It finally happened. The liquidity cushion credit unions have enjoyed for years has evaporated as inflation, high consumer prices, rising interest rates, and more prompted a slowdown in deposits even as lending continues to grow.
The situation shouldn’t be a surprise. Quarterly industry performance data — which Callahan & Associates highlights in its regular Trendwatch webinars — has shown share growth continuing to decline, with fourth quarter growth reaching its lowest level since 2014. Fortunately, a look back at the 2008 financial crisis and its aftermath can help credit unions better understand the current moment.
Trendwatch 1Q 2023 is available to watch now. Learn how credit unions performed in growth, penetration, lending, shares, member relationships, and more. Watch today.
It’s important to understand how credit unions got to this point. Here’s the short version: Economic impact payments from the federal government, expanded unemployment benefits, and reduced consumer spending during the first year or so of the pandemic resulted in a flood of cash moving into consumers’ banking accounts. That propped up liquidity for many institutions, but as the pandemic waned and loan growth continued, consumers’ deposit rates slowed as a result of rising prices amid historic levels of inflation and declining levels of consumer confidence.
The result: a drop in the personal savings rate, which at the end of 2022 had fallen below 4% for the first time since 2008, and still stood at just 4.8% at the end of February, the most recent data available.
With all that in mind, here are a few ways credit unions are navigating the new normal:
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- Credit union leaders are increasingly turning to outside sources of funds to help boost liquidity. For many, that means relying on the Federal Home Loan Bank, and loans from outside sources were up more than 125% at year-end. That’s an effective strategy for now, with rates dropping lower than 3% at year-end, but could become problematic if interest rates on borrowing continue to rise and credit unions begin to pay more to attract additional deposits.
- GreenState Credit Union ($11.4B, North Liberty, IA ) was well prepared for a liquidity crunch, thanks in part to having spent decades focused on bringing in nonmember deposits. That program has grown to the point that nearly 20% of total assets now come from those who don’t even belong to Iowa’s largest financial cooperative. Executives there say the strategy has been “instrumental” in managing liquidity and cost of funds.
- GTE Financial FCU ($2.9B, Tampa, FL) has launched a new checking offering that fills dual purposes: it not only helps bring in deposits during a crucial time but also strengthens the credit union’s ties with local nonprofits, deepening relationships with those who are doing work to improve the community.
“We can’t help with top-line revenue,” says Manny Aguilar, chief commercial and advisory services officer at GTE Financial. “But we can help them manage their bottom line so they can do even more for the community.”
- It’s no secret credit unions have a history of serving consumers of modest means and with less-than-perfect credit. That willingness to give second chances could help boost liquidity. Carolina Foothills FCU ($188.5M, Spartanburg, SC) opened nearly 300 such accounts in 2021, all of which require direct deposit and come with a low monthly service charge. Those two are helping bring in additional liquidity, and the credit union routinely sees double-digit growth for that product.
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