Consider Financial Realignment in 2015: Catalyst
Credit unions with balance sheets poised to take advantage of an improving economy in 2015 can expect to grow financially, as well as in service to their members, said panelists at a Friday webinar sponsored by Catalyst Strategic Solutions.
The webinar, “2015 Blueprint for Success,” was anchored by a team of balance sheet experts from Catalyst, part of Catalyst Corporate Federal Credit Union in Plano, Texas. Participants in the 40-minute session included Mark DeBree, director of ALM services, Sarina Freedland, senior investment officer, and Steven Houle, director of advisory services.
“In 2014, it looked like the economy was headed in the right direction,” said moderator Jane McGarry, a Dallas-Ft. Worth television journalist. “2015 could be the year interest rates start to rise, which could have a dynamic impact on credit unions.”
Rate increases likely would be driven by several positive economic indicators, including declining oil prices that ease economic pressures on consumers and the continuing increase in job creation, which fell just shy of 3 million in 2014, according to the U.S. Bureau of Labor Statistic’s announcement Friday.
However, the lack of wage parity that accompanied the jobs increase, a relative stagnation in home sales and continued economic stress overseas could slow growth, but won’t stop it completely, according to Freedland.
“Manufacturing – and mainly auto manufacturing – was a shining spot in 2014,” Freedland said. “America loves to buy new cars. If you’re buying a new car, you now have a used car to sell and that’s a great source of loan demand for credit unions.”
Short-term investments performed well in 2014 and show every sign of continuing, Freedland added. The current yield on CDs is stronger than many other investments and their maturity rates are a good match to many credit unions’ balance sheets.
Credit unions also should focus on rebuilding their short-term investment ladders to increase liquidity in the face of a more competitive deposit-rate environment, she added. In fact, credit unions that find ways to reach beyond their current membership could profit handsomely.
“Credit unions should issue CDs on a national basis and not restrict them simply to their own members,” Freedland said. “Credit unions able to market to other institutions’ members nationwide can bring in more deposits now, taking advantage of current low rates before they jump up and secure long-term, less expensive funding.”
Read more: Deposits will be needed to meet escalating loan demand ...
Growing credit unions’ deposit bases also will be critical to keeping up with escalating loan demand. Institutions without money to lend could find themselves struggling, according to Houle.
“Credit unions overall saw a 10% loan growth rate through September and that’s fantastic,” Houle said. “However, some smaller credit unions found themselves with a negative growth, which caused them some heartburn. Hopefully, this trend will change.”
Real estate loans still comprise a little more than 50% of credit unions’ overall lending portfolio. Delinquencies and charge offs have declined to an average 1.3% from 3% in 2009, with an average provision for loan loss of 26 basis points, down from 75 basis points in 2010.
“In 2015, lending will grow by another 10% and loan quality will remain impeccable,” Houle said. “On the flip side, credit unions may want to broaden their standards and do more lending on lower grades of paper that will bring a higher yield.”
For those credit unions that are struggling to make loans, Houle suggested that the institution first decide if the problem is organic, which he described as relating to the loan program’s pricing, policies and structure, and make the necessary adjustments. Indirect lending through auto dealerships and participation loans in which the credit unions shares both risk and reward with other institutions are two more ways to lengthen and strengthen a struggling loan program, he said.
“Data-mine your members and see where else they have loans so that you can capture additional business,” Houle added. “Outbound telemarketing will help you get to know your members and their needs and wants as well as help maximize your marketing dollar.”
However credit unions may approach 2015 must be with an eye toward an ever-changing regulatory landscape, and certain changes coming own the road could have a big impact, according to DeBree.
“Examiners are looking for credit unions to understand risk, create plans to manage that risk, and then enact those plans,” DeBree said. “Risk management is a balancing act, one where we walk a very fine line.”
Leading items on the 2015 regulatory agenda include new standards for interest rate risk, concentration risk and liquidity risk, which DeBree expects to move to the forefront both this year and in 2016.
“One big fear is how well credit unions can adjust deposit rates if interest rates rise,” DeBree said. “If credit unions change dividend rates will they see deposits walk out the door? It’s not something that will happen overnight, but credit unions should prepare for it.”
In order to compete effectively, DeBree advised credit unions to think outside the box when it comes to products, pricing and member service. However, all strategies should be governed by risk-based decision making that evaluates pressure points and adjusts strategies to manage balance sheet risk in all areas. Keeping an eye on the Fed and managing price stability should also factor in to any credit union’s 2015 strategic plan.
“Credit unions exist to serve their members, but there is a dichotomy between what everyone wants from the credit union what the institution can realistically do,”DeBree said. “ There is still time for most credit unions to restack their balance sheets and moved toward risk-based processes in order to succeed.”