Members Respond to President’s Message
Many of our members received the e-mail message sent last week regarding the state of the economy and PSECU’s financial position. While there was an overwhelmingly positive response to the e-mail, a few members posed some valid questions. I would like to take this opportunity to address those items.
The first question was “if PSECU is in such a positive position, why didn’t the credit union issue a special dividend last year?” The answer is that the PSECU board seriously considered issuing a special dividend for 2007. However, in the face of the economic uncertainty that the country had seen in the second half of 2007, the board decided to put that money into our capital reserves. The credit union had also grown deposits quite rapidly in 2007 and new deposits do not come with corresponding capital. It takes time to build capital and new deposits have the effect of diluting capital in the short term. The decision not to issue a special dividend was made to maintain the safety and soundness of PSECU, as we are required by our regulators to maintain a certain capital level.
The second question pertained to the Federal Reserve’s aggressive cutting of rates, and why PSECU hasn’t lowered loan rates by an equal amount. There are two answers to this question, but they are closely tied to one another.
First, because of the changes the Fed has made since August, our deposit rates have come down. However, our reduction in deposit rates has not corresponded in tandem with the Fed cuts. For example, in August, our three-month CD was earning 5.00% Annual Percentage Yield (APY). Today it’s earning 3.45% APY, meaning that while the Fed cut 300 basis points, PSECU only cut 155 basis points. For the five-year CD, we were paying 5.05% and today we’re paying 4.00%, a reduction of 105 basis points. The same can be seen in our Money Market Account (MMA). In August, the MMA was paying 4.55% and today it earns 3.00%, a reduction of 155 basis points. While the Fed has been pushing rates down, we haven’t taken rates down quite as much.
You may be questioning why we lower deposit rates at all if we don’t follow the Fed’s moves exactly. Again, this goes back to the issue of capital levels. Because so many other financial institutions were aggressively lowering their rates along with the Fed, PSECU would have seen a significant increase in deposits, diluting our capital level. As an example, we grew by $133 million in February alone. Please understand that we view growth as a good thing, but as the overheated mortgage markets have shown, too much growth too quickly can be unsafe.
The second aspect reflects the loan side where PSECU has also made some changes. Over the past eight months PSECU has:
- Lowered Home Equity Line of Credit (HELOC) rates for loans up to 80% Loan-to-Value (LTV) to prime rate minus 50 basis points
- Lowered HELOC rates for loans greater than 80% and up to 90% LTV to the prime rate
- Lowered the cash advance rate from 12.9% Annual Percentage Rate (APR) to 9.9% APR on the Visa® Capitol Card®, and eliminated the over-limit fee
- Lowered both the new and used vehicle rates and Real Estate Equity rates 25 basis points
Also, remember that most other lenders use risk-based pricing on their loans. The rates they advertise are for consumers with spotless credit, but everyone else pays more. At PSECU, consumer rates are the same for everyone.
While it may sometimes be difficult to directly link our rates to changes in the market, members can be confident that PSECU’s rates will be extremely competitive. Please know that all actions taken by PSECU are considered very carefully and are done with the members’ best interests in mind.
Sincerely,
Gregory A. Smith
President