Credit unions have stood firm with their underwriting practices and have worked with struggling borrowers who were impacted by the coronavirus pandemic.
And the results to the balance sheet so far have been eye-opening.
Delinquent loans decreased 12.7% in the third quarter from the same period in 2019 while net charge-offs fell 8%, according to data from the National Credit Union Administration.
But credit unions should prepare for the potential of rising problem loans in 2021 as the prolonged economic downturn takes its toll on workers, especially those in the hardest hit sectors.
“There will be real losses incurred, and I would strongly recommend that every credit union needs to update their capital plans with robust stress testing that can segment portfolios to estimate the probability of default and losses given default,” said John Hecht, managing director with Artisan Advisors.
The delinquency rate in the third quarter was 0.55%, compared to 0.66% in 2019, according to NCUA data. Net charge-offs as a percentage of average loans were 0.48% in the third quarter. In 2019, that figure was 0.55%.
Credit unions’ loan portfolios have been helped as consumers have had more disposable income, Hecht said. That’s because consumers are saving money by not paying for daycare as many kids are now being homeschooled, and other expenses related to work — such as commuting, parking and dry cleaning — are lower because people are working from home.
“And more people are cooking versus eating out, which means they have more discretionary income to service debt,” he added. “Many have also refinanced mortgages, and that has lowered overall debt service in general.”
But Matt Koch, president and CEO of CSE Federal Credit Union in Lake Charles, La., said those factors are often a wash because while people are not eating out as much, grocery bills have increased for many families. And some parents who are now home are there because they were laid off, and unemployment often fails to cover their regular income.
“I think we’ve learned to be frugal as consumers,” Koch said.
CSE had slightly more than $2 million in delinquent loans on its books as of Sept. 30, according to its most recent NCUA call report. That compares to $1.5 million in delinquencies for the same period in 2019.
Koch said his credit union did not change its underwriting practices as a result of the pandemic but continued to lend in the same manner as before.
The $393 million-asset institution rolled out a personal loan assistance program to help members with any additional expenses above its normal unsecured loan limits. Also, consumer deferrals were made across the board if the members were current on their loan, and mortgage loan deferrals were made on a case-by-case basis. Loan deferrals and extensions, which the credit union did in March because of COVID-19 and again in September due to a hurricane, have helped keep delinquencies in check, Koch said.
North Country Federal Credit Union in South Burlington, Vt., had 180 delinquent loans on its books as of Sept. 30, according to its most recent NCUA call report. Those loans totaled $3.6 million, which was basically flat compared with the same period in 2019.
Bob Morgan, president and CEO of the $768 million-asset institution, said the fact that delinquencies haven’t risen has been somewhat surprising, but he credits North Country’s philosophy of remaining consistent with its underwriting standards.
“It has been my experience that the lending industry becomes too lenient with standards when times are good and too tight in times of economic difficulty,” Morgan said. “We try to remain consistent, and that has served us well over the past two decades.”
Consumers could be further helped with the $600 stimulus checks the government is currently sending out, coupled with the tax refund season, which should start soon, Morgan said. However, some industries, including the hospitability and restaurant sectors, may continue to struggle despite the government assistance.
For instance, debit card spending at restaurants was down almost 3% and credit card spending was down more than 22% during week 50 of 2020, which ended on Dec. 13, compared with the same week in 2019, according to data from PSCU.
“The consumers who are still negatively affected are employees of restaurants and hospitality businesses and many small businesses,” Morgan added. “Their struggles will continue and will only be modestly supported with the stimulus payments.”
Hecht also warned that the good news on problem loans may be coming to an end.
He expects delinquencies will begin to increase in the first half of 2021 as the leading indicator of stress both at the household level and for selected business segments that were hit hard by lockdowns or those that are not agile enough to adapt their businesses to an online environment.
“When you look at how quickly the first relief funds were rolled out in the trillions of dollars, it’s not surprising that the year-over-year comparisons are down. With the $600 weekly federal pandemic [unemployment] supplement, many borrowers were actually making more than their regular paycheck,” he said.
Hecht suspects that the areas of the U.S. with the most stringent stay-at-home policies and health department restrictions on gatherings will eventually see a spike in default.
Michael Poulos, president and CEO of the $1.3 billion-asset Michigan First Credit Union in Lathrup Village, Mich., said the biggest consumer challenge to date has been the low-to-mid sized unsecured loan requests from members whose income has been significantly affected by COVID-19.
Those borrowers often need assistance staying in a home or keeping their car, catching up on household bills or consolidating debt to ease payments.
“When we have evidence of a member receiving unemployment benefits or we are informed that a member has applied, we will require formal documentation of both the application filing and eventually the benefit grant letter showing amount, duration and possible extensions,” he said.
Loans are then structured based on the confirmed benefit. If a member is furloughed and Michigan First also has a verifiable return-to-work letter in addition to benefit documentation, it will consider loan terms outside of the benefit period, he said.
Michigan First had 405 delinquent loans on its books as of Sept. 30, totaling $5.4 million, according to its most recent NCUA call report. That compares to 1,501 delinquent loans worth roughly $7.8 million in the same period in 2019.
“Our concessions of reasonable, fee-free COVID extensions throughout the pandemic have allowed our members to retain ownership of these pieces of collateral but not get buried in additional debt over the life of their loans,” he said.
