Got NAICS Coded Member Employment Data?

Bill Bromback – Chief Research Officer

October 13, 2020

As our economy enters the Fall, after 6+ months of turmoil created by the COVID-19 crisis, everyone with loan portfolios is still holding their breath. This is evidenced by the fact that, per Q2 NCUA data, credit unions’ loss provisions have risen 51.5%.

The clouds hanging on the horizon are caused by:

  • The expiration of loan deferrals provided via the CARES Act.
  • The U.S. unemployment rate is still high at 8.4% (August 2020) per the Bureau of Labor Statistics, but is vastly improved from the 14.7% back in April 2020.
  • Not all industry segments were impacted the same, nor will they recover the same.

So, what can we expect as we look at the economy going forward and how might that affect loan portfolios?

There are a lot of different letters put out by economists to describe the shape that our economic recovery might take: “U”, “V”, “W”. But the one I’m subscribing to is a “K” shaped version. Simply described, segments of our economy have experienced limited impact from the pandemic and will recover quickly, while others were hit hard and will have a longer road to recovery.

Examples of industries on the upside leg of the “K” are grocery stores and technology companies. Conversely, some industries on the downside leg of the “K” include: airlines, restaurants, bars, hotels, retail stores, movie theaters, casinos, entertainment, beauty salons, and gyms.

The contrast between the industries on the upward vs. the downward leg of the “K” is stunning. 

“Depending on where you sit in the COVID economy, business could be booming or on the brink of bankruptcy,” Suzanne Clark, president of the U.S. Chamber of Commerce, said in a statement. 

“Long gone is the notion that we’ll have a V-shaped recovery – a deep economic decline followed quickly by a sharp rebound,” Clark said. “Instead, what we’re looking at is a recovery that will be vigorous for some sectors while others remain in free-fall.”

Just to reinforce the impact to the industries on the down leg of the “K”, here are some startling statics reported by Yelp since the beginning of March:

To further this storyline, one that grabs national headlines and hits home on a personal level is the impact to specialty and national retailers:

  • Men’s Wearhouse, Jos. A. Bank, Brooks Brothers, Lord & Taylor, Ann Taylor, Loft, and Neiman Marcus are among the retailers whose parent companies have entered Chapter 11 bankruptcy. 
  • J.C. Penney, which sought bankruptcy protection in May, said Sept. 9 that it has reached a tentative deal to sell its business and stores to a group of mall owners and lenders in a move that would save the department store chain from liquidation.

So, whether you buy into a “K” economic recovery or not is not the most important aspect of this blog. What is important is recognizing that the two legs of the “K” exist in the market and with that understanding, you may have an opportunity to better manage risk and loan portfolio performance.  

For example, you could analyze your loan portfolio and identify members whose income is derived from the industries I’ve mentioned above (and I’m sure you have more to add to the list) on the down leg of the “K”. If you’ve been capturing an NAICS code associated with the members employer as part of your loan application process, this will be an easy data mining exercise. Alternatively, if an NAICS code is not available in your member database, you could perform a business analytics effort where you could capture the member’s employer (company name) from the loan application and attempt to assign an NAICS code to it. There are companies and organizations that offer services which would help you assign an NAICS code to a company name. For example, you could work with the NAICS Association which offers this type of capability.

Armed with this information, you can segment your member loan portfolio based on the expected level of economic hardship and speed of recovery, identifying members and member loans that may be at short term risk vs. long term risk. This will provide another level of insight to your risk and portfolio management teams which should help aid in the development of a strategic vision and tactical plan for these troubled times, mitigating and minimizing potential financial losses to the credit union.