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Three Easy Steps for Mitigating the Generational Shift of Core Deposits
Thursday, August 30, 2018 6:45 AM

Christopher Uhl, Senior Asset/Liability Management Consultant, Catalyst Corporate FCU

There’s good news for the future of credit unions: our membership base is getting younger! But relative to national averages, we still have a long way to go. So, at least for now, credit unions must prepare for the possibility of sizeable deposits leaving their institutions.

According to a CUNA study, the average age of credit union members in 2014 was 48.5. However, in 2017, that number dropped slightly to 47. While that may seem like a win, the average age of all Americans is 37.8 years old. Realizing your members are a decade older than the average American might give you a few gray hairs.

What's a credit union to do?

Step 1. Keep an eye on the weighted average life of your deposits.

This is a key assumption used in interest rate risk modeling. Organizations like Catalyst Corporate offer a different perspective in calculating the weighted average lives of deposit accounts, going beyond surface data, like balance and term.

The difference is in observing each individual account as it matures and eventually leads to either a closing period or a current balance. After acquiring the overall terms, the weighted average is calculated using the historical decay rates.

Step 2. Take all open accounts and develop a weighting factor based on age and balance.

This will help determine just how much impact the credit union will absorb if member heirs elect to take their newly inherited balances to other institutions.

In other words, the actions in Step 1 will get your credit union off to a great start, but they won’t tell the whole story. Catalyst Corporate’s analysis shows the average member age at many institutions is between 50 and 69, considerably older than industry surveys suggest. This aging demographic may be “exiting the population” sooner, rather than later, at least according to the IRS data.

Step 3. Use historical data, as well as future expected data, based on your membership demographics.

This allows your credit union to more accurately match loans to deposits and offset any pricing or timing mismatches. It also gives the credit union a clearer picture of its membership base and reflects realistic expectations of weighted average lives in their interest rate risk calculations.

All Done?

No method of non-maturity deposit modeling is perfect. But watching how your actual accounts behave, along with considering the likelihood of retaining those deposits after your membership “transitions,” will give your credit union tools to accurately model and plan for a more realistic outcome.

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Catalyst Corporate Federal Credit Union is a five-star endorsed business partner of Credit Union Resources, Inc., a wholly owned subsidiary of Cornerstone Credit Union League.