Weak savings growth over the past year and rapid membershipexpansion reduced the savings-per-member growth rate to 0.6% inAugust. That's the lowest since August 2000, according to CUNAMutual Group's August Credit Union Trends Report.

At the same time, many credit unions have raised dividends ondeposits.

For example, the premium savings dividend offered by creditunions was .14% APY on average, compared to the average rate of.08% APY offered by banks as of Aug. 28, according to a new reportby GOBankingRates, a Los Angeles-based lead generating site.

Analysts predict rates will climb significantly by Q1 of2015.

“With an end to the Fed's stimulus program, we'll see rates onboth deposit and loan products increase to pre-recession levels,”said the GOBankingRates' report.

CU Times gathered deposit pricing advice from fourindustry experts.

Although deposit interest rates bottomed out in the secondquarter, they are slowly climbing and anticipated increases nextyear will impact credit unions, Steve Rick, CUNA Mutual Group's chief economist said.

“With the Federal Reserve expected to raise interest rates in2015, many credit unions are forecasting possible deposit runoffnext year as some interest-rate-sensitive members look for higherreturns elsewhere,” Rick said.

Despite those challenges, credit unions are expected tooutperform most banks in deposit retention because credit unionshave more retail and core deposits and fewer commercial deposits,he said.

“For many credit unions, rising interest rates are just what thedoctor ordered,” Rick added.

Setting extremely high deposit rates or low interest rates candraw new members, but credit unions should take many factors intoconsideration before plunging into the deep end of the pool.

“The first tip is that you have to conduct a marginal costanalysis,” Rick said. “You also have to keep in mind howrate-sensitive your members are and to focus on rates that willhave the biggest impact.”

“Having higher rates for savings and share drafts doesn'tusually bring in that many new members, so it might be best tofocus on raising rates for CDs and money market accounts,” heconcluded. “Those are factors each credit union shouldexplore.”

With today's current bottom-of-the-barrel rates, it's tough forcredit unions to dish out rates that are distinctively differentfrom the competition, but it can be done, according to Denny Graham, president/CEO of FI Strategies, a St. Louis-basedstrategic planning firm.

A perfect example is the recent GoBankingRates study, whichnoted that credit unions had a 75% higher savings rate on averagethan banks.

“Rates being 75% higher doesn't say much in this low interestrate environment. Seventy-five percent better than .10% is awhopping .175%,” Graham said. “But having said that, most creditunions don't really need deposits; they are awash in cash.”

Determining the right rates can be tricky, he said, so it'svital for credit unions to examine both the immediate and long-termimpacts before adjusting them.

Sometimes it can be smart to beat banks, he said, but creditunions don't have to clobber the competition.

“Unless the credit union's strategy is maximum return tomembers, which is not a bad strategy, it's good to beat thecompetition, but we don't have to lap them,” he added.

The bottom line is that credit unions must look closely at allfactors, Graham said.

“Higher deposit rates either mean a lower net interest margin,higher loan rates or more dependence on fee income to producerevenue,” he concluded. “If it's part of an overall strategy; it'sa good thing.”

“Beating banks should never be the point for the credit union,but I understand the short-term buzz an organization can get fromseeing the marketed rate differentials,” CU*Answers CEO Randy Karnes said.

The real point in setting savings dividends is to reward membersfor their patronage of the credit union, not as a competitiveposition, he said.

“Having the highest savings rate for a simple competitiveadvantage over a bank is just bubblegum for marketers, unless itleads to the overall success of the organization,” he added. “Ifyou develop the habit of making your rates higher than the banks,just to be higher than the banks, then something has gone awry inyour cooperative strategy.”

Karnes encourages cooperatives to develop a pricing strategythat is defendable, repeatable and simple enough to correlate withthe organization's culture and business goals.

“We do not play the same game as banks, we do not have the samebalance sheets as banks and we do not have the same owner goals asbanks,” he said. “So, why would we use them in setting rates atall?”

But Karnes acknowledged that setting rates this way could workas a marketing tool. “The only way I can think of to affordthe strategy of having higher savings rates than a bank is toconsider it a marketing strategy, where you have identified themarginal cost paid to the saver as a marketing cost,” he said. “Butthen you must have the discipline to use your marketing budget tojustify the rate. In other words, reduce what you spend onmarketing that might attract members and pay the members thatactually show up.”

“Do not fall into the trap of setting a high price just toimpress,” he added. “Work hard to communicate the impression thatthis is the right rate right now.”

Cooperatives should maximize rates for members based onstretching to deliver the utmost in value to the entire membership,Karnes said.

“The prices you set should be based on an internal scorecard,and you should always be able to defend that, no matter what othersare doing,” he concluded.

Many credit unions have taken an illogical approach to settingrates, according to Dr. Randy Thompson, Ph.D., CEO of TCT RiskSolutions (formerly TCT Inc.), a newly formed CUSO based in Eagle,Idaho.

“Most credit unions use what I call the 'looking over the fence'process to set deposit rates,” said Thompson, who is also a memberof the newly-founded VirtualCorps.com, a Great Falls, Mont.-based consulting firmthat provides expertise and education for credit unionexecutives.

“They look at the other institutions in their market area,examine what they are paying and then create a rate that mirrorswhat they see.”

That simplistic approach doesn't seem to work well, he said.

“As a very simple example, Credit Union A looks at Credit UnionB, and Credit Union B looks at Credit Union C and Credit Union Clooks at Credit Union A,” he explained. “Based on what they see,rates are set.”

The question in that scenario, according to Thompson, is: Who isreally setting the rates?

“Setting high deposit rates is likely to attract deposits whichwill cause assets to grow,” he said. “As assets grow a creditunion's equity ratio declines. For example, in 2013 a credit unionwas offering 1% rate on shares.”

“This is 10 times the market rate,” he continued. “From June toDecember, their assets grew from $65 million to $95 million. Thiscaused the equity ratio to decline from 10.2% to 8.1%.”

Some cooperatives are looking at rates with a more logicalperspective, he said.

“Some credit unions are employing a more internal process to setrates,” he said. “They use what I call the dividend payoutratio.”

“Based on internal metrics such as core-to-high yield deposits,expense ratio, relative interest rates and loan-to-share,they create an internal marker for the percent of interest incomethat should be devoted to interest expense (dividends),” heexplained. “This marker becomes a dividend budget and candistributed to each deposit type based on rates offered.”

The extra attention to detail has paid off for many.

“Credit unions using this methodology are actually paying wellbelow the bank average while improving their net interest margin,”Thompson said. “It also provides an accurate and clear estimationof the total dividends costs in advance of month end.”