/Deborah%20Rightmire_Tools%20for%20Organizing

Tools for Organizing An Effective ALM Process

Presented by: Deborah L. Rightmire, CCUE Vice President Asset/Liability Management Texas Credit Union League

Goals of Asset/Liability Management ď °

Capital Adequacy Adequate level of net worth to insure the credit union’s solvency.

Goals of Asset/Liability Management ď °

Earnings Stability Income must be sufficient to cover: interest expense operating expense loan losses capital contribution

Goals of Asset/Liability Management ď °

Liquidity Management Adequate liquidity to meet normal and seasonal loan/share flows and a contingency plan when liquidity approaches inadequate levels.

Goals of Asset/Liability Management ď °

Interest Rate Risk (IRR) Control interest rate risk to avoid a significant decline in earnings and net worth due to changing interest rates.

Uses of Cash Loans  Share Withdrawals  Expenses  Share Draft Clearings  Credit Card Clearings  Fixed Asset Acquisition  Investments 

Sources of Cash Member Deposits  Non-Member Deposits  Borrowed Money (Notes Payable)  Early Withdrawal of Investments  Income from Loans, Investments, & Fees  Sale of Assets 

Rules & Regulations NCUA Letter 99-CU-12 Real Estate Lending & Balance Sheet Risk Management NCUA Letter 00-CU-05 Investments in Brokered Certificates of Deposits NCUA Letter 00-CU-10 Asset/Liability Management Examination Procedures NCUA Letter 01-CU-01 Prompt Corrective Action (PCA)

Rules & Regulations NCUA Letter 01-FCU-04 Broker Registration Short-Term Investments NCUA Letter 01-CU-08 Liability Management-Highly Rate Sensitive & Volatile Funding Sources NCUA Letter 01-CU-19 Managing Share Inflows in Uncertain Times NCUA Letter 02-CU-05 Examination Program Liquidity Questionnaire

Rules & Regulations NCUA Letter 02-CU-09 Allowance for Loan & Lease Losses NCUA Letter 03-CU-04 CAMEL Rating System NCUA Letter 03-CU-11 Non-Maturity Shares and Balance Sheet Risk NCUA Letter 03-CU-15 Real Estate Concentrations and Interest Rate Risk Management for CUs with Large Positions in Fixed-Rate Mortgage Portfolios

Rule & Regulations NCUA Letter 04-CU-04 Investment Safekeeping Due Diligence NCUA Letter 10-CU-18 Investment Due Diligence NCUA Letter 10-CU-14 Strengthening Funding and High Risk Mgt NCUA Letter 10-CU-06 Interagency Advisory on IRR Mgt

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis Monthly Ratio Analysis

Issues Addressed in an ALM Policy 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Philosophy and Purpose Asset/Liability Management Committee (ALCO) Authority to Adjust Dividend and Loan Rates Borrowing Authority and Activation Early Withdrawal Penalties Rate Risk Management Real Estate Lending Issues Liquidity Monitoring Capital Goals Annual Review by Board

Issues Addressed in an ALM Policy 1)

Philosophy and Purpose 



Guide management and Board in lending, investment, dividend, expense control and service pricing decisions Insure spreads and pricing policies are sufficient to support net worth goals



Maintain appropriate liquidity levels



Avoid undue interest rate risk (IRR)

Issues Addressed in an ALM Policy 2)

Asset/Liability Management Committee (ALCO) 





ALCO structure, Board and Staff representation, chair/vice-chair, quorum Establish regular meeting times and proposed agenda for formal meetings Maintain minutes of formal meetings for Board and Examiner review

Issues Addressed in an ALM Policy 3)

Authority to Adjust Dividend and Loan Rates ď °

ď °

Authority and parameters to adjust deposit rates Authority and parameters to adjust loan rates

Issues Addressed in an ALM Policy 4)

Borrowing Authority and Activation. 





Appoint those able to activate lines of credit Establish aggregate amount as a percent of net worth Maximum time period

Issues Addressed in an ALM Policy 5)

Early Withdrawal Penalties 





Punitive enough to control cost of deposits Acceptable circumstances for waiver of penalty Procedures for withdrawal of dividends

Issues Addressed in an ALM Policy 6)

Interest Rate Risk Management 

How measured: GAP, equity duration, NEV, or income simulation



Policy limits, frequency and responsibility



Non-compliance

Issues Addressed in an ALM Policy 7)

Real Estate Lending Issues 





Maximum credit risk exposure to aggregate real estate loans relative to net worth Limits on fixed-rate RE loans Limits on first mortgage loans that do not qualify for resale in the secondary market

Issues Addressed in an ALM Policy 8)

Liquidity Monitoring 

Monthly liquidity analysis



Set minimum acceptable level of liquidity



Contingency plan when minimum liquidity level is imminent

Issues Addressed in an ALM Policy 9)

Capital Goals ď ą Net worth ratio to be maintained or achieved and net ROA floor ď ą Time frame (if any) to achieve goal

10)

Annual Review of Policy

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis Monthly Ratio Analysis

Issues Addressed in an Investment Policy 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Philosophy and Purpose Policy oversight Investment Officers Permissible and Prohibited Investment Activities Investment Operating Procedures Criteria for Accounting Classifications (FAS 115) of Securities Investment Portfolio Liquidity and Rate Risk Investments at Financial Institutions Corporate Credit Unions (CCUs) Grandfather Clause Annual Review of Policy

Issues Addressed in an Investment Policy 1)

Philosophy and Purpose ď °

SLY Principal Safety Liquidity Yield

Issues Addressed in an Investment Policy 2)

Policy oversight: 

ALCO



Investment Committee



Senior Management

Issues Addressed in an Investment Policy 3)

Investment Officers 



Primary – activities authorized by policy Secondary – restricted authority Board-approved investment advisor (if any)

Issues Addressed in an Investment Policy 4)

Permissible and Prohibited investment Activities ď ą

Must be compliant with either federal or state CU acts and rules & regulations (NCUA Rules and Regulations 703)

ď ą

List specific activities that may be legal by statute and R&R but prohibited for this credit union

Issues Addressed in an Investment Policy 5)

Investment Operating Procedures   



Maximum investment maturities, monthly dividend checks Activities with Board-approved broker/dealers and safekeeping agents Credit analysis (at time of purchase and at least annually thereafter) and documentation on all due diligence testing Aggregate percentages of net worth for embedded investments, including callables

Issues Addressed in an Investment Policy 6)

Criteria for Accounting Classifications (FAS 115) of Securities  Held to Maturity (HTM)  Available for Sale (AFS)  Trading Account

Issues Addressed in an Investment Policy 7)

Investment Portfolio Liquidity and Rate Risk ď ą Should be addressed in ALM Policy and referenced in the Investment Policy

Issues Addressed in an Investment Policy 8)

Investments at Financial Institutions (Banks, Thrifts, and other CUs) ď ą

Is credit exposure limited to federal deposit insurance?

ď ą

If not, set all exposure limits relative to net worth

Issues Addressed in an Investment Policy 9)

Corporate Credit Unions (CCUs) 

Investments only in Board-approved CCUs



Uninsured aggregate limit per Boardapproved CCU as percentage of net worth (Max typically 50 % net worth without acceptable credit rating) Operates under NCUA Rules and Reg 704 and examined by NCUA Annual review of each approved CCU’s annual report, auditor report, investment portfolio concentrations

 

Issues Addressed in an Investment Policy 10)

Grandfather Clause Allows credit union to hold and monitor investments that were permissible in prior periods but no longer permissible under the current policy.

11)

Annual Review of Policy

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis Monthly Ratio Analysis

ALCO 1)

Establish, by position, members of the ALCO. Include both board and staff members whenever possible. Establish Chair, Vice Chair, and quorum. Qualify quorum to include at least one member from each group.

ALCO 2)

Establish format and timetable for training for ALCO members.

3)

Set standard ALCO Agenda for monthly meeting. Develop a format that includes attendees, reports reviewed, analysis completed and decisions made or recommendations made to the Board.

4)

Keep written minutes of all ALCO meetings.

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis Monthly Ratio Analysis

Liquidity Analysis 1)

Develop Liquidity Analysis to support minimum liquidity needs, determine potential seasonality of deposits and loans, and possibly assist with investment strategies.

2)

Establish funding sources for contingency plan when liquidity drops below minimum levels.

See earlier slide “Sources of Cash�

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis

ď ą Monthly Ratio Analysis

Monthly Ratio Analysis Determine the ratios and formulas necessary for a Monthly Ratio Analysis.

These include:

Monthly Ratio Analysis C – Net Worth A – Delinquency Net Charge Offs/Average Loans E - Asset Yield Cost of Funds Spread Net Operating Expense Ratio Operating ROA Net Charge Offs (or Provision Expense)/ATA Net ROA Loan Mix L – Repriceable Gap Ratio

ALM Checklist Asset/Liability Management Policy Investment Policy ALCO (Asset/Liability Management Committee) Liquidity Analysis Monthly Ratio Analysis

Other Tools



Due Diligence



ALCO Agenda



Standard ALCO Packet

Due Diligence 

NASD Member Firm (www.nasdr.com) CRD number, address, type of business, legal status, registrations, disclosure events



NASD Broker (www.nasdr.com) CRD number, full name, employment history, registrations, disclosure events



Depository Institution (www.fdic.gov) Financial and Performance Ratios

ALCO AGENDA     

Review/approve minutes of last meeting Review current rates Review loan and deposit changes Review ROA, spread, NOER, capital contribution Discuss:  Investment maturities within 90 days  Anticipated loan demand  Liquidity needs  Investment strategies

ALCO AGENDA       

Review loan and deposit rates Review competitor’s loan and deposit rates Review investments placed during the past month Month-end aggregate investment exposure Review investment “watch list” Special agenda items Confirm time and date of next ALCO meeting

STANDARD ALCO PACKET ORGANIZATION MEETING     

Basic financial statement Primary ratios Most recent NCUA Letter Relating to the CAMEL Rating System Strategic Plan Glossary of Terms

STANDARD ALCO PACKET MONTHLY       

Basic financial statement Primary ratios Investment Report Deposit maturity repricing schedules Liquidity Analysis List of current loan and deposit rates Competitive rate comparisons for loan and deposit rates

STANDARD ALCO PACKET 

Budget and variance amounts with explanations. (quarterly)



Copy of CU’s long range plan with established goals. (quarterly)



Information on due diligence testing of brokers & firms. (at least annually, more frequently if significant amounts are placed with one broker or firm)

Tools for Organizing An ALM Process Presented by: Deborah L. Rightmire Vice President Asset/Liability Management Texas Credit Union League 1.800.442.5762 Ext. 6496 drightmire@tcul.coop www.tcul.coop Credit Unions Tools and Services Asset/Liability Management ALM Tools login: alm1234