A Darker Q4 May Follow the Brighter Q3 for Credit Unions

Credit unions’ net income was much better than expected in the third quarter, despite another round of larger-than-normal loan loss provisions.

However, CUNA chief economist Mike Schenk said Thursday the economic pain is on course to worsen through the rest of the year as COVID-19 infections rise, and more households run short of cash to keep up with their monthly payments in the absence of additional federal relief.

“Big spikes in bankruptcies and charge-offs may occur in the current environment if we don’t see a significant additional fiscal stimulus in the near term,” Schenk said. “Who knows when help is on the way and how much.”

Callahan & Associates on Wednesday reported that credit unions earned $8.3 billion in the nine months ending Sept. 30. Comparing that data with earlier quarters from the NCUA, the data shows credit unions earned about $3.5 billion in the three months ending Sept. 30.

That means credit unions’ net income for the three months ending Sept. 30 was an annualized 0.79% of average assets for the three months ending Sept. 30, down from an ROA of 1.00% in 2019’s third quarter, but a sharp improvement from 0.53% in the first quarter and 0.61% in the second quarter.

The ROA was also far better than the Sept. 9 forecast from CUNA and CUNA Mutual Group of 0.45% for the third quarter.

“In general, the economy performed better than we anticipated in the third quarter,” Schenk said.

The primary reason is that the two Madison, Wis.-based organizations had premised their combined forecast on tighter restrictions to control the spread of COVID-19. But restrictions were looser, with many more businesses reopening and hiring more workers than the economists expected.

“In some respects, we’re paying the price for that,” Schenk said.

With the looser restrictions, COVID-19 cases have soared, with hospitals in some areas nearing capacity.

Another reason is that forecasting teams underestimated the power of the federal fiscal stimulus through rebates, $600 a week in added unemployment benefits and the Paycheck Protection Program.

“It is amazing when you throw $3 trillion at a problem the effects it will have,” he said.

Those effects have been dramatic, and allowed many people to keep up to date on their bills and loan payments, Schenk said.

In fact, CUNA’s estimate for delinquencies was 0.52% as of Sept. 30 — its lowest in the 30 years CUNA has collected those monthly statistics. It was 0.67% in September 2019 and April 2020, and the rates have been falling since. Schenk said part of that reason is that some delinquencies are not being recorded because of forbearances or other accommodations.

Besides additional deaths and suffering, the economic risk now is that as the danger of infection becomes nearer and clearer, people will hunker down and the economy will hunker with them — no matter the presence or absence of health mandates.

“This is going to accelerate now that it’s cold,” he said.

Without additional stimulus, Schenk said more households will fall behind on their monthly payments. Credit union managers are signaling that they expect conditions to worsen by raising their loan loss provisions.

Callahan found credit unions took a combined $2.1 billion in loan loss provisions in the three months ending Sept. 30, down 32% from 2019’s third quarter and slicing about 11 basis points from the quarter’s ROA.

Provisions had been running at about $1.6 billion to $1.7 billion each quarter in 2019, but have climbed steeply since COVID-19 was declared a pandemic March 11. It rose 34% to $2.1 billion in the first quarter and 68% to $2.7 billion in the second quarter.

By raising loan loss provisions, Schenk said credit union managers “are saying they want to be ready for a big spike in charge-offs.”

Provisions are higher for credit unions whose members are disproportionately employed in travel, tourism and restaurant businesses. And, overall, they tend to be highest in the fourth quarter.

Callahan found credit unions originated $188.5 billion in loans in the three months ending Sept. 30, up 23% from 2019’s third quarter, as consumers took advantage of low interest rates, especially for mortgages. Third-quarter originations by segment showed the following:

• First mortgages rose 55% to $82.9 billion.
• Other real estate fell 5% to $9.4 billion.
• Commercial loans rose 18% to $6.9 billion.
• Consumer loans rose 7% to $89.4 billion.