October 20, 2020

What the NCUA's Latest Data Says About the Impact of COVID-19

EXCERPT: Reserves are increasing among credit unions due to bad loans and a decline in income. This comes as credit unions see a high volume of low rate mortgages and sluggish lending in more profitable loans. Credit unions may want to sell off bad assets and replace them with purchased high-quality loans.

The latest information from NCUA suggests the coronavirus pandemic has had a major impact on credit unions.

Credit Unions have been facing some interesting issues as the coronavirus pandemic continues to spread across the nation. New information from the National Credit Union Administration (NCUA) is providing a clearer idea of just how the financial sector has been affected, as reported in a recent article from American Banker.

According to NCUA's Quarterly Credit Union Data Summary for Q2 2020, loss reserves and deposits have spiked, lending has dipped, and margins are tighter thanks to ultra-low interest rates that haven't been this low since the economic debacle back in 2007/2008. These findings solidify what industry experts already suspected.

The findings outlined in the NCUA report provide a broader perspective on how the current health crisis and the economic slump have impacted credit unions across the country. That said, smaller credit unions have been especially affected.

Most of the first-quarter results were not impacted by the pandemic, since January and February were relatively stable. It wasn't until mid-March when the pandemic became a national health crisis, entering into the second quarter of 2020 with dire stats. During that quarter, lockdown measures were in full effect across the nation, many businesses were shuttered, and consumers drastically cut back on spending.

Mortgages Leading the Way

Loans have been a mishmash for credit unions over recent months. While total lending increased by 6.6 percent to $1.1 trillion over the second quarter - a slightly quicker rate than 6.4 percent from last year - the total outstanding loan balance remains relatively unchanged from 2019 within the credit union industry.  

Mortgages realized a 9.4 percent year-over-year increase in Q2 2020 to reach $499.6 billion, compared to an increase of 6 percent by the end of June 2019. Much of this growth is likely as a result of consumers taking advantage of historically low interest rates. While many other loan categories are showing signs of slowing, mortgages comprise more than 90 percent of all loan growth among credit unions this year.

Mortgages continue to be big business for credit unions as buyers look to take advantage of today's ultra-low mortgage rates.

Meanwhile, auto lending realized modest gains by the end of the second quarter, increasing a mere 1.1 percent to $374.5 billion. Private student loans at credit unions also saw a slowdown with a 7.5 percent increase in the second quarter, compared to the 14.6 percent growth rate by the end of Q2 2019. And credit card balances saw a 2.4 percent decrease over the 12-month period ending June 30.

Return on Average Assets Down

Federally-insured credit unions saw an increase in total assets by 15.1 percent by the end of the second quarter. However, the return on average assets declined by over 40 percent to 57 basis points, compared to 97 basis points marked by the end of 2019's second quarter. Median ROA also decreased.

The credit union industry’s net worth ratio also decreased, dropping to 10.4 percent compared to 11.27 percent in 2019.

Credit unions saw a significant drop in net income over the second quarter, declining 34.6 percent from the same time last year, partly as a result of heightened provisions for credit loss expenses and loan and lease losses. The net interest margin in the industry also dipped to 2.88 percent of average assets compared to 3.18 percent by the end of June 2019.

Credit Unions May Want to Revisit Their Loan Portfolios

As reserves continue to increase due to bad loans and income declines as a result of a higher volume of low-rate mortgages and minimal lending in more profitable loans, credit unions may want to take the time to revisit their loan portfolios to make some changes. Garnet Capital can help credit unions sell off bad assets and acquire high-quality loans to create a more robust portfolio that's better able to withstand today’s financial challenges.

Browse white papers today.