Performance (Sans) Anxiety

Delinquent loans fell year-over-year in 4Q. Take a look behind the metrics.


A credit union's delinquency ratio is a measure of the current credit risk associated with a credit union’s loan portfolio and is a forecaster of future loan losses. Therefore, unusual increases or decreases in the delinquency ratio generally have an impact on future earnings. This ratio should be evaluated in conjunction with the credit union’s loan to share ratio, loan loss ratio, and ROA. As credit unions look to increase their loan originations during a rebounding economy, maintaining asset quality may become more of a challenge. The delinquency ratio for all U.S. credit unions fell from 1.83% at end of 2009 to 1.76% at the end of 2010.

The level of delinquency a credit union can sustain hinges on several factors, including the level of income generated by the loan portfolio, the quality of the credit union’s management of credit risk, and its ability to manage loan losses. Rapid increases or decreases in the loan portfolio can also influence the ratio. Risk based pricing is often accompanied by higher delinquency which should be paid for through higher loan yields. Conversely, low delinquency rates can mean that the credit union’s underwriting policies may be too restrictive. A critical component of the delinquency ratio is the mix of loans in the delinquency portfolio, both in terms of the type of loan and in the days delinquent. Generally, real estate loans have lower actual losses because of the value of the collateral; to a lesser extent this is also true with auto loans. High concentrations of delinquent unsecured loans result in higher losses.

Changes in the delinquency ratio can be broken down into two general categories: external events that affect the members’ ability to make loan payments and internal changes in the credit union’s operations that affect the credit union’s ability to collect loan payments. External factors can be macro events such as a downturn in the economy or local events such as the closing of a sponsor’s factory. Internal factors include changes in loan underwriting policies or changes in the capabilities of the collection department. Risk based pricing is often accompanied by higher delinquency, which should be paid for through higher loan yields. There is a lag time between changes in loan policies and the results of those policy changes, in the form of higher or lower delinquency.