Posted by Mr. Zane Wilson, Director of Brokerage Services, Catalyst Corporate FCU on 5/28/2020

With Treasury yields at historical lows and fewer attractive investment alternatives, many credit unions may have high levels of cash on their balance sheet. And while investments with an embedded call option offer a higher yield, credit unions may also want to consider adding non-callable investments to their portfolio to help reduce call risk when market rates are low. An extended low interest rate environment can wreak havoc on portfolio returns and credit union return on assets (ROA). Weighing credit risk vs. yield with Bank Notes

Credit unions primarily use non-callable certificates of deposits (CDs) and government agency securities to add structure to their investment portfolio and reduce reinvestment risk or call risk. The term “structure” is used because these investments will not disappear or pay down faster when rates decline.

One underutilized investment option for credit unions looking to achieve that structure is bank notes. Bank notes offer a higher yield than CDs and non-callable government agency securities.

Greater risk, greater yield spread

Credit union-eligible bank notes are senior, unsecured obligations of U.S.-chartered state and national banks. Unlike most CDs, bank notes are not covered by federal deposit insurance, which means investors are exposed to the credit risk of the issuing bank. To compensate for assuming this credit risk, bank note investors are paid an incremental yield spread. As the perceived credit risk of the issuer increases, the yield spread grows.

Credit union bank note regulations

In March 2016, the National Credit Union Administration (NCUA) approved a rule change giving credit unions access to a larger pool of permissible bank note investments. As outlined under NCUA Regulation 703.14(f)(5), permissible bank notes must meet the following criteria: 1) The issuer must be a national or state bank, the accounts of which are insured by the FDIC; 2) The remaining maturity must not exceed five years, though the original maturity can be longer than five years; and 3) The bank note must be a senior obligation of the issuing bank and may not be a subordinate note.

Calculated risk assessment

Although bank notes include credit risk, investing for a term less than five years may help reduce some of that risk. Credit union CEOs and CFOs, familiar with financial institution balance sheets, can perform due diligence on a bank and look at a short holding period of less than five years to make a risk determination. CU Investment Solutions’ partnership with corporate bond research firm Gimme Credit offers exclusive third-party analytics on corporate debt. Credit unions can use these insights, along with other key credit metrics, to simplify the due diligence process prior to investing.

Ultimately, with bank notes, credit unions can earn a notably higher spread over Treasury yields versus CDs and non-callable agency securities. Currently, a two-year non-callable bank note issued by Truist Bank, and rated A by S&P, yields 73 basis points higher than the two-year Treasury, giving it a yield of 0.87 percent. A two-year non-callable government agency yields 0.26 percent. The bank note offers a significant pickup in yield for a two-year term. For more information on bank notes, and how they may fit into your investment strategy, contact Catalyst Corporate Brokerage Services at 800.405.7067.

Categories: Business Partners, Financial & Auditing, Strategic Planning & Consulting
Posted by Mr. Idrees Rafiq, Jr., IT Consulting VP, Credit Union Resources, Inc on 5/22/2020

As the coronavirus forces millions to work remotely, your company’s information security is facing unique challenges. This is because remote work environments don't usually have the same safeguards in place as those set up in the office. When someone works in an office, they have several layers of security from their building to the network and the devices they use. On the other hand, when working from home, employees may be juggling caring for children and home schooling, while trying to find a quiet space for a call or to get work done.

To help you work from home more securely, here are five critical steps:

  1. Pay attention. Watch for email messages showing a tremendous sense of urgency, often through fear, intimidation, a crisis, or an important deadline. Cyber attackers are good at creating convincing emails that appear to come from trusted organizations, such as banks, the government, or international organizations. Don’t give into pressure to bypass or ignore security policies or procedures, or an offer too good to be true (no, you did not win the lottery!). Also, be on the alert for messages from a friend or co-worker in which the signature, tone of voice, or wording does not sound like them.
  2. Secure your home network. Because the administrator account is what allows you to configure the settings for your wireless network, you should change the default administrator password. An attacker can quickly discover the default password that the manufacturer has provided. Only allow people you trust to join your network. Require a password for anyone connecting to your wireless network and make sure these passwords are different from the administrator password.
  3. Create strong passwords. When a site asks you to create a password, devise one with at least 12 characters. The more characters your password has, the stronger it is. Using a passphrase, which comprises multiple words such as “bee honey bourbon,” is one of the simplest ways to do this. Using a unique passphrase means creating a different one for each device or online account. This way, if one passphrase is compromised, your other accounts and devices are still safe. To keep up with all those passphrases, consider using a password manager to store them in an encrypted format.
  4. Keep software and hardware up to date. Make sure each of your computers, mobile devices, programs, and apps are running the latest version of its software. Also, ensure your home and Wi-Fi router have the most current firmware available. Cyber attackers are always looking for new vulnerabilities in the software your devices use. When they discover vulnerabilities, they use special programs to exploit them and hack into your phone, laptop, or computer. To stay current, enable automatic updating whenever possible. This rule also applies to internet-connected TVs, baby monitors, security cameras, gaming consoles, and even your car.
  5. Only use work devices for work. Something you most likely don’t have to worry about at the office is children, guests, or other family members using your work laptop or other work devices. Ensure your family and friends understand they cannot use your work devices as they could accidentally erase or modify information or accidentally infect the device.

Filling in the gaps
To help fill in any remaining security gaps, consider the following:

  • When in doubt, type it out. When you receive requests to download a document or donate to a worthy cause, instead of clicking on the email link, visit the organization’s website, typing out the name.
  • Verify attachments and website addresses. When you receive an email, and you’re unsure if the attachment or link/website address is valid, visit virustool (a free resource) to inspect them.
  • Protect sensitive data. Lock your company device while not in use and shred print outs with confidential information.
Categories: Technology Consulting & Compliance
Posted by John Kirby, Investment Officer , Catalyst Corporate FCU on 5/14/2020

I’ll say it, because it needs to be said: bond yields have fallen to near historic lows, again. Until last summer, investors had seen steady rate increases from the Federal Open Market Committee (FOMC) that began at the end of 2016. That meant higher investment yields for credit union investors after eight years with near-zero rates following the 2008 Financial Crisis.

Fast forward to May 2020, and we find ourselves in the same near-zero rate environment. It wasn’t long ago that markets were moving in every direction atExamining Your CU Loan Portfolio breakneck speed, setting unprecedented levels of volatility in the wake of the COVID-19 shutdown. Now, bond markets have stabilized, with most sectors trading within a reasonable, albeit near-zero, range for the last 30 days.

With businesses slowly reopening across the country, the hope is that ongoing economic consequences will be less severe. The FOMC has said they won’t consider raising rates again until the economic fallout from the pandemic is under control. Barring any further aberrant market events, the current rate environment will stand for the foreseeable future.

What does this mean for credit union investors?

Balance sheet strategy

The inverted yield curve of 2019 has passed, and yields are on a normal, upward-sloping curve again. With a normal yield curve, stick to whatever strategy best suits your credit union’s balance sheet. For more yield, ladder investors might consider supplementing their certificate of deposit (CD) and agency holdings with well-calculated credit risk purchases or with four to five-year mortgage-backed security (MBS) purchases for additional yield and monthly cash flow. Credit union MBS buyers typically work with 10-year or 15-year collateral, so you may want to consider expanding your maturity horizons to accommodate 20-year collateral for increased yield. On the short end of the curve, some well-seasoned collateralized mortgage obligations (CMOs) can offer attractive short-term yield and cash flow opportunities. 

Mortgage-backed securities and collateralized mortgage obligations

Due to historically low rates, mortgage refinances are pushing, or exceeding, all-time highs. If you’re an MBS or CMO buyer, that means premium – or prepayment, risk – is also at a record high. Discounted prices are all but gone, so clean, safe mortgage collateral is an investor’s best bet for a secure return. Attributes like big loan counts, small loan sizes and bank servicing are ideal ways credit unions can reduce prepayment risk. However, those features are more expensive now, because prepayment risk is higher than ever. Better yielding options are available but paying a large premium for a higher yield with jumbo collateral and non-bank servicing could work against you in the long run, if current prepayment trends continue. As a result, credit union investors may consider picking up any bonds with clean collateral and +80 spreads to benchmarks, if available.

Credit risk

Risk spreads on public finance bonds have widened drastically over the last 60 days. The COVID-19 shutdowns are wreaking havoc on municipalities, which is creating a lot of uncertainty around the ability of debt issuers to pay their bills. In addition to recent political commentary surrounding the refusal to bail out “poorly run” states, Standard and Poor’s released a report on April 1 entitled, “All Public Finance Sector Outlooks Are Now Negative.” Credit unions may want to consider waiting on these types of purchases until more thorough data is available.

According to Brad Thomas, CFA, a credit analysis specialist with CU Investment Solutions LLC, “It is particularly difficult to evaluate credit stress on issuers. For those participating, we prefer bank notes [over taxable municipal bonds], as bank note issuers have liquidity support from the Fed, regulatory oversight and the ability to raise additional capital. Many municipal issuers do not benefit from these support factors, and for those under stress from pension obligations prior to the pandemic, that situation has only worsened.”

Agency bonds

Agency bullet opportunities remain limited, so you may want to consider adding as many top-tier CD rates as possible. Agency bonds with call features have been a popular credit union buy lately, with Fed MBS purchases reducing value in that sector. Low rates have these agency bonds being called in the hundreds of billions on a monthly basis. As with MBS pools, focusing solely on the highest yield available could end up working against you if that yield comes with a short lockout and you’re reinvesting at a lower rate if it’s called.

Navigating this new market will undoubtedly present a multitude of unique challenges and uncertainties in the months to come. However, tactics such as evaluating your investment portfolio strategy beyond the yield curve and arming your organization with actionable insights are just a couple of ways credit unions can make informed decisions about the road ahead. 

For more information on Catalyst Corporate’s Brokerage Services or a complimentary portfolio review, contact us

All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park, KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934.  CU Investment Solutions, LLC is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.

Categories: Business Partners, Financial & Auditing, Strategic Planning & Consulting
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