Controlling the Balance Sheet

Watching for traps and taking advantage of opportunities: an interview with Hank Sigmon, CFO of First Tech Credit Union, Beaverton, Oregon


Below is an excerpt from an interview with Hank Sigmon, CFO of First Tech Credit Union, Beaverton, Oregon. To read the remainder of this interview and other insight from industry leaders, sign up to receive Credit Union Strategy and Performance today.

What should credit unions be doing in this 0% interest rate environment?

HS: Cash is cheap right now, earning perhaps 25 basis points overnight. It's an environment in which balance sheet managers have to be very cautious. They need to be careful of taking on too much interest rate risk, while at the same time still adding to the net interest margin. You've got 30-year first mortgages that are originating at 5% or less; there's a lot of risk in adding a large quantity of these to the balance sheet. So you've got to be very careful when building a portfolio of fixed mortgages and understand the overall duration of your balance sheet. On the other hand demand for other types of loans is slowing so where can one find yield without excessive interest rate or credit risk? That is a tough question in this environment. No one really knows where interest rates are going to head. Will they stay low for six months, for 12, for 24? No one can say. But the right way to manage is to not make excessive bets in either direction. You don't want to be sitting on a ton of cash nor do you want to place a lot of long-term assets on the books in this environment. Another thing to think about is managing capital. We are all taking a hit to capital this year with the NCUA Corporate stabilization plan so keeping the balance sheet "right sized" is very important. Instead of trying to find a home for cash, perhaps it makes more sense to let some CDs run off the liability side.

Do you sell your mortgages?

HS: That depends on where rates are and what we feel the general trend in interest rates is. In this environment it's tough to see rates having any place to go but up -- the question is when. Where rates are right now, we are selling on a flow basis. We originate and sell, retaining the servicing and the relationship with the member. This is a transaction that is totally transparent to the member. The member will always come to the credit union with any questions they have regarding their mortgage and will always send their payment to us. We won't be adding to interest income this way, but we do generate fee income and income from the sale. Selling on a flow basis is a volumes game. We need to originate as many conforming mortgages as possible, price them right, close them fast and sell. Mainly we sell to Freddie Mac and Fannie Mae; we've never had trouble doing so.

What are you seeing in your credit market?

HS: Almost a "last lender standing" type of environment. A lot of the captive market lenders have pulled back, and local lenders are being risk-averse. This is giving us a very nice opportunity. We are writing a good deal of quality paper. Our volume is up 50% because others have backed out. It's allowing us to re-establish relationships with some auto dealers.

What about the investment side?

HS: In the current interest rate environment it is very tempting to look at callable agencies, but I really think we all make the mistake at times of chasing yield. You might be avoiding credit risk, but there is still risk. The agencies, (Fannie, Freddie and the FHLBs) have smart people and they know what they are doing. Only very rarely does a new callable make sense, for example in a very stable rate environment. The issuers will always do what is in their best interest, so either you will get your Controlling the Balance Sheet Watching for traps and taking advantage of opportunities cash back when you don't want it when rates are falling, or you won't get it back when you need it when rates are rising. There can be some value in callables purchased in the secondary market, where there is relative certainty that a bond will either be called or go to maturity. We are not seeing a great deal of opportunity in investments right now, so we are tending to collect cash. There's pain in doing so though, because there's so little yield in it.

Other Questions:

What do you like?
What kind of mortgages are you writing?
How do you think your membership is going to do this year?
Do you have any programs to help people in financial distress?
What is your biggest concern this year?
Are you cutting expenses anywhere?
Any other reflections?




June 22, 2009


  • In the current environment earnings are taking a beating. It's hard to earn income when competing against subsidized captive auto company lenders offering 0% financing and discounted pricing or providing and retaining real estate loans in the current low interest market. Home equity lines of credit are equally difficult because the market may not have bottomed yet and they become essentially signatue loans. Investments that yield less rthan 1% won't pay the bills either.

    However, there is a viable alternative and that is using the current government guaranttes on SBA loans. Guarantees are now up to 90%; the loans are variable and there is fee income. Small business employs over 60% of those working. During a recession the number of small businesses usually grows. Small business employees provide membership growth and share and loan opportunities in addition to HSA's and 401k's. The current economic downturn provides credit unions an opportunity to diversify and expand services. Gordon
    Gordon Dames