Visionary Conference
Jim Craven
McQueen Financial Advisors
SEC Registered
Investment Advisor
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$4 Billion + under
management
Municipal &
Corporate Credit
Reviews
Comprehensive
Reporting
Valuations
• Credit Union Mergers
• Credit Union + Bank
Mergers
• Mortgage Servicing
Rights
• Complex Investments
Consulting
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Strategic Planning
Branch Analysis
Board Training
Policy Development
Exam Preparation
Risk Analysis
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Asset Liability
Management
Liquidity Stress
Testing
Core Deposit Studies
Assumption
Sensitivity Analysis
Prepay Speed
Analysis
ALM Validations
Back Testing Analysis
Today’s Agenda
CU*Answers & McQueen Financial Advisors
Examiner Focus
Industry Update
Pop
Quiz
Interest Rate Environment
• Economic Indicators
• Interest Rates
Historical Impact of Rising Interest Rates
Challenges
Opportunities
Pop
Quiz
CU*Answers & McQueen
SIMPLE
Asset Liability
Management Advisor
Seamless file exchange
• Loans
• Deposits
• Investments
• Balance Sheet
• Income Statements
Process
• Receive files directly
• Prepare ALM report
• Schedule conference call or
meeting
• Present results
McQueen Financial Advisors
McQueen Field
Experience
Examiner Focus
McQueen Field Experience
At small credit unions:
At large credit unions:
• Interest Rate Risk/ALM
ALM Policy
Use of Reports
Effective ALM Meeting Minutes
• Liquidity
Policy
Testing of Available Lines
• Cyber Security
• Interest Rate Risk/ALM
ALM Policies
Appropriate policy limits
Board oversight
Separation of duties
Effective ALM Meeting Minutes
ALM Validation
Support for ALM Assumptions
Core Deposit Study
Prepay Speed Analysis
ALM Back Testing
Effective ALM
Meeting Minutes
• Liquidity
Policy
Multiple Lines of Credit
Testing of Available Lines
Ability to Borrow
Ability to Sell Loans
Level of Unfunded Commitments
McQueen Financial Advisors
Industry Update
Industry Update
Trends
Industry Update
Trends
Now Exceeds
$1 Trillion
Industry Update
Earnings
Industry Update
Net Worth & Asset Quality
Industry Update
Asset / Liability Management & Productivity
Industry Update
Pop Quiz
We just looked at 24 industry trends.
How many of them are favorable?
20 of 24
Industry Update
Unfavorable Trends
Consolidation related to aging
member base & succession planning
Growth at smaller credit unions is
difficult. Aging neighborhoods.
Difficult to maintain high margin
without loan growth.
At many credit unions, deposits are
growing faster than loans.
Industry Update
Credit Unions
The credit union industry is over 100 years old. Total assets of all credit unions
topped $1 trillion for the first time in 2012.
U.S. banks grew by a similar amount in the past two years
Each of the four largest U.S. banks is larger than the entire credit union industry:
• JP Morgan Chase
• Bank of America
• Wells Fargo Bank
• Citibank
2.7% of U.S. banks have assets of less than $25 million compared to 49% of
credit unions
Industry Update
Credit Unions
Combined, assets at credit unions and banks exceeds $17 trillion.
McQueen Financial Advisors
Economic Indicators
Economic Indicators
Unemployment
Underemployment
Rate still too high
Economic Indicators
Labor Force Participation
Has not been this low
since the late 1970s
Has not been this high
since the early 1960s
Economic Indicators
Consumer Price Index (ex Food & Energy)
1.70%
Economic Indicators
Home Prices
Downward trend for
many years
Economic Indicators
New & Existing Home Sales
New home sales doubled but are
still far below normal level
Economic Indicators
Household Debt Service Ratio: 9.9%
Percentage of take home pay
allocated to debt service
Economic Indicators
U.S. Auto Sales Annualized: 13.2 Million
Back to normal levels and
expected to grow
Economic Indicators
Federal Reserve Meetings
McQueen Financial Advisors
Interest Rates
Interest Rates
Historical Fed Funds Rate: 1955 to 2015
Fed Funds Rate
Unchanged for
Nearly 7 Years
Interest Rates
Pop Quiz
Last Fed Funds rate change was
December 2008 (nearly 7 years)
Pop Quiz Question #1:
In the 7 years prior to this, how
many times did the Fed Funds rate
change? (2002-2008)
Interest Rates
Historical Fed Funds Rate Changes
Number of times the Fed Funds Rate Changed in Each 7 Year Period
Interest Rates
Historical Fed Funds Rate Changes
Pop Quiz Question #2:
On average, over the past 50 years how often
has the Fed Funds target rate changed?
A. Every 3 – 4 months
B. About once per year
C. Every 18 months
D. Every 2 - 3 years
Interest Rates
What’s Next?
When will interest rates change and by how much?
Economic indicators will continued to be released.
Markets and the Federal Reserve Bank will react.
McQueen Financial Advisors
Historical Impact of
Higher Rates
Historical Impact of Higher Rates
Yield Difference: Short vs Long
Wider
spread
Narrow or negative
spread. Difficult
environment.
Historical Impact of Higher Rates
Higher Short Term Rates and Narrow Spread
Late 2003 to Late 2006
Narrow or negative
spread. Difficult
environment.
Historical Impact of Higher Rates
Rates Rose 400 Basis Points 2004-2006
Looking at yield curves and market
changes alone, it appears
impossible to make money
Historical Impact of Higher Rates
Result of a 400 basis point rate increase
McQueen Financial Advisors
Challenges
Challenges
Review Risk to Income
Important to review income sensitivity and trend over time.
Challenges
Review Risk to Value
Important to review value sensitivity and trend over time.
Challenges
Review Non-Parallel Scenarios
Non-parallel scenarios are more diverse and more likely
than parallel scenarios.
Challenges
Review Pricing Sensitivity
Analysis compares changes in the Fed Funds rate to
the client’s deposit rates during a period of rapidly rising
interest rates (2004 – 2007).
Client A: Increased rates very little
Client B: Increased some rates and cut some rates
Challenges
Review Pricing Sensitivity
Often, these studies show that deposit rates changed very little or were
cut in response to a large increase in the Fed Funds rate. It would not
be appropriate to assume the same deposit pricing going forward.
Client A: Increased rates very little
Client B: Increased some rates and cut some rates
Challenges
Review Performance & Condition Ratios
If loan to deposit ratio is high…
Measure liquidity stress, potential impact of loosing deposits.
Review deposit pricing and contingency liquidity sources
Challenges
Impact of Low Rate Environment
Very low rates initially boosted credit union earnings as deposit costs fell
to historic low levels. But it didn’t last long…
Deposit costs can not fall further, while loan and investment yields
continue to fall.
Common to see anemic loan growth and swelling deposits.
Excess cash has been deployed in portfolios that consistently roll-over at
lower yields.
McQueen Financial Advisors
Opportunities
Opportunities
Slope of the Yield Curve
A steeper yield curve would likely result in:
Moderately higher
deposit rates
(generally short
term)
Considerably higher
loan and investment
rates (generally
intermediate to
long-term)
Opportunities
Economic Conditions Matter
ALM reports measure the impact of higher rates on income and value:
Interest Rate Risk
It is also important to consider broader economic conditions and the potential
impact. During the recent tough economic environment:
• House prices fell
• Unemployment increased
• Loan delinquencies rose
• Charge-off rates increased
• Borrower credit scores declined
• Earnings suffered
Reversal of these
trends will likely
have a greater
impact on margin
and net income than
will rising interest
rates.
Opportunities
Economic Conditions Matter
The impact of higher rates may not be immediate on margin or income.
Brighter economic conditions matter much more:
Lower unemployment rate
Higher home values
Faster economic growth
Higher earnings
Greater consumer spending & borrowing
Opportunities
Potential Impact of an Improving Economy
Improved loan-to-deposit ratio
Higher loan volume & yields
Modestly higher deposit rates
‘Normal’ investment returns:
2007 Example:
Loan Yield 7.14%
Investment Yield 4.66%
Higher risk tolerance
Investment portfolio losses
Lower profit on mortgage lending: Spread and fee income
Opportunities
Strategies
Plan to raise deposit rates slowly in response to need for funds
Offer deposit specials to encourage member CDs in response to need for funds
Prepare for consumer loan growth with properly trained staff
Consider member business lending where floating rate loans are more common
Retain only the most favorable real estate loans
Understand your interest rate risk
Shorten investment portfolio as bonds mature
Opportunities
Strategies
Attract and retain low-cost core deposits
History suggests that members may withdraw funds as the economy improves:
Tie members to the credit union with direct deposit, smart-phone apps,
electronic deposit and payment services, low cost non-maturity deposit products
Train staff regarding importance of low-cost core deposits
Enhance marketing efforts and use of technology to reach potential members
Use CU*South resources to enhance member experience!
Questions?
McQueen Financial Advisors, Inc.
Jim Craven
26676 Woodward Avenue
Royal Oak, MI 48067
248-548-8400
[email protected]
www.m-f-a.com