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A 'mad rush' of new deposits? Don't bet on it

The National Credit Union Administration’s move earlier this year to allow more institutions to accept nonmember deposits was greeted warmly by the industry, but that doesn’t mean credit unions are lining up to take advantage of the new rule.

The rule, approved during the regulator’s May board meeting, is intended to increase flexibility for credit unions that may be having liquidity issues or struggling to attract deposits from members. The rule increased the amount of nonmember deposits credit unions can hold, raising the threshold from 20% of capital to 50%. It is particularly expected to have an impact on credit unions with a low-income designation, many of which are also community-development credit unions.

But there could be hurdles that prevent CUs from rolling out the red carpet for new depositors.

“There will not be a mad rush to get nonmember deposits because many states do not allow public funds to be deposited in credit unions and those are the biggest single types of large-sum, non-member deposits,” argued Dennis Dollar, a credit union consultant and former NCUA chairman.

As reported, some credit unions have made overtures toward accepting public monies as a funding strategy, but those efforts have been hindered by some state laws and credit unions have made slow progress in working to get them changed.

“There will not be a cascade,” agreed Cathi Kim, director of Inclusiv/Capital. “Based on our own survey of members last year, our members’ growth is outpacing the industry, so based on loan growth there is a demand for more nonmember deposits, but most are not even at the 20% cap yet.”

Several credit unions filed public comment letters with NCUA during the rule’s review period. Thomas Neumann, president and CEO of First Source Federal Credit Union, a $635 million-asset institution headquartered in New Hartford, N.Y., said his CU was projected to reach the 20% cap in the next several years, as loan growth has been outstripping deposit growth.

Juan Carlos Campos, general counsel and compliance officer for $4.8 billion-asset Bellco Credit Union, Greenwood Village, Colo., wrote, “With additional funds, credit unions (particularly LICUs) can better manage [their] cost of funds, and give back to members in the form of lower loan rates and additional loans, which is needed in some of the areas we serve.”

But the rule wasn’t universally welcomed. Bank trade groups in particular objected to what they saw as attempts to circumnavigate field of membership rules.

“We think these nonmember deposits are volatile and will create some safety and soundness problems,” Christopher Cole, EVP and senior regulator counsel at the Independent Community Bankers of America, said in an interview. “Considering these are coming from nonmember shares and institutional shares, they are volatile, so we think it makes a credit union look less like a mutual. It is the same issue we have with the idea of using supplemental capital.”

“Our concern is having parity – that their regulator is not regulating credit unions with the same stringency that banking regulators regulate banks,” Cole added.
While many credit union sources downplayed how widely the rule will be adopted, Cole suggested the only institutions that won’t make use of it are those who aren’t having liquidity issues. As for the rest, he said, “it would not surprise me if many credit unions will go up to their limits.”

Boon for CDCUs?

Greater flexibility with nonmember deposits could be a boon for community development CUs, but Eben Sheaffer, CFO and chief investment officer at Inclusiv, pointed out that most CDCUs have remained below the 20% cap since the 1980s, and those that have gone above have generally gotten waivers from the regulator, “so the new rule will help them.”

Sheaffer noted that the median share balance in many low-income communities is only $100, “so being able to bring in $250,000 in a non-member deposit is incredibly valuable,” Sheaffer said. “At the same time, these credit unions use it pretty responsibly for managing ALM.”

But Sheaffer’s colleague Kim suggested each institution will have to weigh the pros and cons before moving ahead with additional deposit-gathering strategies. The key question, she said, is whether the credit union has the loan demand to merit bringing on additional liquidity. If loan demand is low, she explained, then taking on non-member deposits just to grow the balance sheet “would not make business sense.”

“If there is no gap between share deposits from members relative to loan demand, they may not take on nonmember deposits,” Kim said.

Dollar said the new rule will “require a solid policy for how to manage [liquidity] and what types of sources the credit union will seek deposits from.” Growth, he added, “will come over time, but it will not be dramatic.”

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