strategies for a flat yield curve island time version

Strategies for a flat yield curveIsland time version

August 2018

Charles N. McQueen

• Founder of McQueen Financial• SEC Registered Investment Advisor• Asset Liability Management• Valuations & Consulting

The Presenter

The Boss

• Interest Rates - Beaver Island • Deposits - Mackinac Island• Liquidity - Put-in-Bay• CECL - Duck Island• Balance Sheet Management

Island Time Strategies for a Flat Yield Curve

How do you think about “Banking”?:

Big Picture Thinking

Is this your lobby?

Or this?

Who Should I Market to?

What ages do you focus on? Do you focus?

Who Should I Market to?

57%

Current Interest Rates & a few Projections

McQueen Financial Advisors

Beaver Island

Beaver Island

• The only Monarchy inside of the USA.

• James Jesse Strang became the King in 1850.

• He was shot and killed by his followers in 1856.

• The island was originally a fishing and trading village with its natural port.

• It is now a tourist destination.• It has a strong Irish population.

Interest Rates

Source: Bloomberg

Interest Rates

Inflation

Wage Based Inflation

Stock Market

Home Prices

Quantitative Easing Portfolio Size:• $ 4.5 Trillion

Monthly Maturities:• Nearly $50 billion

Monthly Purchases:• $10 billion

FOMC Open Market Activities

Contracting by maturities not being reinvested. Nothing is being sold.

Debt

• April 2018 – Largest Government surplus ever of $214 billion• GDP Growth is key

Interest Rates

2018 Thoughts:• Charley boat index• Commercial loan index• Brew pub funding• Home prices• Ted’s pool index

MFA Interest Rate Outlook

2008 Prediction:• Low interest rates for 10 years:2018 Prediction:• Relatively low interest rates • Slowly increasing Fed Funds rate towards 3.00%• Slowly increasing 10 year US Treasury towards 4%• Black Swan Events• Uncertainty

MFA Interest Rate Outlook

Deposits

Mackinac Island


Mackinac Island

Mackinac Island

• In 1780 the island was selected as the site for the fort by English Major Patrick Sinclair.

• In the war of 1812 the island was invaded by the British and the Americans surrendered.

• In 1946 the movie This time for Keeps was filmed.

• In 1979 the movie Somewhere in Time was filmed.

Deposits & Cost

• Deposit Growth has Stopped

• Non-Maturity Deposits• Yields up• Deposit betas of 80% Plus in Q2 2018

• Certificates of Deposit• Yields up

• The savings rate has declined to 2.50% • The last time we were here was in July of 2005

Savings Rate

2005 – 2011 Liabilities & Cost

2011 – 2018 Liabilities & Cost

Deposits & Cost

• Disintermediation• Money market accounts have grown• Under 10% of deposits are in CD’s now

(Average)

• Deposit Generation• CD’s• Brokered CD’s• FHLB advances• Branded products

Deposit Costs

• Where are costs today?

BrokeredCD FHLB CD________

1 year 1.79 2.77 2.703 year 2.34 2.97 3.155 year 2.71 3.11 3.407 year n/a 3.35 3.60

Old School Deposit Generation

• This will be a major differentiating factor for your success compared to peer.

• How do you do it?• Consistent• Ask for the business• Require the deposits• Compensate employees for deposits• Limit indirect lending• Limit participations

New School Deposit Generation

• Solutions for sale

• Have you tried?• Kasassa• New higher yield accounts• Money market aggregators• Brokered CD’s

Deposit Generation

• A focus, commitment and success of core deposit generation will be the key to success over the next five years.


Liquidity

South Bass Island

South Bass Island

South Bass Island

• It is called the “Key West of Lake Erie”.

• The Victory Hotel had 625 rooms and was the largest hotel in America.

• The island is home to nearly 40 bars and restaurants.

• Lots of “liquidity”

Liquidity

• People are spending money: – Restaurants are full– Lots of new toys– Lending is increasing

• People are not saving money

Liquidity

The last Fed tightening cycle resulted in a 3.50% increase in the cost of funds.

• In 2007, after three years of a rising interest rate environment, a 6-month Certificate of Deposit yielded 5.30%. The yield had increased 3.50%.

• Today, after two and one-half years of interest rates rising a 6- month Certificate of Deposit yields 1.45%. This is so far only up 1.00% from 0.45%.

As the economy expands, we expect scarcity of deposits to continue to push deposit rates higher.

Liquidity

• Sources– Cash– Investments– Loan sales– Brokered deposits– Overnight borrowings availability– Term Borrowings availability

Liquidity

• Rising rates = Higher cost of funds• Customers (members) do not use CD’s any

more.• With out CD’s (all else being equal) interest

rate risk increases

Home Values

• Volume of new homes is still low• Dollars spent is way up• Value of houses is up

Liquidity

• Home values are significantly up• Lots of mortgages to pledge • A strong liquidity option is FHLB advances

FHLB Advances for Liquidity

• Fixed advances give you a known interest cost• Advances where you have the right to keep

them or cancel them are to your advantage• If interest rates rise – hold them• If interest rates fall – turn them in

Callable Advances

• Additional cost of 30 Basis points on a 7 year advance− 7 year bullet = 3.35%− 7 year callable by you =3.65%

• 7 year brokered CD = 3.60%

Liquidity

• Major exam focus

• What should you do?– Monthly liquidity forecasting (spreadsheet)– Quarterly liquidity testing– Grow your available borrowings

Liquidity

• Ahead of the curve, behind or just right?– Raise rates now– Later– Ignore it?

• Banks in the news– Comerica– Bank of the Ozarks

Why? 80% deposit betas in Q2 2018


CECL

Duck Island

Duck Island

Duck Island

• It is an uninhabited island.• It is in lake Huron.• I (Google) does not know much

about it.• Not my idea of a fun island.

CECL

• CECL - Current Expected Credit Losses− Implementation is delayed

• CECL – Dates:− PBE = 12/31/20− Non PBE = 12/31/22

CECL

• CECL – Current Expected Credit Losses− Build Equity− Net Income

• CECL – What is it….− Lifetime losses on a loan booked upfront− On going – tough on income− Implementation – tough on equity

CECL

• CECL - Costs− Good economy = current ALLL− Bad economy = 3 times ALLL

• CECL - Effect− One time hit to equity− Potentially spread out over 3 years

CECL

• CECL− Understand the theory− Know your solution (how your bank is

going to do CECL)− Loan product profitability

Balance Sheet Management


Net Interest Margin & More


• Non-Interest Income Sources− Mortgage sales− Insurance − Trust


Strategies for a flat yield curve:

• Loans− Good loan mix− Correct loan to deposit ratio− Plan for credit losses increasing− Understand your loan profitability



• Investments− Correct duration− Staying fully invested− Corporate bonds− Taxable municipal bonds

• Municipal & corporate credit reviews



• Deposits− Deposit generation− Deposit cost control− Marking done right− Core competency

• Callable FHLB advances

• Interest Rates - Beaver Island • Deposit Generation - Mackinac Island• Liquidity - Put-in-Bay• CECL - Duck Island• Balance Sheet Management

Islands Style Strategies

Questions

McQueen Financial Advisors, Inc.

Charles N. McQueenPresident & CEO1239 Anderson Road Clawson, MI 48017

[email protected]

Contact Us

strategies for a flat yield curve island time version

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