Despite Stellar Credit Quality, Small Lenders Expect Economic Headwinds

Source: American Banker

Small lenders are enjoying healthier loan portfolios while at the same time bracing for potential setbacks related to higher interest rates, inflation and more.

The delinquency rate at federally insured credit unions was 49 basis points in the fourth quarter, down 11 basis points from one year earlier, according to the most recent data available from the National Credit Union Administration. The net charge-off ratio was 26 basis points, down from 45 basis points in the fourth quarter of 2020.

Many credit unions are experiencing improved health in real estate lending. The NCUA’s most recent data showed a 0.12% year-over-year improvement in fixed-rate real estate portfolios. That’s because real estate markets have been strong with property values rising, said Tim Scholten, president of the credit union and the community bank consultancy Visible Progress.

“This opens up added opportunities with HELOCs as well as a shortage of supply helps people focus on upgrading their existing home,” he added. “Most credit unions I have been working with are doing very well in these spaces.”

Fixed-rate real estate loans at credit unions have seen a low delinquency rate in part because of the actions of Congress and regulators in response to the pandemic, said Michael Christians, principal of Michael Christians Consulting.

The overall health of the fixed-rate real estate loan book at credit unions continues to be strong and will likely remain that way until all COVID-19-related relief provisions have expired or been exhausted.

“What overall economic conditions look like when we reach that point will help determine in what direction delinquency rates move,” he said.

Still, Scholten said that the inflation pressures may start to have an impact on people as the cost of basics like food, gas and clothing has been increasing rapidly. Many credit unions are starting to take a more conservative approach to credit as rates rise and inflation is taking a real hold.