In the NCUA’s recent webinar, Managing Credit Risk, NCUA Chair Kyle Hauptman explored the deterioration of loan quality within the last three years and ways in which credit unions have been caught off guard. The Credit Union Times summarized these findings in a recent article, NCUA Chair Kyle Hauptman Warns of Rising Credit Risks.
While many in the industry have sensed a shift in portfolio quality, what we’re seeing now goes far beyond a typical market correction. The lending boom during the pandemic, which was fueled by low rates and high demand for homes and vehicles, was always expected to cool. But this isn’t just a cool-down: it’s a sharp downturn that’s catching many credit unions off guard.
At Rise Analytics, we’re hearing consistent concerns from our credit union partners: loan growth is stalling, members are tightening their spending, savings balances are thinning out and delinquencies are on the rise. These red flags aren’t just anecdotal; they’re exactly the issues the NCUA spotlighted in its July 15 webinar. And they’re the same trends we’ve been tracking for months across institutions of all sizes.
If your credit union hasn’t already taken steps to offset increasing delinquencies and decreasing loan quality, there’s still time to take action and protect your organization and its members from the impacts of rising credit risk.
Reexamine Your CECL Reserves
In a downshifting economy, one of the first steps your credit union should take is to reexamine your CECL reserves and decide if you need to be more conservative. Your current reserve should account for expected charge-offs, but in a shifting economy, a more conservative stance may be warranted. Increasing reserves now can create a stronger buffer against rising delinquencies and losses.
Examine Your Loan Criteria
What may have worked for your credit union in 2021 may no longer be effective now. Loan criteria from that period may be misaligned with current economic realities. Outdated credit score thresholds or underwriting standards can increase exposure to risk. Now is the time to review and update your lending policies to better reflect today’s member behavior and financial environment.
Conduct a Multi-Dimensional Loan Portfolio Analysis
Examining your loan portfolio from every angle can identify areas of potential risk, including high concentration limits, loan health across a variety of risk factors, loan performance and loan pricing. Providers who offer multi-dimensional loan portfolio analyses may also be able to provide stress testing for your loan portfolio, including simulation marker and borrower changes.
Strengthen Your Merger with Data-Driven Loan Analytics
Mergers present more than operational challenges because they require a clear view into the health and risk of both loan portfolios. Rise Analytics provides credit unions with multi-dimensional loan analytics that uncover risk, reveal growth potential and ensure fair lending alignment. Whether you're the surviving institution or entering a collaborative merger, our insights support confident decisions before, during and after the merger process.
Conclusion
The numbers the NCUA are reporting right now are concerning: 12-month net charge off rates of 0.81%, credit card delinquencies of 2.0% and charge offs of 5.2%, used car delinquencies of 0.95% and charge off rates of 1.11% – all of these numbers are close to or exceed rates we saw during the Great Recession. While inflation may have receded for the most part across the States, higher price levels, higher interest rates and lower earnings for the average family continue to burden our economy, and credit unions are feeling that strain. Take steps at your credit union to ensure you’re prepared for an increased risk environment. Rise Analytics offers services to help with these and other concerns.
