februaryconnection - read-only · loan growth annual forecast* 2018 2019 loan growth 9.50% 8.00%...

LOAN PARTICIPATIONSKris Muller, CFA, Senior Portfolio ManagerBalance Sheet Solutions

Bill Paton, AVP, Lending & Participations Alloya Corporate FCU

www.balancesheetsolutions.org

All information contained in this document is the confidential property of Balance Sheet Solutions, LLC.Distribution outside of the credit union is strictly prohibited.

The information contained herein is prepared for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.

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Agenda

• Current Snapshot of Lending Data• Risks of High Loan Growth• Why Loan Participations May Be Right for You• LP Process• Success Stories• LP as an Investment


Great News for Credit Unions

Improved Financials

Greater Member Outreach

Strengthening the Credit Union Industry


CUNA Projections on Loan Growth

Annual Forecast*

2018 2019

LOAN GROWTH 9.50% 8.00%

LOAN TO SHARE RATIO 85.70% 86.50%

DELINQUENCY RATE 0.65% 0.75%

NET CHARGE OFF RATE 0.60% 0.65%

*CUNA Economic and Credit Union Forecast, January 2019


Downside to Loan Growth

• Hitting maximum concentration ratios• Increased interest rate risk on the balance sheet• Decrease in liquidity

• Increased costs due to borrowing or raising share rates

SELLING SOME OF YOUR LOANS THROUGH PARTICIPATIONS MAY HELP RESOLVE SOME OF THESE ISSUES


“An effective liquidity and interest rate risk management program is a key component of a credit

union’s safety and soundness. The projected economic fluctuations in 2019 make this an

increased area of emphasis.”


Pricing

• LP data is not easily available

• You want to know:• Where is the market trading?

• What loans are most in demand?


Cyclical Participation Market

Sell Side• Sell large blocks to same buyers in the first two quarters of

the year• Have to find new buyers in the last two quarters of the year• Without new buyers they must slow down loan origination or

find outside funding


Cyclical Participation Market

Buy Side• Buy large blocks in the first two quarters of the year• Smaller block sizes are hard to come by during this time• Q4 most active with smaller block sizes as to meet yearly goals

• Usually comes with a high premium (supply and demand)


0.35%

22.73%

3.52%

1.37%

10.42%

3.49%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Net Worth ROA Loan/Share

Year‐Over‐Year Change ‐ Seller

Seller

Peer Average

Case Study ‐ Seller


Case Study ‐ Buyer

6.43%

28.57%

24.98%

1.37%

10.42%

3.49%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Net Worth ROA Loan/Share

Year‐Over‐Year Change ‐ Buyer

Buyer

Peer Average


Lacking Loan Growth

Purchasing a participation may benefit your credit union:

Help to diversify your balance sheet and loan portfolioIncrease Income


Diversification

Participations allow you to diversify your loan portfolio in terms of:

‐ Term‐ Geographic area‐ Type of loan


Current Market

High lending activity provides a deep inventory of diversified loans to choose from:

‐ Autos (including RV)‐ Mortgages‐ ARMs


Compare Loans to

Investments


Just like analyzing an MBS, you want to get details on estimated yields in various payoff speeds


New for you?

If you think purchasing a loan participation may be a new option for your credit union:

‐ Have someone walk you through the process‐ Check all internal policies to ensure compliance‐ Run a “what‐if” ALM analysis to assess interest rate risk before purchase


Great Resource

“Credit Unions can control risks by starting small and gaining experience over time, using best practices to measure, monitor, and control loan participation programs”

NCUA Supervisory Letter “Evaluating Loan Participation Programs” November 2008


Success Story

• Credit Union was under pressure to raise loan‐to‐share ratio• Purchased first loan participation in Fall 2018• From September to December:

• Loan‐to‐share went from 40.6 to 46.1• Net margin went from 3.98 to 4.06


Strategic Planning

2019 HAS A VERY UNCERTAIN ECONOMIC OUTLOOK

LOAN DEMAND MAY NOT BE WHAT YOU EXPECT

LOAN PARTICIPATIONS MAY HELP YOU MEET TARGETS

EVEN IF YOUR MEMBERSHIP WILL NOT


Where to Begin

www.alloyacorp.org/loanparticipations ‐ Microsite• Sign up to receive a weekly email of our deal of the week and get our

inventory sent right to your inbox• All of the information you need to get started (sample documents, checklists,

best practices, etc.)

www.alloyacorp.org/lp‐offerings ‐ Available Listings

THANK YOUKris Muller, CFASenior Portfolio [email protected](518) 292‐3757

Bill PatonAVP, Lending & [email protected](518) 292‐3810


februaryconnection - read-only · loan growth annual forecast* 2018 2019 loan growth 9.50% 8.00%...

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