Advice, Strategies Shared as Rates Continue to Slide
Interest rates continued to crash last week with a thundering jolt onto credit union balance sheets.
The Fed Funds market, which holds as much as $40 billion in overnight credit union deposits, arrived at the 1% mark targeted by the Federal Reserve the week before, causing a new quandary for credit unions faced with early prepayments of mortgage backed securities and calls on agency bonds at the worst possible time.
"There's a lot of money coming in with no place to invest it out," said Tammy Cantrell, senior vice president, asset/liability management for Corporate One FCU in Ohio.
Credit unions sought to cope with the 45-year-low in short-term rates by continuing to slash their cost of funds, pushing the average rate paid on regular shares down to just 1% for the first time ever. Share draft (checking) account rates and money market rates dipped to all-time lows, as well, to just 0.59% and 1.16%, respectively.
Market experts were urging credit unions to seek a variety of cures to help salve the falling rates on short-term investments, expected to persist through the end of the year.
"We've been telling people for two-and-a-half years, 'Don't keep too much money in overnights,'" said Robert Burrell, chief investment officer for WesCorp FCU, who noted that some WesCorp members have been keeping more than 50% of their surplus funds in the overnight markets. "Most credit unions are still paying 1% or more on regular shares, so they're underwater if they're only getting 1% on their investments."
WesCorp, probably the biggest provider of overnight funds for credit unions, had as much as $9 billion of credit union money in its overnight accounts last week. As much as 70% of Corporate One's $1.8-billion in credit union deposits are in overnight accounts.
The plunge in savings rates to all-time lows has mostly limited what has been the most successful way for credit unions to retain spreads, that is, trimming cost of funds. "The last four months shares have pretty much hit a floor. There's really nowhere else for shares to go," said Burrell.
The options being stressed for credit unions are:
- Go out a little further on the yield curve. According to Timothy Dougherty, senior vice president of CNBS, Overland Park, Kan., mortgage backed securities still pose a nice alternative for both yield spreads and stability. "Really, to pick up spread you need to go out on the steeper part of the yield curve, two years or out," he said.
- Shop the CD market, where some entities are still paying premiums. Cantrell of Corporate One, whose SimpliCD CD brokerage, now holds more credit union funds than the corporate itself, almost $3.4 billion, said premiums can still be found in the CD market. "Some institutions still need liquidity," said Cantrell;
- Hold the line on loan rates. Bruce Beaudette, president of Sunmark FCU, said his credit union has put a floor of 6% on mortgage rates.
- Retain higher-rate loans, rather than sell them. "They'll (credit unions) want to hold as much paper as they can, safely," said David Colby, chief economist for CUNA Mutual Group. "Six-percent to 65% paper will benefit a CU's ROA (return on average assets), obviously."
The bottom line harks back to that old credit union saw; "The best investment you can make is a loan," noted David Dickens, senior vice president, asset/liability management, at U.S. Central CU in Overland Park, Kan.
Other remedies suggested are to raise fees and to seek other sources of revenue, such as offering new products and services.
Colby and others urged credit unions to throw a lifeline to their savers. "I think we need to focus on what we need to do for the savers-the elderly, living off their savings; the people in the middle market-45-to-50 years old-who may have some loans out there but are mostly savers," he said, of the plummeting share rates.
Many credit unions are initiating special accounts to entice new savings with slightly higher rates. "We have a fiduciary responsibility to our fixed-income and low-income members, who have just been taking a beating for the last year," said Beaudette. Among the offerings by the Schenectady, N.Y., credit union are a 13-month certificate paying between 1.35% and 1.90%, depending on the amount. "It's not great, but it's still better than what most banks are paying," he noted.