Core deposits for credit unions are like water to human beings — you need it to live, but too much too fast can be detrimental to your health.
Banks today are finding themselves in the latter scenario and are throwing aside historic deposit incentives, such as free checking, to save their profits. So why are some credit unions not only maintaining free checking but also pricing deposits more aggressively than the competition?
CU QUICK FACTS
Capital educators (CAP ED) Credit Union
data as of 12.31.14
HQ: Meridian, ID
12-MO SHARE GROWTH: 17.45%
12-MO LOAN GROWTH: 33.07%
Idaho-based Capital Educators Federal Credit Union wants to attract core deposits to support the growth it has achieved in its loan portfolio. Washington-based BECU wants to control how and where new deposit activity occurs.
Attracting Dollars To Grow On
Over the past seven years, CapEd Federal Credit Union ($412.1M, Meridian, ID) has more than doubled in asset size, expanded its branch and digital footprint, and moved from approximately 50% to nearly 90% loaned out, says Todd Erickson, who joined the credit union in 1994 and became CEO in 2008.
Although many credit unions would love to post similar growth in their loan portfolio —a success CapEd attributes to recent investments in its indirect lending, mortgage, credit card, and commercial lending efforts — it could also open the institution to potential risks stemming from loan-to-share imbalances.
In the past, CapEd has sold off much of its investments portfolio and brokered out other assets to alleviate these concerns. But in recent years, making core deposits — high- and low-dollar, long-maturing and short — more appealing has also been a crucial part of its strategy.
“We’ve had some real success with our checking accounts and debit cards, with about an $11.5 million increase in balances every year,” Erickson says. “That’s largely due to our rewards checking accounts.”
CapEd purchased its rewards checking in 2009 from the Texas-based financial services provider BancVue, and the two-prong product suite offers members either:
A free, high-yield checking account that pays 2.5% APY on up to the first $10,000. This requires one direct deposit or automatic payment per quarter, 12 debit purchases per quarter, and e-statement enrollment.
A free “Tunes” checking account that offers up to $5 reimbursements on Amazon and iTunes purchases. This requires only 12 debit purchases per quarter and e-statement enrollment.
Both accounts refund domestic ATM fees of up to $25 per quarter. The credit union expected its “Tunes” account to appeal primarily to a Gen Y and Gen X user base, but both accounts garner nearly equal amounts of usage from members of all ages, Erickson says.
Total checking account balances at CapEd are up approximately 11.3% year-over-year as of fourth quarter 2014, according to data from Callahan & Associates. And the benefits of these accounts extend to the virtual channel, where more than 50% of the credit union’s membership is now signed up for e-statements.
Those special seasonal rates alone brought in about $8 million, but they also generated goodwill in the community.
These accounts mainly attract low balances, but the credit union also needed to grow its long-term, high-dollar pool of assets to ensure stable funding for future growth, particularly in mortgages and auto lending.
So the credit union tapped into opportunity in its certificates of deposit (CDs). On Black Friday and Cyber Monday, CapEd pushed a special offer in which it made the five-year rate of 2.12% available for three- and four-year certificates. Actions like this have contributed to a 58.72% year-over-year increase in the credit union’s CD portfolio as of fourth quarter 2014.
“Those special seasonal rates alone brought in about $8 million, but they also generated goodwill in the community,” Erickson says. “Moving forward, we’re offering ongoing promotional rates for new money and are allowing our financial service representatives to match the rates of local competitors.”
Control Where You Can, Anticipate Where You Can’t
Even without promoting its deposit products, BECU ($13.1B, Seattle, WA) has increased total shares 7.9% year-over-year as of fourth quarter 2014, according to Callahan data.
“The interest rate environment and members’ desires to keep their money pretty short has led to some significant growth in share and money market balances,” explains Tom Berquist, senior vice president of marketing and cooperative affairs. “At the same time, we’re also seeing runoff in our longer-term options like CDs.”
CU QUICK FACTS
data as of 12.31.14
HQ: Seattle, WA
12-MO SHARE GROWTH: 7.99%
12-MO LOAN GROWTH: 12.86%
Embracing a market-driven tilt toward early-maturing, lower-dollar deposits could be a scary thought for some institutions, but the diversity of BECU’s investment portfolio helps it minimize interest rate risk and broaden the types of loans it portfolios.
The credit union is nearing its comfort zone for deposits, yet it still wishes to remain responsive to market demands and its philanthropic mission, so it is using its remaining wiggle room in the deposit portfolio to focus on the types of consumers it feels need the most assistance and encouragement, such as first-time savers.
A prime example is the credit union’s Member Advantage program. Established in the mid 2000s, this program returns up to a 4.07% APY on the first $500 deposited in savings and checking as well as a higher than average rate on CDs, IRAs, and money market accounts in return for using eStatements and making one transaction per month.
We wanted to start doing something different that would encourage low-balance individuals and others who weren’t saving anything to start doing so.
“Before the recession, when our reserve level was too high and we wanted to give money back to our membership, we’d simply do things like referral bonuses and across-the-board rate increases,” Berquist says. “In this case, we wanted to start doing something different that would encourage low-balance individuals and others who weren’t saving anything to start doing so.”
These incentivized rates brought another boon as well. As of fourth quarter 2014, the credit union has been able to reach an astounding 82.44% share draft penetration versus the 59.3% average among similar-sized peers.
With lending opportunities expected to pick up in 2015, particularly in areas like auto, mortgage, and credit cards, the rebirth of deposit promotions that encourage a wider array of deposit activity is one — although not the only — possible scenario that lies ahead for BECU.
“Lending is still our priority right now, but we do have a cross-department group that examines our CD pricing at least once a week, weighing both our costs and what the competition is doing,” Berquist says. “On the share and money market side that’s more of a monthly activity.”
Looking for more lessons and best practices from this cooperative institution? Check out in-depth discussions with Tom Berquist and the rest of the executive team in our Anatomy of BECU.