Insights Into Your ALM
Information
Dave Filby, Trey Rudder, Tanya
DeVlieger
The Unemployment Rate
Back near pre-recession levels
Fed Funds & Unemployment
Early innings of a hiking cycle?
Fed Funds Expectations – Fed
FOMC says “higher rates are coming!”
What does “Mr. Market” think?
• Economic data appear to be slowing
• Demand for commodities is slowing
• Interest rates are near lowest levels of
2017
• Stocks still hanging onto gains…
Job Creation
Recent weakness, but is it a trend?
Copper
Is Dr. Copper catching a cold??
Ten-Year Treasury Yield
Election Euphoria leading to hangover?
S&P 500
Stocks hanging on to gains…for now
Fed Funds Expectation - Market
Higher rates, but less increase than
FOMC
Fed Funds & Unemployment
Once the FOMC increases rates, they
keep moving
Fed Balance Sheet
Will they start to reduce or “taper?”
What do rising rates mean for
credit unions?
• It’s been a while since we’ve been in a
rising rate environment
• Understanding share behavior is the first
step in reacting to rising rates
• Once we understand shares, we can
approach investment opportunities with
more information (and less fear)
ALM and Share Accounts
• Assumptions about share lives can drive
ALM results
• Shares create value
• NERA Study 2001
• Deposit Study
• NCUA NEV Supervisory Test 2017
Share Value
• Value is based on both the share rate
and the time the share is on the books
• The rate paid on the share account is
compared to a market rate for the time
the share is on the books.
Share Value
Market Rates vs Share Rates
3.00
2.50
2.00
1.50
1.00
0.50
-
Market Rate
Share Rate
NERA Study 2001
• NATIONAL ECONOMIC RESEARCH
ASSOCIATES
• 2 PHD’s
• 84 pages
• Lot’s of numbers
• Ugly formulas
• Non Maturity Deposit Lives
NERA Average Lives
• Share Drafts
– 2.5 years
• Regular Shares
– 3.0 years
• Money Markets
– 1.0 years
NERA Price Sensitivity
• Share Drafts
– 7.00%
• Regular Shares
– 8.00%
• Money Market
– 3.00%
Credit Union Balance Sheet
•
•
•
•
$100mm Credit Union
$30mm Regular Shares
$30mm Share Drafts
$30mm Money Market
Base NEV Values NERA
• Share Drafts
– $30mm Book = $28.8mm Value
• Regular Shares
– $30mm Book = $28.5mm Value
• Money Markets
– $30mm Book = $29.7mm Value
• Total Value over Book = $3.0mm
NEV Sensitivity NERA
• Share Drafts
– 7.0% x $28.8mm =$2.0mm
• Regular Shares
– 8.0% x $28.5mm = $2.28mm
• Money Market
– 3.0% x $29.7mm = $0.9mm
• Total Risk Offset
– $5.18mm
NERA Weighted Average Lives
Market Rates vs Share Rates
3.00
2.50
2.00
1.50
1.00
0.50
-
Market Rate
Share Rate
Deposit Study
• 10 years worth of share data
• Separate shares into “vintage”
– Year account was opened
• Follow accounts through time
• Identify actual decay rate
– Rate at which accounts close
• Identify reasonable assumed final
maturity
Deposit Study Average Lives
• Share Drafts
– 6.96 years
• Regular Shares
– 7.83 years
• Money Market
– 4.97 years
Deposit Study Base Values
• Share Draft Values
– $30mm Book = $26.7mm Value
• Regular Share Values
– $30mm Book = $26.4mm Value
• Money Market Values
– $30mm Book = $28.5mm Value
• Total Value over Book
– $8.4mm
Deposit Study Sensitivities
• Share Drafts
– 8.88%
• Regular Shares
– 12.64%
• Money Markets
– 6.00%
Deposit Study NEV Sensitivities
• Share Drafts
– 8.88% x $26.7mm = $2.37mm
• Regular Shares
– 12.64% x $26.4mm = $3.33mm
• Money Markets
– 6.0% x $28.5mm = $1.71mm
• Total Risk Offset
– $7.4mm
Deposit Study Average Lives
Market Rates vs Share Rates
3.00
2.50
2.00
1.50
1.00
0.50
-
Market Rate
Share Rate
NCUA Revised Interest Rate
Supervision
•
•
•
•
Interest Rate Risk Workbook
Net Economic Value Supervisory Test
Estimated Net Economic Value Tool
Examiner’s Guide
NCUA Revised Interest Rate
Supervision
• All Shares get 1% discount at Base
• All Shares get 4% discount from Base in
up 300 bps rate shock
Base NEV Value NCUA
• Share Drafts
– $30mm Book = $29.7mm Value
• Regular Shares
– $30mm Book = $29.7mm Value
• Money Market
– $30mm Book = $29.7mm Value
• Total Value over Book = $900k
NEV Sensitivity NCUA
• Share Drafts
– $29.7mm x 4% = $28.5mm
• Regular Shares
– $29.7mm x 4% = $28.5mm
• Money Market
– $29.7mm x 4% = $28.5mm
• Total Risk Offset
– $3.60mm
NCUA Guidance
Risk Level
Low
Moderate
High
Extreme
Post Shock NEV Ratio
7% +
4%-7%
2%-4%
Below 2%
NEV Sensitivity
Below 40%
40%-65%
65%-85%
85% +
NCUA Stuff
• “Credit Unions need to formulate
reasonable and supportable estimates
of how these accounts will reprice and
be retained over time.”
• Should Credit Unions adopt the NCUA
test as policy?
– “No”
Base Value Additions
• NERA
– +$3mm
• Deposit Study
– +$8.4mm
• NCUA
– +$900k
Base Sensitivity
• NERA
– $5.18mm
• Deposit Study
– $7.4mm
• NCUA
– $3.60mm
Better
• The lower the rate, the better
• The longer the life, the better
• The more accurate the data, the better
Important, Why?
• IRR – supervisory priority for NCUA since
2012
• Effects CUs of all sizes – yes, that means
you Mr. Under $50MM
• Your IRR examination scope could be as
in-depth as 35 steps
IRR Exam Scope
Important, Why?
• NEVST results will serve as the Overall
IRR Supervisory Rating floor
• CAMEL becomes plural - CAMELS
CACU Provided
NEV Supervisory Test
Important, Why?
“To adequately address interest rate risk,
it is critical that credit unions be aware of
member deposit behavior and have an
informed view about how share values
may be impacted by changes in interest
rates. Each credit union needs to conduct
its own meaningful sensitivity analysis to
manage its own risk relative to the credit
union’s risk tolerances and policy limits.”
Better
• The lower the rate, the better
• The longer the life, the better
• The more accurate the data, the better
To be conscious that you are ignorant of the
facts is a great step to knowledge.
Benjamin Disreli
Important, Why?
• Understanding share behavior is the first
step in reacting to rising rates
• Once we understand shares, we can
approach investment opportunities with
more information (and less fear)
Important, Why?
12.20%
9.80%
Regular Shares & Deposits
7.50%
5.70%
Money Market Shares
Share Drafts
0.00%
2.50%
14.50%
5.00%
4Q16
4Q15
10.00%
15.00%
Perception Can Be Deceptive
• NERA Average Lives – 2yrs
–
Share Drafts - 2.5 years; Regular Shares - 3.0 years; Money Markets - 1.0 years
• Deposit Study Average Lives – 6.5yrs
–
Share Drafts - 6.96 years; Regular Shares - 7.83 years; Money Market - 4.97 years
Important, Why?
• Understanding share behavior is the first
step in reacting to rising rates
• Once we understand shares, we can
approach investment opportunities with
more information (and less fear)
Keys to Hedging Against Rising
Rates
1. Assess how much a rise in rates may
affect your current portfolio
2. Decide whether you want to reduce
IRR, eliminate IRR, or profit from rising
rates
3. Choose the instrument(s) which best
achieve your own hedging objectives
Strategies for rising rate
environment
1.
2.
3.
4.
5.
Sell longer-term and invest in Super 30
Shorten average duration
Ladder
Variable Rate Instruments – Step-ups
Clean up on aisle 3!
Investment Fun Facts
Approx $145 MM total securities sold – all CUs
–
–
–
–
–
20% Agency callables
40% Agency bullets
15% MBS/CMOs - (spreads tightened)
10% Treasuries
15% Bank Notes
$4.2MM SimpliCD CDs sold – CACU only
– Avg term 2yrs
– Avg rate 1.5%
CACU March (April) Madness CD Specials
–
–
3yr fixed callable & step-up
5yr step-up
Questions
Dave Filby, CIO
Trey Rudder, VP SBSM
Tanya DeVlieger, Member Investment
Director