Funding & Liquidity Risk What Directors Need to Know

David Brehmer President/CEO

First Carolina Corporate Credit Union

David Brehmer •  First Carolina Corporate Credit Union, President & CEO- 19 years

•  San Diego Postal Credit Union, President & CEO

•  San Diego County Credit Union & Torrey Pines Federal Credit Union, Senior Management Positions & President of CUSO

•  Chairman - Board of Managers for CU Business Group

•  Treasurer - Board of Directors for Latino Community CU

•  Recipient of the 1992 Charles Clark Award for Leadership

Introduction

Why So Critical?

•  Negative income will put you out of business over time

•  Poor cash flow management will put you out of

business immediately

Current Regulatory Environment •  NCUA very concerned about:

•  Interest rate risk

•  Liquidity risk

•  Proposing new regulations regarding “Liquidity Contingency Planning”

•  Why so worried – everyone is flush with liquidity today?

Current Rate Environment

•  Fed Funds – 0 to 25 basis points •  Historically low rates for an extended period of

time •  CUs extending out maturities to get more yield •  Lending at extremely low rates •  Rates can only move in one direction -- UP

What happens when rates rise?

•  Market values of fixed assets drop •  Investments & loans extend out as pre-

payments slow – particularly RE •  Mortgage loans •  Mortgage backed securities •  Callable securities

What happens when rates rise? •  If you need liquidity and need to sell assets –

losses likely to be incurred •  Will need to match market rates to maintain

deposits -- if unable to match rates, then deposit runoff may occur (particularly most interest rate sensitive deposits such as CD money)

What happens when rates rise?

•  Liquidity tightens as assets are devalued and are slower to pay down

•  Liabilities become more expensive to keep

Developing a Liquidity Plan

•  Stability of liabilities •  Normal asset-related cash flows •  Liquidity potential of assets •  Outside liquidity resources

Stability of Liabilities •  Regular shares •  Checking accounts •  Money Market accounts •  Certificates of Deposit •  IRAs

•  How rate sensitive is each deposit type?

Stability of Liabilities •  Lines of credit options

•  Corporate Credit Union •  Federal Home Loan Bank •  Banks (???) •  Federal Reserve Bank – Discount Window •  Central Liquidity Facility (CLF)

•  Do we have collateral available to utilize these sources?

Liquidity of Assets

•  Cash •  Overnight Deposits •  ATMs •  Branch vaults/teller drawers

•  Investments •  Certificates-of-Deposit •  Marketable Securities

Liquidity of Assets

•  Loans •  Unsecured •  Credit Cards •  New & Used Autos •  HELOCs •  1st mortgages •  Unfunded LOCs (HELOCs/Credit Cards)

Liquidity of Assets

•  Normal monthly loan repayments •  Principal & interest

•  Monthly interest/dividend payments from investments

•  Maturity of investments & loans

Liquidity of Assets •  Investments that could be readily sold

•  At par/gain/loss

•  Loans that could be sold or participated out quickly

External Sources of Liquidity

•  Corporate CU line-of-credit •  FHLB borrowing capacity •  Readily available collateral for securing loans •  Ability to sell brokered certificates to attract

institutional deposits •  Approved at Fed – Discount Window •  Member of CLF

Liquidity Contingency Planning •  Liquidity events can be local/applicable only to

your credit union: •  Plant closing •  Industry layoffs •  Regional storm damage

•  Under these circumstances access to outside liquidity support is typically readily available unless there are creditworthiness issues

Liquidity Contingency Planning •  Liquidity events can be more wide-spread or

systemic •  Economic downturn/financial crisis

•  Under these circumstances access to outside liquidity support is typically limited and/or not readily available •  Fed’s Discount Window & CLF provide

government backstop

Liquidity Contingency Planning

•  Identify all forms of liquidity that could be generated from your assets

•  Identify liquidity risk of all liabilities

•  Identify all external sources and order in which they would be accessed

Review •  Cash flow/liquidity planning critical element of

managing a balance sheet •  When rates rise, asset values generally fall

making them less liquid •  Identify all your liquidity resources – assets &

liabilities •  Be prepared – develop plan before you need

one

Contact Information David Brehmer

President, Chief Executive Officer First Carolina Corporate Credit Union

Email: dbrehmer@firstcarolina.org Phone: 800-585-4317, ext. 3254