When the Federal Reserve started to lower short-term interest rates in 2001 Tony Gilreath, chief financial officer of Founders Federal Credit Union, Lancaster, South Carolina said the CU’s board and management wasted no time. “We’re liability sensitive. We couldn’t afford a delayed reaction. Seeing the benefit of a lower coast of funds, we lowered rates, too,” said Gilreath. But that’s only one aspect of how Founders (www.foundersfcu.com) has kept growth under control, expenses at bay and showed a good net interest margin in the first quarter.
It’s really a fine balancing act, he said, managing net interest margin by not taking in too much deposit growth, maintaining a healthy loan to share ratio and sticking to a sound investment philosophy. It’s a disciplined approach designed to counter changes in interest rates and member demand for loans and deposits, and it takes patience to see it through, Gilreath said.
Founders’ is one of the Palmetto State’s largest credit unions and is now “knocking on that billion-dollar door” with assets of $994 million, a 4% increase from last year said Gilreath. With 133,000 members served via a 17-branch system in a five county area that has an unemployment rate higher than the national average, it has to manage carefully. (Founders’ core sponsor is Springs Industries, the textile giant and maker of Wamsutta and other famous brands, but it also has some 400 small select employee groups, mostly small businesses.)
Founders has historically paid above market rates, Gilreath said, and, thinking rates were going up in 2000 (like everyone else) the CU issued a step up CD in lieu of funding through a term borrowing. Now, rates are closer to current market, but not below. (Founders just introduced a variable rate CD indexed to the prime rate (prime minus 1) that’s a good deal for members in this environment, he added.)
Expenses grew at just 3.4% from a year ago, despite the addition of a new branch and investments made in technology. “We’re happy it’s below out asset growth rate; the denominator helps keep our operating ratio stable. We tried to leave no stone unturned when analyzing operating expenses.
By extending the duration of the investment portfolio by 6-months, Gilreath hopes to hit the “sweet spot” in the yield curve. “We diversified our portfolio and added 10% in mortgage backed securities and some callable agencies.
Auto loan growth was good at 15.6% (annualized) for the first quarter despite the lack of any indirect lending program and no long term fixed rate mortgages. And with a loan to share ratio of 88%, somewhat lower than Gilreath would like, the risk based lending program in place since 1995 has helped balance potential losses with higher rates for increased returns. “While I’m not ecstatic about 5% loan growth, the economy here is weak and it may be a while before we see stronger loan growth again.”
“We did add new mortgage products, a couple of short-term and variable rate products, like a balloon and a prime-based mortgage to add more rate sensitivity to the asset side of the balance sheet and position us for the crunch we know will come,” said Gilreath.
Last year, Founders issued a whopping $4 million bonus dividend to members that had a 42 basis point impact on ROA, which was 160 before distribution, 118 afterward. “Now, we’re at a turning point,” he said. “The first quarter was nice, but our board knows that short tern rates will rise and we’ll begin to see a tightening of our net interest income.”