Mark H. Smith Newsletter

NCUA Publishes IRR Regulation
as a Letter to Credit Unions

By Mark H. Smith
CEO, Mark H. Smith Inc.

The National Credit Union Administration (NCUA) has officially published its new IRR regulation as Letter to Credit Unions 12-CU-05. This new regulation, which we have already introduced in previous issues is comprehensive in scope in that it requires formalized management processes for IRR for certain federally insured credit unions whose assets exceed $10 million. The regulation requires that affected credit unions adopt a suitable written IRR policy and a program to implement the policy. Mark H Smith Incorporated (MHSI) has endeavored to keep its readers apprised of the events taking place with regard to rate risk and will continue to do so in the following ways:

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Constructing an IRR Policy

By Mark H. Smith
CEO, Mark H. Smith Inc.

Last year I was surprised to learn that there was no regulatory requirement for federal credit unions to have an interest rate risk (IRR) policy. I'd always assumed, from the standpoint of good management and best practices, that credit unions would document their policy as to managing such a major risk as IRR.

Think about it for a second: Credit unions are highly leveraged financial institutions and creatures of their balance sheet. Strong balance sheet management is synonymous with good performance and acceptable risk exposure.

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In-House or Outsource for IRR Modeling

Small and mid-sized credit unions are faced with a choice as they begin the process of IRR analysis. One choice is to purchase a model and dedicate staff and expertise to operate the model and determine the credit union's IRR position. A second choice is to engage an outside consultant to perform IRR analyses and estimates. Each approach offers distinct advantages. The final decision may go either way depending on the circumstances and objectives of the credit union. Here are some of the pros and cons for each:

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Economic Outlook

If you follow the economic news, you know that things have improved a bit over the last 12 months. Whether that improving trend will continue and at what rate is a really good question for which I do not have an answer. However, two forecasters affiliated with the credit union system appear to agree that, overall, things are on a slight upswing.

One of CUNA's most important forecasts is that share growth will continue to outpace loan growth through 2012. This outlook, if correct, has profound impact on your net worth ratio and earnings. Credit unions should use caution in accepting deposits when the only use for the funds is to invest at near zero return. Additionally, remember that you will have to capitalize those low yielding assets or your net worth ratio will decline. The good news is in the forecast for 2013 when, with an improving economy, loan growth may outpace share growth.

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The Best of the Best

"Jeff Bezos Gets It" from Forbes Magazine, 4.25.2012
written by George Anders
Introduction by Mark H. Smith

Jeff Bezos is the multi billionaire founder of Amazon.com. He began by selling books on the internet and shipping them from his garage furnished with homemade desks. Today Amazon lists over 20 million different items and racks up over $48 billion per year in sales to 164 million customers. Amazon employs 56 thousand people.

That's quite a story but how does it relate to your credit union with fewer than 50 employees, often far fewer? Well for one thing he started out less than 20 years ago smaller than your credit union is now. Second, his customers are your members. Jeff can teach all of us a lot about credit union members and how to meet their expectations.

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May 2012

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Client Corner

The Bottom of the
Balance Sheet

By Cynthia R. Walker, COO, Mark H. Smith, Inc.

With this article, I want to focus on the bottom half or the liability portion of the balance sheet. In an ALM training I attended several years ago one of the presenters made the statement about how liabilities can be manipulated to dramatically change the outcome of the interest rate risk analysis. I agree with this assessment.

Webinar News

IRR Basics Webinar
to be Repeated

Because of the regulatory emphasis on IRR, MHSI will repeat its basic webinar,
ALM 101—Introduction to Interest Rate Risk on Thursday, June 21st at noon MDT. This popular program starts with the very basics of balance sheet management. Register at: www.MarkHSmith.com

MHSI Schedules Four-Part Webinar Series to Help Meet the New IRR Reg

NCUA has adopted its new IRR Regulation. It is comprehensive, complex, and effective Sept. 30th this year. Starting June 7th, MHSI will present a four-part series on the new regulation and its requirements. Register at: www.MarkHSmith.com