Plunging Rates Dominated Financial Scene In 2003

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Looking back on the year just completed it's fairly obvious that the record low interest-rate environment dominated the credit union movement along with the rest of the financial services industry in 2003.

In the early part of the year the Federal Reserve kept slashing its short-term rates till the benchmark rate for overnight funds tumbled all the way to 1% at mid-year, the lowest in almost five decades.

All the while loan and savings rates tumbled along, also falling to decades lows. In June the average rate paid by credit unions for regular share accounts pierced the 1% mark for the first time ever, and have continued falling since then to end the year at just 0.81%.

That looks robust in comparison to plunging savings rates paid by banks which fell below the 0.50% mark by year-end.

This, of course, kept credit unions scrambling to maintain their ROAs to balance off the lower returns earned on surplus funds, which they did quite successfully, ending the year with an industry average ROA of more than 1%.

They did this by slashing their average cost of funds, the average rates they paid their members on all accounts, to a record low of somewhere around 1.7%.

At the same time, mortgage rates held steady at five-decade lows, fueling the biggest mortgage boom ever.

Credit unions, which have stepped heavily into the mortgage market over the past five years, prospered mightily from the lower rates, bringing in new members to either take out mortgages or refinance home loans, adding tens of billions of dollars in loans to their books.

The record low rates gave rise to the classic conflict among credit union managers, "should I sell or should I hold," with respect to low-yielding loans.

This classic asset-liability management conflict will continue to plague credit union managers as we head into the new year.

For the record: 2003 began with average rates paid by credit unions at 1.28% for regular shares; 0.76% for share drafts; and 1.46% for money market accounts, according to DataTrac Corp., which tracks rates for 8,000 depositories, including 1,000 credit unions.

And they ended the year at: 0.81% for regular shares; 0.48% for share drafts; and 0.98% for money market accounts-all all-time lows.

But credit unions have reason to feel good about themselves, despite paying their members such paltry dividends, as banks continue to pay even lower returns.

They ended the year paying average rates of just 0.48% for regular savings (shares); 0.34% for checking; and 0.54% for money market accounts.

Speculation continues to arise whether the Federal Reserve will change this scenario and move to cool a heating economy by raising short-term rates. My guess is that won't happen any time soon with policymakers not wanting to extinguish any heat the economy may be generating.

The other major story in 2003 was the growing effort to tax credit unions. From Utah to Iowa to New Mexico and Arizona and California, lawmakers prompted by the bankers sought to extract some kind of levy on credit unions last year, failing each time.

The credit union lobby did a great job in defeating each of the initiatives, but they'll be back, if not in the same states, then elsewhere, especially where state governments continue to battle large budget deficits.

It will be seen as not only an effort to balance state finances, but to extract a price from credit unions seeking to expand to into new markets.

This means that credit unions will continue to have to be on their toes, devoting increasing resources to fighting off the bankers. That will mean more money, more lobbying, and more public relations campaigns.

I expect to be spending a lot of my time in 2004 on this continuing story.

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