Non Maturity Deposit Assumptions Net Economic Value ... Views on Interest Rate Risk FSOC: ... • Credit unions may assume that there is no value when measuring the associated IRR

Non Maturity Deposit Assumptions

&

Net Economic Value Sensitivity Analysis

2

Regulatory Views on Interest Rate Risk

FSOC: Regulatory agencies…continue their scrutiny of

the ways in which potential changes in interest rates could

adversely affect the risk profiles of financial firms.

Financial Stability Oversight Council (FOSC) 2013 Annual Report

FDIC: Effectively managing interest rate risk is part of the

business of banking...significant, unmitigated levels of

interest rate or market risk can lead to losses and liquidity

constraints...

Federal Deposit Insurance Corporation (FDIC) Supervisory Letter FIL-46-2013

NCUA: Interest rate risk is the most significant risk the

industry faces right now.

National Credit Union Administration (NCUA) Letter to Credit Unions 13-CU-02

3


OCC supervisory staff will focus on IRR measurement

processes to ensure management assesses vulnerability to

changes in interest rates and, as appropriate, implements

measurement tools to monitor and control this risk.

The adequacy of interest rate stress scenarios and the

appropriate support for key modeling assumptions (non-

maturity deposits in particular) will be a particular focal point.

Office of the Comptroller of the Currency (OCC) Semiannual Risk Perspective for Fall 2013

4


Common errors observed during FDIC examinations:

• Assumptions were not regularly updated or were not

reasonable for a given interest rate shock scenario

(prepayments or non-maturity deposit price sensitivity and

decay rates) or did not take into account specific

characteristics of certain assets and liabilities (influence of

loan floors and caps on rate exposure).

• Stress tests did not incorporate significant rate shocks

(+300 and +400 basis point shocks) and other severe but

plausible scenarios specific to the particular risk of the

bank.

• Results of stress tests were not compared to internal risk

limits.

FDIC Supervisory Insights: Winter 2013 Edition

5


NCUA Long Term Asset Ratio :

The sum of real estate loans which will not refinance,

reprice or mature within 5 years, member business loans,

investments with remaining maturities of more than 3 years,

NCUSIF deposit, land and building, and other fixed assets

divided by total assets.

Source: NCUA FPR User Guide - http://www.ncua.gov/Legal/GuidesEtc/FPRGuides/UsersGuideFPR.pdf

6


What is NCUA’s benchmark for a maximum long-term asset ratio?

• We don’t have (one). It used to be the old rule of thumb

that we heard that there’s this magic limit of 25% of long-

term assets to total assets was the limit. That’s never

actually been the case.

• We do not have a prescribed or defined benchmark

formally, or informally for that matter, in terms of what’s too

much in terms of long-term assets.

• There is not a limit but it does cause the examiner to start

thinking in terms of interest rate risk and how is this credit

union managing this risk.

(NCUA Director of the Office of Examination and Insurance Larry Fazio at the October 2012 Virtual Town Hall Webinar)

7

Risk vs. Reward

Implementing simplistic, arbitrary, or overly restrictive

controls to position the balance sheet for rising rates may

create an imbalance in the risk – reward profile.

• Only “being conservative” if rates rise

• Taking a risk position that rates will rise

Restrictive Controls

Lost Earnings

8

What if Interest Rates Stay Low?

Risk taking is not risk management!

Source: Bloomberg

Japan’s 10-Year Treasury Note

15 Years and Counting of Below 2.00% Yields

9

Interagency Advisory on IRR

• The regulators recognize that some degree of IRR is inherent

in the business of banking.

• At the same time, however, institutions are expected to have

sound risk management practices in place to measure,

monitor, and control IRR exposures.

• Risk management helps keep risk and reward in balance!

• Good risk management is good business!

10


Common errors observed during FDIC examinations:

• The Board and senior management did not regularly

review and approve policies, procedures, risk limits or

strategies.

• Risk limits were not defined or not appropriate for risk

tolerance of the institution.

• Policies and procedures did not specify oversight

responsibilities for measuring, monitoring or controlling

IRR. FDIC Supervisory Insights: Winter 2013 Edition

11

NCUA Regulation on Interest Rate Risk

• Federally insured credit unions are required to have as part of

their asset/liability management:

– Written interest rate risk policy

– An effective interest rate risk management program

o Identifies, Measures, Monitors, Controls

• Each credit union should formulate a policy that embodies its

own practices and metrics appropriate to its operations

Risk management

practices should be

implemented with

increasing rigor and

diligence as size, risk,

and complexity increase

Some

interest rate risk

exposure is a normal

part of financial

intermediation

12


• Given a 200 basis point interest rate increase (shock),

commercial banks would now see an average negative

adjustment of 24 percent to their EVE—versus only half that

as recently as mid-2007

Source: Office of the Comptroller of the Currency (OCC) Semiannual Risk Perspective for Fall 2013

13

Source: NCUA Examiner Guide Chapter 13 – Asset Liability Management


14

Non-Maturity Share Assumptions

12 CFR.741 – Interest Rate Risk Regulation (Sep 2012):

• Non-maturity shares include those accounts with no defined

maturity such as share drafts, regular shares, and money

market accounts. Measuring the IRR associated with these

accounts is difficult because the risk measurement

calculations require the user to define the principal cash flows

and maturity.

• Credit unions may assume that there is no value when

measuring the associated IRR and carry these values at book

value or par. Many credit unions adopt this approach because

it keeps the measurement method simple.

15

Non-Maturity Deposit Assumptions

• Deposit modeling assumptions are a key component of IRR

measurements and a driver of earnings and economic capital

exposures in modeled rate scenarios. Institutions should

establish methods to capture deposit behavior to improve the

accuracy of IRR measurements.

• At a minimum, the OCC expects banks to model alternative

deposit assumptions to test the potential effect on earnings

and economic capital at risk from changes in interest rates.

Office of the Comptroller of the Currency (OCC) Semiannual Risk Perspective for Fall 2013

16


12 CFR.741 – Interest Rate Risk Regulation (Sep 2012):

• Alternatively, a credit union may attribute value to these

shares (i.e. premium) on the basis that these shares tend to

be lower cost funds that are core balances by virtue of being

relatively insensitive to interest rates. This method generally

results in non-maturity shares priced/valued in a way that will

produce an increased net economic value. Therefore, the

underlying assumptions of the shares require scrutiny.

• Credit unions that forecast share behavior and incorporate

those assumptions into their risk identification and

measurement process should perform sensitivity analysis.

17


• Interagency Advisory on Interest Rate Risk Management

Frequently Asked Questions (Jan 2012):

12. Regarding deposit decay-rate assumptions, what are some

examples of a “market environment in which customer behaviors may

not reflect long-term economic fundamentals?”

Answer: Management should carefully consider deposit and NMD

decay-rate assumptions, particularly when customer behaviors change

during periods of stress as well as external factors that may influence

that behavior.

18


• 12 CFR.741 – Interest Rate Risk Regulation (Sep 2012):

− NCUA …does not seek to endorse certain IRR measures,

measurement techniques, or assumptions over others

− NCUA does not prescribe valuing non-maturity shares at par

• NCUA Letter to Credit Unions 03-CU-11: Non-Maturity

Shares and Balance Sheet Risk (July 2003)

− Some credit unions may choose a simple approach…priced at par

− Some credit unions may choose to incorporate their forecasted share

behavior…best practices indicate that a credit union should conduct a

documented assessment of its member behavior…

19


Interagency Advisory on Interest Rate Risk Management

Frequently Asked Questions (Jan 2012):

11. Can an institution use industry estimates for non-maturity-deposit

(NMD) decay rates?

Answer: Institutions should use assumptions that reflect the institution’s

profile and activities and generally avoid reliance on industry estimates or

default vendor assumptions.

20


Financial Accounting Standards Board Proposed Accounting Standards Update (May 2010)

Accounting for Financial Instruments (Topic 825)

Core deposit liabilities (PDF Page 147)

BC123. The Board believes that core demand deposits should be remeasured equal to the

present value of the average core deposit amount discounted at the difference between the

alternative funds rate and the all-in-cost-to-service rate over the implied maturity of the deposits.

Glossary (PDF Page 31)

Core Deposit Liabilities

Deposits without a contractual maturity that management considers to be a stable source of funds,

which excludes transient and surge balances (further described in paragraph IG22).

Alternative Funds Rate

A rate associated with the next available source of funds if core deposit liabilities are not an

available source of funds. The alternative funds source must be cost effective and sufficient in

volume and duration to replace the core deposit liabilities as a source of funds. A blended rate may

be used if one source alone is not sufficient in volume.

Implied Maturity

For a core deposit liability, management’s assessment of the average life by account type.

Management may make that assessment on the basis of either an analysis of internal data or an

analysis of peer information.

Source: Financial Account Standards Board:

http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176157086783

21




Demand Deposit Liabilities (PDF Page 42)

31. An entity shall measure its core deposit liabilities at the present value of the core deposit amount

during the period discounted at the difference between the alternative funds rate and the all-in-cost-to-

service rate over the implied maturity of the deposits (the core deposit liabilities remeasurement

approach).

An entity shall determine that remeasurement amount separately for each major type of

demand deposit, such as noninterest-bearing checking, savings, and money market accounts.

Remeasurement of Core Deposit Liabilities (PDF Page 74)

IG20. For core deposit liabilities, a subsequent remeasurement is required at each reporting

date. In each subsequent remeasurement, management of the reporting entity must use judgment in

determining the appropriate inputs and assumptions.

The primary method for determining appropriate assumptions would be the analysis of internal

data.

If the reporting entity has no appropriate data (that is, its internal data prove to be unreliable or the

entity has not been in existence enough years), then the reporting entity may utilize peer data in

determining the appropriate assumptions.



22




Inputs and Assumptions to Core Deposit Liabilities Remeasurement Approach (PDF Page 74)

IG22. Management should analyze its demand deposits to determine whether the deposits are

core deposit liabilities. Deciding which balances are not core deposit liabilities is determined by type

of deposit because there are varying inputs (such as implied maturity) by type of deposit. Management

judgment is needed in determining which demand deposits are core deposit liabilities. Core demand

accounts include all balances that management believes will provide a lower cost of funding versus

alternative funding sources over the implied maturity.

IG23. The alternative funds source should be cost-effective and sufficient in volume and

duration to replace core deposit liabilities as a funding source. The alternative funds rate would

be used as the next available source of funds if core deposit liabilities are not an available source of

funding.

IG24. In determining the all-in-cost-to-service rate, management should consider direct income and

expenses to service the core deposit liabilities, including interest expense, branch maintenance

expense, and fee income.



23

Modeling Non-Maturity Deposit Assumptions:

For each Non-maturity Deposit type (and tier):

1. Sort and separate all NMDs by type and tier.

2. Calculate the balance and current rate on each NMD type and tier.

3. Assess the historical rate–sensitivity.

4. Assess the historical delay in rate change.

5. Assess the historical withdrawal rate (eg: the decay rate).

6. Identify the cost of servicing to be applied to each NMD Type.

7. Identify the discount rate to be applied to each NMD type.


Each institution should maintain documentation to support the

reasonableness of the assumptions. The inability to explain the

assumptions or lack of supporting documentation may call in to question

the results of the Interest Rate Risk Management analysis.

24


Deposit Type Code Balance ($)

Current

Rate

Savings Tier 1 $15,013,226 0.00%

Savings Tier 2 $21,018,517 0.10%

Savings Tier 3 $24,021,162 0.15%

Savings Tier 4 $27,023,808 0.20%

Savings Tier 5 $36,031,743 0.25%

Savings Tier 6 $42,037,034 0.30%

Savings Tier 7 $48,042,325 0.35%

Savings Tier 8 $36,031,743 0.40%

Savings Tier 9 $30,026,453 0.55%

Savings Tier 10 $21,018,517 0.60%

Savings Accounts $300,264,528 0.32%


1. Sort and separate all Non-maturity Deposits by type and tier

2. Calculate the balance and the current rate on each NMD type and tier

Source for Data: Example Institution - BSMS ALM Model

25



3. Assess the historical rate–sensitivity for each NMD type

4. Assess the historical delay in rate change for each NMD type


Total Deposits (Millions) $531.0 $536.0 $538.3 $553.7 $560.4 $562.4 $567.5 $582.0 $583.9 $588.4 $589.2 $607.1 $607.5

Deposit Accts Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

Checking 0.35% 0.29% 0.28% 0.26% 0.25% 0.26% 0.27% 0.28% 0.29% 0.30% 0.32% 0.33% 0.33%

Money Market 1.10% 0.94% 0.96% 0.97% 0.98% 0.99% 1.10% 1.25% 1.41% 1.65% 1.89% 2.14% 2.40%

Savings 1.01% 0.94% 0.88% 0.85% 0.86% 0.87% 0.89% 0.91% 0.98% 0.99% 1.12% 1.16% 1.28%

Time Deposits 1.32% 1.35% 1.37% 1.39% 1.49% 1.70% 1.95% 2.35% 2.64% 2.97% 3.25% 3.54% 3.90%

Non-certificate IRA 1.53% 1.42% 1.43% 1.45% 1.49% 1.58% 1.73% 1.90% 2.05% 2.20% 2.42% 2.64% 3.10%

Other Savings 1.70% 1.62% 1.61% 1.60% 1.65% 1.81% 2.04% 2.22% 2.32% 2.58% 3.03% 3.51% 3.50%

Periodic Cost-of-Funds 1.95% 1.72% 1.66% 1.54% 1.50% 1.53% 1.63% 1.64% 1.77% 1.94% 2.17% 2.23% 2.44%

Rate Change Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

Checking -0.05% -0.06% -0.01% -0.02% -0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.02% 0.01% 0.00%

Money Market -0.15% -0.16% 0.01% 0.01% 0.01% 0.01% 0.11% 0.15% 0.15% 0.24% 0.24% 0.25% 0.27%

Savings -0.07% -0.07% -0.07% -0.02% 0.01% 0.01% 0.02% 0.02% 0.09% 0.02% 0.12% 0.05% 0.12%

Time Deposits -0.07% 0.03% 0.02% 0.02% 0.10% 0.21% 0.25% 0.41% 0.29% 0.33% 0.28% 0.28% 0.37%

Non-certificate IRA -0.17% -0.11% 0.01% 0.02% 0.05% 0.09% 0.15% 0.16% 0.15% 0.16% 0.22% 0.22% 0.47%

Other Savings -0.35% -0.09% -0.01% -0.01% 0.06% 0.16% 0.23% 0.18% 0.10% 0.26% 0.45% 0.48% -0.01%

Periodic Cost-of-Funds -0.23% -0.06% -0.12% -0.04% 0.03% 0.10% 0.01% 0.13% 0.17% 0.23% 0.06% 0.21%

Total Deposits (Millions) $531.0 $536.0 $538.3 $553.7 $560.4 $562.4 $567.5 $582.0 $583.9 $588.4 $589.2 $607.1 $607.5

Deposit Accts Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06

Checking 0.35% 0.29% 0.28% 0.26% 0.25% 0.26% 0.27% 0.28% 0.29% 0.30% 0.32% 0.33% 0.33%

Money Market 1.10% 0.94% 0.96% 0.97% 0.98% 0.99% 1.10% 1.25% 1.41% 1.65% 1.89% 2.14% 2.40%

Savings 1.01% 0.94% 0.88% 0.85% 0.86% 0.87% 0.89% 0.91% 0.98% 0.99% 1.12% 1.16% 1.28%

Time Deposits 1.32% 1.35% 1.37% 1.39% 1.49% 1.70% 1.95% 2.35% 2.64% 2.97% 3.25% 3.54% 3.90%

Non-certificate IRA 1.53% 1.42% 1.43% 1.45% 1.49% 1.58% 1.73% 1.90% 2.05% 2.20% 2.42% 2.64% 3.10%

Other Savings 1.70% 1.62% 1.61% 1.60% 1.65% 1.81% 2.04% 2.22% 2.32% 2.58% 3.03% 3.51% 3.50%

Periodic Cost-of-Funds 1.95% 1.72% 1.66% 1.54% 1.50% 1.53% 1.63% 1.64% 1.77% 1.94% 2.17% 2.23% 2.44%

26


Modeling Non-maturity Deposit Assumptions:

3. Assess the historical Rate–sensitivity for each NMD type

Historically, when interest rates have gone up, how much did the

institution increase the rate on its Non-maturity Deposits?

4. Assess the historical Delay in Rate Change for each NMD type

Historically, when interest rates have gone up, how long after rates hit

bottom did it take for the institution start increasing the rate on its

Non-maturity deposits?

Rate Change Summary

# Rate

Increase

Max

Single

Move UP

Max

Cumultv

Move UP Between

Historical

Rate

Sensitivity

Factor

Historical

Delay in

First

Increase

Checking 18 5 Bps 19 Bps Jun-04 Sep-07 4.47% 15 Mos

Savings 15 12 Bps 68 Bps Jun-04 Sep-07 16.00% 12 Mos

Money Market 16 28 Bps 229 Bps Sep-03 Sep-07 53.88% 6 Mos

Non-certificate IRA 18 47 Bps 262 Bps Sep-03 Sep-07 61.65% 6 Mos

All Other Savings Accounts 13 82 Bps 191 Bps Mar-04 Mar-06 44.94% 12 Mos

Time Deposits 18 41 Bps 343 Bps Jun-03 Sep-07 80.71% 3 Mos

Periodic Cost-of-Shares 13 29 Bps 148 Bps Jun-04 Dec-06


Between June 2003 and June 2006 the Federal Reserve raised the Federal

Funds Target Rate by 425 basis points.

Between June 2004 and June 2007 the institution raised savings account rates

by 68 basis points.

In percentage terms the institution raised savings rates by 16.00% of the

change in market rates. (68 bps / 425 bps = 16.00%)

Therefore, 16.00% is considered the historical “rate-sensitivity factor” for

savings accounts.

27


Current

Rate

Historical

Rate

Sensitivity

Factor

Implied

Rate-

change

+300Bps

Assumed

Rate

Sensitivity

Factor

Assumed

+300Bps

Rate

Change

Assumed

Rate:

+300Bps

Shock Rate

Savings Tier 1 $15,013,226 0.00% 16.00% 0.48% 0.00% 0.00% 0.00%

Savings Tier 2 $21,018,517 0.10% 16.00% 0.48% 18.67% 0.56% 0.66%

Savings Tier 3 $24,021,162 0.15% 16.00% 0.48% 20.33% 0.61% 0.76%

Savings Tier 4 $27,023,808 0.20% 16.00% 0.48% 22.00% 0.66% 0.86%

Savings Tier 5 $36,031,743 0.25% 16.00% 0.48% 23.67% 0.71% 0.96%

Savings Tier 6 $42,037,034 0.30% 16.00% 0.48% 25.33% 0.76% 1.06%

Savings Tier 7 $48,042,325 0.35% 16.00% 0.48% 27.00% 0.81% 1.16%

Savings Tier 8 $36,031,743 0.40% 16.00% 0.48% 28.67% 0.86% 1.26%

Savings Tier 9 $30,026,453 0.55% 16.00% 0.48% 33.67% 1.01% 1.56%

Savings Tier 10 $21,018,517 0.60% 16.00% 0.48% 35.33% 1.06% 1.66%

Savings Accounts $300,264,528 0.32% 16.00% 0.48% 24.83% 0.75% 1.07%



First apply the historical rate-sensitivity factor to each deposit type/tier and calculate the implied

amount of rate change.

For example in an assumed +300 Bps rate-shock, 16.00% rate-sensitivity factor would imply an

increase in savings rates of 48 basis points (300 bps * 16.00% = +48 Bps).

Then adjust each tier as appropriate to reflect changes in potential management behavior,

realistic expectations for accommodating “higher balance” accounts and some conservative

“cushion” that this time might be different.



Current

Rate

Savings Tier 1 $15,013,226 0.00%

Savings Tier 2 $21,018,517 0.10%

Savings Tier 3 $24,021,162 0.15%

Savings Tier 4 $27,023,808 0.20%

Savings Tier 5 $36,031,743 0.25%

Savings Tier 6 $42,037,034 0.30%

Savings Tier 7 $48,042,325 0.35%

Savings Tier 8 $36,031,743 0.40%

Savings Tier 9 $30,026,453 0.55%

Savings Tier 10 $21,018,517 0.60%

Savings Accounts $300,264,528 0.32%

28


Non-maturity

Deposits

Current

Balance

Historical

Rate

Sensitivity

Factor

Historical

Rate

Change

Delay

Current

Rate

Assumed

Rate

Sensitivity

Factor

Assumed

+300Bps

Change

Assumed

Rate

+300Bps

Assumed

Delay in

Rate

Change

Checking $120,882 4.47% 15 Mos 0.23% 16.67% +50Bps 0.73% 6 Mos

Savings $300,265 16.00% 12 Mos 0.32% 25.00% +75Bps 1.07% 6 Mos

Money market $211,503 53.88% 6 Mos 0.38% 66.67% +200Bps 2.38% 3 Mos

Non-certificate IRA $27,151 61.65% 6 Mos 0.54% 75.00% +225Bps 2.79% 3 Mos

Other Savings $9,433 44.94% 12 Mos 0.41% 50.00% +150Bps 1.91% 6 Mos

Modeling Non-Maturity Deposit Assumptions: The institution must document and be able to defend the reasonableness

of the NMD assumptions.

Do the rate-sensitivity factors (assumed amount of rate change in the

rate-shock scenarios) and assumed delay in rate change reasonably

represent potential future management behavior?

The easiest way to validate the assumptions are reasonable is to document a

comparison of the assumptions versus history.


29



5. Assess the historical withdrawal rate (“decay rate”) for each NMD type.

The decay rate represents the assumed annualized rate of deposit

withdrawal:

Balance x Decay Rate / 12 = the assumed monthly withdrawal amount.

The goal is to ensure the decay rate assumption, the resulting forecast

withdrawal cashflow and resulting forecast average life reasonably

represents potential future customer behavior.

Historical Analysis can provide the basis for the decay rate assumptions.

30


Historical Non-Maturity Deposit Withdrawal Analysis: Savings Accounts


Deposit Type: Savings Accounts

Date

Period Ending

Balance $ Growth

Annualized

Growth Rate

Annualized

Growth Rate

(Negative

Periods Only)

Interest

Rate Change

Fed Fund

Target

Rate Change

Dec-02 $165,417,526 $2,337,020 2.87% 1.27% -0.21% 1.25% -0.50%

Mar-03 $179,028,764 $13,611,238 32.91% 1.08% -0.19% 1.25% 0.00%

Jun-03 $185,892,363 $6,863,599 15.34% 1.01% -0.07% 1.00% -0.25%

Sep-03 $198,383,247 $12,490,884 26.88% 0.94% -0.07% 1.00% 0.00%

Dec-03 $188,099,027 -$10,284,220 -20.74% -20.74% 0.88% -0.07% 1.00% 0.00%

Mar-04 $198,271,944 $10,172,918 21.63% 0.85% -0.02% 1.00% 0.00%

Jun-04 $199,419,058 $1,147,113 2.31% 0.86% 0.01% 1.25% 0.25%

Sep-04 $206,735,823 $7,316,765 14.68% 0.89% 0.02% 1.75% 0.50%

Dec-04 $196,039,605 -$10,696,218 -20.70% -20.70% 0.91% 0.02% 2.25% 0.50%

Mar-05 $209,611,088 $13,571,482 27.69% 0.89% -0.02% 2.75% 0.50%

Jun-05 $199,108,797 -$10,502,290 -20.04% -20.04% 0.98% 0.09% 3.25% 0.50%

Sep-05 $199,339,239 $230,442 0.46% 0.99% 0.02% 3.75% 0.50%

Dec-05 $188,495,713 -$10,843,526 -21.76% -21.76% 1.12% 0.12% 4.50% 0.75%

Mar-06 $201,664,925 $13,169,212 27.95% 1.16% 0.05% 4.75% 0.25%

Jun-06 $193,263,131 -$8,401,794 -16.66% -16.66% 1.28% 0.12% 5.25% 0.50%

Sep-06 $183,507,987 -$9,755,143 -20.19% -20.19% 1.35% 0.07% 5.25% 0.00%

Dec-06 $175,789,263 -$7,718,724 -16.82% -16.82% 1.39% 0.04% 5.25% 0.00%

Mar-07 $187,976,382 $12,187,119 27.73% 1.41% 0.02% 5.25% 0.00%

Jun-07 $183,099,712 -$4,876,670 -10.38% -10.38% 1.50% 0.09% 5.25% 0.00%

Sep-07 $174,127,215 -$8,972,497 -19.60% -19.60% 1.53% 0.03% 4.50% -0.75%

Dec-07 $165,868,431 -$8,258,784 -18.97% -18.97% 1.51% -0.02% 3.00% -1.50%

Mar-08 $179,873,662 $14,005,230 33.77% 1.32% -0.19% 2.00% -1.00%

Jun-08 $191,267,691 $11,394,030 25.34% 1.18% -0.14% 2.00% 0.00%

Sep-08 $173,882,129 -$17,385,562 -36.36% -36.36% 1.16% -0.01% 1.00% -1.00%

Dec-08 $176,936,290 $3,054,161 7.03% 1.08% -0.08% 0.25% -0.75%

Mar-09 $190,199,172 $13,262,882 29.98% 0.88% -0.20% 0.25% 0.00%

Jun-09 $198,900,974 $8,701,801 18.30% 0.79% -0.10% 0.25% 0.00%

Sep-09 $190,354,178 -$8,546,795 -17.19% -17.19% 0.67% -0.12% 0.25% 0.00%

Jun-13 $276,797,620 $2,455,362 3.58% 0.30% -0.01% 0.25% 0.00%

TOTAL/AVG. $139,775,847 5.90% -19.95%

Fed lowers Fed Funds a cumulative 325 Bps between Mar 2001 and Jun 2003

"The Bottom" in Interest Rates:Jun 2003 - Fed Funds at 1.00%

Fed raises rates 25Bps.The first of seventeen +25 Bps increases

over the next two years.

Last Fed Increase.Fed Funds peak at 5.25%.

Cumulative +425 Bps increase in rates

sine June 2004.

Since Mar 2009 the Fed has held the target rate for Fed Funds at between

zero and 25Bps. Also implemented QE1,

QE2, QE3 & "Operation Twist"

From June 2007 thru Dec 2008 as the housing bubble burst and we entered

"The Great Recession" the Fed lowered

Fed Funds by -500 Bps over 18-months.

31


Resulting Weighted Average Life 5.00Yrs Historical Avg Decay Rate

Month Beginning Balance

Assumed

Decay Rate

Assumed/Forecast $

Run-off

(ie: Withdrawal) Ending Balance

1 $276,797,620 -19.95% $4,601,953 $272,195,667

2 $272,195,667 -19.95% $4,525,442 $267,670,225

3 $267,670,225 -19.95% $4,450,203 $263,220,022

4 $263,220,022 -19.95% $4,376,216 $258,843,806

5 $258,843,806 -19.95% $4,303,458 $254,540,348

6 $254,540,348 -19.95% $4,231,910 $250,308,438

7 $250,308,438 -19.95% $4,161,552 $246,146,887

8 $246,146,887 -19.95% $4,092,363 $242,054,524

9 $242,054,524 -19.95% $4,024,325 $238,030,199

10 $238,030,199 -19.95% $3,957,417 $234,072,782

11 $234,072,782 -19.95% $3,891,623 $230,181,159

12 $230,181,159 -19.95% $3,826,922 $226,354,238

13 $226,354,238 -19.95% $3,763,296 $222,590,941

14 $222,590,941 -19.95% $3,700,729 $218,890,212

15 $218,890,212 -19.95% $3,639,202 $215,251,010

16 $215,251,010 -19.95% $3,578,698 $211,672,313

17 $211,672,313 -19.95% $3,519,199 $208,153,114

18 $208,153,114 -19.95% $3,460,690 $204,692,424

19 $204,692,424 -19.95% $3,403,154 $201,289,270

20 $201,289,270 -19.95% $3,346,574 $197,942,696

21 $197,942,696 -19.95% $3,290,935 $194,651,761

22 $194,651,761 -19.95% $3,236,221 $191,415,541

23 $191,415,541 -19.95% $3,182,416 $188,233,124

24 $188,233,124 -19.95% $3,129,506 $185,103,618

At the selected Decay Rate, Is the forecast Deposit Withdrawal "reasonable?

-$15,831,252 Worst amount of withdrawals over any four consecutive quarters in the past twelve years:

-$50,443,382 The forecast deposit withdrawals in "year-1" at the selected decay rate:


32

Resulting Weighted Average Life 2.50Yrs NERA Equivalent Decay Rate


Assumed

Decay Rate

Assumed/Forecast $

Run-off


1 $276,797,620 -40.00% $9,226,587 $267,571,033

2 $267,571,033 -40.00% $8,919,034 $258,651,998

3 $258,651,998 -40.00% $8,621,733 $250,030,265

4 $250,030,265 -40.00% $8,334,342 $241,695,923

5 $241,695,923 -40.00% $8,056,531 $233,639,392

6 $233,639,392 -40.00% $7,787,980 $225,851,412

7 $225,851,412 -40.00% $7,528,380 $218,323,032

8 $218,323,032 -40.00% $7,277,434 $211,045,597

9 $211,045,597 -40.00% $7,034,853 $204,010,744

10 $204,010,744 -40.00% $6,800,358 $197,210,386

11 $197,210,386 -40.00% $6,573,680 $190,636,707

12 $190,636,707 -40.00% $6,354,557 $184,282,150

13 $184,282,150 -40.00% $6,142,738 $178,139,411

14 $178,139,411 -40.00% $5,937,980 $172,201,431

15 $172,201,431 -40.00% $5,740,048 $166,461,383

16 $166,461,383 -40.00% $5,548,713 $160,912,670

17 $160,912,670 -40.00% $5,363,756 $155,548,915

18 $155,548,915 -40.00% $5,184,964 $150,363,951

19 $150,363,951 -40.00% $5,012,132 $145,351,819

20 $145,351,819 -40.00% $4,845,061 $140,506,759

21 $140,506,759 -40.00% $4,683,559 $135,823,200

22 $135,823,200 -40.00% $4,527,440 $131,295,760

23 $131,295,760 -40.00% $4,376,525 $126,919,235

24 $126,919,235 -40.00% $4,230,641 $122,688,594






33


Resulting Weighted Average Life 0.08Yrs NMDs Valued At PAR


Assumed

Decay Rate

Assumed/Forecast $

Run-off


1 $276,797,620 -1200.00% $276,797,620 $0

2 $0 -1200.00% $0 $0

3 $0 -1200.00% $0 $0

4 $0 -1200.00% $0 $0

5 $0 -1200.00% $0 $0

6 $0 -1200.00% $0 $0

7 $0 -1200.00% $0 $0

8 $0 -1200.00% $0 $0

9 $0 -1200.00% $0 $0

10 $0 -1200.00% $0 $0

11 $0 -1200.00% $0 $0

12 $0 -1200.00% $0 $0

13 $0 -1200.00% $0 $0

14 $0 -1200.00% $0 $0

15 $0 -1200.00% $0 $0

16 $0 -1200.00% $0 $0

17 $0 -1200.00% $0 $0

18 $0 -1200.00% $0 $0

19 $0 -1200.00% $0 $0

20 $0 -1200.00% $0 $0

21 $0 -1200.00% $0 $0

22 $0 -1200.00% $0 $0

23 $0 -1200.00% $0 $0

24 $0 -1200.00% $0 $0





34


Source for Data: Office of Thrift Supervision – Net Portfolio Value Model, Chapter 6, Table 6.D.1


6. Identify the Cost of Servicing to be applied to each NMD Type

IG24. In determining the all-in-cost-to-service rate, management should consider

direct income and expenses to service the core deposit liabilities, including interest

expense, branch maintenance expense, and fee income. (source: FASB Topic #825)

As an alternative source:

The Office of Thrift Supervision (OTS) Net Portfolio Value Model used a standard cost

of servicing assumption. Chapter 6 of the Net Portfolio Value Model Manual table 6.D.1:

If we then annualize the above (multiply each monthly value by 12) we end up with the following:

OTS estimated Cost of Servicing NMD Accounts

Type Monthly Annualized

Transaction Accounts (Checking) 0.15% 1.80%

Money Market Deposit Accounts 0.07% 0.84%

Passbook Accounts (Savings) 0.12% 1.44%

Non-interest Bearing Accounts 0.21% 2.52%

35


Source for Data: Federal Home Loan Bank of Boston www.fhlbb.com


7. Identify the Discount Rate to be applied to each NMD type

IG23. The alternative funds source should be cost-effective and sufficient in volume and duration to replace core

deposit liabilities as a funding source. The alternative funds rate would be used as the next available source of

funds if core deposit liabilities are not an available source of funding. (Source: FASB Topic #825)

The most common discount rate used to value NMDs is the borrowing rate from

the Federal Home Loan Bank at a comparable average life as the NMD:

FHLB Boston

Advance Rates Jun-13 Floor Rate As of

FHLB Boston

Advance Rates Jun-13

Floor

Rate As of

1 Month 0.33% 0.18% Sep-11 3 Year 1.19% 0.73% Apr-13

2 Month 0.34% 0.21% Nov-09 3.50 Year 1.43% 0.83% Sep-12

3 Month 0.35% 0.22% Sep-11 4 Year 1.67% 0.92% Sep-12

4 Month 0.36% 0.23% Sep-11 4.50 Year 1.88% 1.03% Sep-12

5 Month 0.36% 0.24% Dec-11 5 Year 2.08% 1.14% Sep-12

6 Month 0.37% 0.25% Dec-11 5.50 Year 2.31% 1.28% Sep-12

9 Month 0.39% 0.35% Sep-11 6 Year 2.53% 1.42% Sep-12

1 Year 0.42% 0.35% Apr-13 6.50 Year 2.71% 1.56% Sep-12

1.25 Year 0.51% 0.42% Apr-13 7 Year 2.89% 1.70% Sep-12

1.50 Year 0.61% 0.48% Apr-13 7.50 Year 3.05% 1.82% Sep-12

1.75 Year 0.70% 0.54% Apr-13 8 Year 3.22% 1.93% Sep-12

2 Year 0.79% 0.60% Apr-13 8.50 Year 3.34% 2.04% Sep-12

2.25 Year 0.89% 0.63% Apr-13 9 Year 3.45% 2.14% Sep-12

2.50 Year 0.99% 0.67% Apr-13 9.50 Year 3.53% 2.25% Sep-12

2.75 Year 1.09% 0.70% Apr-13 10 Year 3.62% 2.35% Sep-12

3 Year 1.19% 0.73% Apr-13 15 Year 4.40% 3.06% Aug-12

3.50 Year 1.43% 0.83% Sep-12 20 Year 4.75% 3.41% Aug-12

36


Non-Maturity Deposit “Sensitivity Analysis”

FFIEC Advisory on Interest arte Risk Management (Jan 2010)

“stress testing should include a sensitivity analysis to help determine which assumptions have the most

influence on model output. Institutions will generally focus more of their efforts in verifying the most influential

assumptions. Additionally, sensitivity analysis can be used to determine the conditions under which key

business assumptions and model parameters break down or when IRR may be exacerbated by other risks or

earnings pressures.” (Source: FDIC - http://www.fdic.gov/news/news/press/2010/pr1002.pdf)

NCUA Rules and Regulations Part 741.3: ALM Policy and Program (Sep2012)

IV. IRR Measurement and Monitoring, Account Attributes:

“Credit unions that forecast deposit behavior and incorporate those assumptions into their risk identification and

measurement process should perform sensitivity analysis.” (Source: NCUA - http://www.ncua.gov/Legal/Documents/Regulations/FIR20120126InterestRateRiskProg.pdf)

NCUA Letter to Credit Unions 2003-CU-11 (July 2003)

“Credit unions that forecast deposit behavior and incorporate those assumptions into their risk identification and

measurement process will be expected to perform sensitivity analysis reflecting the value of the non-maturity

deposits by varying the underlying assumptions and relating them to changes and differing levels of interest

rates. The sensitivity analysis should be sufficiently rigorous to reflect the potential changes in non-maturity

deposit behavior under stressed interest rate and economic conditions. The sensitivity testing should represent

a good faith evaluation whether non-maturity deposit behavior that differs from the forecast assumptions would

create any undue risk to the credit union. “ (Source: NCUA - http://www.ncua.gov/Resources/Documents/LCU2003-11.pdf)

37


Economic Value Analysis: Sensitivity Analysis

Historical Avg Decay Rate Interest OTS COF All-in +300Bps +300Bps Assumed Average Discount

NMD Balance Rate Adjustment COF RSF Rate Decay Rate Life Rate

Checking $120,882 0.23% 1.80% 2.03% 16.67% 0.73% 14.07% 7.00Yrs 2.89%

Savings $300,265 0.32% 1.39% 1.71% 25.00% 1.07% 19.95% 5.00Yrs 1.88%

Money Market $211,503 0.38% 0.86% 1.24% 66.67% 2.38% 50.00% 2.00Yrs 0.79%

Non-certificate IRA $27,151 0.54% 1.39% 1.93% 75.00% 2.79% 9.41% 10.00Yrs 3.62%

Other Savings $9,433 0.41% 1.39% 1.80% 50.00% 1.91% 19.95% 5.00Yrs 1.88%

Net Economic Value Flat Rate +300Bps

Net Economic Value $120,133 $96,053

EV Capital Ratio 11.17% 9.67%

% Change in EV vs Flat Rate Scenario n/a -20.04%

NERA Equivalent Interest OTS COF All-in +300Bps +300Bps Assumed Average Discount

Decay Rate Balance Rate Adjust COF RSF Rate Decay Rate Life Rate

Checking $120,882 0.23% 1.80% 2.03% 16.67% 0.73% 33.00% 3.00Yrs 0.03%

Savings $300,265 0.32% 1.39% 1.71% 25.00% 1.07% 40.00% 2.50Yrs 0.03%

Money Market $211,503 0.38% 0.86% 1.24% 66.67% 2.38% 100.00% 1.00Yrs 0.03%

Non-certificate IRA $27,151 0.54% 1.39% 1.93% 75.00% 2.79% 50.00% 2.00Yrs 0.03%

Other Savings $9,433 0.41% 1.39% 1.80% 50.00% 1.91% 40.00% 2.50Yrs 0.03%


Economic Value $106,328 $76,528



NMD Shares Valued at PAR Interest OTS COF All-in +300Bps +300Bps Assumed Average Discount

NMD Balance Rate Adjustment COF RSF Rate Decay Rate Life Rate

Checking $120,882 0.23% n/a 0.23% 16.67% 0.73% 1200.00% 0.08Yrs n/a

Savings $300,265 0.32% n/a 0.32% 25.00% 1.07% 1200.00% 0.08Yrs n/a

Money Market $211,503 0.38% n/a 0.38% 66.67% 2.38% 1200.00% 0.08Yrs n/a

Non-certificate IRA $27,151 0.54% n/a 0.54% 75.00% 2.79% 1200.00% 0.08Yrs n/a

Other Savings $9,433 0.41% n/a 0.41% 50.00% 1.91% 1200.00% 0.08Yrs n/a


Net Economic Value $110,205 $40,508



38


For each Non-maturity Deposit type (and tier):

1. Sort and separate all NMDs by type and tier.

2. Calculate the balance and current rate on each NMD type and tier.

3. Assess the historical rate–sensitivity.

4. Assess the historical delay in rate change.

5. Assess the historical withdrawal rate (eg: the decay rate).

6. Identify the cost of servicing to be applied to each NMD Type.

7. Identify the discount rate to be applied to each NMD type.


Each institution should maintain documentation to support the

reasonableness of the assumptions. The inability to explain the

assumptions or lack of supporting documentation may call in to question

the results of the Interest Rate Risk Management analysis.

39


NCUA’s Pre-Examination ALM Test (The 17/4 Test) The 17/4 Test is simply an estimated market-value rate-shock and liquidation analysis. It is designed to help the examiner determine how

detailed the ALM portion of the next examination should be. As noted below, the NCUA has stated the 17/4 Test is not an actual measure of

interest rate risk, and should only be used by the examiner to determine the scope of the exam:

Letter to Credit Unions 00-CU-10, page 3, paragraph 5“…While examiners will evaluate the sensitivity to interest rate risk using asset

valuation methods this exercise is intended to determine the scope of review and not measure interest rate risk or determine minimum

capital standards. We have emphasized this point to our staff and will continue to do so…”

Based on the 17-4 Test results, the greater the estimated decline in the market value of capital the more detailed the ALM portion of the

exam is likely to be.

Asset Valuation Methodology

(the "17/4 Test") Results Low Moderate High

After-shock percentage change in capital <25% 25--50% > 50%

and/or

After- shock capital-to-asset ratio >6% 4--6% < 4%

Potential Risk:

"17-4 Test" Rate-shock Analysis Current Balance

+300 Bp

Devaluation Estimated Loss

Fixed-Rate Real Estate Loans $224,271,334 -17.00% -$38,126,127

Adjustable-Rate Real Estate Loans $119,408,233 -4.00% -$4,776,329

Total Investments < 1-Year $151,452,979 -3.00% -$4,543,589

Total Investments 1-3 Years $90,310,680 -6.00% -$5,418,641



Total Investments > 10 Years $7,373,519 -20.00% -$1,474,704

TOTAL -$68,724,897

CAPITAL ANALYSIS

Total Assets $1,075,313,865

Net Worth $115,837,433

Net Worth Ratio 10.77%

Total Assets Minus Estimated Losses $1,006,588,968

Net Worth Minus Estimated Losses $47,112,537

Net Worth Ratio After Estimated Losses 4.68%

Percentage Decline in Net Worth 59.33%

NCUA Pre-Exam "Potential ALM Risk" Classification:Potentially High RiskNCUA Pre-Exam "Potential ALM Risk" Classification: Potentially High Risk

Source for Data: NCUA Call Report or equivalent data.

40


Sample Credit Union Current Wtd Discount Average Life (Yrs) Present Value

Dec-13 Balance Yield Rate -300bps Flat Rate +300bps -300bps Flat Rate +300bps

Treasuries & Agencies $98,592 1.27% 1.40% 1.42 4.24 4.48 $100,710 $98,332 $88,257

Muni, Corporates, Bank Notes $27,694 1.38% 0.96% 2.97 2.97 2.97 $29,123 $28,161 $25,861

CDs and Other Deposits $50,822 1.15% 0.61% 2.00 2.00 2.00 $54,333 $51,501 $48,576

Fixed-Rate MBS & CMOs $95,385 1.99% 1.97% 2.22 3.67 5.02 $96,555 $95,670 $84,571

Variable-Rate Securities $14,637 0.82% 1.17% 2.64 5.21 7.66 $15,695 $15,085 $13,903

Corporate CU Capital $1,548 0.35% 0.35% 1.99 1.99 1.99 $1,558 $1,548 $1,460

Mutual Funds & Other Equities $2,539 0.46% 0.46% 1.99 1.99 1.99 $2,562 $2,539 $2,395

Cash Equivalents $79,886 0.14% 0.14% 0.04 0.04 0.04 $79,894 $79,886 $79,686

Unreal G/L AFS+Balance Adj. -$2,086 n/a 0.00% 0.00 0.00 0.00 n/a n/a n/a

Total Investments: $369,016 1.18% 1.11% 1.59 2.80 3.23 $380,429 $372,723 $344,710

Credit Card $43,048 9.04% 9.04% 1.53 1.53 1.53 $44,871 $43,039 $41,336

Unsecured Loans $32,189 11.04% 10.54% 1.56 1.63 1.71 $33,769 $32,404 $31,035

New Vehicle Loans $71,982 4.09% 3.44% 1.21 1.27 1.34 $73,008 $72,550 $69,867

Used Vehicle Loans $128,582 4.62% 4.10% 1.17 1.23 1.28 $131,022 $129,358 $124,765

Mtg - 1st Fixed >15yr $89,100 4.37% 4.22% 4.40 6.91 9.84 $92,858 $89,791 $73,667

Mtg - 1st Fixed <15 yr $77,171 3.86% 3.85% 4.06 4.91 5.78 $80,576 $77,217 $67,155

Mtg - Other 1st Fixed $1,560 4.87% 5.22% 3.83 5.19 6.63 $1,645 $1,537 $1,324

Mtg - Other Closed-end Fixed $27,999 4.99% 5.49% 2.05 2.59 3.06 $28,524 $27,679 $25,556

Mtg - Fixed Rate HELOC $1,407 5.14% 4.56% 3.84 4.98 5.74 $1,497 $1,440 $1,267

Loans Held for Sale $1,946 3.87% 4.22% 4.54 6.45 7.95 $1,993 $1,911 $1,613

Leases Receivable $778 4.08% 3.98% 1.86 1.95 2.04 $793 $779 $737

All Other Loans $32,803 6.21% 5.91% 1.47 1.54 1.60 $34,292 $32,939 $31,540

Other Fixed-rate Loans $0 0.00% 0.00% n/a n/a n/a $0 $0 $0

Mtg - Balloon/Hybrid >5yr $27,034 4.33% 3.58% 3.84 5.83 8.68 $27,979 $27,669 $23,565

Mtg - Balloon/Hybrid <5yr $37,221 4.09% 3.48% 3.36 5.20 7.56 $38,001 $37,721 $32,646

Mtg - 1st ARM <1 yr Reset $7,689 3.11% 3.03% 2.51 4.07 6.21 $7,734 $7,695 $7,317

Mtg - 1st ARM >1 yr Reset $31,984 3.33% 3.32% 2.70 4.31 6.70 $32,359 $31,992 $29,825

Mtg - Other Closed-end ARM $2,268 4.09% 5.06% 1.96 2.55 3.10 $2,272 $2,256 $2,137

Mtg - Adjustable Rate HELOC $40,247 3.67% 4.06% 2.01 2.48 2.79 $40,562 $40,193 $39,030

Total Loans: $655,006 4.95% 4.70% 2.46 3.27 4.06 $673,755 $658,173 $604,383

Other Assets $51,291 $51,291 $51,291 $51,291

Total Assets: $1,075,314 3.59% 3.40% 2.15 3.10 3.76 $1,105,475 $1,082,187 $1,000,384

Share Drafts $120,698 1.89% 2.68% 7.01 7.01 7.01 $119,193 $115,129 $100,988

Regular Shares $301,579 1.78% 1.91% 5.00 5.00 5.00 $307,397 $299,779 $273,230

Money Market Shares $215,153 1.36% 1.30% 3.33 3.33 3.33 $217,928 $215,573 $209,378

IRA Shares $23,650 1.83% 3.33% 10.01 10.01 10.01 $21,892 $20,970 $19,256

Other Shares $8,454 1.81% 1.91% 5.00 5.00 5.00 $8,626 $8,416 $7,671

Other Deposits $0 0.00% 0.00% 0.00 0.00 0.00 $0 $0 $0

Share & IRA CDs $249,436 1.17% 0.66% 1.34 1.34 1.34 $253,814 $252,421 $242,731

Borrow ings $30,585 2.49% 0.62% 2.88 2.88 2.88 $32,758 $32,758 $30,260

Brokered CDs $3,062 1.32% 0.70% 1.49 1.49 1.49 $3,112 $3,104 $2,972

Total Deposits & Funding $952,619 1.56% 1.53% 3.94 3.92 3.86 $964,721 $948,150 $886,486

Other Liabilities $10,240 $10,240 $10,240 $10,240

Total Deposits\Liabilities: $962,859 $974,960 $958,390 $896,725

Equity Capital: $112,455 Net Economic Value: $130,515 $123,797 $103,659

Capital Ratio 10.46% NEV Capital Ratio: 11.81% 11.44% 10.36%

% Change in Capital from Book Value 16.06% 10.09% -7.82%

% Change in NEV from Flat Rate Scenario 5.43% n/a -16.27%

NMD Valuation Method: FASB Topic #825. Decay Rate = Historical Avg.. Discount Rate = FHLB Borrowing Rates. Cost of Funds = Dividend + Estimated Cost of Servicing.

NCUA Risk Classification from the AIRES Questionnaire: Low Risk

Source for Data: BSMS NEV

Analysis (Dec.31, 2013)

Net Economic Value: +/- 300 bps Detail Results

41


FASB Topic # 825 Methodology for Valuing Non-maturity Deposits In May 2010 the Financial Accounting Standards Board (“FASB”) published a proposed

comprehensive “market-to-market” accounting rule for financial instruments (FASB Topic # 825).

In part, FASB Topic # 825 offered guidance on the valuation of Non-maturity Deposits. In

summary:

1. Each institution should identify which deposits are “core” versus “non-core”. Among

other things, this may include an internal analysis” of historical Non-maturity Deposit in-

flows and out-flows, and/or identification of“ surge” or “seasonal” balances. Based on

this analysis, a “deposit withdrawal forecast” may be used to estimate the effective

average life (weighted average maturity) of the core deposits.

2. This analysis and identification of “core deposits” must be done separately for each

deposit account type (ie: savings, separate from checking, separate from money

markets, etc.).

3. A replacement cost (ie: borrowing rate) should be used as the discount rate to value the

core deposits.

4. In the valuation of NMDs, the interest rate (ie: dividend rate) on the core deposits should

be modified (increased) to include and account for the cost of servicing core deposit

accounts (ie: the cost of branches minus fee income from deposits accounts). If internal

analysis is not available, peer or market proxy data may be substituted. (FASB refers to

this modified cost of funds as the “all-in-cost-to-service rate”).

Source: Excerpt from Balance Sheet Management Services Sample ALM (pg 62).FASB Accounting for Financial Instruments Topic # 825: http://www.fasb.org

http://www.fasb.org/

42

Historical Non-Maturity Deposit Decay Rate Analysis Analyzing the last 12 years of history for each share type, we have isolated each period in which there have

been net share withdrawals. These “negative growth rates” are then annualized. From the credit union’s actual

member behavior over the prior 12 years we then calculated six “historical average decay rates.”

1. Average historical decay rate (annualized withdrawal rate) over the prior 12-year period.

2. Average historical decay rate between June 2003 and June 2007 (when the general level of interest rates went

up by 425 basis points).

3. Historical decay rate for the single worst 12-month period.

4. Average of the historical average decay rate and the decay rat in the historical worst quarter (the average of #1

above and #6 below).

5. Average decay rate from the four worst quarters over the prior 12 years.

6. Decay rate for the worst single calendar quarter during the prior 12 years.

In addition, we also include two additional sensitivity scenarios using “industry estimate” decay rates (even

though these assumptions do not reflect the credit union’s historical member behavior and are contrary to the

published FFIEC and NCUA guidance):

7. Valuing NMDs using the “proposed safe harbor average life assumptions” from NCUA’s cover letter to the

National Economic Research associates’ Study “The Valuation of Credit Union Non-Maturity Deposits.” (This

methodology is commonly referred to as the NERA method).

8. Assuming a 1200% decay rate, and that all Non-Maturity Shares will be withdrawn in one day. (This method is

commonly referred to as “valuing all NMDs at PAR).

9. If the credit union has directed BSMS to run an additional scenario using “custom” assumptions (decay rate or

discounts rate or some other set of NMD assumpti8ons no represented above there will also be an additional

ninth scenario included in this document.

Source: Excerpt from Balance Sheet Management Services Sample ALM (pg 62).FASB Accounting for Financial Instruments Topic # 825: http://www.fasb.org

http://www.fasb.org/

43


NEV: Non-Maturity Deposit Sensitivity Analysis Assumptions Summary

NEV Analysis Decay Rate Methodology NMD Discount Rate Assumed Cost of Funds

#1FASB Topic #825: Decay Rates =

12-year Historical AvgFHLB Borrowing Rates Dividend + Estimated Cost of Servicing


Avg Jun'03-Jun'07FHLB Borrowing Rates Dividend + Estimated Cost of Servicing


Historical Worst 12-month PeriodFHLB Borrowing Rates Dividend + Estimated Cost of Servicing


Avg. of 12-yr Avg & Worst Q (#1 & #6)FHLB Borrowing Rates Dividend + Estimated Cost of Servicing


Avg.of the Four Worst QuartersFHLB Borrowing Rates Dividend + Estimated Cost of Servicing


Historical Worst QuarterFHLB Borrowing Rates Dividend + Estimated Cost of Servicing

#7NERA: Decay Rates =

NCUA "Proposed Safe-harbor" Avg Life90-day T-bill Dividend Rate

#8 NMDs at PAR: Decay Rates = 1200% Dividend Rate Dividend Rate


CU Specif ied Avg LifeFHLB Borrow ing Rate Dividend + Estimated Cost of Servicing

NEV

Analysis Decay Rate Methodology

Weighted Avg

Life of Liabilities

+300 bps NEV

Capital Ratio

NCUA Risk

Assessment

+300 bps Change

in NEV vs Flat Rate

NCUA Risk

Assessment


12-year Historical Avg3.92yrs 10.36% Low Risk -16.27% Low Risk


Avg Jun'03-Jun'073.80yrs 10.20% Low Risk -17.26% Low Risk


Historical Worst 12-month Period7.68yrs 19.73% Low Risk -1.14% Low Risk

#4FASB Topic #825: Decay Rates = Avg.

of 12-yr Avg & Worst Q (#1 & #6)3.24yrs 8.70% Low Risk -23.73% Low Risk


Avg.of the Four Worst Quarters3.16yrs 8.48% Low Risk -24.60% Low Risk


Historical Worst Quarter2.78yrs 7.58% Low Risk -29.95% Moderate Risk

#7NERA: Decay Rates =

NCUA "Proposed Safe-harbor" Avg

Life

1.92yrs 8.03% Low Risk -26.97% Moderate Risk

#8 NMDs at PAR: Decay Rates = 1200% 0.51yrs 4.46% Moderate Risk -60.88% High Risk


CU Specif ied Avg Life3.57yrs 9.39% Low Risk -19.63% Low RiskSource for Data: Results: BSMS ALM Model,

NCUA Risk Assessment : NCUA AIRES Questionnaire, Aug. 2012, worksheet IRR – Part D, Step 5, Question 2 cell A87 embedded comment.

NEV-NMD Sensitivity : +300 Basis Point Rate-Shock Summary Results

44

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