WEST PALM BEACH, Fla. — Although 40% of credit unions polled by CU Journal reported adjusting what they're paying for deposits, analysts are suggesting many continue to struggle with their pricing and the resulting strain on margins.
CU Journal turned to several economists and other experts for strategies credit unions can use to cope with the dilemma. "Where credit unions are very competitive is CDs," said Tun Wai, chief economist and director of research for NAFCU in Arlington, Va. "The CD is the major component in the savings portfolio."
Wai said he remains optimistic in cost-terms of the Fed cutting its rates. "Deposit growth has been a problem, too," said Tim Sciborski, vice president of lending for 75,000-member Community First Credit Union, Appleton, Wis.
Sciborski said that Community First CU did adjust its rates downward, but it was already priced above market and as a result did not see much of an outflow of funds. On the other side, it recently ran a loan sale offering a 5.49% APR on secured loans. "Once the sale was over in the end of October, we went back to 6.24%," Sciborski related, adding the $916-million credit union has not adjusted its loan rates.
"It's more competitive on the deposit side than it's ever been and I don't think that's going to change," said Dave Colby, chief economist for CUNA Mutual Group, Madison, Wis. "Credit unions are going to be earning less on loans. This is kind of a long-term trend."
"The competition has changed as well. All of the sudden we're competing with a new business model," continued Colby, citing Capital One and Charles Schwab as examples.
Brandon Michaels, vice president of finance for San Francisco Fire Credit Union, agrees.
"Due to many factors, competition from non-bank banks/credit unions — ING, Charles Schwab, E-Trade, etc., credit unions are forced to keep their rates high in order to attract funds," he said. "The coping mechanism: lower margins."
But credit unions do have some options in coping with paying a premium for certain deposits, Michaels said. "But nothing more than the market will bear," he said.
"For my credit union, we offer very competitive and aggressive rates on both loans and deposits, thereby reducing our net interest income," he noted. "We have also significantly eliminated most of our fees charged to members, keeping the courtesy pay and other 'abuse fees.' This strategy has also reduced our non-interest income, a source that many credit unions continue to rely on."
Michaels said the strategy has worked well for the credit union, as its membership base has become "more core, and less rate-shopper-like."
"We continue to see benefit through that," he said. "However, in addition to this deposit crunch, we offer all our SEG membership (firefighters) a 50 BP reduction on loans, and 50 BP increase on deposits, in addition to our competitive rates."
While that policy certainly puts further strain on margins, Michaels said SF Fire Credit Union is seeing payoff in higher loyalty from members.
(c) 2007
