Non-Maturity Deposit (NMD) Analysis
What is Non-Maturity Deposit Analysis?
In order to provide analytical insights into your intuition’s deposit book, ALM First Analytics utilizes a proprietary, industry-recognized method that evaluates non-maturity deposits via a rigorous econometric investigation of account behavior. ALM First Analytics couples this model with qualitative overlays, supporting documentation, and sensitivity of key variables. Through our solution, understand how non-maturity deposit account balances and rates behave, both over time and with possible changes in market rates, to create defendable, institution-specific assumptions.
Services with ALM First Analytics
ALM First has two levels of service to analyze non-maturity deposits:
Building Your Model
ALM First Analytics utilizes your historic, institution-specific data to build a robust model:
- Historical NMD data
- Effective final maturity
- Decay rate
- Rate sensitivity factors (beta)
- Non-interest cost
- Anticipated future pricing strategy
What constitutes an institution's NMDs?
- Sophisticated modeling software: leverage our extensive, multi-factor prepayment model based on reputable observed and projected data.
- Unbiased Strategic Consulting: we focus on strategic positioning to improve institutional performance and profitability while minimizing risk
What timeframe of historical data is required for the analysis? What if the historical data are unavailable?
It is preferable to capture an entire interest rate cycle in analyzing data in order to accurately predict dividend rate behavior in future scenarios. For practical purposes, ALM First requests a minimum of five years of monthly data. It is recommend the provided data be updated annually in order to refresh the analysis. If historical data are unavailable, ALM First can work with an institution to develop assumptions using the institution’s anticipated future pricing strategy and ALM First’s internal database of NMD data by FHLB region.
What if the NMD assumptions do not correspond with future behavior?
While it is preferable to capture an entire interest rate cycle when analyzing data, the rate environments of the last decade often have made it difficult to capture enough data in changing interest rate environments to develop statistically significant assumptions for all potential future scenarios. Additionally, historical behavior is not always a reliable indicator of future account behavior. There are many factors that are important determinants of value and that may not be predicted from history, including competition, the economy, and the institution’s flexibility in changing offering rates.
Regardless, ALM First is confident in our approach, and our modeling continually passes regulatory scrutiny. For additional testing, ALM First recommends stressing each NMD assumption annually as a “what-if” scenario to determine the potential impact on the institution. Example scenarios include decreasing the effective final maturities, applying multipliers to the rate sensitivity factors, and increasing the decay speeds.
Why not value NMDs at par?
In theory, an account with no maturity has no duration and no economic gain or loss. However, in practice, non-maturity deposits do have duration, as accounts remain with an institution over time, regardless of the prevailing interest rate environment. In economic value analyses, opinions vary as to what weighted average lives and discount rates are appropriate for non-maturity deposits.
One approach is to set the economic value of the accounts equal to par value in all interest rate scenarios. However, par values recognize no economic gain or loss in the value of non-maturity deposits. This means, for example, that the results of the model are unaffected whether a financial institution pays 0.00% or 5.00% on regular checking accounts. ALM First believes that gains or losses should be captured in the model to better assess the economic value of low-cost funds and loyal depositors. Industry theory generally holds that if a financial institution attracts funds at lower rates than its borrowing cost, it creates economic value in its balance sheet. ALM First recommends modeling NMDs at par only as a “what-if” scenario.
Why perform an NMD analysis instead of applying the regulatory Net Economic Value Supervisory Test and standardized NMD values?
For the federally designed Net Economic Value Supervisory Test, standardized values are used for both the base case and shocked scenarios for NMDs. ALM First recommends running this valuation on top of the regular NMD valuation, and this can be completed with each ALM Report. ALM First encourages institutions to use institution-specific assumptions in order to capture values of funds not considered in standardized assumptions, such as depositor loyalty and the strength of the competitive landscape.
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Contact us today to model your future NMD behavior with a robust, proven model.
All investing is subject to risk, including the possible loss of the money you invest.
“ALM First” is a brand name for a financial services business conducted by ALM First Group, LLC (“ALM First”) through its wholly owned subsidiaries: ALM First Financial Advisors, LLC (“ALM First Financial Advisors”); ALM First Advisors, LLC (“ALM First Advisors”); and ALM First Analytics, LLC (“ALM First Analytics”). Investment advisory services are offered through ALM First Financial Advisors, an SEC registered investment adviser with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. Moreover, ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. Balance sheet advisory services are offered through ALM First Advisors. Financial reporting services, loan introduction services, and other special project services are offered through ALM First Analytics. Neither ALM First nor any of its subsidiaries provide legal, tax, or accounting advice. This firm is not a CPA Firm.
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