MANAGING INTEREST RATE RISK: SETTING THE STAGE FOR TOMORROW MIKE DELISLE, ALM ADVISORS GROUP WVBA Convention July 29, 2014
Dec 26, 2015
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
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
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
What we know…Historical transitions
0 5 10 15 20 25 30 353%
4%
5%
6%
7%
8%
9%
Treasury Curve 1/1/94 Treasury Curve 1/1/95
8
What we know…Historical transitions
0 5 10 15 20 25 30 350%
1%
2%
3%
4%
5%
6%
Treasury Curve 4/1/04 Treasury Curve 4/1/05
9
What we know…Historical transitions
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
What we know…Historical transitions
0 5 10 15 20 25 30 35
Treasury Curve 7/18/14 Treasury Curve 3/1/88Treasury Curve 1/1/94 Treasury Curve 4/1/04
11
What we know…Historical transitions
0 5 10 15 20 25 30 350%
2%
4%
6%
8%
10%
12%
Treasury Curve 7/18/14 Treasury Curve 3/1/89Treasury Curve 1/1/95 Treasury Curve 4/1/05
12
What we know…Historical transitions
0 5 10 15 20 25 30 35
Treasury Curve 7/18/14 Treasury Curve 3/1/89Treasury Curve 1/1/95 Treasury Curve 4/1/05
13
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
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
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
25
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
26
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
27
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
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
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
31
Securities
32
Securities
33
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
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
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
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
Blend and Extend Example
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
Blend and Extend Example
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
Positioning the Balance Sheet
Retail Tactics Loans Deposits
Wholesale Tactics Securities Brokered Deposits Advances
Off Balance Sheet Derivatives
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
Fixed Rate Loan with
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
Fixed Rate Loan with
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
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
46
Estimating the Cost of Being Wrong
Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions
47
Alternate Rate Scenarios
Historical Transitions Bear / Bull Worst Case
48
Alternate Rate Scenarios
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
Alternate Rate Scenarios
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
Estimating the Cost of Being Wrong
Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions
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
Estimating the Cost of Being Wrong
Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions
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
-300 bps -200 bps -100 bps +100 bps +200 bps +300 bps
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
-300 bps -200 bps -100 bps +100 bps +200 bps +300 bps
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
Estimating the Cost of Being Wrong
Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions
60
Estimating the Cost of Being Wrong
Alternate Rate Scenarios Asset Growth Deposit Migration Deposit Runoff NMD Assumptions
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
-300 bps -200 bps -100 bps +100 bps +200 bps +300 bps
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
-300 bps -200 bps -100 bps +100 bps +200 bps +300 bps
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
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
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
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