As interest rates increase, credit unions are exploring deposit acquisition, additional sources of funding and operating expenses.
One of the advantages of running thousands of what-ifs for hundreds of credit unions each year is that it provides a window into what is on the minds of credit union executives. The what-if scenarios that are being requested by our ALM, budgeting, and forecasting clients are widely varied, but the top three financial tests we’re being asked to run are:
- Increasing deposit rates to retain or acquire new deposits
- Adding borrowings or selling investments and loan participations to provide additional sources of funding
- Increasing operating expense
Increasing Deposits, Adding Funding Sources
Even though the federal funds rate has been increasing since 2015, credit unions only recently began testing higher deposit rates in earnest. While the federal funds rate has risen 2 percent since late 2015, credit union cost of funds barely moved until 2017.
The reason it took so long is that liquidity was generally plentiful. But now some credit unions are seeing deposits leave while others are no longer growing fast enough to fund loan growth. This is one of the reasons we’re asked to test adding borrowings, selling investments (often at a loss) and selling participation loans. Commonly, a combination of options is requested so the impact of increasing rates and running CD promotions can be compared to other methods of bringing in funds. (What-ifs on adding borrowings and selling investments may also relate to interest rate risk mitigation.)
According to Callahan & Associations, Q2 2018 industry loan growth was 10.1 percent and Q2 2018 industry deposit growth 5.8 percent. As credit unions think through this issue, they are turning their attention toward studying detailed deposit trends and fine-tuning deposit rate structures to better respond to member sensitivity. They are concluding that strategic deposit acquisition relies not only on fast and easy delivery channels, but must also focus on engaging members in ways that go beyond rate. Examples include stickier interactions like goal setting, progress tracking, rewards, and intriguing, bite-sized educational components.
What-Ifs for Technology & Talent
Operating expense is also a hot topic, with areas of concern emerging in technology and talent.
The need to constantly invest in remaining relevant into the future continues to bring increased technology costs. There is still plenty of focus on making delivery channels fast and easy. Some credit unions are switching core systems to pave the way for more capabilities. Many are building data analysis infrastructures as they turn to the promise of data analytics to better understand and serve members and have actionable business intelligence at their fingertips.
At the same time, competition for talent affects every organizational level. The combination of low unemployment, upward pressure on compensation and the all-important need for great talent is often cited in what-ifs for increased costs. According to a Deloitte 2018 survey, 43 percent of millennials envision leaving their jobs within two years. Some credit unions are responding by more fully developing their talent through training and leadership development programs.
These types of what-ifs reflect changes in the thinking of credit union executives as the world continues to evolve. Negotiating the shifting deposit landscape and remaining relevant to members with the talent to make it all happen are keys to success that many credit union executives are factoring into their view of the future.
c. myers corporation has partnered with credit unions since 1991. The company’s philosophy is based on helping clients ask the right, and often tough, questions in order to create a solid foundation that links strategy and desired financial performance. C. myers has the experience of working with over 550 credit unions, including 50 percent of those over $1 billion in assets and about 25 percent over $100 million. The company helps credit unions think to differentiate and drive better decisions through real-time ALM decision information, financial forecasting and budgeting, liquidity services, CECL consulting, process improvement, project management, strategic planning, and strategic leadership development.
Also on this blog, read “Deposit Dilemma Pushing Mergers?”
CUES School of Applied Strategic Management™, slated for May 6-9 in Orlando, includes running a credit union simulation.