Loan Losses? You’re Covered

With lingering concerns regarding asset quality, credit unions build their allowances and increase their coverage ratio in 2009.


In response to last week’s analysis of fourth quarter data discussing the significance of the net interest margin rising above the expense ratio, a commenter suggested that a greater examination of the provisions for loan losses would help provide a more accurate understanding of what credit unions are currently experiencing.  Asset quality is very much a concern for credit unions, and while we have not hit the bottom just yet, there are still positive trends to be acknowledged.

Dealing with Loan Losses

Typically, the provision expense is measured against average assets for comparison against other income ratios.  However, for comparison to the annualized net charge-off rate, let us examine them relative to average loans.

Provisions Coutinue to Outpace Annualized Net Charge-Offs

Source: Callahan’s Peer-to-Peer Software
*4Q09 Data is for 7,555 First Look Credit Union

The provision expense has been steadily rising, driven by the growth in loan charge-offs.  In 2009, credit unions set aside a projected $9.5 billion through provisions, more than covering the near $7.0 billion depleted by loan losses in the same year.  This brought the allowance for loan loss to $8.8 billion, up 45% from $6.1 billion in 2008.  Prior to the recession, credit unions maintained allowances greater than the total of their delinquent loans.  This coverage ratio (allowances for loan losses divided by delinquent loans) dipped to a low of 76.5% in the third quarter of 2008, and has since begun to recover.

 Coverage Ratio Improves at Credit Unions

Source: Callahan’s Peer-to-Peer Software, FDIC’s Quarterly banking Profile
*4Q09 Data is for 7,555 First Look Credit Union

By contrast, the coverage ratio at FDIC-insured institutions continues its steady freefall.  With many banks struggling to build their reserves against growing delinquency, continued losses will put pressure on liquidity and capital at banks.  While the provision expense has created difficulty for credit unions at the bottom line, the industry has been focusing on rebuilding allowances to reinforce the claim that credit unions are the safe and sound choice for their members.

 Lingering Concerns

Managing asset quality is going to stay a top priority for credit unions in 2010.  At the end of 2009, credit unions held a reportable delinquent loan portfolio of approximately $10.6 billion.  Further, with a 30-60 day delinquency portfolio of another $9.5 billion, the prospect of rising charge-offs seems nearly as certain as it is daunting.  Having risk mitigation strategies in place with remain a necessary component of the loan growth strategy for credit unions.

 Delinquency Continues To Climb at Steady Rate

Source: Callahan’s Peer-to-Peer Software
*4Q09 Data is for 7,555 First Look Credit Union

 Positive News

The important thing to keep in mind is that, despite these losses, the credit union industry is growing at an accelerating pace.  While assets at FDIC-insured institutions have shrunk by 5.3% over the last year, credit unions have grown approximately 9.7%.  Further, asset quality and capital concerns at banks have led to a 7.5% contraction in the loan portfolio, while outstanding loans continue to grow at a projected 1.2%.  Further, despite growing loan losses, earnings have become to recover.  The industry posted an estimated net income of $1.67 billion in 2009, or an ROA of 0.20%, up from the near break-even 0.01% for 2008.  With growing liquidity and sound risk mitigation strategies, credit unions are in a position to continue to lead the financial sector through recovery.




March 1, 2010


  • The coverage ratio (allowances for loan losses divided by delinquent loans. Does delinquent loans from above mean reportable delinquency (60 days and beyond) or all delinquent loans (includes 30 to 59 days and 60 and above. Appreciate the clarification.

    Best regards
    Edward Lis