ALCO BEST PRACTICES. Police Officers Credit Union Conference May 6, Presented By Stacey Wilkerson Financial Advisor

Transcription

1 ALCO BEST PRACTICES Police Officers Credit Union Conference May 6, 2014 Presented By Stacey Wilkerson Financial Advisor

2 Agenda Risk vs. reward The inherent conflict between earnings and risk Strategic ALCO Operational ALCO Underperforming ALCOs Validations 2

3 Risk vs. Reward You can t broad brush risk Do not avoid an opportunity because of a previous negative experience Totally avoiding risk is not a strategic plan Risk should be managed and risk management should be clear and concise 3

4 Strategic ALCO Primary focus is to execute the strategies and parameters established at long range planning meetings Agenda is focused; objectives are clear Emphasis on the future and not the past Do not emphasize individual member issues that are irrelevant to ALCO material Primary focus on strategic development and decision making 4

5 Strategic ALCO Finance Board representative Investments Operations Lending Marketing 5

6 Flow of Information Strategic ALCO Objectives Policies Procedures Board Of Directors 6

7 Report Packaging Avoid Data / Information Overload Clear and concise Easy to understand reports Assumptions 7

8 Strategic ALCO Sample agenda Review of the balance sheet Economy direction of interest rates Action plans Strategies 8

9 Review of Balance Sheet Earnings Future outcomes What is driving profitability and why? ALM Reports Net interest income Net economic value Liquidity Current liquidity position Sources of liquidity Uses of liquidity Regulatory Guidelines NCUA letters Trends Historical perspective Understand outliers Policies ALM, investment, liquidity, concentration, interest rate risk, etc 9

10 Market Rate Environment Structure of Interest Rates Rate Environment Credit Union s Position Economy and Markets Fiscal and Monetary Policy Easing or Accommodative Economic Reports Unemployment / Inflation GDP

11 Action Plans Recommended strategies / actions Implementation: timetable and responsibilities Optimizing the balance sheet Analyzing true loan yields Loan pricing, products and product development Investment strategy 11

12 Strategies Brief description of progress from previous report Objectives Maintain a moderate amount of interest rate risk Maintain XXX amount of net interest margin Interest rate environment 12

13 ALM Policy Guidelines Basis of Measurement In Policy Approaching Policy Out of Policy Gap - 12 Month +/- 20% +/- 10% to +/- 20% >+/- 20% Net Interest Income - 12 Month >- 30% -20% to -30% < -30% Net Income - 12 Month > -75% -50% to -75% < -75% Net Economic Value - % Change > -50% -35% to -50% < -50% NEV Ratio > 4% 4% - 6% < 4% 13

14 Risk Measurement ANALYTICAL MEASURES 31-Dec Sep Jun Mar Dec-12 1-Year Cumulative Gap -8.47% -5.49% -8.40% -5.59% % Declining Rate Scenario NII Volatility 0.18% 0.54% 0.58% -0.05% 0.89% Rising Rate Scenario NII Volatility 1.37% 1.17% 0.76% 1.14% -0.75% Shock-Up 300 Scenario NII Volatility % -9.35% % -7.72% % Base Case Return on Assets 0.30% 0.61% 0.11% 0.54% 1.57% Base Case Net Interest Margin 4.53% 4.57% 4.46% 4.45% 4.90% NEV Percent Change Up % % % 23.82% -3.76% NEV Ratio Base 7.88% 6.68% 1.24% % % NEV Ratio Dn % 7.31% 2.97% 4.56% 5.54% NEV Ratio Up % 8.92% 4.45% 1.94% 4.60% In Policy Approaching Policy Out of Policy 14

15 Interest Rate Risk Emphasis Examiners are focusing more on interest rate risk Looking at the assumptions used in the model and their reasonableness Run alternative analyses to stress-test the balance sheet by changing assumptions 15

16 What-if Analyses Sensitivity analysis Prepayment speeds Non-maturity deposits Maturity Rate sensitivity factor Decay rates Valued at par Scenario analysis Yield curve twist change shape / slope of yield curve Basis risk Forward NEV Balance sheet growth Offering rate changes Yield curve twist 16

17 Operational ALCO Objectives are to carry out the decisions of the strategic ALCO and would include: ALCO implications effecting daily operations Emphasis on the details Emphasis on operations 17

18 Operational ALCO Executive Staff Accounting Finance Collections Lending 18

19 Operational ALCO Sample agenda Minutes review Review financials Cash management Reporting review Branch Collections Profitability Rates Promotions Action plans 19

20 Minutes Review Members in attendance ALCO discussions Evaluation of IRR exposure and what-if scenarios Contingency plans Evaluation of current risk measurement system

21 Review Financials More emphasis on granularity Financial Statement Ratios and Targets Balance Sheet Target Allocations Actual performance versus budget Cash Management Balance Sheet Loans Operational expense ratio Income Statement Deposits Margins Investments

22 Reporting Review Branch report Production Significant plan and budget variations Collections report Delinquency Bankruptcies Repossessions ALL calculation Review product profitability True yields Product market rate review Promotions Action plans 22

23 Underperforming ALCO Fear of change Focusing on the minutia Lack of future focus Personal agendas 23

24 What is a Validation? Validation should not be thought of as a purely mathematical exercise performed by quantitative specialists. It encompasses any activity that assesses how effective a model is operating. Validation procedures focus not only on confirming the appropriateness of model theory and accuracy of program, code, but also tests the integrity of model input, outputs, and reporting. 24

25 What is a Validation? Review of the ALM model Calculations Processes An audit of the ALM process Ensuring accuracy Strength of internal controls Logical and conceptual soundness 25

26 Validation Key Points Validations should be performed by parties completely independent from the models design and use Potential auditors : Independent group within the institution Internal audit Staff with model expertise External vendor Third-party validations Large, complex financial institutions Financial institutions with embedded options Can be costly 26

27 Validation Types ALM process review The process review is patterned after guidelines for model validation as described in OCC Bulletin ALM parallel analysis An ALM run independent of the financial institution s report Full ALM validation Both an ALM parallel analysis and a process review 27

28 Conclusion An effective way of conducting ALCO meetings is to separate the committees between strategic and operational Strategic ALCOs should focus on the analysis of future opportunities and their impacts to rate risk and performance of the institution Operational ALCOs should focus on the day-to-day impacts of the strategies developed in the strategic ALCO Institutions should ensure the integrity of their rate risk systems by engaging in one or more types of model validations 28

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