Heated competition for deposits in conjunction with rising short-term interest rates is leading to more advertising spending and a higher cost of funds for some credit unions and community banks.

Deposits at U.S. credit unions increased 5.0% year over year to $1.223 trillion, while community banks saw deposits climb 7.1%. The cost of funds for U.S. credit unions rose 15 basis points during the past year and 24 basis points for community banks.

Lynnwood, Wash.-based Pacific Crest Savings Bank is among the community banks that saw its cost of funds rise over the past year — to 1.57% in the third quarter compared to 1.17% a year earlier. President and CEO Sheryl Nilson said the community bank has had to increase its deposit rates due to competition.

"It's been a challenge to gather deposits due to aggressive, competitive pricing," Nilson said in an interview. "Lending rates have not increased, so it's a squeeze on our net margin."

Credit unions are feeling a similar squeeze. Veridian CU is one of the largest credit unions in the Midwest with more than $4 billion in assets. Its deposits totaled $3.31 billion in the third quarter, up 13.4% year over year. The Waterloo, Iowa-based credit union increased its advertising efforts on deposit products in the last six months after being focused on bringing in loans for the past few years, President and CEO Monte Berg said in an interview.

Veridian also opened branches in the last year or so in areas where it expects it could attract deposits at a lower cost. The credit union's loan-to-deposit ratio sits at 112%, which Berg said is approaching the upper limits of where Veridian is comfortable.

"We really need to balance loan growth and deposit growth into the future," Berg said.

Like Veridian, Arkansas FCU has seen an elevated loan-to-deposit ratio of late. The Jacksonville, Ark.-based credit union grew deposits 8.1% year over year, to $922.7 million in the third quarter. President and CEO Rodney Showmar said it has been a challenging year to grow deposits, thought the credit union is having some success thanks to aggressive pricing and marketing of its interest checking and money market accounts and through specials it has run on CDs.

"With all that taken into account, our cost of deposits has only risen 12 basis points year-to-date," he said.

Showmar said the company is analyzing its markets closely to ensure it is staying at or near top of market in the key deposit products, which in turn will continue to increase its cost of deposits.

On the lending side, U.S. community banks grew aggregate loans 9.2% year over year to $2.007 trillion.

Credit unions grew total loans to $1.037 billion at Sept. 30, marking a 9.5% rise from the year-ago quarter. Real estate loans grew by $43.35 billion to $511.63 billion whereas consumer loans grew by $43.41 billion to $472.64 billion.

Did you enjoy this analysis? Click here to set alerts for Data Dispatches. Click here to view aggregates for U.S. credit unions, here for U.S. commercial banks, here for U.S. savings banks and here for U.S. savings and loan associations. Commercial banks, savings banks and savings & loan associations report deposit information on Call Report Schedule RC-E and loan information on Call Report Schedule RC-C. These schedules can be accessed under the Regulatory Financials section of a company's Briefing Book page on the MI web platform or in MI Office.