By Cassandra Kowieski, Catalyst Strategic Solutions, ALM Consultant
Non-maturity deposits are a critical component of every credit union. As depository institutions, they are the bread and butter of our service portfolio, and without them, we’d have no funds to lend. One of the key benefits of these deposits is that they offer a fairly stable, low-cost source of funding, while also helping offset asset risk.
But, just how much risk can be offset, and how stable are these funds?
The answers to these questions are an enigma for many credit unions. How will balances behave in the future? How long will accounts remain at the credit union? What rate needs to be paid to maintain the accounts? For these reasons, forecasting non-term share assumptions can present quite a challenge.
When assessing such questions, credit unions should evaluate their deposits from multiple angles. Catalyst Strategic Solutions suggests looking at historical analysis, as well as future expectations, and blending in credit union strategies, such as a need for additional liquidity.
Historical trend analysis is a good starting point, as it clearly illustrates past performance and pricing levels, such as highest or lowest rates paid, how much dividend rates have moved, etc. In its simplest form, a historical trend analysis examines how non-term shares behaved during past interest rate and economic environments. In a more complex form, a static pool analysis can track how individual accounts behaved during past interest rate and economic environments.
Extensions of historical analysis allow for regression studies to be performed, which helps identify a statistical relationship between deposit pricing and interest rate movements. Since no two credit unions or their memberships are alike, you can expect different deposit pricing correlations (betas) as well as potential pricing lags. These factors are critical when trying to determine how to price dividend rates in the future and how aggressively those dividend rates may respond to market interest rate changes.
A static pool analysis complements a regression analysis well, as it provides great insight into how long deposits may be expected to remain at the credit union. A review of a static pool of deposits can show how long deposits have remained at the credit union in the past (lives), as well as how quickly they leave (decay rates). This data presents a wealth of information, as it can be constructed to establish relationships and behaviors between account age and balance, account age and runoff, average account size and dividend rates on runoff and growth.
With the recent influx of deposits many credit unions have experienced over the last few months, it’s important to evaluate deposits not only for pricing relationships, but also for how “hot” funds are – in other words, how long they might remain on the balance sheet.
Catalyst Strategic Solutions has an industry-leading solution that offers credit unions insight into their actual membership behavior and demographics – not just a maturity term and beta. To fully understand the level of risk or benefit these funds provide, credit unions must dig deeper into their balance sheets and member behaviors to ensure they understand the level of risk or benefit associated with these funds.
If you are looking to perform an “in-house” analysis, beware of common pitfalls during the data compilation process. When pulling historical rate data, taking too long a term of the sampling may cause a blending of trends that are not true to the current market activity. If the sampling period is too short, the data may be over-biased to short-term anomalies that do not resemble normal behavior. A five-year lookback is typically recommended but should be adjusted depending upon past economic events.
As an earnings driver, as well as a source of lending funds and liquidity, non-term shares play a critical role in the overall health and success of credit unions. Their significance warrants a closer look. So, take time, dig deep, and see what your data tells you.
Having worked with credit unions for decades to support their balance sheet management and strategic needs, Catalyst Strategic Solutions’ ALM Team understands the importance of non-term shares. If you find you need some help, we are here to assist…we, too, are member-owned and member-focused. Contact us today for more information.