With Investment Yields Low, Strategies Vary For Pricing Loans & Deposits
COLORADO SPRINGS, Colo.-At a time when many credit unions are resigned to riding out the low-rate investment market, there remains a very real challenge in how to price both loans and deposits in a record low environment.
While it may not be time today to move away from credit unions' traditional position of offering the best rates in town, a prolonged recession could force CUs to change, some have suggested.
According to Dan Leclerc, SVP/CFO of the $135-million Aventa CU, more credit unions must realize they can't always offer the best deal on rates when earnings pressure is high. "It will take a paradigm shift. Some credit unions seem to be stuck on offering the best rates for deposits and loans simply because they are member-owned. I wonder why you (continue to offer the best rates) if you can't afford that?"
Rates Reduced By 25 BPs
Leclerc noted his credit union recently lowered deposit rates to drive down assets, while also increasing loan rates by 25 basis points on selected products, such as on unsecured loans and loans to members with lower credit scores.
Brandon Michaels, CFO for the $416-million Mazuma CU in Kansas City, Mo., emphasized that the decision to alter rates must be based on the balance sheet of the credit union. "It's a credit-union-by-credit-union decision," said Michaels. "But it is fair to say you can no longer be all things to all people with all the issues we are facing, including the new regs. You have to draw a line in the sand and say we can't always be the low-cost provider of loans, offer high returns on dividends, and charge no fees."
Mazuma has yet to reduce deposit rates to offset investment shortfalls, simply adjusting rates with the market's movement. But as Michaels has made his decisions, and with pressure on earnings, he recognizes even a minor decline in deposit rates has an impact. "As I make these determinations do I think that a five-basis-points reduction is worth it? Well, yes, when investments are not earning as much. It's in the back of your mind."
David D'Annunzio, SVP/CFO at the $415-million Heritage Trust FCU, Charleston, S.C., believes if CU deposit rates fall it will be due more to the market's movement. However, if credit unions do make some minor adjustments to their loan and deposit rates to make up for slim investment returns, it will not change the strong value CUs offer members.
Resigned To Situation
"The lower rate environment has forced credit unions to drop rates more quickly than we'd like," D'Annunzio said. "But when you look at the spread between deposits and loan rates, credit unions have stayed fairly close to historical norms."
Do credit unions, though, give in to earnings pressure? "Do we attempt to maximize deposits to the fullest extent we can? No. I think we resign ourselves to the fact that at the end of the day we are not-for-profit institutions and we give that value back to our members before we put it to bottom line," stated D'Annunzio. "Now, having said that, if 12 months from now things don't improve, is it something the industry must face-potentially."