#3224: Why Horizon Federal Credit Union is Getting Rid of CDs...

7/20/2023

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Yes, most of us got rid of our CDs a decade or so ago in favor of iTunes, Spotify, and/or Pandora. But in this case we're not talking music; we're talking certificate of deposits (CDs) -- which are all the rage right now because of the elevated interest rates.

One credit union, however, is bucking this trend and getting rid of their CDs in favor of core deposits.

To get the backstory on this controversial move, we invited Horizon Federal Credit Union’s CEO Justin Howard and Your Marketing Co.’s President/CEO Bo McDonald on the show. Both Justin and Bo shared the reasoning behind this move, which has been a gradual process over the last 6-7 years -- certainly not an overnight decision.

By listening closely to their members, Justin and his team discovered that young people are not interested in CDs. They can’t grasp why they wouldn’t be able to access their own money for the duration of the CD investment. Dialing in on the credit union’s ideal members helped to make the decision.

They both also shared messaging strategies to members -- and the Board -- to venture down this no CDs in favor of core deposits road.

Justin added that he's had some “energized and lively debates” with peers and shared some highlights of those conversations. But it's all good for Horizon, as they are listening to their membership doing right by them -- honing in on the credit union’s niche to gain clarity around who they’re truly serving.

A fun and fascinating conversation with Justin and Bo. Check it out and let us know your thoughts. And be sure to watch the entire episode for all the details.

Connie L Davis link

7/21/2023 04:39:56 am

I would echo the sentiments. In this day and age, CU members feel that if there is a payment of dividend to them for being a member, then it shouldn't come with strings attached. They are relationship focused, brand loyal and comparing interest rates between digital banks like Chime, Ally who are paying higher interest dividends without locking in their funds. Liquidity matters in modern times with high interest rates and rising living costs. Emeergencies come up and people need access to their funds. I fully support this 'bucking of the trend" because it means that Horizon is listening to their members. Kudos!

Steve Wofford link

7/21/2023 08:21:47 am

A few key elements here. First, ditching CDs is no big deal as they only had ~3% of deposits there. They also require a checking account which is excellent IF it includes direct deposit. Adding a dormant checking account drives up costs with little residual benefit. We've seen this happen a lot with indirect lending follow up programs where the borrower relinquishes to the sales pitch and never uses the account. The same thing happens when pitching credit cards.

Another was that they give discounts to borrowers on loans. Their web site suggests auto loans at a minimum of 7.50% which is respectable if still underpriced. A fully risk adjusted (Including IRR) auto loans are in the 8.00% range. The thing they must be careful of is not to underprice loans AND get a dormant checking account PLUS a $5 share account. That's just adding costs to a loan that’s already harming shareholder value.

The third thing is that underpricing loans could exasperate a liquidity issue. Selling loan production is one of the main levers for managing liquidity. If you underprice a loan and then try to sell it to raise cash, you may find you have to take a loss on that sale. They might have damaged a major liquidity management avenue.

So, overall, their ideas make a lot of sense. Managing the risks is the key ,as always.

Mike Higgins

7/24/2023 07:39:50 am

Steve -- Agree with your comments about managing risk, and your observation about low CD funding percentage is spot on. That being said, Connie brings up good points on the deposit side and because credit unions are not subject to CRA, they are better suited to pull a strategy like this off, especially in a more traditional rate environment where it is possible to earn a substantial investment spread over cost of funds. Operating in a productive (cost efficient) manner will also be helpful.

Steve Wofford link

7/24/2023 08:27:39 am

Hi Mike, I always enjoy your insights. I agree, CUs are in a better position to do this. However, I do take a little issue with the last statement that CUs are earning an "investment" spread over their cost of funds. I argue they are making nothing on their "investments" as the average rates on auto loans are being priced below fully risk adjusted levels.

The spread they are earning is made up of almost entirely interest rate risk and deposit "earnings" that are subsidizing lending. They underpay members for deposits, ignore IRR in loan pricing and use that money to subsidize member borrowings.

This is the main reason why some credit unions are experiencing liquidity issues. Discretionary tier deposits are leaving for better returns, and they are unable to sell loan production without a loss. Now, if a CU has no CDs, they must raise rates on NMDs which usually mean ALL deposits immediately increase in cost or they borrow expensive money.

Now if their assets were priced to consider IRR (like the buyers do) then most of these problems go away. First, if they need to sell loans, they can sell them without taking a loss. Also, the higher loan rates provide headroom to raise deposit rates and still maintain the ROA to maintain capital.

Finally, your company is in a perfect position to address many of these issues. Most of these problems boil down to incentive compensation. If anyone is compensated exclusively on volume or asset size versus value contribution this problem will persist. I know you are keenly aware of that.

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#3224: Why Horizon Federal Credit Union is Getting Rid of CDs...

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