Credit Unions Defy Low-Income Forecasts in 2020

Usually when CUNA and CUNA Mutual Group economists get together, they emerge with forecasts that turn out to be reasonable approximations of reality.

They were remarkably accurate this year in many respects despite the unprecedented turbulence of novel forces unleased by the COVID-19 pandemic.

But they’ve missed on their income predictions this year. They predicted returns on average assets (ROA) that were far below those that actually found their way into NCUA Call Reports.

Things turning out better than expected should be a good thing, and perhaps it is. The troubling part is that many of the assumptions that went into those forecasts might be truer than the NCUA reports.

For starters, the economists were frank from the first major post-pandemic forecast revision March 24 that they assumed Americans would follow the advice of health experts to socially distance, including maintaining restrictions on businesses where COVID-19 was likely to spread. Um, that didn’t happen.

Steven Rick, chief economist for CUNA Mutual Group, said the summer showed improvement in unemployment, but there were still 10 million more people unemployed in November than in February. Moreover, the resurgence of the virus is beginning to show up in higher jobless claims.

“It’s going to be a dark winter,” he said. “A double-dip recession is still a high probability right now.”

Rick and the CUNA economists presumed earlier this year that credit union executives would provision heavily for losses that seemed sure to come.

Provisions did rise substantially, but not uniformly. The largest credit unions – those with $4 billion or more in assets and accounting for roughly a third of the movement – had loan loss provisions in the first nine months of 2020 that were an annualized 0.83% of average assets, up from 0.59% a year earlier.

Small credit unions – those with less than $1 billion in assets and accounting for roughly a third of credit union assets – provisioned at a rate of 0.31% from January through September, the same rate as a year earlier.

Medium-sized credit unions provisioned at a 0.47% rate in the first nine months, up from 0.34% a year earlier.

Forbearances and other loan accommodations have lowered reported delinquencies, and in turn delayed charge-offs. But Rick said credit unions were forced by NCUA rules to cut off most accommodations around October, and after 90 days, charge-offs will be required for many consumer loans.

“The worst is yet to come with all these charge-offs,” Rick said. “The charge-off peak will come in the first and second quarters next year.”

Larger credit unions have done a better job preparing for the wave of charge-offs than smaller ones, Rick said.

One test of whether provisions are adequate is to compare the allowance for loan losses to net charge-offs for the past two years. Pooling all credit unions, the ratio increased from 81% as of Sept. 30, 2019, to 108% as of Sept. 30 this year.

There are two problems with that: Charge-offs are down in the last 12 months, in part because of forbearances and other accommodations, and larger credit unions have been slightly more aggressive in building their allowances.

CUNA forecast March 24 that net charge-off rates would be 0.75% for the three months ending Sept. 30. Instead they were 0.38%, down from 0.55% a year earlier. And the charge-off rate was 0.51% for large credit unions, compared with about 0.30% for the others.

Another surprise was the strength of the mortgage market in the pandemic. The Mortgage Bankers Association has one of the best economics shops in the field, but its predictions of when the booming refinance market will start to drop (which it surely will) has been postponed many times, most recently by six months with the drop starting in 2021’s second quarter.