Professional sports thinking has it that the best defense is agood offense. Brian Daskalovitz feels much the same way aboutmortgage lending and its related fee income.

Daskalovitz, accounting services manager for FedChoice FederalCredit Union in Lanham, Md., is planning for flat financial growthin 2014. He also believes that rising interest rates will dampenany further mortgage refinancing, slicing into the $350 millioncredit union's noninterest income. To combat the anticipated incomedecline, Daskalovitz said FedChoice is ramping up its mortgage loanefforts in the new year.

“We've tried to stay out of this area because rates were at rockbottom,” Daskalovitz said of the credit union's $10 millionmortgage loan portfolio. “We anticipate rates moving up, so we'replanning to expand our mortgage lending program.”

Mortgage lending comprises about 10% of the credit union's loanportfolio, the accounting manager said. Through more aggressivemarketing and sales, the Maryland credit union hopes to double itsmortgage portfolio in 2014.

FedChoice is not alone in its thinking. Fearing the decline infees, credit unions across the country are looking for ways toreplace what may be significant lost income from mortgageorigination and sales fees, as well as other sources of noninterestincome.

In the case of FedChoice, the mortgage fee income has not beenas significant as income from other noninterest sources. Such isnot the case with all credit unions.

“Noninterest income makes up roughly 30% of revenues for allcredit unions, but the distribution varies greatly from creditunion to credit union,” said Dwight Johnston, chief economist forthe California and Nevada Credit Unions Leagues in Ontario, Calif.“The 30% figure is historically on the high side.”

NCUA statistics bear this out. Total noninterest income peakedat $14.6 billion for fourth-quarter 2012, or about 30% of totalincome for federally insured credit unions, according to NCUAspokesperson John Fairbanks. Of that figure, fee income, includingmortgage fees, totaled $7 billion for the same period, also arecord. By comparison, average noninterest income since 2009 hasbeen about $7 billion for all types, or about 15% of credit unions'total income, Fairbanks said.

Rising rates definitely mean that mortgage refinancing willdecline, Johnston stressed, resulting in lower levels of relatedfee income. Larger credit unions with significant mortgageportfolios will feel the hit but may have the resources tocompensate in other areas. And many credit unions with less than$100 million in assets and not as deeply involved in mortgages mayslide by with only minimal damage, the economist said.

At West Community Credit Union, located in the St. Louis bedroomcommunity of O'Fallon, Mo., mortgage fee income makes up asignificant percentage of noninterest income. Declines in thatincome will be dearly felt by the $155 million institution,according to Jason Peach, its chief financial officer.

“With gross annual revenues close to $11 million, our mortgagefee income of $400,000 is not a small part of that,” said Peach.“It's an important revenue stream and if it's gone we would missit.”

Mortgage refinancing declined during 2013, falling about $8million behind the credit union's “stretch budget,” whichtranslates to a net income loss of $110,000, said Peach. “That'snot a small number for a credit union our size,” he added.

Mortgage fees are West Community's second-largest source ofnoninterest income after overdraft fees and more than doublecredit/debit card interchange fees. The decline in mortgagerefinancing activity has sent definite signals to management thatsteps should be taken to offset continued decline, said Peach. Aswith FedChoice, those steps will be pro-active.

“There is still a huge opportunity to get mortgage purchasebusiness, but doesn't just walk in the door,” Peach said. ”We'regoing hire mortgage loan officers that are outside sales people whowill go out and find that business.”

Despite the challenges, West Community has set an optimisticgoal in light of its new strategy. The credit union hopes thatincreased lending and fee income from other sources will make upfor any shortfall from mortgage fee decline.

“In 2013 we grew 3%, which is slow compared to our historicalaverage of 9% annually,” Peach said. “We're budgeting 5% growth in2014, which is close to what CUNA says the industry average willbe.”

Mortgage lending and other growth activities in 2014 willrequire a shift in emphasis and, in some cases, a delicatebalancing act for credit unions to stay on the right side of theledger, according to William Kennedy, chief financial officer atthe $147 million Interior Federal Credit Union in Washington, D.C.Whatever steps the Federal Reserve takes could have a significantimpact on credit union stability and growth, he said.

“Most credit unions have a lot of activity within the mortgagearena, selling their loans to Fannie (Mae) and Freddie (Mac) andcollecting fee income,” said Kennedy. “The quantitative easinggoing on by Fed has created an artificial environment, and oncethat easing stops the situation will have to be delicatelymanaged.”

Interior Federal has 58% of its loan portfolio tied up inmortgages, which account for 40% of the $150 million credit union'sassets. A bump of 80 to 90 bps can have a significant impact on aportfolio that size, Kennedy said.

“Overall portfolio declines past summer saw boatloads of creditunions moving from positive to negative market values,” Kennedysaid. “The lucky ones went from really nice positive values tobarely nice positive values.”

A credit union with a portfolio worth $100 million hit by an 8-to 90-bps decline can lose as much as $20 million over the life ofthe loans, Kennedy stressed. Many credit unions long ago cutwhatever corners they could to cushion financial shortfalls, butfortunately the rising interest rates and new mortgage money couldbe good news for a lot of institutions ready and willing to takeadvantage of it, he added.

“New purchase mortgages have flipped places with mortgage refis,but the total pie is smaller,” Kennedy said. “Success will dependon how long and how well credit unions have built out theirliability structures.”

Regulator fears to the contrary, an increase in interest ratesis critical for continued economic growth, said the CFO. Creditunions need to be ready to embrace those increases and adjust theirexpectations and activities accordingly despite historic regulatorconcerns.

“Credit unions are like buffalo – one will go over the cliff andrest will follow,” said Kennedy. “There has to be a credit unionpioneer, face down in the mud with an arrow in his back, who canpoint the way.”