LEADERSHIP LETTER
January 18, 2024
Fiscal Year 2023 saw financial effects MSIC has been anticipating for a number of years. After nearly 25 years of consistently declining interest rates, we experienced a dramatic rise in rates over a very short period of time. Credit unions that had resisted the temptation to extend the maturity of their investments to increase yield when rates were extremely low were not affected when the rates spiked. Financial Institutions that did not hold yield discipline, however, faced serious liquidity issues and a dramatic rise in their unrealized loss exposure from investments that were under water after the spike in rates. As a direct result of this rise in interest rates, upticks in inflation, and other post-pandemic financial effects, consumers sought other financial products as The Pandemic-related infusions of cash reversed, and the fear of recession increased. Financial institutions which had previously been awash in liquidity saw liquidity decline rapidly, and many were forced to compete for deposits for the first time in many years, thereby rapidly increasing their cost of funds. Moving forward in 2024, cost of funds management, and dealing with a much smaller loan pipeline will put pressure on credit union earnings. However, MSIC’s member credit unions are supported by high capital and good asset quality in the face of the earnings challenges ahead.The MSIC Cooperative is well-positioned for the next year.
Starting in the prior year, and in anticipation of a rise in rates, MSIC undertook a strategy to de-leverage its balance sheet by paying off borrowings at maturity and letting the balance in its Liquidity Reserve Fund decline. This strategic move helped MSIC’s earnings by significantly reducing its interest expense over the year. Also, MSIC recaptured half of its loss reserve during the year as the risk of loss from The Pandemic subsided and the financial condition of member credit unions improved. This also helped MSIC offset the impact of the overall decline in assessment revenue from the decline in the growth rate of excess shares and deposits as previously noted. At this writing, nearly all MSIC members are well-capitalized and well-run. With the recent stabilization in Federal Reserve interest rate policy, and the possibility that a soft landing of the economy will avoid a significant recession, we are confident that the few institutions which experienced a problem with interest rate risk are well on their way to resolving their issues. MSIC’s deposit insurance risk remains low as we enter the new year. As you will see in the pages of this report, MSIC enjoys a vibrant and effective business model, high capital, and sufficient resources. Our Active Risk Management program, now in its 15th year, has helped MSIC keep its deposit insurance risk low by helping avoid problems before they pose significant risk for MSIC and any affected member credit union. In addition to, and perhaps because of, the interest rate volatility noted previously, last March we all experienced a significant modern-day bank run with the collapse of Silicon Valley Bank and others, including Credit Suisse. MSIC’s members handled the crisis and allayed consumer fears very effectively. MSIC’s webinar series helped with immediate training on how to manage consumer contagion. MSIC members not only helped consumers evaluate their real risk, but also saw deposit increases as consumers sought out MSIC’s full deposit insurance system. As a direct result of the Silicon Valley Bank crisis, MSIC received numerous inquiries from institutions seeking to join our Cooperative. Those inquiries were from Massachusetts-based institutions and also from institutions in Maine,New Hampshire and Connecticut. As many of you know, MSIC has, for years, sought to expand membership beyond Massachusetts in
MSIC recaptured half of its loss reserve during the year as the risk of loss from The Pandemic subsided and the financial condition of member credit unions improved.
These factors also resulted in a significant decline in the growth rate of excess shares and deposits among MSIC members from the record setting growth rates of the past five years. MSIC members experienced a decrease in excess shares and deposits during Fiscal Year 2023, resulting in reduced revenue for MSIC.
4 INTERNATIONAL COLLABORATION
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