BEWARE THE PERFECT STORM - FHLBank Topeka

9 STEPS YOU CAN TAKE RIGHT NOW
CONTINUED FROM PAGE 3
ASSET/LIABILITY STRATEGIES
3. PRE-INVESTING CASH FLOW NOW COULD PAY BIG
DIVIDENDS FOR ASSET SENSITIVE BANKS IF RATES
CONTINUE TO FALL.
Most bank investment portfolios will soon be throwing off considerable cash flows
that need to be reinvested as loan demand has slowed. Now is an excellent time to
consider restructuring some of those “callable” securities and buying call protection.
Special note: Be careful of floating rate TRUPs, especially at discounts.
4. LIABILITY SENSITIVE BANKS SHOULD GIVE SERIOUS
CONSIDERATION TO EXTENDING FUNDING AND
LOWERING THEIR DEPENDENCY ON CDS.
Banks can extend funding and lower their costs considerably. Don’t waste marketing
dollars promoting CDs; now is an excellent time to design your own liability structure
at bargain prices.
5. CONSIDER EMBEDDED DERIVATIVES TO OFFSET
OPTIONALITY.
Embedded caps and structured advances are very compelling now. Keep in mind that
you don’t want to extend too far and create a falling rate problem down the road.
6. TAKE ADVANTAGE OF THE CURRENT LIQUIDITY CRISIS.
The best way to increase yields is to hold loans in portfolio and take advantage of the
risk premium of both conforming and non-conforming loans. Yield premiums are significantly
higher than normal, particularly on Jumbo loans.
7. CONSIDER BUYING LOANS IF YOU CANNOT GENERATE
THEM YOURSELVES OR IF YOU HAVE CONCERNS OVER
CONCENTRATION RISK.
C&I loans can be purchased at attractive rates from some very large banks. We
encourage you to do your due diligence and underwrite these loans accordingly.
8. SELL OPTIONS AND GET PAID A PREMIUM RATE.
Offer a no-cost refinance option on mortgage loans for a stated period but charge a
quarter point higher. Most consumers won’t refinance until rates fall significantly, in
which case they would have refinanced anyway, but maybe not with your bank! A win/
win for the bank and customer. The same applies to “no penalty” CDs that pay a lower
rate initially for the opportunity to withdraw funds before final maturity (after seven
days). In a falling rate environment, this is a real winner that competes well with highercosting
term CDs.
9. LASTLY, REVISIT YOUR LIQUIDITY AND CONTINGENT
LIQUIDITY POLICIES TO ENSURE COMPLIANCE AND
TO PROVIDE FLEXIBILITY FOR THE BANK.
FHLBank advances are significantly less expensive than brokered CDs and national
market CDs, yet I still see banks rolling over CDs because they are reaching their
internal borrowing limit even though they have sufficient collateral to borrow from
an FHLBank. Hint: Change your borrowing limit if it makes good business sense.
BOTTOM LINE:
NOW IS A GOOD
TIME TO TAKE
ACTION REGARDLESS
OF YOUR BANK’S IRR
POSITION. DON’T
WAIT FOR RATES TO
CHANGE BEFORE
MAKING BALANCE
SHEET MANAGE-
MENT DECISIONS;
IT MAY BE TOO LATE!
AND, REMEMBER
THE ANDREA GALE.
The Darling Consulting Group specializes in
education, strategic planning and management
tools for banks, thrifts and credit unions. DCG’s
nearly 300 clients consistently outperform their
peers by over 60 percent, based on ROE.
Frank Farone is a managing director of DCG,
working nationwide with financial institution
CEOs and CFOs to increase earnings through
the proactive management of capital, liquidity/funding
risk and interest rate risk. He assists
clients in anticipating the effects of changing
market conditions on their balance sheets and
develops strategies based on a clear understanding
of risk/reward tradeoffs.
Contact Mr. Farone at 978.463.0400, ext. 171, or
e-mail him at ffarone@darlingconsulting.com.
This article may not be reproduced or distributed
without written permission from DCG.
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FHLBank Focus | Winter 2007