C. Myblog

Shifting Deposit Trends

February 17, 2011

Over the last couple years, credit unions have grown lower-cost deposits.  This growth has largely been the result of a flight to safety that has occurred due to the economic environment.  Certificates of deposit (excluding IRAs) have decreased from a high of about 28% of funding in late 2007 to about 24% as of 3rd quarter 2010.  Regular Shares have increased from about 22% to 24% of funding during this same time period.

Recall that a similar pattern was observed during the flight to safety experienced in the early 2000s.  Also note that the funding mix changed as the economy rebounded from 2004-2006.  By the end of 2006, CDs became a larger part of funding than Regular Shares for the first time ever (see graph below).

It would be nice if we could count on growth in reliable, low-cost funding to continue.  As history has shown us, though, that would probably be a mistake.  We encourage you to model scenarios involving shifts from lower-cost to higher-cost shares as well as funds leaving your institution.  How might this impact your margins, particularly in light of the low-rate assets booked in this low-rate environment?  How might this affect your liquidity position and, consequently, your deposit pricing?  If you were planning to lag on deposit pricing as short-term rates increase, will you be able to do that or will you have to “pay up” to keep money from leaving?  Even if you may not need the money, is your board and management mentally prepared to let the institution shrink?

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