Measuring Your IRR Profile Against Peers & Regulatory Targets. February 26, 2015 Webinar

Transcription

1 Measuring Your IRR Profile Against Peers & Regulatory Targets February 26, 2015 Webinar.

2 PRESENTERS Tom Hauck joined Austin Associates in He works with financial institutions around the country in the areas of asset liability management, interest rate risk management, liquidity risk management, strategic planning, and officer and Board of Director training. He is a frequent speaker and author on the topics of IRR and ALM and is active with state trade associations as a moderator of CFO forums for multiple organizations. Todd Togrul joined Austin Associates in He is responsible for analysis of interest rate risk and margin management, economic and interest rate forecasting, financial management and controls, EVE analyses, and budgeting for clients served by the firm's Financial Management Division. Prior to joining Austin Associates, he served in financial management roles in the community banking industry. Tom Hauck Managing Director & Principal Financial Management & Consulting thauck@austinassociates.com Todd Togrul Managing Director & Principal Financial Management & Consulting ttogrul@austinassociates.com

3 AUSTIN ASSOCIATES, LLC Financial Management Consultants for Community Bankers Community bank advisors for more than 40 years Specialized consulting and advisory services Asset / Liability and IRR Management Loan Pricing & Profitability Systems Investment Banking Strategic Consulting Risk Management Technology Solutions Current owners are consultants/managers Currently serving over 200 bank/thrift clients in 26 states 3

4 AGENDA Measuring IRR Webinar February 26, 2015 OCC Range of Practice Memorandum Results Policy Limits Earnings at Risk Results EVE Results NMD Repricing Rates (Beta s) NMD Decay Rates Interest Rate Risk Indicators Balance Sheet Structure Asset extension risk IRR Comparison Then & Now 4

5 OCC Range Practice Memorandum OCC distributed IRR worksheet for member banks to complete in late 2013 Interest rate risk remains a key regulatory focus given the prolonged low rate environment, significant growth system wide in non maturity deposits, and the pressure on margins that result in some institutions reaching for additional yield on assets through either extended maturities or additional credit risk in non traditional products. the OCC plans to collect IRR data through a new IRR Data Page and then make that data available to the reporting institutions in order to benchmark assumptions and risk exposures better before interest rates begin a consistent rise. the OCC is taking steps to identify institutions that are more susceptible to IRR and to assess where individual IRR measurements could be masking the risk, perhaps due to less than rigorous assumptions. 5

6 OCC Range Practice Memorandum OCC distributed IRR worksheet for member banks to complete in late 2013 In order to achieve a baseline level of reporting that can be consistently provided and compared to peer, the data collection will only compare a limited number of data items and categories. OCC intends to provide customized benchmark reports to reporting banks/fsas in relation to actual IRR exposures, risk limits, portfolio durations, and non maturity deposit assumptions. 6

7 OCC IRR Input Form 7

8 OCC IRR Input Form OCC requested a significant amount of IRR data for this study. Results provided were limited in scope relative to the information requested. 8

9 OCC Results National Statistics on Risk Limits for Parallel Shocks 12 Month, Net Interest Income Economic Value of Equity Scenario 25 th %ile Median 75 th %ile 25 th %ile Median 75 th %ile % 8% 5% 15% 10% 5% % 8% 4% 15% 10% 5% % 10% 5% 25% 20% 10% % 15% 10% 30% 25% 15% % 20% 10% 40% 30% 15% Source: Office of the Comptroller of the Currency This table provides the most valuable information contained in the memorandum. Management and Boards are able to compare IRR limits to peers. Limits expand and contract based on the severity of the rate movement. Notice that all limits are expressed as negative limits, not +/. Regulators want management and boards to understand implications of the limits they set. Common examiner question: Is your board comfortable with placing 20% of net interest income at risk or 30% of equity at risk? 9

10 OCC Results National Statistics on Earnings at Risk 12 Month, Net Interest Income, and Parallel Shocks Scenario Number Largest Loss 25 th %ile Median 75 th %ile Largest Gain 100 1,163 13% 4% 2% 0% 6% 100 1,189 8% 1% 1% 4% 16% 200 1,229 16% 3% 2% 7% 30% 300 1,220 24% 4% 2% 9% 44% 400 1,134 31% 6% 3% 12% 57% Source: Office of the Comptroller of the Currency More banks run shocks relative to ramps and as such the results provided are for rate shocks. Majority of institutions responding are asset sensitive. Only a small percentage of banks are significantly asset or liability sensitive. Narrow band of risk between 25 th and 75 th percentiles at 100 bp and 200 bp shock. Higher levels of liquidity are the primary reason for asset sensitive position. Overnight funds reprice immediately in rising rate environment creating asset sensitivity. 10

11 OCC Results Distribution of EAR Results: NII in a 12 Month, +200 BPs Shock Approximately 500 Banks Approximately 725 Banks 250 Number of Banks Source: Office of the Comptroller of the Currency 11

12 OCC Results National Statistics on Economic Value of Equity, Parallel Shocks Scenario Number Largest Loss 25 th %ile Median 75 th %ile Largest Gain 100 1,289 17% 3% 3% 9% 31% 100 1,306 22% 7% 3% 2% 18% 200 1,343 44% 15% 7% 2% 29% 300 1,338 65% 23% 11% 1% 41% 400 1,193 85% 31% 14% 1% 52% Longer term measurement technique to measure IRR EVE is a worst case liquidation scenario Significant majority of banks responding are liability sensitive Results underscore examiner concern of a rising rate environment Banks have extended the duration of assets over the past five years to increase interest income NMD decay speeds impact results relative to EaR results 12

13 OCC Results 250 Distribution of EVE Results: +200 BPs Shock Approximately 900 Banks Approximately 400 Banks 200 Number of Banks Source: Office of the Comptroller of the Currency 13

14 OCC Results National Statistics on +100 BPs Repricing Rates (Beta s) Deposit Type Count 25 th %ile Median 75 th %ile MMDA 1,282 25% 40% 55% High Yield MMDA % 50% 76% Now Interest Checking 1,256 15% 23% 35% Savings 1,282 15% 25% 37% Other % 50% 75% Beta represents expected pricing of NMD rates for 100 BP move in Fed Funds rate. Most banks assume that they will not aggressively raise NMD rates when interest rates rise. Excess liquidity and margin improvements are primary reasons. Examiners want banks to apply historical price changes in your IRR analysis. MMDA accounts are most price sensitive. NOW and Savings account pricing are expected to remain low. 14

15 OCC Results Distribution of MMDA Repricing Rates in +100 BPs Number of Banks Source: Office of the Comptroller of the Currency 15

16 OCC Results National Statistics on Annual Deposit Decay Rates Deposit Type Count 25 th %ile Median 75 th %ile MMDA 1,149 12% 21% 36% High Yield MMDA % 20% 36% Now Interest 1,131 9% 15% 25% Checking Savings 1,151 9% 14% 23% Non Int Bearing 1,024 10% 15% 21% Source: Office of the Comptroller of the Currency NMD don t have maturity dates. Assumptions must be made about the life of the instrument. Decay rates measure the duration, which shows in %, the annual run off of a type of deposit. General rule: a decay rate of 20% = average life of 2.5 years (1 / decay rate = 5 year cash flow). MMDA and High Yield MMDA have highest decay rates due to highest price sensitivity. Variability of measurement techniques can significantly impact EVE results. Regulators want bank specific decay speeds incorporated into IRR modeling. Decay rates may be measured by open/closed accounts or by longer term analysis of NMD changes. 16

17 OCC Results Distribution MMDA Deposit Decay Rates Number of Banks Source: Office of the Comptroller of the Currency 17

18 OCC Range Practice Memorandum Summary OCC compiled data from over 1,500 midsize and community banks to establish the range of practices banks use to identify and measure IRR. Results reflected a wide range of results due to diverse modeling techniques, assumptions, and balance sheet complexity. Results of the OCC Memorandum allow banks to compare results relative to peers. Limits signify management and board appetite for risk. A majority of banks are asset sensitive in EaR and liability sensitive in EVE. NMD assumptions vary considerably among banks. 18

19 Interest Rate Risk Indicators 2014 vs 2007 Key Ratios: Long Term Assets/Total Assets Weighted Average Maturity/Repricing on Loans Weighted Average Maturity on Securities Transaction Accounts/Total Funding CD s, FHLB Advances, & Other Borrowings/Total Funding Source: Call Report (U.S. Banks < $10b) 19

20 Interest Rate Risk Indicators Long Term Assets/Total Assets % 30.0% 29.0% 25.0% 20.0% 15.0% 15.1% 10.0% 5.0% 0.0% 1 Securities that mature or reprice in > 5 years + Loans that mature or reprice in > 5 years + CMO s with remaining maturity > 3 years/total Assets Source: Call Report (U.S. Banks < $10b) ` 20

21 Interest Rate Risk Indicators Weighted Average Maturity/Repricing on Loans (Years) Source: Call Report (U.S. Banks < $10b) 21

22 Interest Rate Risk Indicators Weighted Average Maturity on Securities (Years) Source: Call Report (U.S. Banks < $10b) ````` 22

23 Interest Rate Risk Indicators Non Maturity Deposits/Total Funding 80.0% 60.0% 40.0% 47.3% 65.4% 20.0% 0.0% Source: Call Report (U.S. Banks < $10b) 23

24 Interest Rate Risk Indicators CD s, FHLB Advances, & Other Borrowings/Total Funding 60.0% 50.0% 54.2% 40.0% 35.7% 30.0% 20.0% 10.0% 0.0% Source: Call Report (U.S. Banks < $10b) 24

25 Austin Associates Client Study 2007 vs (Then vs. Now) 1 IRR Profile Comparison +200bp EaR over 12 month time horizon (Ramp) +200bp Economic Value of Equity 1 Randomly selected 20% of AA ALCO clients 25

26 AA Client Study 2007 vs bp Earnings at Risk over 12 month time horizon (Ramp) 0.4% 0.2% 0.1% 0.0% 0.2% 0.4% 0.6% 0.8% 0.6%

27 AA Client Study 2007 vs bp Economic Value of Equity (EVE) 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 6.4% 5.9%

28 CONTACTS We appreciate hearing from you. If you have questions or comments, regarding today s webinar, or if you would like to discuss how Austin Associates can assist your bank with any aspect of ALM or IRR management, please contact us. Thank you! Tom Hauck Managing Director & Principal Financial Management & Consulting thauck@austinassociates.com Todd Togrul Managing Director & Principal Financial Management & Consulting ttogrul@austinassociates.com