Rising deposits put credit unions in regulatory deadlock | Journal of Credit Unions


Consumers have accumulated many more savings since the start of the COVID-19 pandemic, putting pressure on the ability of credit unions to maintain capital at required levels.

Total U.S. stocks – deposits that also pass partial ownership into the credit union – rose 14.8% year-on-year to $ 1.71 trillion in the second quarter of 2021, according to data from National Credit Union Administration.

These stocks are ideally used to finance loans. Since demand for loans lags, credit unions often have to place excess deposits in low-yielding investments, including federal funds, said Tim Scholten, president of the credit union and advisory board. Visible Progress community bank.

In any case, loans and investments must be matched with capital, according to Scholten. But credit unions have fewer options than banks when they need more capital – they can only rely on profits.

Low-yielding investments reduce the profits of credit unions and, ultimately, their equity ratio, which is calculated by dividing assets into retained earnings.

A net worth ratio of 7% or more represents a “well-capitalized” credit union, according to the NCUA. At 6%, the credit union is “adequately capitalized”.

If the net worth ratio drops below 7%, the institution will have to transfer part of its net income to legal reserves instead of all of the undivided profit. Below 6%, that’s where it gets more serious, and credit unions must develop plans to restore equity and face increased regulatory scrutiny.

“It’s a Catch-22 trend that hasn’t been around for a long time,” Scholten said of the challenge created by deposit wealth.

How credit unions fare


The North Country Federal Credit Union in South Burlington, Vermont, had $ 762 million in deposits as of June 30, up 14.6% from $ 665 million a year earlier. Bob Morgan, CEO of the institution with $ 850 million in assets, said he expects to end the third quarter up about 12% or 13% in terms of year-over-year share growth. the other.

Morgan said that while this may not seem like too much after growing over 20% last year, it is problematic and caused North Country’s net worth to drop by just over 10% in December 2019 to about 8.6% today, Morgan said.

“We’re still well capitalized, but it’s still a notable drop,” he said. “The reality is that neither earnings nor loan growth have kept pace with deposit growth.”

North Country has kept the majority of excess cash in overnight funds. It assesses whether the new deposits will be sticky as consumers regain confidence in the economy, he said.

Some credit unions use excess deposits to buy certificates of deposit that earn around 2% interest rather than using them to fund loans that could earn more than double that rate, as demand is simply not there. there, according to Scholten.

“[Credit union] the margins are tightening pretty hard, ”said Scholten. “It’s hard to tell customers you don’t want their money, but ultimately they have to turn down some large deposits. “

The threat of inflation in the fourth quarter will slow deposit growth somewhat, as consumers will need more of their income to pay for everyday goods and services. “But that alone will not solve the pressure on capital,” he said.

The most logical approach is therefore to control growth in order to manage the interest rates paid on deposits. The decline in the rate of asset growth and the resulting small improvements in the net interest margin could alleviate some of the pressure on capital ratios.

“My approach is pretty fundamental, but capital is still a growth constraint in this business,” said Scholten.

Truliant Federal Credit Union in Winston-Salem, North Carolina, held $ 3.2 billion in shares as of June 30, down from $ 2.8 billion a year earlier.

Todd Hall, president and CEO of the $ 3.5 billion-asset credit union, said its annualized growth rate of deposits in the first quarter exceeded 30%, and the strong growth continued until the second trimester.

“We expect a lot of this increase in deposits to stay with us, allowing Truliant to be opportunistic about how we manage our assets,” he said.

Loan growth has been strong in recent quarters for Trulaint, driven by member business loans, mortgages and consumer loans. The credit union has also increased the size of its investment portfolio, focusing on highly liquid fixed income securities while avoiding credit risk.

“Our prudently allocated investment portfolio offers a lower return than our loan portfolio, but we see an opportunity in the ability to shift assets from investments to loans in the future when the business cycle drives demand. lending exceeds growth in deposits, ”he said.

Truliant has also devoted some of its deposit growth to repaying borrowed funds, while retaining the ability to borrow again in the future when conditions warrant, Hall said.

And there are signs that members’ desire to save is slowing.

Signs of recovery?


The growth rate of stocks across the industry fell from 23.1% in the first quarter of the year to 15% in the most recent quarter. That rate is still above normal, but the drop is a good first step, said Curt Long, vice president of research for the National Association of Federally Insured Credit Unions.

“Credit union net worth rebounded in the second quarter,” Long said. “There are currently a number of positive trends in the industry, evidenced by moderate growth in stocks, increased membership growth and rock solid lending performance. “

The problem is much the same for banks, although they have more options for raising capital. Deposits totaled more than $ 17.2 trillion at the end of the second quarter, up nearly 11% from the previous year, according to the Federal Deposit Insurance Corp.

And many banks have plenty of cash, Scholten said. One of its banking clients holds at least 10% of its total assets in federal funds, which earns about a quarter of a percent in interest, he said.

Shane London, president and CEO of Deseret First Credit Union, an asset of $ 891 million, in West Valley City, Utah, said the credit union had a significant number of members who saved the stimulus product, which led to high stock levels.

Deseret First held $ 815 million in shares as of June 30, up 11.7% from the previous year.

There has been an increase in spending over the summer months, but the delta variant of the coronavirus may be responsible for some slowing in spending over the past month. Supply chain shortages and inflation-induced price increases could also reduce spending, he said.

The credit union predicts savings growth could range from 10% to 12% next year, but any other restrictions or economic events could push those numbers up.

“Consumers will end up spending again and deposits could actually go,” he said. “How long that will take is a conundrum. Net worth ratios have been affected by the excessive growth in deposits, but if consumers are spending, the downward pressure on net worth should be reversed.”

Scholten said the stock glut is an emerging issue and one that is unlikely to go away anytime soon.

“If a credit union hasn’t fixed this problem yet, it will in the future,” he said.

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