By Ray Birch
HUNT VALLEY, Md.—The only way to address the current rising rate environment is to leverage all areas of the organization that influence rate setting and deposit gathering and retention, says one CEO.
“If you do it the right way, attack this holistically, you will be much more successful than looking at this situation as a one-off challenge,” said Bernie McLaughlin, CEO of the $775-million Point Breeze CU. “It’s like if your body has these aches and pains and a lot of it has to do with you not building up your core muscles. Your core muscles are attached to other muscles in your body. So, what I am saying is with rates rising you can’t just approach deposit gathering and retention with a singular focus. Everything is connected, and you need to address this situation with that in mind.”
McLaughin’s observations are being shared as part of a series that recognizes many newer CEOs and CFOs have not managed in a rising rate environment, and CUToday.info has contacted more experienced CEOs to share their perspectives on how to best proceed.
Complicating matters, too, is recent indications by the Federal Reserve that appears to be backing off plans to raise rates at least twice in 2019.
Steps to Take
McLaughlin outlined steps credit unions should take across several areas of the organization today to remain competitive in a rising rate environment— including marketing, the rate committee and finance.
McLaughlin acknowledged many of the skills needed to navigate through the current rate cycle have likely become stale for many.
“For almost a decade, the skills to manage deposit acquisition and retention have become rusty,” he said. “They have gathered dust because rates had not moved for virtually a 10-year period and remained extremely low. That’s now changing.”
McLaughlin shared several tips with CUToday.info on how to address rising rates, and conceded he even held a few back to avoid giving his market competitors an advantage.
“The whole issue really depends on the liquidity position of the institution,” McLaughlin said. “If you are highly liquid, then you really don’t care about deposit acquisition or even retention. So it starts with assessing your liquidity.”
The Two Types of Liquidity
McLaughlin pointed to the two types of liquidity.
“One is cash in the vault, and the other is the overall liquidity of the institution, which includes the investment portfolio,” he said, saying any highly liquid shop would have total duration of its investment portfolio under three years.
“Many institutions in the past 10 years went away from short-term duration because they saw a chance to increase their return, and also saw no real movement in rates for some time,” he noted. “And for many years they were right, reaping the benefits of the higher yields from longer terms.”
That simple approach is now boomeranging.
“Now some of these institutions playing that game are stuck with five- to seven-year instruments they can’t do anything with. So liquidity will strike some in a negative way,” he said.
For those credit unions that are not liquid, and need liquidity from the market, they must ensure their rate committees are strong, skilled and diverse, McLaughlin said.
“This team needs the right players,” he said. “You need loan people, those from the deposit side of the house, marketing, the branches… Rates are not set by the CEO. They are set by the rate committee, and regulators are keeping an eye on this. Having a bona fide, viable rate committee is very important.”
Rethinking Online Competition
Meanwhile, McLaughlin observed how rates available from online lenders can sometimes have an undue impact on a credit union’s rate decisions.
“Online competition has been around for a long time, and, yes, it is increasing,” said McLaughlin, who believes online banks are not as big a local threat as some might believe. “But this competition is not yet to the point where members and customers always want to send their money all over the country. Many still want to know where their funds are, and that means locally. So there are plenty of deposits to be had from the local markets and you don’t have to lose a lot of sleep worrying about the Internet banks.”
The CEO insisted when a credit union prices against online competition, the organization is simply falling into the “trap” of trying to be everything to everybody.
“So then, what do you do? You price to the local market competition. THat means you rate shop, get to know who your competition is. Shop the competition and arm your rate committee with that information.”
Monitor, Don’t Mirror
But McLaughlin said monitoring competitors does not mean mirroring them.
“Let’s say you have two large players that have a lot of borrowing from the Fed, and they have loan-to-deposit ratios over 90%. Those larger players will be very hungry for deposits. So what does that mean? They will drive the market rates up abnormally. They are big and will create a lot of pain in the marketplace,” said the CEO.
In some cases, that will mean just letting those competitors grab a larger share of deposits.
“It just depends on whether you want to be in the middle or upper quadrant of local rates,” McLaughlin said. “This is a decision for the rate committee.”
McLaughlin said input from marketing to the rate committee is important, but marketing can’t take over committee meetings.
“Over the years I have had difficulty keeping the rate committee from turning into a marketing committee meeting,” he said. “When you start talking about the local market, saying this outfit has this promotion, and this one has this rate, pretty soon all you are doing is talking about where you should advertise. This is not the job of the rate committee. They are just supposed to set rates and then turn them over to the marketing teams and let them do their jobs.”
‘Huge Piece of All This’
McLaughlin reminded the CU’s investment portfolio has a critical impact on rate setting.
“It’s a huge piece of all this,” he said. “If your total duration is longer, then you are forced to gather deposits in the general marketplace. Whereas, if you stayed short, like we have at Point Breeze, and forgone that extra income from longer terms, you’re in great shape. You don’t necessarily need to pay a lot higher on deposits, which means your deposit expense can stay lower as you pass on a lot of that competition.”
McLaughlin believes it’s time to begin flipping the investment portfolio to shorter durations so the CU can have additional funds available.
“Even of you don’t need the funds this second, it’s a piece of the puzzle to fueling loans you will need to fund,” he said.
During internal discussions on deposit gathering and retention, McLaughlin said the credit union’s expenses—overall efficiency—should be firmly addressed.
“You always need to be as efficient as possible,” said McLaughlin. “We recently shifted our staff to a universal agent model, and in doing so were able to reduce our number of front-line staff through attrition. FTEs are a big part of your expenses. We reduced our costs there which is allowing us to pay higher rates.”
Reviewing Contracts
Vendor contracts are also a significant expense for any credit union, and McLaughlin said they need to be reviewed more closely.
“Take your most expensive contracts and throw them to a contract broker,” he said. “They are more familiar with contract pricing and terms today than the typical credit union. They know what to look for and how to maximize a contract and bring you a great deal of savings.”
Point Breeze also reviews its branch presence for redundancies and savings. McLaughlin said given the consumer shift to mobile banking, having more than one location in a market is often a mistake.
Finally, a “golden rule” to always follow, added McLaughlin, is to avoid getting involved in rate wars.
“Like in any fist fight, both sides lose. In rate wars everyone loses,” he said. “There is always that temptation to say let’s go out with a screaming rate. But you have to be careful, because once you start a war sometimes you can’t crawl out of the pile.”
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