CUJ Q&A: CEO Of Billion-Dollar San Antonio Credit Union Talks About Setting Pricing, Effects From Competition
As part of a Credit Union Journal series examining deposit and loan pricing, Jeffrey H. Farber, CEO San Antonio Federal Credit Union, discusses what drives SACU's decisionmaking.
CUJ: Are you feeling pressure to raise deposit rates?
Farber: The primary driver of savings growth is loans. Credit unions here in San Antonio have a 40% share of the market, and our credit unions have one of the largest loan-to-share ratios in the country. But banks are moving in. Wachovia launched a very aggressive campaign last year. WaMu is expanding. We keeping hearing Citibank is coming, but we haven't seen them yet. When you have new banks entering the market, you see them willing to lose money to gain a foothold. The interest rate issue partly is funding loans, partly to play defense against competitors.
The "pressure" is business as usual. You make loans, you use up your liquidity, you have to raise more funds. The second point-competition versus the banks in this marketplace-is relatively new. We have had other competitors come in and market and price aggressively, but it isn't pressure, it is everyday business in San Antonio. It is not a negative, because the members win when institutions pay very high savings rates.
CUJ: How do your rates compare to your competition?
Farber: In this marketplace, looking only at the local competition, credit unions have the best rates. They are the dominant ones. We are not necessarily the best in market for all of our products, but we are in the top 15% in all our products. Some of our products are the best, but not all. It depends on our asset-liability models and what types of funds we want to attract: short-term or long-term.
CUJ: What strategies do you use in setting rates? In addition to the Fed and your competition, what other factors do you consider?
Farber: Today, there is one other set of competitors we need to deal with: the Internet-based competitors. ING is paying 4% on their savings account. That is very aggressive; one of the highest rates.
CUJ: What sort of asset-liability management tools are you using, and what are they telling you about your deposit interest rates?
Farber: We do not use our forecasting tools to set rates, we use it to determine the term of the deposits we are gathering. We decide if we want short-term or long-term deposits to hedge the risk of rates rising or dropping.
One year ago, we had an 18-month CD campaign. My dialogue with our staff was: it is better to be aggressive in a rising rate environment. We offered a CD at 4%, which looks very good when the Fed Funds rate went up to 4.75%.
CUJ: What rates at your institution move faster: deposits or loans, and why?
Farber: My perception is: deposits move faster than loans. Not scientific, just anecdotal.
CUJ: Of your deposit products, which rates move faster and why?
Farber: Certificate of deposit rates move the fastest with the market, next is money market, last is shares.
CUJ: Where do you expect rates to go from here?
Farber: When you talk rates, I would suggest you talk about the yield curve. I believe the Fed will raise the Fed Funds rate to 5% at the May meeting. That might be the end, or it may go to 5.25% later. But, I am not sure what will happen to the 10-year rate, which is currently just 5.05%. There is a flat yield curve, meaning there is not an advantage in lending long term right now. Traditionally, there is a 1% differential between short-term rates and long-term rates, but today it is just a quarter-percent. That is an issue that is more driven by international finances. It is driven by the trade deficit with China and the Chinese buying treasuries. It is driven by buying so much oil from the Middle East and the Saudis buying treasuries. It does create a challenge for all financial institutions.