Why credit unions’ deposit problem is different this time around
Credit unions are confronting a problem they haven’t faced in a decade: How to manage a surplus of deposits.
Banks and credit unions saw deposit volumes surge in the wake of the Great Recession but those eventually leveled off as the economy righted itself. Both sides have seen a steep increase in deposits this year, however, as the coronavirus and recession slowed consumer spending, decreased lending and spurred many Americans to park their money.
Second-quarter data for the industry from the National Credit Union Administration won’t likely be available until September, but credit unions saw deposits rise by 8.1% during the first three months of the year. That's more than two percentage points higher than the same time last year, according to NCUA data.
And because the coronavirus crisis began so late in the first quarter, figures for April through June are likely to be even higher. Data from CUNA Mutual Group predicts a 17% rise this year, nearly 7 points higher than at the peak of the Great Recession. The company predicted deposit growth won't return to near the 6.6% long-run average until 2022.
“What we saw in the first quarter is continuing in the second quarter,” said Brian Turner, president and chief economist at Meridian Economics. “That’s primarily as expected — loan demand is down and even though people are out of work and may not have wages, because of the stimulus payments and some other aspects of their revenues, we still see share growth.”
SecurityPlus Federal Credit Union in Baltimore has already seen an 8.3% increase in deposits compared with last year, a total of about $30 million, said CFO Bill Kennedy. The $425 million-asset institution is putting a lot of its new money into government-backed investments, said Kennedy, “so that in the case that money starts flowing out, we do have a monthly cash flow coming in. But if it’s more than that cash flow we could sell those securities pretty close to at par, so at least during the time we had that money we’d be earning a spread and adding to our bottom line, because it’s very important at this juncture.”
Overdraft fee income, credit card interchange income and other revenue streams have “dramatically decreased, so we need to make up that money in some way, shape or form if we’re going to keep the same fixed costs, [such as] employees," Kennedy added.
While much of the money coming into SecurityPlus is from stimulus checks, Kennedy also noted that because the credit union primarily serves government employees, most of whom have not lost their jobs, they’re simply holding on to their paychecks and not spending any more than necessary.
“I know the intention of the stimulus was for people to spend that money to keep the economy going and I know obviously some did that, but I know a lot of people sat on that money for a rainy day just in case,” he said.
Unlike with traditional seasonal patterns, which normally see a surplus in savings at the end of April due to tax season, “my sense is the liquidity surplus is going to be here for a while and loan demand other than mortgages and mortgage sales is not going to be as robust as in a normal economic environment,” said Chip Filson, co-founder of the consulting firm Callahan & Associates.
That’s not the case at all credit unions, though, and some shops continue to see loan growth in categories other than mortgages.
The end of the second quarter saw a 7.3% year-over-year increase in total deposits at Canopy Credit Union in Spokane, Wash., compared with a 3.2% lift between the second quarters of 2018 and 2019. Consumer lending continues to be strong there — and auto loans in particular, which are up 5.5% compared to last June, an increase over the 4.8% growth seen the prior 12 months. CEO Charlotte Nemec said the credit union is working closely with members to ensure it can continue making loans to keep deposits off the books, including a lot of financial coaching for those who need it.
“We’re in a really nice and unique situation that I can’t imagine putting a whole bunch of 30-year mortgages on the books at 2.75% right now,” said Nemec. "That to me is super scary for long-term viability, especially if you’re not selling them back out of your institution.”
‘Fear is driving everything’
One element that makes this crisis different than the last, said Filson, is that it impacts almost everyone. In the 2008 crisis, different regions of the country were affected more than others. For instance, real estate assets in Florida and Southern California soured more severely than loans in other states, Filson said.
"Everyone is equally impacted by the uncertainty of the crisis, both the health costs and the economic uncertainty of when people go back to work [and] when things will recover,” added Filson. “Everyone is susceptible to it."
What makes things potentially easier for credit unions, said Filson, is that the collateral values that caused so many problems in 2008 are holding up well right now. Low interest rates have kept the real estate market moving and prevented a significant drop in housing prices.
“Back in 2008, it was more of a monetary phenomenon and the thought process was, ‘Oh, this is temporary and we can fix this going forward,’” said Kennedy. “With COVID-19, there’s a lot of fear out there and people just don’t know. If a vaccine comes through and it’s effective, that will change the ballgame. But I just think fear is driving everything right now.”