Crystal Ball-Challenges Credit Unions will face in 2018


Will the Nightmares of 2008 Return in 2018?

TCT’s Services Help Managers Sleep Better at Night


Credit unions generally have experienced phenomenal growth and prosperity the last few years. Credit unions also saw prosperity in the early years of the new century – just before everything came crashing down during the “Great Recession” beginning in 2008. There were ominous signs previous to the Great Recession that indicated the good times were coming to an end. There are ominous signs now that the good times of the past few years may be coming to an end as well. In this article, we will look at some signs that there could be profitability challenges ahead for credit unions. A steep recession would exacerbate these profitability problems. In this article, we’ll also look into how the services of TCT Risk Solutions, LLC (TCT) can help credit unions prepare and remain profitable whatever the challenges may be.

The Future Presents Profitability Challenges for Credit Unions

The Fed is Announcing Rate Increases

Even though inflation appears relatively subdued, the Fed has announced it plans to increase rates and reduce the money supply. These steps are seen by many as somewhat risky and an unorthodox approach to keeping the economy robust. The Fed is engaged in a delicate balancing act and these actions could lead to turmoil in the money markets. Credit unions may struggle to maintain healthy interest margins in this environment.

A Flattening Yield Curve Presently Exists in the Bond Markets

The bond markets are experiencing a condition referred to as a flattening yield curve. A flattening or an inverted yield curve in the bond markets usually portends an imminent recession of some degree just ahead. A hard recession will impact a credit union’s loan demand as well as borrowers’ ability to pay existing loans depending on how the recession affects employers’ payrolls.

Small Credit Unions are Already Struggling

Small credit unions are not experiencing the growth and profitability enjoyed by their larger cousins. An economic slowdown could drive small credit unions further into marginal profitability and diminishing growth. Furthermore, many small credit unions have had to increase loan loss provisions.

Current Expected Credit Losses (CECL) Could Affect Profitability

The looming implementation of CECL could mean greater initial loan-loss set-asides for many credit unions, which will drive up expenses in the long run. Few credit unions are really prepared for the implementation of CECL. An economic slowdown could exacerbate the effects of CECL.

Inexperienced Managers are Taking Over

Credit unions are seeing many of their experienced, seasoned managers retire. New, younger management people are replacing the “old guard”. Experience is limited for many in dealing with recessions. Learning curves are steep and credit unions may see diminished profitability until new managers get up to speed. CEOs would be wise to look to outsourcing many of their compliance and decisioning processes – especially in the short term.

Subprime Auto Loans are Becoming Problematic Subprime auto loans are already deteriorating even in light of a fairly healthy economy. Credit unions that depended on sub-prime auto loans to grow their loan portfolios had better have processes in place to control losses due to loan write-downs. Growth in loan profitability is possible still in the less-than-prime market so long as unique risks and expenses are reflected in the pricing of loans.

Consumers Are Back in Debt to the Same Levels Leading Up to 2008

Consumer debt is to the same level as it was leading up to the “Great Recession”. Another severe recession affecting borrowers’ cash flows could lead to the same catastrophic loan write-downs credit unions experienced as a result of the economic collapse of 2008. Credit unions need effective credit migration tools in place to warn of impending problems in loan portfolios so action can be taken to keep losses to a minimum.

TCT’s Management Tools and Services Help Credit Unions Meet Their Objectives

TCT provides the tools and expertise to help credit union managers meet their objectives and effectively manage risk. Many of these tools are interactive. Some of the services provided by TCT include:

Risk Based Loan Pricing (RBL)

This management tool uses statistically derived methods to accurately price loans according to the unique risk each borrower poses based on credit scores. TCT’s RBL is one of few tools that take into account all costs incurred by an individual credit union relative to making loans for each credit grade.

Deposit Pricing

TCT provides a stochastically derived model to set deposit rates. This method assures rates are objectively set according to loan demand and other factors.

Credit Migration (CM)

TCT’s Credit Migration tool is one of few that are already CECL compliant. TCT’s Credit Migration is one of the most accurate and concise statistically-derived loan-risk management tools available to credit unions at a price no competitor can match.

Asset Liability Management Modeling (ALM)

TCT’s ALM tool is unique and superior in that it focuses on Earnings (Equity) at Risk (EAR) as opposed to traditional ALM models that employ Net Economic Value (NEV). TCT’s ALM reports do include NEV, however, so managers will know how regulators are interpreting risk in a credit union’s balance sheet.

Regulatory Compliance Services

Too often, management is preoccupied with compliance to the detriment of earnings and services. Many credit unions have found it advantageous to outsource their compliance needs to TCT’s team of compliance experts.

“Vital Signs” Management Reports These are timely and concise reports that provide a quick review of a credit union’s financial health and how well it is meeting objectives.

In Summary

A recession may be upon us soon. The future always holds uncertainty. But, credit unions using TCT’s services and management tools are in a far better position to meet challenges as they arise.