Rising interest rates expected sometime in 2004 should prompt credit unions to consider implications to financial performance. Credit unions may want to invest in shorter-term instruments early in the year and see increasing yields as rates rise.
Maintaining shorter investment durations will allow credit unions to take advantage of higher, more attractive rates and not be locked into lower rates over the longer term. Likewise, it will help minimize interest rate risk created by large amounts of low interest fixed-rate mortgages that have been put on the books in the past 18 months. Exploring new investment alternatives and strategies, through the assistance of a registered investment advisor, may complement existing expertise and maximize investment returns in a challenging low-rate environment.
Rising rates will also result in interest spread compression and a cooling mortgage market. To offset these, CUs should look to other sources of fee income related to their lending programs. Greater marketing emphasis on adjustable rate mortgages may also make sense.
CUs should review their loan pricing structure and consider member-price demand relationships. Reducing loan rates by even as little as 25 basis points could stimulate more lending volume and result in an overall increase in income.
Indirect lending, with appropriate credit quality standards in place, can complement a CU's traditional consumer lending package. Having a lending relationship with a member also provides better opportunities to cross sell.
Tom Merfeld is SVP CU financial solutions, CUNA Mutual Group.
