By Andrew Gelsomini, Catalyst Strategic Solutions, Senior ALM Consultant
Although we are living in unprecedented times, our economic environment does feel remotely familiar. It was during the Great Recession that we last experienced such historically low rates, and even though 10 years have passed, many of us still remember it all too well.
Spreads on assets were thin, but at least funding was cheap. How cheap are our funding sources now? For non-member deposits and term advances, the cost is straightforward and the term is stated. However, non-maturity deposits (NMDs) are a major source of funding for many credit unions.
The estimation of the maturity term and decay rates of varying NMD account types (share drafts, regular shares, IRA shares, money market, etc.) require an in-depth study of member accounts, across a significantly long-term horizon.
While this is a valuable piece of the equation, it is also important to consider the transparent cost, or dividend rate. At current rates, most of the dividend rates paid are negligible and considered to be immaterial. However, the dollar cost of a deposit account consists of much more.
Credit unions cannot add accounts of a desired balance at the flip of a switch. Nor can they afford to turn away deposits. In order to acquire a deposit, and keep it, credit unions must allocate for certain fixed costs related to the acquisition, maintenance and retention of that deposit. For credit unions, this means branch locations, employees (ranging from tellers to marketing specialists, and even accountants) insurance policies, and anything tied to operations – whether directly or indirectly. Because without a primary source of funding, the credit union would not be able to operate successfully.
Alternatively, deposit account fee income – like transaction revenue or overdraft protection – combined with additional opportunities for lead generation on loan products, could partially mitigate these costs.
So, how can institutions accurately determine which costs and revenues should be applied to these deposit accounts, and how much? The now nonexistent Office of Thrift Supervision (OTS) set out to help answer these questions by commissioning a study to measure and quantify the various costs for each deposit account type. However, the OTS merged with the Office of the Comptroller of the Currency (OCC) almost a decade ago, and the study was discontinued.
Technology has vastly changed the financial services industry over the last 10 years. Some of the changes have helped introduce efficiencies, but other aspects have increased costs associated with digital banking and digital information security. Ultimately, the OTS estimates were reasonable industry averages at the time they were performed, but they no longer accurately reflect the current economic environment or the cost structure of credit unions.
With rates fluttering at historically low levels again, liquidity rushing in and loan volume on the decline (according to Catalyst Strategic Solutions’ latest industry rate comparison), credit unions could benefit from examining their total cost structure, as well as the true cost of attracting, servicing and retaining deposits. For the last 30 years, Catalyst Strategic Solutions has been helping credit unions accomplish this. Our experts have often found that the total cost of deposits is lower than the outdated OTS estimates. This information has the potential to help credit unions refine their risk measurement systems, but also to improve their understanding of product profitability. Unlike industry benchmarks, we use your data to drive the cost analysis, which generates value as you seek to optimize strategic planning and even evaluate merger and acquisition opportunities.
As you seek to take your balance sheet management and risk analytics to the next level, let Catalyst Strategic Solutions help guide you along the way. Our team of experienced ALM Consultants and Advisors works with credit unions to understand their unique needs, challenges, and strategies. For risk management assistance or guidance on your balance sheet allocations, contact us today.