The recession just might be loosening its grip. Credit unions are easing loan loss provisions and reaching out to expand members’ access to loans. And they’re using the lessons learned in hard times to find new ways to balance risk and opportunities within their loan portfolios.
Nationwide, credit unions’ annual delinquency and charge-off rates tripled over the course of the recession, according to Mike Schenk, CUNA’s vice president of economics and statistics.
Continued weakness in housing markets will slow the economic recovery, he says, with more than 25% of homeowners still “underwater” because they owe more on their mortgages than their homes are currently worth.
But improvements in labor markets should help credit unions and their members.
“People’s ability to pay will improve going forward,” says Schenk. He expects delinquencies and charge-offs to decline gradually in 2011, although they’re likely to remain higher than normal at year-end.
Declining delinquencies should enable loan loss provisions to dramatically decrease in 2011 and 2012, Schenk says, creating approximately 40 basis points of improvement in credit unions’ bottom lines.
The recession’s impact varies significantly by region. Horizon Credit Union, Spokane, Wash., has experienced that variation even among its own membership, with concentrations in northern Idaho, and eastern and central Washington.
The recession hit hardest in rural northern Idaho, where unemployment was still in the double digits in early 2011, says Jeff Adams, president/CEO of the $425 million asset credit union. Homeowners there struggled to recover from a 40% fluctuation in real estate values.
In eastern Washington, unemployment in early 2011 remained above 9% as economic recovery trailed national trends. Central Washington proved the most stable, with minimal recessionary effects on employment.
Horizon’s total delinquencies were at 0.2% in 2007 and peaked at 1% in 2009 before returning to near pre-recession levels in April 2011. Charge-offs mirrored delinquencies, and declined steadily in the first four months of 2011.
This should allow loan loss provisions to drop about 20% from the 2010 budgeted 1% of total assets, or $4 million. Horizon’s loan portfolio was $307 million as of April 1, 2011.
“Since we’re two to three years into this now, we’ve worked through a lot of the stuff that was really painful,” says Adams.
Conservative underwriting policies helped minimize losses. Horizon also hired an additional collections employee to work on mortgage modifications, and it reassigned a loan employee to work part-time in the collections area to handle payment modifications.
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