The predictions have become very familiar.
For a good five years credit unions have been told this will be the year that interest rates will finally snap higher after being cut to historic lows to try to spur the American economy out of the Great Recession.
And once again, when it comes to a large increase it appears "this year" will be put off to next year.
Vincent Hui, senior director with Cornerstone Advisors Inc. in Scottsdale, Ariz., said he expects interest rates will go up "a little bit" in 2015, but nowhere near the sharp rise some forecasters predicted near the end of 2014.
"The Fed Funds Rate will go up perhaps 25 basis points," Hui predicted. "The question is: how steep will the rise be? We do not expect the rise to be too steep, because although the economy is improving things are still a little fragile. In 2016, maybe 2017, rates might go up a little bit more."
The big wild card, according to Hui, is the 2016 elections as it's possible that interest rates could be affected next year not just by economics, but by politics.
Lower oil prices in recent months have added to consumers' disposable income, which Hui said "hopefully" will add some momentum to economic growth. "But we need to see more of a track record of sustainable growth before we call the economy improved. We need to see employment growth, more new business launches and other indicators of a recovering economy.
"We have been in 'recovery' for two years, and need to go beyond recovery to stronger growth," he said. "While growth brings the risk of higher rates increases, it is needed."
While few economists could have predicted nine months ago crude oil prices would drop so low now, Hui said the economy needs structural strength, not just a one-time event. He noted many thousands of people have been removed from the employment numbers by the U.S. Bureau of Labor Statistics, "so job recovery may be overstated."
It will not be until 2016, Hui reasoned, until there will be a "real need for the Fed to tap on the brakes."
Rewards Checking
Jeremy Foster, chief financial officer at Austin, Texas-based BancVue, said his company's research indicates a probability of rising interest rates.
In a recent white paper, BancVue pointed out simply averaging the forecasts of the individual members of the Federal Open Market Committee suggests that the Fed Funds Rate could increase to 1.13% in 2015, 2.5% in 2016 and 3.75% in the long run.
"The time for problem solving is now," the white paper states.
According to Foster, the U.S. might see a "gradually rising" rate environment. He said an increase of no more than one percent in 2015, perhaps another point in 2016, and then a point or a point and a quarter in the longer run would be an example of a "slow rise" on a historical basis.
"Right before the crisis we saw a 3% rise in a single year," Foster recalled. "That would have been a good time to be in CDs."
BancVue is a wholesale financial services company. Its product line includes Kasasa accounts, which are rewards accounts that can be offered by CUs and community banks. In 2013, the company said rewards-based accounts provided a median 52% discount on cost of funds or 104 basis points across nearly 700 community financial institutions.
"The benefits of Kasasa accounts increase in a rising-rate environment," said Foster. "Typically, people think of CDs as a hedge against rising rates. The credit union essentially overpays for risk protection during the time the CD rate is above the price of funds. They are not a good hedge when there is a time of gradual rate increases. They reprice when they mature, so they are not good for a period longer than the term of the CD."
With reward checking, the rate goes up a lot more slowly because there are three products rolled into one, Foster explained. There is a promotional rate, which right now is 2%. Second is a non-qualifying product, which typically is going to be 0.05%. Third is the above cap, 0.5%. It is a unified product for the member, but the dollars within the account get treated differently.
"We are talking about $6 in new value every month for every member, counting savings from switching people to e-statements," he said.
Consumers are focused on the flexibility of the rewards account, as opposed to locked up in a CD, Foster continued. He said money in a rewards account typically stays for eight or nine years, as opposed to three years for a CD.
"But in comparison to a CD, the credit union is saving a lot of money," said Foster. "There are other rewards checking accounts that accomplish a similar goal. Kasasa includes training, compliance and a strong, national brand."
Hui of Cornerstone Advisors said rewards checking products are a good option if they help attract new checking accounts and retain checking account balances. However, he said, CUs "really have to take a look at the cost of rewards. The credit union cannot end up paying more for rewards than they are paying on interest rates. The business case needs to be sound."
Core Deposit Strategy
Hui said in 2015 credit unions and their boards of directors should think strategically. On the deposit side, he said there should be a core deposit strategy going forward.
"Credit unions want to know as rates rise they have a good, dependable cost of funds," he said. "Some credit unions do a better job of it than others. They need to be competitive, but the focus needs to be on checking versus savings/money markets/CDs. The latter are more cost-sensitive. In a rising-rate environment, the best option for credit unions is not get more non-interest-bearing checking accounts."
NCUA has sounded warnings to some of Cornerstone's clients regarding deposits especially those that came in the door in 2009-10 because most of that came from banks. "It is hot money, and there may be some run-off," Hui pointed out.
On the loan side, there are two opportunities, according to Hui.
First, CUs should examine their existing portfolios for variable-rate loans. A loan repricing higher is good, as long as the loan is performing, he noted. But if members have to pay higher rates there may be more delinquencies and charge offs.
"Credit unions need to stress test their portfolios to determine their overall risk," he advised.
Second, for growth, there is an opportunity to break down by loan type. On the mortgage side as rates continue to rise there will be less refi activity, so Hui said CUs need to think about their purchase mortgage strategy.
"They need to reach out to Realtors to continue to feed their mortgage volume," he counseled. "When rates rise, and people are expecting rates to rise, there will be more of an appetite for fixed-rate products. In that case, an attractive, 30-year mortgage is good and will drive volume, but if held on the balance sheet they create interest-rate risk."
For those CUs that have sold into the secondary market but have retained servicing, Hui said they are in good position because those servicing rights will be more valuable. As rates go up, he noted, there is less probability of borrowers refinancing.
Member Business Side
On the member business side Hui foresees a different picture in 2015, especially for member businesses that have lines of credit, which usually have variable rates that renew every year. He said CUs need to look at the business at review time to ensure the business is still viable. "The renewals need to be attractive because they are going to increase costs for the businesses."
Historically when rates go up, people who have been sitting on the fence about buying a house or a car tend to rush in. Hui said credit unions everywhere need to be ready to handle the business when interest rates finally creep up.
"It might lock in a below-market rate, but it means getting a loan you might not otherwise get," he said. "Credit unions need to decide where they put their pricing bets. When rates rise mortgage volumes go down so the pie is smaller, but the yields get better. So credit unions need a plan for the loan markets they are in so they know where to be proactive."
