May 29, 2012

This is bonus from “Pricing Properly” in the June 2012 issue of Credit Union Management magazine.

As a preparation for economic recovery and for prudent asset/liability management control, we believe now is the time for all credit unions to begin developing their core funding strategy. That is, what are the core funding beliefs that drive your pricing decisions and product mix goals?  How will the credit union go about achieving these goals? What metrics are best suited for ensuring the right funding is in place to manage overall risks and protect long-term liquidity sources like Federal Home Loan Bank advances? What systems are in place to assess the rate-setting process, and review changes to pricing strategy and effect on demand? Is the time upon us for implementing real deposit pricing models, even when deposit rates appear to be so low?

We believe the answer is yes—that, in fact, it’s actually past time. Why? Because we continue to see pricing actions based on emotion and “philosophy,” but the number of community-based financial institutions continue to decline.

A great starting point is to develop core deposit analytics for such non-maturity accounts, such regular shares, money market deposit accounts and checking accounts. Such a study is necessary for your asset/liability process, as many credit unions have simply been using a set of regulatory assumptions from the old savings and loan industry. Many asset/liability vendors and consultants used these as default values. Now those assumptions are going away, and the regulatory pressure is on credit unions to be able to define and defend the core attributes non –maturity accounts. These assumptions help shape the core funding strategy, and define the duration of these accounts, which may lead to lending opportunities with greater returns.

It is shocking that since the third quarter of 2011, 183 credit union mergers have taken place, almost double that of the banking space (95) in that same time frame. While the size of the deals is small, the numbers of institutions is alarming. How far does consolidation need to go to maintain profitable, viable institutions? Gaining control on the largest cost in your income statement and treating it with more realistic approaches is warranted to maintain your credit union’s independence. Get your team ready for the recovery and get talking about share pricing now. After all, we call these shares “core deposits.” Do we manage them that way?

David Koch is SVP/chief operating officer of Farin and Associates (www.farin.com), Fitchburg, Wis.