By Ray Birch
LATHRUP VILLAGE, Mich.—The current rising rate environment may prove to be quite different from those in the past, asserts one CEO who has managed his credit union through several rising rate cycles.
Michael Poulos, CEO of $926-million Michigan First CU, told CUToday.info what could make this time unique is the potentially “volatile” nature of the economy.
“We are in weird political and economic world,” said Poulos. “I have seen things occur in the last few years that I have never seen in my life. So, given that the economy may not function is it normally has in the past, you can’t necessarily make decisions based on how long you think this rising rate cycle will last based on historical trends. You just have to play with this cycle, adjust, and when things start to go the other way adjust back.”
Poulos noted that in a typical rising rate environment, financial institution leaders expect rates to rise for a number of years before either stabilizing or dropping.
“Again, that may not be the case today,” he said. “The Federal Reserve has even indicated they are revising their projections for raising rates.”
FOMC Members Also Divided
As CUToday.info reported, following the Federal Open Market Committee’s meeting in December, committee members pared their projections for 2019 from three rate hikes to just two. President Trump has been critical of the rate hikes, and some members of the FOMC have indicated they do not feel as strongly as they have in the past about raising rates given recent economic data.
After a decade of flat and near-zero rates, the insights are being shared as part of a series in CUToday.info dedicated to sharing the perspective of credit union leaders who have experienced periods of rising rates in the past with newer CEOs and CFOs.
Inany rising rate environment, Poulos said the key is managing assets.
“You have liquidity demands—how much do you have to pay to get liquidity and through what source?” he said.
Poulos believes in the current rising rate cycle that financial institutions should pay close attention to money moving out of their organizations.
“The reason is that rates have been so low for so long that investors for quite some time were lulled into thinking rates will be ultra-low for a long time,” offered Poulos. “As rates are rising finally to a noticeable point for investors, they may get more excited and be more rate sensitive than in the past.”
Watching for Outflows
The CU, insists Poulos, needs to pay close attention to members who have a lot of money on deposit.
“Look for outflows, especially from those large investors,” he said.
It also means regularly scanning the market to see where members might shift their money.
“When it comes to a small difference in rate, I think members remain loyal to the institution that treats them well,” said Poulos. “But as the rate gap widens, they just can’t give that money up and move.”
An Eye on Lending
On the lending side of the house, Poulos said it’s all about remaining competitive and carefully choosing wherever it’s possible to raise rates.
“If you are dealing a lot in A and B paper, these are very rate-sensitive people, so I would be cautious about raising rates for these borrowers too quickly,” he advised. “If you are dealing with the C, D and E market, these borrowers are less rate sensitive, so you can afford to move up rates here at a faster pace.”
Poulos said Michigan First has adjusted its CD rates after it noticed money flowing out of the institution.
“We adjusted rates to be more competitive and that slowed the outflows, really stopped them and things have actually gone back the other way a little. We are a little heavy on deposits now,” Poulos said.
MFCU has yet to make any adjustments on regular savings and checking since those rates are low and the credit union has not seen any real money movement from those accounts.
“We have tweaked our loan rates here and there,” noted Poulos.
With rates remaining down for nearly a decade in this latest rate cycle, Poulos said it is easy for a CEO’s skills to slip in managing through a rising rate environment.
“It used to be every four or five years you’d get a new rate cycle and have to make adjustments,” he noted. “But this latest cycle has been a long time coming. You can get lackadaisical, and some skills you used to employ more often got stale and instincts you had are not as sharp.”
Poulos said he thinks the biggest shock to CEOs is the disappearance of cheap money.
“We certainly got used to a low cost of funds. Loan rates adjusted somewhat, you moved them a bit here and there. But with savings, you got kind of comfortable, thinking, wow, we have all this money and it doesn’t cost us much—then all of a sudden it does.”
While Poulos said to monitor the market, he cautioned against blindly following the crowd, which could be a normal reaction to this latest rate cycle.
“Know what the crowd is doing and then decide if you follow partially or fully,” he said. “I know some credit union leaders will say, ‘OK, that credit union raised its rates so we have to.’ Whereas, in reality, the credit union might not have to, based on its own business model and strategy. Do what’s right for your credit union, but always be watching what others do around you just in case there’s something you can learn.”
More in this series: