managing interest rate risk: setting the stage for tomorrow mike delisle, alm advisors group wvba...

MANAGING INTEREST RATE RISK: SETTING THE STAGE FOR TOMORROWMIKE DELISLE, ALM ADVISORS GROUP

WVBA ConventionJuly 29, 2014

2

Agenda

Evaluating and Anticipating the Rate Environment

Understanding Your Current Risk Profile

Positioning the Balance Sheet

Estimating the Cost of Being Wrong

Considering Other Regulatory Concerns

3

Agenda






4

What we know…Rates as they are

0 5 10 15 20 25 30 350%

1%

2%

3%

4%

Treasury Curve 7/18/14

5

What we know…How we got here

0%

200%

400%

600%

800%

1000%

1200%

1400%

1600%

1800%

2000%

Core PCEFed Funds Target3-Month Bill2-Year Note10-Year Note

6

What we know…Historical transitions

0 5 10 15 20 25 30 355%

6%

7%

8%

9%

10%

11%

Treasury Curve 3/1/1988 Treasury Curve 3/1/1989

7


0 5 10 15 20 25 30 353%

4%

5%

6%

7%

8%

9%


8


0 5 10 15 20 25 30 350%

1%

2%

3%

4%

5%

6%


9


0 5 10 15 20 25 30 350%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Treasury Curve 7/18/14 Treasury Curve 3/1/88Treasury Curve 1/1/94 Treasury Curve 4/1/04

10


0 5 10 15 20 25 30 35


11


0 5 10 15 20 25 30 350%

2%

4%

6%

8%

10%

12%


12


0 5 10 15 20 25 30 35


13

Agenda






14

NII at Risk

Earnings at Risk (EAR) – Net Interest Income (NII) Short term view of risk Asset Sensitive: Increased income in rising rate

scenarios Liabilities Sensitive: Decreased income in rising

rate scenarios

15

NII at Risk ProfileAsset Sensitive

-200 bps -100 bps Base +100 bps +200 bps +300 bps +400 bps

1st Quarter 7,035 7,167 7,312 7,494 7,662 7,820 7,965

2nd Quarter 6,692 7,240 7,667 7,946 8,201 8,439 8,669

3rd Quarter 6,584 7,326 7,954 8,345 8,701 9,038 9,368

4th Quarter 6,612 7,486 8,217 8,615 8,972 9,308 9,639

26,924 29,219 31,149 32,400 33,537 34,605 35,642

% Difference -13.6% -6.2% 4.0% 7.7% 11.1% 14.4%

Series1

-15.0%-10.0%

-5.0%0.0%5.0%

10.0%15.0%20.0%

16

NII at Risk ProfileLiability Sensitive

-200 bps -100 bps Base +100 bps +200 bps +300 bps +400 bps

1st Quarter 3,421 3,391 3,302 3,270 3,245 3,227 3,196

2nd Quarter 3,528 3,500 3,375 3,337 3,309 3,293 3,278

3rd Quarter 3,575 3,560 3,414 3,396 3,356 3,349 3,346

4th Quarter 3,606 3,600 3,434 3,464 3,429 3,442 3,459

14,129 14,050 13,526 13,468 13,339 13,311 13,279

% Difference 4.5% 3.9% -0.4% -1.4% -1.6% -1.8%

Series1

-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%

17

Peer Data March 14NII Rates Up 200 bps

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% More0%

5%

10%

15%

20%

25%

30%

35%

40%

0% 0% 0% 0%

4%

9%

24%

35%

19%

4%3%

1% 0% 0%

Percent Change NII

Perc

ent

of C

lient

s

18

Peer Data March 14NII Rates Up 200 bps

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% More0%

5%

10%

15%

20%

25%

30%

35%

40%

0% 0% 0% 0%

4%

9%

24%

35%

19%

4%3%

1% 0% 0%

Percent Change NII

Perc

ent

of C

lient

s

Asset Sensitive

62%

Liability Sensitive

14%

19

EVE at Risk

Economic Value of Equity (EVE) EVE = PV Assets – PV Liabilities Long term view of risk

20

-15% -10% -5% 0% 5%

EVE at Risk ProfileAsset Sensitive

EVE Difference % Difference

UP 300 58,520 1,724 3.0%

UP 200 58,038 1,242 2.2%

UP 100 57,604 809 1.4%

Base Case 56,796

DN 100 50,812 (5,984) -10.5%

Book Value: 46,529

21

EVE at Risk ProfileLiability Sensitive

EVE Difference % Difference

UP 300 77,816 (9,912) -11.3%

UP 200 81,773 (5,955) -6.8%

UP 100 86,145 (1,583) -1.8%

Base Case 87,728

DN 100 89,913 2,185 2.5%

Book Value: 89,452 -15% -10% -5% 0% 5%

22

Peer Data March 14EVE Rates Up 200 bps

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% More0%

5%

10%

15%

20%

25%

3%

2%

4%

7%

20%21%

19%

13%

6%4%

0% 0% 1% 0%

Percent Change EVE

Perc

ent

of C

lient

s

23

Peer Data March 14EVE Rates Up 200 bps

-30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% More0%

5%

10%

15%

20%

25%

3%

2%

4%

7%

20%21%

19%

13%

6%4%

0% 0% 1% 0%

Percent Change EVE

Perc

ent

of C

lient

s

Asset Sensitive

24%

Liability Sensitive

57%

24

Agenda






25


Retail Tactics Loans Deposits

Wholesale Tactics Securities Brokered Deposits Advances

Off Balance Sheet Derivatives

26





27





28

CD Migration

1-3 Month

4-6 Month

7-9 Month

10-12 Month

13-18 Month

19-24 Month

2-3 Year

3-4 Year

4 Year +

Total 1-3 Month

4-6 Month

7-9 Month

10-12 Month

13-18 Month

19-24 Month

2-3 Year

3-4 Year

4 Year +

Total

New Volume

0 4326.44691

0 3428.65183

2188.95281

388.87463

327.92407

363.45065

1019.47639

12043.77729

Matured

0 5052.10626000002

0 3429.87194000001

2048.21639

1023.58143

789.62331

1009.84156

2820.44304

16173.68393

New Volume Rates

0.33000000000000

1

0.05 0.35 0.15 0.2 0.2 0.3 0.4 0.5 0.16603439567587

7

Matured Rate

0.33000000000000

1

0.05698917405589

17

0.35 0.15 0.33901335810519

5

0.87472084902908

4

1.88041312128945

2.91038995562828

4.99996017870299

1.29333988662285

Migration

0 -725.659349999999

0 -1.22010999999975

140.736420000001

-634.70

68

-461.69

924

-646.39

091

-1800.96665

-4129.90664

Spread

0 0.00698917405589179

0 0 0.13901335810519

6

0.67472084902908

5

1.58041312128944

2.51038995562829

4.49996017870299

1.12730549094697

0.50

1.50

2.50

3.50

4.50

5.50

500

1,500

2,500

3,500

4,500

5,500

6,500

New Volume vs Matured Balances

Rate

Balan

ce

29

CD Migration

1-3 Month

4-6 Month

7-9 Month

10-12 Month

13-18 Month

19-24 Month

2-3 Year

3-4 Year

4 Year +

Total 1-3 Month

4-6 Month

7-9 Month

10-12 Month

13-18 Month

19-24 Month

2-3 Year

3-4 Year

4 Year +

Total

New Volume

0 4326.44691

0 3428.65183

2188.95281

388.87463

327.92407

363.45065

1019.47639

12043.77729

Matured

0 5052.10626000002

0 3429.87194000001

2048.21639

1023.58143

789.62331

1009.84156

2820.44304

16173.68393

New Volume Rates

0.33000000000000

1

0.05 0.35 0.15 0.2 0.2 0.3 0.4 0.5 0.16603439567587

7

Matured Rate

0.33000000000000

1

0.05698917405589

17

0.35 0.15 0.33901335810519

5

0.87472084902908

4

1.88041312128945

2.91038995562828

4.99996017870299

1.29333988662285

Migration

0 -725.659349999999

0 -1.22010999999975

140.736420000001

-634.70

68

-461.69

924

-646.39

091

-1800.96665

-4129.90664

Spread

0 0.00698917405589179

0 0 0.13901335810519

6

0.67472084902908

5

1.58041312128944

2.51038995562829

4.49996017870299

1.12730549094697

0.50

1.50

2.50

3.50

4.50

5.50

500

1,500

2,500

3,500

4,500

5,500

6,500

New Volume vs Matured Balances

Rate

Balan

ce

30





31

Securities

32

Securities

33





34

Brokered CD’sBrokered CD's

7/21/2014

For settlement 7/30/2014

Indicative Levels for Best-Efforts Posting

CD Rates Benchmark

Term All-In Low All-In High FHLB-Bost Spread

3-mos 0.25 0.30 0.35 (5)

6-mos 0.30 0.35 0.36 (1)

9-mos 0.35 0.40 0.37 3

1 yr 0.40 0.50 0.39 11

15-mos 0.45 0.55 0.51 4

18-mos 0.50 0.60 0.64 (4)

2 yr 0.65 0.75 0.90 (15)

2.5 yr 0.90 1.00 1.13 (13)

3 yr 1.10 1.20 1.37 (17)

3.5 yr 1.30 1.40 1.59 (19)

4 yr 1.50 1.60 1.81 (21)

5 yr 1.85 1.95 2.12 (17)

7 yr 2.40 2.50 2.68 (18)

10 yr 3.05 3.15 3.27 (12)

Note: Calendar convention for CD rates are Actual/365, UST are Actual/Actual, Swaps are 30/360 & FHLB-Bost are Actual/360.

35





36

Blend and Extend Strategy

Old advance is closed out and new advance is initiated at par value.

There is no cash settlement of the prepayment fee.

The prepayment fee is then “blended” into the rate of a new advance.

The term of the new advance is selected to take advantage of the current low rate environment and minimize the annual impact of the penalty.

37

Blend and Extend Results

Lower advance costs and improved net interest margin.

Allows liability sensitive institution to extend duration of advances without increasing total advances outstanding.

No accounting concerns if structured correctly.

Lock in today’s low rates.

38

Blend and Extend Example

CurrentStructure

After Restructure

Par Value $15,000,000 $15,000,000

Interest Rate 4.06% 2.64%

Prepayment Fees$664,833

Included in the new interest

rate

Years to Maturity 1.2 Years 3.0 Years

Annual Savings $213,000

39


Current Rate New Rate0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

FHLB Rate Spread

Prepayment Fee = 1.50% over the life of

the new 5 year ad-vance

40


2014 2015 20160.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%

New 3 Year Rate Penalty Spread Old Advance Rate

41





Derivatives

Fixed Rate Loan

Interest Rate Swap

Fixed Rate Loan with

Interest Rate Swap

Borrower InstitutionReceive Fixed %

Customer Desires Fixed Rate Loan

Derivatives

Fixed Rate Loan

Interest Rate Swap


Interest Rate Swap

Borrower InstitutionReceive Fixed %

Pay Fixed

ReceiveLIBOR Floating

Swap Loan Receipt to Floating

Derivatives - Results of Swap

Fixed Rate Loan

Interest Rate Swap


Interest Rate Swap

Borrower InstitutionReceive Fixed 4.50%

Pay Fixed 4.50%

Receive1M LIBOR +

2.84% Floating

Pay Fixed Loan

Rate: 4.50%Amount: $5,000,000Amortization: 20 yearsMaturity: 5 years

Hedged Transaction

Loan: Receive Fixed 4.50%Swap: Pay Fixed (4.50%) Receive 1M Libor+2.84% 2.99%Net Floating Cash Flow 2.99%

45

Agenda






46


Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions

47

Alternate Rate Scenarios

Historical Transitions Bear / Bull Worst Case

48


Bear Flattener When short term interest rates rise faster than long term interest

rates Bear Steepener

When long term interest rates rise faster than short term interest rates

Bull Flattener When the shape of the yield curve flattens as a result of long

term interest rates falling faster than short term interest rates Bull Steepener

When short term interest rates fall faster than long term interest rates

49


Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octobe

r

Novem

ber

Decem

ber

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

Net Interest Income - Alternate Scenarios

Base Case Bear Steepener Bear Flattener Long End Up 200 Up 100 Up 200

50



51

Asset Growth

Growth Assumptions Total

Total Asset Growth $162.8MM

Cash/Fed Funds $36.0MM

Securities $4.0MM

Loans $122.8MM

Funded By Total

Non Interest Bearing DDA $38.2MM

Interest Bearing DDA $53.4MM

CDs/IRAs $67.9MM

FHLB/Other ($5.9MM)

Equity $9.2MM

52

Asset Growth

Growth Assumptions Total

Total Asset Growth $162.8MM

Cash/Fed Funds $36.0MM

Securities $4.0MM

Loans $122.8MM

Funded By Total

Non Interest Bearing DDA $38.2MM

Interest Bearing DDA $53.4MM

CDs/IRAs $67.9MM

FHLB/Other ($5.9MM)

Equity $9.2MM

NII Impact of$2.9MM

53

Asset Growth - NII

-300 bps -200 bps -100 bps +100 bps +200 bps +300 bps

Flat 0.0192826339187343

0.0223255611253063

0.0237874055028035

0.0244112091785046

0.0945836367910384

0.18034757900647

Growth 0.0187313103697266

0.0214927460484103

0.0237435932964358

0.037204750565955

0.116798101206812

0.210275369836999

2.5%

7.5%

12.5%

17.5%

22.5%

Perc

ent C

hang

e fr

om B

ase

Case

54



55

Deposit Migration

Current Position Total

Total Non-Interest DDA $245.9MM

Interest Bearing DDA/MMDA/Savings $575.7MM

Customer Repo $47.3MM

Deposit Changes Migration Cost

Migrate 20% of Non-Interest DDA to Premier Savings $49.2MM 16bps

Replace Non-Interest DDA with FHLB Advance $15.0MM 261bps

Replace Customer Repo with FHLB Advance $15.0MM 242bps

56

Deposit Migration

Current Position Total

Total Non-Interest DDA $245.9MM

Interest Bearing DDA/MMDA/Savings $575.7MM

Customer Repo $47.3MM

Deposit Changes Migration Cost

Migrate 20% of Non-Interest DDA to Premier Savings $49.2MM 16bps

Replace Non-Interest DDA with FHLB Advance $15.0MM 261bps

Replace Customer Repo with FHLB Advance $15.0MM 242bps

Impact to NII ($0.834MM)

And EVE($7.2MM)

57

Deposit Migration - NII


Regu-lar

-0.066611034381727

7

-0.047031473061959

7

-0.020525699363460

1

-0.037257390982505

6

-0.074943929446250

7

-0.114025143757758

Stressed

-0.067662307945624

6

-0.047587546378643

-0.020411396799613

3

-0.046599359062578

9

-0.093688155415879

6

-0.142256629652279

-15.0%

-13.0%

-11.0%

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

Perc

ent C

hang

e fr

om B

ase

Case

58

Deposit Migration - EVE


Regu-lar

-0.165671259181959

-0.143342921869103

-0.064816116183076

2

-0.013701574279746

8

-0.038143895034753

6

-0.068098007602923

4

Stressed

-0.161252897753984

-0.144241308478335

-0.065311775809617

2

-0.019044238976614

6

-0.048727309827929

-0.083693267440205

2

-17.0%

-15.0%

-13.0%

-11.0%

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

Perc

ent C

hang

e fr

om B

ase

Case

59



60



61

Beta Stress Test

Assumptions Regular Betas

Stressed Betas

Interest Paying DDA 9% 15%

MMDA 75% 85%

Savings 30% 60%

Premier Savings 80% 90%

Christmas Club 30% 60%

Customer Repo 80% 90%

62

Beta Stress Test - NII


Regu-lar

-0.044759011977763

9

-0.039859017708751

3

-0.018281849962748

6

-0.009685368789042

35

-0.025044415152730

8

-0.042867786119548

6

Stressed

-0.044764899306240

8

-0.039860364464309

2

-0.018274273470074

9

-0.020465566249674

9

-0.046573684934198

6

-0.075576547131302

-7.5%

-6.5%

-5.5%

-4.5%

-3.5%

-2.5%

-1.5%

-0.5%

Perc

ent C

hang

e fr

om B

ase

Case

63

Average Life Stress Test

Assumptions Regular Average Life

Stressed Average Life

Non Interest Deposits 6 3

Interest Paying DDA 5 2

MMDA 3 2

Savings 6 3

Premier Savings 3 2

Christmas Club 6 3

Customer Repo 3 2

64

Average Life Stress Test - EVE


Regu-lar

-0.177010973522602

-0.163470250679553

-0.089328500956408

-0.004832376925400

19

-0.027685492801771

9

-0.060278868418403

3

Stressed

0 -0.005000000000000

01

0.002 -0.068 -0.152 -0.241

-27.5%

-22.5%

-17.5%

-12.5%

-7.5%

-2.5%

2.5%

Perc

ent C

hang

e fr

om B

ase

Case

65

The Cost of Being Wrong

Impact to: Earnings Liquidity Position Risk Profile (NII and EVE)

66

Agenda






67

Other Regulatory Concerns

Assumption inputs, documentation, and presentation

Stress testing betas, average lives, and prepayment speeds

Concern with market value losses Setting policy limits Back testing Liquidity

68

Agenda






managing interest rate risk: setting the stage for tomorrow mike delisle, alm advisors group wvba...

Documents

rate risk

current risk profile

risk earnings

eve rates

rate environment

nii rates

risk ear net

balance sheet derivative