Credit Union Asset Quality in Today’s Environment

Delinquency and net charge-off rates are falling amid a recovering economy.


Asset quality improved at credit unions in 2010 as economic activity picked up. The delinquency rate at credit unions fell seven basis points to 1.76% in 2010. The net charge-off rate declined at a similar pace, falling eight basis points to 1.14%. The dual trend indicates credit unions’ improvement in delinquency is organic and is not the result of institutions charging-off more loans to bring down delinquency.

Credit unions are outperforming banks in both delinquency rate and net charge-off rate. The delinquency rate for banks in the United States was 4.87% in 2010; that’s more than two-and-a-half times the credit union rate. The fact that credit unions report loans as delinquent at 60 days past due but banks report delinquent loans at 90 days past due makes the difference in delinquency rate even more drastic. In addition to posting better delinquency numbers, credit unions also bested their for-profit peers in net charge-off rate. Banks’ net charge-off rate, 2.54%, is more than twice that of credit unions.

Current credit unions in two Sand States, Nevada and Utah, posted the two largest improvements in delinquency. From 2009 to 2010, Nevada’s delinquency rate decreased 1.09% to 4.69%, representing the largest decline of any state. Delinquency rates for current Utah credit unions fell 20 basis points to 3.50%; the net charge-off rate dropped 23 basis points to 1.76% at yearend.

Credit unions have learned from the economic hardships of the past few years and are well prepared for lingering troubles. The coverage ratio, defined as the allowance for loan losses divided by delinquent loans, reached 94.9% at the end of 2010; this is the highest level since mid-2007. Banks’ allowance accounted for only 64% of their delinquent loans. Continued improvement in asset quality bodes well for the future of credit unions. Asset quality flows into other areas of credit union performance, such as reduced provisions expenses and higher earnings, which the credit union can use to rebuild capital.