SUMMERVILLE, S.C. — No one knows what 2010 will hold, creating one of the most difficult environments ever for charting an asset management strategy with confidence.
The result: CFOs and other analysts around the country told Credit Union Journal they are deploying a number of strategies for hedging their bets.
With deposit growth far exceeding lending demand, the $425-million Heritage Trust FCU here is among those finding limited options in putting its liquidity to work. With the economy's prospects still uncertain and defaults still high, CFO David D'Annunzio is very concerned both about short-term profitability and betting long on fixed assets at today's rates.
"For now, we are prepared to weather the credit risk storm," D'Annunzio told CU Journal. "We believe our underwriting should not change in response to elevated charge-offs. However, if this trend continues much longer than the next 12 months, I believe we will be forced to reconsider underwriting standards. We have been preparing for the inevitable rise in interest rates over the last 12 months. We have sold a portion of our 30-year fixed mortgage pool and have shortened the duration of our investments by nearly 30%. Until the future rate environment becomes clearer, we plan to shorten the balance sheet; this obviously has short-term repercussions to profitability, but we believe the health of the credit union depends on it."
Cut Deposit Rates More Aggressively, Expert Suggests
With lending not generating the revenue it has in the past, Tom Manley, managing director with ALM First Financial Advisors, urges CUs to be more aggressive on deposits and cut rates significantly. Credit unions that are growing because of deposits are "doing it at a cost to overall spread," he noted, and "missing the opportunity of the steep yield curve that is engineered by the Fed for financial institutions to earn their way out of their problems."
That is just what Heritage Trust is seeking to do. "Squeezing margin and staying short are at odds, but that is precisely what we are attempting to accomplish," D'Annunzio added. "We do not want to drive short-term profitably by chasing yields with longer duration at the expense of long-term stability."
In recent weeks the central bank has talked up continued deflationary risks in the economy, but has also telegraphed its strategy for drying up the monetary stimulus it pumped into the system for the last two years. Commodities price spikes coupled with continued dollar weakness has also suggested the need for interest rates to rise at least by the end of the year, but the disconnect between those increases, stagnant wages and falling housing prices is making it tough for CUs to chart an asset management strategy with confidence.
"It is very difficult to predict interest rates because of the unprecedented levels of economic headwinds that exist now-and because not only have the old fiscal stimulus tools never been used to this degree, but the new tools have never been tried before," Jim Toliver, executive director of advisory services for Balance Sheet Solutions, a subsidiary of Members United Corporate FCU in Warrenville, Ill. "We also consistently recommend that our credit unions build balance sheet strategies that perform well across various rate environments. When the range of plausible interest rate environments is so diverse, building an asset/liability management strategy optimized around one rate forecast is not prudent."
Setting Same Provision for Loan Losses in 2010
Pensacola, Fla.-based Pen Air FCU is taking that approach by preparing the same provision for loan losses in 2010 as it has for 2009, but expecting those losses to be on the front-end of the year. CFO David Tuyo is doing his best to prepare the $985-million institution for whatever the next couple of years may throw at it.
"We are hedging with funding strategies, and have prepared a plan of attack with various levers to pull to address each scenario," Tuyo told Credit Union Journal. "Fortunately we are only 53% loan-to-assets so we are able to position both sides of the balance sheet without affecting our membership."
Tuyo suggested other CUs to encourage long-term deposits so they can extend the duration of their liabilities and think about FHLB funding to garner longer-term advances. He espoused a strategy similar to the one being employed by Heritage Trust FCU, saying CUs should try and thread the needle on the other side of the balance sheet by shortening their assets.
