ALM Strategy in the Current Rate Environment. Current Landscape Interest Rates CU Balance Sheet & Financial Performance Trends

Transcription

1 ALM Strategy in the Current Rate Environment Lisa Boylen Senior ALM Analyst December 12, Objectives Current Landscape Interest Rates CU Balance Sheet & Financial Performance Trends Lessons Learned From Previous Rate Cycle Action Items, Strategies and ALM Considerations 2 1

2 Rate Change in Rate CURRENT LANDSCAPE 3 Rates on the Rise US Treasury Yield Curve Month 6 Month 1 Year 2 Year 3 Year 5 Year 10 Year 30 Year Change /30/ /30/

3 Projected Rates FFT 2 YR Treasury 10 YR Treasury 11/30/ /31/ /31/ Source: Bloomberg Forecast 5 CU Industry Earnings ROA Dec-2015 Dec-2016 Dec-2017 Jun-2018 ROA Source: NCUA Financial Performance Report 6 3

4 Increase in ROA The Drivers Contributors to ROA Change Operating Expense Fee & Other Operating Income PLL NIM ROA Source: NCUA Financial Performance Report NIM Yield or Cost? NET INTEREST MARGIN Dec-2015 Dec-2016 Dec-2017 Jun-2018 Net Interest Margin Yield on Assets Cost of Funds Source: NCUA Financial Performance Report 8 4

5 % of Total Deposits % OF EARNING ASSETS YIELD Cost of Funds % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% EARNING ASSETS & YIELD % 70.90% 73.22% 73.86% 31.23% 29.10% 26.78% % D E C D E C D E C J U N Investments Loans Yield on Assets Loan Yield Investment Yield Source: NCUA Financial Performance Report 9 DEPOSIT COMPOSITION % % 80.00% 60.00% 40.00% 20.00% 0.00% Dec-2015 Dec-2016 Dec-2017 Jun-2018 Non-Member 0.66% 0.80% 0.88% 0.89% IRA 7.54% 7.15% 6.70% 6.42% Share certificates 18.71% 18.26% 18.29% 18.20% Money Market 22.81% 22.81% 22.39% 21.73% Regular, Share Drafts & Other 50.28% 50.99% 51.73% 52.75% Cost of Funds Source: NCUA Financial Performance Report 10 5

6 Year over Year Growth % Non-Member Deposits Share Certificates Money Market Shares Regular Shares Share Drafts 0% 5% 10% 15% 20% 25% 30% 35% Non-Member Share Drafts Regular Shares Money Market Shares Share Certificates Deposits Jun % 6% 2% 7% 18% Dec % 7% 4% 6% 17% Dec % 12% 8% 5% 31% Dec % 10% 6% 1% 32% 11 Loan Growth Outpacing Share Growth Source: NCUA Financial Performance Report 12 6

7 Investment Drawdown for Loan Funding Cash + Short-Term Investments / Assets Source: NCUA Financial Performance Report DEC-2015 DEC-2016 DEC-2017 JUN What Do Market & Trends Tell Us Increase in Overnight Fed Funds Target Rate Flat Yield Curve Expansion in Net Interest Margin Can it Continue? Slightly Higher Funding Cost starting to see higher CD offering rates Loan Yields were trending down until June 2018 Earning asset yields are up with reallocation of investments into loans Loan Growth Faster than Share Growth How much liquidity left on balance sheet to fund growth? Pressure for higher deposit rates to fund growth Investment Portfolios increased rates, lower values 14 7

8 PRIOR RISING RATE CYCLE SIMILARITIES & DIFFERENCES 15 Source: Federal Reserve St Louis 16 8

9 Last Cycle 425 bp increase in Fed Funds over 24 months Current Cycle 200 bp increase to date over 36 months Much slower rise in rates than previous rate cycle Starting point at historical lows 17 Both cycles experienced a flattening of the yield curve 18 9

10 Comparative Earnings 19 74% 56% 20 10

11 Prior Cycle shift in share mix from NMS to Certificates Current Cycle rise in NMS despite increase in market rates Key difference level of rates, pace of change 21 Comparative Change in Fed Funds & Cost of Funds Last Cycle 2Q 2004 to 2Q 2006 Last Cycle Q to Q Current Cycle 4Q 2015 to 2Q 2018 Change in COF Change in Fed Funds Last Rising Rate COF rose 143 bps with a 425 bp increase in FFT Only a 2 bps increase with a 175 bp increase in FFT Current Cycle 13 bps increase at June 30, 2018 higher than comparable FFT increase last cycle. Expectation for higher cost of funds as rates continue to rise 22 11

12 Last Rising Rate Loan Yields up 42 bps 18 bp decline in loan yields with 175 bp increase in Prime Current Cycle 5 bp decline with similar increase in Prime Expectation for pressure on NIM as COF outpaces rise in loan yields 23 Liquidity Levels 24 12

13 Other Changes Last Rising Rate Cycle was over 10 Years Ago Demographics US Census Bureau Estimate Millennials born between 1982 and 2000 total 83.1 million or 25% of the population compared to 75.4 million baby boomers Technology - Mobile and Internet Banking easier to move money Competition Nonbank Financial and Fintech companies Social Media Influences consumer decision-making Regulation Retail deposits more valuable to large banks due to new liquidity coverage ratios US Census Bureau Release # CB Key Points Pressure on Net Interest Margin occurs later in rate cycle Increase in cost of funds could outpace increase in earning asset yields Loan competition has kept loan rates low Flat yield curve also lowers loan yields Uncertainty in terms of member behavior - this rate cycle unlike previous cycles 26 13

14 ACTION ITEMS, STRATEGIES & ALM CONSIDERATIONS 27 Loans Fundamentals of Net Interest Income Deposits Wholesale Funding Volume Mix Pricing Investments 28 14

15 Liquidity Will Drive Strategy & Earnings Deposit & Funding Strategy Liquidity Loan Strategy Earnings Investment Strategy 29 Action Items for Strategy Assessment Don t Bet on Timing or Direction of Rates Prepare for Any Change Liquidity How Much Do You Have? How Much Do You Need? Liquidity Forecast Driver of Funding (Deposits & Borrowings), Loan and Investment Strategy Need Funding Offensive Funding Strategy Adequate Liquidity Defensive Funding Strategy 30 15

16 Action Items for Strategy Assessment Refit your ALCO Transition from regulatory compliance monitoring to strategic balance sheet management Static balance sheet risk assessment to dynamic balance sheet with scenario analysis Model and Evaluate current and proposed level of interest rate risk 31 Deposit Action Items & Strategy Use liquidity forecast to determine strategy Deposit Growth Maintain Deposits Deposit decline is ok Be disciplined with deposit rate increases MODEL PROPOSED CHANGES Across the board rate increases put significant pressure on net interest margin. A change in NMS rates impacts the entire portfolio

17 NMS Rate Change 33 Deposit Action Items & Strategy Know & monitor your deposit base Who are your largest deposit members? Who has left over the last year? Who are at-risk members Single Relationships Account Balance is declining over time Don t blindly follow competitor pricing strategy it may not be in your best interest Review account balance distribution of tiered accounts do they need adjusting? 34 17

18 Deposit Growth Strategy Objective Attract new deposits while minimizing the increase in deposit cost Considerations Cost of new funding as well as paying higher rates to existing members Segregate rate sensitive from non-rate sensitive members 35 CD Deposit Promotion Growth Strategy Offer a CD Promotion(s) at a term(s) other than your current terms 7 month, 15 month, 27 month, etc. Price the promotion at the top of the market Offer the promotion during months of low maturities of current certificates Price non-promotional rates at the bottom of the market 36 18

19 CD Deposit Promotion Growth Strategy Allows you to raise funds without repricing all of your existing certificates at maturity Existing certificates will renew at non-promotional rate unless they request the promotional rate MODEL THE PROPOSED STRATEGY TO DETERMINE IMPACT TO INCOME AND IRR 37 Wholesale Funding Action Items & Strategy Review wholesale funding alternatives and be ready to implement if liquidity forecast indicates a need for funding FHLB Corporate Lines of Credit Brokered CDs Listing Services Simpli CDs Repurchase Agreements Model the cost/risk of deposit growth alternatives with wholesale funding alternatives 38 19

20 39 Wholesale Funding Action Items & Strategy Diversify funding sources Assess collateral requirements Diversify borrowing terms 40 20

21 Wholesale Funding Strategy Borrow at current rates to fund future loan growth Flat yield curve borrowing out on the curve adds little cost Borrow and invest in the securities portfolio adds liquidity Bond that provides stable cash flow Is eligible collateral for pledging needs Could add income depending upon investment Diversify across sources and maturities MODEL STRATEGY TO DETERMINE IMPACT ON EARNINGS & IRR 41 Loan Consideration, Action Items & Strategy Loan growth expected to slow with rising rates Prepayments will slow, reducing cash flow Decline in mortgage refinancing Flat yield curve puts pressure on loan yields Make plans to reprice loan portfolio Increase in rates on NMS deposits is immediate Impact to loans dependent upon average loan turnover rate Are you being paid for the risk you are taking? Are rates competitive? 42 21

22 Loan Consideration, Action Items & Strategy Loan sales or participations sold for added liquidity Loan Participations Purchased if loan growth is slow Promote variable rate loans HELOCs and variable Credit Cards MODEL STRATEGY TO DETERMINE IMPACT ON EARNINGS & IRR 43 Investment Portfolio Considerations, Action Items & Strategy Investment values decline as market rates rise Review bonds now for sell opportunities to provide liquidity or reposition the portfolio Prepayments on MBS securities slow as rates rise reducing cash flow Callable bonds extend to maturity Need liquidity - stay short and keep a larger cash cushion Liquidity Ok Adjustable Rate Bonds SBA floaters and ARMs also provide cash flow Seasoned MBS provide cash flow for reinvestment at higher rates MODEL STRATEGY TO DETERMINE IMPACT ON EARNINGS & IRR 44 22

23 Summary PLAN EXECUTE MODEL DECIDE 45 Contact Lisa B. Boylen, CPA Senior ALM Analyst (336) (direct) (800) ext Triad Center Drive, Suite 410 Greensboro, NC