Credit Unions Plateaued in 4th Quarter, New Data Reveals

Credit unions pumped up their allowances for loan losses with heavy provisions through most of 2020, but eased off in the fourth quarter. They were just $1.4 billion, down from $1.7 billion a year earlier and one of the lowest for a fourth quarter in recent years.

Credit unions provisioned at record levels in earlier quarters, and some banks and credit unions have been talking in recent months about whether it was time to gear back with prospects for a stronger rebound in the economy in 2021.

Jeffreys said the fact that credit unions pulled back on provisions is a sign that executives are feeling more optimistic, with many believing they might have over-reserved. “They’re just not seeing the delinquencies or charge-offs yet,” he said.

“The vast majority of credit unions we talk with took a conservative approach,” Jeffreys said.

Back in the spring of 2020, “we didn’t know what the recovery phase of the pandemic would look like,” he said. “There’s not a playbook on how to navigate a financial institution in a pandemic.”

For example, NCUA data showed BECU of Tukwila, Wash. ($26.8 billion in assets, 1.3 million members) recorded $82.6 million in loan loss provisions from January through September, more than double its provisions for the first nine months of 2019.

However, it took back $6.2 million in provisions in 2020’s fourth quarter, reducing its total provision expense to $76.4 million for the year. It still ended the year with a loan loss allowance of $146.2 million, or 1.6 times its net charge-offs for the past two years.

Jeffreys said another benefit to credit unions and their members last year was the continuing rise in home values. Many members were able to increase savings and cash flow by refinancing their homes at significantly lower rates.

For members who were laid off or suffered other setbacks in the pandemic, credit unions were able to help them through forbearances or loan modifications. They also helped members by cutting fees. Average fees per member were $66 last year, down from $75 in 2019.

While credit unions might have eliminated late fees temporarily, they will return, but perhaps at lower rates. For example, a $20 late fee of the past might return as a $15 fee. “I don’t think they’re going to go back to zero,” Jeffreys said.

Even with the plateauing of origination volumes, the plateau’s elevation is at a record high.

Jeffreys said his conversations with credit union leaders indicate mortgage origination pipelines are full. “There are still a lot of loans that can be refinanced.”

The high volume allowed a record amount of sales of mortgages to Fannie Mae and Freddie Mac, and that income was a major reason ROA was stronger than many anticipated.

From 2018 to 2019, credit union sales of first mortgages rose 38% to $63.7 billion. Last year they nearly doubled to $121.1 billion, according to Callahan.

“Credit unions were extremely aggressive,” he said.

The loan sales were a major boost to other operating income, which rose 26%. It also helped the 12-month ROA of 0.70% by about 3 basis points by reducing the average assets denominator of the calculation.

Jeffreys said credit unions lost some market share in mortgages and automobiles last year. To better compete with banks, they need to present a clearer story to the public about how they are different, rather than try to appear as “nicer, friendlier, cuddlier banks.”

He said one version of the credit union story could be: “We’re going to make communities better, and we’re going to be part of this rebuilding process. We’re going to have an impact on members, and as we have impact on members it’s going to make the communities where you live, work and raise your families a better place.”