"Anytime rates are reduced borrowers gain and savers lose," said Dr. Wai. "But credit unions have to take a hard look at their earnings; they've been squeezed for some time now and they are clearly waiting for appositive reaction on the cost of funds."

CUs have been using CDs as their main source of funds, he said, but that's complicated by what's been going on over at the lending side of the balance sheet. It's not uncommon for CUs to lag slightly on the lending side to lower rates but react much faster by raising savings rates. "I'm betting we'll see a flight to safety like we did when the tech stock market shock correction hit," he said. And it's also likely that many credit unions will re-price their credit card rates lower.

It's a difficult balancing act, said Wai. It's never been more necessary for credit unions to know their members' borrowing and repayment histories. "Because the economy is so bad right now, the ability to repay is an important issue. That's because of the income effect. If a member loses his job they simply can't repay a loan, so it won't matter how attractive a rate you offer, they just are not going to borrow. So it's not just about price."

Lowering CD rates can attract a lot of new money in these times, but Wai said that doing so forces members to make a decision when the term matures. "Do they roll over, cash out or move it elsewhere? A movement in pricing raises sensitivities by itself, and members who are retired, say, don't like such big fluctuations. But it's not just old versus younger members and finding the right level of borrowing against savings; all these other factors come into play."

CUs need to provide a sense of stability when volatility hits the economy with such force, agreed Hampel and Wai. Sending that message can be accomplished by not reacting too wildly to any one sweeping indicator or another. "I'd tell CU boards to look to their overall strategy to get them through this hump," said Wai. Hampel again stressed the strong capital position CUs hold now. "They've been accumulating this capital for a rainy day. Well, it's raining. Get that umbrella up and keep it up."

Corporate Outlook

Cory Johnston, chief investment officer for the Georgia Central Credit Union in Duluth, called the Fed's move "dramatic and aggressive" and said it signaled a continued defensive strategy to further extend investment maturities 12 to 24 months amid a pursuit of greater yield protection. "The Fed mentality has shifted away from inflation to an all-out assault on preventing a recession and that means rates will continue to fall in the months ahead," he said.

Johnston's comments came as Georgia Central announced year-end investment sales had jumped to $1.25 billion, a record 89% increase. The figure included term certificates, fixed callables, SimpliCD, and brokered marketable securities. He said that 2007 started off slow, with members' behavior motivated by two consecutive years of strong loan demand. "In the early part of the year we were able to assist members with liquidity by introducing them to the opportunity to issue certificates through SimpliCD," he said. During the year, 14 CUs took advantage of this option for raising deposits.

Calling the investment increase "enormous," Johnston said the corporate enjoyed a rise in its consultative sales activities as CUs found themselves with less loan demand and greater liquidity.

Those conditions were underscored in mid-September when the Fed began lowering rates, causing CUs to start buying investments stretching out a year or more.

"This really put a focus on our investment tools like analytics and reporting tools," said Johnston as the corporate sought to help CUs with extending portfolios and sharpening purchasing capabilities. He noted that Georgia Central's year-end "satisfaction survey" of CUs showed a jump on two fronts. First, "members gave us a 6.14 for 'investments are competitive' (on the 1-7 scale), up from 6.01 in 2006 and perhaps more importantly, we moved from a 5.86 to 6.25 for the statement: 'staff helps me choose the right investments for my credit union.'"

Johnston went on to say that the corporate sold 7% more investments than what matured, "which equated to 54% more, excluding Agencies."

Brian Turner, manager of advisory services for Southwest Corporate in Plano, Texas, observed that the reduction was the biggest since October 1984, when the central bank lowered the rate by 1.75 percentage points and the first inter-meeting cut since Sept. 17, 2001, when the Fed lowered borrowing costs in the aftermath of the terrorist attacks six days before.

"In light of today's Fed move and the direction which the markets seem to be taking us," said Turner, "this is a pivotal time to review all share and deposits ratesparticularly money market rates."

"It's important to make sure that all deposit rates are positioned in respect to each other to avoid any transitory shift between product. Given that most have not raised share draft or regular share rates, there might be a propensity to believe that there's little room to move, but please check anyway. In that money market rates have risen significantly over the past year, and in many cases are higher than 3.25%, all tiered rates need to be reviewed," Turner said.

"This morning, most corporates lowered their rates across the board," he added. "By all accounts, a proactive stance taken on non-term accounts is greatly encouraged to position cost of funds at this time. This is also important for term certificates rates. As a comparison, term borrowing rates for one-, two- and three-year maturities are 3.28%, 3.09% and 3.33%, respectively. These rates should serve as indicative basis from which to assess the credit union's term certificate rates."

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