Deposits Turn Crucial In Battle Against A Liquidity Squeeze

Credit unions are hungry for deposits to feed loan growth.

The hunt takes on more urgency as some institutions with money tied up in medium-term investments face liquidity squeezes. In 1994, loans grew nearly five times faster than deposits.

"For the rest of this year credit unions have to call attention to the other side of the balance sheet," said Tun Wai, chief economist for the National Association of Federal Credit Unions.

William F. Hampel, chief economist for the Credit Union National Association, agreed.

"The pendulum of emphasis in terms of marketing and pricing is shifting toward savings," he said.

In 1994, loan portfolios fattened 15.6%, compared to 3.3% growth in deposits - the slowest rate in 50 years, according to the National Credit Union Administration.

Last year, some credit unions started aggressively pushing certificates of deposit, and this practice is expected to continue and spread. But through February, loans were still growing faster than deposits, Mr. Hampel said.

According to Mr. Hampel, the average CD rate in February was 6.1%, up 250 basis points from a year earlier.

Instead of focusing solely on price, some credit unions are tacking bells and whistles on their products.

For example, in January, Pentagon Federal Credit Union, Alexandria, Va., rolled out its five-year "ladder certificate."

Available as either a money market or individual retirement account certificate, the CD has five one-year "rungs" that allow customers to choose a maturity date.

Members of the $2 billion-asset institution may choose how much they want to invest in each rung, with a total minimum deposit of $2,500. Investors get higher rates with longer maturity dates. As each rung matures, members can take the money out or roll it over.

In 15 days, Pentagon Federal sold more than $2.1 million in both money market and IRA certificates.

Motorola Employees Credit Union, Scottsdale, Ariz., started offering its Investors Advantage CD March 1. Pegged to the six-month Treasury yield, the 14-month certificate has an initial rate of 6.34%. After six months its yield automatically renews, either at the original rate or, if it has increased, the new, higher Treasury rate.

"It can go up, but it can't go down," said Daniel Desmond, senior vice president of finance for the credit union.

Credit unions have been less aggressive about rates on regular savings accounts, in part because boosting them would increase operating costs. But these rates have begun to bump upward and are expected to increase dramatically - soon.

"Although they're very competitive in the CD market, they're not as competitive in regular savings," Mr. Wai said.

In January, banks were offering 2.98% for regular savings accounts, compared to 3.36% at credit unions. This gap is narrower than it was last year, as banks have boosted their rates and gained on credit unions.

"With all this loan demand coming through the door," Mr. Wai said, "credit unions have to raise rates in order to attract savings."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER