navigating uncertainty creating a path forward · nim/growth headwinds continue to see offsets...

Navigating Uncertainty Creating a Path Forward

Todd Taylor, CPA, CFA

E-mail: [email protected]

Website: www.TaylorAdvisor.com

Phone: 502 412-2524

Omar Hinojosa, CFA



Phone: 502 814-5656

Rate Climate and ALCO/NIM

COVID Challenges for Managing the Balance Sheet

Capital and Liquidity Take Center Stage

How to Navigate Uncertainty: Prepare for the Future

Position Your Balance Sheet to Protect Earnings

3

AGENDA

Federal Reserve lowers rates 150 bps in 13 days

3mo Treasury Bill Briefly dips below 0.00%

10 Yr Treasury Yield Briefly dips below 0.50%

30 Yr Treasury Yield Briefly dips below 1.00%

Yield curve today is low with some slope

4

RATE CLIMATE

April 2019

June 2020

TREASURY RATES

5

NIM/Growth Headwinds Continue to See Offsets

– United Bankshares, Inc.

Weaker NIM Helped by Lower LLP and Higher Loan Sale Fees

– BankUnited, Inc.

3Q19 1st Look: Added Wholesale Leverage to BS, NIM Guide Moves Lower

– Webster Financial Corp.

NIM Pressure Unavoidable, Expenses and Fee Income Support Higher EPS

– 1st Source Corporation

Lower NIM and Larger LLP Offset Strong Fee Revenues

– First Guaranty Bancshares

3Q19 results Mostly Good, but Trimming estimates on Margin Pressure

– Cathay General Bancorp

6

EQUITY RESEARCH HEADLINES

Interest Income (Earning Asset Yields)

Interest Expense (Cost of Funds)

Net Interest Income (NII) Balance Sheet Management:Primary Focus

Other Income

Operating Expense

Taxes

Net Income

7

Net Income Before Taxes

BASIC INCOME STATEMENT

Source: S&P Global Market Intelligence, Data for all banks Nationally <$15B as of 12/31/19

8

2.92

3.86

4.64

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

Net Interest Margin

10th Percentile Median

90th Percentile

0.71

0.87

0.95

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

NII Dependency

10th Percentile Median

90th Percentile

The more net interest income dependent your institution, the more NIM will drive earnings

NII DEPENDENCY AND NIM AMONG ALL BANKS NATIONALLY

8

9

Improved ALCO

Process (NII)

Higher Profitability

(NIM)

Maximizing Shareholder Value

>

>

BENEFITS OF A STRONG ALCO PROCESS

9

WHAT IS YOUR INSTITUTION’S

NET INTEREST INCOME DEPENDENCY?

NET INTEREST MARGIN?

10

Performance and Balance Sheet Snapshot - 2020Q1

National Bank of Indianapolis Strategize Prosperity

107 North Pennsylvania Street Indianapolis, IN 46204 700 N. Hurstbourne ParkwayLouisville, KY 40222

Performance Rankings www.tayloradvisor.com

Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank

Yield on Investments (FTE) 2.15 2.61 9%

Yield on Total Loans 4.40 5.02 13%

Earning Asset Yield (FTE) 3.45 4.41 3%

Interest Expense to Avg. Earning Assets 0.51 0.82 20%

Net Interest Margin (FTE) 2.95 3.60 11%

Return on Average Assets 0.86 0.96 39%

Net Interest Income Dependency Ratio 0.79 0.82 33%

Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank








Earning Asset Mix and Balance Sheet Positions

Asset Size ($000) 2,256,064 Pledged Securities (% of Portfolio) 37%

Net Loans ($000) 1,413,543 63% Liquidity Ratio 30%

Security Portfolio ($000) 410,588 18% FHLB Advances and Brokered CDs ($000) 0

Cash and FFS ($000) 352,974 16% Cost of Funds (% of Average Liabilities) 0.48%

Municipals (% of Portfolio) 64,628 16% Tier 1 Capital 180,817

MBS (% of Portfolio) 116,817 28% Tier-1 Leverage Ratio (%) 7.97

CMO (% of Portfolio) 147,014 36% Total Risk Based Capital 197,939

Agencies (% of Portfolio) 76,785 19% Total Risk-Based Capital Ratio (%) 12.81

Other Securities (% of Portfolio) 5,344 1% Municipals (% of Total RBC) 33%

Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix

Investment Portfolio

Liquidity and Funding

Capital

National Bank of Indianapolis versus UBPR Peer Group*

National Bank of Indianapolis versus Indiana Banks

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Yield on Investments (FTE) Earning Asset Yield (FTE) Net Interest Margin (FTE)

Performance Rankings

National Bank of Indianapolis UBPR Peer Group Avg. Indiana Bank Avg.

11





Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




A. Regulatory Appeasement

B. Profit Improvement

C. Setting Deposit Rates

D. Meet Audit Requirements

0

WHAT IS THE PRIMARY OBJECTIVE OF YOUR ALCO MEETING?

12

From a Best Practice Standpoint the main focus should be to

drive profitability, the secondary focus should be satisfying

auditors and regulators.

B. Profit ImprovementA. Regulatory Appeasement

C. Setting Deposit Rates D. Meet Audit Requirements

13

ANSWER:

14

Position Assessment

Capital Liquidity

Interest Rate Sensitivity

Investments

POSITION ASSESSMENT

15

16

▪ Study the Past

▪ Monitor the Present

▪ Prepare for the Future

ALCO BEST PRACTICES

16

17

▪ Where were we?‒ Trend Analysis

‒ Historical Ratios

‒ Peer Comparison

‒ Balance Sheet Mix

‒ Rate Movements

‒ Spread Changes

▪ Reflect‒ What did we do right?

‒ What did we do wrong?

‒ Were our strategies effective?

‒ How did environment change?

STUDY THE PAST

17

18

▪ Where are we?‒ Position Assessment

‒ Net Interest Margin Dissection

‒ Competition Analysis

‒ Word-Problem Approach

‒ Re-focus on Objectives

▪ Reflect‒ Loan Demand vs. Deposit Growth

‒ Rate Climate

‒ Current Profitability (or not!)

‒ Resources: Loan/Deposit Officers

MONITOR THE PRESENT

18

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Min Max Median

4.50%

4.25%

5.00%

4.75%

Average Earning Asset Yield 5.02 4.92 4.60 4.14

Source: 12/31/19 Call Report data from all Banks Under $15 Billion in Assets.

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

High 14.55 21.53 33.00 488.09

Median 11.16 17.93 26.14 45.29

Low 0.00 14.56 21.53 33.00

MONITOR THE PRESENT LIQUIDITY RATIO DISTRIBUTION

4.00%

19

Stimulus Checks, PPP forgiveness,

Soft Loan Demand, Consumers not Spending20

Biggest financial shock since the Great Recession

Stay-at-home provisions increasing credit risk from behavior changes

Coronavirus Loan Considerations: Modifications, Deferrals, Forbearance (Commercial/Mortgages)

Potential for lending opportunities via SBA/CARE Act/Paycheck Protection Program loan application.

Credit risk premium increasing (Bond Credit Spreads Widen – Credit Risk Increased)

Blend NIM compression with Asset Quality Issues/Potential Capital Eroding

21

COVID 19 HIT – CHANGES IN CLIMATE/INDUSTRY

22

▪ Where could we go?‒ Accountability

‒ Review Minutes: Action Items, Strategies

‒ Tactical Forecasting‒ Loans vs. Deposit Projection

‒ Liquidity Flows

‒ Stress Testing‒ Capital: Credit Deterioration

‒ Interest Rate Risk: Higher/Different Betas

‒ Liquidity: Reduced Access to Funding

‒ Securities: Cash Flow Volatility, Duration

‒ Strategic Forecasting

PREPARE FOR THE FUTURE

22

23

PREPARE FOR THE FUTURE CAPITAL STRESS TEST

How would your institution react if…

● Loan concentrations in high risk sectors exceed guidelines

● Asset quality deteriorates to historically stressful levels

● Charge-offs increase

● Dividends become restricted

● Retained earnings fall (or become negative!)

● Capital levels decline, leading to regulatory criticism

What tools do you have at your institution?

● Quantify and discuss capital adequacy

● Growth Stress Testing

● Credit Stress Testing

● Comparison versus a historically stressful period (and higher)

● Measuring the impact of credit loss on capital

● Scenario Analysis – mild and major recession

23

24


24

CHALLENGES

Some cash flow interruption may become permanent

Balance sheet growth pressuring capital ratios from increased loan funding & deposits

Margin compression with higher provision expense increasing risk to capital levels

25

CAPITAL

STRATEGIES

Stress testing capital to account for heightened credit risk and balance sheet growth.

● Growth against your will – Lines of credit draws, payment deferrals, deposits

Be aware of additional sources of capital: equity offering, subordinated debt, holding company loan

26

PREPARE FOR THE FUTURE LIQUIDITY STRESS TEST

How would your institution react if…

● FHLB Capacity was significantly reduced

● Brokered deposit lines were shut off

● Deposit run-off exceeded historical norms

● The institution became subject to deposit rate caps

What tools do you have at your institution?

● Quantify and monitor liquidity position

● Contingency Funding Plan: How would you cure a shortfall?

● Early Warning Indicators

● Prevent liquidity crisis before being subject to restrictions

26

27


27

CHALLENGES

Potential for Lingering Cash Flow Disruption

● Loan payment deferrals, draws on credit lines

● Not all borrowers will be able to recover

- Increase in non-performing assets

- Lowering borrowing capacity at FHLB and FRB

28

LIQUIDITY

STRATEGIES

Know Your Stress Tested Positions

● Where to get funding and at what cost (Present & Future)

Increase Access to Off Balance Sheet Liquidity

● Pledge loan portfolios to FHLB & FRB before investments

● FHLB & FRB offer attractive rates, some as low as 0bps.

30


30

31

CHALLENGES

Exposures to falling interest rates, with majority of institutions being asset sensitive

Loan Pricing - Customers asking for rate modifications (some are not warranted)

Deposit Pricing – Ability to reprice time deposits, some institutions are slow to adjust

STRATEGIES

Balance sheet Management

● Protect against net interest margin compression in a low rate environment (mix, selection, pricing)

● Check All Assumptions, Loan floors, etc.

Loans & Deposits

● Make sure to appropriately price credit risk as credit spreads widen (maintain discipline)

● CD Specials should be benchmarked off of wholesale funding curves

● Shorter CD maturities will allow for repricing lower in 2021

31

INTEREST RATE RISK CONSIDERATIONS

32


32

CHALLENGES

Cost of Staying in Cash is expensive

Premium acceleration on certain mortgage products (Refi wave)

Fed is buying securities and distorting prices, especially MBS

Lack of cash flow diversification

33

INVESTMENTS

STRATEGIES

Know the Different between Asset Class and Sectors

● Not all Mortgage Back Securities or Municipal Bonds are the same

Investment Best Practices

● Investment Strategies – whole bank, bar bell strategy (o-o), high quality municipals

● Investment Mix – Preaching Diversification

● Security Selection – Relative Value is constantly changing

● Trade Execution – Don’t overpay

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

10th Percentile Median 90th Percentile

2.01

2.57

3.39

2.19

2.64

3.24

<$1B $1B - $15B

Source: S&P Global Market Intelligence.

INVESTMENT YIELD STATISTICS – GRAPHICAL

PERSPECTIVE

34





Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




35





Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00








Metric

National Bank of

Indianapolis

UBPR Peer

Group Average**

Percentile

Rank








Metric

National Bank of

Indianapolis

Indiana Bank

Average

Percentile

Rank


















Net

Interest

Margin

Dissection

Net

Interest

Margin

Dissection

Earning Asset Mix



Capital



1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00




Balance Sheet MixCashInvestmentsLoans

Loan Mix1-4 FamilyCommercialConsumerFixedFloatLoan Marketplace

Liquidity PositionFHLB Borrowing CapacityCore Deposit StabilityPledging Requirements

Tax PositionNet Operating LossAMT

Interest Rate Risk PositionAsset/Liability Sensitivity

Bank 1

10%30%60%

80%10%10%90%10%Flat

HighStableHigh

YesNo

Liability

Bank 2

5%50%45%

20%40%40%20%80%Flat

ModerateStableNone

NoNo

Asset

Bank 3

0%20%80%

35%45%20%50%50%

Strong Growth

NoneVolatileNone

NoYes

Neutral36

HOW ARE BANKS DIFFERENT?

37

Economy and Rates

Strategies

Loans

Deposits

Investments

Capital

Liquidity

Funding

Strategies

OBJECTIVES AND STRATEGIES

38

A. Above AverageB. AverageC. Below Average

0

HOW WOULD YOU RATE YOUR ALCO STRATGIES WHEN IT COMES

TO DRIVING PROFITABILITY AND NAVIGATING THE FUTURE (RISKS)

39

Follow Up Items

Request a performance SNAPSHOT for your Bank/CU client or prospect

Call or email if you have questions

Institutions who would like protect on improve:

➢Regulatory Crisis Management –Liquidity/Capital

➢Earnings Enhancement -Net Interest Margin & Investment Portfolio

Ebrief Blast

➢4 part Mini Series -Liquidity, Capital, Investments & Interest Rate Risk

41

T

Todd Taylor, CPA, CFA



Phone: 502 412-2524

Omar Hinojosa, CFA



Phone: 502 814-5656

Thank You!

navigating uncertainty creating a path forward · nim/growth headwinds continue to see offsets...

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