Download Emergency Economic Stabilization Act of 2008

Profitability in a Low to Negative
Interest Rate Environment
July 2016
Charles N. McQueen
McQueen Financial Advisors
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SEC Registered Investment Advisor
Asset Liability Management
Merger Valuations
Mortgage Servicing Rights Valuations
Municipal and Corporate Credit Reviews
Core Deposit Studies
Assumption Sensitivity Analysis
Prepayment Speed Analysis
Outline
• Current Interest Rate Environment
• Effect of Low to Negative Interest Rates
• What We Can Do to Enhance Profitability
Goal: Provide you with five take home
ideas to implement.
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Balance Sheet Management
Why the EESA was Created
Interest Rates
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US – 10 Year Treasury Yield
Why the EESA was Created
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Inflation – CPI ex F&E +2.20%
Why the EESA was Created
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Interest Rates
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Interest Rates
Why the EESA was Created
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Interest Rates
Why the EESA was Created
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Loan Growth
Why the EESA was Created
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
2011
2012
2013
2014
2015
Mar. 2016
Net Loans & Leases
Growth
2012
2013
5.78% 6.02%
2014
4.98%
2015
9.19%
3/2016 Anu.2016
0.84% 3.38%
FDIC Data
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Deposit Growth
Why the EESA was Created
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
2011
2012
2013
2014
2015
Mar. 2016
Total Deposits
Growth
2012
2013
4.73% 3.57%
2014
2.36%
2015
6.62%
3/2016 Anu.2016
1.81% 7.26%
FDIC Data
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5 Year US Treasury - Volatility
Why the EESA was Created
Source: Bloomberg
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Gross Domestic Product (GDP)
Why the EESA was Created
Q1 2016 = 2.10%
Avg. of 3.21% from 1948 to 2016
US Population growth rate of nearly 1.00%
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Interest Rates
Why the EESA was Created
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MFA Interest Rate Outlook
Why the EESA was Created
2008 prediction:
• Low interest rates for 10 years:
2016 Prediction:
• Low interest rates (2 more years on original)
• Low interest rates for another 5 years
• Black Swan Events
• Potential for negative rates (GDP revised to
1.90% by the White House this week)
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Economic Outlook
Why the EESA was Created
Current 10 year bond yields:
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US
Italy
Canada
UK
France
Germany
Japan
Switzerland
1.59%
1.25%
1.12%
0.83%
0.22%
0.00%
-0.24%
-0.60%
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Economic Outlook
Why the EESA was Created
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Economic Outlook
Why the EESA was Created
Current Economic Projections:
• Interest Rates
– Same
– Lower
– Negative
• Earnings
– Same
– Lower
• What can we do to help earnings?
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McQueen Financial Advisors
Why the EESA was Created
• We need to make decisions….
– During economic uncertainty
– During changing interest rates
– During uncertainty / Black Swan
• We need to focus on what we can control
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McQueen Financial Advisors
Why the EESA was Created
• What can we do to help earnings in Low to
Negative interest rates?
– Balance Sheet Management
– Interest Rate Risk Management
– Non-Interest Income
– Management Decisions
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Balance Sheet Management
Why the EESA was Created
Balance Sheet Management
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Balance Sheet Management
Why the EESA was Created
• What can we do to help earnings in Low to
Negative interest rates?
– Increase the size of the balance sheet
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Balance Sheet Management
Why the EESA was Created
• Size
Take Home Idea #1
– Bigger the better
– Borrow funds if you can make a spread
– Fully leverage your Capital
– Low cost growth
Case Study: Sell 1.00% yielding investments
or borrow at 0.60%
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Balance Sheet Growth
Why the EESA was Created
How to grow the balance sheet?
• Loan growth:
– Mortgage loans
– Business loans
– Other consumer loans
• In 5 years, what type of lending will
customers want?
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Lending
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Lending
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Loans and Leases to Deposits
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Balance Sheet Growth
Why the EESA was Created
• Investments
• Fills in what is left after loans…
• Maximize income vs. cash
• Low overhead cost to add balances
• Efficient based on spreads today
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Investments
Why the EESA was Created
• Buy bonds – Do not be sold…
• Optionality
• Calls – Lower income when called
• Steps – Do the same
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Investments
Why the EESA was Created
• Products:
• US Agency Bonds
• US Agency Mortgage Backed Securities
• Taxable Municipal Bonds
• Tax Exempt Municipal Bonds
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Municipal Bonds
Why the EESA was Created
Options:
• Taxable & Tax Exempt
• Well Rated – Moody’s & S&P
• Well Rated - MFRS
• Good Financials
• GO / GOUT / GOLT
• Schools / Utilities / General
Govt.
Recent Issues:
• Stockton
• San Bernardino
• Detroit
• Puerto Rico
• Soon - Illinois
• Soon - Chicago
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Balance Sheet Growth
• Liability Structure / Deposit Growth
• Non-maturity deposits
• Term deposits
• Borrowings
• Overnight
• Term
• Optionality
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Liability Structure
• Borrowing Preference: Where should I
borrow from first?
• FHLB
• Brokered CD’s
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Liability Structure
• What are you doing to make your
deposits more sticky?
• Remote deposit by scanner / phone
• Savings clubs / lottery
• Rewards
• Growing checking accounts?
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Liability Structure
FDIC 3/31/16 Page
QGB
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Balance Sheet Management
Why the EESA was Created
Interest Rate Risk Management
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Proper Duration
Why the EESA was Created
• Duration of Investments
Take Home Idea #2
– Do not make an interest rate bet
– Expecting a rate increase is making a bet
– Buying 10 year / 3 month call agency bonds is
making a bet
Case Study: What does your ALM report say
about your duration of assets?
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Maximization of IRR
Why the EESA was Created
• Current Position
• NII at no change = $9,770,000
• NII at +200 bps = $10,257,000 (or +500,000)
• Portfolio Duration = 3.5 Years
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Maximization of IRR
Why the EESA was Created
• New Position
• NII at no change = $10,270,000
• NII at +200 bps = $10,310,000
• Portfolio duration = 4.0 years
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ALM
Why the EESA was Created
Take Home Idea #3
• Introduction of new products:
• Process to select new products
• Determination on pricing
• Marketing and ALCO
• Product profitability – How…
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ALM
Why the EESA was Created
Product Profitability:
• Return of the product
• Competitive pricing
• Balance sheet mix
• Effective duration
• Prepayments
• Amortization
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Balance Sheet Management
Why the EESA was Created
Non-Interest Income
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Non-Interest Income
Why the EESA was Created
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Take Home Idea #4
Standard fee income
Debit / Credit card interchange income
Gain on sale of mortgages
Brokerage
Insurance
Case Study: The Little De Novo bank
that could write mortgages
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High Performers
Why the EESA was Created
• Non Interest Income
• Mortgage sales
• Investments (broker in the lobby)
• Insurance
• GAP
• Warranty
• Other
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Non-Interest Income
Why the EESA was Created
NCUA & FDIC 3/31/16
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Balance Sheet Management
Why the EESA was Created
Management Decisions
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Branches
Why the EESA was Created
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Take Home Idea #5
Branch Profitability
Technology
Number – Can we close a branch?
Location – Should we move a branch?
Structure – Should we close all drive up lanes
and make ATM lanes?
• Size - Branch or sales center?
• Would you sell a branch to Bank of America?
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People
Why the EESA was Created
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Good people lead to success
Management training program
Management succession
Motivation of the team
Efficiency / technology
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High Performers
Why the EESA was Created
• What are high performing people doing?
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Solid focus on loans
Non Interest income
Investments and leverage
Value from technology
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McQueen Financial Advisors
Why the EESA was Created
• Back in your office:
• Pick your view on interest rates & the economy
• Focus on what you can control
• Focus on your institution
• People
• Process
• Product
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Our View
Why the EESA was Created
• Low interest rates for the foreseeable future
• Lots of uncertainty
• How to enhance earnings in this
environment:
1. Balance Sheet Size
2. Correct Duration
3. Products that work and customers want
4. Non Interest Income
5. Make Tough Decisions
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Questions
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Contact Us
Why the EESA was Created
McQueen Financial Advisors, Inc.
Charles N. McQueen
26676 Woodward Avenue
Royal Oak, MI 48067
248-548-8400
[email protected]
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