Managing your allowance through the COVID/CECL crossroads
At the beginning of 2020, because of the COVID-19 pandemic, credit unions along with the rest of the world, saw threats to safety and soundness. Not only financial safety and soundness but threats to physical safety and soundness. The response at credit unions was multi-faceted. First it was ensuring the physical safety of members and staff. Then it was tending to the financial need of members, which took shape by providing extensions and/or short-term funding to consumers and securing Paycheck Protection Loans for business members. Once the members were served, it became time to consider the impacts to financial statements and loan loss reserves.
In 2020 credit unions began building up their allowance for loan loss reserve by taking additional provision for loan loss expense. As a result, allowance for loan losses at credit unions rose from approximately 0.86% of loans as of December 31, 2019 to approximately 1.11% of loans as of December 31, 2020.
As reserves at credit unions were increasing, delinquency and charge offs were falling. Charge off ratios fell from 67 bps to 56 bps and delinquency fell from 68 bps to 59 bps.
It’s been over a year since the economy was shaken by the COVID-19 pandemic. The dust has begun to settle and economies have begun reopening. While some uncertainty remains, it is starting to become more likely that the impacts to credit union losses will be less than expected.
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