By JD Pisula - VP Strategic Advisory
As credit unions continue to navigate the complexities of deposit and liquidity management, a shift in strategy may be warranted for those still facing challenges. Non-member deposits can be a more cost-effective and proactive option compared to traditional member certificate specials or FHLB borrowings.
Typically, members prefer certificates of deposit (CDs) with 6-month and 1-year tenors. However, the current yield curve shape makes these options less appealing from a management standpoint. These tenors are more expensive and exacerbate the mismatch in durations between assets and liabilities.
In contrast, institutional investors are keen on extending asset durations to hedge against a potential downturn in interest rates over the next year. This presents a unique opportunity for credit unions looking to lengthen liability durations while reducing interest expense. Recently, we have observed a noticeable void in the supply of 30-month term investments on CD placement platforms. By tapping into this unmet demand, credit unions can effectively attract non-member deposits that better fit their balance sheet strategy.
Some of our recent advice to clients has centered on raising non-member deposits specifically at the 30-month tenor. These credit unions have successfully raised deposits at or below the rates offered on Federal Home Loan Bank (FHLB) advances.
This strategic offering is not only attractive to investors but also aligns with the durations of used auto loans—a common asset class for credit unions. While we anticipate liability expense to top out and decline over the next year, locking in a net interest margin to used auto loans removes some uncertainty from the asset-liability management process. It also leaves capacity for strategic FHLB borrowings, as non-member deposits fall into a different liability category. Issuing longer-term non-member CDs could also be a tool to prefund (or refinance) BTFP borrowings scheduled to mature later this year.
The CD platform also matters, as we consistently see brokered CD offerings at rates well below those offered on direct placement CD services. For credit union CEOs and CFOs, considering non-member deposits could be an opportunistic move to enhance liquidity management while securing financial sustainability in a fluctuating rate environment.
If you would like to learn more or need help developing a well-rounded balance sheet strategy, please reach out to our Accolade balance sheet advisers.