Managing Liquidity and Stress Testing Arizona AFP, May 18, 2016 Brian Peterson, CTP Treasury Strategist, Arizona Federal Credit Union

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 2

My Background Arizona Native Chess Champion Favorite Game: Acquire Newly Created Positions 3

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 4

ALM = Balance Sheet Management Adequate earnings in changing interest rate environments (Managing Risk). Stable or increasing net interest margin. Adequate liquidity. Acceptable level of net worth. 5

ALM Policy Design Pros/Cons of one versus multiple policies. Static versus Dynamic Metrics. Asset Liability Committee (ALCO). Board Presentations and Minutes. 6

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 7

Interest Rate Risk (IRR) Impact on earnings and net worth from changes in interest rates. – Timing differences in asset and liability repricing. – Prepayments and rate caps. – Unexpected changes to the yield curve. 8

IRR Metrics Earnings at Risk (EaR) – Instantaneous Rate Shocks (i.e., +/- 300 bps). – No more than 15% changes to earnings. Net Economic Value (NEV) at Risk – Incorporates all cash flows over estimated life of all balance sheet positions. – No more than 30% changes to NEV. 9

Interest Rate Sensitivities GAP Ratio = Rate Sensitive Assets/Rate Sensitive Liabilities. Deposit pricing and sensitivity assumptions are critical. > 1 = Assets are more sensitive than liabilities. Revenues likely to increase as interest rates increase. < 1 = opposite of the above. 10

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 11

Liquidity Risk Regular monitoring of – Current and future cash flows. – Balance Sheet Mix. – Borrowing Capacity. 12

Increasing Liquidity Increase deposit balances. Increase available credit lines. Sell assets, including investments and loans. 13

Key Liquidity Ratios Borrowed Lines/Total Assets< 15% Total Loans/Total Assets< 60% Total Loans/Total Deposits< 80% Total Deposits/Total Assets> 60% 14

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 15

Contingency Funding Plan for Risk of Crisis Sufficient funding available in crisis situations. – Inability to fund asset growth. – Inability to renew or replace liability funding. – Unexpected deposit withdrawals. – Market value changes to certain asset classes. – Operational or local disasters. 16

Liquidity Severity Levels Strong (Level I) Adequate (Level II) – Short Term Funding Event Weak (Level III) – Long Term Moderate Funding Crisis Developing Critical (Level IV) – Long Term Severe Funding Crisis 17

Stress Test Scenarios Deposit Runoff Prepayment Speeds Interest Rate Shock Available Borrowing Lines Increased Loan Defaults 18

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 19

Concentration Risk Risk of a significant loss due to concentrating entirely on one or a few issuers, or concentrating on a single type of investment or loan product. – Asset Classes. – Member Business Loans (MBLs). – Loan Participations. – Loans to single borrower. – Investments with high credit risk (i.e., private label). 20

Concentration Risk Limits % of Assets or multiple of Net Worth Auto Loans 1 st Mortgage Loans 2 nd Mortgage and HELOC Unqualified Mortgage Loans Unsecured Loans Credit Cards 21

Agenda 1.My Background 2.Asset Liability Management 3.Interest Rate Risk 4.Liquidity Risk 5.Contingency Funding Plan 6.Concentration Risk 7.Q&A 22