NCUA Unfurls New Net Worth Proposal

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

On January 23rd the NCUA released its 198 page risk-based net worth (capital) proposal, which if enacted will dramatically alter the way in which credit unions manage their balance sheets. The proposed rule applies to all NCUSIF insured credit unions with assets greater than $50 million. Although multifaceted, the core of the proposal will require a level of capital based on the risk posed by various classes of assets rather than the across the board requirement of 7% required under current PCA rules.

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Opinion—Five Reasons Why Your Investments Broker Shouldn't be Your IRR Advisor

By Mark H. Smith

1. Investment brokers are not obligated to provide advice that is in the credit union's best interests.
The broker's best interests are often contrary to the credit unions'. Brokers earn their commissions by marking up the price of the instruments they sell you. It doesn't seem like much, but a few basis points on a large transaction can mean thousands of dollars in income to the broker. The broker is not obligated to disclose this mark up to you. The commission is hidden in the price. Additionally, the more often you trade the more profit the broker makes. Frequent trading is usually a detriment to the credit union. One of the best questions that you can ask your broker or investment advisor is, "How do you get paid?"

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Economic Update—What Can Janet Yellen do for Credit Unions in 2014?

By Jason Williams
Financial Analyst, Mark H. Smith, Inc.

In our January Newsletter I published an economic update entitled "Life after Taper" discussing the possibility and probability that the Federal Reserve will continue the process that it began in December 2013 and reduce its unprecedented open market bond buying program that has been in place over the last three years.

I pointed out that there are benefits to the bottom line for credit unions if interest rates began a slow and measured climb upward. Using data mined from NCUA call reports and SNL DataTrac during the last interest rate increase cycle 2004-2007, credit unions in general saw an increase to net interest income during the last interest rate increase.

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Using Segmentation Strategies to Manage Cost of Funds When Rates Rise

By Mark H. Smith

Segmentation strategies continue to evolve as a tool to manage the cost of funds and optimize the flow of deposits. We began urging clients to consider segmentation strategies in 2001 and continue to advocate their use.

The objectives of a segmentation strategy are (1) separate rate-sensitive from non rate-sensitive deposits; (2) minimize the cost of non rate-sensitive funds at a very low level, (3) For rate-sensitive deposits, minimize the cost at or below market rates to control the flow of funds. That is, attract needed deposits when necessary and discourage undesirable deposits. Remember that, in terms of economic substance, shares and deposits are the same and I use the terms interchangeably. Also the terms interest expense, dividend expense and cost of funds are used interchangeably.

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Client Corner

Forecasting with Accuracy

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

I have heard people joke about how great it would be to be a weather forecaster, because they only have to be right part of the time and still have a job. This is a little facetious, but there are some times when forecasting interest rate risk might have some similarities to forecasting the weather.

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New Faces

Please join us in welcoming a new employee to the Mark H. Smith organization.

Mike Collett has recently joined Mark H. Smith, Inc. as Director of Marketing.

Learn more about Mike Collett

Featured Webinar

Managing Your Investment Portfolio in a Rising Rate Environment

Do you like all of the investments in your investment portfolio? If you own callable securities you may be holding those securities longer than you have in the past. When interest rates rise, the dynamics of your investment portfolio will change. If you haven't visited your investment strategy recently, 2014 may be a great time to do so.

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Is your regulator requesting a Third-Party review?

A third party review is frequently requested by regulators who would like to see a second opinion as to the quality of the credit union's IRR management process. Learn More

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