Police Officers’ Credit Union Conference

Intermediate ALM Strategies

Agenda

FoundationStructure of the Balance Sheet

The Role of the ALCO in Balance Sheet Management

Balance Sheet Risk

ALM StrategiesThe Landscape

The Role of Strategic Planning in the Structure of the Balance Sheet

Balance Sheet Optimization

Structure of the Balance Sheet

Assets

Discretionary

Able to determine duration, liquidity and credit

Non-Discretionary

Duration, Liquidity and credit are determined by the member

Liabilities

Discretionary

Duration is determined by the credit union

Non-Discretionary

Member determines duration

The Role of the ALCO in Balance Sheet Management

GovernancePolicies

Exposure Limits

Reporting

Strategic

Risk ManagementModeling

Compliance

Balance Sheet Risk

Credit Risk

Interest Rate Risk

Concentration Risk

Liquidity Risk

Vendor Risk

Credit Risk

OperationalPolicies, Standards and Procedures

UnderwritingAppropriate credit risk assessment

Predictive credit risk modeling

Risk based pricing / Risk bases capital

ServicingProactive credit risk modeling

Interest Rate Risk

Basis RiskIndex pricing disparity between assets and liabilities i.e. LIBOR vs FF

Spread RiskSpreads tighten and loosen during different rate and economic cycles

Duration RiskReprising disparity between assets and liabilities

ConvexityA function of mortgages

Option RiskA function of caps, floors and call features

Concentration Risk

Managing a portfolio of risk

Borrower

Predictive modeling

Sector

Local and macro economics

Vendor

Fraud prevention

Loan Officer Underwriter

Training and fraud prevention

Liquidity Risk

Funding Availability

Seasonal cash flows vs. Loan demand

Contractual cash flows

Funding cost

Proactive cash flow management to

minimize cost

Leverage

Manage available lines pf credit and

borrowings

Vendor Risk

Loan purchasing / participationCredit quality

Fraud

Loan ProcessingInformation Security

Fraud

Loan ServicingRegulatory and legal risk

Balance Sheet Management Landscape

InnovationElectronic Wallet

Credit Card vs Line of Credit

Mobile Banking

Member expectationsInstant access

Instant availability

Simple but powerful

Balance Sheet Management Landscape

Regulatory

Beyond Risk Based Capital/Capital Allocation

Risk Adjusted Return on Capital

RARO

Interest Income-Interest Expense-Operating Cost-Expected Losses

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Capital Allocation

The Role of the Strategic Plan in Asset/Liability Management

Balance Sheet Management Enterprise Approach

(Driven by Member Needs)

Vision Statement

Financial Goals

Predictive Modeling

Ownership

Portfolio Level risk Management

Balance Sheet Management Transaction Approach

( Driven by Competition )

Do what the banks in the area are doing

Do what the other credit unions are doing

Financial engineering

Balance Sheet Optimization

Data Mining

Know your Member

Demographics

Need

Convert Data to Smart Data

Meet your Members were they are

Study Member Patterns

Balance Sheet Optimization

DriversCapital

Liquidity

Policy

Regulatory Constraints

Accounting

ALLL

Stress testing

Mark to Market

Balance Sheet Management

Questions & Answers