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Asset Liability Management
Adrian S. JohnsonSenior Vice President & Chief Financial Officer
The views expressed here are those of the author, and do not necessarily represent those of the Municipal Employees Credit Union of Baltimore, Inc.
Asset Liability Management
� Welcome
� ALM – What’s It All About
� State of the Economy & the Impact on CUs
� The ALM Process
� Summary
ALM – What’s It All About?
� MECU’s Mission - To provide members
with high quality financial services through sound management and innovation.
� So what does that really mean?? (Interest Earning Assets/ Interest Bearing Liabilities)
� What’s your CUs mission?
ALM – What’s It All About?
� Objective
� Goal
� Strategies
� Benefits
ALM – What’s It All About?
� C – Capital Ratios
� A – Asset Quality
� M - Management
� E - Earnings
� L – Liquidity (ALM)
What have you heard?
The State of the Economy
Housing Crisis photo FRB of Richmond
Hurdles for the U.S. Economy
� Housing
� National debt
� North Korea
� Japan disaster
� Libya turmoil
� Middle East unrest
� Oil prices
� European debt crisis
� Employment
� Inflation
� State & local fiscal challenges
FOMC Moves- “Measured Pace”
1.75% 2.00%2.25%
2.50%
2.75%
3.00%3.25%
3.50%3.75%
4.00%4.25%
4.50%
4.75%
5.00% 5.25%
4.75%
4.50%4.25%
3.00%
2.25%
2.00%
1.50%
1.00%
0.25%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Sep-0
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Mar
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May
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Sep-0
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Mar
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May
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Jun-
06Sep
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Oct
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Dec
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Jan-
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Oct
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FOMC Moves "Measured Approach"
Treasury
� FOMC started lowering short-term rates Sept. 2007 – 4.75%(from 5.25%)
� Last move Dec 16, 2008…Short-term rates lowered to 0%-.25%� Next FOMC meeting ends, January 25, 2012
Impact of the U.S. Economy on Credit Unions
� Loan Growth
� Provision for loan loss
� Deposit Growth (Including Share growth)
� Average Costs of Funds
� Yield on Earning Assets
� Net Margin
� Net Worth
The Role Of Investments in Your Credit Union…What Are Your Portfolio Goals?
� Sufficient Liquidity
� Principal & Interest Safety
� Positive Spread
� Offset Interest Rate Risk
� Rate of Return
MECU’s Investment Portfolio Structure 12/31/11
Govt/Agy Bullets11.7%
Agency Callables
31.6%MBS
41.5%
CMO15.2%
Bank Notes0.0%
Investments By Type
Asset/Liability Management Report
Period EndingPeriod Ending
December 31, 2011December 31, 2011
Topics Usually Discussed
� GAP Reports
� Effect on Net Interest Income (IRSA)
� Net Economic Value (Fair Value Matrix)
� Target Financial Asset/Liability Goals
GAP REPORT - Cumulative 12/31/11
Interest Rate Sensitive Assets & Liabilities
Total Interest Earning Assets 1,059,137$
Total Deposits & Shares & Borrowings (990,069)
Cumulative GAP Position : 69,068$
Note: Theoretically, because MECU is in an asset position,
a rising rate environment is preferable since more assets
will reprice upward as interest rates rise than liabilities
GAP REPORT - 1 Year – 12/31/12
Interest Rate Sensitive Assets & Liabilities
Total Interest Earning Assets 326,872$
(314,020)
Cumulative GAP Position : 12,852$
Cumulative Repricing GAP% 104.09%
Cumulative GAP/Total Assets 1.14%
Total Interest Bearing
Liabilities
Interest Rate Sensitivity Analysis (IRSA Matrix) 1 Year - 12/31/12
Parallel Rate Shock +/- 300 basis points
% Change from Flat 3.66% +/-30%
Up 300 Bps Scenario 39,704$
Flat Rate Scenario NII 38,304$
Down 300 Bps Scenario 32,526$
% Change from Flat -15.08% +/-30%
� Net Economic Value is a solvency measure where the fair market value of all assets and liabilities are estimated. The difference between the two is the fair market net worth.
� Refer to ALM Policy VII (2)
What is Net Economic Value?
� 2 year projection
� Takes into consideration prepayments on mortgage loans
& investments
Net Economic Value Assumptions
Net Economic Value (Fair Value Matrix) 2 Year - 12/31/11
% Change from Flat -27.13%
Net FV
Ratio
Up 300 Bps Scenario 88,578$ 8.57%
Flat Rate Scenario ME 134,092$ 11.76%
Down 300 Bps Scenario 142,678$ 12.18%
% Change from Flat 3.54%
2011 Target Financial Asset/Liability Goals
Financial Position Policy 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Target Ratios
Return on Assets (ROA) -YTD 0.72% 0.92% 0.96% 0.74% 0.19%
0.77%
Return on Equity (ROE) - YTD 6.97% 8.78% 8.97% 6.89% 1.86%
7.07%
Net Worth to Assets 9.42% 10.38% 10.48% 10.59% 10.19%
Loans to Shares and Deposits 75.15% 71.86% 70.47% 70.92% 70.27%
Net Interest Margin 3.08% 3.41% 3.48% 3.48% 3.47%
Net Interest Spread 3.11% 3.50% 3.62% 3.64% 3.60%
2011 Target Financial Asset/Liability Goals
Risk Measurement Policy 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Target RatiosCredit Risk Delinquent Loans
To Total Loans 1.00% 1.32% 1.78% 1.69% 1.77%
Liquidity Risk Liquidity Ratio 15%
10% minimum 20.64% 26.31% 21.26% 20.02%
Interest Rate RiskReal Estate Loans / Tot Assets 36.00% 33.84% 34.08% 34.10%
* Excluding HELOCs
and ARMs
40%28.09% 25.87% 26.21% 26.31%
1.) Interest Rate Shock (IRSA) +/-30% -3.08% 2.51% -0.29% 3.66%
(Entire BS +/- 300 basis points)
2.) NEV Shock (Interst Rate Risk)- FV Matrix -50% -37.50% -31.81% -29.14% -27.13%
(Entire BS +/- 300 basis points)
In Summary:
� ALM Analysis
� Policies Review
� Strategy
� Educate
� Inform
� Execute
In Summary:
� Does your ALM process meet your CU’s objectives?
� Sufficient Liquidity
� Mitigating Interest Rate Risk – Long-Term Assets
� Risk/Reward
Examiner Considerations:
� NCUA 12 CFR Part 741: Interest Rate Risk
� Establishing Policy Limits
� NCUA Letter 10-CU-04 Concentration Risk
� Interest Rate Risk (IRSA, NEV)
� NCUA IRR Regulation Effective as of September 30, 2012
� Liquidity Risk
� Core Deposits (Non-Maturing Deposits)
� Assumptions
� Modeling
� Validation
� Back Testing
Contact Info:
� Adrian Johnson
� 410-223-4032
Live Simply, Care Deeply, Speak Kindly,
and Give of your time and your treasure
Asset Liability Management
Adrian S. JohnsonSenior Vice President & Chief Financial Officer
The views expressed here are those of the author, and do not necessarily represent those of the Municipal Employees Credit Union of Baltimore, Inc.