Prepare Now for Future Mortgage Production

Mortgage lenders with strong deposit bases may not face many challenges funding mortgage production, but those that hold long-term loans in portfolio still face interest-rate risk. Given the historically low interest-rate environment and recent volatility in the markets, now may be a good time to lock in an interest rate for term funding. How can a lender that’s flush with retail deposits balance its liquidity and interest-rate risk management needs?

Prepare and Compete Later

  • Goal: Introduce new 10-year and 15-year fixed-rate mortgage portfolio product while managing interest-rate risk.
  • Solution: Forward Starting advance with two-year forward starting period and three-year fixed-rate period. Fund loans off deposits for first two years and take on advance funding at year three.
  • Result: Savings of $337,000 in interest expense on a $10 million advance compared to a traditional five-year Fixed Rate Credit Hybrid advance.

Case Study:
A small community bank in Athens, GA, has built a deposit base from its local municipality, as well as from individuals in the surrounding counties. It has a strong market presence that has allowed it to gather deposits and provide banking services to its clients. It has offered 3/1 and 5/1 ARMs, along with HELOCs, to meet the residential mortgage needs of its customers. With rates at historically low levels over the past several years, several of the institution’s competitors began offering 10-year and 15-year residential mortgage loans.

In 2014, the community bank’s management decided that it needed to revamp its mortgage loan offerings to retain existing customers and add new ones. To offer the longer-term loans that its residential customers were seeking, management had to become comfortable with a portfolio mortgage strategy.

While funding the loans was not a significant concern due to its strong depositor base, the interest-rate risk that these loans would generate was an issue. How could the bank offer competitively-priced term mortgage loans without exposing itself to a significant increase in interest-rate risk?

The management team decided to use a Forward Starting advance from FHLBank Atlanta to help offset the interest-rate risk generated by the pool of longer-term loans. They identified the interest-rate exposure of this new loan program to be at the five-year mark. Instead of borrowing a traditional five-year Fixed Rate Credit advance and placing the funds on its balance sheet today, the bank borrowed $10 million using a two-year forward starting, three-year Fixed Rate Credit Hybrid advance. This gave their management team the ability to lock in a three-year fixed-rate advance at today’s funding costs, but not actually place the funds on the balance sheet – or incur interest costs – for two years.

The community bank will fund the pool of fixed-rate mortgages for the first two years from its robust deposit base, and then at the end of the two-year mark, will automatically receive the advance funds at a rate negotiated up front with FHLBank Atlanta. The rate on the Forward Starting advance is 2.46 percent, which is 31 basis points above the rate on a five-year Fixed Rate Credit Hybrid advance. However, since the Forward Starting advance is only funded for the last three years, the total interest cost is $738,000, which represents a $337,000 savings over a five-year Fixed Rate Credit Hybrid advance.

Strategic Benefits of Forward Starting Advance

  • Compete for Members: Offering an intermediate-term fixed-rate portfolio product for which the funding and pricing are fixed for a known time provides loan officers the opportunity to retain existing customers and attract new ones.
  • Keep Costs Low: The forward starting feature enables institutions to leverage a strong deposit base to fund the first three years of the pool, then use an advance negotiated at today’s low rates to fund the next two years. Because the advance is on the balance sheet for less time than a traditional advance carrying the same term, total interest cost is significantly lower.
  • Lock in Interest Rate Protection at Today’s Lower Rates: Locking in funding at today’s lower rates can potentially help mitigate interest-rate risk at the five-year mark when management was most concerned about its exposure.
  • Achieve Portfolio Growth: The bank has the opportunity to grow its loan portfolio by attracting high-quality mortgage business from both existing and new clients at yields more attractive than other investment alternatives.
  • Easy to Explain: The strategy is easy to explain to regulators, ALCO, or the board of directors.

FHLBank Atlanta is the NAFCU Services Preferred Partner for Credit Union Liquidity and Financing Services. Learn more about our Preferred Partner by visiting nafcu.org/FHLBank_Atlanta

 

Creating a Collaborative Fraud Prevention Program

By: Ann Davidson, VP of Risk Consulting at Allied Solutions.

Many financial institutions in 2016 began picking up their efforts to build more robust risk management strategies. Creating a collaborative, cross-departmental risk strategy has proven to be a great way to manage fraud risk. Watch the full webinar to learn more: Collaboration is Key to Manage Fraud Risk.

One strategy your credit union may want to adopt is to create a risk culture awareness program that will help your financial institution better monitor, identify, and manage potential fraud activity.

What is a Risk Culture Awareness Program?

A risk culture awareness program is an ongoing initiative managed by leaders within your credit union to encourage enterprise-wide awareness of fraud and financial loss threats, so every member of your staff is better equipped to quickly and effectively detect and address these threats. Such programs include creating a fraud investigation unit to centralize the management of these risks, or adopting an enterprise risk management strategy that includes fraud mitigation.

What are the steps an organization should take to implement a risk culture awareness program?

1. Develop the foundational changes that will encourage this new culture of risk awareness.
2. Apply these new organizational changes and the risk culture awareness program.
3. Measure the impact of these changes to determine if they were effective.
4. Apply any necessary changes to the risk culture awareness program.
5. Adjust your risk culture awareness program as needed to meet the evolving needs of your organization and address current risks.

There is something to say about knowing your entire staff is doing their best to help ward-off fraud before it happens. There is also the added bonus of being able to tell your account holders all the hard work you are putting in to help keep their information and money protected – which will inevitably lead to good things for your organization. No matter where 2017 takes you, know that there is much to offer in the way of risk awareness and prevention.

Listen to a more in-depth discussion about how your compliance team and your risk management teams can work together to mitigate risk by watching the full webinar here: Collaboration is Key to Manage Fraud Risk 

 

Allied Solutions is the NAFCU Preferred Partner for Insurance—Bond, Creditor Placed (CPI), Guaranteed Asset Protection (GAP), and Mechanical Breakdown Protection (MBP); and rateGenius. Learn more at www.nafcu.org/allied.





Top Drivers of Change Important to CUs

By: Stacy Styles, Vice President and Senior Business Leader, Mastercard.

Technology and other drivers of change are dramatically reshaping consumers’ lives and the environment in which we – and they – operate.  As a result, we face a future that challenges us with ever-growing complexity.

To better anticipate and shape that future, Mastercard partnered with Kantar Futures to identify and analyze the changes taking place over the next 4- 5 years.  Our approach was a combination of proprietary research (consumers, financial institutions, and merchants), expert interviews, and desktop research, workshopped with a team of accomplished futurists.

Our objective was simple: to explore specific opportunities for ourselves and our partners, so we can better prepare for and shape this future. Learn more about Mastercard’s research by listening to this insightful podcast. Click here to listen.

Through this work, we identified 40 drivers of change in areas such as demographics, values and attitudes, technology, consumer experience, macroeconomics, and much more.  We grouped these drivers into three critical areas:

  • Relationships: Reimagining how to define, connect and build relationships with consumers
  • Technology: Harnessing the power of technology to establish responsive, seamless, and secure consumer experiences
  • Standing for something: Recognizing the growing importance of embedding greater purpose in the corporate charter

Credit union leaders should focus on these drivers of change:

  1. Emerging entrants in the financial services landscape: Smartphones and digital tech are enabling mobile operators, tech giants, and startups to jockey for position in the financial services industry.  FinTech firms are unburdened by regulators, legacy IT systems, branch networks, and the need to protect existing businesses; and some, like Venmo, have become quite successful.  Where they are vulnerable, and credit unions are strong, is security.
  2. Rising member service expectations: People’s expectations for more efficient, enhanced, and human-centric member services are growing as consumer choice proliferates, access to information increases, and it becomes easier to communicate via online platforms.  Creating a culture of service will help establish the long-term relationships critical to success. Learn more in Mastercard’s podcast series. Click here to listen
  3. Increasing expectations for anything on demand: Companies are providing more on-demand solutions, whether through same-day deliveries or via mobile apps. This is altering baseline consumer expectations: they can get whatever they want whenever they want it. Financial services companies with Big Data will continue to play an important role in enabling us to meet people’s desires and expectations and to recognize them as individuals, not just accounts.
  4. Growing desire for customized and tailored products: There is a rise in demand for personalized products that fit not only the individualized tastes of consumers but also begin to anticipate their needs. As one credit union executive we interviewed said, “People aren’t looking for individual items anymore; they want to have a full-service experience that will not only solve their problem but excite and delight them at the same time.” Learn more in Mastercard’s podcast series. Click here to listen.
  5. Ubiquitous and constant social connectivity: The integration of mobile devices into Americans’ daily lives is leading to continuous, seamless, and instant social connection. 66% of Americans agree that they could not get by without their smartphone. Mobile needs to be at the heart of everything we do.
  6. The social path to purchase: The center of social trust has moved from large, stable, corporate brands to peer-to-peer networks. Due to social media and online ratings, consumers feel comfortable trusting their peers, despite the fact that they may be strangers. They are quick to share what they love – and what they don’t – about any interaction they have with a business.

For a more in-depth conversation about these trends, listen to the podcast series with Stacy by clicking the links below: 

The World in 2020: Part 1

The World in 2020: Part 2

Mastercard is the NAFCU Services Preferred Partner for Credit, Debit, and Prepaid Branded Products. More educational resources and contact information are available at www.nafcu.org/Mastercard.

 

Key Insights Credit Unions Need to Know about the Nation’s Underbanked

By: Bryan Clagett, CMO at Geezeo, and Adele Glenn, Emerging Channels Innovation Architect at San Antonio Federal Credit Union (SACU).

According to experts, one in four American households is considered unbanked or underbanked. That’s approximately 50 million individuals.* Credit unions are uniquely positioned to tackle the toughest issues facing these individuals and make a positive impact on their quality of life.

Two experts who have dedicated their careers to researching and creating tools to serve these segments: Bryan Clagett, CMO at Geezeo, and Adele Glenn, Emerging Channels Innovation Architect at San Antonio Federal Credit Union (SACU), shared some key insights with us.

What are the demographic and psychographic characteristics of the financially underserved?

Adele:

The behavioral data shows that whether these members are unbanked, underbanked, or financially struggling, they exist across all age groups and all demographic groups.
We refer to the unbanked as living in a “prepaid economy” because they are reliant on using prepaid cards with no traditional account structure. Psychographic data shows that those who are financially struggling have difficulty managing their finances from day to day. The inability to build a financial cushion leads to not having access to affordable credit; which ultimately inhibits them from building up the long-term savings necessary to achieving their aspirational goals.

Bryan: There are places in the United States where roughly 20% of residences have no bank accounts. Some examples of the regions are: Miami, Florida; Detroit, Michigan; the Bronx in New York, and several counties in Texas. It seems that urban areas and areas in the mid-south are the geographic regions with the highest percentage of unbanked.

Why are so many people in the United States outside of traditional banking channels in 2017?

Bryan: There are several reasons, but if we were to boil it down I’d start with:

  • Many immigrants, millennials, and others do not trust financial institutions, including credit unions.
  • Credit unions need to be more proactive when it comes to educating their members on financial literacy and actually show members the opportunities/options credit unions have available.
  • The typical underbanked consumer is working long hours with long commutes and often lives paycheck to paycheck.
  • They do not have the time or money to wait for checks to clear nor are they able to visit the brick-and-mortar branches.
  • The hard reality is that payday lenders exist because some financial institutions do not offer affordable products to consumers with limited resources.

For a more in-depth conversation, listen to the first podcast in this series with Bryan and Adele: “Key Issues Credit Unions Need to Know about the Nation’s Underbanked – Part 1 (Podcast)”

Geezeo A-Z LogoGeezeo is the NAFCU Services Preferred Partner for Personal Financial Management (PFM). More educational resources and contact information are available at www.nafcu.org/Geezeo.

Image source: FDIC July 2014 The Financial Brand

5 Emerging Risks and How to Mitigate Them

By Joe Luedke, Risk Consultant – Emerging Risks, Risk & Compliance Solutions, CUNA Mutual Group.

With each technological advance emerges new risk. Think about it: Every technology upgrade, new mobile device and new payment method brings exposure that wasn’t identified previously.

The real threat occurs when these risks aren’t anticipated or communicated within your organization.

Here are five emerging risks every credit union should have on their radar right now:

  1. Social media. Employees posting comments on social media that are inaccurate or appear incomplete or disparaging can threaten your organization’s reputation. Be careful when taking disciplinary action, as the National Labor Relations Board can classify social media activity as “protected concerted activity.” Mistakes here can lead to retaliation, wrongful termination claims and expensive litigation.
  2. Internet of Things (IoT) era. The IoT offers new tools and technologies that provide constant connectivity. It also creates new opportunities for data compromises. Workplace devices – like printers, clocks, break room appliances and TV – and employee devices – like watches, Bluetooth headsets and fitness trackers – are all susceptible to hacking, which can lead to unauthorized access to your network.
  3. Bitcoin and blockchain. Members may already use bitcoin and blockchain for fast and unregulated transactions, sometimes associated with nefarious activity. Unfortunately, about a third of bitcoin trading platforms are hacked.
  4. Ransomware. Today’s phishing attacks can restrict access to files and threaten disruption or permanent destruction of sensitive information unless a ransom is paid. Ransoms can range from hundreds to thousands of dollars, and they are typically payable in bitcoin.
  5. SMiSHing and website spoofing. As demand for mobile access grows, members don’t think twice when they receive texts claiming to be from their credit union. These fraudulent texts can infuse malware or redirect members to spoofed websites that allow fraudsters to capture or confirm personal or account information.

Credit unions must be ready to deal with emerging risks like these, while still tending to familiar threats. So, the bottom line is, don’t be complacent. Start implementing basic steps – like the following – today, so you don’t fall victim:

  • Educate staff and members about spam, shams and other scams. Ensure they understand how to identify fraud. Teach them what to click and what not to click and how to use proper technology etiquette to keep themselves – and your credit union – out of harm’s way.
  • Stay in the loop, as executive involvement is critical to success. Remember, when risk management is effective, nothing bad typically happens and the status quo is maintained. But, when you’re blindsided by a problem, poor risk management usually takes the blame.
  • Follow a process that includes risk mapping matrices, risk heat maps and process mapping to help uncover potential risks, quantify their potential impact and keep leadership aware.
  • Implement risk and compliance best practices, including policies and procedures to reduce potential loss. A number of great resources in the credit union marketplace are available to help, including those in CUNA Mutual Group’s Protection Resource Center.

As technology continues to evolve, risks will continue to emerge. So, do your best to visualize, track and communicate risk at your credit union. Once you identify an emerging risk, you can begin taking action to mitigate it.

Learn more about emerging risks by watching our recent webinar “Emerging Risks on the Radar.”

CMG logoCUNA Mutual Group is the NAFCU Services Preferred Partner Mortgage Payment Protection. Learn more about our Preferred Partner at www.nafcu.org/cunamutualgroup.