DENVER-Interest rate risk tops the list of concerns for state credit union regulators, but a still tepid economic recovery that has prompted weak loan demand also is creating worry.
That was the message from the NASCUS State System Summit here. Credit Union Journal sat down with representatives from four states-Kansas, Michigan, Ohio and Washington-to discuss recurring examination issues, local and macro economic conditions, and other risks to their CUs.
Michael Wettrich, Deputy Superintendent
Credit Unions Division of Financial Institutions,
Ohio Department of Commerce
DENVER-On the third morning of the NASCUS Summit, the Federal Reserve Board released its latest market guidance. Wettrich said the most significant development for credit unions was the Fed's promise to keep interest rates low for three to four years.
"We think ROA will continue to be a challenge, as will growing capital," he said. "The yield environment is not there and margins will continue to be squeezed."
With the Fed keeping interest rates "artificially low," Wettrich continued, it is very difficult for credit unions to price products. He said Ohio regulators are reviewing interest rate risk "very closely" while looking for model validations.
"We are making sure credit unions are demonstrating ALM and risk awareness," he said.
The status of CU real estate lending is "pretty good" in Ohio, Wettrich said, in part because underwriting has been "sound" and most credit unions managed to stay away from risky loans.
"One other concern we have is due-diligence is lacking for the third-party companies credit unions are doing business with, especially on the IT side," he declared. "Credit unions need to do a better job of knowing who has access to their members' information. We have hired IT-specific examiners in Ohio to address this issue."
Wettrich is a current member of the NASCUS board.
John Kolhoff, Deputy Commissioner
Credit Union Division, State of Michigan
Office of Financial & Insurance Regulation
DENVER-According to Kolhoff, when credit unions develop an ALM model, they must understand the volatility of funds and the impact of rates on deposit products.
"Interest rate risk is the biggest risk for us given what is going on with the government's manipulation of rates," he said. "If rates go up quickly it will have a huge impact on Michigan institutions."
While some CUs are very "simplistic" in their funding, Kolhoff said others have complex funding sources that demand extra considerations that "must have pricing strategies for loans and portfolios."
One bit of advice Kolhoff's office gives frequently: look at underlying assumptions to ensure they are realistic.
"When institutions reach for yield they take on more risks," he observed. "They need both appropriate due diligence and ongoing due diligence."
Kolhoff is a current member of the NASCUS board.
Linda Jekel, Director of Credit Unions
Washington Department of Financial Institutions
DENVER-Jekel said the Washington DFI is concerned about the number of fixed-rate mortgages credit unions are taking on as they search for loans.
"When you look back at history to S&Ls in the mid-1980s, many of them had lots of fixed-rate mortgages in their portfolios," she said. "We lived through the subsequent crisis, and I don't want to substitute 'credit unions' for 'S&Ls.' We want to know credit unions are prepared for the risks of interest rate spikes."
In Washington, much of CU loan growth in recent years has been in first and second mortgages. Jekel said credit union mortgage lenders need to have complete strategies in place, including if they are planning to sell loans on the secondary market, if they are going to hedge, or if they will be borrowing long term from the Federal Home Loan Bank.
"The other big concern we have is the compliance burden," Jekel said. "No matter the asset size, credit unions are struggling to keep up with the changes. It also is a struggle for the examiners to know all the changes."
John Smith, Administrator
Kansas Department of Credit Unions
DENVER-Kansas is a much smaller state than Ohio, Michigan or Washington, Smith noted, with just 79 credit unions, 40% of those with less than $20 million in assets.
"The compliance problem is multiplied in smaller credit unions," he said. "Other issues we are watching include lending and excess liquidity. Deposits are coming in that the credit unions do not need because loan demand is low."
According to Smith, with many investment options carrying low yields, the Kansas Dept. of CUs is cautioning the state's credit unions to exercise great care when extending their time horizon in a search for higher rates.
Although Kansas has been hit hard by the ongoing drought, Smith said the effect on credit unions will be limited. "Farmers have crop insurance as a safety net, so they should be able to continue to make their loan payments. On a one-year basis it won't hurt credit unions too much, as long as they made sure farmers had crop insurance. The real problem would be if the drought continues into a second year or longer."
