High APYs In Some Markets Challenge CUs In Pricing Deposits

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Not all is peachy in Atlanta when it comes to pricing deposit accounts.

Like many markets across the southern U.S., Atlanta has seen a surge in new residents, and financial institutions have noticed, with banks especially dangling attractive rates on deposits as they seek to capture those relationships.

At the $32-million Retail Employees Credit Union, President Jeanne Kucey couldn't help but take notice when local Peachtree Bank began touting its Personal Peachtree Prime account paying an APY of 4.65% on a $10,000 minimum. While many members have far less in their own savings accounts, it's still hard for them not to take notice when RECU is paying 1.5% on its savings.

"We can't compete with those rates. It is tough," Kucey said, acknowledging that the credit union has watched deposits flow out to institutions offering those returns.

Equally tough for Kucey and other credit union CEOs who spoke with The Credit Union Journal is the challenge of asset-liability management in a rising rate environment, along with the setting of rates on both deposits and loans.

To determine her own rates, Kucey said she monitors the Fed and conducts extensive rate surveys on eight area banks and 10 local credit unions. Her first order of business is to stem her outflow of deposits which have dropped from $37 million in March 2005 to $33 million in March 2006. Kucey said there is good news in that lending has been strong, and it sees its auto loans as one competitive advantage against local banks. Retail Employees Credit Union has placed a marketing emphasis on its auto loan offerings, and it not only prices below the market but also makes loans to consumers typically rejected by banks.

"They don't have options. They can't go somewhere else," she said.

Plenty Of Big Numbers In Ads

What can't be missed in Atlanta, Kucey said, is the extensive advertising by financial institutions. For her part, Kucey said she's expecting up to two more rate increases by the Fed, meaning even more aggressive rate competition on the deposit side with which to compete.

Across town at The Coca-Cola Company Family FCU, VP of Operations Anna Copello said it is seeing a similar scenario. She called managing the credit union's deposit rates a balancing act between internal costs and competitors that include not just banking giants Suntrust and Wachovia, but even the $2.5-billion Delta Community CU. "It's a struggle," Copello said.

Copello said $120-million Coca-ColaCo. Family FCU generally reprices its deposits just behind the Fed and tracks its competition "point by point" with research and member surveys. At press time it was offering a Premier Savings Account with a $5,000 minimum paying 3.4% APY. Copello said deposit rates have generally held steady even as the Fed has pushed rates upward.

Where it has seen activity, she said, is on the auto financing side, as gas prices are apparently driving members from larger SUVs into smaller cars. Copello said Coca-Cola Company Family FCU's actions have been typical to the Atlanta area based on discussions with her peers. "Our discussions are 'We're all in the same boat,'" she related.

Meanwhile, in Raleigh, N.C., the $12-billion State Employees Credit Union reports it is feeling the same margin squeeze as every other credit union that has watched the Fed hike rates 15 times in as many months.

While CEO Jim Blaine told The Credit Union Journal that higher rates will reduce net income and earnings, he also said it is a good situation as SECU will simply pay more to its members. "Our board has chosen to pay more. We don't mind zero growth," Blaine said.

In Virginia, Navy Federal Credit Union VP of Investment/Asset Liability Management Alan MacEachin said the nation's largest credit union is also feeling the same pressure to raise product prices, especially on its share certificates. MacEachin said Navy Federal has raised its rates each month since the winter, and that Navy Federal likes to make a quick rate decision ahead of the Fed before anyone else reaches the market.

"We try to stay a step ahead. We try to lead," MacEachin said.

Competition From CUs On CDs

Navy Federal has been paying a share account dividend of 1.4%, while also offering a $20,000-minimum share certificate at 5.05% APY. Each month MacEachin attends a Savings Rate Group Meeting with representatives from the lending, marketing and investments departments to hash out all the factors in raising or lowering rates. MacEachin said he considers the key driver to rates to be the competition from banks and other credit unions, with the latter especially affecting decisions on pricing share certificates.

"We look mostly at credit unions. They're the most aggressive on (CD rates)," he said.

MacEachin said he is expecting to reach a 5.25 Fed Funds rate by June 2006 that will remain steady until the end of the year, and in turn ease in 2007. He added he believes that long-term rates will remain stable.

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