Strategies For Managing in a Rising Rate Environment

Will Rising Rates Throw Your Credit Union Into the Red?

If your credit union is not using the right management tools, rising interest rates could lead to unprofitable operations.

Managers and boards are now facing the dilemma of rising rates

After a decade of low and stable rates, credit union boards and CEOs are now facing pressure from members to raise interest rates on deposits. Boards and managers need to prepare now for the impact rate increases will have on their cost of deposits, their earnings on loans, their interest margins, and their profitability. Wise management teams have already prepared and planned for rising rates by relying on integrated models to control interest rate risk. However, far too many will resort to subjective and, inevitability, disastrous methods to determine what their rates should be on deposits and loans.

Managers and boards need to avoid common mistakes

For the past 30 years or so, we at TCT Risk Solutions, LLC (TCT) have been studying the effects rising rates have on credit unions. Our findings point to some interesting conclusions:

• Credit unions tend to increase their rates faster and to a higher level than necessary.
• Credit unions should increase rates on the most rate sensitive deposits first and only at the speed necessary to adhere to their Asset/Liability Management plans.
• Not all classes of deposits have the same rate sensitivity which means they should be priced differently.
• Credit unions should use a disciplined approach to deposit pricing and resist the temptation to price their deposits (and loans) on the competition.
• CEOs and boards have better control over deposit costs and rate shocks when they follow a well-designed A/LM policy.

TCT’s CostPro™ suite of management tools assures profitability

TCT has developed tools that help credit union boards and managers maximize their interest margins. These tools include:

• Asset/Liability Management Modeling
• Margin-Optimizing Deposit and Loan Pricing Tools

○Deposit Pricing (including Dr. Thompson’s unique “Dividend Payout Ratio”)

○ Loan Pricing (Risk Based Loan Pricing)

○ Margin Management Tool (an interactive system for predicting interest rate margins and performing “what if” scenarios)

TCT’s Margin Management Tool (MMT) is particularly effective when integrated with TCT’s A/LM model. TCT’s A/LM process aids in determining the price elasticity of share classes.

Using the MMT, credit union managers are able to:

• Predict Net Interest Income broken out by deposit classes over a specified timeline
• Perform “what if” scenarios, i.e. outcomes of (1) increasing/decreasing balances by deposit class; and/or (2) raising/decreasing rates by deposit class; and (3) applying various timelines to those changes. Note: MMT takes into account existing deposit balances, CD maturities, repricing opportunities, etc.