Preparing for ALM ExamsMelissa R. Scott

VP, ALM Services

Vizo Financial l Copyright © 2019 l All Rights Reserved

DisclaimerThe information contained herein has been prepared for general informational purposes only and is not offered as and does not constitute legal advice or legal opinions. You should not act or rely on any information contained herein without

first seeking the advice of your legal counsel.

No copy or use of this presentation should occur without the permission of Vizo Financial. Vizo Financial retains all intellectual property interests associated with

this presentation. Vizo Financial makes no claim, promise, or guarantee of any kind about the accuracy, completeness, or adequacy of the content of the presentation

and expressly disclaims liability for errors and omissions in such content.

“Preparing for ALM Exams” discussed in this presentation is the current version with effective date of June 3, 2019.

The comments today are my own and not necessarily those of Vizo Financial or the Vizo Financial membership.

Policy

Read through policy

Identify areas for change/review

Policy

BRING UPDATES TO THE ALCO AND BOD

NOTE APPROVAL IN POLICY NOTE DISCUSSION AND CHANGES IN MINUTES.

COMMUNICATION AND DOCUMENTATION IS KEY.

EXAMINERS ARE LOOKING TO THE MINUTES TO ENSURE

ITEMS ARE DOCUMENTED.

Policy

Policy Review and

Approve

Liquidity Stress Test

Policy

Non-maturity

Stress Test

Assumption Review

Simulate new loan

promotion

Report parameters

INSTANTANEOUS OR LAG

SHOCK OR RAMP

PARALLEL OR NON-PARALLEL

Policy Limits

Minimum: +/- 300 bps *rate shock * static balance sheetNEV Sensitivity % ChangeNEV Ratio MinimumNII Sensitivity % Change

Additional considerations

NIM ROACapital

Policy Limits

Typical Policy Limit for NII -20%Does your board know what this means?State it as a dollar amount:

Current base case (flat rate) Net interest income $1.0 million

20% decline in NII policy limit -0.2 million

Net Interest Income in + 300 shock 0.8 million

ALCO Meeting

• Current product pricing• Financials• ALM Reporting

• Current Trends• Compliance

• Liquidity Reporting• Quarterly Stress Test

• What if scenarios• Budget

• New products• Liquidity Stress

All Meetings As Needed/Scheduled

Note items in the minutes. Pay attention to both regular reports and stress tests compliance limits.

Assumption Review

Review data files

Betas (Sensitivity)

Prepayments

Reinvestment Rates

Reinvestment Terms

Adjustable Framework

Growth

Assumption Review-Data Files

KNOW THE INFORMATION FROM YOUR DATA

KNOW WHAT IS BEING ADDED IN TO MODEL

Assumption Review - Betas

Betas reflect current

repricing behavior?

Valid caps and

floors?

+3 00 2.50%

+3 00 1.75%

+3 00 1.00%

+2 00 1.75%+2 00

1.25%

+2 00 0.75%

Assumption Review- Betas Understand the Impact

25

+1000.50%

50 75

+1000.75%

+1001.00%

Rate 0.25%

Assumption Review-Prepayments

Identify products with prepayments

Internal Source

When was it last updated

Correct in the model

External Source

When was it last updated

Is it reasonable

Assumption Review- Rates

Fixed/Adj products correct?

Adjustable attributes

valid or have product

structures changed?

Rates represent

current market?

GrowthStatic - Regulatory Dynamic - Manage

New Business

Shifts in balance sheet concentration

Participations

New products

Annual Stress Test

Non-Maturity Prepayments

Yield Curve Share Mix

Stress Scenario-Out of Policy

Validation

Purpose to make your assumptions and modeling more reliable for business decisions

Establish board approved frequency

Recommend 2-3 years or at board’s discretion

Back Testing RatesBalance sheet

Indirect Fees

PremiumDiscount

Servicing Fees

Purpose: To uncoverdiscrepanciesin the model

• Volume = (Difference in Actual vs. Projected Average Balance) * Actual Annualized Yield/ Annualization Factor

• Rate = (Difference in Actual vs. Projected Annualized Yield)/ Annualization Factor*Actual Average Balance

• Mix = (Difference in Actual vs. Projected Average Balance)* (Difference in Actual vs. Projected Annualized Yield)/ Annualization Factor

• Total Variance = Volume + Rate + Mix

• Variance % = Total Variance / Actual Interest Income

Nov 2018-Jan 2019 Actual Compared to Model Forecast October 2018

Base Case - Static Rates

Nov 2018-Jan 2019

Nov 2018-Jan 2019

Projected

Dynamic

12 month

Sources and Uses

Report

Share Deposits

Borrowing

Non-Member Deposits Brokered

Deposits

Loan Sales

Cash on Deposit

Inv. Sales

Inv. Maturity/

Repayment

Loan Principal Payments

Fee Income

Interest Income

Share With-

drawals

Loans Granted

Inv. Purchased

Paydown of

Borrowing

Fixed Assets

Purchased

Operating Expenses

Loans Purchased

Dividends

Sources and Uses of Funds

https://publishedguides.ncua.gov/examiner/Pages/Content/ExaminersGuide/Liquidity/CashFlows-Identify.htm

Primary

Cash and depositsCertificates of Deposit

and Unencumbered Investments with maturities not exceeding 90 daysCash inflow from loans

and investmentsCore Deposits

Secondary

Sale of investments classified as Available for SaleSell of loans or

participations in secondary marketCertificate of deposit

promotionsLine of credit with

CorporatesFHLB AdvancesBrokered Deposits

Emergency

Federal Reserve Discount WindowCentral Liquidity Facility

Liquidity Stress Testing

https://www.ncua.gov/newsroom/ncua-report/2016/margins-shrinking-effective-liquidity-management-critical

Loans

Liquidity Stress Testing

Shares

Stress Test – Option 1

* Based on NCUA Report July 2017

Stress Test – Option 2

Stress Test

Loan growth& Share decline

Modifying prepayment

speeds

Events limiting

contingent funding sources

* Based on NCUA Report July 2017

1st Quarter 2nd QuarterStatic Processing Static Processing

Policy Compliance Policy ComplianceDynamic Processing Dynamic ProcessingLiquidity Reporting Liquidity ReportingReview Policy Liquidity Stress Test

Note discussion and changes in the minutes Yield Curve Stress TestNote approval of the policy Assumption Review

Prepayment Stress Test Note discussion and changes in the minutesUpdate Prepayment Calculations Note approval of the policy

3rd Quarter 4th QuarterStatic Processing Static Processing

Policy Compliance Policy ComplianceDynamic Processing Dynamic ProcessingLiquidity Reporting Liquidity ReportingBack Test BudgetShare Mix Stress Test Non Maturity Stress TestUpdate approved assumption changes in the model Evaluate Validation schedule

As NeededSimulate significant new business lines or balance sheet shiftsAdd a liquidity Stress Test of liquidity becomes tight

ALM Annual Schedule

Resources

Prepayments

Back Test Template

ALM Annual Schedule

Contact

Melissa R. Scott, CPAVP, ALM Servicesmscott@vfccu.org

(336) 217-4831 (direct)