Many credit unions are facing potential problems with their liquidity because they are saddled with portfolios full of low-yielding loans but face competitive pressure to increase rates on deposits.
The speed at which this situation developed is part of why liquidity risk is among the National Credit Union Administration's biggest priorities going into 2023, John Kutchey, eastern regional director for the National Credit Union Administration.
"The world has changed pretty significantly over the last six, seven, eight months. The rapid increase in interest rates has changed the landscape of just about everything, including your balance sheet," said Kutchey, who spoke at the CrossState Credit Union Association's
After rates dropped to historically low levels for most of the past decade, they've begun rising sharply, leaving credit unions stuck with a portfolio of "low yielding" loans relative to the current market, Kutchey said.
In response, many credit unions started to go longer on the investment portfolio in the fourth quarter of 2021 to try to squeeze some margins from their investments.
"And it's sort of like the worst possible storm right now," Kutchey said. "Everything is at rock-bottom rates and you're stuck with a portfolio of mortgages that no one is refinancing out of now. You're going to be holding onto those for a long time."
Some institutions were caught off guard by how quickly rates rose and put more long-term assets on the books than they otherwise would have in that low-rate environment, said Andrew Jaeger, CEO of Credit Union of New Jersey in Ewing.
"I think a lot of credit unions may have gone out long, and that's where credit unions are going to have some issues," said Jaeger, who is also a CrossState board member.
Now the $423 million-asset Credit Union of New Jersey is repricing deposit rates to keep some of the money around. Jaeger said bank and credit union competitors in its market have been raising rates on time deposits and savings accounts. "So we're deploying some strategies to retain those deposits," he said.
The credit union is "OK" in terms of its liquidity position, Jaeger said. Credit Union of New Jersey currently has a loan-to-share ratio of about 87%.
"We certainly did see a big influx of liquidity over the last two years, and we have seen some of that flow out although it's stabilizing now," he said.
Credit union liquidity has dropped precipitously over the last year. Cash plus investments as a percent of assets fell to 28.9% in August 2022 from 35.2% in August 2021, according to a report from CUNA Mutual Group, an insurance and financial services company that monitors the credit union industry.
That 6.3 percentage point drop in liquidity was the biggest year-over-year decline since July 2000 when the S&P 500 stock index reached its apex during the stock market bubble of 1998-2000. Credit union members were buying stocks with their excess funds instead of placing them in insured deposits at their local credit union, CUNA Mutual said.
Today, members are drawing down some of their excess savings built up during the COVID-19 pandemic to spend on goods and services. The average credit union member reduced their total credit union deposits by $80 in August, from $14,060 in July to $13,980, CUNA Mutual said.
Kutchey, who oversees the examination and supervision of federally insured credit unions in 15 states and the District of Columbia, said the Federal Reserve is likely to issue one or two more rate increases before the end of the year.
"And that's causing a lot of stress on your balance sheets because your members are expecting increases in their share rates in order for you to keep the money in the credit union," he said. "Now [members] have options again."
So credit unions that need to generate liquidity have some tough decisions to make. They can liquidate investments at a loss, but that would negatively affect their net worth ratio, Kutchey said.
Many credit unions are now borrowing money to make loans and, at the same time, either have to raise dividend rates to keep the deposits around or let them roll off to protect earnings and net worth.
"These are tough decisions you all are going to have to make over the next year or two," Kutchey said.
