For most of the past two years, credit unions have fought the same battle: holding onto deposits while lending aggressively enough to keep earnings alive. Now, as the Federal Reserve pivots from tightening to cutting, the industry faces a new paradox. Falling rates may ease funding costs but could also squeeze margins, test liquidity plans, and expose risk in portfolios built during the high-yield frenzy.

Harborstone Credit Union’s most recent Asset/Liability Committee (ALCO) discussion is a microcosm of this national debate. The meeting, guided by Darling Consulting Group, offered a sober assessment: margins are tight, deposit migration is accelerating, and interest-rate risk is shifting from parallel shocks to curve steepeners and troughs—a subtler but equally dangerous threat.

---

The Deposit Shuffle

Across the industry, members are voting with their wallets. Non-maturity deposits—savings and checking accounts that once anchored credit unions—continue to bleed into higher-yield money market accounts. Harborstone’s data reflect this broader pattern: declines in NOW and savings balances offset by growth in MMKTs, pushing up overall funding costs even as the Fed signals cuts ahead.

This isn’t just Harborstone’s problem. Nationally, the betas (or sensitivity) of deposits to rate changes have risen sharply compared with prior cycles. In plain English: members are savvier, faster, and more willing to chase yield. As rates fall, credit unions will need to lower costs without sparking another round of attrition—a delicate dance that requires both pricing discipline and a renewed focus on relationship-driven “core” deposits.

---

Loan Growth: Feast or Fatigue?

While deposits leak, loans are still growing—especially in auto and installment categories. At Harborstone, consumer lending drove $47 million of growth this quarter. But such concentration carries risk. Auto lending is cyclical, highly rate-sensitive, and exposed to both credit quality swings and potential tariff shocks on imported vehicles. The yield advantage is tempting; the diversification trade-off less so.

Nationwide, credit unions are asking the same question: can they pivot into higher-quality, longer-term lending (residential or C&I) without sacrificing growth? For many, the answer depends on local economies and risk appetite—two variables that remain stubbornly unpredictable in a post-pandemic, pre-election market.

---

Liquidity and the “Perfect Storm”

The phrase “perfect storm” surfaced in Harborstone’s contingency planning—a nod to the nightmare scenario of falling rates, deposit runoff, and unexpected credit stress colliding at once. Here, the playbook is clear: maximize pledging of collateral to the FHLB and FRB, diversify funding sources, and keep a close eye on concentration risk.

This level of preparedness is becoming table stakes. The industry’s regulators are pressing credit unions to show not just if they can survive a storm, but how long—and with what margin for error. As liquidity pressures have shifted from theoretical to practical (just ask anyone who lived through March 2023), this scrutiny is unlikely to ease.

---

The Yield Curve Trough

One of the subtler signals in the ALCO deck was the shape of the yield curve: bottoming out, hinting at a future steepening. A U-shaped curve offers both opportunity and hazard. Credit unions can borrow mid-term at low rates and invest or lend at higher long-term yields—a spread play that flatters margins. But mistiming the trough, or misjudging prepayment behavior on mortgage-backed securities, can turn that advantage into a drag.

---

The Big Question: Positioning for Cuts

With rate cuts likely in September and December, the strategic question is simple but profound: Are credit unions positioned to capture margin on the way down, or will they be caught flat-footed? That means repricing deposits with care, locking in loan yields where possible, and extending investment duration without sacrificing liquidity.

For Harborstone—and the industry at large—the next six months are less about predicting the Fed than preparing for the aftershocks. In a market that has shifted from abundance to scarcity and back again in record time, adaptability may be the only real hedge.

---

Bottom Line:

Credit unions are entering a new phase of the cycle: from defense to cautious offense. Those that master deposit strategy, manage liquidity like a hawk, and stay nimble on the yield curve will be the ones telling this story—not living through the cautionary tale.