Mike McGinnis- Vice President, Investment Sales SSI 1 - INTRODUCTION TO CREDIT UNION FINANCIAL MANAGEMENT

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1 Mike McGinnis- Vice President, Investment Sales SSI 1 - INTRODUCTION TO CREDIT UNION FINANCIAL MANAGEMENT Reviews the basic financial components and variables that impact credit union financial performance. SSI 2 APPLICATION OF CREDIT UNION RISK ANALYTICS Outlines assessment ratios and analytical methodologies used in evaluating risk and financial performance. SSI 3 - CREDIT UNION INVESTMENT PORTFOLIO MANAGEMENT AND ANALYTICS Reviews credit union investment types, portfolio analytics, and prudent investment portfolio practices. SSI 4 COMPREHENSIVE FINANCIAL MANAGEMENT AND STRATEGIC POSITIONING Integrating financial concepts and analytics into practical application. 1

2 Course 3 CREDIT UNION INVESTMENT PORTFOLIO MANAGEMENT AND ANALYTICS THREE-FOLD MISSION OF A CREDIT UNION S INVESTMENT PORTFOLIO Prudently park surplus liquidity until it can be re employed into loans or managed against shares. Earning asset whose yield and duration ensures long term return and liquidity to support core operations. Structured to offset adverse interest rate and credit risk or liquidity exposure from core operations. 2

3 Billions % 5.00% % % Investments Cash & Equivalents % 1.00% Yield on Average Investments 2 year Treasury 0 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Mar % CUNA Mutual Interest Trends report 3

4 Interest Rate Risk Changes in market value of securities Up in Yield, Down in Price Liquidity Risk Inefficient cash flow, duration is too long for funding needs Reinvestment Risk Interest rate cycle management; ability to reinvest at the right time Credit Risk Changes in the worthiness of securities 4

5 FDIC/NCUA insured Bullet/term maturity Great for building a cash flow ladder Provide monthly/quarterly cash flow Perfect for small to midsized credit unions limited to $250,000 pieces Billions Non Member Deposits Issuance increases during periods of tighter liquidity Credit union issuance up 16% 0 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Demand for funds = higher rates 5

6 Source: Freddie Mac and Securities Industry and Financial Markets Association as of March 31, 2015 Implicit government guarantee Not limited to $250,000 per security Variety of structures = variety of strategy Callables provide extra yield Bullets for structure and liquidity 6

7 Mortgage Pass-Through Securities- Fixed and Adjustable Rate securities that are collateralized by pooled mortgage whole loans. Monthly cash flow Principal & interest passed to investor Average Life, prepayment/extension risks Need to dissect and understand Simple to complicated 10yr MBS to wide window CMO More experienced investor 7

8 Estimated institutional holdings of Agency MBS Source: Freddie Mac, Fannie Mae, Federal Reserve, Inside MBS & ABS, National Credit Union Administration, and the U.S. Treasury Department. Collateralized Mortgage Obligations (CMOs)- Securities collateralized by pools of mortgages and MBS Pass-throughs whose cash flows are separated into short-, medium- and longterm positions ( tranches ). 8

9 Interest Principal U.S. Treasuries Certificates of Deposit Agency Bullets Straightforward Fixed maturities enhance spread under declining rates but could be adverse in rising rates. Agency Callables Agency Step ups Callable CDs Called or matured? Callables redeem early in declining rates and can be adverse in rising rates. Agency MBSs Amortizing Structures Erratic Amortizing structures best in rising rates providing needed cash flow for higher reinvestment but can be unpredictable. Declining rates could result in faster cash flows, lower investment yields. Agency bullets and callables Foundation with CDs for FF liquidity base MBS/CMOs 9

10 10% Capital, 1% ROA, Loan/Share ratio 87%, Primarily Auto Loans Investment Policy/Strategy Considerations Liquidity Profile- conservative, target cash position 10% Strong Lending- Investment Income not Critical Low ALM Risk CFO handles Accounting, Investments, IT- Limited Time for Portfolio Management Conservative Board/ Management- Risk Adverse Portfolio Goal: Want Easy to Manage Portfolio Focus is on available liquidity and steady cash flow Strategy- 10% Cash Position Target - Ladder -Buy Hold - Investments Available for Sale Investment Sectors- Agency Bullets, Callables, CDs 10

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13 10% Capital,.60% ROA, Loan/Share Ratio 50% Investment Policy/Strategy Considerations Liquidity Profile- high deposit base, always having to deploy funds Weak Lending- Investment Income Critical Low ALM Risk CFO and Accounting staff handle investments Primary goal is earnings without undue risk. Want Portfolio to Safely Generate Average Yield of 1.80% Strategy: - Lower target cash position, OK with minimal borrowing for liquidity - Barbell or target duration strategy - Investment Sectors Yield/Relative Value Driven- MBS/CMOs, CDs, Agency Bullets, Callables 13

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16 Portfolio Policy, Strategy and Procedures Aligned with: Your Credit Union s Lending and Deposit Trend Managing the Rate Environment Market and Debt Market Trends Regulatory Environment Mike McGinnis Vice President, Investment Sales mmcginnis@catalystcorp.org All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered by ISI or Catalyst Strategic Solution s Advisory Service are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice. 16