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Articles by Ian Lampl
Great expectations
LoanStreet’s capital markets desk manages the pool-building, pricing and execution for billions of dollars of loan participations each year.
Now you’re really floating
Given the rising rate environment, many investors are looking for ways to mitigate their interest rate exposure, often investigating floating-rate assets. As discussed previously in our first article, Floating on Rising Rates to Success, from April 2022, this requires a framework to compare fixed against floating assets, as well as a way to compare floating-rate assets with differing rate reset characteristics.
Floating on rising rates to success
As the era of easy money and quantitative easing comes to an end, and with the Federal Reserve embarking on what looks likely to be several rounds of rate increases, depository institutions should be looking to floating-rate loans to help manage interest rate risk. However, before an institution jumps all-in on floating rate loans it is important to establish criteria for comparing these loans against the more common fixed-rate loans originated by many lenders.
Continuously enhancing portfolio visibility with analytics
Managing a portfolio of loan participations is no different than managing your own loan book: attention must be paid to ever-changing credit risk, interest-rate risk, and one’s liquidity profile, among other things. Yet, loan participations offer some additional complexities. Loans purchased as part of a participation program are almost always different in kind from the loans originated by the purchasing credit union.
Step two: Risk vs. return assessment methodology
In our previous article related to measuring nonprime returns and associated risks, we addressed the importance of having a consistent quantitative framework for measuring return and risk.
Measuring nonprime returns and risks
Currently many financial institutions find themselves having excess liquidity and are experiencing net interest margin (NIM) compression. In response, ideas to enhance yield through riskier investments and/or expanding credit boxes to serve lower credit score borrowers are being discussed more frequently. For certain financial institutions, serving lower credit score borrowers is an important part of their core mission.
Participate in the fight against NIM compression
During the past year, net-interest margin (NIM) compression has become a pervasive challenge for many credit unions.More broadly, many credit unions are experiencing difficulty generating sufficient revenue because of a lack of interest income and seemingly few sources of material, non-interest fee income. Yet, a well-known and simple tool is available to fight this NIM compression – selling loan participations.
Participations Are the Key Enabling Tool for CU Loan Diversification
Expert Opinion They let CUs access a diverse pool of loans without having to invest resources to expand their footprints or areas of lending expertise. Source: Shutterstock In uncertain and volatile markets, many credit unions are looking to rebalance their portfolios but may find methods they have traditionally relied upon suddenly unavailable.
Proactive risk management using participations
Even before COVID-19, risk management was receiving renewed focus at many institutions. While the general principles and goals of risk management have been relatively static, technology, techniques and the potential alternatives institutions have access to have evolved. Many financial institutions are revisiting how loan participations can be part of a proactive, regularly-used, risk management toolkit to fine-tune their balance sheets.
Why the SBA Paycheck Protection Program will change business lending forever
Until this March, your typical small business owner could run their entire life from their smartphone. The one exception: their business banking relationship. That experience had not changed since the advent of email and, in some cases, the fax machine. If that small business needed to apply for credit, update financials, or make a draw request, then fax, email, or physically showing up at a branch was the primary and most effective method. No other part of their life worked in this fashion.
Securitizations vs participations: Balance sheet flexibility vs. leverage
The first credit union securitization recently closed in November 2019 (GTE Auto Receivables Trust 2019-1), undoubtedly catalyzed by the NCUA’s June 2017 opinion, issuing the authority for credit unions to undertake securitizations. Moving forward, credit unions with the scale to access the securitization market looking to liquify a portion of their loan portfolio may be exploring participations and securitizations as competing alternatives, or undertaking both transactions contemporaneously.
Leveling the playing field: Regulatory changes & booming CU business lending
Credit Union business lending is on the rise. Notably, as of Q3 2019, MBLs are 6.19% of total loans compared to 5.65% as of Q1 2018 according to NCUA. This growth is due to a few factors, not the least of which is a number of recent regulatory changes creating room for business lending growth to bloom, including: A loan secured by a 1-to-4 family dwelling, regardless of the member’s occupancy status, is no longer classified as an MBL or commercial loan.
Disaster relief – The credit union way - CUInsight
On July 9, 2019, the five-county area surrounding Kearney, Nebraska experienced unprecedented flooding. The flooding affected several Trius Federal Credit Union members, employees and even one of their branches. Being proactive, Trius immediately went to work implementing a Disaster Relief Program for their members. Dee Schriner, CEO at Trius, knew that this Disaster Relief Program was not just a decision for Trius but for all of their credit union partners.
4 Pieces to Solving the CECL Puzzle for Loan Participations
Expert Opinion Harvesting the data necessary to achieve CECL compliance is in fact quite manageable for FIs that pursue loan participations. Source: Shutterstock. The new Current Expected Credit Loss standard is having a profound financial and operational impact on the way credit unions and other financial institutions collect data and analyze loan performance – and loan participations create an added wrinkle for compliance.
The truth (and myths) about buying loan participations
Buying loan participations enables credit unions to diversify their balance sheets, more profitably deploy excess liquidity, and increase revenue. However, too many credit unions remain on the sidelines because they are uncertain if they will be able to correctly assess the credit risk or manage a cumbersome due diligence and post-sale reporting processes. Much like sales of loan participations, several myths linger and continue to discourage purchases of loan participations.
Mitigating adverse selection: Leveraging advanced pricing strategies
The commercial lending boom among credit unions continues to reach new heights. As of the end of the first quarter 2019, outstanding commercial loans at credit unions reached $73 billion, up 33% since 2015. However, many are facing growing challenges in efficiently maintaining exposure to the stronger performers in their commercial portfolio. Lenders, of course, want to maintain their best client relationships.
No minimums: The new rule for loan participations
Liquidity. Every credit union seems to need it. Yet, no one seems to know where to find it. At the end of 2018, the credit union industry’s collective loan-to-share ratio was at an all time high of 85.6%. But look a little closer and you’ll discover that it is really the tale of two markets. Large credit unions, and especially those with assets greater than $500 million, are over-concentrated with loans and desperate to diversify their balance sheets.
Funding Loan Growth: The New Problem for Credit Unions
Expert Opinion Loan participations keep your cost of funds low while reducing concentration risk. Business growth is top of mind for CUs. Access to fresh capital and liquidity has always been a critical issue for credit unions. In today’s market, that issue has become front and center as record loan growth and lagging growth in share deposits have drained the capacity for many credit unions to continue to fund new loan growth.
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