ROYAL OAK, Mich.-The slight increase in rates should be viewed by credit unions as a remainder to ensure balance sheets are in order, one analyst is reminding.
"We have, I think, seen the shot over the bow that interest rates aren't going to stay at these levels forever," said Charley McQueen, president of McQueen Financial.
While no institution should be surprised that rates, which have been at near historic lows, have shown signs of increasing, McQueen said that nevertheless some institutions "continually go out and attempt to get yield and extend their portfolios. We've seen them extend their investment portfolios by buying a bunch of 15- and 30-year mortgages and step-up callables ... Unless you're prepared to do some sort of interest rate swap or some long-term Federal Home Loan Bank-type advances to offset that, a number of credit unions have taken on significant interest rate risks."
So what can CUs do to prepare? McQueen offered a few suggestions.
"The easiest thing to do is to ensure that you're not causing problems to your balance sheet-you're not putting on long-term mortgages, 7-, 8-, 9-, 10-year loans," he said. "Focus on more short-term car loans, 5/1-type ARM-type mortgage products, and work at keeping your duration of loans shorter for the new ones you put on your books."
On the investment side, McQueen advised "keeping nice, solid cash flow maturity where you have constant cash flow coming back every quarter, every month, every year." With those two steps, he said, unless CUs have over-extended themselves on loans, credit unions can protect themselves fairly well at little or no cost.
Restructuring May Be In Order
Thirdly, McQueen noted that CUs can borrow fixed-term funds from corporate CUs, the FHLB or brokerage CDs, though he noted that that can get a bit expensive, and may not be an option for smaller CUs.
Beyond that, CUs can also restructure their portfolios, including selling long-term mortgages. In some situations that may require taking a loss now, said McQueen, but better to take a smaller loss now than to wait and face bigger problems as rates go even higher.
For small CUs, McQueen stressed the importance of sticking with core competencies such as car loans, as well as finding any means of boosting non-interest income streams. "If you're doing a lot of car loans, are you selling gap insurance? Are you doing life and disability? And are you properly pricing those?"
For small CUs that need to do mortgages, McQueen suggested offering 5/1 or 7/1 ARMs rather than 15- or 30-year terms, as well as working with CUSOs or other mortgage companies that will purchase those mortgages.
McQueen said that CUs may even see a slowdown in deposits, and advised continuing to accept deposits as long as they're priced properly.
The biggest risk, he reminded, is institutions not properly managing interest rate risk. "Too many credit unions think they can correct as it becomes an issue ... instead of focusing on what they can do to maximize profits every day."
