Funding Loan Growth: The New Problem for Credit Unions

Business growth is top of mind for CUs.

Access to fresh capital and liquidity has always been a critical issue for credit unions. In today’s market, that issue has become front and center as record loan growth and lagging growth in share deposits have drained the capacity for many credit unions to continue to fund new loan growth. The knee-jerk answer for many credit unions experiencing these types of problems has been to issue high-rate CDs to both members and non-members alike. However, this solution is less than ideal and creates greater problems for many credit unions in the long run.

When high-rate CDs are marketed to existing members, many members will simply transfer money from lower earning accounts into the high-rate CDs, increasing the credit union’s interest expense without increasing shares – the worst of all worlds for the issuing credit union.  Similarly, when marketing high-rate CDs to non-members, even though you might be guaranteed new deposit shares, those shares are incredibly unstable. Non-member, high-rate CD investors represent the truest form of “hot money.” Non-member, high-rate CD investors are incredibly rate sensitive, have no loyalty to the issuing credit union and will move their money to the highest offer as soon as their originally-purchased CD expires. Moreover, once a credit union has originated additional loans against those CDs, your credit union is now stuck issuing CDs at the highest rate to keep the money. According to BankRate.com, as of Feb. 5, 2018, the national average rate for two-year CDs was 2.04% with the higher offerings reaching 2.50%. In this rising rate environment, funding new loan growth with CDs (or even just maintaining old loan growth) will only become more and more expensive over time.