Be Ready, the Shares Are Coming . . .

The first quarter is typically when credit unions experience the largest increase in shares for the year. How can credit unions make the most of the environment?


According to the latest Federal Reserve data on bank assets and liabilities (Release H.8), banks grew deposits by $120 billion or 2.03% in the fourth quarter of 2004. For the same period, the 834 credit unions participating in Callahan’s First Look program grew deposits $3.7 billion or 1.97%. For the fourth quarter of 2004, credit union deposit growth trailed banks by only six basis points.

If history is an indicator of future performance, then the first quarter of 2005 is when credit unions will experience the largest increase in shares for the year. Over the past five years, credit unions over $50 million have grown deposits on average by 5.2% in the first quarter.

What observations can be drawn from this data? What makes these numbers noteworthy? First, the competition isn't growing deposits at a rapid pace. In January 2005, banks grew deposits by only 0.08%, for an annualized rate of 0.96%. If credit unions can maintain their historical first quarter deposit growth, they can gain market share from banks.

Second, increased volatility in the equity markets is helping credit unions. The Dow Jones Industrial Average is up over 1000 points since last July, but January saw some rough patches. The trading range for the Dow was 10,368 to 10,729, with a one month return of -2.7%. This type of volatility reminds members – and potential members – of the “safe haven” aspect of credit unions. If credit unions can position themselves as a safe alternative to investing in the equity and bond markets, opportunity for deposit growth is a reality.

Third, with interest rates rising on the short end of the curve, investors could be fearful of the end of the bull market. January would be more than just a weak spot, it could be a market correction. Bond investors might be skittish regarding the flat yield curve. Despite fed funds going from 1.00% to 2.50%, the long end the curve fell. If the long end of the curve rises, bond investors could experience a lower return than someone invested in cash. Credit union deposits are looking better than direct investing in the market for many members.

How can credit unions make the most of the environment? One strategy is to be as aggressive as the Fed: raise rates on deposits as quickly as fiscally prudent from an ALM perspective. Let your marketing people work, inform the membership you are raising rates and promote the safety and soundness of the credit union. Be ready for the traditional inflow of funds in the first quarter!