Where Delinquency Rates Really Stand

Bank delinquency figures have declined faster than credit unions’ delinquency rates, but remain elevated compared to the unemployment rate.

Credit union delinquency has been stable throughout 2011 while bank delinquency rates continue to drop. However, bank delinquency rates remain much higher relative to pre-recession levelsand macroeconomic indicators like unemployment.

Last week the Bureau of Labor Statistics released the February jobs report. By most indications, the report was positive both in the February job creation figures and the upward revisions of previous months. The unemployment rate remained unchanged at8.3% as workers who had previously stopped searching for positions re-entered the job market at roughly the same pace as employers created positions. This bodes well for credit union asset quality.

Throughout 2011, the credit union delinquency rate (loans more than 60 days past due) remained stable, ending the year at 1.61%, down 15 basis points from 4Q 2010 figures. Credit union delinquency normally is highest in the fourth quarter and drops inthe first quarter as loans are charged-off early in the year.

Bank delinquency, which includes loans more than 90 days past due, ended the year at 6.42%, down from the December 2010 level of 7.03%. While the improvement in asset quality was more impressive in FDIC-insured institutions, they still have a ways to go before reaching more normal levels. One way of considering financial institution delinquency ratesis relative to the unemployment rate.

Since the fourth quarter of 2007, the unemployment rate (using the monthly rate from the last month of the quarter) has increased 1.70 times. The credit union industry’s delinquency rate increased a nearly identical level 1.73 times. Banks,by contrast, increased 3.67 times the 4Q 2007 rate. Credit unions also report differently. They are carrying the excess burden of loans that are more than 60 days past due as the bank figures are only loans that are 90 days or more past due.

Financial Institution Delinquency Rates & Unemployment Rate 2007-2011
Source: Callahan & Associates’ Peer-to-Peer software, FDIC, Bureau of Labor Statistics.

Reporting differences may also significantly affect asset quality ratios moving into the second half of 2012. Beginning with the June financial filings, creditunions will no longer report current modified loans or Troubled Debt Restructures as past due. It’s difficult to estimate the potential impact of this change, however credit unions now hold 18.5% of loans in the over 12 months delinquentcategory. The historical average has hovered 7.5% prior to the Recession. Nearly one-third of the loans in the over 12 months delinquency category are modified real estate loans. If the majority of these will no longer need to be reported as delinquent,the delinquency ratio could drop significantly for credit unions with these types of loans.

May 23, 2014

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