By Ray Birch
LAS VEGAS—While the majority of credit unions have emerged from the coronavirus pandemic with far stronger bottom lines than many had forecast in March of 2020, the question now is are CUs out of the woods, or are there still threats that remain to emerge?
Some CEOs have concerns the other shoe has not yet dropped on certain aspects of the economy, and they don’t just mean minimal mortgage losses masked by forbearances. Instead, some are worried problems could be festering related to evictions, rising wage costs and a potential labor shortage.
Several credit union CEOs spoke with CUToday.info about the potential for financial problems as the country pulls itself out of the pandemic. The leaders outlined what they believe lies ahead and how CUs can also avoid taking hits to the balance sheet.
It’s ‘Counterintuitive,’ But…
Rick Schmidt
Rick Schmidt, CEO of $250-million WestStar CU in Las Vegas, a city hit hard by the pandemic, is worried about renters being evicted from their apartments, and due to either problems finding a place to live or their personal finances, decide to turn their backs on the CU, including their obligations.
Schmidt, who recently shared how his credit union bet on its members—and won—during the pandemic, emphasized he is not concerned about the mortgage market, especially in Las Vegas. The CU’s loan delinquencies are 11-12 basis points, and less than 2% of members who asked for a forbearance remain in deferral status.
“It's counterintuitive that the real estate market in Las Vegas is probably too strong and has been one of the true bright spots in the midst of all this,” said Schmidt. “Las Vegas is one of the 15 or 20 fastest appreciating housing markets in the country, which makes no sense given what's going on here.”
The majority of WestStar’s members work in Las Vegas’ entertainment and hospitality industries. Schmidt said the local economy is beginning to come back but he does not expect business to return to pre-pandemic levels until later in 2021 or early 2022.
Rent Coming Due
But what will be happening soon, pointed out Schmidt, are evictions.
“What happens when the moratorium on evictions goes away and landlords start evicting people who have not paid rent for 18 months?” asked Schmidt. “For all the money the federal government is throwing at these sorts of problems I don't believe they have enough money to pay everyone's back rent for a year-plus.”
Schmidt said there is very little likelihood most renters will be able to pay the money owed to their landlords or begin making double payments.
“What's going to happen is people will just say, ‘The heck with it. I can't pay my back rent. I've been evicted so I'm going to move back home or go to some other part of the country to find another job’,” said Schmidt. “That to me is where the stress lies.”
In those cases, Schmidt expects the effects will hit WestStar indirectly.
“If a member gets evicted and decides to move to Kentucky, do they just abandon their car? Walk away from their credit card obligations?” asked Schmidt. “We see that as sort of the ripple effect, the unintended consequences of renters getting kicked out of their apartments. That's where I think the other shoe can drop and that's the part that worries me the most. Six months from now when the unemployment money runs out…”
Knowing What is Happening
Scott Wilson
In Massena, N.Y., SeaComm FCU s reporting member feedback indicates the $717-million shop should not be impacted dramatically if renters start getting kicked out.
“Having conversations with our members has enabled our resolution staff to know what is happening in their lives,” said CEO Scott Wilson.
Wilson explained that during the health crisis SeaComm has worked closely with its members, talking to them monthly in detail when they ask for and received forbearances, which has helped the credit union avoid problems with delinquencies and charge-offs.
It has also done the same with its delinquent accounts.
During the past year SeaComm had only had 12 member loans that at any time were under forbearance, and that was from the organization’s $90-million mortgage portfolio. Today, there are none.
“In a recent review of our 60-day plus accounts, only one member out of 55 was mentioned in the collection notes as receiving unemployment benefits,” said Wilson. “No one has even mentioned not paying their rent. If they aren’t paying rent, they are not talking about it. Certainly when the moratorium ends, at least in New York State, there is economic relief that can be applied for not only renters, but landlords who have lost income during this time.”
Help From Strong Employment
In Chattanooga, Tenn., Todd Fortner, CEO of $2.1-billion Tennessee Valley FCU thinks job growth can keep issues with renters at bay.
“Overall economic conditions, particularly job growth, look strong at the present and should buffer the impact of the end of federal assistance,” he said. “Inflation concerns are real and rising wages are impacting both credit unions and their business customers. There is a real divergence among economists as to whether the spike in inflationary pressure is a short-term result of the stimulus or an issue we will deal with long term. Responding to inflationary pressures is a complication which is new to most businesses and the playbook is evolving.”
Deflating Inflation Worries
But Evan Clark, CEO of the $566-million Department of Commerce FCU in Washington, does not see inflation as a concern.
“Don’t listen to the talking heads who are all worried about inflation and the fact that the Fed will be raising rates soon,” said Clark. “They won’t be because they said they won’t be doing that. They said they won’t be raising rates until the end of 2023 at the very earliest.”
Todd Fortner
Clark said to confirm his point all anyone has to do is look at some of the big cities.
“I was in New York City Memorial Day weekend and New York doesn’t have the energy it did pre-pandemic,” said Clark. “And if I had to estimate, I’d guess 10% of the storefronts in New York are vacant now. The same is true here in Washington. Until all of this extra real estate is brought back online in some way, shape or form, the economy is not going to perform as it did pre-pandemic.”
Why are rising rates important to focus on?
“Because the low rates on the short end of the curve are here to stay until the Fed does move,” said Clark. “That means that if you’re investing in short-term CDs and the like, your return is not going to be all that great anytime soon.”
The Potential Risk
So, where might risk lie?
“Here’s the place where I think credit unions can get themselves in big trouble,” stated Clark. “They can continue to sit on a big pile of cash earning them a robust five basis points. Let me give that perspective: If a credit union has $10 million sitting in overnights, they are earning $5,000 on that money per year. You shouldn’t have a bunch of money in overnights if you want to have a strong bottom line, obviously. That’s a tough one, though, because so many of our members are not spending money yet. At our credit union we’re starting to see some member spending. It makes sense--people are starting to go on vaccination vacations. But there’s still is an enormous amount of liquidity.”
Which leads to another concern, said Clark.
“Here’s the other problem credit unions can run into,” he explained. “They have all this cash and they know they have to invest it in some way. Don’t invest it in something you don’t understand. It’s not just credit unions with excess liquidity. There are all sorts of financial institutions that have too much cash and they all want to invest it. This is making margins crazy tight and I’m afraid some credit unions will make investments in things they shouldn’t be in. If it’s too good to be true, it probably is too good and you shouldn’t be investing in it.”
Evan Clark
Threat is Limited
As for dealing with issues related to the eviction of renters as various moratoriums expire, Clark downplays the risk, saying only those heavily invested in rental units should worry.
“Overall, I think most credit unions will be OK,” he said. “Allowance for loan loss accounts are at solid levels. There has been capital dilution at many credit unions because of the excess liquidity and because of weak bottom lines. But for most credit unions that’s OK because they had a lot of capital stored up just in case something like this happened. There could be an uptick in delinquency and charge-offs, but overall I don’t think it will be bad because so many credit unions are more heavily invested in member mortgages and the underwriting on member mortgages is so much stronger than it was in the 2004 to 2007 era.”
Potential New Issue
Tennessee Valley FCU’s Fortner instead points to what he sees as a potential new issue for CUs as the country climbs out of the pandemic.
“The mobility of membership is of lesser concern to us than the mobility of the workforce, particularly in our community as our area is poised to see a net population growth due to having a great technology infrastructure and awesome outdoor amenities,” said Fortner. “The rise in telecommuting has made hiring more complicated as employees no longer are geographically constrained. It will be interesting to see how this impacts work force trends, and there could be an advantage for employers who have adopted a substantial work from home model. Employers will have to closely monitor the impact telecommuting has on their turnover rates and productivity.”
Wilson agrees.
“I think the real issues we are facing going forward is that there will not be enough labor,” said Wilson. “Businesses of every size are looking for employees. In general terms, that will be an issue that may impede the overall economic recovery.”