By Ray Birch
SIGNAL HILL, Calif.–At the same time industry analysts and consultants are expecting credit unions to see a stronger 2021 due to unrealized loan losses in 2020, many credit unions are reporting they have a similar forecast. But that doesn’t mean some CUs are reducing their provisions just yet, as at least one person is urging caution.
As CUToday.info reported here, companies that work with hundreds and even thousands of credit union clients told CUToday.info the big loan loss reserves set aside early in 2020 as the pandemic began to spread never needed to be tapped, as loans generally performed far better than expected.
Credit union leaders who spoke with CUToday.info shared similar views.
At the $87-million VA Desert Pacific FCU, located near Long Beach in Southern California, CEO Christine Wood said loan losses are below projections.
“Our reserves are based on 12-month rolling historical losses, and (the 2020) losses have been very low,” she said. “So, we are not over-reserving—but it still looks like we are, on paper, at over 120% of actual losses. Our internal measure of financial success actually acknowledges this shift of dollars from and to reserves. We exclude the shift dollars from ROA calculation, but include actual charge-offs to ensure management are not bonusing from the shift.”
Christine Wood
Wood acknowledged VA Desert Pacific is concerned over potential loan losses from members who have rental properties and from those who own retail strip malls and other commercial properties.
“They have experienced significant hardship because their tenants are not able to pay full rent for months now,” Wood said. “Many of them do not have sufficient reserves to continue paying on these loans, even after six months of forbearance. No real financial help is extended to these landlords. The focus has always been on the tenants. I do think that this segment of the loan portfolio will create additional losses for credit unions if shutdowns continue well into 2021.”
‘We Didn’t Overreact’
In Massena, N.Y., SeaComm FCU says 2021 is looking good for the $590-million CU.
“We really looked hard at the trends for forbearances, skips and extensions,” explained CEO Scott Wilson. “Like other CUs, we did have a significant amount of forbearances early on, but they trended downward by the middle of Q3. We didn’t overreact and increase our provision expense. Currently, our delinquency and net charge-offs are well below our 2020 goals.”
Scott Wilson
Wilson said the credit union’s “resolution staff” managed forbearances closely early on and kept in contact with members monthly during the height of the forbearance, skips and extension request period.
“I think that made all of the difference,” Wilson said. “We didn’t just fill an order, but really had deep conversations on what was affecting members directly. Our region, too, has never been a hot spot for economic growth, so we normally don’t see the highs or lows.”
ALLL In
The $3-billion California Coast CU in San Diego is planning for an allowance for loan and lease losses (ALLL) that is virtually flat from yearend 2020 to 2021.
“Through November 2020, we added $8.6 million in qualitative and environmental (Q&E) reserves in our ALLL,” said CEO Todd Lane. “We intend to maintain that amount of Q&E reserves in 2021. Currently, we hold ALLL as a percentage of the total loan portfolio at 82 basis points, which is a 56% increase over yearend 2019.”
Todd Lane
Lane said California Coast expects to maintain the high level of ALLL for 2021, “As we anticipate continued higher levels of charge-offs on unsecured loans and credit card loans in Q1 and Q2. Additionally, while we have not had any material charge-offs on commercial real estate loans for several years now, primarily a reflection of conservative underwriting and management, we have determined the continuing impact on various sectors of that portfolio, due to the continuing pandemic and potential consumer-assistance legislation, maintaining a high level of reserves is appropriate.”
What will be beneficial in 2021, according to Lane, is the CU anticipates a healthy decrease in the provision for loan losses compared with 2020--
“Thereby boosting net income in 2021. This is because we feel the ALLL is currently adequately funded and we anticipate a decrease in loan levels, primarily in vehicle loans, in 2021.”
CU’s FOM Delivers
In Long Beach, Calif., $77-million PostCity Financial Credit Union said there has never been much of an issue with delinquencies in 2020.
“I have heard that loan losses at credit unions are below expectations, but I think that depends on the type of CU you are,” CEO Christine Haley said. “Since we are a postal CU, there has been no spike in delinquencies and members are paying after their extension is over, as well.”
Michael Moebs
‘Just Guessing’
Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill., believes making any estimates on the extent of loan losses to come is premature.
“The tale will be told in next year when we get the data results from the final quarter of the year,” Moebs said. “Right now we are just guessing. How much money credit unions will be able to return to the bottom line will also be told by the effectiveness of the vaccine next year and how quickly the country can return to normal business.”