A Strategy To Build A Stash Of Non-Member Cash

Iowa’s largest credit union has been preparing for this moment for more than two decades.

Although liquidity is tightening across the financial services landscape and many credit unions are concerned about slowing deposits, GreenState Credit Union ($11.2B, North Liberty, IA) is largely not sweating it. That’s thanks in part to more than 20 years of accepting non-member deposits that now total nearly $2.2 billion, approximately 19% of its total assets as of the third quarter of 2022. That percentage is the 17th highest among the nation’s credit unions. Among the top 50, only four other credit unions have more than $1 billion in assets. GreenState is by far the largest — it’s also the only one with more than $1 billion in non-member deposits.

John Strabala, the credit union’s vice president of card and deposit services, says non-member deposits are one leg of what he calls GreenState’s “tripod funding philosophy,” which includes member deposits, non-member deposits, and borrowings. All three are essential to providing the liquidity to fund loans and other services. According to Strabala, the tripod has afforded a kind of flexibility that has freed the credit union from dependence on a single source of funding.

“Non-member funding has been instrumental in helping to manage our liquidity and costs of funds (COF),” he says. “We consistently experience strong loan demand in the markets we serve and do not have a traditional investment portfolio. Utilization of non-member deposit sources as part of our funding tripod helps us continue to meet this loan demand.”

Fluctuating Pricing And Liquidity Needs

According to Strabala, GreenState started taking non-member deposits by bidding on and receiving public funds more than 20 years ago.

“Around 2010, we then started working with a few online brokers [QwickRate and National CD Rateline] to begin accepting investments from other credit unions,” the GreenState vice president says. “When we received our low-income designation in the summer of 2013, that enabled a greater access to other sources and helped to expand who and where we were able to accept funding from.”

Now, he says, the amount fluctuates based on pricing and liquidity needs.

“At the end of December 2019, we had 23% non-member to total deposits,” Strabala says. “This increased to over 25%; however, we have been strategically lowering this as we have success growing traditional member deposits at less-expensive rates.” 

Interest Rates Churn The Deposit Business

According to Strabala, the quick rise in interest rates in the last half of 2022 created a wave of early non-member deposit withdrawals as it was advantageous for depositors within this channel to surrender CDs early and invest with others at a much higher rate that more than offset the CD penalty. At the same time, GreenState provided its members the benefits of higher interest rates on its traditional deposit offerings such as CD and transactional accounts.

That reinvesting is often not with GreenState, which enables the cooperative to replace those funds with member deposits that are cheaper for the credit union compared to the pricing of non-member CD rates and terms.

“We’re not seeing as much member money cashing early because we have a different penalty term on member CDs,” Strabala said. “Members probably don’t watch and calculate things like this as much as those in charge of investments at most financial institutions.”

Meanwhile, GreenState bumped up its cost of funds on transactional accounts by almost 500 basis points to still provide members with higher interest rates and encourage those deposits to continue.

“Overall, it’s an additional liquidity lever that is incredibly helpful for FIs but should be used strategically and embedded within an organization’s interest rate risk management practices,” Strabala says.

Lower Acquisition Costs. Lots Of Quick Cash.

At GreenState, non-member deposits come from other banks and credit unions, and more than $160 million comes from public bodies. They’re equally split between CDs and money market accounts. Half of the CDs come from Depository Trust & Clearing Corporation (DTCC) offerings, Strabala says, while two online brokers — QwickRate and CD Rateline — provide most of the money market funds. The credit union also works with Reich and Tang, which helps financial institutions invest excess funds, and Prudent Man Advisors, which helps public entities invest liquidity.

“It’s easy to do,” Strabala says. “You set your rate and term, and brokers contact you. We’ve also done well reaching out to various cities and counties we are in to get on their list of approved FIs to bid on the public fund CDs they offer from time to time.”

Overall, non-member deposits come with lower acquisition costs than traditional member deposits, Strabala says.

“You can raise larger quantities quicker and do not have the traditional sales, marketing, and operational expenses,” he says.

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Managing Accounts. Seizing Opportunities.

Managing non-member deposits does take time, according to Strabala, which increases as the portfolio grows. The amount of time it takes to manage non-member deposits is also dependent on how aggressive the credit union sets its terms of pricing.

“You can turn the spigot on or off based on your pricing,” Strabala says.

GreenState has a team responsible for setting rates, managing accounts, and working with the various sources of deposits. The team has monthly calls to talk through plans and strategies.

“Regardless of the size of your portfolio, you have to pay attention to what you have and what’s available,” Strabala says. “If you don’t, you’re going to be missing opportunities.”

Strabala says that non-member funding at GreenState will continue to be a resource and tool in tandem with borrowings and member deposits.

“Pricing is one of the biggest things that will determine the amount we rely on non-member funding in the future,” he says. “We’ll also always balance this with continuing to offer highly competitive, market-leading member deposit rates for those traditional members and communities we serve.”

And although GreenState’s strategy is well-established, its tactics are not static.

“We’ll continue to research and monitor the various sources of funding that continue to evolve and come to market,” the VP says. “We’ll continue to look for opportunities that allow us to take advantage of favorable pricing and terms that allow us to then pass along savings to our membership and make funds available to meet their lending and overall financial needs.”

The Role Of Organic Growth

Making new members out of non-members is another benefit of the business. Strabala says that has happened to a degree, mostly among public fund depositors.

“Since they already reside within our FOM, it is easy to make them a member,” he says. “Getting the quarterly statements reminds them of the relationship and helps to keep us front of mind for other bid opportunities when they become available. It also allows us to talk to them about other services and accounts we might be able to assist them with.”

That said, non-member deposits won’t take the place of attracting cash from existing members.

“As a credit union serving our local communities, organic deposit growth will always have a primary seat at the table,” Strabala says.