Why did non-member funding increase more than 25% from Q4 2016 to Q1 2017? Why did investments with durations from one to three years decrease 12.4% over the same time period?
Credit unions are experiencing robust loan growth, which is great news for credit unions and their members. However, given current loan growth rates, you’ll never be able to bridge the funding gap by attracting new members to your lobby.
This should not come as a shock to anyone, as the big banks are being forced to roll up their sleeves and compete for a finite pool of deposits in your local markets. The culprit is Dodd-Frank’s Net Stable Funding Ratio (NSFR) & Liquidity Coverage Ratio (LCR) metrics, which increased funding requirements for those in the $10 billion and up club. Too big to fail now includes a regulatory push to extract retail deposits from your institution.
The bottom line for credit unions is that you are, once again, at a disadvantage. The assets that credit unions historically book don’t allow for top of market deposit rates. Why? Because you would destroy your margins and overpay for hot, rate-driven funding. The honest truth is that big banks will beat you almost every time you go head-to head-for retail funding that is purely based upon rate.
You are probably asking yourself, “What am I to do?” Well, if your credit union has a low-income designation (LICU), you can access the non-member funding markets to supplement your funding gap. If you aren’t an LICU, you face a bigger challenge.
Let’s compartmentalize the issue and speak to each credit union type individually.
Qualified LICUs can freely access non-member funding up to 20% of shares. What you may not know is how to actually generate these non-member funds. Several programs exist to satisfy LICU funding needs, including a couple of programs CMS recently brought to market.
The first program has been utilized in the FDIC insured space since the late 1980s and is referred to as Brokered CDs or DTC CDs. They are one in the same and allow credit unions to use their NCUA insurance to issue larger blocks ($500K to $50M) with maturities ranging from 3 months to 10 years. The benefit of this program is the ability to get out on the curve and lock in long-term funding with no required collateral and no voluntary early term provision. Meaning, if you issue a 2 to 5 year CD, even if rates rise you will maintain that deposit.
The second program is the overnight Non-Member Funding Program (NMFP). NMFP opens up a pool of investors that credit unions would never be able to access. Large, household name corporate institutions are looking for ways to insure their overnight corporate cash. The NMFP acts as a conduit to provide them with NCUA insurance. The money is very sticky and because of the depth of the investor base, it allows you to mitigate liquidity risk.
All of this said, these programs coupled with FHLB membership and member shares allow you to diversify your funding sources. Reliance solely on member shares is both expense and dangerous. It’s expensive because you must carry excess amounts of available cash to fund an unexpected shortfall. And, it’s dangerous if the amount of excess cash is still insufficient and you have no other options.
If you are going to survive in the “new normal” you must be willing to leverage all that is available to your institution.
Now, what if your credit union doesn’t have a low-income designation? Unfortunately, your options are limited. You can obviously join the FHLB and you have organic growth potential, but the other wholesale sources are not available. Additional sources would include rate-listing services, which can provide funding, but are labor intensive. In addition, there are direct issuance programs available but distribution in some cases has been limited.
Finally, you have your short duration investment portfolio. I spoke to this point in my opening paragraph. You can certainly liquidate securities to free up cash for wider margin assets, but you are now at the mercy of the market. So, as stated above, your options are limited. For some credit unions short-term securities may be sufficient; however, for others, a lack of available liquidity is hindering your ability to serve your members.
With all of the options available to LICUs, why isn’t everyone seeking the designation? Now that more than 40% of the industry is categorized as low-income designated, many credit unions are waking up and recognizing this regulatory benefit. No longer does the designation carry a negative connotation. In fact, it’s just the opposite: the designation allows for regulatory benefits and the ability to increase the services you provide.
If you have questions about the content provided or would like to learn more about the programs described, please do not hesitate to reach out to me directly. My contact information is listed below.