Reviewed ALM Committee, January 2018 POLICY: ALM Policy Approved January 2018

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1 Purpose The Asset-Liability Management (ALM) Policy of NorthPark Community Credit Union (NorthPark) sets forth the policies and guidelines to be followed in the overall management of the credit union s deposit, loan, and investment portfolios. This policy statement formalizes the credit union s commitment to the ALM process. Objectives The objectives of the credit union s ALM process to maintain the following conditions during all phases of the interest rate cycle: a.) Stable and consistent financial performance b.) Adequate liquidity and funding to meet cash needs; c.) Managed Interest Rate Risk d.) Fair and equitable treatment of both savers and borrowers. Responsibility Under the direction of the Board of Directors, Management is responsible for the daily accomplishment of established objectives of asset/liability management by committing personnel and necessary technology to respond to changes in deposit, loan, and investment balances and rates. An ALM Committee made up of the Treasurer of the Board, President/CEO, and at least two other committee members appointed by the Board of Directors, will direct and periodically review the decisions made by Management and any activity carried out. The Board delegates this authority, and is to review monthly reports presented by the Treasurer of the Board. Functions of the ALM Committee The ALM Committee (also referred to as the ALCO Asset/Liability Committee) will meet at least quarterly to review and monitor all phases of NorthPark s operations as they relate to the ALM process. The ALM reports in conjunction with supplemental reports generated by NorthPark s accounting department and the Board Treasurer are the basis of the ALM Committee s activities. These reports focus on the credit union s interest rate risk, liquidity risk, and key ratios. The specific functions of the committee are: Monitor Interest Rate Risk It is the policy of NorthPark to manage interest rate risk within the policy limitations established by the Board of Directors NorthPark s interest rate risk will be evaluated by focusing on the Net Interest Income (NII) and Net Economic Value (NEV) sensitivities of the credit union s balance sheet. Monitor the Liquidity Position It is the policy of NorthPark to maintain adequate liquidity levels consistent with prudent financial practices and regulatory requirements. Specific liquidity is contingent on a variety of factors, including seasonal or cyclical fluctuations in the Page 1

2 economy, the desirability of investment income versus loan income, the present as well as the forecasted mix of earning assets, and the availability of funds. The manner in which existing assets and liabilities mature plays a major role in determining the credit union s liquidity position. Corrective action will be taken when necessary. See the NorthPark Liquidity Policy for more details. Monitor Real Estate Loan Risks NorthPark has four primary risks involved in holding real estate loans on its balance sheet: a.) The interest rate risk involved in holding long-term, fixed rate investments; b.) The geographic concentration risk of having real estate investments in a single metropolitan area; c.) The liquidity risk of being unable to fund member loan demand, and share withdrawals without adversely affecting profitability or capital; d.) The credit risk of borrowers defaulting or not repaying the principal loan balance. It is the desire to fulfil the mortgage needs of its members by originating fixed rate and adjustable rate mortgage loans. However, the ability of the credit union to hold long-term real estate loans on its balance sheet will be limited by its overall balance sheet interest rate risk (IRR) limitations. The decision to originate or hold any long duration (greater than five years) loan will include an analysis of the related impact on compliance with overall balance sheet IRR limitations. Examine ALM Trade-offs Reduced interest rate risk may lead to reduced profitability. Action taken to improve liquidity may adversely affect NorthPark s interest rate risk position. These and other strategies must be considered. To match shorter term deposits to the types of loans preferred to be retained in its loan portfolio, it is NorthPark s policy and practice to focus on a loan portfolio primarily consisting of shorter term consumer loans, such as automobile loans, personal unsecured loans, home equity lines of credit, VISA loans and adjustable rate mortgage loans secured by residential and light-commercial properties. It is understood that a few, select long term, fixed rate mortgage loans secured by residential or light-commercial properties, in the first lien position, will be held in portfolio, along with a few first and second lien position fixed term home equity loans. See Asset Concentration Policy described later in this policy. Monitor Key Ratios and Statistics In addition to the ratios and statistics related to interest rate risk and liquidity, key ratios that measure other aspects of the credit union s operations will be monitored. Special attention is to be focused on those ratios that relate to the financial goals of the credit union. Ratios and their trends should be evaluated in light of these goals and the stated ALM objectives. The financial goals will be reviewed and adjusted annually, with periodic review and adjustments occurring on a quarterly basis. Page 2

3 Analyze Pricing, Strategies, and New Products When new types of loans, deposits, or pricing strategies for these products are proposed, the potential impact on the credit union s interest rate risk and liquidity position should be examined. A shift in emphasis from fixed-rate loans, or vice versa, has important risk implications. Similarly, the effects of calendar repricing or anniversary repricing of variablerate loans should be analyzed. Review and Monitor Competitive Position Rates charged and paid by competing financial institutions for loans and deposits will be reviewed. The purpose of this process is to: a.) Ensure that the rates paid on deposits and the rates charged on loans are consistent with local market conditions; b.) Ensure that rates paid and charged are fair and equitable to both savers and borrowers; c.) Ensure that the credit union s profitability and financial strength are not impaired by interest rate and/or dividend policies. Examine Impact of Changing Rates NorthPark will estimate the effects of different levels of rates on the credit union s financial position, rate risk, and liquidity position through a NEV and NII sensitivity Analysis. These analyses reflect the fact that when rates are high, the cash flow from assets tends to decrease while that of liabilities tends to increase. These simultaneous consequences will adversely affect the credit union. When rates are low the situation is reversed, with cash flow from assets accelerating while that of liabilities decreases. Again, the simultaneous impact will have adverse implications for the credit union. These situations result from the fact that members have the option to refinance high rate loans, keep low rate loans, and withdraw low rate certificates and IRA s prematurely to reinvest at higher rates. ALM Risk Guidelines The nature of ALM and the dynamics of the financial statement in changing market conditions make it difficult to specify a rigid policy related to interest rate risk control and liquidity management. Corrective action often requires Board approval for policy changes, the effects of which may take considerable time. Thus, in some sections below, the Board sets forth risk guidelines rather than rigid policy. These guidelines provide management with operational latitude and yet specify the degree of interest rate risk that is acceptable to the Board of Directors. The guidelines for interest rate risk are set forth in terms of a range for the Board s definition of high, moderate and low risk levels. Page 3

4 A. Income Simulation 1. In a Rates-Up Shock Scenario: Interest rates increase instantaneously 300 basis points in a parallel manner. The credit union s Cumulative NII at risk, when compared with the results of the base-case scenario, will not exceed: NP Profile <20% 20% to 30% >30% 2. In a Rates-Down Shock Scenario: Interest rates decrease instantaneously 300 basis points in a parallel manner. During times of low interest rates, management may choose to use a lesser level of shock. The credit union s cumulative NII at risk, when compared with the results of the base-case scenario, will not exceed: NP Profile < 20% 20% to 30% >30% 3. In a Rates-Up Shock Scenario: Interest rates increase instantaneously 300 basis points in a parallel manner. The credit union s Cumulative NI at risk, when compared with the results of the base-case scenario, will not exceed: NP Profile <60% 60% to 80% >80% 4. In a Rates-Down Shock Scenario: Interest rates decrease instantaneously 300 basis points in a parallel manner. During times of low interest rates, management may choose to use a lesser level of shock. The credit union s cumulative NI at risk, when compared with the results of the base-case scenario, will not exceed: NP Profile <60% 60% to 80% >80% Page 4

5 B. Market Value Analysis/NEV Simulation In a Rates-Up Shock Scenario: Interest rates increase instantaneously 300 basis points and in a parallel manner. The credit union s cumulative net worth at risk will not exceed: NP Profile <25% 25% to 40% >40% C. NEV Ratio Measured by the ratio of net worth to total assets: Acceptable Caution NP Profile >10% 10% to 9% <9% D. Net Worth/Capital Measured by the ratio of net worth to total assets: Acceptable Caution NP Profile >8% 8% to 7.5% <7.5% ALM and Investment It is recognized that significant changes in the credit union s ALM position often require Board action. However, the Board, through its ALM Committee, directs Management to use the investment portfolio to make the necessary day to day adjustments in the overall ALM position. By managing the maturity structure of the portfolio in light of ALM goals, policy, and guidelines, significant adjustments can be made and thus greater control exerted over interest rate risk and liquidity risk. Investment decisions must be consistent with the credit union s investment policy. If, however, there is a conflict between maturity constraint in the investment policy and maturities needed to satisfy ALM guidelines, the ALM are given a higher priority and investment decisions should be made on that basis. Asset Concentration The concentration limits portion of this policy are intended to provide guidelines and limitations for the management of assets. To avoid an unwarranted concentration of assets in any type of loan or security, the following table sets out the policy limitations: Page 5

6 ASSETS Total Loan Portfolio #REF! 1000% A+ 650% A 530% B 350% C 180% D 30% E 25% No Score 25% Auto #REF! 1000% Direct 1000% Indirect 200% Participation (TCU) 200% A+ 250% A 250% B 150% C 100% D 25% E 15% No Score 15% RV #REF! 150% Direct 150% Indirect 50% A+ 100% A 60% B 30% C 5% D 0% Page 6

7 E 0% No Score 0% Unsecured #REF! 100% Signature 100% Personal Draft LOC (Disbursement Limit) 25% Courtesy Pay 13% Dow Stock 25% A+ 100% A 50% B 40% C 20% D 10% E 5% No Score 5% Visa #REF! 200% Visa (Disbursement Limit) 150% A+ 100% A 100% B 80% C 40% D 20% E 10% No Score 10% Real Estate #REF! 375% Fixed Rate 1st Mortgages 200% Adjustable Rate 1st Mortgages 250% HE Closed End- Variable 50% HE Closed End- Fixed 50% HELOC (Disbursement Limit) 100% Commercial Real Estate Var 13% Page 7

8 A+ 100% A 70% B 50% C 15% D 10% E 5% No Score 5% MONTHLY LOAN CONCENTRATION LIMITS In order to limit the concentration of D, E, and No Score, management is limited on their quarterly funding of these paper types. This will be reported on the new loan report monthly. Secured 5% Unsecured 1% Shares LIABILITIES Regular Shares Christmas Club Secondary Shares Money Market Savings HSA Account Easy Checking Perks Checking Free Checking Premier Checking 1500% Member Certificates Non-Member Certificates 200% IRA Certificates IRA Shares Roth IRA Shares Jumbo CDs (Investments) Borrowings Page 8

9 Reporting Process Because of the Board of Directors role in developing and approving a policy that guides NorthPark s ALM position, it is essential that the Board be kept informed of the ALM risk position. For this reason, the reporting process outlined next, should be followed. ALM Reports to the Board: At the second Board meeting after quarter-end, the Board Treasurer will review and report on NorthPark s ALM position. The report should contain these elements, at a minimum: Key Performance Ratios: 1. Net Worth/Total Assets 2. Delinquent Loans/Total Loans 3. Net Charge-Offs/Total Loans 4. Concentration Limit Analysis Note: Other key performance ratios may also be reported. Goals ALM Reports: 1. ALM Executive Summary 2. Interest Rate Report 3. Back testing Report Review of special problems or issues that may require Board action. At least annually, the Board of Directors and Management will establish and monitor goals related to: 1. Portfolio Mix 2. Key Performance Ratios, and 3. Interest Rate Risk Sensitivity 4. Concentrations 5. Capital Levels Policy Changes The ALM Committee may recommend changes to the Board of Directors to adjust or correct ALM Policy. The policy should be reviewed periodically, at least annually, and amended as circumstances warrant. All changes to the policy must be approved by the Board. Page 9