Protecting Competitive Loan Rates Through the Use of Non-Member Funding

As the chart below illustrates, credit union member share certificate growth has increased dramatically over the last several quarters.  


In fact, as of Q2 2019, member share certificates now account for more than 21% of total shares. Not surprising, the rate being offered for share certificates is up as well, with the average share certificate rate across all credit unions (now 1.18%) having more than doubled since Q3 2017 (0.56%). 


And, with the current 10-year Treasury yield hovering around 1.50%, it is not uncommon to see credit unions bidding more than 3% for member share certificates. These elevated rates are a testament to just how difficult it is to capture and retain a consistent source of liquidity. 

At the same time, net interest margins have remained fairly flat – rising just 26 bps over the past two years.  


While many view a flat net interest margin in the face of rising funding costs as a success, we contend that rising member funding costs should lead prudent credit unions to consider alternative sources of funding. Why chase member funding exclusively as the cost reaches new highs? 

The traditional argument against non-member funding goes something like this: “If there is a higher rate to be paid, our credit union would prefer to pay it to our members.” This argument strikes us as overly simplistic. It begs the question of exactly which members such a strategy is paying. More specifically, it only makes sense for a credit union that is only in business to pay depositors, regardless of the effect on borrowers. 

By chasing rates on the liability side of the balance sheet, a credit union must take from borrowers on the asset side of the balance sheet. If a credit union wants to maintain its net interest margin against rising funding costs, the difference must come from  the pockets of borrowers. 

We are not suggesting that a credit union completely neglect its depositors. But, embracing non-member funding sources as part of a liability mix is a responsible plan.

DTC Share Certificates can offer the same term and interest rate mitigation as member share certificates, but the pool of liquidity is far larger than any credit union’s field of membership. 

DTC Share Certificates can (A) improve a credit union’s elevated loans to shares ratio, (B) reduce any reliance on borrowings, and (C) supplement existing member share certificate growth to maintain a consistent duration. A DTC Share Certificate program also provides the potential for improved efficiency and cost savings. This type of nonmember funding is priced competitively to member share certificates and to borrowings from the Federal Home Loan Bank. Additionally, the DTC Share Certificates (1) require no collateral, (2) include no significant operating costs, (3) allow for funding in a single block deposit, and (4) can be structured to provide a call feature for the issuer.

We encourage credit unions looking to remain competitive on loan offerings, without compromising net interest margin, to further explore DTC Share Certificates. In some cases, today’s available savings in DTC Share Certificates is wider than 50bps versus organically sourced member share certificates. That type of savings can be passed through to members or can increase ROA.  Regardless of the decision a credit union makes, it is always wise to consider the full menu of available options. 


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