MANAGING INTEREST RATE RISK: SETTING THE STAGE FOR TOMORROW MIKE DELISLE, ALM ADVISORS GROUP

Transcription

1 MANAGING INTEREST RATE RISK: SETTING THE STAGE FOR TOMORROW MIKE DELISLE, ALM ADVISORS GROUP WVBA Convention July 29, 2014

2 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 2

3 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 3

4 What we know Rates as they are 4% 3% 3% 2% 2% 1% 1% 0% Treasury Curve 7/18/14 4

5 What we know How we got here 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Core PCE Fed Funds Target 3 Month Bill 2 Year Note 10 Year Note '60'62'64'66'68'70'72'74'76'78'80'82'84'86'88'90'92'94'96'98'00'02'04'06'08'10'12'14 5

6 What we know Historical transitions 11% 10% 9% 8% 7% 6% 5% Treasury Curve 3/1/1988 Treasury Curve 3/1/1989 6

7 What we know Historical transitions 9% 8% 7% 6% 5% 4% 3% Treasury Curve 1/1/94 Treasury Curve 1/1/95 7

8 What we know Historical transitions 6% 5% 4% 3% 2% 1% 0% Treasury Curve 4/1/04 Treasury Curve 4/1/05 8

9 What we know Historical transitions 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Treasury Curve 7/18/14 Treasury Curve 3/1/88 Treasury Curve 1/1/94 Treasury Curve 4/1/04 9

10 What we know Historical transitions Treasury Curve 7/18/14 Treasury Curve 3/1/88 Treasury Curve 1/1/94 Treasury Curve 4/1/04 10

11 What we know Historical transitions 12% 10% 8% 6% 4% 2% 0% Treasury Curve 7/18/14 Treasury Curve 3/1/89 Treasury Curve 1/1/95 Treasury Curve 4/1/05 11

12 What we know Historical transitions Treasury Curve 7/18/14 Treasury Curve 3/1/89 Treasury Curve 1/1/95 Treasury Curve 4/1/05 12

13 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 13

14 NII at Risk Earnings at Risk (EAR) Net Interest Income (NII) Short term view of risk Asset Sensitive: Increased income in rising rate scenarios Liabilities Sensitive: Decreased income in rising rate scenarios 14

15 NII at Risk Profile Asset Sensitive 20.0% 10.0% 0.0% 10.0% 20.0% -200 bps -100 bps Base +100 bps +200 bps +300 bps +400 bps 1st Quarter 7,035 7,167 7,312 7,494 7,662 7,820 7,965 2nd Quarter 6,692 7,240 7,667 7,946 8,201 8,439 8,669 3rd Quarter 6,584 7,326 7,954 8,345 8,701 9,038 9,368 4th Quarter 6,612 7,486 8,217 8,615 8,972 9,308 9,639 26,924 29,219 31,149 32,400 33,537 34,605 35,642 % Difference -13.6% -6.2% 4.0% 7.7% 11.1% 14.4% 15

16 NII at Risk Profile Liability Sensitive 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% -200 bps -100 bps Base +100 bps +200 bps +300 bps +400 bps 1st Quarter 3,421 3,391 3,302 3,270 3,245 3,227 3,196 2nd Quarter 3,528 3,500 3,375 3,337 3,309 3,293 3,278 3rd Quarter 3,575 3,560 3,414 3,396 3,356 3,349 3,346 4th Quarter 3,606 3,600 3,434 3,464 3,429 3,442 3,459 14,129 14,050 13,526 13,468 13,339 13,311 13,279 % Difference 4.5% 3.9% -0.4% -1.4% -1.6% -1.8% 16

17 Peer Data March 14 NII Rates Up 200 bps 40% 35% 35% 30% Percent of Clients 25% 20% 15% 24% 19% 10% 9% 5% 4% 4% 3% 0% 0% 0% 0% 0% 1% 0% 0% 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 30% More Percent Change NII 17

18 Peer Data March 14 NII Rates Up 200 bps 40% Percent of Clients 35% 30% 25% 20% 15% Liability Sensitive 14% 24% 35% 19% Asset Sensitive 62% 10% 9% 5% 4% 4% 3% 0% 0% 0% 0% 0% 1% 0% 0% 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 30% More Percent Change NII 18

19 EVE at Risk Economic Value of Equity (EVE) EVE = PV Assets PV Liabilities Long term view of risk 19

20 EVE at Risk Profile Asset Sensitive EVE Difference % Difference UP ,520 1, % UP ,038 1, % UP , % Base Case 56,796 DN ,812 (5,984) 10.5% Book Value: 46,529 15% 10% 5% 0% 5% 20

21 EVE at Risk Profile Liability Sensitive EVE Difference % Difference UP ,816 (9,912) 11.3% UP ,773 (5,955) 6.8% UP ,145 (1,583) 1.8% Base Case 87,728 DN ,913 2, % Book Value: 89,452 15% 10% 5% 0% 5% 21

22 Peer Data March 14 EVE Rates Up 200 bps 25% 20% 20% 21% 19% Percent of Clients 15% 10% 5% 0% 13% 7% 6% 4% 4% 3% 2% 0% 0% 1% 0% 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 30% More Percent Change EVE 22

23 Peer Data March 14 EVE Rates Up 200 bps 25% Percent of Clients 20% 15% 10% 5% 0% 3% Liability Sensitive 57% 2% 4% 7% 20% 21% 19% 13% 6% 4% 0% 0% 30% 25% 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 30% More Percent Change EVE Asset Sensitive 24% 1% 0% 23

24 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 24

25 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 25

26 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 26

27 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 27

28 CD Migration New Volume vs Matured Balances , ,000 Rate ,000 4,000 3,000 2,000 Balance , Month 4-6 Month 7-9 Month Month Month Month 2-3 Year 3-4 Year 4 Year + Total New Volume - 4,326-3,429 2, ,019 12,044 Matured - 5,052-3,430 2,048 1, ,010 2,820 16,174 New Volume Rates Matured Rate Migration - (726) - (1) 141 (635) (462) (646) (1,801) (4,130) Spread

29 CD Migration New Volume vs Matured Balances , ,000 Rate ,000 4,000 3,000 2,000 Balance , Month 4-6 Month 7-9 Month Month Month Month 2-3 Year 3-4 Year 4 Year + Total New Volume - 4,326-3,429 2, ,019 12,044 Matured - 5,052-3,430 2,048 1, ,010 2,820 16,174 New Volume Rates Matured Rate Migration - (726) - (1) 141 (635) (462) (646) (1,801) (4,130) Spread

30 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 30

31 Securities 31

32 Securities 32

33 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 33

34 Brokered CD s Brokered CD's 7/21/2014 For settlement 7/30/2014 Indicative Levels for Best-Efforts Posting CD Rates Benchmark Term All-In Low All-In High FHLB-Bost Spread 3-mos (5) 6-mos (1) 9-mos yr mos mos (4) 2 yr (15) 2.5 yr (13) 3 yr (17) 3.5 yr (19) 4 yr (21) 5 yr (17) 7 yr (18) 10 yr (12) Note: Calendar convention for CD rates are Actual/365, UST are Actual/Actual, Swaps are 30/360 & FHLB-Bost are Actual/

35 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 35

36 Blend and Extend Strategy Old advance is closed out and new advance is initiated at par value. There is no cash settlement of the prepayment fee. The prepayment fee is then blended into the rate of a new advance. The term of the new advance is selected to take advantage of the current low rate environment and minimize the annual impact of the penalty. 36

37 Blend and Extend Results Lower advance costs and improved net interest margin. Allows liability sensitive institution to extend duration of advances without increasing total advances outstanding. No accounting concerns if structured correctly. Lock in today s low rates. 37

38 Blend and Extend Example Current Structure After Restructure Par Value $15,000,000 $15,000,000 Interest Rate 4.06% 2.64% Prepayment Fees Included in the new $664,833 interest rate Years to Maturity 1.2 Years 3.0 Years Annual Savings $213,000 38

39 Blend and Extend Example 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Current Rate Prepayment Fee = 1.50% over the life of the new 5 year advance FHLB Rate Spread New Rate 39

40 Blend and Extend Example 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% New 3 Year Rate Penalty Spread Old Advance Rate 40

41 Positioning the Balance Sheet Retail Tactics Loans Deposits Wholesale Tactics Securities Brokered Deposits Advances Off Balance Sheet Derivatives 41

42 Derivatives Borrower Fixed Rate Loan Receive Fixed % Institution Fixed Rate Loan with Interest Rate Swap Interest Rate Swap Customer Desires Fixed Rate Loan

43 Derivatives Borrower Fixed Rate Loan Receive Fixed % Institution Fixed Rate Loan with Interest Rate Swap Pay Fixed Interest Rate Swap Receive LIBOR Floating Swap Loan Receipt to Floating

44 Derivatives Results of Swap Borrower Fixed Rate Loan Receive Fixed 4.50% Institution Fixed Rate Loan with Interest Rate Swap Pay Fixed 4.50% Interest Rate Swap Receive 1M LIBOR % Floating Pay Fixed Loan Rate: 4.50% Amount: $5,000,000 Amortization: 20 years Maturity: 5 years Hedged Transaction Loan: Receive Fixed 4.50% Swap: Pay Fixed (4.50%) Receive 1M Libor+2.84% 2.99% Net Floating Cash Flow 2.99%

45 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 45

46 Estimating the Cost of Being Wrong Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions 46

47 Alternate Rate Scenarios Historical Transitions Bear / Bull Worst Case 47

48 Alternate Rate Scenarios Bear Flattener When short term interest rates rise faster than long term interest rates Bear Steepener When long term interest rates rise faster than short term interest rates Bull Flattener When the shape of the yield curve flattens as a result of long term interest rates falling faster than short term interest rates Bull Steepener When short term interest rates fall faster than long term interest rates 48

49 Alternate Rate Scenarios 2,300 Net Interest Income - Alternate Scenarios 2,200 2,100 2,000 1,900 1,800 1,700 1,600 Base Case Bear Steepener Bear Flattener Long End Up 200 Up 100 Up

50 Estimating the Cost of Being Wrong Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions 50

51 Asset Growth Growth Assumptions Total Asset Growth Cash/Fed Funds Securities Loans Funded By Non Interest Bearing DDA Interest Bearing DDA CDs/IRAs FHLB/Other Equity Total $162.8MM $36.0MM $4.0MM $122.8MM Total $38.2MM $53.4MM $67.9MM ($5.9MM) $9.2MM 51

52 Asset Growth Growth Assumptions Total Asset Growth Cash/Fed Funds Securities Loans Funded By Non Interest Bearing DDA Interest Bearing DDA CDs/IRAs FHLB/Other Equity Total $162.8MM $36.0MM $4.0MM $122.8MM Total $38.2MM $53.4MM $67.9MM ($5.9MM) $9.2MM NII Impact of $2.9MM 52

53 Asset Growth NII 25.0% Percent Change from Base Case 20.0% 15.0% 10.0% 5.0% 0.0% 300 bps 200 bps 100 bps +100 bps +200 bps +300 bps Flat 1.9% 2.2% 2.4% 2.4% 9.5% 18.0% Growth 1.9% 2.1% 2.4% 3.7% 11.7% 21.0% 53

54 Estimating the Cost of Being Wrong Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions 54

55 Deposit Migration Current Position Total Non Interest DDA Interest Bearing DDA/MMDA/Savings Customer Repo Total $245.9MM $575.7MM $47.3MM Deposit Changes Migration Cost Migrate 20% of Non Interest DDA to Premier Savings Replace Non Interest DDA with FHLB Advance Replace Customer Repo with FHLB Advance $49.2MM $15.0MM $15.0MM 16bps 261bps 242bps 55

56 Deposit Migration Current Position Total Non Interest DDA Interest Bearing DDA/MMDA/Savings Customer Repo Total $245.9MM $575.7MM $47.3MM Impact to NII ($0.834MM) And EVE ($7.2MM) Deposit Changes Migration Cost Migrate 20% of Non Interest DDA to Premier Savings Replace Non Interest DDA with FHLB Advance Replace Customer Repo with FHLB Advance $49.2MM $15.0MM $15.0MM 16bps 261bps 242bps 56

57 Deposit Migration NII 0.0% Percent Change from Base Case 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 300 bps 200 bps 100 bps +100 bps +200 bps +300 bps Regular 6.7% 4.7% 2.1% 3.7% 7.5% 11.4% Stressed 6.8% 4.8% 2.0% 4.7% 9.4% 14.2% 57

58 Deposit Migration EVE 0.0% Percent Change from Base Case 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 300 bps 200 bps 100 bps +100 bps +200 bps +300 bps Regular 16.6% 14.3% 6.5% 1.4% 3.8% 6.8% Stressed 16.1% 14.4% 6.5% 1.9% 4.9% 8.4% 58

59 Estimating the Cost of Being Wrong Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions 59

60 Estimating the Cost of Being Wrong Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions 60

61 Beta Stress Test Assumptions Regular Betas Stressed Betas Interest Paying DDA 9% 15% MMDA 75% 85% Savings 30% 60% Premier Savings 80% 90% Christmas Club 30% 60% Customer Repo 80% 90% 61

62 Beta Stress Test NII 0.0% Percent Change from Base Case 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 300 bps 200 bps 100 bps +100 bps +200 bps +300 bps Regular 4.5% 4.0% 1.8% 1.0% 2.5% 4.3% Stressed 4.5% 4.0% 1.8% 2.0% 4.7% 7.6% 62

63 Average Life Stress Test Assumptions Regular Average Life Stressed Average Life Non Interest Deposits 6 3 Interest Paying DDA 5 2 MMDA 3 2 Savings 6 3 Premier Savings 3 2 Christmas Club 6 3 Customer Repo

64 Average Life Stress Test EVE 5.0% Percent Change from Base Case 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 300 bps 200 bps 100 bps +100 bps +200 bps +300 bps Regular 17.7% 16.3% 8.9% 0.5% 2.8% 6.0% Stressed 0.0% 0.5% 0.2% 6.8% 15.2% 24.1% 64

65 The Cost of Being Wrong Impact to: Earnings Liquidity Position Risk Profile (NII and EVE) 65

66 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 66

67 Other Regulatory Concerns Assumption inputs, documentation, and presentation Stress testing betas, average lives, and prepayment speeds Concern with market value losses Setting policy limits Back testing Liquidity 67

68 Agenda Evaluating and Anticipating the Rate Environment Understanding Your Current Risk Profile Positioning the Balance Sheet Estimating the Cost of Being Wrong Considering Other Regulatory Concerns 68