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Weekly Recap: No concern on deposit rates as loans are repricing quicker

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Weekly Recap: No concern on deposit rates as loans are repricing quicker

The weekly recap features news on regulatory actions, mergers and other issues facing the credit union space. Send tips, ideas and chatter to ken.mccarthy@spglobal.com.

In the spotlight

The cost of funds for U.S. credit unions has basically remained static for several quarters, but industry observers say that may not last much longer.

Cost of funds when expressed as total interest expense as a percentage of average interest-bearing liabilities and average noninterest-bearing deposits ticked up to 0.61% for credit unions in the second quarter of 2017. That number was 0.58% in both the linked quarter and in the year-ago period.

Cornerstone Advisors Senior Director Vincent Hui said in an interview that there is a concern among credit unions about rising deposit rates, but he added that higher-performing credit unions are looking more at their net interest spread rather than just deposit rates.

Michael Wishnow, senior vice president of marketing and communications for the Pennsylvania Credit Union Association, said in an interview he has heard of no concerns from Pennsylvania credit unions because loan rates are repricing quicker than deposit rates. "So most of our credit unions are viewing this as a net positive for their balance sheets," he said.

Because of their deposit rates being pretty competitive, most credit unions have not yet had to move their basic share rates, and time deposits will reprice over time. But the loans that are going on the books now have been repricing and continue to reprice much more quickly, he said.

"While both are moving upward, the margin seems to be getting a little wider," Wishnow said.

The Association anticipates one more 25 basis point interest rate hike by the Fed in 2017 — and possibly two but most credit unions have already factored that increase into their deposit pricing. Wishnow said some institutions even shock their balance sheets with up to a 1% interest rate hike in testing "and I'm not hearing any concerns with respect to repricing," he said. "As long as it's a gradual increase I think credit unions are welcoming to that."

In other news

* The National Credit Union Administration on Oct. 6 unveiled its proposed 2018 operating budget at $298.2 million, which includes a net workforce decrease of 42 full-time equivalents. The agency in July announced a restructuring plan that includes closing 40% of its regional offices, eliminating overlapping office functions and re-tooling its business model. The NCUA will accept written comments on the proposed 2018-2019 budget by email until 5 p.m. on Oct. 27. The regulator will hold a public budget briefing Oct. 18. Last year, the NCUA approved a final budget of $298.2 million for 2017 and a preliminary budget of $312.1 million for 2018.

* The NCUA on Oct. 2 liquidated Shreveport FCU — making it the third federally insured credit union liquidation in 2017. The Shreveport, La.-based institution's membership, most shares, loans and other assets were assumed by Texarkana, Texas-based Red River FCU. Shreveport had 22,212 members and approximately $86 million in assets, based on its most recent call report; Red River has 84,093 members and $807.1 million in assets.

* The Consumer Financial Protection Bureau finalized a rule that would impose new protections on payday loans, auto title loans, deposit advance products and certain high-cost installment and open-end loans. The rule, originally proposed in June 2016, requires lenders to conduct a "full-payment test" that would evaluate a borrower's ability to repay the lender while still meeting basic living expenses and major financial obligations. The rule also limits lenders' ability to push distressed borrowers into reborrowing or refinancing the same debt by installing caps on the amount of short-term loans that can be made in succession.

* In Pittsburgh, Tri-Valley Service FCU and Consumer Healthcare FCU explored a merger but it fell through, Consumer Healthcare FCU's CEO Marlene McLeod told S&P Global Market Intelligence. McLeod said the credit union was sharing space with Tri-Valley Service for a short period of time while contemplating a merger. Both credit unions have less than $20 million in assets.

* Community bankers are increasingly worried about future competition from credit unions, according to the 2017 National Survey of Community Banks conducted by the Federal Reserve and the Conference of State Bank Supervisors. About 10.1% of respondents expect credit unions to be their greatest source of future small business lending competition. Only 3.2% of respondents named credit unions as their current toughest competition. Credit unions, however, overshadow small community banks when it comes to consumer loan competition, with 45.1% of respondents indicating credit unions are their greatest source of competition in the space.