Unemployment and gas prices are both down, and interest rates may soon be heading up — all of which spells good news for credit unions' bottom lines.

That's the verdict from a number of CFOs and economists who spoke with Credit Union Journal and predicted that while sunnier times may be on the way, CUs can do more now to bolster the bottom line later.

At West Community CU in O'Fallon, Mo., CFO Jason Peach said that his institution is willing to spend money to make money, which means "we don't shy away from hiring the sales staff that's needed to make sure we can work with our members on independent and tailored solutions, and that takes an investment of time. We already have invested in a sales culture and making sure we have the staffing. That's not a specific tactic, but sometimes strategically credit unions are afraid of how much to invest in those human resources."

Farewell, Free Checking

West Community has spent much of 2015 focusing on finding new revenue sources now that the refinance market has dried up, including bringing in an outside mortgage lending officer to help identify those opportunities.

The $165 million CU is also considering a value-added checking product that charges a fee but includes services such as ID theft protection and various insurance coverages, though it has yet to roll out that product. "[Free checking] is not going to go away completely, but members are going to have some choices, and we want to make sure it's around choosing value and services rather than just avoiding a fee, and making sure it's something that they can control," said Peach, who is also second vice chair of the CUNA CFO Council.

Non-interest income remains nearly 25% of total revenue at Red River CU, Texarkana, Texas, where CFO Sonya Jaynes said the $699 million CU has tried to maintain that percentage without overwhelming members with fees. While checking is still free there, other services such as P2P transfers or transferring to money to another institution do carry a small fee.

"We have a lot of room on the table to implement new fees, it's just that we haven't reached the point where we needed to," said Jaynes.

Similarly, RRCU is considering revamping free checking in a few years, switching to an electronic checking account that requires e-statements, e-notices and a debit card instead of checks. "Right now it wasn't feasible to do away with [traditional free checking] or to charge a fee for a certain minimum balance," said Jaynes.

At Department of the Interior FCU, CFO William Kennedy said the CU has looked to increase revenue by delving into new lending categories, including student lending and business participations, both of which have brought in more than $11 million since they were started in early 2014. Interior is also doing FHLB advances on mortgages to mitigate interest rate risk.

"We'll make a 30-year mortgage and do a 10-year advance from the FHLB and have a 2-2.5% spread on it," he said, noting that the credit union holds most loans it makes as long as they are 4% or more.

"The interest rate environment has been like this for seven or eight years and the margins have been squeezed," said Kennedy, noting that interchange rates have declined somewhat, as has usage of the CU's overdraft protection service. With so many factors trending down, "you've got to sharpen your pencil" and look for new ways to keep the money flowing.

External Factors

Curt Long, NAFCU director of research and chief economist, noted with margins already stretched thin, CUs should prepare for an increase in interest rates. But there's a risk in moving too quickly and losing potential income.

"As we look at numbers, the last couple quarters have seen a pronounced move of credit unions getting out of long-term investments and into shorter ones," he said. "That probably makes regulators happy, but if there is a delay in terms of when rates move, that's something to keep an eye on."

The $161 million CU has moved to variable-rate investments, explained Kennedy, "but they've already reached the floor, so...they're not going down." The CU sees about a 10 basis point return on those, "but our duration is very short, so when interest rates go up, we will move with the market."

With the release of another positive jobs report, many pundits forecasted that interest rates may go up in June or September or in early 2016. Whenever that happens, said Long, "it's going to be pretty gradual, especially compared to the last era when rates increased significantly, which was 2004-06. There was a pretty steep increase in the Federal Funds rate at that time, so I don't think the expectation is for that to happen again; I'd expect a more gradual increase."

Perc Pineda, senior economist at CUNA, pointed out that there's a strong correlation between credit union lending growth and GDP growth. "As the economy continues to expand there will be more lending activity, and in our March estimate we saw loan growth up 10.6% over the 12-month period ending march 2015, so I think that trend is probably going to continue," he said, adding that the falling unemployment rate is likely to lead to decreased delinquency rates and improved asset quality at credit unions.

Declining unemployment could also spell good things for business lending, said Pineda.

"If you look at the data... small businesses have actually hired close to 100,000 workers for the month of March alone," he said, pointing out that many CUs' MBLs tend to be in the $250,000 range. "That's really where the action is in the economy in terms of labor absorption. Large businesses only hired something like 5,000 workers based on April data, so there is going to be some action in credit unions based on that."

Long added that a sustained decrease in unemployment should also lead to an increase in wage growth, which "would be a big positive for credit unions" since it would likely lead to an increase in spending and loan demand at the household level. "Most analysts are a bit surprised we haven't seen that yet," said Long. "There's a lot of reasons for that. I think one potential reason is that maybe wages are a little stickier than we thought and they didn't drop as much as they could have during the recession, so there wasn't as much of a bounce back as there could have been during the recovery."

Good News for Durable Goods

Pineda also predicted if oil prices stay low for the next 12 months, there's likely to be an increase in durable goods consumption — products that often need financing. "If we have an environment where energy prices continue to stay low, then it gives enough time for credit union members and consumers in general to allocate resources, and then you see more consumption in things financed by lending," he said.

Red River has seen an increase in auto lending due to the drop in gas prices, said Jaynes, but members aren't buying fancier cars with that extra money in their pockets. Rather, she said, they're buying newer model cars to replace vehicles that have been on the road for years. The bigger problem, she said, is that competition from the dealerships continues to be a struggle.

With rates expected to rise, however, credit unions might see an increase in auto lending as consumers try to get a loan before rates go up.

"Consumers are very inefficient when it comes to money management," observed Bill Kennedy. "They're always waiting for the best time to do it. So I'd expect that if interest rates to start increasing, a number of people that were sitting on the fence will make a move."

Until that happens, expense management continues to be the watchword. While Interior has "pretty much cut the fat," said Kennedy, it continues to look for ways to save money. One way the CU has done that recently is by shoring up its member refund policy and not being as lenient with refunding members when they complain about charges. "We gave back $62,000 in refunds in 2010, and in 2014 we gave back $38,000," he said. "It's not insignificant."

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