When making strategic decisions, credit union managers need to consider a number of factors:
- What is the current liquidity position of the credit union?
- Is loan demand increasing or decreasing?
- What are the average lives of the credit union’s existing assets? (For example: Are your loan and investment maturities dated five years or more into the future?)
Until the stock market turns around members will continue to direct their investment dollars to the credit union. Managers can expect this trend to continue until the quarterly IRA and 401k statements stop showing negative returns. The credit union may not be paying “high” rates, but at least the entire amount of money the member deposited is still there at the end of the month. The “stimulus” money was delivered to members the same way their 2007 tax returns were delivered. This was a departure from the prior stimulus payments, which were always mailed to taxpayers. It also means credit unions were seeing a mini tax return season in May and June. At the same time, the Federal Reserve was signaling that interest rates would not be going down any further.
Credit union managers need to view this as an opportunity to lower dividend expense and restructure the term liabilities. Lowering the regular share rate is never popular; so consider taking this opportunity to lower the rate with minimal member reaction. Managers can soften the message by offering comparatively high, longer term (three through five year) certificate of deposit (CD) rates. Steepening the CD curve will attract member deposits into longer fixed CD’s, which will prove to be cheap liabilities when rates begin to rise.
If loan demand is flat or declining, be cautious with the urge to lower rates to spur loan demand. The numbers can vary widely depending on the loan product. But for most intermediate term loans like autos, a 25 basis point rate decrease requires a greater than 30% in loan volume to replace the lower cash flows from the new loans. Further, since most loans credit unions offer are fixed rate, lowering the loan rates to aggressive levels will constrain the credit unions earning ability in the future when rates increase. This doesn’t mean loans are bad in this environment, but we need to insure we are covering our cost now and in the future when making loan pricing decisions.
Investments represent the quickest means to adjusting the balance sheet when deposits are flowing in, but loans are not flowing out. The temptation to “reach” for yield by purchasing longer maturity investments can be hard to resist. Consider purchasing floating rate investments or amortizing mortgage backed securities as a way to earn a respectable yield with some protection against a rising interest rate environment. (One note of caution – mortgage backed securities are marketed on average life, and that means only half the principal will be paid back by that average life date, if the models are correct. The rest of the principal will come back to the credit union over the remaining term to maturity.) If your credit union can afford to stay short with investment maturities, this could be a good time to build a one to two year investment ladder.
The ultimate solution for credit union managers to maximize the performance of their balance sheet is to utilize their Asset and Liability models to determine “what if” strategies. These “what if” models should be done over a range of interest scenarios to quantify the interest rate risk and rewards of any ideas management has on the table.
In the end, it’s always important to remember that the credit union needs to remain competitive for the members both today and in the future. Care needs to be taken to navigate today’s choppy seas to insure smooth sailing in the future.
For more information on asset and liability services available through Mid-Atlantic Corporate, please contact your Corporate Account Manager by calling toll-free (800) 622-7494.
