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WEST PALM BEACH, Fla. – It’s not there yet, but it’s getting close to becoming the boy who cried wolf scenario. Credit unions keep hearing rates are going to rise, but it still hasn’t happened. It will, say corporates, and credit unions need to have a plan of action. At its May 4 Open Market Policy meeting the Fed left the federal funds rate at 1%, but its statement indicates the expected rate hike could be imminent. Ron Araujo, Managing Principal, WesCorp Investment Services LLC, pointed out how this Fed statement lacked the word “patient” in its outlook on inflation as it had in the statement after its March 16 meeting. Fear of inflation of course is one of the primary reasons the Fed raises rates. If economic indicators start coming in strong, look for the Fed to act. He said the big report to keep an eye on is the employment figures being released on Friday May 7 (after deadline). “If that’s an incredibly strong number, that could lead to an in between meeting rate hike,” said Arajuo. The Fed acting in between scheduled Open Market meetings isn’t common, but it does happen and Arajuo, who noted that the Fed used that technique when it started the rapid rate decline a few years back. Araujo encourages credit unions to look ahead and start considering their interest rate risk if rates rise, yet not fall into the trap of becoming too liquid. He said a lot of credit unions have lost money over the last three years because of excess liquidity they’ve kept in anticipation of rate hikes. WesCorp is encouraging CEOs, not just CFOs and investment gurus, to start thinking about how the CU needs to position itself in anticipation of a higher rate environment. He said if you’re a CEO, “make sure you’re having dialogue with your CFO. Make sure the CFO isn’t carrying around any surprises,” said Araujo. Araujo said it’s important for the CEO to set the tone from the top and ensure the staff doesn’t panic about rising rates. “If your NEV today is 22% and next June rates are higher and it’s 28% don’t be surprised, don’t panic,” Araujo said credit unions are equipped to handle any rate scenario, as long as they’re anticipating. “We like to talk about managing expectations. Rates are going to go up. and it’s going to change the nature of your balance sheet,” he said. He said credit unions need to focus on their entire balance sheet. For example credit unions may want to anticipate stronger lending if the economy picks up, even though rates rise. In doing this they should ensure they have sufficient liquidity available and consider tactics such as sufficient borrowing lines. This could keep them from having to liquidate a portion of their investment portfolio in a higher rate environment. Dave Haglund, VP of Investments for Empire Corporate, said CUs should have been thinking about rising rates for over a year now, but even if they haven’t it’s not too late. “If they (credit unions) have excess cash now, they should be looking at floating rate products,” said Haglund. He said if the floating rate product doesn’t have a cap, duration isn’t so much a problem, so three-year and five-years work. He said credit unions should also consider a very short-term ladder of term fixed rate products, such as three month, six month, and nine month investments. Unfortunately said Haglund, credit unions have been reluctant to sell off their fixed-rate mortgages which bring on interest rate risk if rates rise. He said banks and other financials typically sell off their fixed-rate mortgages and keep their ARMs – credit unions need to take a page from that book now. He said CUs can participate or sell off the fixed rate mortgages already on their books through their corporates and traditional secondary market players. U.S. Central’s Charlie Mac is a secondary market option for jumbo mortgages in particular. Haglund is also worried about severe spread compression. He said credit unions need to react faster on repricing their shares when rates drop and slower when they rise. “From what I’ve seen some credit unions didn’t change rates as much as banks did. We’re still talking to folks trying to pay 2% on share deposits,” said Haglud. [email protected]

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