By Ray Birch
PLANO, Texas—In the months following the introduction of the Trump tariffs, credit unions must focus their balance sheet strategies largely on their outlook for loan and share growth, stresses one economist.
Brian Turner, president and chief economist at Meridian Economics, spoke with CUToday.info about the road ahead for credit unions in the days of the Trump tariffs, noting that while interest rates will likely continue to trend downward, potential increases in consumer prices won’t be dramatic enough to severely impact consumers’ spending behavior. That will provide stable, yet slower, economic growth for a few quarters and lower the likelihood of a recession he said.
Turner emphasized the upcoming months are a very critical period for CUs to be paying close attention to their balance sheet strategies.
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“Share growth should determine the pace of permissible loan growth. Credit unions should avoid the Will Rogers approach to lending of never knowing a borrower they didn’t like, especially when their funding—namely core deposits—is more vulnerable,” Turner explained. “That is what led to the chaos between 2021-2024 when credit unions mismanaged loan and share growth. If they can avoid this propensity to grab all the loan demand they can muster, instead of what they can responsibly fund, this will stabilize their earnings and position them properly after the transition.”
Turner said consumer inflation is definitely the number-one negative force on credit unions, with credit mitigation being a close second.
“More members are living a paycheck-to-paycheck existence due to paying higher prices on food, shelter and transportation—even having to tap into regular savings and other investment accounts,” he said. “This has caused great volatility on credit union core deposits—checking and savings—something that credit unions have not had to deal with for decades.”
Overnight Rates High
Fortunately, Turner noted, the Federal Reserve kept overnight rates relatively high and there has been just enough loan demand at higher rates, with relatively wider pricing spreads, to offset the higher cost of funds caused by premium-priced term certificates.
“However, many credit unions didn’t manage their loan growth relative to their funding capacity, especially given the pressure on core deposits, and found themselves in a liquidity nightmare,” Turner explained. “This caused most to offer premium-priced term certificates to rebuild this liquidity.”
With rates already on a downward trend, any effect from tariffs could possibly accelerate a drop in rates, Turner said.
“Which is a positive for the consumer and, if managed appropriately, can be easily absorbed by credit unions,” Turner said. “Credit unions’ earnings are based on pricing spread. So, the biggest impact on earnings would be the return on surplus cash that is tied to overnight fed funds, and prime-based loans—a fraction of most credit unions’ balance sheets.”
Slightly higher consumer prices, even though temporary, will have little impact on consumer demand, asserted Turner.
Brian Turner
“Because prices that impact the consumer the most—namely shelter, transportation and food—are already seeing declines and are less impacted by import tariffs,” he said. “Therefore, the flow and distribution of goods will not be significantly impacted. Consumers typically do not respond to 10% to 15% increases in everyday goods and generally purchase lower-cost alternatives. Since the nation’s GDP is based on the value of goods and services produced and distributed by the United States, slightly higher prices but consistent demand will not adversely impact the nation’s growth metric to lead two consecutive quarters of negative growth, which, as we know, is the definition of recession.”
Elevated Operating Expenses
In addition to credit risk exposure and fraud, in the coming months, credit unions must also address elevated operating expenses, Turner said.
“We have already experienced two consecutive years where delinquency and charge-offs have doubled during each, mostly in credit card and vehicle loans,” Turner said. “Also, the occurrence of fraud and theft has grown to historical levels, mostly exposing vulnerable elderly members. Operating costs have risen such that credit unions’ cost to deliver has diluted their net operating return despite experiencing stronger net interest income.
“So, in the next 12-24 months, credit unions can expect a range of -0.50% to +0.00% on surplus cash, -0.35% to +0.25% on loan portfolio returns, no change at all on core deposit rates, and -0.20% to 0.00% on term deposit rates,” continued Turner. “Because credit risk continues to rise, make sure that at least 88% of newly retained loan origination is B+ underwritten. You should expect volatility in rates and demand on most mortgage loans, but don’t be afraid to retain at least 50% of origination in single-family, fixed rate first-lien mortgages. Avoid sub-B+ vehicle loan origination and reduce the allocation of vehicle leases that are currently creating significant loss exposure.”
Turner insisted credit unions must retain a level of discipline that manages performance and expectation, not by loan growth or just by earnings, but rather by net worth and net operating return.
“This requires credit unions to retain the proper mix of credit and noncredit risk asset allocation, and the prudent allocation of transaction and term funds based on the expected economic and rate outlook of the credit union’s region,” he explained. “To avoid this important factor, understanding complexity and resilience of the credit union’s profile and its market, increases the risk exposure of future performance. I wish I had a dollar for every credit union that told me, ‘We’re different and not as vulnerable as others.’"