For the first time in years, some credit unions are now on the prowl for deposits, joining other financial institutions in a competition that will likely increase their costs to keep lending.
Many credit unions were flush with liquidity coming out of the financial crisis because their deposit rates were often higher than competing banks. But some institutions say those funds have been lent out, and they are now looking for more.
One of those is Wyomissing, Pa.-based Utilities Employees CU. The $1.18 billion credit union had total deposits of $1.01 billion at the end of 2017, which represented year-over-year growth of 2.01%.
President and CEO Bret Krevolin said the credit union had several years in which it saw significant deposit growth because its rates were higher than its competitors. But that growth has slowed considerably in the last couple of years. The credit union's goal for 2018 is to see 4% or 5% deposit growth, he said.
But rising rates are bringing in more players. Small banks have also recently indicated that deposit competition is heating up, and they are exploring ways to win more market share.
"It's a struggle because others are starting to look for them, too," Krevolin said of deposits. The credit union has raised its rates and is paying more in general than its competitors. But he said there are outliers — both banks and credit unions — that are paying, for example, 3% interest on a five-year CD, which is about double the average rate in the U.S. "It's been pretty aggressive these past few weeks," he said.
The credit union will match where it can, but that is expensive, Krevolin said. About 90% of its deposits are in low-cost funding such as money markets or checking. "So to move those 10 basis points would cost us a million bucks," he said.
Deposits at credit unions increased 6.0% year over year to $1.174 trillion, but lending eclipsed that pace, expanding 10.0% to $967.89 billion. That growth followed a 10.5% jump in the third quarter and a 10.8% rise in the second quarter. This brought the industry's loan-to-deposit ratio to 82.46% at the end of the 2017 fourth quarter, up from 79.46% a year earlier.
For comparison, deposits climbed 3.9% year over year among U.S. banks and thrifts as aggregate loans grew 4.5% year over year to $9.721 trillion, resulting in an aggregate loan-to-deposit ratio of 72.55%.
Ronaldo Hardy, president and CEO of Southwest Louisiana CU, said the Lake Charles, La.-based credit union is about to ramp up its deposit-gathering efforts. When he first joined the company late in 2016, its loan-to-deposit ratio was about 68%. At that point, the organization had been growing deposits, but it was not growing assets as quickly as it needed to.
So in 2017, Southwest Louisiana CU decided that it would pull back on deposit growth and managed that through its rates. "We didn't necessarily want to run money off, but we didn't want to attract it," he said. Meanwhile, Hardy said Southwest Louisiana operates on the "old school" model of working with members that would not ordinarily have access to credit, a customer base where there is little competition and a steady flow of lending opportunities.
The credit union now has loans totaling of about 80% of its deposits, and when it reaches 85% it will feel comfortable bringing in new dollars, Hardy said. Total deposits for the credit union were $81.6 million in the most recent quarter, a drop of 1.18% on a year-over-year basis. Total loans for Southwest Louisiana stood at $63.2 million, which represented year-over-year growth of 9.5%.
But while a recent spike in loans has sopped up some of credit union's capacity to lend, there are indications that major drivers of that growth are cooling off. The industry's recent year-over-year increase was mainly driven by vehicle loans and closed-end first-lien one- to four-family loans. Auto — along with mortgage products — has long been the bread and butter of credit union lending, but auto industry consultants J.D. Power and LMC Automotive forecast retail light-vehicle sales for 2018 to slip. Some credit unions have indicated they are already scaling back expectations for auto lending in 2018.
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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.