By Ray Birch
COLORADO SPRINGS, Colo.—The current rate environment has certainly challenged the balance sheet management skills of chief financial officers, says Brad Barnes, who believes better days are coming soon and that it may be time for a shift in loan and deposit strategies.
“I’m 48, and I started here in January of 2000,” said the CFO at the $925-million Air Academy CU. “I’ve been through a rising-rate environment before. But nothing like this current rate environment, where rates have risen so fast.”
Barnes 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.
Barnes said the current rate landscape is certainly challenging, even for tenured CFOs.
“The fact that we're having to pay so much on the short side for deposits, and there's not a lot of opportunity to lend. I think this is one of the hardest environments to operate in,” said Barnes, a member of the CUNA CFO Council.
Add to the fact the balance sheet did a “180,” moving from a period in which CUs were growing deposits at an almost unprecedented rate to shifting quickly to a liquidity crunch, made matters worse.
“It's a war for deposits now, and we're trying to manage expenses,” concluded Barnes. “I remember not too long ago when we were growing core deposits, saying if we have the checking accounts we can get the savings accounts and then we don’t have to pay the higher rates for (CDs). We wish we had more of those on the books right now.”
A Positive View
But hope is ahead, Barnes believes.
“I think we might be coming toward the top of this rate cycle,” he said. “Looking forward, we want to start to lock in some yield on assets. If you can invest a little bit longer right now, if you can make some longer loans, it's a good time to do it because I don't think rates are going much higher and they could go down.”
CUToday.info has shared some reports that have suggested deposit dollars are flowing out to bigger institutions, oftentimes because consumers are wary of the smaller outfits and they believe the bigger shops will be backstopped by the government.
“I think that's true to a certain extent, but it’s not true with us, and at least at the credit unions I've talked to. They haven't seen any significant losses in deposits,” said Barnes. “But, as I said, there is a war for deposits going on right now.”
AAFCU is approximately 92% loaned out.
Volume Had Been Strong, But…
Barnes noted his credit union and others have been enjoying strong lending volume through mid- to late 2022 before the Fed’s rate increases began to have an effect on consumers’ household balance sheets.
“As we know, consumers have largely used up the money they had saved from COVID, and the stimulus funds,” Barnes said. “That has led to a great deal of competition for deposits. Look at Apple; they have a high-yield savings account that was paying 4.15% in early May.”
Meanwhile, Barnes said selling investments at below-market rates in order to generate liquidity, as some CUs have been forced to do, is not being considered Air Academy FCU.
Brad Barnes
Getting Competitive
“That has just made us all pretty competitive, to not only attract new money but to certainly keep the deposits we have,” he said.
Barnes explained Air Academy’s deposit pricing strategy differs based on the type of account, such as CDs, money market or checking.
“For our core deposits, we've got a high-yield checking account that's only paying 1.5%. Our money market accounts are priced towards the middle of the market,” he explained. “But the competition is coming largely from the CD side. We are running some CD specials that are pretty close to what we could borrow those funds from the Home Loan Bank. We have had to be more competitive on CDs and we are taking on money there.”
Not Reluctant to Move
On the other side of the balance sheet, he said Air Academy has not been reluctant to make moves.
“We are being more aggressive and raising our loan rates,” Barnes said. “That's just driven from a profitability standpoint. We want to make sure we're putting profitable loans on the books. But I think that's just to slow some of the production.”
Not surprisingly, as mortgage rates have skyrocketed from the rock-bottom pricing of just two years ago, Air Academy’s mortgage business has slowed significantly.
“And, as rates have risen consumers aren't buying as many cars,” he said. “Plus, there's just not as many refinance opportunities. So, our liquidity has improved just because lending has slowed down.”
Barnes said he has noticed more credit unions are raising their auto loan rates, bringing them up from what for many were ultra-low positions.
“I think some credit unions realize it's time to quit putting those below-market auto loan rates out there,” he said.
‘Can’t Lend for Sake of Lending’
Barnes said Air Academy struggled with the issue of pricing vehicle loans, seeking to keep the auto loan pipeline flowing while ensuring it did not put too many below-market rate auto loans on the books.
“That's something we tried to be very cognizant of,” Barnes told CUToday.info, noting Air Academy’s liquidity position. “As the Fed started to increase rates we realized we couldn't just lend for the sake of lending. We really needed to make sure that those loans were going to be profitable assets.”
Air Academy could easily have more auto loans on its books today, Barnes said.
“We made a conscious effort early on not to make below-market-rate auto loans and it has paid off,” said Barnes.
With some analysts and credit union leaders saying the average auto loan rate should be priced at 8% to cover costs and make money, Barnes said that thinking is sound, adding that Air Academy sees that rate as being slightly lower.
At the time Barnes was interviewed, Air Academy is charging 6.99% for new auto A paper and averaging in the upper 8% to 9% range overall.
Ample Lines Available
Should the credit union begin to see a runoff in deposits, Barnes said the organization will turn to borrowing through the Federal Reserve.
“There are ample borrowing lines available,” he said, adding that the investment portfolio was put together on a one-three year ladder, with some investments coming due later this year.
More in this series: