Credit Union Exam Solutions Presents With Flying Colors

Hey everyone.

This is Mark Rele with another short
take on the interest rate risk and

the interest rate environment as
it relates to credit union risk.

We chat with three of my team members.

This was part of a longer video
from early in the month, and

I'm breaking it down into more
snackable slash digestible content.

Without further ado, here's
Todd, Steve, and Dennis on the

interest rate environment and
what it means for credit unions.

Treichel: So interest rate, environment
created is creating mixed opportunities.

One thing that popped into my head
is, Todd, I think you mentioned the

Trump tariffs and it's kind of like,
should we stay or should we go now?

The Clash song?

But the Fed came out.

The fed chair came out saying, yeah,
one of the reasons I haven't reduced.

Rates is because of, of
the tariff situation.

So that kind of feeds into the interest
rate environment, uh, that we're having.

Any, any general thoughts on, on the
interest rate environment for banks and

how it might apply to credit unions?

Bauer: One Oh, go ahead.

Okay.

Yeah.

One thing I, I've noticed, and I
followed this quite a bit, and as a

CFO, right, as the yield curve, right?

The yield curve was, was inverted for so
many years, and then right in, I think at

the end of last year, it finally, if you
look at the 10 year and the two year rate

was inverted, you had negative spread.

But now, right, and I think that's why
we're starting to see margins improve is

that yield curve is not between the 10 and
two year now it is plus 50 basis points.

So that makes it a little bit easier
to work in an environment where

the longer term rates higher than,
than shorter, shorter term rates.

Back in September of 24, it
was a negative 35 basis points.

Today it was about 50, so Right.

That's a 85 basis point swing in
a fairly short period of time.

So yeah.

Right.

I think Mark was, mark was
talking depending upon Fed

that could influence that.

Maybe not so much the tenure, but the
short end of that curve might come

down even farther, thereby Right.

Hopefully allowing credit unions
to continue to maybe drop their

cost of funds a little bit faster
rate than on their asset side.

So, and we actually did see, right,
a drop in, in cost of funds in the

credit union world in Q1 2025, similar
to, I think in that article in the

LCCI think banks saw that as well.

Um, so that rate, that's
all helping improve margins.

For credit unions, we're
up about 20 basis points.

If you go back to pre COVID or around
right when COVID started, we're up about

20 basis points, um, from the Q1 of 2020.

So that, that looks positive from that
perspective, just we're, the environment

that we're in, the yield curve is
getting back to maybe a more normal.

Um, that, that, that could have an impact.

And then also the mix, right?

A mix of deposits has changed
dramatically, which also could have an

impact on cost of funds and margins.

Right.

Back in 2022, right before rates
started to jump, we were sitting

only with 13% of, in credit unions.

13% of our deposits were in CDs.

Today, that's 28%.

So we got a lot of high cost CD
money sitting out there with the Fed,

most likely dropping rates for sure.

Or hopefully by September.

You know, all of that
will start to reprice.

And again if that yield curve stays
positively sloped, that should be good

news for, I think the credit union world.

Treichel: Todd, go ahead.

I know, I know.

Todd, in the past you've talked about CDs
being at all time lows and going back to

new normal are we at normal or is it gonna
swing back a little bit or any other?

I think we're,

Miller: I think we're
back close to normal.

It's been pretty stable for the last
two or three quarters, and it's kind

of about back to where we were in prior
to the last recession in 2008, 2009.

Back then CDs, money markets
together were running around 40,

45% of credit union deposits.

And then we had those long periods through
COVID were interest rates were flat,

where there was really no difference
in pricing in the industry between a

regular share account and a money market.

And you maybe got five more basis
points for a cd, you know, hot money.

Was kind of mixed with regular money.

Um, once rates started coming up out of
COVID, you started seeing a reversion

to mean where people are putting money
to where it fits their lifestyle.

I'm willing to tie money up.

I want a little bit more
for my money market.

Both credit union and banks improve
their net interest margin in 2024.

So I would say what's really going on
is they're adapting to the new normal.

And even now it's hard to make
money 'cause rates are really flat.

Um, Monday fed funds were 4 33
and a 10 year treasury was 4 32.

So really, really a
flat curve still exists.

The OCC report throws out that
volatility of those longer term rates

is higher than it was in the past.

And, you know, credit unions and
banks, and it sounds like from

the OCC report, banks are in worse
shape than credit unions on this,

but they still have investment
portfolios that are way underwater.

The credit unions here in
the first quarter, their a FS

stuff was about 6% underwater.

Their, um, I have it right
here somewhere in front of me.

On their HTM portfolios, it's
about 6% under their water.

Let me correct that.

Their a FS portfolios were still 7%
underwater, so they still got some

liquidity in pricing challenges in that
they're still sitting with investment

portfolios that are not yielding market
rates and there's unrealized losses there.

Um, I.

You know, they, they mentioned
this in the risk report.

They expect GDP growth to
be really flat this year.

Like you said, the fed doesn't know
which way to go on rates and, you know,

because of this uncertainty, what we're
seeing from examiners with our clients

is they want way more stress testing
on interest rate risk and liquidity.

And they want different yield curves
and they want different shapes of

things and they want credit stresses
combined with liquidity stresses.

So there's it's uncertainty on their part.

And you know, when you do all these stress
tests of this nature and scenario analysis

is, it's to inform decision making.

And I think we're seeing
a lot of regulators.

Imposing this stuff on credit unions,
not necessarily to inform the credit

union's decision making, but Yeah,
maybe somewhat that, but I think a

lot of it is the examiners want to
see this to inform their own decision

making so they can apply appropriate
risk ratings to their credit union

for liquidity and interest rate risk.

And it does help the credit union,
but this whole uncertain market, it

shows up in that your examiners want
enhanced scenario analysis of what

might happen under different scenarios.

And that's a burdensome
request at sometimes.

Um, 'cause all the scenario analysis,
it isn't easy to put together.

It's costly, it's time consuming.

Then when you end up with results
from 6, 8, 10 different scenarios, how

do you communicate that risk level?

To your board and what
should you do about it?

So it it, it's things that can inform
decision making, but it's things that can

just lead to more, how would you put it?

Confusion amongst the
board or uncertainty.

Some of the scenario analysis increases
uncertainty rather than lowering it.

But for our credit union listeners, you
can expect that from your examiners.

They want more scenario analysis around
interest rate risks and liquidity and

cash flow forecast, in part due to the
uncertainty of where things might go.

Treichel: And theoretically
that should happen.

You know, it, if you're, if this
is the simple credit unions and you

get more complex going up my arm
here, if you're listening, you can't

see the visual I'm creating, but.

A plain vanilla credit
union should need less.

A very complicated credit union
with different sources and uses

of funds or unique loan programs
should expect to see more of that.

And that continuum doesn't always
necessarily work for examiners.

'cause examiners will see something
cool that they learned that one, one

examiner made a complex credit union do,
and then they'll apply it in situations

that might not necessarily make sense.

And Todd, as you touched on you didn't
say it this way, but one of the things

NCA is not very good at is figuring
out what actions they ask to be done

compared to how much it costs the
credit union to do that compared to

what the actual value of that is.

And you can see some disconnects in that.

We've seen it amazing disconnects,
I would say, over, over the five

years in general, but in particularly
over the last short period of time.

Steve, any, any thoughts on this topic?

Farrar: Uh, very, uh, item you
talked about in that, be able to,

if when asked to do some of these
additional stress testing, have some

knowledge of how much that's gonna
cost and share that with the examiner.

'cause uh, they don't
tend to think that way,

Treichel: then they beat
'em up on profitability.

Yeah.

So we tiptoed into unrealized investment.

I think we co we may have
covered that next topic.

Any more thoughts on the upside down
nature of investment portfolios?

Bauer: Just the, just the comment
that's been so volatile, right?

The 10 year treasury rate alone, in, I
think this year it's been as high as 4.8%

and as low as 4%.

Right.

So that'll, that raises havoc
on that unrealized investment

losses and on health to maturity.

Types of investments we're currently
it's at 4 35, so hopefully that that

stabilizes and you know, that, that those
portfolios can get a little relief, but

that's a big swing right in, in a less
than six, seven months 80 basis points.

So that's all I wanted to say on that.

Treichel: Got it.

Farrar: Yeah, we had some of our, a
number of credit unions that ended

up with, uh, in the COVID times,
taking all that, uh, in inflow of

funds and investing at long term.

And now we're, we're starting
to see the effects of that.

The negative effects of that are starting
to dissipate out of the balance sheets.

Treichel: No, good point.

Good point.