Delinquency Drops 42 BPS; Sand States Most Improved

Credit unions are improving asset quality across the board with all of the Sand States posting double- or triple-digit gains.

 
 

The most recent reports on jobs, housing, and consumer confidence all point to a steady, albeit it slow, recovery. The economy added 171,000 jobs in October, but the unemployment rate increased to 7.9%. Housing starts rose in October, but applications for building permits dropped. And as we move through this extra-long holiday season, consumer confidence is at a four-year high.

In the credit union industry, delinquency has fallen 42 basis points from one year ago. Part of this decline is the result of NCUA’s decision to change the way credit unions report troubled debt restructurings (TDRs) between the first and second quarters of 2012. The change — which allows credit unions to avoid reporting TDRs as delinquent when they restructure a loan — sets a standard that is in-line with Generally Accepted Accounting Principles (GAAP) and gives a more realistic picture of delinquency at credit unions. The quarter in which the change took effect is highlighted on the graph below.

The sand states — California, Arizona, Nevada, and Florida — benefited the most from the new rule, as they had higher than average loan modification activity. In total, 46 states and the District of Columbia saw improvements in their overall delinquency.

TOP 10 STATES WITH LARGEST DECLINE IN DELINQUENCY | DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates, Inc. | www.creditunions.com

delinquency-decline

Generated by Callahan & Associates' Peer-to-Peer Software.

However, the reporting change does not account for the full decline in delinquency. As of September 30, 2012, overall delinquency declined three basis points from the second quarter to 1.18%. This shows that as the recession slowly ebbs and members regain their financial footing, credit unions likewise are posting decreases in their delinquencies.

DELINQUENCY & NET CHARGE-OFF RATIOS| DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates, Inc. | www.creditunions.com

delinquency-and-net-charge-off

Generated by Callahan & Associates' Peer-to-Peer Software.

In addition to the delinquency decline, net charge-offs also improved. The annual net charge-off ratio as of September 30 was 74 basis point. That’s a two-basis-point drop from the second quarter and an 18-basis-point drop from September 30, 2011. The net charge off-ratio has not been this low since second quarter 2008, when it hit 69 basis points.

The improving economy in conjunction with the TDR reporting change contributed to improvements in every major segment of the delinquency portfolio.

REPORTABLE DELINQUENCY RATES BY LOAN TYPE | DATA AS OF SEPTEMBER 30, 2012
© Callahan & Associates, Inc. | www.creditunions.com

delinquency-by-loan-type

Generated by Callahan & Associates' Peer-to-Peer Software.

First mortgages, the largest segment of the loan portfolio, posted the highest delinquency in the third quarter — 1.52%. Indirect loans, on the other hand, had the lowest delinquency rate — 73 basis points.

Because of improving asset quality, credit unions set aside less money to cover potential delinquent loans. Total provisions for loan losses as of September 30 were $2.7 billion. That’s down 25% from last September. Drops such as this allow credit unions to offer more competitive products and rates.

Despite the decrease to reserves, credit unions still remained adequately prepared for future losses. The coverage ratio, which measures the allowance for loan losses to reportable delinquent loan balances, was 119.1% as of September 30. This means that credit unions have reserved $1.19 for every $1 of delinquent loans.

Improving asset quality means credit unions can redouble their focus on members.

Patelco Credit Union ($3.9B, Pleasanton, CA), for example, is taking advantage of improved asset quality to push the housing rebound further along. So far this year, it has modified 31 mortgages-more than $10 million in loans-and beefed up its collection process to work more efficiently with delinquent borrowers.

"Every loan modification we're able to process and work with our members to avoid foreclosure, that's one less REO we add to the housing inventory," says David Luu, vice president of collections for Patelco. "In that sense, it helps to stabilize the housing market."

As loans, shares, and members continue to grow, credit unions can expect a strong finish to 2012 and a solid start to 2013.

 

 

 

Dec. 3, 2012


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