By Ray Birch
HARRISBURG, Penn.—Be competitive, but don’t be too competitive. That’s the advice from one CEO who has managed his credit union through several rising rate environments and who warns that chasing the high deposit rates of top-of-market competitors is often a losing battle.
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.
Greg Smith, who has led the $5.3-billion Pennsylvania State Employees CU since 1991, noted that today much of the emerging competition for deposits is coming from the big, low-overhead players such Capital One and Ally Bank. He added that with the emergence of fintech as well as the increased use of the Internet by consumers to shop for rates, managing through this current rising-rate environment becomes even more difficult.
“It will be very hard for credit unions to compete against the high rates, with most credit unions’ operating costs higher than those of the largely online competitors and even the large banks. They don’t have operating costs nearly as high as most credit unions,” said Smith. “So, you can fall into a trap of promising to pay that high rate, saying you will always be 10 basis points above Capital One. But if your operating expenses are higher than theirs, it will be difficult to continue to do that.”
A Tougher Task
Smith acknowledged the task is tougher today than in previous rising rate environments.
“Money is so much more mobile today,” said Smith. “People are willing to consider an institution that does not have a branch in their hometown. They have heard of Capital One and Ally. They’ve seen the commercials. And with a five-minute account application they can move their money out of the credit union.”
Smith recalled the most “memorable” rising-rate environment he had to manage the credit union through.
“It was in the early ’80s, when Paul Volker was ruining the Fed and he was determined to squeeze inflation out of the U.S. economy, and he was successful,” recalled Smith. “But we had to go through a lot of pain—overnight rates I recall went to over 21%. Those were incredible rates. It was quite an experience to go through that.”
Gutting It Out
Smith looked back on how he managed PSECU through the sky-high rate period.
“Back then, things like overnight money market accounts did not really exist,” he said. “I think we were coming off the old Regulation Q—I think it was still in force back then. There was a weekly process when the Fed would post a new set of base rates and you were pretty much restricted to what you could pay based on where the index rates were. You had to just kind of gut it out. That’s how we got through that period.”
With rate competition much more fierce today and CU operating costs possibly a handicap against low-overhead competitors, should credit unions begin considering cutting back on branches?
“It’s something you always have to be aware of. If your costs are not under control, you will have problems,” said Smith, whose credit unions employs a branchless model that significantly limits its expenses, even though it has 449,000 members. “That is the whole issue of do you continue to build branches, do you modify them to scale them back . . .”
But CUs must be even more wary today of the potential growth potential of the low-overhead online players.
“Capital One is the old ING,” Smith said, referring to the company previously known as ING Direct that was taken over by Capital One in 2012. “I remember when ING was out there they grew to $70 billion before Capital One took them over. That growth came over the course of two to three years, an amazing growth rate.”
A Basic Principle
Smith said he always adheres to a basic principle, no matter what the rate situation might be.
“It’s really just a matter of balancing liquidity needs with the rates,” said Smith. “You want to be competitive, but you don’t want to be too competitive that you attract more money than you can actually use. You want enough money to fund your lending operations. Say you have a loan-to-share ratio of 60% to 70%. You make it worse by bringing in more deposits and that hurts your overall ROA.”
Smith compared the days of managing through the very rock-bottom rates following the latest recession to a rising-rate scenario.
“If you asked me after the recession when we headed to near zero rates, I would have told you then I was uncertain how we could make money,” said Smith. “That was an incredible time. But I guess the rate decline then was such a slow-enough process that we were able to adjust—and PSECU had some of our best operating years ever. I guess what it comes down to is that you don’t have any choice in the matter, you just find ways to deal with the hand you are dealt.”