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.
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?
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.
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,
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.
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?
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,
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?
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.
Got it.
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.
No, good point. Good point.