Investing in Bonds:
Should Credit Unions Take the Plunge?

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

Credit union membership has changed since my initiation into the industry in the mid-1970s. In that era, borrowers had far fewer options than they do today. The credit union was often the only choice for a reasonably priced loan. Additionally, members then were much younger and more likely to borrow. Loan demand often exceeded available funds. The question of what to do with shares not loaned out seldom arose.

Over the last four decades, our population has aged and likewise credit union members are aging. Older members borrow less and save more. Of course, credit unions will market to upcoming generations and will design products to meet their needs. But a slowed population growth has resulted in fewer prospective borrowers and there is far more competition for their business than with past generations. The robust lending environment that powered the success and growth of the credit union industry in the past will be difficult to regain in future periods.

So, how do you know if your credit union should take plunge?

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NCUA Modifies IRR Regulation—
Exempts Small Credit Unions

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

Less than a week before the NCUA interest rate risk (IRR) Regulation became effective, the NCUA board performed a totally unexpected turnaround and proposed major changes in the definition of credit unions subject to the regulation. Actually, the title of this article is a little misleading. NCUA has not actually changed the regulation as yet; but they are proposing to change the definition of "small credit union" and simultaneously the IRR Regulation. The likelihood of adopting the proposed changes is near certain.

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Opinion: Is NCUA Doing Small Credit Unions
Any Favors with Respect to IRR Analysis?

The NCUA Board has sent entirely the wrong message to small credit unions. By its actions, the Board is saying small credit unions need not be concerned with interest rate risk (IRR). Of course officially, NCUA is saying no such thing. Their position is credit unions not coming under the IRR regulation need to analyze IRR and act accordingly where it is found. But their actions speak louder than words. Based on NCUA's recent decisions, some small credit unions will continue to conduct business as if they had no risk and will pay a high price when IRR materializes.

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Dangerous Minds

Written by Callahan & Associates
Introduction by Mark H. Smith

In the following article, Aaron Pugh of Callahan & Associates points to alternative thinking in a positive way. Clearly as the trustees of your member deposits and shares your thinking needs to be well thought out and as risk free as possible. Yet Mr. Push points out that often such a philosophy doesn't lead to progress and success. Read the article and determine for yourself its applicability to your credit union. This article is reprinted with the permission of Callahan & Associates.

Click for Aaron Pugh's article.

Webinar News

In the fall of 2012 MHSI will continue to offer webinars to any credit union officer or volunteer without charge or obligation. For a complete webinar schedule, visit our website. Highlights for the fall of 2012 include:

Liquidity Risk 101—An Introduction to Liquidity Risk — This basic webinar has been recently updated to include prospective on the continuing record-low interest rates that have prevailed for almost four years and are expected to prevail indefinitely. Additionally, we will present a new outlook and explanation of the NEV approach to measuring IRR. NEV is conceptually more challenging for non-financial participants. However, with ever-increasing mortgage lending occurring, NEV is becoming more important than ever.

ALM 101—An Introduction to Interest Rate Risk—NCUA has proposed a new liquidity risk regulation along the lines of the IRR Regulation recently adopted. The proposed regulation has progressed through the exposure and comment stage and is now under final consideration by the NCUA Board. We anticipate this regulation will be adopted along the proposed lines. In this introductory webinar, we will present basic liquidity risk principles along with tools to estimate and manage the risk. We will also present the new regulation in its proposed form with suggestions for meeting the requirements.

Concentration Risk 101—An Introduction to Concentration Risk—Credit unions are, by their nature, risk concentrators in that they are small, local, and often focused on a concentrated field of membership such as an employer group or church group. This webinar presents the basics of concentration risk and makes suggestions for identifying, estimating, and controlling the risk.

Swimming with the Sharks—a monthly topical webinar addressing a current point of interest. October's Sharks presentation is entitled Bond Basics and will present arguments for and against investing in bonds. MHSI sees this period of excess liquidity and challenges in the investments area continuing indefinitely. We strongly recommend this webinar. Register at the website.

Client Corner

Common Questions
About the ALMPro^® Model

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

Below are some frequent questions that we have received from clients and regulators. This list is not all inclusive, but is intended to be a resource to help you address questions that might arise in your ALCO, Board Meetings or during regulatory examinations. As always, do not hesitate to contact us if you have ALMPro^® or interest rate risk questions or concerns.

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Webinar News

MHSI has archived almost all of its webinars and newsletters. They are available through our website and we encourage you to access and use them.

To access these archived webinars, register here.

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