Get ready to fight for deposits
Credit unions can bid adieu to the easy years of gathering deposits.
Since the crisis a decade ago, the financial services industry has been awash with liquidity as interest rates remained low and depositors parked their money at banks and credit unions. That meant credit unions could pay less in interest to members to hold their deposits.
But now the Federal Reserve has raised rates four times this year and is likely to continue that next year. This is forcing institutions to start paying up for deposits, including running special rates on certificates. All of this could potentially squeeze credit unions’ bottom lines.
“It’s simple competition. As rates go up, credit unions will see the institutions that they compete with holding deposits doing so as well, and that introduces some pressure to keep up in the marketplace,” said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions. “If a credit union does not raise rates consistent with their competition, they certainly could see their deposits leaving.”
Total deposits at federally insured credit unions totaled $1.2 trillion in the third quarter, according to quarterly data from the National Credit Union Administration. That’s up 5 percent from a year earlier.
However, the rate of growth for these deposits is slowing, NCUA data shows. From the third quarter of 2016 to the same period in 2017, deposits had jumped about 6.7 percent.
Additionally, lending opportunities have boomed with total loans outstanding topping $1 trillion, according to NCUA. Additionally, the loan-to-share ratio was 85.2 percent, its highest level since 1979.
All of this means credit unions are feeling more pressure in terms of liquidity.
“That’s the highest ratio we’ve seen since 1979, which means that credit unions don’t have a lot of liquidity and would more than likely want to have more deposits,” said Mike Schenk, Credit Union National Association’s chief economist.
Credit unions will have to cast a larger net to diversify their funding. One source will be certificates.
In 2007, the last time the U.S. economy faced a rising rate environment, certificates made up about 33 percent of deposits, according to Sam Taft, associate vice president of analytics and business development at credit union consulting firm, Callahan & Associates. Taft says that today, certificates are about 19 percent, meaning that much of that growth in funding has largely come from core deposits in recent years and that there is room for credit unions to tap into this area.
“But in the last year, as interest rates have increased, you’ve seen certificate growth increase and part of that has to do with the interest rate environment and the liquidity situation that credit unions are facing,” Taft said. “Loan-to-share ratios are rising with sustained strong loan demand, so certificates are an easy way to manage that."
Midcoast Federal Credit Union in Freeport, Maine, has already launched a special certificate, said President and CEO of Joe Gervais. Through the offer, members could lock in 2.25 percent for 22 months, as long as that the member had an existing relationship with the $176 million-asset Midcoast or an active checking account.
“As rates are rising, we had a number of members that moved out-of-term products and into money market products through the past few years waiting on the sidelines and now that rates are rising, we are offering off-term specials to encourage members to lock in rates for longer terms,” Gervais said.
But paying higher rates for certificates will be costly. Because of that, credit unions would be wise to think about other ways to attract and retain funds.
For one, credit unions may rely on the convenience and service they provide to members to keep their core deposits, Schenk said.
“Neighborhood deposits, still in this day and age, are more important for consumers than necessarily chasing down the highest yield,” Schenk said.
Institutions should also offer a simple product set, including just one or two checking account options, said Mike Moebs, a credit union economist and CEO of Moebs Services. That makes it easier for branch employees to explain the different options to members.
“I don’t care if you’re a tiny credit union or Navy Federal, you want your frontline person who’s selling to the member to have a very simple and easy way to sell,” Moebs said. “That's one way that [credit unions] can handle 2019. In other words, if I have 20 or 30 different types of deposits, then cut that in half. That simplicity makes it easier for your frontline people to sell and makes it easier for CUs to establish a pricing point.”