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Increase In Intermediate- And Long-Term Rates, Potential Increase In Risk-Based Net Worth Required

October 10, 2013

With the change in intermediate- and long-term rates since the last Call Report cycle ending June 30, 2013, credit unions may find that the reported weighted-average life (WAVG life) of their investment portfolios has changed. This may be true even if no new investment purchases were made. This change in reporting on the 5300 will have an impact on the Risk-Based Net Worth (RBNW) requirement calculated.

For many investments with optionality (callable agencies, MBS pass-thrus, CMOs, etc…) that credit unions purchase, a change in long-term rates also results in changes to WAVG life calculations. As interest rates increase, prepayment of these investments with optionality slows. Additionally, investments that were previously assumed to call may now remain on credit union books longer, thus increasing their WAVG life.

For purposes of calculating RBNW requirements, investments with WAVG lives in excess of 3 years carry more weight than investments with WAVG lives less than 3 years. Boards and senior management teams should be prepared to see an increase in this number over the last call report period. While it is always recommended to understand what other reasons there may be for a change in this number, credit unions should first look to their reported investment WAVG lives in evaluating the reason for the change.

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