Improving asset quality can have ripple effects such as lowered provision expenses and a brighter future outlook. For the 7,091 First Look credit unions that had reported their fourth quarter financials as of Feb. 17, average asset quality remained stable, with no change in delinquency and a minor decrease in net charge-offs from September.
Delinquency rates were flat between September and December, standing at 1.60%. However, the delinquency rate significantly improved throughout 2011 as delinquency dropped 13 basis points, or 8.1%, from December 2010 levels. Similarly, net charge-offs significantly improved in the fourth quarter from a year prior, falling to 0.91% from 1.13% in 2011, a 19.5% improvement.
Over the past 12 months, credit unions reported a decline in delinquency rates for all loan categories. Credit card delinquency had the greatest improvement in the last year, falling to 1.15% in the fourth quarter from 1.54% a year prior. The indirect loan category, which includes auto loans, had the lowest delinquency rate among FirstLook credit unions, at 0.99%, which is down 15.4% from the 1.17% rate in December 2010.
First mortgages made up the largest percentage of the delinquent portfolio – 55.7% at the end of December – and they also had the highest delinquency at 2.19%, according to FirstLook data. Delinquency rate for first mortgages is down from its peak in the fourth quarter of 2010 when 2.30% of first mortgages outstanding were delinquent. First mortgage delinquency may be elevated due to TDR accounting methods, in which modified loans that remain below market rates or terms would be reported delinquent despite being current. A change in this reporting method will take affect later this year, at which time first mortgage delinquency should decline.
Improved asset quality allows credit unions to lower their provision for loan losses, thus boosting their net income. With asset quality holding steady and certain areas of delinquency improving over the last couple quarters, credit unions may be able to revise outlooks for 2012.