O'FALLON, Mo. — With big question marks over when interest rates will finally rise, what's coming down the regulatory pike and how the political landscape is going to change, credit unions need to keep their eyes peeled for both challenges and opportunities in the second half of 2014.
Jason Peach, SVP/CFO at $161 million West Community CU here, said the big "ifs" in the second half aren't coming from big financial and economic shifts, but rather from the political, legislative and regulatory shifts. Over the next six months, credit unions will need to keep a wary and vigilant eye on NCUA, CFPB and others.
"We're still in the comment period for the risk-based capital proposal; that is extremely concerning to all credit unions," he said. "We're a large home equity lender. We've done it safely and have better asset quality than our peers, but will have to hold significantly more capital" because of a high concentration of those loans.
Sonya Jaynes, CFO and strategic planning coordinator at $670 million Red River Employees FCU, Texarkana, Ark., agreed. "I think we're going to continue to see more of the same," Jaynes said of the economic environment. "I would like to be more optimistic than that, but I think that for the rest of the year we're going to keep on keeping on. If we could get some momentum going and more than just a few little breadcrumbs I think it would make a big difference."
Instead, the big challenge is whatever comes down the pike from NCUA regarding its proposed risk-based capital rule.
"I think just monitoring that situation and being aware of what the norm is, and then monitoring that situation, is going to be vital," she said. "Because once rates go up, we're all going to be fighting again for the same dollars, and people are going to want higher rates. That's what they've been waiting on. You're going to find out just how much hot money you really have on hand. I think they just need to remain aware of their liquidity position."
With that in mind, Jaynes said she has tracked Red River's certificates and the penalties members have taken for early withdrawals.
"It's important to evaluate — and if your system will allow you to — on the longer-term certificates, maybe implement a more stringent early withdrawal penalty," she said. "On our system we have options — 90-day, 180-day and all. I'm not ready to go to all; I'd like to see a 270-day penalty for the four- to five-year certificates."
Examining Pricing & Efficiencies
David D'Annunzio, CFO at South Florida Educational FCU in Miami and chair of the CUNA CFO Council, reminded that credit unions must be monitoring their profitability and cost of funds so they are prepared for when things really pick up — whenever that may be.
"In light of fierce competition, you have to make sure that an adequate job is being done on determining profitability and making sure that your offering rate is sufficient to cover the cost of funds and credit risk and all the other associated costs of generating loans," said D'Annunzio. "The industry should be careful not to get caught up in competing so fiercely that they make unprofitable loans."
The CFO of the $876 million credit union noted that none of this represents a dramatic change from what he expected at the start of 2014.
What continues to be imperative for credit unions, he added, is "renewed efforts to make sure that you're being effective at reaching out to your membership and looking at your efficiencies. That's not new, it's just continuing, and maybe doing it at a higher level than you were six months ago, based on the fact that we're largely in the same economic environment as six months ago."
Bill Kennedy, CFO at $149 million Interior FCU, said that many CUs will spend the second half of the year looking closely at the liability side of their balance sheets and doing their best to shock test it for whenever rates finally rise.
When Will Rates Finally Rise?
"We really don't know when interest rates are going to go up. You hope at some point they do," said Kennedy. "I think personally that the longer we stay in this rate environment the worse it is for credit unions. But I think if interest rates do indeed rise, there's a reason for that — the economy is getting better."
But all of that is likely further on down the line, he said, and not something CUs should expect to see in the remainder of 2014.
"If we see any bumps in the interest rate it's going to be minor," he said. "I'm not much of a better, but I would say chances are pretty good that by the end of this year interest rates are probably going to be right around where they are now. Maybe a tiny bit higher, but I don't think you're going to see a dramatic increase in rates in the next six or seven months."
