Limbo: Not Just For Cocktail Parties

Credit union provisions for loan losses are at the lowest level since the second quarter of 2008. How low can they go?


With improving asset quality, credit unions this year have significantly begun to reduce the amount provisioned for loan losses. With the lower expense, credit union earnings have continued to improve despite a record-low interest rate environment. There are limitations to this good news – the provision will, at some point, reach a normal historical level and stabilize, which will limit continued earnings improvements.


Click on graph for larger view. |  Source: Callahan & Associates' Peer-to-Peer

Delinquent loans decreased significantly for current U.S. credit unions. In the first three months of 2011, credit unions reported an improvement in delinquent loan balances to $763 million. This improvement translates to a decrease of 7.6% in reportable delinquent loan balances in one quarter alone. The delinquency ratio was 1.63% at the end of the first quarter of 2011, down 14 basis points from the previous quarter. The charge-off ratio also decreased significantly during the first quarter, which indicates strong improvements across asset quality.

With fewer delinquent loans overall, delinquent loan balances fell but the dynamics of past-due loans are shifting toward longer delinquencies. Before the recession, nearly 61% of delinquent loans were less than two months past due. As of the first quarter, only 43.3% were less than two months late.

Both loans that were six months to 12 months past due and those more than 12 months past due saw increased balances from the fourth quarter of 2010. More than 15% of all past-due loans were between six and 12 months past due and 9.5% were more than 12 months past due. Troubled debt restructures, in which loans are classified as “delinquent” until the consumer has proven they can pay for six months straight, are one factor driving the longer loan delinquencies. Essentially, credit unions may be holding these loans as delinquent even if the member is paying on time.

With the improvements in asset quality, the provision for loan loss is at the lowest quarterly amount since the second quarter of 2008. The credit union industry reported just $1.24 billion in loan loss provisions through the first three months of 2011, a 32.8% decline, or improvement, over the first three months of 2010. How low, though, can the provision go?

The dollar amount for loan provisions has decreased, but credit union assets are up 30% over three years, fueled by member savings during the recession. And despite slower loan growth on the balance sheet, total loans are still higher than they were in 2007. When the provision is measured relative to the credit union asset base, credit unions provisioned half the level in the first quarter of 2011 that they did in the fourth quarter of 2009. While we still have a way to go to reach the pre-recession average of 32 basis points, that quarter may be sooner rather than later.


Click on graph for larger view.  |  Source: Callahan & Associates' Peer-to-Peer




July 25, 2011



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