Loan Loss Reserves Decline at Credit Unions

Credit unions, with a 122% coverage ratio, remain well reserved for asset quality problems.

Reserve drawdowns at large banks have surpassed reserve buildups at smaller institutions, according to the FDIC’s Quarterly Banking Profile for the second quarter. Credit unions have decreased their allowance for loan losses in recent years, as asset quality continues to improve and credit unions work with members through troubled debt restructurings. Because of this, credit unions of all asset sizes have been able to reduce their loan loss reserves, unlike their for-profit counterparts.

About 44% of credit unions decreased their allowance during the second quarter, compared to the 38% of banks that reduced their allowance. The 46% of credit unions that reported allowance increases was also below the 54% of banks that reported reserve increases. Ten percent of credit unions reported no quarterly change in their allowance for loan losses, compared to just over 7% of banks. Despite a larger portion of credit unions increasing their allowance during the quarter, the overall dollar balance fell by $144 million.

Quarterly Change In Allowance For Loan Losses 2Q 2012


Source: Callahan & Associates Peer-to-Peer software

A significant number of the largest U.S. credit unions posted annual increases in their allowance for loan losses. Out of the 20 largest credit unions, nine posted an increase from June 2011. In spite of this, credit unions with more than $1 billion in assets decreased their allowance for losses by nearly $300 million annually. This change was primarily driven by a group of about 15 credit unions in the sand states of Arizona, Florida, and California. In spite of being hit hard by the housing crisis, these states have seen housing prices begin to recover in recent years and this has begun to improve the financial situation of credit unions within the states.

Smaller credit unions also saw declines in their allowance for loans losses over the past year. These financial cooperatives with assets under $1 billion saw an annual reduction of $187 million in their allowance. Similar to their larger peers, the primary drivers of this reduction were a collection of credit unions in the sand states of Arizona, California, Nevada, and Florida. While overall these smaller credit unions greatly outnumber their larger peers in terms of total number of institutions, they have $15.5 billion less in outstanding loans and $1.1 billion less in the allowance for loan losses.

Coverage Ratio Vs. Allowance For Loan Losses 2Q 2012


Source: Callahan & Associates; Peer-to-Peer software

Despite reducing their loan loss reserves, credit unions remain well reserved for any potential lingering asset quality problems. Credit unions coverage ratio, which measures the allowance for loan losses to the total amount of delinquent loans, was 121.7% as of the second quarter. This means that credit unions have almost $1.22 reserved for every $1 of delinquent loans. That’s more than double banks coverage ratio of 60.4% during that same time.

The industry’s reserves are well above pre-recession levels, although both large and small credit unions are decreasing their loan loss reserves. Credit unions made fewer risky loans than banks leading up to the recession, helping them to improve their asset quality and thus allowance for potential losses quickly as the economy recovers. Continuing to reduce the allowance will free up funds to lend to members or to invest in providing better service for members.

May 29, 2014

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