FHLB Des Moines and Darling Consulting Group...1 P e P 2 5 0 7 2 0 7 1 19 P Y P e 25 50 75 00 25 50...

FHLB Des Moines and Darling Consulting Group

Current Issues in Liquidity ManagementThursday, August 8th │ 3:00 PM CT

Examine key business issues and trends to help defend your liquidity position, understand key requirements of a comprehensive liquidity management system and learn why your management strategy and philosophy are crucial.

Wholesale Funding: Perception Versus RealityThursday, August 15th │ 3:00 PM CT

In today's economy, consider how wholesale funding can support your earnings challenges and develop a meaningful and cost-effective funding game plan to support the growth of your institution.

www.fhlbdm.com/products-services/advances/2019-funding-products-webinar-series

2019 LEADERSHIP SUMMIT

OCTOBER 16-18, 2019JW MARRIOTT MALL OF AMERICA │MINNEAPOLIS, MN

Register Now: www.fhlbdm.com/leadership-summit

© 2019 Darling Consulting Group, Inc.

Risk Management Strategy & Solutions

© 2019 Darling Consulting Group, Inc. • 260 Merrimac Street • Newburyport, MA 01950 • Tel: 978.463.0400 • DarlingConsulting.com

Frank L. Farone, Managing Director

[email protected]

Wholesale Funding Perception vs. Reality

Why NOW is the Best Time to Formulate a Winning Game Plan!

August 15, 2019

© 2019 Darling Consulting Group, Inc. © 2019 Darling Consulting Group, Inc. Page 4

Mirror, Mirror On the Wall, What’s the Fairest Funding of All?

7 Common Reasons NOT to Use Wholesale Funding

1. Wholesale funding is too costly 2. Deposits reflect customer relationships, borrowings do not 3. Wholesale funding does not increase value of franchise or attain

mission of a community institution4. Lack of spread (hint: best opportunities when spread tightest)

5. Negative regulatory attitude (perpetuates board/Mgm’t negativity)

6. No need for funds, flush with cash!7. Not set up to borrow! (Really?!)


Current Rate Environment

Bond Market is Screaming for More Rate Cuts

“Double Whammy”


The Journey: Challenges of a Flat/Inverted Curve

Asset Yields

Funding Costs

YOUR Strategies Throughout Journey?


Fed Funds & 10 year Treasury: Note Timing and Patterns


Curve Flattening Continues With Short-Term Inversion (Previous Page Journey of Rate Moves)

Current Environment: 2/10 Spread

Curve Flattening

continues…


Curve Inversion FAST Approaching!?

“Is This Time Different”?

First Inversion Recession Start Lead (Months)

Dec-56 Aug-57 8

Sep-59 Apr-60 7

Dec-67 Dec-69 24

Mar-73 Nov-73 8

Sep-78 Jan-80 16

Sep-80 Jul-81 10

Feb-89 Jul-90 17

Apr-00 Mar-01 11

Jan-06 Dec-07 23

10 YR TSY - 1 YR TSY “No reason for great concern”John Snow (Treasury Secretary) – January 2006

“I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come”

Ben Bernanke – March 2006

“I don’t think I’m concerned with it (flat yield curve).Bill Gross – January 2007


Steep Curve in October 2018 (Expecting 3 Hikes):

Think Opposite? BUY LONG ASSETS!


2019 Growth Forecast for Bank (8.00% growth assumed): Life is Good!

Consider Leverage of 50% of Growth With INVESTMENTS? (Next Page)


BUY JUMBO MBS 4.05%; Fund Short @3.15% Spread Too Thin?

3-4 Fed Hikes Ahead…Let’s Wait to Buy… Think Opposite!


GNMA JUMBO MBS $95 13/32 (No Credit Risk)


Fed Funds Futures Then and Now!

Just 7 Months Ago


Fed Funds Futures “Forward” Rate@ 1.50% by June 2020!?

How Reliable is This Forecast?


Treasury Curve From the Beginning of the Year 2019

Consider Impact on Loan

Yields?

What About CD Pricing?

INVERT CD Curve

NOW!

Long Rates Down 60bp,

Short Rates Lower, Too!

Expect Fed Cuts and Steeper Curve Ahead


Year 4

Year 5

Year-1 NII Year-1 NII





Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

-5,453

-3,560

-7,310

-9,538

-11,964

-15,479

-1,588

-3,139

-3,077

-3,771

-13,261

-4,116

-6,529

-7,583

-9,076

198,269

192,186 241,166

244,694

CHANGE / DIFFERENCE IN RESULTS

Down 200BP Base Up 200BP

269,117

279,870

293,035

305,354

262,588

256,658

258,582

256,645197,639292,093

256,209

223,544

202,040

208,827

283,959

272,287

BASE SIMULATION AS OF 6/30/2019

NII SUMMARY

253,145

246,671

Down 200BP Base Up 200BP

245,202

220,405

205,750

254,187

251,272

246,790 257,747 257,261

BASE SIMULATION AS OF 3/31/2019

Up 200BP

NII SUMMARY

Down 200BP Base

38,925

48,050

57,175

66,300

75,425

84,550

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Net Interest Income ($000)

Base Down 200BP Up 200BP

38,925

48,050

57,175

66,300

75,425

84,550




Key Issue: Investment and All Loan Replacement Rates Are Lower This Quarter.

Down 25 to 35bp just over the quarter. This is a result of intermediate and long

term market rates declining. Has pressured NII lower over the long

term.

NII Graph: Quarter to Quarter Ramps Compare


Even After Fed Is Done Raising Rates, Deposit Pricing Pressures Continue!

How Can FHLB Advances Help?

?

So, What If the Fed Truly IS Done?


125BP of Steepening Between 2Y and 10Y Points

(Exposure to Falling Rates Is Reduced)

+/- 200bps Parallel and Non-Parallel (12 months)


Time Deposit Maturities

Pricing Relief ? Drop 8 Month CD to 2.00%


Lower 8 Month CD Special to 2.00%

(“Fed Cut 25BPS” July & 10 Year Treasury Rate 1.64%)


Industry Margin Declining

Most Community Institutions are Net Interest Income Dependent

• 80-90% of NOI

NII Is a Function of Balance Sheet Size and Spread

Growth Is Necessary for Success!

To Grow, We Need Funding!!!

Which Means…….


Increase margin Asset Yields Cost of Funds

Fee Income Expense Control Asset Sales (Gains? How Replace $?) Tax Management

Growth Local Expansion Acquisition Capital Markets

ROA X LEVERAGE = ROE (NI/Capital)

More GROWTH NEEDED As Margins Shrink

Cost of Funds Management Is “Key” Now


“The declining liquid asset cushions and increased use of potentially non-stable liquidity sources…suggest that small

banks as a group are increasing their liquidity risk profiles…”

– FDIC Supervisory Insights, Summer 2017How Will You Respond?

Remember the Basic Surplus Approach?

Liquidity “Tightening”

Commentary in the Field…


Liquidity Funds Management Process

Plan needs to include:

Strong liquidity management, plus proactive deposit strategies BASED ON YOUR POSITION, are critical!

Educate and Execute.


Basic Surplus


May 2019 ALCO meeting

Asset sensitive

Plentiful liquidity (access to 45% liquidity)

NO wholesale funding (never…the way always been here)

Short investment portfolio (18 month average duration)

Capital 8.05% (policy 8.00%...capital management critical)

Case Study: What Strategies Would YOU Recommend?


Key Points:

Asset sensitive and ultimately very well positioned for higher interest rates

Amount of overall rising rate benefit will depend on (1) pace of rate hikes and (2) shape of market yield curves and “when” rates rise…don’t hold breath!

Falling rates proves to be the most problematic scenario for NII

Deposit stability and pricing sensitivity remain important “unknowns”; Revisit MCOF wholesale

Parallel Rate Ramps & Steepening of Market Yield Curves

Year 2

Year 3

Year 4

Year 5






BASE SIMULATION AS OF 3/31/2019 BASE SIMULATION -ALTERNATIVE SCENARIOS

NII SUMMARY NII SUMMARY

60,618

66,349

79,135

Down 200BP Base Up 200BP Steep Down 200BP Down 200BP Base Up 200BP Yield Curve Twist

91,232

57,093 86,177

83,579

84,731

85,453

101,219

83,579

84,731

85,453

91,232

105,136

108,445

80,232

72,597

71,299

70,55557,093 86,177

79,135

66,349

60,618

54,568 87,241 112,20754,568 87,241 112,207 70,024

101,219

105,136

109,862

84,900

94,252

101,778

105,675108,445

9,675

14,125

18,575

23,025

27,475

31,925



Base Steep Down 200BP Down 200BP Up 200BP Yield Curve Twist

9,675

14,125

18,575

23,025

27,475

31,925




Slope Matters…A LOT!!


Non-Maturity Deposit Products Time Deposits Time Deposits Specials / Promotions

Rate (APY) Rate (APY) Rate (APY)

Primary Savings 3 Month

Owners Choice Savings 6 Month

Preferred Savings Low Tier 9 Month

Preferred Savings High Tier 12 Month

Preferred Plus Savings Low Tier 24 Month

Preferred Plus Savings High Tier 36 Month

48 Month

60 Month

Term

3 Month

6 Month9 Month

12 Month

24 Month

36 Month

48 Month

60 Month

Money Market Fund (SEC Reported Average) @ 2.49%

Term

3 Month6 Month9 Month12 Month24 Month36 Month48 Month

60 Month

-0.10%

CHANGE IN RATE CURVES (SINCE LAST REVIEW)

-0.13%

Brokered CD Rates

Chg

0.05%0.00%-0.10%-0.10%-0.15%-0.20%-0.15%

2.55%

Chg

2.90%

-0.17%

2.45%2.45%

2.67% 2.67% 0.00%2.73%

N/A N/A2.68%

N/A2.78%

2.40%

2.68%

Current

Credit Union CD Rates FHLB Rates

Current Prior

-0.05%

-0.10%

2.45%

2.95%

Prior Current Prior

2.70%2.85%

2.35%2.45%2.55%

2.55%-0.14% 2.65%

2.78%

-0.17% 2.75%

2.85%

2.72%

0.90%0.90%1.41%1.76%

2.59% 2.76%

0.00%

0.00%0.10%0.15%-0.05%

2.58%2.59%

2.65%

2.76%

2.63%2.78%2.73%

2.78%

0.90%0.90%1.41%1.76%

0.00%

0.00%0.00%

2.53%2.63%2.78%

2.78%

Chg

LIBOR Swap

Rates

COMPARATIVE WHOLESALE FUNDING RATES AS OF 4/30/2019

Treasury

Rates

0.30%

2.73%

2.65% -0.13%

2.32%

2.75% 0.02%

2.85% 0.07%

2.32%

2.31%

0.92%

2.59% -0.04%

1.77%

2.78%

2.78%

2.72%

2.38%

2.45% 1.55%2.45% 1.04%

2.45% 0.69%

2.55%

Brokered CD

Rates

vs. CU2.40% 1.50%

-0.08%

2.65% -0.13%

2.59% -0.14%2.26%

2.28%

2.67%

2.68%

2.40%

2.27%

2.43%

N/A

2.58%

2.68%

CREDIT UNION DEPOSIT RATES

0.30%

0.30%

2.63%

2.24%

1.78%

FHLB Advance

New York

vs. CU

-0.20%

2.46%2.43%

0.85%

0.30%

2.02%

N/A

2.58%

2.62%2.67%

0.90%

0.90%

1.41%

1.76%

(20)

(15)

(10)

(5)

0

5

10

15

3 Month 6 Month 9 Month 12 Month 24 Month 36 Month 48 Month

Ch

ang

e (b

ps)

Changes in Rates (Since Last Review)

Credit Union CD Rates FHLB Rates Brokered CD Rates

Case Study: Deposit Rates & Funding Alternatives

Where Do We Want to Position Our Funding? At What Cost?

Consider 7 month CD @2.25%! 11 month 2.30% 2-3 year 1.75% 4&5 year 1.80%


Case Study Cont’d: CD Maturities:

Incent Shorter With Pricing, NO Long CDs


Current Basic Surplus w/ FHLB

Less: Net New Loan Fundings

Plus: Net Customer Deposit Flows

Plus: Non-Pledgable Investment Cash flow

Equals: Projected Basic Surplus (Deficit) at 90-Days

Liquidity projections to be discussed at ALCO.

Cash Investments

Investments

Total Inv. Cash Flow

Brokered Deposits

National CDs

Borrowings

Total Funding Maturities

4,094 3,249 747 7,50024,975 20,176 2,186 13,094

22,005 848

0

880 848

21,125

540

0 0 0 0 0

721 1,171

721

540

566 5031,171 649

Q4Y2Q1Y1 Q2Y1 Q3Y1 Q4Y1 Q1Y2

3,000 0

994 249 747

0 0 0

24-MONTH WHOLESALE CASH FLOW PROJECTIONS

0

94,614

0

127,458

10,244

649 566 503

0 0

Q2Y2

0

0

0

Q3Y2

LIQUIDITY FORECAST @ 90-DAY HORIZON

7,500

0

111,366

4,421

12,331

0

16,752

3,100

127,458

Forecast

Variance

Previous

Forecast

94,614

0

0

Current

0

0

Actual

0

94,614

(4,421)

12,331

21,303 9,750 0 2,850

3,672 10,426 2,186

0

Loan and Deposit Growth Forecast? Game Plan for Excess Deposits?

Could Pay Down FHLB and/or Brokered CDs, But…Discuss Opportunity Cost Today.

Liquidity Forecast







Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

Quantifies the impact of maintaining $73MM of 1 year FHLB borrowings @ 2.16% to support 30yr MBS @ 3.10%.

Base Simulation as of 5/31/2019 Earnings Impact of Maintaining FHLB and MBS


Steep Down 200BP Down 200BP Down 100BP Base Up 200BP Steep Down 200BP Down 200BP Down 100BP Base Up 200BP

41,033 40,015 40,379 40,571 39,621 41,735 40,661 41,004 41,176 40,266

44,228 38,027 40,531 42,115 41,493 45,902 39,847 41,770 42,708 41,008

45,371 34,526 39,218 42,710 45,226 47,057 36,225 40,368 43,274 44,919

45,586 32,220 38,034 42,853 47,817 47,245

49,579

33,752 39,072 43,404 47,734

45,682 30,914 37,306 42,929 49,499 47,318


32,317 38,256 43,474

Steep Down 200BP Down 200BP Down 100BP Base Up 200BP

624 605 645702 646

1,239 593 -4851,674 1,820

1,686 1,699 1,150 564 -307

1,659 1,532 1,038 552 -84

1,636 1,403 950 545 81

6,400

7,875

9,350

10,825

12,300

13,775



Base Steep Down 200BP Down 200BP Down 100BP Up 200BP

6,400

7,875

9,350

10,825

12,300

13,775



Base Steep Down 200BP Down 200BP Down 100BP Up 200BP

Earnings Impact From purchasing 30 Year Jumbo MBS

Funded With 1 Year Wholesale Funding


Rising Rates Still A Concern? Think Opposite!

Don’t Become So Fixated on Rising Rates That You Forget Greatest Risk to FIs…Declining Rates


Strategy Considerations

Liability Sensitive IRR Profile

Considerations:

Balancing exposure to both rising and falling rates

If extending: How far? How much of protection?

Cost of insurance to rising? Free today w/inversion

Understand most effective options

Should be able to extend assets

Deposit strategy: New money (MCOF issue)

Keep funding “short” or go longer? Swap?

Mismatched leverage or growth

Swaps/Caps (Last of layer approach)


Don’t Follow the Village Fool!


FHLB Des Moines Borrowing Costs with Dividend Adjustment


Marginal Cost Analysis: MMDA


Marginal Cost of Funds MMDA

First Level


Derivative/Option Pricing

NOTE: Decline in 5 Year Rate 2.25% to 1.34%


NEV SUP Test With $20MM 5 Yr Pay Fixed Swap, Hedge 1 Mo. Advances

Net Impact in +300bps Shock Is $2.617MM to Equity

ASSETS

Investments

Loans

Other Assets

TOTAL ASSETS (EVA)

% Chg from 0 Shock

LIABILITIES

Non Maturity Deposits

Time Deposits

Borrowings

Other Liabilities

TOTAL LIABILITIES (EVL)

% Chg from 0 Shock

NET ECONOMIC

VALUE (NEV)

% Chg from 0 Shock

NEV Ratio (NEV/EVA)

BP Chg from 0 Shock

Risk Level

NMD pricing for 0 shock and +300 based on NCUA guidance and all other scenarios are interpolated. NEV calculations are provided for informational purposes only.Falling Rate Shock Scenarios = Book Value

0 Shock Scenario = 1% Premium from Book Value

+100 Shock Scenario = 2% Premium from 0 Shock (interpolated from NCUA guidance)


+300 Shock Scenario = 4% Premium from 0 Shock


High 2% up to 4% 65% to 85%

Extreme < 2% > 85%

Low > 7% < 40%

Moderate 4% up to 7% 40% to 65%

Post-Shock NEV NEV Sensitivity (%)

-362 -502

117 76 -84 -220

NCUA Supervisory Test Thresholds +300 Shock Scenario

9.26% 10.73% 10.32% 9.56% 8.72% 7.36% 5.94% 4.55%

16.2% 10.3% -11.1%

13,947

-27.0% -42.6% -57.3%

31,648 37,977 36,021 32,670 29,048 23,844 18,737

0.35% 2.25% 1.29% -1.63% -2.85% -4.04% -5.20%

(2,080)

310,064 315,942 312,985 308,986 303,963 300,185 296,503 292,915

1,303 3,261 2,237 1,271 360 (501) (1,314)

129,056

57,575 57,761 57,673 57,585 57,498 57,412 57,327 57,242

135,612 139,346 137,501 135,712 133,975 132,288 130,649

-10.18%

115,574 115,574 115,574 114,418 112,130 110,986 109,842 108,697

0.02% 3.59% 2.15% -2.53% -5.16% -7.73%

28,209

341,712 353,919 349,006 341,656 333,011 324,029 315,240 306,862

28,209 28,209 28,209 28,209 28,209 28,209 28,209

55,727

243,523 251,330 248,417 243,912 238,691 233,301 228,015 222,927

69,980 74,380 72,380 69,535 66,111 62,518 59,017

NCUA SUPERVISORY NEV TEST

Book Value -200BP -100BP 0 Shock +100BP +200BP +300BP +400BP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

NEV Ratio (NEV/EVA)

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

NEV ($) - Pct. Chg from 0 Shock

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Net Economic Value ($000s)


$0 Cost of Insurance to Flat & Rising Rates (Think Opposite) Danger Ahead!

Pay Fixed Swap 3 Years at 1.88%, Receive 3mo Libor at 2.50%






Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

$50MM 3 year Swap: Paying 1.88% and receiving 3M LIBOR (currently @ 2.50%).

Base Simulation as of 04/30/2019 $50MM Interest Rate Swap


Down 200BP Down 100BP Base Up 200BP Up 400BP 24M Down 200BP Down 100BP Base Up 200BP Up 400BP 24M

53,833 54,523 54,275 51,001 51,017 53,742 54,643 54,606 51,754 51,770

49,546 54,013 55,654 51,156 47,547 48,860 53,833 55,982 52,498 49,308

45,304 52,748 56,860 55,860 51,226 44,618 52,569 57,188 57,201 53,581

43,026 52,119 57,996 60,053 58,716 43,026

65,440

52,119 57,996 60,053 58,716

41,458 51,640 58,854 63,664 65,440 41,458


51,640 58,854 63,664

Down 200BP Down 100BP Base Up 200BP Up 400BP 24M

331 753 753-91 120

327 1,341 1,761-687 -180

-687 -180 327 1,341 2,355

0 0 0 0 0

0 0 0 0 0

8,500

10,500

12,500

14,500

16,500

18,500



Base Down 200BP Down 100BP Up 200BP Up 400BP 24M

8,500

10,500

12,500

14,500

16,500

18,500





3 Year Cap @2.50% Strike =24BPS (8BPS/Year)

Roll Funding Short and BUY an Interest Rate Cap






Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

$50MM 3 year Cap on 3M LIBOR @ 24bps up-front; Strike rate at 3M LIBOR (currently 2.50%).

Base Simulation as of 04/30/2019 $50MM Interest Rate Cap


Down 200BP Down 100BP Base Up 200BP Up 400BP 24M Down 200BP Down 100BP Base Up 200BP Up 400BP 24M

53,833 54,523 54,275 51,001 51,017 53,792 54,482 54,244 51,393 51,409

49,546 54,013 55,654 51,156 47,547 49,506 53,972 55,627 52,142 48,953

45,304 52,748 56,860 55,860 51,226 45,264 52,708 56,832 56,846 53,226

43,026 52,119 57,996 60,053 58,716 43,026

65,440

52,119 57,996 60,053 58,716

41,458 51,640 58,854 63,664 65,440 41,458


51,640 58,854 63,664

Down 200BP Down 100BP Base Up 200BP Up 400BP 24M

-31 391 391-41 -41

-28 986 1,406-41 -41

-41 -41 -28 986 2,000

0 0 0 0 0

0 0 0 0 0

8,500

10,500

12,500

14,500

16,500

18,500




8,500

10,500

12,500

14,500

16,500

18,500





(And, NEVER Buy Callable Bonds Ever Again!)

SELL Callable Bonds & Buy MBS (Or Pre-invest)






Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

This simulation assumes the Bank sells $10.5MM of callable Agency bonds and uses those funds to purchase 20Y MBS bonds @ 3.05%

Income numbers do not reflect estimated loss of $100K-$125K.

Base as of 3/31/2019 Bond Portfolio Restructure - Sell Agencies


Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M

20,897 20,885 21,037 21,132 21,009 20,988 20,994 21,151 21,255 21,142

20,735 20,321 21,002 21,157 20,810 20,802 20,431 21,105 21,268 20,929

20,883 19,981 21,120 21,371 21,175 20,942 20,070 21,193 21,426 21,212

20,711 19,582 21,423 22,722 23,591 20,762

26,164

19,656 21,450 22,681 23,483

20,408 19,137 21,586 24,171 26,255 20,454


19,201 21,607 24,136

Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M

114 123 13291 109

103 111 11966 110

58 89 73 55 37

52 74 27 -41 -109

45 64 20 -35 -91

4,225

4,825

5,425

6,025

6,625

7,225



Base Steep Down 200BP Down 100BP Yield Curve Twist Up 400BP 24M

4,225

4,825

5,425

6,025

6,625

7,225





HOLD 30 Year Mortgages 4.25% Funded With Short Advances






Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

This simulation assumes the Bank funds $10MM of 30Y Residential mortgages @ 4.25% with 3 month FHLB advances @ 2.73%.

Base as of 3/31/2019 $10MM Loan Growth - 30Y Residential Mortgages


Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M

20,897 20,885 21,037 21,132 21,009 21,146 21,071 21,186 21,281 21,086

20,735 20,321 21,002 21,157 20,810 21,104 20,553 21,153 21,207 20,708

20,883 19,981 21,120 21,371 21,175 21,253 20,207 21,275 21,373 21,010

20,711 19,582 21,423 22,722 23,591 21,077

26,158

19,799 21,577 22,742 23,463

20,408 19,137 21,586 24,171 26,255 20,771


19,347 21,740 24,206

Steep Down 200BP Down 100BP Base Yield Curve Twist Up 400BP 24M

149 149 77249 186

150 50 -102369 232

369 226 155 2 -165

366 218 155 20 -128

363 210 154 34 -98

4,225

4,825

5,425

6,025

6,625

7,225




4,225

4,825

5,425

6,025

6,625

7,225





Strategy Considerations

Asset Sensitive IRR Profile

Considerations:

Extend cash/pre-invest (MBS, DUS, Trsy)

Consider buying call protection

Mismatched leverage

Understand capacity to extend assets (“core funding” utilization…next page)

Flexibility with commercial deals and structures; front run repricing deals

Hold portion of fixed rate mortgages

Positioning of wholesale funding and deposit specials ”short”

Understand role of derivatives (floors, receive fixed swaps, sell caps, etc.)


Assets ( > 60 Months)

Cumulative Cumulative Cumulative CumulativeCore Liabilities ( > 60 Months) Volume Volume Volume Volume

Equity

Other Liabilities

DDA

NOW

Savings

Other Deposits

% Utilization

NOTE #1: Core funding utilization measures the long term structural position of the balance sheet (i.e. EVE simulation) and quantifies the degree to which the Bank utilizes long-term (i.e. >5-years) funding

sources to support long-term assets. The cumulative excess may be used as an indicator of the Bank's capacity to add additional long-term assets.

Excess

655,496

843,334

853,830 845,104

Excess

1,399,185

19.3%

646,770

834,608187,838

10,496

187,838

10,496

39.6%

1,399,185

39.0%

545,351

175,973

36,678

988,196

949,562

1,399,185

1,399,185

32.1%

Up 400BP 24M

554,077

175,973

988,196

270,678

175,973

36,678 36,678

988,196

Excess

988,196

187,838 187,838

751,228

939,066

36,678

Down 200BP Up 200BP

Excess

INTEREST RATE SCENARIOS

HISTORICAL ASSESSMENT

4 4 845,108853,8344 949,566 4 1,128,507

449,619

175,973

Base

930,169

1,118,007

1,128,50310,496 10,496

Quantifying Capacity for Added Asset Duration

Core Funding Utilization


Year -200 bps -200 Stpn

Base +200 bps

1 $181 $222 $237 $244

2 $258 $391 $313 $143

3 $474 $670 $394 $20

Total $913 $1,283 $944 $407

Investment Strategy Then: Now Requires Loans For Same Yield

4.12% YIELD @$96 MBS Funded With 1 Month Advances


Simulate a “Big $” to Make a Point…Then Scale Back

Higher Earnings,Retain Asset Sensitivity

&Never Make Less $ Than Today

Asset Sensitive: Fixed Rate CRE Funded Short







Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

The simulation assumes the execution of a $150MM swap.

The Bank receives a fixed rate of 5.74% and pays Prime (5.00%).

BASE SIMULATION AS OF 3/31/2019 $150MM Swap (Pricing as of 9/30/2018)


Down 200BP Steep Down 200BP Down 100BP Base Up 200BP Down 200BP Steep Down 200BP Down 100BP Base Up 200BP

79,135 80,232 82,733 83,579 91,232 81,745 82,842 84,593 84,689 90,842

66,349 72,597 78,751 84,731 101,219 70,459 76,707 81,361 85,841 99,329

60,618 71,299 76,410 85,453 105,136 64,728 75,409 79,020 86,563 103,246

57,093 70,555 74,604 86,177 108,445 61,203

110,317

74,665 77,214 87,287 106,555

54,568 70,024 73,067 87,241 112,207 58,678


74,134 75,677 88,351

Down 200BP Steep Down 200BP Down 100BP Base Up 200BP

1,860 1,110 -3902,610 2,610

2,610 1,110 -1,8904,110 4,110

4,110 4,110 2,610 1,110 -1,890

4,110 4,110 2,610 1,110 -1,890

4,110 4,110 2,610 1,110 -1,890

9,675

14,125

18,575

23,025

27,475

31,925



Base Down 200BP Steep Down 200BP Down 100BP Up 200BP

9,675

14,125

18,575

23,025

27,475

31,925




$150MM 5 Year Receive Fixed/Pay Floating Swap ( 9/30/18)

Receive Fixed @5.74%

Pay Floating Prime

@5.50%

5 year Term Insurance

Policy

(Spread TOO THIN?...Best Opportunities When Tight!!)

mailto:[email protected]%25







Year-1 NII

Year-2 NII

Year-3 NII

Year-4 NII

Year-5 NII

The simulation assumes the execution of a $150MM swap.

The Bank receives a fixed rate of 5.06% and pays Prime (5.50%).

BASE SIMULATION AS OF 3/31/2019 $150MM Swap (Current Pricing)


Down 200BP Steep Down 200BP Down 100BP Base Up 200BP Down 200BP Steep Down 200BP Down 100BP Base Up 200BP

79,135 80,232 82,733 83,579 91,232 79,975 81,072 82,823 82,919 89,072

66,349 72,597 78,751 84,731 101,219 68,689 74,937 79,591 84,071 97,559

60,618 71,299 76,410 85,453 105,136 62,958 73,639 77,250 84,793 101,476

57,093 70,555 74,604 86,177 108,445 59,433

108,547

72,895 75,444 85,517 104,785

54,568 70,024 73,067 87,241 112,207 56,908


72,364 73,907 86,581

Down 200BP Steep Down 200BP Down 100BP Base Up 200BP

90 -660 -2,160840 840

840 -660 -3,6602,340 2,340

2,340 2,340 840 -660 -3,660

2,340 2,340 840 -660 -3,660

2,340 2,340 840 -660 -3,660

9,675

14,125

18,575

23,025

27,475

31,925




9,675

14,125

18,575

23,025

27,475

31,925




$150MM 5 Year Receive Fixed/Pay Floating Swap

Insurance PolicyWe DO NOT Necessarily

Want This To Look Good!!!

(Current Pricing…Why Did I Wait!?)


Flat Yield Curve & Lower Term Rates

Loan pricing under downward pressure (25-50BP at minimum)

Elevated “non-rate” based competition: Terms & conditions remain

ALCOs questioning growing loans at thinner spreads

2019 Loan Growth Outlook Facing “Headwinds”

Prepayments/Refis a BIG issue

Treadmill speeding up (net/gross loans becoming a real challenge)

Concentrations becoming more of an issue

Credit concerns?

Current Lending Market Observations


Fixed Rate Lending: “What’s the Buzz” The “Matched Funding” Myth Pressures to Extend? Some Negotiation Strategies Revisiting Adjustable CRE Repricing Terms/Conditions Front Running Refinancing Risk Prepayment Penalties: “The Great Giveaway” Credit Lines: Fixed vs. Floating Relationship Managers vs. Lenders: What’s in a Name? Loan Pricing Models Tax law Changes: Credit Stress Testing/Capital Planning Why Changes in Derivatives Accounting Matter Some Comments on Residential/Consumer Lending

Lending Discussion Items


A Top of the List ALCO Issue

Fixed Rate Lending: “Just Say No”?

(And Why Not? What Is the Issue? FHLB Your Best Friend to Manage Risk)


Get Ahead of Upcoming Maturities/Re-pricings

What About Forward Rate Locks on Advances? Swaps?


CRE Repricings

Merit to Pro-Actively Renegotiating Prior to Contractual Reset?

Could any of these loans go elsewhere at reset? Can we pro-actively lock in at a higher rate (albeit lower than contractual

reset) and recast prepayment penalties/additional fees?


Derivative/Option Pricing

NOTE: Decline in 5 Year Rate 2.25% to 1.34%


Strategies for the Current Environment

Earnings and Interest Rate Risk (Asset Sensitive)

Managing Trade-Offs

Strategy Considerations:

Extend cash

Understand tolerance for added duration (how much? how far? What asset classes?)

Hold portion of fixed rate mortgages

Flexibility with commercial deals and structures

Mismatched leverage

Prioritize call and prepay protection

Interest rate swaps/ floors (New acct’g rules)

Strong bias for rising rates, but worst case exposure is falling rates

Best timing for “buying” protection?

Capacity to tolerate asset duration, but culturally conditioned to avoid asset duration

Short term funding “fits” my balance sheet, but Fed and market signally more rate hikes

Do the Right Thing! No Gambling

Common Strategy Issues/Challenges:


Strategies for the Current Environment

Earnings and Interest Rate Risk (Liability Sensitive)

Managing Trade-Offs

Strategy Considerations:

PAY NOW…Today’s Deposit Premium May be Tomorrow’s Cheap Cost of Funds

Limit growth in “long” assets to growth in “long” funds

Increase emphasis on acquisition of new checking relationships (shift in incentive plans)

Replace duration in bond portfolio with duration in loan portfolio

Increase education on using yield curve in loan negotiations

Increase usage of wholesale funding (marginal costs and control over maturities)

Loan Level Back to Back Swaps

Macro level Hedges (swaps and caps)

Degree and timing of deposit cost pressures unknown variable

Cost of maturity extensions is expensive, especially to incremental asset yields (how far should we go?)

Limited wholesale funding = limited opportunity/control for maturity extension

Lending landscape is predominately “fixed” rates

Reducing IRR will cause reduction in income (at time when growth is slowing)

Don’t over hedge and create risk to falling rates

Common Strategy Issues/Challenges:


Mirror, Mirror On the Wall, What’s the Smartest Decision of All?

1. Wholesale Funding least costly funding at the Margin (reliable) 2. Depositors NOT always Relationships, high cost form of borrowing! Unreliable3. Wholesale funding provides opportunities to increase earnings and provide

added value to customers, stakeholders, and ultimately increases value of franchise and helps attain mission of a community institution

4. Lack of spread does not mean lack of opportunity to better manage risk and take advantage of opportunities; consider MCOF and functional cost vs. deposits (hint: best opportunities when spread tightest)

5. Negative Regulatory Attitude by “some” but not Agency wide; must defend your position and have policies that make sense and support decision making

6. Excess Cash can be costly, put to better use and use FHLB as just in time inventory funds management.

7. FHLB access is a valuable too that should not be ignored! Hopefully today proved the point!

7 Great Reasons to Use Wholesale Funding

FHLB Des Moines and Darling Consulting Group...1 P e P 2 5 0 7 2 0 7 1 19 P Y P e 25 50 75 00 25 50...

Documents

Transcript of FHLB Des Moines and Darling Consulting Group...1 P e P 2 5 0 7 2 0 7 1 19 P Y P e 25 50 75 00 25 50...