Pub. 8 2020 Issue 4

www.uba.org 6 PLANNING FOR LOW RATE, HIGH LIQUIDITY SCENARIOS By Zachary Bassett, Relationship Manager D eposit growth continues to out- pace loan demand, leaving financial institutions across the country f lush with liquidi- ty. Many factors have resulted in these unprecedented conditions, from near-ze- ro interest rates to an inf lux of deposits from Paycheck Protection Program (PPP) loans and CARES Act stimulus checks. This exacerbates the growth of deposit balances that were on the rise prior to the pandemic. This deposit growth has resulted in the personal savings rate in April, reaching 33%, 1 which is the highest level ever record- ed. These external factors have converged to create a wave of “surge” deposits. This leaves two very important questions facing most financial institutions: 1. How sticky are these “surge” deposits? 2. How do financial institutions deploy excess liquidity to maintain net inter- est margin levels? Though most institutions have little need for additional funding until PPP loans begin to run off and overall loan demand picks up, it does not eliminate the need to have a long-term strategic liquidity plan. A prudent funds management process is of paramount importance regardless of economic or interest rate environment. Gauging your institution’s collateral availability is a vital piece of this process. To maximize your collateral position with FHLB Des Moines, we recommend using our collateral eligibility checklists. These checklists can be used to evaluate existing loan portfolios to determine collateral eligibility. We also recommend utilizing the checklists as part of your new loan origination process. In addition, the unprecedented level of “surge” liquidity injected into the f i- nancial system by the Federal Govern- ment has resulted in downward pres- sure on net interest margins for many f inancial institutions. One important assessment to conduct during these uncertain times is your institution’s overall cost of funds. While it is important to maintain a di- verse portfolio of funding sources, are there opportunities to lower your funding costs? In this low-rate environment, how long would it take you to recoup the cost of replacing existing high-cost funds with FHLB Des Moines advances? If your institution already has a low cost of funds, consider restructuring outstanding fixed-rate bullet or convertible advances into longer-term bullet advances to take advantage of these historically low-interest rates. Embedding the prepayment fee into a new advance can result in members low- ering their cost of funds while maintaining the existing maturity structure.* Additionally, don’t forget to factor in the impact of your FHLB Des Moines dividend when weighing your funding options. While this is often overlooked, our Dividend Calculator tool can assist in evaluating funding opportunities. Our Member Solutions and Strategy teams can offer an analysis of your funding options using our Marginal Cost of Funds tool, as well as provide a glimpse of how your funding costs stack up against peers using our Peer Trend Analysis tool (www. fhlbdm.com/products-strategies ) For 88 years, FHLB Des Moines has been here through all economic cycles. We look forward to continuing our role as a strategic partner to support your ongoing funding needs. n For questions or assistance, please contact your Relation- ship Manager, Zachary Bassett at zbassett@fhlbdm.com or 206.390.0229. *FHLB Des Moines does not offer nor provide any accounting guidance about advance restructuring, the appropriate accounting treatment or possible accounting implications. Members should consult with their own internal and/or external accoun- tants and/or auditors prior to entering into an advance restructuring transaction. 1 https://fred.stlouisfed.org/series/PSAVERT