WEST PALM BEACH, Fla. - As the Fed continues to try to jumpstart the economy by dropping the Fed Funds rate, credit unions are scrambling to reconfigure their pricing strategies. Credit Union Journal asked members of the CUNA CFO Council to discuss how their credit unions are reacting.
CU Journal: Have you been surprised by the pace at which the Fed has reduced its rates?
Matthew Yussman, CFO, Achieve Financial CU, Berlin, Conn.: Yes. We had anticipated in our budget a 75 BP decrease during the first quarter of 2008. We were figuring rates would drop early and by mid-year with the elections coming they would remain stable.
Peg Lamb, CFO, CapCom CU, Lansing, Mich.: Not really. Due to all the media and recently reported indexes showing that a recession was coming, it was expected that the Fed would reduce. Shortly before the Fed’s “off meeting” meeting, a 75 BP reduction was given a better-than-half probability. And then again, the next week there was a better than 65% chance that the Fed would drop another 50 BPs.
Steve Smith, CFO, Sharonview FCU, Fort Mill, S.C.: Yes, somewhat. I think it indicates the economy is deteriorating more than most people think.
CUJ: How are you repricing your deposits and loans?
Smith: Rates on variable rate loans tied to prime are dropping, as well as rates on mortgage loans. We are not dropping any other loan rates, at this time. We have reduced rates on deposits sufficient to offset the drop in rates on loans and maintain our budgeted spread.
Lamb: We have reduced prices on both sides of the balance sheet although not in the same magnitude as the Fed reductions, and with the exception of our regular share rate. We had lowered that to 25 BPs during the last ride down the yield curve and never brought it back up, so we didn’t feel we had any room to move it.
Yussman: We will be reducing our share rates first. We have not done so yet because we are trying to see what our competition is doing. Share growth is going to be tough this year and we do not want to lower rates too much and choke off the growth. Loan rates may get lowered but we have a loan-to-share ratio of 90% and therefore are not desperate for loans. The reduction in rates hurts us because we have HELOCs and overnights.
CUJ: More specifically, which have you repriced more quickly (assuming you’ve repriced at all)?
Lamb: Both loan and deposit prices were dropped at the same time but in different magnitudes. We dropped the deposit prices a little more than the loan prices trying to build in a little more spread, however we kept most prices higher than the rates that we could borrow in the wholesale market in an attempt to keep deposits from running off.
Smith: We have repriced money market and certificates.
CUJ: What is your most attractive deposit, loan product?
Smith: We have a special on certificates of deposit with a seven- or 15-month term paying 4.0% APY and on the loan side we have very competitive credit card rates.
Yussman: Our most attractive deposit product is our Medallion Certificate. Members are allowed to make unlimited deposits during the term and are allowed to make one withdrawal for up to 50% of the balance during the term. The certificate also has a bump-up feature that allows the member to bump-up the rate to our current rate on the product once during the term. This product has been successful because it gives the member some protection in a rising rate environment with the bump-up feature and the ability to withdraw up to 50% of the balance to place in higher yielding accounts. We offer the product on a 30-month term.
Our most attractive loan product is our HELOC. Our lowest rate on our HELOC is prime minus 1% and there are no fees or prepayment penalties.
CUJ: Are core deposits that rate sensitive, or do they tend to stay on deposit regardless of the changes you make?
Lamb: I don’t view them as very rate sensitive. As I mentioned, our share rate has been 0.25% for quite some time and while there has been a little runoff, it hasn’t been more than I think we would have seen due to the current Michigan economy. Members are tending to take any savings they have out to pay down on debt or spend on living expenses, which is what I attribute the share decreases to, not to rate issues.
Yussman: A couple of years ago we saw a trend with our core deposits. Our members began taking their money out of our core deposits and placing it in higher yielding certificates. Many of these members were threatening to leave the credit union if we did not match rates from our competitors. Our core deposits are now stable and do not seem to be as rate sensitive. I believe it is because most of our members have already moved their available excess cash out of the core deposits. Our core deposit rates are low and we do not see an outflow.
Smith: They tend to be very sticky.
CUJ: It may be anecdotal, but what sorts of demands are members making? Do they expect to see bigger loan reductions, for instance, given all they’ve read?
Yussman: I believe that the media is mostly to blame for the demands we are seeing. Many members are coming in and asking for their loan rates to be reduced by 100 or more basis points. The media is telling people that all loan rates are dropping. That is not the case. The rates on first mortgages actually increased after the Fed’s reduction.
People are unaware that the only rates that were immediately affected were adjustable-rate loans tied to the prime rate. We had members actually cancel first mortgage closings because they thought first mortgage rates were going to drop as much as the prime rate did.
CUJ: In your ’08 ALM scenario planning, had you anticipated these types of reductions, or have you reworked your models?
Smith: We focus on budgeting and maintaining a spread versus trying to guess absolute rates.
Yussman: In our 2008 planning we anticipated only a 75 BP reduction during the first quarter of the year. I currently run our models monthly and therefore will be running the simulations for the current decline and I will also be assuming a 50 basis point decline at the Fed’s March meeting.
CUJ: Looking ahead to the rest of 2008, what are you projecting for rates and growth in both lending and savings?
Lamb: Even before the recent rate changes, Michigan has been experiencing a lot of stress in the economy. We have the highest unemployment rate in the country and are close to the top in the number of home foreclosures occurring.
So our growth during our 2008 planning consisted of funding some fixed mortgages and doing additional member business loans. Most of the rest of the loan products were projected to stay flat–we would generate just enough new volume to cover any payoffs and regular payments–or see slight decreases. Even with the Fed rate changes, I don’t see that plan changing much in our environment.
We may start to experience more liquidity challenges, but I don’t anticipate many members pulling their deposits out to put it in the market as the market isn’t doing well, either. Most members will be looking for a safe place to put their money.
Smith: Further rate declines to 2.0-2.25% for Fed Funds. We will grow loans 8 to 10% and savings 6 to 8%.
Yussman: Our projections for loan growth for 2008 is 3.4% and for share growth 6.3%. We do not expect much change in our loan growth target, but the decrease in share rates is expected to reduce our targeted share growth. We are still projecting that the third and fourth quarters will not see any rate changes by the Fed.
