ASSET/LIABILITY MANAGEMENT - YEAR 2

Transcription

1 ASSET/LIABILITY MANAGEMENT - YEAR 2 ALM Process, Positioning & Profitability Darren Herrmann Executive Vice President & Treasurer UMB Financial Corporation & UMB Bank Corporate Treasury Kansas City, MO Darren.Herrmann@umb.com July 30, 2018

2 Asset/Liability Management: Process, Positioning, & Profitability Graduate School of Banking Madison, Wisconsin July 30, 2018 Darren D. Herrmann Executive Vice President & Treasurer UMB Financial Corporation Graduate School of Banking, Madison, Wisconsin 1 Year 2 Overview Darren Herrmann Day 1 Asset/Liability Management (ALM): Positioning, Profitability & Process Andy Trovillion Day 2 Interest Rate Risk Measurement and Management John McQueen Day 3 Developing an Effective Liquidity Strategy Dave Koch Day 4 Putting it all together: Implementation of a Risk- Return Framework Graduate School of Banking, Madison, Wisconsin 2 1

3 Disclosures The information and opinions expressed in this message are solely those of the author and do not necessarily state or reflect the opinion of UMB Bank, n.a. or UMB Financial Corporation. This communication is provided for informational purposes only. UMB Bank, n.a. and UMB Financial Corporation are not liable for any errors, omissions, or misstatements. Graduate School of Banking, Madison, Wisconsin 3 Overview ALM Overview ALM and Positioning in the Current Environment ALM & Profitability Drivers of Net Interest Income (NII) A Case Study Marginal Cost of Funding Simple Derivatives to Manage the ALM Profile Intersession Project Part 1 The ALM Process Structure, responsibilities Seven Steps to an Improved ALCO Intersession Project Part 2 Graduate School of Banking, Madison, Wisconsin 4 2

4 ALM Overview Graduate School of Banking, Madison, Wisconsin 5 ALM Definition The term asset/liability management refers to the processes of acquiring and deploying funds to maximize net interest income, and thereby profitability and the value of the bank, while managing related financial risks and constraints. Graduate School of Banking, Madison, Wisconsin 6 3

5 ALM Net Interest Margin ROE Liquidity Risk Interest Rate Risk ROA Leverage Graduate School of Banking, Madison, Wisconsin 7 ALM s Primary Areas of Responsibility Net Interest Income & Net Interest Margin Balance Sheet & Off Balance Sheet Structure ALM Mix Loan and Deposit Pricing Investment Portfolio Management Wholesale Funding Capital/Leverage Derivatives Risk Measurement and Management/Constraints Interest Rate Risk Liquidity Risk Capital Graduate School of Banking, Madison, Wisconsin 8 4

6 ALM Levers Balance Sheet Composition/Mix Optimization Pricing Capital/Leverage Interest Rate Risk Liquidity Risk Derivatives Graduate School of Banking, Madison, Wisconsin 9 ALM and the Current Environment Graduate School of Banking, Madison, Wisconsin 10 5

7 Questions for the Current ALM Environment Should I keep making fixed-rate loans? Should I add funding with tenor now? Will my deposit mix shift back toward my pre-crisis position? Am I modeling deposit sensitivity appropriately? Should I lever or delever my balance sheet? What could happen to my liquidity as rates increase and the Fed shrinks its balance sheet? How has technology changed the competitive landscape in terms of raising deposits, rate sensitivity, switching costs (remote deposit capture, mobile banking, Kasasa)? Do I know who my large funds providers are and how they might behave? Do I know the trend in uninsured deposits at my institution? Graduate School of Banking, Madison, Wisconsin 11 Questions for the Current ALM Environment What is the marginal cost of new deposits raised? The Fed has increased 175 basis points since December 2015, has the expected impact materialized in your bank s NIM? Do I have exposure to a flattening yield curve and if so which kind? Am I using derivatives to enable loan growth and/or provides protection during a flat curve period? What is my bond portfolio s exposure to rising rates and what are the market value and liquidity implications? What will be the impact of no more Reg. D? Do I have a Liquidity Coverage Ratio (LCR) bank in any of my markets and how could that impact deposit rates? Graduate School of Banking, Madison, Wisconsin 12 6

8 Is This Time Different? Graduate School of Banking, Madison, Wisconsin 13 Yield Curve Is Flat by Historical Norms 10 2 Slope Over Time Last 30 years Last 20 years Last 10 years Last 5 years Last year Current Graduate School of Banking, Madison, Wisconsin 14 7

9 Interest Rates: Past, Present, Future? Percent MO 6 MO 1 YR 2 YR 3 YR 5 YR 7 YR 10 YR 30 YR Year Forward Rates Graduate School of Banking, Madison, Wisconsin 15 Cost of Funds vs. Market Rates Will Be Key to Interest Rate Risk Sensitivity Historically 55% of Market Rates 6.00 Cost of Funds with DDA Comparison 5.00 Credit Crisis 4.00 Percent Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 UMB Financial Corporation 1 Month Libor Graduate School of Banking, Madison, Wisconsin 16 8

10 Funding Mix More Indeterminate, Less Term 22% 9% 20% 19% 15% 8% 23% 18% 9% 6% 6% 6% 18% 22% 22% 35% 30% 36% 41% 35% DDA NOW MMDA Savings CDs Graduate School of Banking, Madison, Wisconsin 17 ALM & Profitability Graduate School of Banking, Madison, Wisconsin 18 9

11 NII & Margin Components 000s Omitted Average Interest Avg. Earning Assets Balance Inc/Exp Rate Investments 311,041 7, % Loans 433,842 17, % Other 18, % EA/Int. Inc./YEA $763,573 $25, % Costing Liabilities NOW Accounts 190, % MMDA Accounts 104, % Savings Accounts 39, % CDs 45, % Borrowings 112,809 1, % IBL/Int. Exp./COF $491,876 $2, % Net Interest Spread 2.93% Net Int. Inc./NIM $23, % Free Funds $271,697 Graduate School of Banking, Madison, Wisconsin 19 NII & Margin Components 000s Omitted Free Funds/Earning Assets 271,697/763,573 Interest Income Interest Expense Earning Assets $763,573 $25, % Yield on Earning Assets Interest Bearing Liabilities $491,876 $2, % Cost of Funds Free Funds $271,697 $22, % Contribution of Spread Free Funds Ratio 35.58% 0.15% Contribution of Free Funds % $1,159 Contribution of Free Funds $ Net Interest Income $23, % Net Interest Margin Free Funds Ratio*Cost of Funds 35.58%*.43% Contribution of Spread*Earning Assets 2.93%*763,573 Free Funds*Cost of Funds 271,697*.43% Graduate School of Banking, Madison, Wisconsin 20 10

12 Drivers of Net Interest Income Graduate School of Banking, Madison, Wisconsin 21 Drivers of NII Rate (Pricing, credit risk interest rate risk, liquidity risk) Volume of assets and liabilities Mix of assets and liabilities Graduate School of Banking, Madison, Wisconsin 22 11

13 Net Interest Income Variance Equations Net Interest Income Variance Analysis Calculation Example Dollars 000s Omitted Rate Variance = M (2) *L (2) *R (2) - M (2) *L (2) *R (1) Volume Variance = M (2) *L (2) *R (1) - M (2) *L (1) *R (1) Mix Variance = M (2) *L (1) *R (1) * - M (1) *L (1) *R (1) Period 1 Period 2 Avg. Avg. Avg. Avg. Balance Rate Balance Rate 309, % Investments 311, % 719,755 Earning Assets 763,573 Investments Rate M 2 * L 2 * R 2 - M 2 * L 2 * R 1 Variance 311,041 / 763, , % - 311,041 / 763, , % = 1,058 Investments Volume M 2 * L 2 * R 1 - M 2 * L 1 * R 1 Variance 311,041 / 763, , % - 311,041 / 763, , % = 369 Investments Mix M 2 * L 1 * R 1 - M 1 * L 1 * R 1 Variance 311,041 / 763, , % - 309,937 / 719, , % = -347 Total Investments Variance 1,080 Graduate School of Banking, Madison, Wisconsin 23 Net Interest Income Variance Analysis Sample Bank Net Interest Income Variance Analysis (000s Omitted) Period 1 Period 2 Rate + Volume + Mix = Total Amount Rate Amount Rate Variance Variance Variance Variance Earning Assets 309, % 311, % Investments 1, , , % 433, % Loans 1, ,898 18, % 18, % Other $719, % $763, % $21,664 $25,657 Interest Income $2,393 $1,335 $264 $3,993 Costing Liabilities 167, % 190, % NOW Accounts , % 104, % MMDA Accounts , % 39, % Savings Accounts , % 45, % CDs , % 112, % Borrowings $457, % $491, % $1,040 $2,099 Interest Expense $925 $67 $67 $1,059 $20, % $23, % Variance $1,468 $1,268 $198 $2,933 Graduate School of Banking, Madison, Wisconsin 24 12

14 Case Study Graduate School of Banking, Madison, Wisconsin 25 Net Interest Income Variance Analysis Year-to-Date -- Jun 2009 Year-to-Date -- Jun 2008 AVG AVG VARIANCE ANALYSIS RATE RATE AVERAGE INTEREST EARNED/ AVERAGE INTEREST EARNED/ RATE BASIS VOLUME MIX TOTAL ASSETS: BALANCE INC/EXP PAID BALANCE INC/EXP PAID VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE Net Loans 436,723 10, % 405,634 11, % (2,704) (70) 2,240 (1,154) (1,688) Total Investment Securities 446,703 7, % 313,818 6, % (2,278) (5) 1,634 1, Other Earning Assets 43, % 44, % (489) (3) 103 (123) (512) Total Earning Assets 932,151 17, % 768,882 18, % (5,471) (78) 3,977 (182) (1,754) Int Inc LIABILITIES: Total Demand Deposits 235, , Total Transaction Accounts 368, % 284,896 1, % (1,317) (12) (896) Total Time Deposits 148,622 1, % 147,947 3, % (1,336) (17) 537 (525) (1,341) Total Interest Bearing Deposits 517,314 2, % 432,843 4, % (2,652) (29) 933 (487) (2,236) Total Borrowings 150, % 137,335 1, % (1,595) (10) 316 (141) (1,430) Total Interest Bearing Liabilities 668,265 2,841.86% 570,178 6, % (4,247) (39) 1,248 (628) (3,666) Int Exp Interest Income & Rate Earned 17, % 18, % Interest Expense & Rate Paid 2,841.86% 6, % Net Interest Income & Rate Spread 14, % 12, % (1,224) (39) 2, ,912 NII Net Interest Margin 3.25% 3.41% Graduate School of Banking, Madison, Wisconsin 26 13

15 Drivers of NII Observations Fairly large negative rate variance during period of declining rates becoming a drag on net interest income growth What does that indicate? The bank has seen its spread widen but its net interest margin decline What explains this? What does this indicate about this bank s interest rate risk exposure? The bank s volume variance offset the negative rate variance due to significant asset growth, what happens if this growth slows and rates stay low? What levers remain for this bank to pull? Graduate School of Banking, Madison, Wisconsin 27 Net Interest Income Variance Analysis $ In Thousands Year-to-Date Year-to-Date AVG AVG VARIANCE ANALYSIS RATE RATE AVERAGE INTEREST EARNED/ AVERAGE INTEREST EARNED/ RATE VOLUME MIX TOTAL ASSETS: BALANCE INC/EXP PAID BALANCE INC/EXP PAID VARIANCE VARIANCE VARIANCE VARIANCE Net Loans 585,582 9, % 502,719 9, % (988) 1, Investment Securities 679,385 4, % 611,730 4, % (833) 591 (54) (295) Other Earning Assets #1 21, % 16, % (26) Other Earning Assets #2 81, % 85, % 7 10 (34) (17) Total Earning Assets 1,376,012 14, % 1,224,685 14, % (1,839) 1, (31) LIABILITIES: Total Demand Deposits 465, , Total Rate Bearing Transaction Accts. 588, % 497, % (98) (46) Total Time Deposits 112, % 133, % (68) 47 (127) (148) Total Int Bearing Deposits 700, % 630, % (167) 85 (113) (195) Total Borrowings 170, % 153, % (5) 12 (12) (5) Total Interest Bearing Liabilities 871, % 783, % (171) 96 (125) (200) Interest Income & Rate Earned 14, % 14, % Interest Expense & Rate Paid % % Net Interest Income & Rate Spread 13, % 13, % (1,668) 1, Net Interest Margin 2.52% 2.77% Graduate School of Banking, Madison, Wisconsin 28 14

16 Drivers of NII Observations Bank continues to offset negative rate variance with positive volume variance and positive mix variance What constraints could this bank face in trying to continue this strategy? The bank is sacrificing net interest margin for net interest income, what financial goals must be a priority (ROA vs. ROE vs. EPS)? As you survey the regulatory and competitive landscape what if anything concerns you about the bank s funding base? What levers remain for this bank to pull? Graduate School of Banking, Madison, Wisconsin 29 Net Interest Income Variance Analysis $ In Thousands Year-to-Date Year-to-Date AVG AVG VARIANCE ANALYSIS RATE RATE AVERAGE INTEREST EARNED/ AVERAGE INTEREST EARNED/ RATE VOLUME MIX TOTAL ASSETS: BALANCE INC/EXP PAID BALANCE INC/EXP PAID VARIANCE VARIANCE VARIANCE VARIANCE Net Loans 1,123,626 21, % 1,057,795 18, % 1, ,026 3,444 Investment Securities 614,401 5, % 642,474 4, % (269) 241 Other Earning Assets #1 135,721 1, % 131,855 1, % Other Earning Assets #2 51, % 49, % (25) 158 Total Earning Assets 1,924,910 28, % 1,881,795 24, % 2, ,980 LIABILITIES: Total Demand Deposits 592, ,498 Total Rate Bearing Transaction Accts. 973,433 2,222.55% 848, % 1, ,400 Total Time Deposits 103, % 115, % 75 6 (32) 49 Total Int Bearing Deposits 1,077,406 2,542.57% 964,014 1,094.27% 1, ,448 Total Borrowings 167,846 1, % 252, % (290) 215 Total Interest Bearing Liabilities 1,245,252 3,622.70% 1,216,916 1,959.39% 1, (210) 1,663 Interest Income & Rate Earned 28, % 24, % Interest Expense & Rate Paid 3,622.70% 1,959.39% Net Interest Income & Rate Spread 24, % 22, % ,317 Net Interest Margin 3.30% 3.08% Graduate School of Banking, Madison, Wisconsin 30 15

17 Drivers of NII Conclusions Determine what has been driving net interest income Has rate variance been positive or negative as rates have increased how fits with interest rate risk results? Assess what levers exist to alter this Assess likelihood of offsetting if negative rate variance through growth or mix changes If already highly loaned, assess likelihood of improving mix variance on the liability side of the balance sheet Assess the impact of any changes on the institution s risk profile Model forward results and load into simple comparison Consider the potential impact of sustained high or low rate environments Graduate School of Banking, Madison, Wisconsin 31 Marginal Cost Funding Graduate School of Banking, Madison, Wisconsin 32 16

18 Source: SNL Financial and Wells Fargo Securities Graduate School of Banking, Madison, Wisconsin 33 Source: SNL Financial and Wells Fargo Securities Graduate School of Banking, Madison, Wisconsin 34 17

19 Marginal Cost Funding Analysis No Growth Strategy Current Position Rates Up 50bp Match Rate Rates Up 50bp Don't Match Rate Interest Interest Interest Balance Rate Expense Balance Rate Expense Balance Rate Expense MMDA 15,000, % 37,500 15,000, % 112,500 13,500, % 33,750 Wholesale Funding 1,500, % 28,500 Combined Position 15,000, % 37,500 15,000, % 112,500 15,000, % 62,250 Marginal Cost Savings 50,250 Marginal Cost Break Even 5.25% Growth Strategy Current Position Special Nets $3 Million 50/50 Split No Special, Fund Wholesale Interest Interest Interest Balance Rate Expense Balance Rate Expense Balance Rate Expense Existing CDs 15,000, % 150,000 13,500, % 135,000 15,000, % 150,000 New Money 37 Month CD Special 1,500, % 33,750 Old Money 37 Month CD Special 1,500, % 33,750 Wholesale Funding 1,500, % 43,500 Combined Position 15,000, % 150,000 16,500, % 202,500 16,500, % 193,500 Marginal Cost of Funds $ 52,500 43,500 Marginal Cost of Funds Rate 3.50% 2.90% Comments: 75% new money assumption gets the special CD option down to a marginal cost of 2.33%. Breakeven new money percentage equals 60.33%. Graduate School of Banking, Madison, Wisconsin 35 Key Considerations What is my expected range of new money to be raised? What is my expected range of existing deposit cannibalization? Am I raising in all locations or the cheapest? What is my expected rate of outflow if don t match rate? How much outflow can I tolerate? What would my wholesale funding options cost? What are my breakeven results? Graduate School of Banking, Madison, Wisconsin 36 18

20 Simple Derivatives to Manage the ALM Profile Graduate School of Banking, Madison, Wisconsin 37 Context Bank has experienced margin expansion as rates rise Two thirds of loan book reprices or cash flows within 12 months Believes Fed will increase another 100 basis points over the next year Late in economic cycle and flat curve raises likelihood of lower rates to come which would be adverse to margin Bank has experience with embedding loan rate floors, but averse to doing so presently Graduate School of Banking, Madison, Wisconsin 38 19

21 Interest Rate Swaps Overview Fixed Rate Loan or Bond Floating Rate Funding Your Bank 1. Pay Fixed, Receive Float 2. Convert fixed rate loans or bonds to floating rate 3. Convert floating rate funding to fixed 4. Expect rates to rise and/or want to limit exposure to rising rates 5 year bullet 2.90% 1 Month Libor 2.10% Initial cost is 80 basis points Counterparty Receive Fixed Pay Float Floating Rate Loan or Bond Fixed Rate Funding Your Bank 1. Pay Float, Receive Fixed 2. Convert floating rate loans or bonds to fixed 3. Convert fixedrate funding to floating 4. Expect rates to fall and/or want to limit exposure to falling rates 1 Month Libor 2.10% 5 year bullet 2.90% Initial benefit is 80 basis points Counterparty Receive Float Pay Fixed Graduate School of Banking, Madison, Wisconsin 39 Interest Rate Cap Fixed Rate Loan or Bond Floating Rate Funding Your Bank 1. Long (Buys) Cap 2. Pays Option Premium 3. If 1Month Libor goes above strike price, Your Bank receives payment 4. Used to limit exposure to 1 Month Libor rising above a certain level 5 Year ATM Cap Rate = 2.77% Pay 2.08% Receive Amount 1ML Exceeds Strike Counterparty 1. Short (Sells) Cap 2. Receives Option Premium Interest Rate Floor Floating Rate Loan or Bond Fixed Rate Funding (DDAs) Your Bank 1. Long (Buys) Floor 2. Pays Option Premium 3. If 1Month Libor goes below strike price, Your Bank receives payment 4. Used to limit exposure to 1 Month Libor falling below a certain level Receive Amount 1ML Below Strike Counterparty 1. Short (Sells) Floor 2. Receives Option Premium Graduate School of Banking, Madison, Wisconsin 40 20

22 Graduate School of Banking, Madison, Wisconsin 41 Intersession Project Part 1 Analysis of Financial Performance Graduate School of Banking, Madison, Wisconsin 42 21

23 Equity Multiplier Total Assets $ 100,000,000 Total Equity $ 8,000,000 Equity Ratio 8% Equity Multiplier 12.5 Peer Total Assets 100% Peer Equity 8% Equity Multiplier 12.5 Graduate School of Banking, Madison, Wisconsin 43 Seven Steps to a Better ALCO Graduate School of Banking, Madison, Wisconsin 44 22

24 Seven Steps to a Better ALCO Step 1: Make your policies metric driven Step 2: Get your membership right Step 3: Focus your agenda on risk/return metrics and action items Step 4: Build meeting information around agenda Step 5: Review Your Risk/Return Profile --Is the bank measuring the opportunity cost of its current interest rate risk position? Step 6: Pricing methodologies should be robust and reflect metrics Step 7: Have action items --Meeting should not just be a history lesson Graduate School of Banking, Madison, Wisconsin 45 Setting Limits Base Case 20% NII Limits Minimum.80% ROA Metric Total Assets 100,000, ,000, ,000,000 NII 3,500,000 2,800,000 3,192,308 NI 1,000, , ,000 Tax Rate 35% 35% 35% ROA 1.00% 0.55% 0.80% 4,000 Comparison of Base Case to Limit Methodologies 1.20% ROA metric requires NII limit of < 9%, not 10%-20% 3,500 3,000 2,500 2, % 0.80% 0.60% 1,500 1, % 0.20% 0.00% Base Case 20% NII Limits 0.80% ROA NII ROA Graduate School of Banking, Madison, Wisconsin 46 23

25 Expected Outcomes More engaged ALCO Better questions Increased volume and quality of ideas Greater strategic focus Improved financial results Graduate School of Banking, Madison, Wisconsin 47 Intersession Project Part 2 ALCO Responsibilities and Tools Graduate School of Banking, Madison, Wisconsin 48 24

26 Conclusions ALM s primary responsibilities center on Net interest income and net interest margin Rate, volume, mix Interest rate risk Liquidity risk Capital Management Levers Balance Sheet Mix Composition, Capital/Leverage, Pricing, Interest Rate Risk, Liquidity Risk, Derivatives Understand the interest rate cycles and what the yield curve is saying Follow the 7 steps for an improved ALM process Graduate School of Banking, Madison, Wisconsin 49 Questions? Darren Herrmann Executive Vice President & Treasurer UMB Financial Corporation darren.herrmann@umb.com Graduate School of Banking, Madison, Wisconsin 50 25