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Net Non Core Funding

October 14, 2010

By Larry W. Martin

Should you ever drop from Well Capitalized to Adequately Capitalized status, or enter into a formal agreement with your regulator that calls for higher minimum capital requirements (i.e., 9% Tier 1 and 12% RBC/RBA) that you do not currently satisfy, you will be restricted on the interest rates you can pay for any deposit product you offer and you will be prohibited from renewing, rolling over or obtaining any brokered deposit (brokered deposits and CDARS) without permission of the FDIC--which is very difficult to get.  Interest rates on your deposit products will be limited to 75 basis points above the "national cap rate."  http://www.fdic.gov/regulations/resources/rates/  See FDIC Rule 337.6 http://content.lawyerlinks.com/default.htm#http://content.lawyerlinks.com/library/banking/rules/fdic/337/12cfr337_6.htm for the specific elements of this brokered deposits and interest rate limitation.

 While this may not be a problem today given the low level of interest rates, in a rising rate environment it can become a significant liquidity challenge, particularly if the customers you have were attracted using a premium rate relative to the local market, incuding interest checking product, Under $100,000 CDs, and Internet CDs.  These "volatile deposits" will likely leave your bank if you can no longer pay a premium rate relative to other competitors in the market.

 Even if this will never apply to you, here is what you should do:

Liquidity is a growing concern with all regulatory agencies, see FIL-13-2010.  But concerning volatile deposits and non-core funding, you need to do the following:

1.  Know where you stand relative to your UBPR peer group in Net Non Core Funding Dependence.  If you are below or equal to them, great.  The higher you are above them the more the regulators will have you on their radar screen.

2.  You should have a written contingency funding plan, particularly if you exceed you peer average.  What is your plan for remaining liquid should non-core funding sources evaporate or be restricted? 

3.  Does your liquidity policy or ALCO policy specify funding limits percentage on non core funding sources and volatile deposits of overall funding?

 We at Bank Strategies LLC hope you are doing well and this non core funding issue is not a concern.  But it is important to know the concern of regulators on this and the other considerations outlined in the FIL-13-2010 noted above.  We have assisted a number of our clients with Contingency Funding Plans.

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