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May 12 2015

Client Corner – What Can MHSI Do for You?

Client Corner

Written by Cynthia R. Walker - CEO

4 min read

A particular advertising campaign created by UPS sticks in my mind as a successful campaign. I easily recall and still reference the tag line “What can Brown do for you?” As clients of Mark H. Smith, I would like to reinforce to you the services we provide and “What MHSI can do for you.” I’ve recapped below a list of the many services we provide to our customers. Many of you are aware of these services, but sometimes as I talk with clients, they realize they may not be fully utilizing the resources we offer.

IRR Analysis – The ALMPro Report measures interest rate risk using income simulation and NEV analysis. Gap analysis is also contained within the report. We offer several levels of analysis from ALMPro Classic through ALMPro Premier based on the credit union’s asset size, complexity, and other needs. Our web site www.markhsmith.com details the various levels of service we offer. As your needs grow or change, please contact us and we can help you explore our other options. We have multiple options to serve small to large, and simple to complex institutions.

What-if Scenarios – Our ALMPro Report service includes up to 2 what-if scenarios. A what-if scenario can be helpful as you explore new business lines, product offerings, and shifts in the balance sheet. A what-if scenario may also include adjusting the assumptions for non-maturity shares to evaluate the impact to IRR if share behaviors change.

Loan Turnover Calculations – Loan turnover or prepayment assumptions are important when modeling interest rate risk. The assumptions need to accurately reflect current credit union prepayment trends and also how payments may change in different rate cycles. We can help our clients calculate current loan turnover by loan type. We will also help calculate contractual maturities for loan types to assist in making assumptions in the up-rate scenarios. This is included in the ALMPro service.

ALCO Consulting – MHSI staff are available for discussion prior to or during your ALCO meeting to help you interpret and understand the ALMPro Reports. We have exceptionally friendly and qualified staff to assist you.

Board Meeting Consulting – If you would like a MHSI staff person to participate in board meetings or if you would like to schedule a time to discuss the report in preparation for the board meeting, please call or email one of us.

Training Through Webinars and Seminars – We have a very full schedule over the next 6 months with online webinars and live seminars. The training schedule is available on our web site. I encourage the management team, ALCO, and board members to utilize this resource.

One-on-One Training – As team members and board members change, it is often helpful to schedule some one-on-one training to review and discuss your credit union’s ALMPro Report and the concepts of interest rate risk. GoToMeeting is a very valuable tool that we have available.

Policy Review – As the credit union’s balance sheet composition shifts, net interest margins and ROA change, and economic and regulatory environments evolve, the policies need to be reviewed periodically for relevancy. We will assist in the review of your current ALM, IRR, Liquidity, and Contingency Funding policies as part of our service.

Regulatory Questions and Responses – Regulatory scrutiny of interest rate and liquidity risk has increased in the last few years. As we have adopted more realistic assumptions for non-maturity shares, the oversight agencies may take exception. We are always available to assist with responses to their comments and findings. We will also help our clients develop an appropriate action plan if necessary to address items of concern. Unlimited phone support is part of our service.

Trade Organization Meetings – If you are affiliated with a trade organization and are looking for a guest speaker, we are very interested in these opportunities. We bring over 30 years of experience in the credit union industry and interest rate risk analysis to the table. Please keep us in mind.

Optional Fee-Based Services

Liquidity Analysis – The ALMPro Report offers static liquidity ratio analysis as a part of every report. We also offer expanded liquidity forecasting in a base case, a moderate stress, and a severe stress scenario. As loan portfolios grow, investment portfolios and cash reserves recede, and deposits fluctuate, a cash flow projection may become a valuable tool in business planning. We offer this service at an additional fee.

Executive Summary – The executive summary is a written recap of the ALMPro Report. The executive summary is prepared by a senior analyst and contains an economic update, an explanation of the dashboard, and the results of the ALMPro Report in an easy-to-understand format. Many credit unions have found this to be helpful for boards and ALCO committees, and it can bolster meeting minutes.

Regulatory Package – The regulatory package analyzes the results of the ALMPro Report running multiple alternative non-maturity share assumption scenarios. Given the current prolonged low interest rate environment and the possibility that the nature and behavior of non-maturity shares may change from historical data, additional interest rate risk stress scenarios provide the end user with a variety of results and empower the end user to make well informed decisions when evaluating IRR. We have also found this to be helpful when addressing regulatory issues and questions.

Deposit Study – A deposit analysis studies the behavior of non-maturity shares over time and provides institution-specific results needed to accurately measure and manage interest rate and liquidity risk. As a credit union becomes larger and more complex, a need for a deposit study may increase. With increasing complexity the regulatory focus will also increase and some of their concerns may be addressed with a deposit analysis. A full deposit study includes decay, beta and lag, surge shares, non-interest expense, and a present value for multiple rate scenarios.

Beta and Lag Analysis – The beta or rate sensitivity is derived from the historical rate paid by the credit union. It displays the percentage that deposit rates adjust per a given change in interest rates. The lag also defines the timing of the credit union’s response to a rate change. This is an option for customizing some of the model inputs for non-maturity shares at a cost less than the full deposit study.

As you can see from the list above, Mark H. Smith, Inc. offers a wide variety of services. We have staff with extensive industry experience and we work very hard to provide our clients with exceptional value and outstanding customer service. If you have questions, comments, or suggestions for improvement, please do not hesitate to reach out to me or one of our highly trained staff.

Related/Popular Articles

Jan 14 2021

Five Top Credit Union Topics For 2021

As we move into 2021, the following topics might be worth discussing and considering with your management team.

Earnings

During the first half of 2020, net interest margins came under substantial pressure as market interest rates were shocked dramatically downward. Net interest margins are expected to remain under downward pressure throughout 2021 as investment portfolios continue to reprice lower and share growth continues.

One of the easiest and quickest responses to declining interest income is to address the cost of funds. Many credit unions still have room to decrease their cost of funds, as shown in the September 2020 ending period graph below.

Source: NCUA

Delinquency

Based on the September 2020 call report data, loan delinquencies and net charge-offs remained low and were below September 2019 delinquencies. Loan forbearance and other assistance programs in place through the entirety of 2020 may have helped delinquencies. Also, certain sectors of the economy are not as impacted as others. The unemployment rate is expected to continue drifting lower in 2021. However, as the assistance programs are lifted, delinquencies and charge-offs are expected to increase as unemployment remains substantially above the years leading up to the pandemic.

Source: MHSI Online Peer Analysis Module through September 2020

Credit Union Philosophy

Serving the underserved has always been a hallmark of credit unions, and now more than ever, there is an opportunity to do this for many credit union members. As these times have been challenging, credit unions can continue to evaluate and prioritize how to best serve members in the coming year, especially those under financial stress. Exploring how to provide service to those that are underbanked might be an opportunity. One option may include evaluating risk-based lending policies and programs, especially given the robust liquidity on most credit union balance sheets. New and alternative avenues to bolster income should continue to be explored.

Digital and Technology

As the pandemic shifts and prolongs, credit unions should evaluate if their electronic delivery channels meet members and potential members’ needs. Moving to or improving digital delivery channels should be accelerated and prioritized. Digital delivery should include evaluating loan origination and servicing channels to maximize new loan volumes. Online and remote financial services will continue to grow and may be the preferred way members access and manage their financial activities.

Balance Sheet Growth

Before the pandemic, many experts anticipated credit union loan growth to taper off but remain positive. After the first quarter of 2021, loan production became unpredictable, however, by the end of the third quarter, annualized loan growth was 6.34%. Real estate lending, driven by the abruptly lower interest rate environment, helped with the growth. Experts anticipate loan growth to be around 6.0% to 6.5% over the next 12 months as the economy recovers.

The first few months of 2021 may see strong share growth as the second round of government assistance and stimulus takes hold, and households remain reluctant to spend until signs of COVID easing and warmer weather occur. Share growth last year increased at an annualized rate of over 18% and is expected to be approximately 8.0% to 10.0% in the coming year. If double-digit growth continues, earnings sufficient enough to sustain capital will be critical. If economic conditions improve and overall consumer activity increases, loan growth and increasing long-term interest rates could counter some of the anticipated income pressures. Fortunately, the credit union industry is very well capitalized and able to ride out the adverse conditions and absorb some more growth, even if earnings are reduced.

Nov 04 2020

The Bottom of the Frog Market

Several years back, I went to Mexico for a vacation. While there, I found a ceramic hand-painted frog-shaped planter that I wanted. My husband loves the hunt, and his quest began. Every time we saw a frog-planter, he would start negotiating with the vendor to get the lowest possible price. We searched for several days and would stop in different towns and check the markets while enjoying our vacation and exploring. When we found a frog, he would inquire about the price and negotiate for further discounts. After a few days and no success at getting the cost of the frog below a certain point, my husband declared, “we have hit the bottom of the frog market.”

…

The Bottom of the Frog MarketRead More »

Sep 30 2020

Economic Uncertainties and Interest Rate Certainties – Asset Allocation Assessments and Considerations

Future GDP Projections

In September, the Federal Reserve Chairman spoke publicly on several occasions and reiterated that the central bank is committed to helping the economy “for as long as it takes.” He noted continued improvements in the economy, but also acknowledged a highly uncertain path ahead. The September FOMC (Federal Open Market Committee) projections are now projecting a full-year GDP decline of 3.7%. This is substantially better than their previous expectation of a 6.5% decline. However, they lowered their 2021 outlook from 5.0% to 4.0% and their 2022 outlook from 3.5% to 3.0%. Their 2023 outlook is at 2.50%.

Interest Rates and Economic Uncertainties

The FOMC also indicated that they would allow inflation to run above 2.0% on a sustained basis before any federal funds rate increases. As such, most individual members of the Committee indicated that the federal funds rate could remain close to zero through 2023. Some economists and analysts even think that we may not see an increase in the federal funds rate until 2024 or 2025. They believe that it will take up to five years for the global economy to fully recover to pre-pandemic levels.

The risks to the FOMC economic growth projections are high. Even the Chairman of the FOMC acknowledged the economic uncertainty of the path ahead. Following the sharp rebound in many economic data measures and drop in the unemployment rate, some recent measures have disappointed compared to expectations and some are indicating a recovery that is stalling. At the current time of this article, the nature of further fiscal stimulus continues to be negotiated in congress and some are not expecting a resolution until after the presidential election. Of course this only adds to the current economic uncertainty.

What is highly certain over the short to medium term timeframe is that interest rates will not likely be increasing more than just relatively minor fluctuations in the medium to long end of the U.S. Treasury yield curve. It is more likely that potential risks on the horizon could drive medium and longer-term U.S. Treasury yields even lower.

Reassessing Balance Sheet Strategy

Given the above outlook, it would certainly seem that some credit union balance sheet strategies of recent years should be reevaluated for the foreseeable future. Reassessing asset allocation strategies is possibly more relevant at the current time than at any time in the past several years. For example, the credit union may want to ask itself how much should we be redeploying assets into two to three year investment CDs given current interest rates on those maturities. If the answer is less than previous years, then what are the alternatives we can explore.

Priorities Going Forward

In exploring alternatives, the first priority for credit unions is of course serving members. Assessments and considerations could include expanding the types of loans offered, reevaluating risk based lending allocations, increasing real estate concentrations, debt consolidation programs, and loan payment support alternatives to name just a few. Secondary to the first priority are considerations such as allocations to loan participations and alternative investments. For example, should the credit union assess CUSO or similar investment possibilities. What are all of the possibilities for these type of investments that may be available to the credit union? After all, an alternative of earning five basis points at the corporate credit union with too much of assets is not likely to accomplish any priorities or goals for the credit union.

The present time and foreseeable future is a great time for credit unions to really show how they can serve and support members during these challenging times. Being there for your members is for sure the highest purpose for the credit union and always assessing ways to provide service and assistance to them will always be the credit union’s first priority. In addition and secondarily, now more than any time in recent years it may make sense to really take a deep dive into the above asset allocation assessments, considerations, and possibilities. Ideally, the best answers going forward would combine the first priority with the second to optimize balance sheet performance while best serving members.