Objectives. NCUA Interest Rate Risk Supervision

Transcription

1 NCUA Interest Rate Supervision Lisa Boylen Senior ALM Analyst March 21, 2017 Objectives Understand NCUA s Revised Exam Procedures For Interest Rate Understand Exam Scope and Ratings Help You Prepare For Next Exam 1

2 Regulatory Guidance Effective 1/1/2017 Letter to Credit Unions: 16-CU-08 Fact Sheet: Revised Interest Rate Supervision Revised Examiners Guide Interest Rate Review Procedures Workbook Guide to Using NCUA s Interest Rate Exam Procedures Workbook NCUA IRR Supervision Key Changes 1. New IRR Review Procedures Workbook 2. Revised NEV thresholds 3. New NEV Supervisory Test 4. New NEV tool CUs with assets <= $50 million 5. Revision of Examiner s Guide 2

3 Exam Scope Asset Size as Measured by NEV Supervisory Test Special consideration for CU < $50 million Exam Scope: Credit Unions Total Assets <=$50 Million IRR rating based solely on NEV tool or Examiner judgement on exam steps IRR is high or extreme expand scope 3

4 Estimated NEV Tool Uses Call Report Data Predefined Values Assets Call Report Category Base NEV Up 300 Cash & Equivalents = Book Value = Book Value Investments = MV reported on Call Report Predefined % of Base Value by maturity ranging from 1.5% to 26.8% Loans = Book Value Predefined % of Base Value by loan type ranging from 1.0% to 22.1% Other Assets = Book Value = Book Value Estimated NEV Tool Liabilities Call Report Category Base NEV Up 300 Non Maturity Shares Book Value x 1% Base Value x 4% Certificates Book Value x 0.25% Predefined % of Base Value by maturity ranging from 1.5% to 12.0% Borrowings Book Value x 0.25% Predefined % of Base Value by maturity ranging from 1.5% to 12.0% Other Term Shares & Deposits Book Value x 0.25% Other Liabilities = Book Value = Book Value Predefined % of Base Value by maturity ranging from 1.5% to 12.0% 4

5 Estimated NEV Tool NEV Ratio & NEV Sensitivity Call Report Category Base NEV Up 300 Total Assets Total of Base Values Total of Up 300 Values Total Liabilities Total of Base Values Total of Up 300 Values Net Economic Value Total Assets Base Value Total Liability Base Value Total Assets Up 300 Values Total Liability Up 300 Values NEV Ratio Base NEV/Base Assets Up 300 NEV/Up 300 Assets NEV $ Sensitivity Up 300 NEV Base NEV NEV % Sensitivity NEV $ Sensitivity/Base NEV Source: NCUA IRR Workbook Guide External 5

6 Source: NCUA IRR Workbook Guide External Source: NCUA IRR Workbook Guide External 6

7 Sample CU ESTIMATED NEV TOOL 09/30/2016 Balance Sheet Category Book Base Up 300 Book vs Base Base vs. 300 Book vs 300 TOTAL ASSETS 160,850, ,434, ,393, % 8.70% 8.37% TOTAL LIABILITIES 143,782, ,792, ,150, % 3.95% 4.61% NET ECONOMIC VALUE Net Economic Value (NEV) 17,067,788 18,642,025 10,242,601 NEV Ratio 10.61% 11.55% 6.95% Moderate NEV Sensitivity 45.06% Moderate NEV Ratio = Net Economic Value/Value of Assets NEV Sensitivity = (Up 300 Value Base Value)/Base Value NEV Supervisory Test Levels NEV INDICATOR NEV Supervisory Test Levels Extreme High Moderate Low Post Shock NEV Ratio <=2% 2% 4% 4% 7% > 7% Base to Shock NEV Sensitivity <= 85% 65% to 85% 40% to 65% > 40% Source: NCUA IRR Workbook Guide External 7

8 Credit Unions Total Assets <=$50 Million Low to Moderate - Currently have a model used only for regulatory compliance Will examiner judgement require that I maintain a model? High & No Model What are regulatory expectations? Be prepared to discuss expectations with your examiner Exam Scope Asset Size as Measured by NEV Supervisory Test Special consideration for CU < $50 million 8

9 Exam Procedures Review Areas Market 5 to 10 Steps Management 4 to 13 Steps IRR Rating Earnings At 3 to 6 Steps Measurement Systems 1 to 5 Steps Stress Testing 2 to 3 Steps Required Exam Steps: Market 1. Prepare the NEV Supervisory Test 2. Determine the level of risk Low to Moderate : 3. Determine accounts generating risk 4. Determine reasonableness of valuations 5. COA aggregations appropriate? 9

10 Step 1: NCUA NEV Supervisory Test Economic Value per CU ALM Model NCUA NEV Supervisory Test Market (000 s) Book Value Base Up 300 Base Up 300 Assets 100,000 99,948 92,077 = CU Model Base = CU Model Up 300 NMS 75,000 72,528 67,967 BV x 99% NCUA Base EV x 96% Other Deposits & Liabilities 15,000 14,976 14,564 = CU Model Base = CU Model Up 300 Total Liabilities 90,000 87,504 82,530 NMS + Other Deposits & Liabilities NMS + Other Deposits & Liabilities Capital (NEV) 10,000 12,444 9,547 Assets Liabilities Assets Liabilities NEV Sensitivity 23.3% (Up 300 Value Base Value)/Base Value NEV Ratio 10.37% Value of Capital/Value of Assets Step 1: NCUA NEV Supervisory Test Market Economic Value per CU ALM Model NCUA NEV Supervisory Test (000 s) Book Value Base Up 300 Base Up 300 Assets 100,000 99,948 92,077 99,948 92,077 NMS 75,000 72,528 67,967 74,250 71,280 Other Deposits & Liabilities 15,000 14,976 14,564 14,976 14,564 Total Liabilities 90,000 87,504 82,531 89,226 85,844 Capital (NEV) 10,000 12,444 9,546 10,722 6,233 NEV Sensitivity 23.3% 41.9% NEV Ratio 10.4% 6.8% 10

11 Step 2: Level of Market Source: NCUA IRR Workbook Guide EXTERNAL Step 2: Level of Economic Value per CU ALM Model Market NCUA NEV Supervisory Test (000 s) Book Value Base Up 300 Base Up 300 Assets 100,000 99,948 92,077 99,948 92,077 NMS 75,000 72,528 67,967 74,250 71,280 Other Deposits & Liabilities 15,000 14,976 14,564 14,976 14,564 Total Liabilities 90,000 87,504 82,531 89,226 85,844 Capital (NEV) 10,000 12,444 9,546 10,722 6,233 NEV Sensitivity 23.3% MODERATE 41.9% NEV Ratio 10.4% MODERATE 6.8% 11

12 Step 3: Contributors to Asset Contribution to Change Loans Investments Liabilities Contribution to Change NMS Certificates Borrowings Market Step 4: Asset Review Review Reasonableness of Asset Valuations Loans Investments Cash Review Prepayment Assumptions Review Discount Rate Assumptions Market 12

13 Step 5: Account Aggregation & Data Completeness Market Is the model COA appropriately segregated to capture unique contractual and behavioral characteristics? Review the reconciliation between the model data and the CU s financial statements or Call Report CU Exam Preparation Tips Calculate the NEV Supervisory test Know the largest contributors to market risk Ensure AFS security base case valuations agree to the balance sheet Ensure assumptions are supported and documented Review COA Documented reconciliation between model and financials Market 13

14 Book Value Economic Value NCUA NEV Test* Base Base Base $ Change % Change Asset Overnight Investment Cash Cash 8,253,832 8,253,832 8,253,832 8,253,832 8,253, % Cash (Total) 8,253,832 8,253,832 8,253,832 8,253,832 8,253, % Investments Investments (Total) 185,598, ,602, ,356, ,602, ,356,616 (7,245,496) 3.90% Loans Vehicle Loans 94,775,449 93,960,815 89,945,432 93,960,815 89,945,432 (4,015,383) 4.27% Other Secured 5,751,336 5,742,624 5,633,124 5,742,624 5,633,124 (109,500) 1.91% Unsecured Loans 14,486,791 14,470,758 13,845,504 14,470,758 13,845,504 (625,253) 4.32% Credit Cards 6,802,278 6,760,642 6,315,670 6,760,642 6,315,670 (444,972) 6.58% First Mortgage 47,384,377 47,863,831 43,633,151 47,863,831 43,633,151 (4,230,681) 8.84% Home Equity_Other RE 10,539,375 10,498,686 10,028,100 10,498,686 10,028,100 (470,586) 4.48% Other Loans 1,526,836 1,480,454 1,337,648 1,480,454 1,337,648 (142,806) 9.65% Allowance for Loan Losses (710,547) (710,547) (710,547) (710,547) (710,547) 0.00% Loans (Total) 180,555, ,067, ,028, ,067, ,028,080 (10,039,182) 5.58% Other Assets Other Assets (Total) 17,864,512 17,864,512 17,864,512 17,864,512 17,864, % Asset (Total) 392,272, ,787, ,503, ,787, ,503,041 (17,284,678) 4.41% Book Value Economic Value NCUA NEV Test* Liability Base Base Base $ Change % Change Deposits Non Maturity Deposits 257,186, ,334, ,361, ,614, ,430,302 (10,184,596) 4.00% Share Certificates 70,259,271 69,769,775 67,510,831 69,769,775 67,510,831 (2,258,944) 3.24% IRA Shares 18,409,683 17,906,290 17,575,978 18,250,125 17,574,610 (675,514) 3.70% Other Deposits Deposits (Total) 345,855, ,010, ,448, ,634, ,515,744 (13,119,054) 3.83% Other Liabilities Other Liabilities (Total) 5,756,432 5,756,432 5,756,432 5,756,432 5,756, % Liability (Total) 351,612, ,767, ,204, ,391, ,272,176 (13,119,054) 3.77% Economic Value of Equity 40,660,578 49,020,500 48,298,557 43,396,488 39,230,865 (4,165,624) 9.60% NEV Supervisory Test* Rating Low Post Shock NEV 10.48% NEV Sensitivity (%) (9.60%) *Using NMS Premiums of 1%/4% 14

15 Required Exam Steps: Low to Moderate 1. Compare CU Base Case Results to Actual Results 2. Compare Shocked Results to Policy Limits Limits based on instantaneous & parallel are preferred Is non-compliance reported to Board? 3. Earnings at Results Liabilities Is Dividend (Interest) expense reasonable? Review Material Assumptions (NMS Betas, Lags) Earnings At CU Exam Preparation Tips Earnings At Prepare report comparing actual to model projected results (aka backtesting) Ensure you have reporting comparing earnings at risk to policy limits Ensure exceptions to policy are noted in the ALCO minutes Ensure assumptions are supported and documented 15

16 Sample Backtesting Sample CU 4th Qtr 2016 Actual Compared to Model Forecast as of 9/30/16 Base Case Static Rates Actual Projected as of 9/30/16 Account Average Balance 4th QTR Annualized Yield/Cost Average Balance 4th QTR Annualized Yield/Cost Annualization Factor 4 4 Variance % Total Loans to Members 558,409,472 5,301, % 555,476,505 5,488, % 3.51% Total Cash & Investments 451,118,916 1,759, % 454,565,551 2,165, % 23.01% Total Earning Assets 1,009,528,389 7,061, % 1,010,042,056 7,653, % 8.37% Total Shares 720,419, , % 720,950, , % 8.16% Borrowings 201,407,650 1,048, % 201,793,066 1,322, % 26.14% Total Int Bearing Liabilities 921,827,380 2,021, % 922,743,623 2,216, % 9.62% Net Interest Income 5,040, % 5,437, % 7.87% Required Exam Steps: Low to Moderate 1. Review Rate Scenarios Rate Shocks Yield Curve Twists Rate Ramps 2. Review Sensitivity Testing NMS Prepayments Discount rate spread changes 3. Is stress testing addressed in policy? Stress Testing 16

17 CU Exam Preparation Tips Include stress testing in your IRR process Scenario Alternate rate scenarios Sensitivity Key Model Assumptions Stress Testing Required Exam Steps: Low to Moderate Measurement Systems 1. Review Model Capability CU process for using the model Model complexity sufficient to measure CU risk Rate scenarios employed 17

18 Required Exam Steps: Low to Moderate Measurement Systems 1. Review Model Capability CU process for using the model Model complexity sufficient to measure CU risk Rate scenarios employed Required Exam Steps: Low to Moderate Management 1. Board & Senior Management Oversight Meetings 2. Policy Limits 3. Reporting 4. Internal Controls 18

19 Step 1: Board & Management Oversight Management Review Board/ALCO minutes and ALCO packets Check for evidence of annual policy review Check for ALCO representation in strategic planning session Review frequency of meetings Step 2: Policy Limits Management Review and evaluate policy limits and compliance with limits to NEV and IRR stated as % or $ Income measured over at least one and two-year horizons Limits too high or too low? Board review of o limit exceptions oproposed management actions 19

20 Step 3: Reporting Management Assess frequency of measurement Verification of IRR results to ALCO & BOD including trends Assumptions changes documented with analysis of impact Step 4: Internal Controls Management Determination if internal controls are documented & approved Has review of internal controls noted any deficiencies taker (investment office or CEO) segregated from the persons measuring risk 20

21 Credit Union Exam Preparation Management Scheduled ALCO meetings with supporting minutes IRR/ALM policy reviewed on an annual basis & documented Board/ALCO receives IRR results compared to policy limits and trend analysis Exceptions to limits are noted in minutes with a plan of action Review of assumptions Internal controls documented and audited Scoring Guidelines Separate Score for Each of the Areas Overall IRR Rating Market Score sets a floor Other Areas can reduce the score, but can t improve it 21

22 Scoring Guidelines Example Section Market Earnings at Stress Testing Measurement Systems Management Score Moderate Low Low Low Low Market Score - Moderate Other Areas - Low Overall Score Moderate can never be better than Market Score Scoring Guidelines Example Section Market Earnings at Stress Testing Measurement Systems Management Score Low Moderate Moderate Moderate High Market Score - Low Other Areas - Moderate to High Overall Score Examiner discretion. Other areas can lower the rating to Moderate or High 22

23 L in CAMEL L in CAMEL IRR Overall IRR Score Liquidity Strategic Reputation Summary Calculate and Know your Market Rating from the NCUA NEV Supervisory Test Review Guidance Provided by NCUA Presentation Reviewed Only the Required Steps for Low to Moderate they are other optional steps that could be included in the exam Exam Preparation and Knowledge is key to a successful exam 23

24 Regulatory Material Links Letter to Credit Unions: 16-CU-08 Fact Sheet: Revised Interest Rate Supervision Revised Examiners Guide Interest Rate Review Procedures Workbook Guide to Using NCUA s Interest Rate Exam Procedures Workbook Contact Lisa B. Boylen, CPA Senior ALM Analyst lboylen@firstcarolina.org (336) (direct) (800) ext Triad Center Drive, Suite 410 Greensboro, NC