCG drew down C$1 billion of a C$2 billion credit line from Healthcare of Ontario Pension Plan

• May 5, 2017: HCG announced the replacement of their Chairman/CEO (who was also the founder of the company!)

• May 8, 2017: HCG drew down another C$400 million from their credit line and announce the suspension of dividend payments.

• May 9, 2017: HCG announced an arrangement to sell C$1 billion in qualified uninsured mortgages and C$500 million in insured mortgages or mortgage commitments.

• May 24, 2017: HISA deposit balances had dropped to C$113 million and HCG drew an additional C$250 million from it’s credit line.

• May 29, 2017: Deposit balances had stabilized, outflows greatly reduced.

Liquidity Management Strategies


•Strategies:• What is the best strategy to resolve the Stress Scenario?

• Asset-based strategy?

• Liability-based strategy?

• Blended funding?

•Asset-Based Strategy:• Sell Investments (Pro: able to obtain funds relatively quickly; Con: Potential realized losses due to declines in market

value, reduction in collateral, pledgable assets, reduction in earning assets)

• Sell Loans (Pro: able to obtain funds relatively quickly; Con: reduction in earning assets, reduction in cash inflows, reduction in collateral)

•Liability-Based Strategy:• Wholesale Funding (FHLB Advances) (Pro: able to obtain funds relatively quickly; Con: increased cost of funds, funding

may be limited either by policy or by lender qualifications)

• Brokered CDs (Pro: not as costly as wholesale funding; Con: funding amount may be indeterminate, funding may be limited either by policy or by lack of demand, may take several months to achieve adequate funding)

•Blended Funding Strategy:• Sell some investments, issue some brokered CDs, borrow some FHLB Advances

Asset-Based Liquidity Strategies


•Identify Asset-Based Liquidity:• Develop accurate, daily measures of sources and uses of funds; know how much principal and interest you have coming in

and balance it against how much principal and interest you have going out

• Identify liquidity sources and categorize them into timeframes of availability (immediate = daily, intermediate = 1-2 weeks, longer-term = 2-4 weeks)

•Establish a Cash Buffer:• Determine optimal range for Cash and Cash Equivalent Balances (Fed Funds Sold, Overnight Deposits, etc.)

• Diversify (have more than one correspondent bank account)

•Effective Investment Portfolio Management:• Establish a ladder of maturities to ensure steady “roll off” of investments

• Maintain a balance of diversified, high quality investments; limit market value risk (investments that can be converted into cash with minimal market value loss)

• Maintain a balance of unpledged securities

• Repurchase Agreements

•Loan Securitization:• Pooling residential mortgages, commercial loans, etc. then sell the cash flows “upstream” to a third-party (e.g., FNMA,

FHLMC, etc.), maintain the servicing for a fee

Liability-Based Liquidity Strategies


•Identify Core vs. Non-Core Deposits:• Measure and analyze “elasticity” of deposit accounts

• How much of your deposit base is highly sensitive to changes in market rates?

•Increase Core Deposit Base (both Non-Maturity and Term Deposits):• Offer variety of deposit account types with tiered balances

• Technology (e.g., on-line banking, phone apps, etc.)

•Increase Non-Core and Public Deposit Base:• Certificate of Deposit Account Registry Service (CDARS)

•Establish Lines of Credit with Wholesale Funding Partners:• Secured and Unsecured Fed Funds Purchased

• Overnight Advances

• Longer-term Advances

•Capital Markets• Issue debt (i.e., sell bonds and notes)

•Mergers and Acquisitions:• Acquire another bank, expand footprint to establish new deposit base

Liquidity and A/L Management


•Liquidity Management is directly impacted by Asset-Liability Management:• Changes in the composition and term structure of assets and liabilities change cash flow structures over time

• The variability of periodic cash flows also changes over time and over various interest rate environments

• Risk tolerance in the ALM process will ultimately determine liquidity requirements and liquidity management strategies

•Liquidity Management Policy should:• Define liquidity risk tolerances (determined by Board of Directors)

• Analyze ALM strategies for sources of risk

• Assess the bank’s ability to manage that risk

• Model the impact of liquidity stress

• Establish Contingency Funding Plan

• Establish monitoring and control systems

•Diversification will be key to effective Liquidity Management:• Diversified deposit base

• Diversified Investment Portfolio

• Diversified Loan Portfolio

Liquidity and A/L Management


•The Liquidity Management Process:

1) Estimate and Evaluate Current Liquidity Position (Static Liquidity Measures)

2) Estimate and Evaluate Future Liquidity Needs (Dynamic Liquidity Measures)

3) Establish a Monitoring Process and Develop Triggers (Liquidity/Funds Management Policy)

4) Stress Test Future Liquidity Needs and Availability of Funds

5) Develop a Funding Plan (Capital Plan and Contingency Funding Plan)

6) Test Liquidity Sources (Fed Funds Purchased, FHLB, etc,)

Liquidity Coverage Ratio


•Liquidity Coverage Ratio (LCR) proposed by Basel III accord, became effective January 1, 2015

•Requires banks to hold sufficient high-quality liquid assets (HQLA) to cover total net cash outflows over a 30 day period. Calculation is as follows:

•Consequences of LCR implementation, impact on Community Banks• Larger banks reduce holding of riskier assets to accumulate more HQLA (reduction in corporate bond and municipal

bond holdings in large bank investment portfolios)

• Lower yields in investment portfolios = reduced Net Interest Margin

• Larger banks shying away from larger, more volatile deposits, particularly corporate deposits

• Increased competition for Retail deposits between larger banks and community banks

Intersession Project


1. Explain how your institution measures and manages liquidity risk. Attach a copy of any reports that document specific measures.

1. Liquidity Reports to ALCO and Board of Directors

2. Describe key balance sheet (static liquidity) ratios that management uses to measure and manage liquidity risk. Are they used as policy guidelines (limits) or as triggers? Discuss specific strengths and weaknesses of the ratios.

1. Loans-to-Deposits Ratio

2. Loans-to-Total Assets Ratio

3. Investments-to-Total Assets Ratio

4. Non-Core Funding Dependency Ratio

5. Total Borrowing-to-Total Assets Ratio

6. Volatile Funds Ratio

Intersession Project


3. Discuss to what extent your institution utilizes non-core sources of funding (i.e., brokered CDs, internet CDs, public funds, repurchase agreements, FHLB borrowings, etc.). Is this activity addressed within the institution's policy(s)? Are limits in place at the individual source level? Are there overall limits on the use of non-core funding?

4. Indicate the kinds of liquidity stress events identified by management as potential sources of liquidity stress. Does your policy incorporate stress tests in your analysis? Attach an example of any stress tests that have been performed. Discuss briefly what the stress tests indicate.

1. List stress events identified by your institution

2. Has your institution run stress tests on these events?

3. What were the conclusions of these stress tests?

Appendix



•Liquidity Coverage Ratio (LCR) proposed by Basel III accord, became effective January 1, 2015

•Requires banks to hold sufficient high-quality liquid assets (HQLA) to cover total net cash outflows over a 30 day period. Calculation is as follows:

•Does not apply to community banks• Large Bank Holding Companies (BHC) – those with over $250 billion in consolidated assets, or more in on-balance

sheet foreign exposure, and to systemically important, non-bank financial institutions; to hold enough HQLA to cover 30 days of net cash outflow. That amount would be determined based on the peak cumulative amount within the 30-day period.

• Regional firms (those with between $50 and $250 billion in assets) would be subject to a “modified” LCR at the (BHC) level only. The modified LCR requires the regional firms to hold enough HQLA to cover 21 days of net cash outflow. The net cash outflow parameters are 70% of those applicable to the larger institutions and do not include the requirement to calculate the peak cumulative outflows.

• Smaller BHCs, those under $50 billion, would remain subject to the prevailing qualitative supervisory framework.



•HQLA split into three categories:• Level 1 represents assets that are highly liquid (generally those risk-weighted at 0% under the Basel III standardized

approach for capital) and receive no haircut.

• Level 2A assets generally include assets that would be subject to a 20% risk-weighting under Basel III and includes assets such as GSE-issued and -guaranteed securities. These assets would be subject to a 15% haircut.

• Level 2B assets include corporate debt and equity securities and are subject to a 50% haircut.

• At least 60% of HQLA must be Level 1. No more than 40% of HQLA can be drawn from Level 2.

• Total Net Liquidity Outflows are defined as the total expected cash outflows minus total expected cash inflows during the 30 day stress period. Cash outflows are subject to prescribed ‘runoff’ rates while cash inflows are subject to prescribed ‘inflow factors’, resulting in a severe stressed ‘net cash outflow scenario’.



NUMERATOR

High Quality Liquid Assets Amount Available % Available $Cash Balances 2,571,767 100% 2,571,767FHLB Overnight/ FRB EBA Balances 3,601,339 100% 3,601,339Fed Funds Sold 11,000,000 100% 11,000,000Marketable Securities Net of Pledged 14,748,367 100% 14,748,367Total HQLA 31,921,473 31,921,473

Amount of funds available to cover 30 days of liquidity needs



DENOMINATOR

Cash Outflows Amount Runoff OutflowStable NMDsSavings 29,182,045 7.50% 2,188,653Int Bearing NMDs 22,536,988 7.50% 1,690,274Non-Int Bearing NMDs 19,392,185 7.50% 1,454,414Total Stable NMDs 71,111,218 5,333,341

Less Stable Retail NMDs Amount Runoff OutflowSavings 15,326,208 15.00% 2,298,931Int Bearing NMDs 8,440,522 15.00% 1,266,078Non-Int Bearing NMDs 0 15.00% 0Total Less Retail Stable NMDs 23,766,730 3,565,009

Maturing CDs - 30 Days 1,962,809 50.00% 981,405



Wholesale Funding Amount Runoff OutflowFHLB Advances 13,650,000 25.00% 3,412,500Commercial Repos 3,063,166 100.00% 3,063,166Fed Funds Purchased 0 100.00% 0Total Wholesale Funding 16,713,166 6,475,666

Other Available Borrowing Amount Runoff OutflowAvailable Lines of Credit 2,500,000 10.00% 250,000Letters of Credit 1,500,000 10.00% 150,000Origination Commitments 5,438,000 100.00% 5,438,000Other Unused Commitments 5,000,000 10.00% 500,000Total Other Available Borrowing 14,438,000 6,338,000

Total Cash Outflows 15,563,403

Cash Inflows Amount Runoff InflowScheduled Loan Repayments 5,663,448 100.00% 5,663,448Non-Scheduled Loan Repayments 4,292,778 0.00% 0Scheduled Investment Repayments 344,370 100.00% 344,370Non-Scheduled Investment Repayments 60,025 0.00% 0Total Cash Inflows 10,360,620 6,007,817

Total Net Liquidity Outflows over 30 Days 9,555,586



HQLA 31,921,473Total Net Liquidity Outflows over 30 Days 9,555,586

Liquidity Coverage Ratio = 334.06%

=



•Consequences of LCR implementation• Larger banks reduce holding of riskier assets to accumulate more HQLA (reduction in corporate bond and municipal

bond holdings in large bank investment portfolios)

• Lower yields in investment portfolios = reduced Net Interest Margin

• Larger banks shying away from larger, more volatile deposits, particularly corporate deposits

• Increased competition for Retail deposits between larger banks and community banks


UMB Institutional Asset Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a. Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a. Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.

This presentation is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Institutional Asset Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB InstitutionalAsset Management obtained information used in this report from third party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Institutional Asset Management does not guarantee that it is accurate.

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