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A/LM Education and Anticipating What is Top of Mind

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We are looking forward to hosting 3 days of asset/liability management (A/LM) education next week. Often our education classes will have a similar foundation of how to use A/LM to make decisions, how to identify what environmental factors to watch, and how to see potential problems that might be hiding in the modeling—to name a few. Beyond the base topics, there are always new things happening that also become part of the discussion. These new topics are driven by the things at the top of decision-makers’ minds. As part of preparation for the A/LM education courses, we always work to anticipate what people are most worried and excited about.

Here are some of the things we think will be a focus of attendees during our upcoming classes.

Rates

How are rates changing and what it could mean about the economy? A great example of uncertainty has been happening in the past two short months of 2016.  Consider short-term rates, where the news has confidently expressed each of the following perspectives:

  • The Fed is going to increase rates at least four times in 2016 – Much of January
  • The Fed is not going to increase rates in 2016 – Much of February
  • The Fed is going to increase rates two times in 2016 – Currently

While the rate change amounts are small – from a big picture perspective – the larger concern for credit unions is often the reason for the change, since it represents different outlooks for the economy. The various paths that the economy can take may have an impact on members’ mindsets, and result in shifting behavior. The behavior can impact different areas of credit union growth. For example, which of the above paths could play a role in slowing the fast consumer loan growth the industry has been experiencing?

Of course, beyond short-term rates, there are also a lot of questions swirling around long-term rates.

Stock Market

Another area of uncertainty has been the stock market:

  • The market is falling quickly and could experience another 10% correction – Much of January
  • The market is rebounding and should stabilize – Early February
  • The market is dropping, and this time it could be sustained – Mid February
  • The market is climbing and making up most of the loss this year – Currently

Each of these paths also impacts the mindset of members. Which of these paths, if they were to continue, may lead to more deposit growth? Which could cause deposits to shrink? What could each of the paths do to lending?

Technology

What new technologies are being released and what are their potential impacts on how people will look to get things done in the future? Three days could be spent on this topic alone, but a prime example of this is Amazon Echo, which came out in 2015. So far this year, there are a lot of parties looking to interface with this product, so they can be part of the new generation of home automation, with the objective of making it easy for consumers to get things done. Currently, Amazon Echo is making it easy to get a lot of things answered or done – such as what the weather will be, if a team won, what the best Italian restaurant is in the area, adding events to your calendar, buying things from Amazon, or adding items to your shopping list.

As other parties are hooking up to the Echo, they are providing new conveniences like making it possible to change the temperature in your house from your car, or helping you locate your misplaced keys. What does this have to do with uncertainty for credit unions? Beyond the potential direct impact of even more routine shopping happening through Amazon (where hopefully your member set up your credit card for one-click payments), there are other potential impacts to depository institutions. Will people be asking their device where the best place is to get a loan, or which places will give the best rate? The same could be true for members looking to transfer money to a better money market rate, or finding the best rate on a 1-year CD. Will people be able to send instant payments just by vocalizing it as soon as the thought occurs? Adoption of technology is always a hard thing to predict, but the impact on a member’s mindset, and their desire for things to be even easier, is to be expected.

It is impossible in a blog to cover all of the things that will be on attendees’ minds in our 3 days of A/LM education, but these are a few of the things that we think will be brought up.

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Do Lower PLL Ratios Mean The Credit Crisis Is Over?

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On the surface, recent credit union provision for loan loss (PLL) trends seem encouraging; industry-wide through second quarter 2010, the ratio of PLL to average assets has declined by 31 basis points to an annualized ratio of 0.81%.  However, delinquencies and charge-offs as a percent of loans have only decreased by 11 basis points and 5 basis points respectively for the same period.
Of course every situation and institution is unique, but as we look toward 2011, credit unions might want to consider:

  • Is the improvement in PLL sustainable?  Or, could it be a function of allowance accounts being over-funded?  As noted above, recent delinquency and charge-off trends do not look as positive as the industry PLL trend
  • Do the unemployment outlook, real estate values and the trends in member credit scores support the assumption that PLL will continue to decrease through 2011?
  • What if many of our usually dependable borrowers lose their jobs and, at a certain point, run out of savings?
  • What if strategic defaults become more commonplace?  Consider that strategic defaults are currently blamed for as much as 25% of foreclosure activity
  • Could commercial real estate woes trickle down to further impact the economy and cause broader loan losses?

Is 2011 the year that we’ll see sustainable improvements in PLL?  Hopefully it is, but with all of the uncertainty out there, we may not want to count on it just yet.