Using your MCIF for Asset/Liability Management.

• Author: Coffey, John J.
• Position: Database Marketing - Brief Article

The Federal Reserve has changed the federal funds target 17 times in the past two years. These rate changes have dramatically affected the prime rate and your bank's net interest income (the difference between your bank's interest income from loans and its interest expense for deposits). When the Federal Reserve lowers interest rates, it could hurt your bank's net interest income or it could help it. It all depends on how quickly the interest rate change impacts your loan portfolio (or assets) and your deposit portfolio (or liabilities).

Using your MCIF to understand your asset/liability mix

One of the most useful MCIF reports is the product summary report. This report can illustrate the weighted average remaining maturity (WARM) of each product portfolio. This is the period of time between the date of the data in your MCIF and when each product matures. For instance, your loan portfolio may have a WARM of 220 months (there are 360 months in 30 years) and your deposit portfolio may have a WARM of 10 months.

In this scenario, when interest rates go down, your bank's net interest income will increase because your liabilities are repricing faster than your assets. In other words, your bank is liability sensitive. However, the opposite could also be true. If the WARM of your bank's loans is less than the WARM of its deposits, when interest rates go down, your bank's net interest income will decrease because your assets are repricing faster than your liabilities. In other words, your bank is asset sensitive.

The product summary report can also be used to calculate your bank's loan-to-deposit ratio. In order to calculate this ratio, simply divide the total loans listed on this report by your total deposits. In community banks, the loan-to-deposit ratio can typically be around 90 percent. It's important to note that the balances of sold loans should not be included in your overall loan portfolio because sold loans generate fee income, not interest income.

Using your MCIF to reprice your products

Another useful tool is a repricing report that can show when various portfolios of products are maturing (or repricing). For instance this report can show you that your bank has $50 million of six-month CDs that are maturing three months from now. You can then determine the impact of repricing these CDs using...