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Mar 20 2018

Member Regular Share Vs. CD Migration Analysis

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Written by webmaster

4 min read

In June of 2006 the federal funds target rate was at 5.25%. From 2007 to the end of 2008 the rate was decreased to a range of 0.00% to 0.25% where it remained until December of 2015. Since that time, the target began to slowly increase to a range of 1.25% to 1.50% at the end of December 2017. During the decrease and subsequent increase, credit unions continued to see member deposit growth. This was counter to what some had expected given that rates paid on member deposits also dropped close to zero percent. However, taking a look at the historical member deposit mix and rates may offer a view of what they may do as rates rise.

From June of 2004 to June of 2006, when the federal funds rate hit its high for the cycle, member CDs increased from 16.37% of total member deposits to 19.61% (Graph 1). As the federal funds rate began falling, this percentage continued to increase to a peak of 24.97% in March of 2008. Following this peak, members CDs have now fallen to 13.02% of total member deposits. In June of 2007 the difference between the average member CD rate and average regular share rate was 3.22% (Graph 2). At the March 2008 peak, the difference was 2.32% as members took advantage of fixed rate-term deposits while interest rates were falling. In recent years, the difference has been as low as .40%. As of the end of the fourth quarter in 2017, this difference has increased to .57%. In assessing the member deposit composition at the end of 2017, we can see that this increase in the difference has not yet translated to an increase in member CDs as a percentage of total member deposits, but it is clear that member CD rates have started to increase whereas regular share rates have remained constant so far. What can we infer from these relationships and trends going forward?

Mark H. Smith, Inc. Peer Analysis Balance Sheet Module

Mark H. Smith, Inc. Peer Analysis Interest Rate Module

Based on this historical assessment we can expect that as the federal funds target rate continues to rise, the difference between regular share rates and CD rates will continue to increase. As such we should expect the CD composition of member deposits to eventually start increasing as well. Will it get back to comprising approximately 25% of total member deposits? It is tough to say at this time, but keeping an eye on the difference in average member CD rates compared to the average regular share rate can certainly provide some insight. The credit union’s cost of funds will also increase proportionally as member CDs become a greater composition of total member deposits and the difference in CD rates and regular shares widens. Credit unions will want to consider this in their budgeting process in the coming years if the likelihood of the federal funds target rate continues to project higher.

In addition, the composition within member CDs also changed with the rate cycle. At the end of the fourth quarter in 2007, member CDs with less than 1 year maturities comprised approximately 79% of total member CDs (Graph 3). At the end of the fourth quarter in 2017, this percentage dropped to approximately 66%. On the other hand, member CDs with maturities between 1 and 3 years comprised approximately 18.5% of total member CDs at the end of the fourth quarter in 2007, but increased to approximately 27% at the end of the fourth quarter in 2017 (Graph 4). Member CDs greater than three years also increased from approximately 3% to 8% during this time period as members reached further out in term for greater yield (Graph 5). Will these trends reverse course also as interest rates rise? One plausible explanation why we may see this reversal is if members do not want to lock in longer-term fixed rate maturities as interest rates rise in anticipation of higher interest rates tomorrow. As with the regular share versus CD migrations, credit unions can utilize these balance sheet composition changes relative to the interest rate environment in their planning and asset/liability management.

Member Regular Share Versus CD Migration Analysis

Mark H. Smith, Inc. Peer Analysis Balance Sheet Module

The migration between regular shares and CDs, the widening of rate differences between regular shares and CDs, and the migration between terms in CDs can vary greatly from region to region and credit union to credit union. When evaluating possible changes to deposit composition and cost of funds, especially in budgeting, all of these items need to be considered. It is even more important to look at these numbers for the specific credit union to accurately estimate possible changes. Our Peer Analysis can display these numbers by any selection of states, counties, or individual credit unions. Please contact us if you are interested in how the MHSI Peer Analysis can further help your credit union.

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Jan 14 2021

Five Top Credit Union Topics For 2021

As we move into 2021, the following topics might be worth discussing and considering with your management team.

Earnings

During the first half of 2020, net interest margins came under substantial pressure as market interest rates were shocked dramatically downward. Net interest margins are expected to remain under downward pressure throughout 2021 as investment portfolios continue to reprice lower and share growth continues.

One of the easiest and quickest responses to declining interest income is to address the cost of funds. Many credit unions still have room to decrease their cost of funds, as shown in the September 2020 ending period graph below.

Source: NCUA

Delinquency

Based on the September 2020 call report data, loan delinquencies and net charge-offs remained low and were below September 2019 delinquencies. Loan forbearance and other assistance programs in place through the entirety of 2020 may have helped delinquencies. Also, certain sectors of the economy are not as impacted as others. The unemployment rate is expected to continue drifting lower in 2021. However, as the assistance programs are lifted, delinquencies and charge-offs are expected to increase as unemployment remains substantially above the years leading up to the pandemic.

Source: MHSI Online Peer Analysis Module through September 2020

Credit Union Philosophy

Serving the underserved has always been a hallmark of credit unions, and now more than ever, there is an opportunity to do this for many credit union members. As these times have been challenging, credit unions can continue to evaluate and prioritize how to best serve members in the coming year, especially those under financial stress. Exploring how to provide service to those that are underbanked might be an opportunity. One option may include evaluating risk-based lending policies and programs, especially given the robust liquidity on most credit union balance sheets. New and alternative avenues to bolster income should continue to be explored.

Digital and Technology

As the pandemic shifts and prolongs, credit unions should evaluate if their electronic delivery channels meet members and potential members’ needs. Moving to or improving digital delivery channels should be accelerated and prioritized. Digital delivery should include evaluating loan origination and servicing channels to maximize new loan volumes. Online and remote financial services will continue to grow and may be the preferred way members access and manage their financial activities.

Balance Sheet Growth

Before the pandemic, many experts anticipated credit union loan growth to taper off but remain positive. After the first quarter of 2021, loan production became unpredictable, however, by the end of the third quarter, annualized loan growth was 6.34%. Real estate lending, driven by the abruptly lower interest rate environment, helped with the growth. Experts anticipate loan growth to be around 6.0% to 6.5% over the next 12 months as the economy recovers.

The first few months of 2021 may see strong share growth as the second round of government assistance and stimulus takes hold, and households remain reluctant to spend until signs of COVID easing and warmer weather occur. Share growth last year increased at an annualized rate of over 18% and is expected to be approximately 8.0% to 10.0% in the coming year. If double-digit growth continues, earnings sufficient enough to sustain capital will be critical. If economic conditions improve and overall consumer activity increases, loan growth and increasing long-term interest rates could counter some of the anticipated income pressures. Fortunately, the credit union industry is very well capitalized and able to ride out the adverse conditions and absorb some more growth, even if earnings are reduced.

Nov 04 2020

The Bottom of the Frog Market

Several years back, I went to Mexico for a vacation. While there, I found a ceramic hand-painted frog-shaped planter that I wanted. My husband loves the hunt, and his quest began. Every time we saw a frog-planter, he would start negotiating with the vendor to get the lowest possible price. We searched for several days and would stop in different towns and check the markets while enjoying our vacation and exploring. When we found a frog, he would inquire about the price and negotiate for further discounts. After a few days and no success at getting the cost of the frog below a certain point, my husband declared, “we have hit the bottom of the frog market.”

…

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Sep 30 2020

Economic Uncertainties and Interest Rate Certainties – Asset Allocation Assessments and Considerations

Future GDP Projections

In September, the Federal Reserve Chairman spoke publicly on several occasions and reiterated that the central bank is committed to helping the economy “for as long as it takes.” He noted continued improvements in the economy, but also acknowledged a highly uncertain path ahead. The September FOMC (Federal Open Market Committee) projections are now projecting a full-year GDP decline of 3.7%. This is substantially better than their previous expectation of a 6.5% decline. However, they lowered their 2021 outlook from 5.0% to 4.0% and their 2022 outlook from 3.5% to 3.0%. Their 2023 outlook is at 2.50%.

Interest Rates and Economic Uncertainties

The FOMC also indicated that they would allow inflation to run above 2.0% on a sustained basis before any federal funds rate increases. As such, most individual members of the Committee indicated that the federal funds rate could remain close to zero through 2023. Some economists and analysts even think that we may not see an increase in the federal funds rate until 2024 or 2025. They believe that it will take up to five years for the global economy to fully recover to pre-pandemic levels.

The risks to the FOMC economic growth projections are high. Even the Chairman of the FOMC acknowledged the economic uncertainty of the path ahead. Following the sharp rebound in many economic data measures and drop in the unemployment rate, some recent measures have disappointed compared to expectations and some are indicating a recovery that is stalling. At the current time of this article, the nature of further fiscal stimulus continues to be negotiated in congress and some are not expecting a resolution until after the presidential election. Of course this only adds to the current economic uncertainty.

What is highly certain over the short to medium term timeframe is that interest rates will not likely be increasing more than just relatively minor fluctuations in the medium to long end of the U.S. Treasury yield curve. It is more likely that potential risks on the horizon could drive medium and longer-term U.S. Treasury yields even lower.

Reassessing Balance Sheet Strategy

Given the above outlook, it would certainly seem that some credit union balance sheet strategies of recent years should be reevaluated for the foreseeable future. Reassessing asset allocation strategies is possibly more relevant at the current time than at any time in the past several years. For example, the credit union may want to ask itself how much should we be redeploying assets into two to three year investment CDs given current interest rates on those maturities. If the answer is less than previous years, then what are the alternatives we can explore.

Priorities Going Forward

In exploring alternatives, the first priority for credit unions is of course serving members. Assessments and considerations could include expanding the types of loans offered, reevaluating risk based lending allocations, increasing real estate concentrations, debt consolidation programs, and loan payment support alternatives to name just a few. Secondary to the first priority are considerations such as allocations to loan participations and alternative investments. For example, should the credit union assess CUSO or similar investment possibilities. What are all of the possibilities for these type of investments that may be available to the credit union? After all, an alternative of earning five basis points at the corporate credit union with too much of assets is not likely to accomplish any priorities or goals for the credit union.

The present time and foreseeable future is a great time for credit unions to really show how they can serve and support members during these challenging times. Being there for your members is for sure the highest purpose for the credit union and always assessing ways to provide service and assistance to them will always be the credit union’s first priority. In addition and secondarily, now more than any time in recent years it may make sense to really take a deep dive into the above asset allocation assessments, considerations, and possibilities. Ideally, the best answers going forward would combine the first priority with the second to optimize balance sheet performance while best serving members.