Police Officers’ Credit Union Conference Intermediate ALM Strategies

Agenda Foundation Structure of the Balance Sheet The Role of the ALCO in Balance Sheet Management Balance Sheet Risk ALM Strategies The 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 Governance Policies Exposure Limits Reporting Strategic Risk Management Modeling Compliance

Balance Sheet Risk Credit Risk Interest Rate Risk Concentration Risk Liquidity Risk Vendor Risk

Credit Risk Operational Policies, Standards and Procedures Underwriting Appropriate credit risk assessment Predictive credit risk modeling Risk based pricing / Risk bases capital Servicing Proactive credit risk modeling

Interest Rate Risk Basis Risk Index pricing disparity between assets and liabilities i.e. LIBOR vs FF Spread Risk Spreads tighten and loosen during different rate and economic cycles Duration Risk Reprising disparity between assets and liabilities Convexity A function of mortgages Option Risk A function of caps, floors and call features

Concentration Risk

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 / participation Credit quality Fraud Loan Processing Information Security Fraud Loan Servicing Regulatory and legal risk

Balance Sheet Management Landscape Innovation Electronic Wallet Credit Card vs Line of Credit Mobile Banking Member expectations Instant 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 _____________________________________________________ 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 Drivers Capital Liquidity Policy Regulatory Constraints Accounting ALLL Stress testing Mark to Market

Balance Sheet Management Questions & Answers