By Ray Birch
FOLSOM, Calif.—Managing a credit union’s balance sheet may be more difficult today than it’s ever been due to several “game-changing” factors, according to one CFO, who adds the current pace of deposit rate hikes is “not sustainable” for many financial institutions.
Alexis Fitzpatrick, CFO at $4.5-bilion SAFE CU here, spoke with CUToday.info as part of a series about the challenging environment currently facing CFOs as rates have continued to rise, deposits can move with just the touch of a button, and pressures on liquidity are felt daily.
“On top of the liquidity concerns already faced by credit unions with the runoff from pandemic-related consumer deposits and slow prepayments, in this current age the ability to easily rate shop and transfer funds digitally is a game-changer,” said Fitzpatrick, who is a member of the CUNA CFO Council. “It is very easy for people to shop for rates on deposit products and transfer money out of their accounts right on their phones. We’ve never experienced a move in interest rates at this level and had to compete in a digital environment.
“Because it’s so easy for people to move their money around amid the liquidity crunch, the competition has become a lot harder—you have to be much more aggressive with your pricing. You have to be very competitive to retain those deposits and it’s very costly,” Fitzpatrick continued.
Indeed, many analysts have referred to the recent failure of Silicon Valley Bank as being due in part to the first-ever “digital deposit run.”
The Real Driver
Fitzpatrick said SAFE CU has been adjusting rates up since 2022, and believes the failure of several big banks and the ensuing consumer concerns over the safety of their deposits is not what’s driving the current rate competition.
“It has been driven by the broader market, largely,” she said. “Credit unions have been increasing deposit rates long before the recent bank collapses. As the economy opened up and consumers were spending, coupled with high inflation and high interest rates impacting loan growth and liquidity, credit unions had no choice but to raise rates to stay competitive.”
However, with the recent bank collapses, credit unions must now be more cognizant that if they have uninsured deposits, that they ensure they have the pricing in place to retain those dollars.
“We are able to strategize with our members on options to keep as much of their funds insured,” she said.
Not Something New
Fitzpatrick contended the trends that have led to the current environment didn’t develop in just the past few months.
“This was three years in the making,” she said. “The government stimulus was the catalyst that led us here. Credit unions and other financial institutions invested the extra liquidity the stimulus provided in loans and securities as they should, which is now negatively impacted by this rapid rise in inflation and the Fed's commitment to slow the economy with dramatic shifts in interest rates in a post-pandemic world.”
Fitzpatrick said credit unions in the greater Sacramento market have been making adjustments to deposit rates at the same pace as SAFE.
“We all started long before the collapse of the banks. It’s due to the need to compete for liquidity, and provide our members with competitive rates, at a time when deposit retention is difficult because of the digital landscape and online banks that makes it so easy for members to transfer funds to other financial institutions,” she reminded.
Some Self-Inflicted Wounds
Alexis Fitzpatrick
Fitzpatrick acknowledged some CUs are suffering from self-inflicted balance sheet wounds—identified in previous CUToday.info reports—by keeping their auto loan rates too low for too long once the Federal Reserve began raising rates. She pointed out much of that competition was being driven by the captives and their extremely low, dealer- incentivized rates, which prompted many credit unions to seek to compete with those offerings, even though they were going to have to raise rates on the deposit side. Now that captives have pulled back those deals, more credit unions are raising their auto loan rates, working to more appropriately price their assets.
On the asset side, SAFE has been raising its loan rates. Its current auto loan rate for the best paper is 5.59%. It has not, however, had to securitize and sell those loans in order to generate liquidity.
“Yes, we have adjusted loan rates up because, as you know, appropriate asset pricing is important,” she said. “We sell loans on a flow basis to the GSEs, but we have not done additional asset sales for liquidity purposes.”
Pressure Subsiding?
But the CFO also believes that much of the pressure is subsiding.
“I think we are topping out on rates,” she said. “The cost of funds and the cost of keeping deposits have grown faster than the increase on our assets. Frankly, this isn’t sustainable. I think many are holding the line as we wait on the Fed. Once we see a rate cut, then you will start to see deposit rates slowly come down for products, such as certificates.”
Some experts have told CUToday.info that auto loan rates, to be profitable, should be priced near 8%, as a base rate, Fitzpatrick does not disagree, but the industry needs to change to keep market share.
“Credit unions need to adequately price their assets and be sure they include loan-loss expense—under CECL—so they are covered on their asset side,” Fitzpatrick explained. “Credit unions that have not priced their products appropriately will experience significant compression, and that impacts profitability and their ability to keep dividends high for retention purposes and to provide a strong return to members.”
Addressing the Challenge
Fitzpatrick said the challenges facing CFOs can be addressed.
“I don't think it's new skills that are needed,” she said. “I think that you have to evaluate higher pricing your balance sheet in an environment that is unusual, and frankly, somewhat contradictory to the credit union mission. Our mission is to give as much back to our members with lower loan rates and higher deposit rates. But at the same time we have to be able to price accordingly to build capital to withstand economic volatility. So, you just have to manage those two things very well.”