Because of our growth and loan-to-assets hovering around 92%, we don’t have an investment portfolio. There’s no need for one.
The credit union uses a “funding tripod.” Can you explain what that is?
TF: Traditionally, most credit unions fund loans by growing member deposits. However, when a credit union is growing like ours — by more than $700 million in assets in one year — the ability to raise enough member deposits at rates that are not excessive becomes challenging.
Rather than depend solely on member deposits, we use Federal Home Loan Bank (FHLB) advances and non-member deposits. There are several CD hotlines or brokerage lines where you can post your rates and get deposits from other financial institutions.
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Those avenues help us keep funding costs down. If we depended on one source alone — either member deposits or non-member deposits — we’d have to raise rates quite a bit to attract the funding we need.
If another option can decrease your cost of funds, why not take advantage of it?
Each year, we look at our history and expanding branch network to set a reasonable goal for the total member deposits we can attract at the market rates we set. Then, we fill in the gaps with non-member deposits and FHLB advances.
There’s not a set percentage, but we do calculate a goal percentage for each and monitor that throughout the year to see how close we are. It’s really a function of being able to control the cost of funds.
Talk more about the “non-member” deposits.
TF: Any credit union or financial institution can join a network like National CD Rate Line, QwikRate or SimpliCD. These platforms allow you to post your rates and see what others are posting. It’s primarily institutional deposits from other credit unions and banks, although other types of institutional investors use these networks as well.
Typically, investors are looking to stay below the $250,000 federal insurance limit, so we tend to see deposits of $248,000 or $249,000.
Is there a maximum amount of non-member deposits the credit union can take in or a limit on FHLB advances?
CU QUICK FACTS
U of I Community Credit Union
HQ: North Liberty, IA
Data as of 09.30.17
12-MO SHARE GROWTH: 18.3%
12-MO LOAN GROWTH: 23.7%
TF: According to our ALM policy, the credit union cannot hold more than 20% of its total deposits in non-member deposits. We’re at approximately 14% today, so we have plenty of room for growth.
As far as the FHLB advances, any financial institution is limited by whatever collateral its pledging. We have room to grow there as well. Currently, we have a little more than $500 million in non-member deposits and roughly $660 million in FHLB advances.
In terms of the loan portfolio, have you sold loans or loan participations?
TF: Yes, we have some commercial loans that we’ve participated out due to their size. We’ve also sold close to $200 million in first mortgage loans over the past four or five years. And we did sell an auto portfolio several years ago.
We typically do this to provide extra liquidity; however, it’s not something we do frequently as we want to maintain the relationships with our members. And when we do sell mortgage loans, we do so through participations so we can retain the servicing.
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Any advice you’d give to other credit unions looking at their funding options?
TF: We’re in a unique situation because of our growth and loan-to-asset ratio. This tripod approach grew out of our need to maintain a high level of funding.
However, any time a credit union is faced with rising costs or needs funds to meet growing loan demand, the traditional thinking is to simply attract more member deposits. It’s important to remember that there are other options that might be cheaper for the institution. Credit union executives and bankers often look at borrowing as a negative when, in fact, it could be a more cost-effective funding solution than continuing to raise deposit rates.
I’d encourage other credit unions to think outside the box and monitor the rate environment. With interest rates moving up, member deposits had been the most expensive funding source, now that has shifted to non-member being the most expensive and the FHLB is the cheapest. It is always contingent on the market and things change, which is why we monitor those rates on a weekly basis. At the end of the day, if another option can decrease your cost of funds, why not take advantage of it?
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