By Ray Birch
EDWARDSVILLE, Ill.—Following the Federal Reserve’s 50-basis-point rate cut in response to coronavirus’ threat to the economy, credit union ALCO committees and senior management are huddling across the country, discussing actions to take now and in the near future to keep their CUs performing.
Among the responses some management teams are considering: ramping up efforts to support refinancing volume, which is expected to climb; bracing for the possibility of negative interest rates; adjusting strategies to compete in an environment in which spreads are squeezed even tighter; ensuring digital channels are prepared for an increased workload, and even keeping more cash on hand in the event of a run on money.
Two additional concerns were also raised by CU leaders who spoke with CUToday.info: the uncertainty of what lies ahead from the coronavirus and its impact on American’s health, the economy and credit unions themselves, and what tools the Fed has left to deal with any future downturn.
As CUToday.info reported, the Federal Reserve has cut the target range for the federal funds rate by .5% to a target range of 1% to 1.25%.
‘Unique Set of Circumstances’
“These are certainly interesting times and present a unique set of circumstances that I certainly have not had to contend with in my career,” said Frank Padak, CEO at the $1.2-billion Scott Credit Union here. “The coronavirus has really created a lot of uncertainty, and no one likes uncertainty.”
Frank Padak
Padak called the Fed’s surprise cut a “significant challenge” to financial institutions.
“The immediate impact is overnight funds are repriced resulting in a material decrease in income and, of course, the expectation from members there will be lower loan rates,” said Padak. “As most FIs have historically reduced deposit rates first followed by a more methodical reduction in loan rates, the demand for loans has waned and the immediate concern is there may be an additional slowdown in the economy and possibly even a recession.”
The CEO said Scott Credit Union will carefully determine which rates to reduce, and the timing of the reductions, to minimize the negative impact on deposit growth.
“And we want to maintain a reasonable margin while also being able to attract loans from what has been a declining pool,” said Padak. “SCU has seen strong deposit growth so far this year, and the recent equity market downturn has the potential to see more money leave the markets and move to safer options, such as credit union deposit accounts.”
Holding More Cash
The $68-million North Bay CU in Santa Rosa, Calif., is planning to turn more of its deposits into cash on hand.
“We have yet to see any member reaction specifically to virus news reports—no run on the CU yet—but we may increase our cash on hand just in case,” CEO Chris Call said.
Call acknowledged the rate cut came as a surprise to North Bay.
“Our variable rate loans—HELOCs—are a relatively small part of our loan portfolio, so this rate drop should not have that great of an impact on earnings,” explained Call. “We may see this as an opportunity to push refi’s. We are going to wait to see how long-term rates react to the cut before making any pricing changes.”
Prepared to Adjust
Chris Call
Joan Opp, CEO of the $2.8-billion Stanford FCU in Palo Alto, Calif., said she recognizes that even with all the careful planning at the end of 2019, the credit union must now be ready to adjust to change.
“Reality is often different as economic ups and downs are rarely in line with your assumptions,” noted Opp. “Our budget will be impacted in that our spread will be squeezed more than anticipated. We may not make our budgeted return, but we will be OK. A budget is just that—a budget based on what you know and the assumptions you use. You control what you can control, and deal with what you can’t control.”
Stanford FCU will be reducing its deposit rates.
“And we will monitor loan rates and do the best we can for our members without being irresponsible,” Opp said. “Our members’ behavior will likely be impacted, but how remains to be seen. They may hold off on some things, there may be an influx in deposits for flight to safety, among other things. We will be here to serve them.”
No Snap Decisions
The Fed’s move, which many had not anticipated until later this year if it moved at all, will put pressure on every CU’s asset/liability committee, but those decisions will need to be carefully made, said Shirley Cate, CEO at the $140-million Providence Federal Credit Union in Portland, Ore.
“We are diligent when it comes to our rates, and we won’t make any snap decisions,” Cate said. “We price at or above market on our deposit products, so this change, or any additional decrease, will allow us to look closely at not only our share rates but our money market rates as well. Our members tend to utilize the money markets more than our other deposit accounts. Our HELOC product is our most popular product, and with the rate decrease it will grow even more in popularity—with new loan requests and limit increases from existing members. These changes will happen sooner than later.”
While falling loan rates may attract additional borrowers, Cate is concerned members could take their current loans elsewhere.
“We have struggled with loan growth the last couple of years…Members may ask us to lower their current loan rate or they may move their loan for a better rate,” Cate said. “We planned to add a few first mortgages to our balance sheet this year, however, this rate change may effect that strategy. On the other side, our fee income may increase due to our members refinancing their mortgages, which will bring in additional mortgage loan origination income to PFCU.”
Scott Wilson
‘A Lot to Discuss’
At SeaComm FCU in Massena, N.Y., CEO Scott Wilson told CUToday.info the $568-million CU’s 2020 budget was based on no change in Fed funds.
“Obviously this rate cut will have an impact on our interest income, as well as it can persuade more members to refinance mortgages,” said Wilson. “We really focus on efficiency and that will continue.”
Like other credit unions, Wilson said SeaComm is evaluating its options.
“There were three Fed cuts in 2019 and we were able to keep our deposit rates where they were, assisting our members by still providing above-average rates and maintain ROA above 1%,” said Wilson. “Our cost of funds are higher than our peers, but our board believes it is a way to give back and have an immediate impact on our members’ lives. But we will have a lot to discuss at the next ALCO meeting.”
Loan Slowdown Anticipated
After recently cutting its deposit rates, $2.1-billion Advia CU in Parchment, Mich., is set to do that again with the decrease in the Fed funds rate.
“We’re reviewing our deposit rates, particularly CD rates, and will continue to lower them, after reducing them earlier this month,” said Jeff Fielder, EVP of finance. “These actions are necessary to help maintain our net interest margin, as our relatively short loan portfolio will certainly reprice lower. On the loan side, many of our members are taking advantage of lower rates and refinancing their mortgages. We anticipate seeing greater refinancing in our commercial portfolio as well.”
Outside of refinancing, Fielder said Advia is bracing for a lending slowdown.
“If the virus spreads like it has in other communities, we expect there will likely be reduced consumer loan demand,” he said. “Given the increased market volatility, we expect some of our members may bring more funds into the credit union, increasing our deposit balances and liquidity. If there is a virus spread within our communities, we would expect less branch traffic and a greater reliance on our digital and member contact center channels.”
Linda Bodie
New Products?
Linda Bodie, CEO at $35-million Element FCU in Charleston, W.Va., said new products may need to be on the horizon.
“We’ll analyze our rates and spreads and determine our course of action,” Bodie said. “As spreads continue to get even tighter, we’ll need to invent more products and services to generate additional revenues. We will also investigate the expense side to identify areas that could be trimmed during this period of super-low rates.”
Running Through Scenarios
In Chicago, David Mooney, CEO at the $12.2-billion Alliant CU, said the credit union will make no major moves at this time.
“While we didn’t anticipate a 50-basis-point reduction in March, we run multiple rate and economic scenarios in our planning, so we have a sense of what the impacts might be and how we might respond,” Mooney said. “The situation is dynamic, so we aren’t taking any dramatic action at this time.”
Rob Werner
Making a Move
Ardent CU in Philadelphia, however, plans to make moves now.
Thomas O'Shea
“We will be lowering certain deposit and loan rates immediately and hold ongoing pricing meetings to stay on top of this situation,” said Rob Werner, CEO of the $720-million CU. “Our ALM planning considers the impact of interest rates changes up and down 100 to 400 basis points. Since we did not believe interest rates were heading in any direction but lower, we had paid particular attention to operating in a lower interest rate environment this year. We even had discussions of the potential impact of negative interest rates.”
Looking at the bigger picture, and how the coronavirus may affect the economy, and therefore the CU, Werner said he is not sure how the Fed’s move will solve that issue.
“Unfortunately, I am not sure the emergency rate 50-basis-point cut is going to have the intended positive results the Fed is looking for, considering the real concern is the impact of COVID-19 on our economy,” Werner said.
The Bigger Concern
In Clark, N.J., Thomas J. O'Shea, CEO at the $132-million Aspire CU, shared similar concerns.
“The bigger concern is, with rates going to the 1%-1.25% range, what does the Fed have left when a real recession hits?” said O’Shea who noted Aspire will adjust its rates, especially home equity. “This rate cut was triggered by coronavirus fears. From most reports I’ve read the underlying economy is doing okay. So what happens when the economy starts to go into its normal recessionary cycle, one that’s not caused by pandemic fears?”