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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
Page 2
The Boss
Page 3
• 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
Page 4
How do you think about “Banking”?:
Big Picture Thinking
Page 5
Is this your lobby?
Page 6
Or this?
Page 7
Who Should I Market to?
Page 8
What ages do you focus on? Do you focus?
Who Should I Market to?
Page 9
57%
Current Interest Rates & a few Projections
McQueen Financial Advisors
Page 10
Beaver Island
Page 11
Beaver Island
Page 12
• 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
Page 13
Source: Bloomberg
Interest Rates
Page 14
Interest Rates
Page 15
Inflation
Page 16
Wage Based Inflation
Page 17
Stock Market
Page 18
Home Prices
Page 19
Quantitative Easing Portfolio Size:• $ 4.5 Trillion
Monthly Maturities:• Nearly $50 billion
Monthly Purchases:• $10 billion
FOMC Open Market Activities
Page 20
Contracting by maturities not being reinvested. Nothing is being sold.
Debt
Page 21
• April 2018 – Largest Government surplus ever of $214 billion• GDP Growth is key
Interest Rates
Page 22
2018 Thoughts:• Charley boat index• Commercial loan index• Brew pub funding• Home prices• Ted’s pool index
MFA Interest Rate Outlook
Page 23
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
Page 24
Deposits
Mackinac Island
McQueen Financial Advisors
Page 25
Mackinac Island
Page 26
Mackinac Island
Page 27
• 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
Page 28
• 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
Page 29
2005 – 2011 Liabilities & Cost
Page 30
2011 – 2018 Liabilities & Cost
Page 31
Deposits & Cost
Page 32
• 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
Page 33
• 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
Page 34
• 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
Page 35
• Solutions for sale
• Have you tried?• Kasassa• New higher yield accounts• Money market aggregators• Brokered CD’s
Deposit Generation
Page 36
• A focus, commitment and success of core deposit generation will be the key to success over the next five years.
McQueen Financial Advisors
Page 37
Liquidity
South Bass Island
South Bass Island
Page 38
South Bass Island
Page 39
• 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
Page 40
• People are spending money: – Restaurants are full– Lots of new toys– Lending is increasing
• People are not saving money
Liquidity
Page 41
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
Page 42
• Sources– Cash– Investments– Loan sales– Brokered deposits– Overnight borrowings availability– Term Borrowings availability
Liquidity
Page 43
• 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
Page 44
Home Values
• Volume of new homes is still low• Dollars spent is way up• Value of houses is up
Liquidity
Page 45
• Home values are significantly up• Lots of mortgages to pledge • A strong liquidity option is FHLB advances
FHLB Advances for Liquidity
Page 46
• 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
Page 47
• 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
Page 48
• Major exam focus
• What should you do?– Monthly liquidity forecasting (spreadsheet)– Quarterly liquidity testing– Grow your available borrowings
Liquidity
Page 49
• 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
McQueen Financial Advisors
Page 50
CECL
Duck Island
Duck Island
Page 51
Duck Island
Page 52
• 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
Page 53
• CECL - Current Expected Credit Losses− Implementation is delayed
• CECL – Dates:− PBE = 12/31/20− Non PBE = 12/31/22
CECL
Page 54
• 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
Page 55
• 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
Page 56
• CECL− Understand the theory− Know your solution (how your bank is
going to do CECL)− Loan product profitability
Balance Sheet Management
McQueen Financial Advisors
Page 57
Net Interest Margin & More
Page 58
Balance Sheet Management
Page 59
• Non-Interest Income Sources− Mortgage sales− Insurance − Trust
Balance Sheet Management
Page 60
Strategies for a flat yield curve:
• Loans− Good loan mix− Correct loan to deposit ratio− Plan for credit losses increasing− Understand your loan profitability
Balance Sheet Management
Page 61
Strategies for a flat yield curve:
• Investments− Correct duration− Staying fully invested− Corporate bonds− Taxable municipal bonds
• Municipal & corporate credit reviews
Balance Sheet Management
Page 62
Strategies for a flat yield curve:
• 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
Page 63
Questions
McQueen Financial Advisors, Inc.
Charles N. McQueenPresident & CEO1239 Anderson Road Clawson, MI 48017
charley@m-f-a.com248-548-8400
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