By Ray Birch
WASHINGTON—As rates continue to rise and more credit unions feel liquidity pressures, at least one CEO is cautioning that any CU pricing auto loans well below 4.78% (this week) is risking “institutional suicide.”
Another CEO is cautioning CUs to be mindful of what they want the certificates on their balance sheets to look like a year from now.
All of this decision-making and debate is coming after years of flat, rock-bottom pricing on deposits, and rising rates have many members actively shopping around and moving funds, especially as inflation erodes the value of their deposits.
That, in turn, has led to new challenges for many CFOs and ALCOs—including for some that have never operated in a rising rate environment—as they seek to respond appropriately.
Analysts told CUToday.info the liquidity shortfalls are not uniform across the nation, and that many CUs still have plenty of money to lend. But for others there may be problems ahead, especially for those cooperatives that have not treated stimulus funds as transitory—using them, for example, as core deposits.
Evan Clark
Evan Clark, CEO at $860-million Department of Commerce FCU, told CUToday.info that credit unions are seeing “substantial” deposit outflows.
“This, coupled with putting on way too many well-below-market-rate loans, is already causing a significant liquidity issue for credit unions of all sizes,” said Clark. “Credit unions are drawing heavily on their FHLB lines and are going to the market for nonmember deposits.”
Clark predicted those nonmember deposits will dry up near the end of the year as all financial institutions seek out cash to “window dress” their year-end balance sheets.
“This is a very serious problem and it will only get worse as the Fed continues to raise rates,” explained Clark. “And the Fed is shrinking its balance sheet to the tune of $95 billion a month. In other words they are taking $95 billion of cash out of the system every month. Any credit union that doesn’t understand this or isn’t experiencing it already will be soon.”
Where the Problem Lies
Michael Moebs, economist and CEO at Moebs $ervices, has conducted research on the issue and discovered the liquidity problem lies largely at credit unions that have relied too heavily on stimulus money for longer-term funding.
“The credit unions that are not in trouble now are those who realized the 20% growth in deposits due to stimulus funds is not money they could rely on,” explained Moebs. “This is what we see in the numbers. These credit unions did not get beyond what they could handle in loans. They actually allowed their loan-to-share ratio to fall due to the stimulus money. They did not make a lot more loans with the temporary money and they did not hire new employees to support this growth, the data show.”
Moebs emphasized these “wise” CUs kept their lending at pre-COVID levels.
“I believe these will be the strongest depositories in 10 years and the ones most likely to be around then,” Moebs said.
The credit unions that could be in some “trouble” now are those in which the leaders took a different view of the stimulus funds than those who viewed them as transitory.
Michael Moebs
A ‘Misunderstanding’
“There is misunderstanding by some executives of small to large credit unions regarding growth,” asserted Moebs, saying these organizations viewed the stimulus deposits as growth dollars and even hired additional employees.
The situation of shrinking deposits at credit unions will only worsen as the holiday season arrives, predicted Moebs.
“Mastercard just projected a 7% increase in purchases this Christmas,” said Moebs. “They can see it in their data. So, are these stimulus funds going to stay with their current institution or not? All indications are they will not. And will they go to another institution? No. They will be used to buy a new car, to travel…”
‘In The Offing’
Clark emphasized the money is moving out for other reasons, as well.
“In January, rates started really moving and they are continuing to move much, much higher,” reminded Clark, noting credit unions have to keep pace with market competition for deposits. “Couple that with an inflation rate that is sapping people’s ability to make ends meet and it becomes readily apparent that a liquidity problem is in the offing. And there’s one more piece to the puzzle. Too many credit unions are putting on too many loans at too-low rates.”
Clark pointed to current Treasury rates.
“The Treasury rates give us context,” Clark said. “How many credit unions are currently doing car loans with rates less than 4.28%? Let’s look at the math. The rate for a two-year Treasury, a risk-free investment, is 4.28%. That’s the average life of many car loans—though it could be that the average life is actually closer to three years with terms extending. Add CECL losses of 50 basis points to the 4.28% and you get 4.78%. What the market is telling us is that no credit union should have any rate on a car loan below 4.78%.”
CEOs Share Concerns
Clark said he is hearing from CU executives that they are concerned their loan demand will dry up if rates are raised to too high.
“The market is telling you that is where your loans should be priced,” said Clark about the 4.78% figure. “I call it institutional suicide if a credit union’s rates are below that for one simple fact—how are you going to fund your loans if you have to go to the Home Loan Bank and borrow? Their rates are very competitive and yet they are typically 20 to 50 basis points higher than the applicable Treasuries. Raise your loan rates.”
Reminding the Fed plans to continue to raise rates, Clark emphasized that what a credit union may view as a high rate deposit today may soon not seem al that big in the eyes of members.
“Credit unions have to constantly be recalibrating what they think are high deposit rates to the reality of what actually are high rates,” Clark said. “At our credit union we’ve always prided ourselves on having competitive CD rates. Every Tuesday we have a rate committee meeting and every Tuesday recently we’ve been setting our CD rates so that they are top 10 in the country. By the time the next Tuesday rolls around our rates aren’t in the top 10 anymore and we have to raise them again.”
Even with competitive CD rates, average deposits in September at DOCFCU were down almost $2.5 million from the prior month.
Ken Walters
Liquidity Heads to the Exits
“The liquidity is definitely leaving the system,” he said. “And, you know, that’s what the Fed wants. They want to pull liquidity out of the system in hopes of tamping down inflation. Again, what credit union needs to do is raise their loan rates to make sure their rates are commensurate with the applicable Treasury rates plus a premium for credit losses. They can’t let their loan department dictate rates if the loan department is not cognizant of what’s going on in the rate environment. And, all credit unions have to realize that their members’ loyalty is a two-way street. Your members will be loyal to you if you are loyal to them by offering them competitive deposit rates. If you aren’t offering competitive deposit rates then you aren’t loyal to your members and you shouldn’t be surprised if they take their deposits from you.”
The Local View
Ken Walters, CEO at Evolve FCU in El Paso, Texas, believes the liquidity problem among credit unions, is often based on local markets and that declining shares, at his organization, is not a bad thing. Walters told CUToday.info he is aware of liquidity crunch at some credit unions.
“I am seeing this to some degree,” said Walters, whose $351-million organization has been offering a 7% ePriority checking account. “Rates locally have not gone up as much as the national average. We always run a little tight, but we have used both non-member CDs and borrowing to help take the pressure off when we are a little short. But we have good cash flow from P/I on investments and lending portfolios…We have raised our CD rates a little, just to keep pace with local competition. But, with the exception of one credit union, we have not seen rates really increase, but that may change over the next 120 days.”
Walters believes any liquidity crunch among credit unions will not be long lived.
“I think this will be short lived from a liquidity standpoint. With the stock market in a big bear market right now, we don’t see money running there,” he explained. “We are still paying zero on shares and not much has run off. We actually like the idea of getting back to what our asset size was pre-COVID—this whole thing was caused by government stimulus. We think that by this time next year we will see rates start to fall, and the last thing we want on our balance sheet is CDs with high rates extending out three to five years.”