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Apr 27 2018

Ensuring Data Completeness and Integrity

Article

Written by Matthew Jacobsen

4 min read

Achieve Better Measurement, Performance, and Member Service

As data storage, computation, and analysis technology continue to advance, many financial institutions continue to leverage this evolution to improve performance and customer service. At a minimum, this has included better overall analysis to improve risk/return measurements. Beyond the deeper overall risk/return analysis, many institutions have realized that through better data mining and analysis, they can even become better predictors in such areas as member product/service preferences, price point adoption, and credit performance at a finite level, to name a few. Although many credit unions will not have the budget to obtain the level of data mining and analysis available at large banks, the continuing technological evolution has made a greater level of analysis much more affordable for any size institution. In fact, in today’s world, increasing an institution’s data analysis in certain areas is essential to remaining competitive in addition to meeting ever-changing industry and regulatory requirements.

Given the above, what should a credit union consider in preparation for the next step toward greater use of their data? Two areas, to begin with, should be assessing the credit union’s data completeness (including potential future needs) and data integrity. This should be a standard practice that is done periodically. In performing asset and liability management analysis, modeling, and consulting, we work with a lot of credit union data as it relates to these functions. Periodically, we see deficiencies in data completeness for the expected analysis or data integrity issues in loan, deposit, and investment files. Although we are very adept at cleaning, fixing, and appending additional data to data files, this is not always possible nor the best solution. So what should a data completeness and integrity assessment include?

Data element completeness

To begin with, the first assessment of data element completeness should consider all possible needs in the different areas of the institution. One subset of this assessment could be financial reporting/ analysis, operations, and compliance. Another subset to consider could be products/services, member relationship support and analysis, regulatory requirements, financial analysis (including risk analysis), and financial performance.

The next step of this assessment should include not only current data element needs, but potential future needs. For example, this assessment should be done for those institutions that foresee increasing the depth of their loan and credit analytics on the horizon with the goal of increasing competitiveness and/or performance. Even if this is not on the credit union’s horizon, CECL (for example) is on the horizon and an assessment of data element needs should be done with loan data at a minimum for this purpose. In addition, the credit union should consider current and future processes to a refined enough degree and in their entirety. For example, a credit union may be able to produce historical loan charge-off data elements, but can these be produced by loan type and charge-off date? Can historical recoveries be identified with specific loan types?

Following the needs assessment, the next step would be a review of all the data elements being captured. This means across all systems and processes where data elements are captured including those of an outsourced service provider (ex. credit card processor). In addition, this should also include data element capture in loan participations, particularly where the credit union is not the service provider. This review should also identify how long each data element is retained, how is it stored (including its ease of access), and is it backed up. Once you have identified all of the data elements being captured, how does it match up with your needs?

Data Integrity

Data integrity is defined as:
“The accuracy and consistency of stored data, indicated by an absence of any alteration in data between two updates of a data record. Data integrity is imposed within a database at its design stage through the use of standard rules and procedures, and is maintained through the use of error checking and validation routines.”

In addition to having a complete set of data elements, the data needs to meet a number of expectations to address data integrity. For our purposes, we focus on only three of those expectations in this article. These are accuracy, consistency, and being able to identify the capture time of a data element. These expectations can be ensured by sound procedural and system controls. If manual input processes are involved, are the procedures themselves accurate, consistently followed, reviewed for revisions, and are operators periodically checked to ensure accuracy and consistency? Are appropriate system controls established where possible and applicable? For example, are data fields correctly identified as optional or required. At times we will see certain relevant data fields randomly populated that are used for ALM analysis and as such are clearly identified as optional in the system. In certain cases, we can employ “cleansing” methods to accurately populate the empty fields, but at other times we cannot. Another example is the use of validation rules where possible to ensure data accuracy. There are numerous possible types and combinations of validation rules that can be incorporated to ensure data capture accuracy, consistency, and time identification of the data element capture.

Finally, what are the benefits to my credit union after all of this is done?

More accurate and/or in-depth analysis, including ALM/IRR modeling and CECL/loan analytics modeling results.
Improved decision-making and performance by having a complete and more accurate picture.
Improved competitiveness and member service.
Being able to meet industry and/or regulatory requirements.

Periodically going through this process is a strong practice, particularly as the credit union evolves and the business environment changes. Two areas of change in the industry are the upcoming CECL requirement and the strive at institutions for a higher level of data analysis, “big data,” particularly with loan analytics.

What if I’ve done these assessments and have gaps in my data for CECL or broader loan analytics? Don’t worry; we’ve got answers for those gaps. At Mark H. Smith, Inc., we understand the needs of the credit union and will be offering affordable loan analytics and CECL solutions to help our clients succeed. We’re here to help!

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.