How are Deposit Rates Determined?

PFFCU’s goal with our deposit and loan rates is to use our financial strength to offer members the best deposit and loan rates possible. PFFCU’s business philosophy is to share its success with the members that have enabled us to achieve that success.

What do we do with the money when it is deposited by members?

We receive deposits from our members in the form of Savings, Checking, Money Market Accounts, Certificates, and IRAs. Our first goal with the deposits we receive is to make loans to members. Our loans to members consist of Mortgages, Home Equity Loans, Auto Loans, and Unsecured Loans (PLOC, Signature, and VISA).

Because our members have more deposits with PFFCU than loans, every new dollar deposited in PFFCU is currently added to our investment portfolio. We are very conservative in our investments, choosing only those investments that have a government guarantee and less than a 2-year maturity or interest rate reset. These guaranteed investments are only earning between 0.25% and 0.50% as of September 2014. Historically, our average Certificate rate has equaled our average yield on investments so that PFFCU passed through all of its income from investments to members in the form of higher Certificate rates. Our deposit rates have to reflect what PFFCU can earn on its investment portfolio so that PFFCU remains financially sound.

Why are deposit and loan interest rates so low?

We understand that many members would like higher deposit rates. Unfortunately, due to the weakness of the economy, it is unlikely that interest rates will increase through mid 2015. In September of 2012, the Federal Reserve Bank stated that it expects weak economic conditions to warrant “exceptionally low levels for the federal funds rate … at least through mid 2015”.

PFFCU has approximately $1.3 billion of investment funds or excess member deposits sitting at the Federal Reserve Bank earning the federal fund rate of 0.25%. Because our members have more deposits with PFFCU than loans, every new dollar members deposit is currently added to our holdings at the Federal Reserve Bank earning 0.25%. We are very conservative when investing our member funds, choosing only government guaranteed investments with less than a 2-year maturity. These guaranteed investments only yield between 0.25% and 0.50%.

The reason PPFCU deposit rates’ are low is that our rates are driven by the Federal Reserve Bank’s rate, which are currently being held exceptionally low. The Federal Reserve is keeping interest rates low in order to discourage consumers from saving and encourage consumers to borrow and spend, hoping to stimulate economic growth.

Since 2009, the Federal Reserve Bank’s economic growth strategy has driven down the yield PFFCU can earn when making investments and, correspondingly, impacted PFFCU’s deposit rates. Historically, our average Certificate rate has equaled our average yield on investments so that PFFCU passed through all of our income from investments to members in the form of higher Certificate rates.

PFFCU helps members by offering the best longer term Certificate rates. PFFCU’s two to five year Certificate rates range from 1.0% to 2.0% APY. Our five year Certificate rate has consistently been one of the best in the entire country since 2009. Because of the impact of falling interest rates on savers, PFFCU has always encouraged members to use longer term Certificates to “ladder” their funds rather than keep all of their money in the Premium Yield Account or short term Certificates. (Laddering means spreading your Certificate purchases over different maturities.) This strategy protects members if interest rates fall while also ensuring that some funds come due each year if interest rates increase.

Finally, while PFFCU’s deposit rates are historically low, so are PFFCU’s loan rates. Our five year auto loan rate is 2.24% and our 15 year 1st mortgage rate is 3.25%. Since 2009, PFFCU saved members millions of dollars by refinancing their mortgages at record low rates.

Why are all the share rates the same?

Under normal circumstances there would be a significant difference in the Savings & Checking rates compared with the Premium Yield Account rate to reflect their different characteristics. Typically, Savings & Checking have the lowest rate because members have the most access to these funds while the Premium Yield Account has the highest rate because there are restrictions on the number of penalty free withdrawals. This is similar to the rate structure on our Certificates. Shorter term Certificates generally have lower rates than longer term Certificates.

Unfortunately, with the economy struggling and the Federal Reserve Bank forcing interest rates toward zero, share account rates have become compressed since share account rates can’t go below zero. We have set share account rates roughly equal to each other because it doesn’t benefit members or PFFCU to create small artificial differences. For example, a 0.1% interest rate difference is worth only $1 per year for every $1,000 of deposits.

The interest rate PFFCU pays on a particular deposit product is a rough measure of the value of those funds to PFFCU. In the current interest rate environment, financially speaking it makes no difference to PFFCU where members choose to allocate their funds among share accounts and short term CDs. Before the economic recession, there was a very significant benefit to members to move funds to the Premium Yield Account. The PYA yield reached 5% in 2007 and was among the highest rates offered anywhere in the country through 2008 and 2009.

What will happen to deposit rates in the future?

PFFCU doesn’t have an economic crystal ball; therefore we don’t manage our balance sheet based upon a forecast of interest rates and the economy. We plan for different scenarios and respond accordingly as economic events unfold.

Comment: By Jim DeMasi, Chief Fixed Income Strategist, Stifel Nicolaus Investment Firm 8/10/2011

“The Fed’s message was crystal clear: the central bank will do everything in its power to ensure that cash and cash-like instruments earn decidedly negative real rates of return for the foreseeable future. The Fed’s signal that short term yields will remain well under the rate of inflation indefinitely was meant to provide a powerful incentive for investors to take greater risk in pursuit of positive real rates of return.”


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