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As interest rates appear poised to rise, credit unions must prepare their balance sheets for the inevitable impact on their liquidity positions. Credit unions have been able to position their balance sheets with excess liquidity for this low interest rate environment, but have neglected to access funds held at the Federal Reserve Bank to satisfy reserves, or to actively manage cash stored in the vault.
These institutions can easily create new and permanent revenue streams by transforming these funds into revenue-generating income. Rather than “sitting” on their underperforming assets, credit unions should consider new strategies to generate incremental levels of revenue.
For example, $1.83 billion, St. Joseph, Mich.-based United Federal Credit Union recently faced a liquidity shortage with $20 million tied up at the Federal Reserve Bank. UFCU offers its members an “Interest Plus Checking” product, which pays a high interest reward rate on balances up to the first $25,000. To capitalize on this high interest payout, several of UFCU’s members began using this product as their primary savings account. However, as members began feeling the sting of the financial crisis, fewer deposits came in and withdrawals increased, putting a strain on the institution’s liquidity.
“Before the Great Recession, deposits were coming in at much higher volume, so liquidity was never an issue,” says Barb Najacht, UFCUaccounting manager. “As the economy struggled, our deposit volume decreased, and it became more challenging to maintain sufficient liquidity levels. Without sufficient liquidity, we had to considerably scale back on lending and investment activity.”
To improve its liquidity position, UFCU implemented Deposit Reclassification from CetoLogic, Atlanta, to reduce the CU’s reserve requirements and recover these non-liquid funds for diversified lending and higher-yield investment opportunities.
Compliant with Regulation D and Federal Reserve Board requirements, CetoLogic’s deposit reclassification solution is a retail sweep program that reclassifies transaction accounts as non-transaction accounts, which are not subject to reserve requirements. This allows Fed-held funds earning minimal interest to become accessible for diversified loans and investments, permanently increasing returns for the credit union.
“At first, CetoLogic’s deposit reclassification system almost seemed too good to be true, but I am happy to report that was not the case,” says Najacht. “I was extremely impressed with the CetoLogic staff and their presentation—they 100 percent convinced me. It was clear that this solution was the real deal and the key to addressing our liquidity issues.”
Throughout the implementation process, CetoLogic provided UFCU with documentation required by the Federal Reserve Bank, as well as the necessary communication materials for the CU’s membership. CetoLogic’s onboarding checklist provided product managers with a detailed project schedule, including a timeline of when tasks needed to be completed. UFCU also leveraged CetoLogic’s communication guides to prep its call center to field any calls from its membership regarding the deposit reclassification process, but fortunately, they did not receive any calls.
“The entire implementation went smoothly. CetoLogic did a phenomenal job of providing us with all of the documentation that we would need in a format that was easy to understand,” says Robb Zurawski, project manager of business applications for UFCU.
According to Najacht, deposit reclassification has reduced UFCU reserve balance to practically zero by reclassifying its checking accounts as savings accounts, enabling the credit union to leverage funds previously held at the Federal Reserve Bank for other purposes. Deposit reclassification establishes two legally separate sub-accounts for each transaction account—a checking sub-account and savings sub-account. The funds routinely needed to cover activity are allocated to the checking sub-account, and the remaining funds are maintained in the savings sub-account. By doing so, seposit reclassification maximizes the portion that is allocated to the savings sub-account, which is exempt from reserve requirement calculation.
“If UFCU had to borrow $15 million a year at a borrowing rate between 43 and 45 basis points, that would cost us about $67,500 a year alone,” says Najacht. “Deposit reclassification automatically saves us this cost by eliminating our reserve balance, and that is strictly cost savings—we can further increase our revenue by reinvesting these funds in mortgage and consumer loans.”
“We just conducted our annual audit and thanks to CetoLogic, we did not run into any issues,” says Zurawski. “Their team was instrumental in helping us navigate this process. They provided us with the letters we needed for the Federal Reserve Bank – we simply had to sign and send. CetoLogic even knew the necessary verbiage for each specific federal reserve district, which made an otherwise stressful process incredibly easy for our team.”
David Austin is vice president of CetoLogic, a leading provider of software and analytics for financial institutions and retailers. With more than a decade of industry experience, Austin is responsible for directing new sales and strategic alliances at the Atlanta-based company.
