ALCO: The Fundamentals

Transcription

1 ALCO: The Fundamentals Presented by: Urum Urumoglu Senior Consultant ext

2 What Is Asset/Liability Management? Asset/Liability Management (ALM) is the process of planning, controlling and monitoring financial performance to achieve financial goals of the capital plan. Financial Risks are measured to determine if plan can be met in reasonable risk situations Credit Risks Interest Rate Movements Changes in liquidity position Changes in regulatory expectations 2

3 Key Parts of the ALM Process Set Achievable Financial Goals -Earnings Identify Levels of Financial Risk Develop Appropriate Risk Measurement Systems & Limits Integrate Measurements into Management Process (The ALCO Process) and reporting Evaluate New Ideas Before Implementation to Determine Risk Implement New Strategies to Maximize Performance 3

4 Responsibilities of BOD & Management 4

5 Understanding Financial Risks What Financial Risks Impact Core Earnings? Credit Risk: Will the borrower of funds repay the committed amount? Liquidity Risk: Will we have enough funds to meet the demands for loans or deposit withdrawals? Interest Rate Risk: To what extent will the core earnings change if market interest rates change? Factors in Measuring Risks Must be able to project cash flows (Principal & Interest) Must understand potential changes in these flows Embedded Options 5

6 Financial Institutions Risk Management Financial & Business Risk Management Financial Risks Business Risks Operational Risks Liquidity Risk Credit Risk Interest Rate Risk Management Risks People Risks Maturity Mismatch Default Commodity Prices Strategic Risk Legal Risks Asset/Liability Imbalance Downgrade Equity Prices System Risks Cash Flow Counterparty Interest Rate Changes External Risks 6

7 THE ALCO PROCESS Credit Risks Market Risk Liquidity Risk Regulatory Risk Capital Planning Interest Rate Risk Reputation Risk Operational Risk 7

8 Why is a Capital Plan Important Business strategies need to be developed and applied in the context of a business plan or strategy. We are dealing with Asset quality issues affecting earnings and capital accumulation in many shops. The new increased capital standards. High liquidity levels that are decreasing spreads Maturing loans and investments going back out at lower rates. Deposit costs at near 0% levels Your capital plan feeds: Core funding growth goals Non-Regulatory core funding goals Goals for overall level of investments Goals for business plan or strategy we will be evaluating and stress testing 8

9 Capital Planning Process Capital planning is a dynamic and ongoing process that, in order to be effective, is forward-looking in incorporating changes in a bank s strategic focus, risk tolerance levels, business plans, operating environment, or other factors that materially affect capital adequacy. OCC Guidance on Capital Planning The most effective capital planning considers both shortand longer-term capital needs and is coordinated with a bank s overall strategy and planning cycles, usually with a forecast horizon of at least two years. From OCC

10 ROA Required to Maintain Capital Ratio Step 1: Set Strategic Financial Goals That Work! Growth Scenario Beginning Assets Total Capital Capital Ratio Annual Asset Growth Assets After Growth New Total Capital to Maintain Ratio Additional Capital Needed Average Assets ROA 1 $ 100,000 $ 8, % 0.00% $ 100,000 $ 8,500 $ - $ 100, % 2 $ 100,000 $ 8, % 5.00% $ 105,000 $ 8,925 $ 425 $ 102, % 3 $ 100,000 $ 8, % 10.00% $ 110,000 $ 9,350 $ 850 $ 105, % 4 $ 100,000 $ 8, % 15.00% $ 115,000 $ 9,775 $ 1,275 $ 107, % 5 $ 100,000 $ 8, % 20.00% $ 120,000 $ 10,200 $ 1,700 $ 110, % 6 $ 100,000 $ 8, % 25.00% $ 125,000 $ 10,625 $ 2,125 $ 112, % Growth Scenario Beginning Assets Total Capital Long Term Capital Ratio Annual Asset Growth Assets After Growth New Total Capital to Maintain Ratio Additional Capital Needed Average Assets ROA 1 $ 100,000 $ 8, % 0.00% $ 100,000 $ 9,500 $ 1,000 $ 100, % 2 $ 100,000 $ 8, % 5.00% $ 105,000 $ 9,975 $ 1,475 $ 102, % 3 $ 100,000 $ 8, % 10.00% $ 110,000 $ 10,450 $ 1,950 $ 105, % 4 $ 100,000 $ 8, % 15.00% $ 115,000 $ 10,925 $ 2,425 $ 107, % 5 $ 100,000 $ 8, % 20.00% $ 120,000 $ 11,400 $ 2,900 $ 110, % 6 $ 100,000 $ 8, % 25.00% $ 125,000 $ 11,875 $ 3,375 $ 112, % 10

11 Managing Growth and Capital Scenario 1: Increase Capital & Grow at 10% Year Beginning Assets Step 2: Set Annual Goals to Reach Strategic Financial Goals Total Capital Beginning Capital Ratio Targeted Capital Ratio Annual Asset Growth Assets After Growth New Total Capital to Achieve Ratio Additional Capital Needed Average Assets Net Income Current $ 100,000 $ 8, % 8.50% 10.00% $ 110,000 $ 9,350 $ 850 $ 105, % Year 2 $ 110,000 $ 9, % 8.75% 10.00% $ 121,000 $ 10,588 $ 1,238 $ 115, % Year 3 $ 121,000 $ 10, % 9.00% 10.00% $ 133,100 $ 11,979 $ 1,392 $ 127, % Year 4 $ 133,100 $ 11, % 9.25% 10.00% $ 146,410 $ 13,543 $ 1,564 $ 139, % Year 5 $ 146,410 $ 13, % 9.50% 10.00% $ 161,051 $ 15,300 $ 1,757 $ 153, % Scenario 2: Increase Capital and slow asset growth Year Beginning Assets Total Capital Beginning Capital Ratio Targeted Capital Ratio Annual Asset Growth Assets After Growth New Total Capital to Achieve Ratio Additional Capital Needed Average Assets Net Income Current $ 100,000 $ 8, % 8.50% 0.00% $ 100,000 $ 8,500 $ - $ 100, % Year 2 $ 100,000 $ 8, % 8.75% 2.50% $ 102,500 $ 8,969 $ 469 $ 101, % Year 3 $ 102,500 $ 8, % 9.00% 5.00% $ 107,625 $ 9,686 $ 718 $ 105, % Year 4 $ 107,625 $ 9, % 9.25% 7.50% $ 115,697 $ 10,702 $ 1,016 $ 111, % Year 5 $ 115,697 $ 10, % 9.50% 10.00% $ 127,267 $ 12,090 $ 1,388 $ 121, % 11

12 Income at Risk MEASURING INTEREST RATE RISK 12

13 What Is Interest Rate Risk? Interest Rate Risk is the risk that an institution s earnings AND market value will change as market interest rate change. Measures the amount of change in earnings or value under different rates. The earnings at risk portion measures short-term changes to the income statement. The market value at risk element measures long-term risks to earnings and relative value of assets & liabilities. Both measures indicate the impact on earnings capacity only difference is the horizon evaluated. 13

14 Types of Interest Rate Risk Mismatch/Repricing Risk: The risk that assets and liabilities reprice or mature at different times, causing margins between interest income and interest expense to narrow. Basis Risk: The risk that changes in underlying index rates used to price assets and liabilities do not change in a correlated manner, causing margins to narrow. Prepayment/Extension Risks: The risk that asset repayments accelerate at a time when interest rates are low, resulting in diminished interest income and the need to reinvest repaid funds in lower-yielding assets. This risk intensifies when loan customers or bond issuers exercise their explicit call options to pay off the bank s asset prior to maturity and interest rates decline. The flip side of prepayment risk is extension risk, which stems from the lengthening of asset payoff rates in a rising rate environment, thereby reducing the funds available to invest at higher yields. Yield Curve Risk: The risk that nonparallel changes in the yield curve will disproportionately affect asset values or cash flows. 14

15 Interest Rate Risk Redefined Income Portion of Definition Reinvestment risk is the risk that as one instrument matures and is replaced with another, the funds being reinvested will carry a different interest rate than the funds in the original instrument. Reinvestment risk is not a problem as long as it s occurring at approximately the same speed on both assets and liabilities. 15

16 Interest Rate Risk Financial Instrument Sources Financial Instruments Reprice for Four Reasons Maturity Example: 90 day CD with P&I due at maturity Amortization Example: 30 year fixed rate mortgage reprices gradually as the principal and interest payments are received. Prepayment Example: 11% fixed rate mortgage with market rates of 8%. It reprices when owner refinances to obtain a better rate. Contractual repricing terms on arm or variable rate loan Example: 30 year ARM with annual resets. Cash Flow 16

17 Four key elements of a risk Management program for IRR 17

18 Common IRR Measurement Techniques 18

19 IRR Measurement Techniques Picking the Right Tool to match the job Gap Analysis Measures dollar volume difference between rate sensitive (repricing) assets and liabilities Income Simulation Measures impact of interest rate changes on earnings Economic Value of Equity (EVE) Present value of all asset, liability, and financial derivative cash flows 19

20 Static vs. Dynamic IRR Measurement Static Systems Measure IRR in Existing Balance Sheet Fail To Consider Institution Strategy Can t Be Used to Evaluate Risk/Return Tradeoffs Regulatory Systems Are Static IAR Examples - Gap, Constant BS Income at Risk VAR Examples - Duration, Current VAR, Dynamic Systems Measure IRR in Future Balance Sheet Consider Institution Strategy Evaluate Risk/Return Tradeoffs IAR Example Dynamic BS Income at risk, VAR Example Running VAR on projected balance sheets under projected interest rate scenarios 20

21 Gap Analysis Inventories Timing of Repricing of RSA & RSL Future divided into time bands (buckets) Balances slotted based on Cash flows (fixed) Scheduled repricing (variable) Total RSA & RSL totaled by time band Control ratios are Gap/Assets (+/-10%) RSA/RSL ( ) Goal of GAP: Provide a Proxy on Earnings at Risk Advantages Easy data availability Can be done manually Inexpensive Disadvantages How soon but not how much Fails to consider option risk Not a good market value tool Difficult to explain to boards & non-financial managers Measures risk but not return 21

22 Definition Static Income Simulation Projecting financial statements assumes a constant balance sheet. Effect of rate changes on income measured by running multiple rate environments. Changes in income in the different rate environments are income at risk as measured by the model. Policy limits established using same metric used in measuring return Example Drop in Net Interest Margin should not be more than 15% of base level if rates move against institution. 22

23 Sample Static IAR Analysis Non-parallel Rate Changes Immediate & Parallel Rate Shocks 23

24 Dynamic Income Simulation Definition Project an institution s financial statements based on a set of assumptions. The effect of rate changes on income be measured by running multiple rate environments. Fluctuations under the different rate environments are income at risk as measured by the model. Advantages Model used for dynamic income at risk analysis can be used for multiple purposes. Budgeting Strategic Planning Interest Rate Risk Analysis Liquidity Risk Measures what management is most concerned about the effect of changes in rate on bottom line and performance measures driven off the bottom line Disadvantages Management Time Model and People Cost Assumption Intensive 24

25 Static vs. Dynamic IAR 1 Yr Net Interest Income at Risk $18,000, % $16,000, % $14,000,000 $12,000, % NIM ($) $10,000,000 $8,000, % % Chg in NIM $6,000, % $4,000, % $2,000,000 $- GI Base Oct-2012 GI High Oct-2012 GI Low Oct-2012 Flat rates I & P -100 I & P 200 I & P % Net Interest Income - Dynamic Net Interest Income - Sta c % Chg from Base- Dynamic % Chg from Base - Sta c Policy Limit 25

26 Static vs. Dynamic IAR 2 Yr Net Interest Income at Risk $25,000, % 10.00% $20,000, % NIM ($) $15,000,000 $10,000, % -5.00% % Chang in NIM % $5,000, % $- GI Base Oct-2012 GI High Oct-2012 GI Low Oct-2012 Flat rates I & P -100 I & P 200 I & P % Net Interest Income - Dynamic Net Interest Income - Sta c % Chg from Base- Dynamic % Chg from Base - Sta c Policy Limit 26

27 Conclusions Measuring Income At Risk Gap as a primary measurement tool fails to answer key questions Use of a static income at risk analysis is easier and may satisfy examiners But if you are experiencing growth and/or mix changes fails to capture real reinvestment risks Provides potentially wrong answer to questions that aren t necessarily relevant. Dynamic Balance Sheet Forecasts Require more effort and assumptions Should be done in conjunction with static Give a better sense of real performance and risks 27

28 Value at Risk MEASURING INTEREST RATE RISK 28

29 Measuring Value at Risk Value at Risk is defined by: The present value of net cash flows from all assets Minus the present value of net cash flows from liabilities Plus the present value of net cash flows from any off-balance sheet activities. Market value of capital is a derived value and does not necessarily correlate to book value of capital Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. In essence, market value represents a long-term income statement view. 29

30 Calculating Market Value Period Payment NPV Wtd NPV 1 1,600 1,455 1, ,500 1,240 2, ,400 1,052 3, , , , , , ,726 Total 8,100 6,000 18,092 Analysis is for a $6,000 loan paying 6 equal annual principal payments plus interest on remaining balance at 10% rate. Cash flows marked to market using a 10% discount rate. Duration = 18,092 / 6,000 = Years Calculation Project Amount & Timing of Cash Flows Calculate Net Present Value of Cash Flows - (PV = FV / (1+i) n) n - payment number i - discount rate PV - market value FV - future cash flow Weight NPVs by timing (Period x NPV) Calculate Duration (Wtd NPV/NPV) 30

31 How Price Changes with Rates Effect of Rate Changes on Price $110 $105 Price $100 $95 Value - SD $90-3% -2% -1% 0% 1% 2% 3% Rate Change (%) Chg MV = - D x Chg MR % = x 2% 31

32 Option Risk Issue Effect of Rate Changes on Price $110 Price $105 $100 $95 Value - SD $90-3% -2% -1% 0% 1% 2% 3% Rate Change (%) Formula assumes these are independent variables. What if they aren t? Chg MV = - D x Chg MR % = x 2% 32

33 Option Risk Definition The risk that a party to a financial instrument will exercise its imbedded options causing cash flows to vary by rate environment. The IRR Issue If cash flows cash flows vary with rate environment analysis of IRR is complicated along with the ability to hedge IRR. Convexity As a result of imbedded options, market values track along a curve rather than a straight line. Examples of Imbedded Options Prepayment Options in Consumer Loans Annual and Lifetime Caps in ARMs Early Withdrawal Options In CDs Bump Rate CDs Options To Convert From ARMs to Fixed-rate Mortgages Step-up Bonds Derivative Mortgage-Backed Securities Callable Bonds and FHLB Advances 33

34 Market Value Basics SAMPLE Market Value Summary Assets Book Value -100 bp Flat +100 bp +200 bp +300 bp Total Cash 5,000 5,000 5,000 5,000 5,000 5,000 5 Year Bond 1,000 1,050 1, Total Investments Market to Book Mortgage-Fixed 45,000 47,275 46,500 44,265 42,850 40,975 Market to Book Mortgages - Variable 18,750 18,850 18,775 18,750 18,595 18,495 Market to Book Total Loans 185, , , , , ,258 Market to Book Nonearning Assets 4,250 4,250 4,250 4,250 4,250 4,250 Total Assets 219, , , , , ,758 Market to Book

35 Market Value Basics SAMPLE Market Value Summary Liabilities Book Value -100 bp Flat +100 bp +200 bp +300 bp Non-Interest Checking 18,000 17,575 15,000 14,375 13,295 12,750 Short Term CDs 85,000 89,828 88,500 87,173 85,845 85,181 Long Term CDs 40,000 38,330 37,950 37,191 36,432 35,294 Total CDs 125, , , , , ,475 Market to Book Savings 45,000 44,255 42,750 41,932 40,028 39,195 Market to Book MMDA 18,750 18,850 18,485 18,010 17,798 17,538 Market to Book Total Non-Maturity 63,750 63,105 61,235 59,942 57,826 56,733 Market to Book Borrowings Equity 12,500 22,753 26,515 27,453 29,415 25,800 Total Liabilities & Equity 219, , , , , ,758 Equity/Assets 5.70% 9.82% 11.57% 12.14% 13.20% 11.96% What if Exp. #2: 5.7% 12.5% 11.5% 9.5% 8.0% 6.5% 35

36 Measuring EVE Risks Measurement #1: Post Shock EVE Ratio Maintain a minimum level of EVE Ratio Ensures viability Acts Like a core capital ratio Usually measured at +/-2% or 3% level Example #1 in a +2% shock, 13.2% Example #2 What if, 8.0% Both results are above levels of concern Example #1 INCREASES from Flat/Base Case Example #2 DECREASES In times when interest rates are extremely low, use of negative rate shocks is ignored as rates cannot fall lower so the analysis is not helpful. 36

37 Measuring EVE Risks Measurement #2: Sensitivity of the EVE Ratio Measures the % change in the EVE ratio When EVE Ratio is higher, can afford more fluctuation When EVE is less, can t afford to have significant movements Example #1: Flat Rate EVE = 11.57% +2% shock, EVE Ratio = 13.2% Change in EVE Ratio = 1.63% ( ) % change = +14% (1.63 / 11.57) Example #2 What if, 6.5% Flat Rate EVE = 11.5% +3% shock, EVE Ratio = 6.5% Change in EVE Ratio = -3.5% ( ) % change = -31.5% (-5 / 11.5) Question: What does a -31.5% or +14% position in EVE mean? 37

38 EVE Interpretation Remember EVE is a Present Value of Future Cash Flow Result If you are seeing increases in values when rates go up, your balance sheet will benefit from rising rates If results are negative you have exposure to rising rates The EVE ratio is not a direct measure of the impact of rate changes on earnings, but an indicator of long term rate exposure Combined with income simulation helps to determine optimal balance sheet mix 38

39 Keys to Value at Risk Elements effecting Value at Risk Remaining term to maturity or repricing Longer term = greater volatility Rate on similar investments vs. your rate Called the Discount Rate Greater the difference the greater the change in value (Your rate discount rate) * remaining term gives you an idea of the change in value. Issues impacting Value at Risk How do non-maturity deposits work? No stated maturity Rates don t change when market rates move Creates Value as offer rates LAG market rates 39

40 EVE Summary EVE/NEV is a critical measurement for ALCO to incorporate Captures full horizon of risk Expected by examiners more than ever Provides a long-term view of income statement performance Use EVE/NEV as a decision making tool on potential strategies Acts a an early warning indicator Helps weed out Quick Fix ideas 40

41 Liquidity Risk LIQUIDITY & THE ALCO 41

42 FDIC/OCC/Federal Reserve Liquidity Definition: The capacity to readily meet cash and collateral obligations at a reasonable cost. Maintaining Adequate levels depends on the institution s ability to meet expected and unexpected cash flow and collateral needs without adversely affecting daily operations or financial performance Sources Assets readily convertible to cash Net operating cash flows Ability to acquire funding through Deposits Borrowings Liquidity Defined Capital Injections 42

43 Liquidity Risk Definition: The risk that you will not have enough cash on hand to meet loan demand, deposit outflow, or expenses. Causes of Risk Changes in credit risk Changes in interest rates that change projected repayments Loss of lines of credit & other borrowings due to financial performance issues Management Maintain sufficient levels of cash & marketable securities to sell in times of need. Manage stream of incoming cash flow from loan & Investment repayments & maturities Maintain lines of credit and other borrowing sources to use in lieu of above ALCO Must be able to measure and manage liquidity and reasonable risks 43

44 Mismatch Risk Types of Liquidity Risk Insufficient cash to meet obligations in normal course Market Liquidity Risk Market constraints will affect the conversion of assets into cash Contingent Liquidity Risk Risk from unexpected events 44

45 Liquidity - Framework Movement away from Static measures Balance sheet liquidity measures Loans/Deposits Loans/Assets Investments/Assets Non-Core Funding Dependence Borrowings/Assets Volatile Funds Ratio Movement toward Dynamic measures Current balance sheet Business strategy or plan Unexpected triggering (stress) events Fail well capitalized status Securitization markets freeze up Corporate CU or bankers bank placed into receivership Requires contingency funding plans 45

46 Liquidity Definitions Asset Based or Core Liquidity: Cash and other financial assets that can be easily converted to cash for operational needs Withdrawals Originations Total Liquidity: The ability to meet financial obligations: withdrawals, loan demands and other commitments. Considers ALL sources of Liquidity That includes changes from plans, available securities & borrowing sources. 46

47 A Practical Approach to Liquidity MEASURING ASSET BASED LIQUIDITY 47

48 Asset Based Liquidity Determining How Much is Enough: How long can an institution survive a crisis without having access to wholesale funding? Requires: A definition or reasonable crisis An estimation of the sensitivity of liabilities at risk An estimation on assets available An understanding of the sources of asset based liquidity A method for calculation 48

49 Calculating Asset Based Liquidity Sources of Asset Based Liquidity Cash & Cash Equivalents (FF, MMA, etc.) Unpledged Securities (at market value or deeper discounts) Scheduled Investment cash flows and maturities Scheduled Loan cash flows and maturities Uses that you have to cover Firm Loan commitments Maturing Borrowings/Non-Core funding Maturing CDs Some amount of Non-maturity balances considered at risk Potential draw down on lines of credit 49

50 Asset Based Liquidity: How Much is Enough? Basel Liquidity Coverage Ratio (LCR) Test Can you survive a 30 day stress event with assets only? Numerator Cash & Due From Highly Liquid Unencumbered Marketable Securities Denominator Projected Deposit Runoff Loss of all Non-Core Funding renewing in time horizon Projected Increased Line Draw Downs Less Cash Inflows from loans (& securities?) - Limited amounts included Note that this is the first Liquidity rate to consider loan cash flows as a source! 50

51 LCR Goal Maintain sufficient asset based liquidity (numerator) to get you through a 30 day test of outflows (denominator). In other words, the LCR needs to be >=100%. LCR January 1, 2015 >60% LCR January 1, 2019 >100% 51

52 Deposit Definitions Stable/Less Stable Basel Says Stable is Fully insured Meaningful business relationship Applies to retail, small business, large business Penalties adequate on CDs just count 30 day maturities Penalties inadequate count all the balances Less Stable Deposits not meeting the above definition Bank Regulators (Likely) Fully Insured Call Reports Internal systems? Not sure how bank regulators will deal with penalty issue For most community FI s a good baseline is to consider a 5-10% runoff of deposits. On all NMD s On maturing CD balances 52

53 A Practical Approach to Liquidity MEASURING CASH FLOW BASED LIQUIDITY 53

54 Using Liquidity Gap Advantages Dynamic measure derived from business plan Considers sources and uses of funds Gap between sources and uses is liquidity buffer Buffer includes cash flow mismatch, asset based buffer (LCR), and liability based buffer (unused borrowing capacity) Liquidity gap/assets can be used as control ratio Can be stress tested Recommendation Primary long-term measure of liquidity in policy statement Limits set on pre- and poststress ratios 54

55 Asset Sources/Uses First two of forecast show Assets are a net drain of funds in years 1 & 2: $25.7 million Investments are providing sources of funds to fund loan growth $3.8 million over 2 years Loans using $29 million in funding by end of Yr. 2 55

56 Liability Sources/Uses Non-maturity funding providing $2.7 million over 2 years CDs expected to provide $6.9 million. Equity growth from earnings also contributing (not shown) Remainder is borrowed by model. Sources MUST = USES 56

57 Sources/Uses Summary Sec 1 Sec 2 Sec 3 Section 1 Net Cash flow sources/uses Removing balancing accounts. Section 2 Adds in asset and liability adjustments Section 3 Recalculates Gap with adjustments and buffers 57

58 Sources/Uses Summary Cumulative Cash Flow Based Liquidity Gap No borrowings, securities, or OBS commitments 2. Adjustment to Liquidity Available securities, borrowings, and potential customer draws on liquidity 3. Cumulative Liquidity Gap/Assets our primary measure of long-term liquidity includes adjustments for investments, borrowings & OBS commitments 58

59 Credit Risk CREDIT RISK & THE ALCO 59

60 Definition: CREDIT RISK The chance of default on asset repayments due on loans or investments Loan repayments are not made by the borrower Investment payments are not made by the issuer Investment issuer defaults or fails Influencers of Credit Risk Business Cycles/Interest Rates Internal Underwriting Problems 60

61 Credit Risk 61

62 ALCOs Role in Credit Risk ALCO is NOT directly dealing with Underwriting Key issue for ALCO is the impact of potential changes in credit risk on: Cash Flows to the Institution Impact on Liquidity Impact on Earnings and Growth Impact on the Margin Increase Provision Expense causing losses Decreasing earnings impacting growth Expect increased modeling of credit risk in future ALCO guidance 62

63 ALCO COMPOSITION AND PROCESS 63

64 Elements of an Effective ALCO Meeting Review Past Projections Did our assumptions that we control do as we expected? Did the market move as expected? What do we need to modify going forward? Assess Current Position Examine risk levels and past trends Assess current plan risks for policy compliance Set Objectives What would you like to improve or change in your profile? What new product introductions, market areas, etc are you considering Examine alternatives Always assess options versus status quo (do nothing) Retail versus wholesale growth or funding Grow versus shrink Select strategies that: Provide earnings to meet objectives Manage Risks to acceptable levels Better the risk/return profile 64

65 ALCO Composition Head Lending Officer(s) by Area Head of Retail Operations (deposit gathering) Chief Financial Officer President/CEO Marketing Manager Board Representation Any other team member with direct responsibility for managing business plan objectives. 65

66 Review Prior Minutes ALCO Agenda Review Actual performance to projected Monitor status of prior actions Measure Performance relative to Policy Limits Peers Review trends and costs for recent funding Review economic outlook and interest rate forecasts Review Income Simulation results & assumptions 66

67 ALCO Agenda (continued) Review Market Value results Current Position Projected under various interest rate scenarios Review simulation results of any major actions or plans being considered Review current and projected Liquidity Positions Review Non-earning asset and NPLs Set targets for upcoming quarter. 67

68 For Additional Information Visit our Encyclopedia for more definition of new terminology and past articles related to ALM If you have any questions, please me with the session name in the subject line. Thank you for attending. We hope to have you on another session soon. 68

69 How We Can Help 69