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Declining oil prices could put credit unions over a barrel

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The steep decline in oil prices is likely to have a widespread impact on credit unions.

While consumers may be enjoying the drop in gas prices, crude's plunge will touch everything from auto lending to profit margins. On April 20, U.S. oil prices fell into negative territory, falling from $18 a barrel to -$38 as the coronavirus pandemic drove down demand for crude and left tankers with excess supply.

A host of factors will affect how the declining cost of a barrel of oil plays out at individual institutions, but credit unions that serve the oil industry are likely to be especially impacted. Indeed, the oil industry is preparing for the lingering effects of these record low prices, with many producers prepared to decrease their supply. That means that wells will need to shut down, and many energy companies are at risk of going bankrupt.

“Oil still affects this area a lot because we’re right in the middle of it,” said John Doucet, president and CEO of Beaumont, Texas-based MobilOil Credit Union. “We’re right in the middle of the ports that are exported and imported to the refineries, which is our lifeblood — so when [oil] drops that much in price, it affects a lot of things.”

In response to the decline in oil prices and the coronavirus, MobilOil CU has lowered rates on unsecured personal loans and extended due dates on some loans for as long as the pandemic continues.

MobilOil’s community charter gives it a more diverse field of membership than CUs focused just on the oil industry. A bit more than one third of the $905 million-asset CU’s membership works for ExxonMobil.

And today’s low oil price environment isn’t MobilOil’s first rodeo. The credit union already weathered the 1979 oil crisis, which sent shocks throughout the United States via huge gas shortages. Doucet said the credit union consistently works with members to extend loans, but now that the CU has diversified its membership it doesn’t feel oil's impact to the extent it did in the past.

The number of credit unions serving the oil industry continues to decline with smaller, less diversified shops merging into larger institutions. In 2016, for example, $4.5 million-asset Union Oil Santa Fe Springs Employees FCU merged into Credit Union of Southern California, while in 2017, Amoco East Texas FCU merged into Barksdale FCU.

Trade groups and regulators on watch

Texas is the nation’s largest domestic oil producer, though California, Alaska, Oklahoma and Louisiana are major players as well.

Caroline Willard, president and CEO of the Cornerstone Credit League, which serves CUs in Texas, Oklahoma and Arkansas, said institutions throughout her league’s service area are worried about a drop in oil production.

“They are increasing their allowance for loan losses because they’re anticipating that while the short-term news is good, they’ll have to be there for extra losses,” she said.

Currently 42.5% of Cornerstone CUs tied to the oil and gas industries have a community charter, and that figure jumps to 85% when institutions with multiple select employer groups are factored in.

Todd Harper, the junior member on the National Credit Union Administration board, has also raised concerns. Harper suggested at the annual meeting of the Mountain West Credit Union Association – which serves CUs in Arizona, Colorado and Wyoming – that top mining production states could "face the double whammy of a national economic contraction" even as their own states’ economies suffer due to changes in oil production.

“There are certainly credit unions that are tied to the oil and gas industry or tied to communities within the oil and gas industry,” Harper said later in an interview with Credit Union Journal. “We have seen the price tumble for oil and gas in recent weeks. One thing that we ultimately see as this plays out is prices drop," which could lead to additional layoffs both in the oil industry and within the respective communities — "and we’re not expecting to see any rise of oil prices in the near future.”

Credit unions serving that industry and in communities where oil is the dominant industry could see rising unemployment rates, slower membership growth, decreases in credit quality or a rise in loan delinquencies, Harper said. And as consumers drive less, that’s likely to push down the need for auto loans, Harper noted, which would spread the impact to credit unions well beyond the oil and gas sector.

Diversification

Not all credit unions tied to oil and gas will be as adversely affected as others. An institution’s size will be a factor, since smaller shops serving subsets of the energy sector are more likely to have field-of-membership concentrations compared to larger, more diversified credit unions.

As reported, one of the lessons from the 2008 financial crisis was the importance of FOM diversification, and some have suggested the coronavirus could bring those lessons to the fore once again. One method of diversification includes converting to or expanding an existing community charter. On average, about 42 federal credit unions per year have converted to or expanded a community charter each year since 2008, according to NCUA data.

Even institutions with a subset of membership connected to the oil and gas industries could still feel a pinch. Roughly 40% of Community Connect Federal Credit Union's membership is tied to plastics, a material derived from oil. The credit union – based in Titusville, Pa., home to the first oil well drilled in America – was formerly known as Oil Country Federal Credit Union, and President and CEO Wade Brink said many plastics manufacturers have furloughed employees, in part due to shrinking demands and safety concerns surrounding COVID-19.

To meet member needs, the $19 million-asset shop is helping impacted membership by deferring loan payments for two months. Brink said concentration risk could heavily impact CUs serving the industry.

“If you take Exxon, they’re going to decrease staff because they’re not taking in the profits and those staff members obviously are banking somewhere,” said Brink. “If [credit unions] don’t have the income, they’re going to lose the membership and write off a lot of loans so their bottom line is going to get hit pretty hard.”

As credit unions seek to help members, they will also be taking steps to protect their own bottom lines. Those with business loans on the books – particularly in commercial real estate – will need to pay close attention to their segmentation of loans, said John Meyer, senior director of Cornerstone Advisors, an Arizona-based consulting firm unrelated to the Cornerstone CU League. This can be done by looking to the North American Industry Classification System, or the NAICS code for short. The NAICS code is a standard that classifies business establishments and has its own subset for oil and gas.

“I’m going to look at my loans with that code and I’m probably going to put them into some short-term lending options,” Meyer said.

Meyer also said low oil prices will likely expedite consolidation within the industry and that smaller CU players will have to find ways to buffer their capital due to their increased exposure. And finding a larger credit union to merge into, he added, is just one way of being better capitalized.

Doucet echoed Meyer's remarks, and advised that credit unions analyze their portfolios.

“We’ve always been told to build our capital ratio for a rainy day,” and all the income that the CU gained over the years has been put aside, he said. “We’re almost at a 13% capital ratio.”

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