By Ray Birch
WILLIAMSPORT, Penn.—Just as what were once staples of the retail financial relationship have faded away or are fading—first, the passbook and now the checkbook—so, too, will certificates of deposit become a thing of the past, predicts one credit union that’s doing away with CDs for good.
The $147-million Horizon FCU is eliminating certificates, saying CDs do little to drive deeper relationships and that the credit union’s core deposit accounts--checking and saving products–-are better vehicles for driving PFI penetration and attracting deposits for lending—and that includes providing funds to match against long-term loans.
“Remember those old passbook accounts? Well, they are a thing of the past,” said HFCU CEO Justin Howard. “And I believe so will CDs someday. They are almost gone at our credit union. We believe that certificates have lived through their prime and now they are on the downward swing. There's a lot more innovative products and a lot better strategies that all financial institutions can be offering to better serve the members of today.”
Howard told CUToday.info that all of Horizon’s CD accounts will be paid out and closed by the end of the year.
“Nothing bothers me more than a person who has a single relationship with us—a CD—and demands special treatment," said Howard.
In Howard’s view, checking accounts are a better driver of relationships and the credit union’s bottom line.
As a result, the CEO explained the organization has been steadily moving away from certificates in recent years, and he says now the decision looks even better as time passes.
“It’s improved the credit union's health through core deposit growth, swipe fee income, which makes things less balance sheet sensitive, and has lowered the credit union's cost of funds to less than a quarter point,” Howard said.
Not for Everyone
Howard said a few years ago Horizon determined its strategy moving forward was that it was not going to be the “financial institution for everyone.”
“So, we really decided to focus on the target segments we wanted to attract,” he explained. “Talking with the younger members that we're looking to attract, they didn't value certificates. They really did not understand why they would give a financial institution their money and not be able to have access to it, since it was their money. And, for us, it makes sense not to do certificates, as well, because the economy now changes so fast. Someone can send out a tweet and within hours the economy changes.”
Justin Howard
Ability to Reprice
Howard explained that with its deposits spread across savings and checking only Horizon Credit Union can reprice its rates monthly. The credit union offers a high-yield checking account, which paid 3.56% at the end of June. To receive the high rate, members are required to use their debit card 15 times a month for a signature purchase that's at least $5 per transaction, and have direct deposit or pay a recurring bill through bill pay.
The tiered high savings rate is 1.75%.
The accounts, Howard stressed, are priced to reward members for deeper relationships, “as opposed to having money locked up in a specific term with CDs, and we are obligated to pay that rate for the term.”
Howard added with all the changes that have been taking place in the financial services market during the past two years, with an economy that is uncertain—will there be a recession, will rates go up again, will they come down?—Horizon’s balance sheet benefits from the flexibility.
Nothing ‘Hot’ About Funds
The CEO emphasized that having significant member funds in core deposits—$35 million (28%) in checking and the rest of the portfolio in savings—the perceived risk that it’s “hot money” and could flow out at any time is significantly overstated.
“If you look at our peer group, their cost of funds is not at .23% now because they've been raising their certificate rates,” Howard noted. “We haven't seen any loss in deposits, because people have it in our checking product. Our checking product is producing a lot more income for us because we require direct deposit and debit card transactions. And, you might think that they're short-term deposits, but when you do a lifetime analysis of our checking account portfolio, that money is much more stable than certificates, with the average life at 8.7 years.”
Drawing Examiners’ Attention
Howard acknowledged the credit union’s move away from CDs has attracted the attention of its NCUA examiner, noting the agency has shared concerns in the past.
“But when we show them the data on our checking--the profitability, the stability--they are now good with our approach,” he said, adding that numerous studies from auditors and consultants support the CU’s checking and savings dollars are stable and highly profitable.
‘Not a Stopper’
In the wake of this year’s big bank failures, and the digital runs on deposits, Howard emphasized early withdrawal penalties on certificates are simply not major deterrents when consumers want to move their funds.
“That is not a stopper for anyone,” he said.