charles n. mcqueen€¦ · mcqueen financial & cu*a •strategic partner for asset liability...
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Charles N. McQueen
McQueen Financial & CU*A
• Strategic Partner for Asset Liability Management
• Current Interest Rate Environment
• Industry Analysis
• Interest Rate Risk (IRR) Mitigation
• Investing Cash
• Sample McQueen Financial ALM Report
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McQueen Financial & CU*A
• Strategic Partner for Asset Liability Management
• McQueen Financial Provides:
– Completed report
– Analyses of the report
– Review the report with you (conference call or in person)
– Recommendations to improve your ALM position
– Recommendations on leveraging your CU*A system
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McQueen Financial & CU*A
• CU*A Provides
– Click to send data
– Schedule data transfer
– Custom reports for McQueen Financial
– CU*A user reports to look at historical yields vs. historical rates (in process)
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McQueen Financial Advisors
• Economic Outlook
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Economy
• The outlook, despite the monthly ups and downs, reflects improving conditions real GDP growth of 2.9% in 2010 and about 3.0% in 2011
• The second half of 2010 demonstrated consistent growth. Corporate profits, global growth and accommodating monetary policy are all pluses
• The recovery is still constrained by a number of structural factors, but the healing process is clearly underway
• Unfortunately the recovery, while on firmer footing, still faces risks:
• threat of inflationary pressures/asset bubbles
• private and public sector deleveraging
• international events that are wide-ranging
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Real GDP Quarterly Growth Q1
2004 – Q4 2010
Source: BEA. Gross Domestic Product. March 25, 2011.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Rea
l G
DP
q/q
Ch
an
ge
Economic Recovery is Gaining Strength and Growth May Exceed 3% in 2011
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
S&
P 5
00
Dail
y C
los
e
S&P 500 Daily IndexJanuary 4, 2010 – April 6, 2011
Source: Yahoo Finance. April 7, 2011.
1,335
1,132
1,225
2010 12%
2011 6% YTD
Although Recent Global Shocks Have Impacted the Equity Markets, Some Clear Signs of Acceleration
are Visible
Industrial Production IndexJanuary 2007 – February 2011
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Ind
us
tria
l P
rod
ucti
on
Industrial Production Has Rebounded 12% Since the 2009 Bottom, a Signal That the Sector is Healing
• Recovery has been slower than all post-war cycles due to structural imbalances; not a surprise in retrospect
• Recovery is proving to be more durable than many feared– numerous external shocks over the last 18 months
• Households are still in the process of deleveraging and rebuilding balance sheets– the process will take time
• Against this back-drop, consumers are continuing to display higher levels of price-sensitivity
• Imbalances in some sectors were more severe than previously assumed–housing and commercial real estate
• The public sector is just now entering the deleveraging phase and the process will likely accelerate over the next five years
Key Observations Two Years Into the Recovery
Cumulative Change in GDP and Employment from Start of Recession(latest one and the three previous)
If the economy adds 150,000 jobs/month, the labor market will break even in April 2015*
-9%
-4%
1%
6%
11%
16%
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Months after each recession's start
GDPJuly 1981 -November 1982
July 1990 - March 1991
March 2001 -November 2001
Latest Recession
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Months after each recession's start
Jobs GrowthJuly 1981 -November 1982
July 1990 - March 1991
March 2001 -November 2001
Latest Recession
The U.S. Economy Lost 7.5 Million Jobs During the Latest Recession and in 2010 Added Only 909,000
Cumulative Change in Employment by Sector (in months after the start of the latest recession)
LS. April 2011.
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
0 3 6 9 12 15 18 21 24 27 30 33 36 39
Months after latest recession's start
Education
Health Care
Finance & Insurance
Retail
Transportation
Information
Manufacturing
Construction
Manufacturing and Construction Sectors are Far from Returning to Pre-recession Employment
Cumulative Change in GDP and Personal Consumer Expenditures from Start of Recession(latest one and the three previous)
-9%
-4%
1%
6%
11%
16%
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Months after each recession's start
GDP
July 1981 -November 1982
July 1990 - March 1991
March 2001 -November 2001
Latest Recession
-5%
0%
5%
10%
15%
20%
0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48
Months after each recession's start
Consumer Spending
July 1981 -November 1982
July 1990 - March 1991
March 2001 -November 2001
Latest Recession
Latest Recession Hurt Consumer Spending More Than Any Other Downturn in Recent History, But it is Coming Back
Total U.S. Debt vs. Real GDP Q11952 – Q4 2010
$0
$5
$10
$15
$20
$25
$30
$35
Tri
llio
ns
Total U.S. Debt GDP
U.S. Debt is Nearly Triple GDP
Total U.S. Government Debt vs. Real GDP Q1
1952 – Q4 2010
$0
$2
$4
$6
$8
$10
$12
$14
Tri
llio
ns
Total U.S. Government Debt GDP
Public Sector Debt is Reaching a Tipping Point
0
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400
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800
900
1,000
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Fe
de
ral G
ove
rnm
en
t H
um
an
Re
so
urc
e
Ou
tla
ys
by F
un
cti
on
(in
$ B
illi
on
s)
Social Security
Medicare
Health
Income Security
Education, Training, Employment, and Social Services
Veterans Benefits and Services
Federal Government Human Resources Outlays by Sub-function (in $ Billions)FY 1990 – 2016
% Change 2000 to 2010
73%
145%
129%
139%
131%
138%
Spending on Some Major Groups Has Accelerated in Recent Years – Social Security, Health, Medicare, and Income Security
Yield Curves
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Historical Yields
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Last Two Rate Cycles
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Current Fed Funds Projections
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Last Two Rate Cycles
212011 | 2012 | 2013 | 2014
Over 2 Years
Net Loans and Leases to Deposits(Domestic and Foreign)
2001-2010
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Real Estate Loan Growth Rates2001-2010
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Quarterly Net Interest Margins, Annualized2006-2010
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Quarterly Cost of Funding Earning Assets2004-2010
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IRR Mitigation
• How to mitigate IRR and live in today's interest rate environment
– Liability structure
– Asset structure
– Investment portfolio structure
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IRR Mitigation
• Liability Structure
– Portfolio mix
– Add fixed term deposits (CD’s)
– More Non-Interest bearing deposits
…..What is your Credit Union marketing?
– FHLB Advances
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IRR Mitigation
• Asset Structure
– Loan types and pricing
– Grow short duration loans
– Sale vs. portfolio loans
• Why keep fixed mortgages
• Keep 5/1 & 7/1 Arms
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Investment Portfolio
• Do not bet on rates
– Manage your portfolio to the best duration for your needs
– Invest cash:
• Low earning
• May skew IRR position
When interest rates rise cash will be utilized, and mitigate the benefit for your IRR position.
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Investment Portfolio
• How to invest cash?– Limit duration extension securities
• Step up bonds (most ALM reports can not handle)
• 30 year mortgage pass through
• Long maturity callable securities
– Add non duration extending• Bullet agency bonds
• CD’s
• Taxable municipal
• US Treasury Bonds
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Investment Portfolio
• What to buy?– Limit concentration in any asset type
• FNMA
• FHLMC
• Cash– Plenty
– Use the positive sloped yield curve
– 6 times the yield if invested
– Can mask IRR situations
– Do not buy, if you do not understand
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ALM
• Review of McQueen Financial Advisors, Inc. ALM report
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Questions?
• Thank you for your time and commitment.
Charles N. McQueen
McQueen Financial Advisors, Inc.
248-548-8400
www.m-f-a.com
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