The strain of staying ahead of managing capital and net worthratios has left some credit unions looking at the bottom of thebarrel for more solutions as the year comes to an end.

Dave Colby, chief economist at CUNA Mutual Group, said deposityields are being looked at harder in light of a slowdown in suchsavings products as money market accounts and certificates ofdeposits.

“While they have many levers to pull, given the headwinds ofassessments, low loan demand and rising compliance costs, the mosteffective lever is deposit yields,” Colby said. “This lever notonly reduces savings growth but also reduces cost-of-funds [and]improves net spread.”

Since the beginning of the recession around December 2007,one-year CD yields are down 70%, money market account yields aredown 76%, regular shares 64% and share drafts 36%. Translation: allkey deposit rates are at historic lows, Colby said. The net effectwas the cost-of-assets declined 54% from June 2007 to this pastJune, according to CUNA Economics and Statistics.

Following midyear data revisions, credit union assets wererestated $1.6 billion lower, cutting 20 basis points off ofprevious growth estimates, Colby said. Reductions in both borrowingand savings estimates were the key factors, he added. At the end ofAugust, CUNA estimates showed $925 billion in assets with annualgrowth now at 3.4%, which is less than half the 10-yearaverage.

“If you're having a problem with the numerator as far as growingcapital, then you can also slow down or reverse growth in gettingdeposits out the door,” Colby said. “If those deposits leave whenrates are lower, that's reducing the cost of funds and you can makea positive spread.”

Meanwhile, credit unions may have to be more creative andflexible to meet the savings needs of their members. The demand forshort-term CDs is down 28%, but banks and credit unions added 26%more short-term CD products so far this year, according to researchfirm Market Rates Insight.

Still, some financial institutions may be out of sync with whatconsumers are demanding. In the first nine months of 2010, demandfor three-month CDs dropped by 16%, from a balance of $277 billionin January to $232 billion at the end of September, MRI datashowed. Despite such substantial decrease in demand, banks andcredit unions increased their three-month CD product offering by10% over the same time period. Demand for CDs of three to 12 monthsdropped by 12%, from a balance of $502 billion to $443 billion, yetbanks and credit unions added 16% more CDs of six-, nine-, and12-month terms.

“Offering consumers more of what they don't want is not likelyto produce positive results” said Dan Geller, executive vicepresident at MRI. “At a time when developing long-termrelationships with customers is paramount, banks and credit unionsshould be very tuned in and responsive to how consumers vote withtheir dollars.”

The opposite holds true for long-term CDs, according to MRI.From January to the end of September, demand for long-term CDs ofthree years or more increased by 4%, from $105 billion to $109billion. Despite an increase in demand for long-term CDs, banks andcredit unions decreased their long-term CD product offering by 24%over the same time period.

“This asymmetric approach to market demand is counterintuitivebecause it is in the best interest of banks and consumers to getmore of what they want,” Geller said.

For consumers, locking in current rates for three or more yearsis a hedge against future decline in rates, and for banks andcredit unions, it is advantageous to lock in long-term deposit at alow rate environment as a hedge against rate increases in one ortwo years, Geller suggested.

Colby said the lack of loan demand and other factors willcontinue to impact what credit unions do with deposit rates. Shortterm rates, whether they are U.S. Treasury or overnight atcorporate credit unions, are probably lower that what a creditunion's cost of funds are, he added.

“If you get $1,000 in the door, even before you do anything it'sgoing to cost [a credit union] 24 basis points because ofassessments,” he pointed out. “Discouraging deposits by reducingrates-it's a strategy no one wants to do short term. It's kind ofcontrary to what credit unions do, but we're in extremely toughtimes now.”

Long term, credit unions need growth to balance rising expenses,Colby said. In an environment with low consumer loan and mortgageloan demand, holding on to fixed-term assets can be a barrier toearn positive spread. He doesn't anticipate interest rates movingup any time soon and is uncertain if they would produce a desiredoutcome.

“If rates move up very sharply, it would have temporary results.A ton of people would default. Any kind of drastic move would beshortly followed by a slowdown and a then a small recovery.”

It's not that some credit unions chief financial officers andCEOs do not want to make changes. They wish the adjustments couldbe made faster with the inflow of deposits, but things like risingcompliance expenses can halt efforts.

“Boards want to maximize rates. There are loans, but no onewants to do loans,” Colby said. “I would like to see credit unionsmake more loans and take a little bit more risk.”