C. Myblog

PLL and Managing Expectations

January 24, 2013

The most recent 2012 NCUA data shows that year-to-date, about 29% of all credit unions have run either a zero or negative provision for loan loss, due primarily to overfunding of the allowance.  The bulk of these credit unions were smaller in terms of asset size. Filtering to credit unions with assets over $500M, the answer is 5%.  Knowing that, it might be easy to infer that the abnormally low provision for loan loss is a small credit union phenomenon, but that is not necessarily the case. While the smaller institutions may have seen the more extreme swings in provision, recent data also shows that about 53% of credit unions over $500M have benefited from a provision for loan loss below 30bps (remember that in the exuberance prior to the credit crisis, PLL averaged 30-35bps).

The drop in PLL expense has helped offset the squeeze in margin that many credit unions are experiencing.  This leads to the question:  Can such a low level of expense be sustained in the future? Looking forward, credit expenses are likely to go back up as many institutions have delinquency and charge-off ratios that materially exceed provision for loan loss.  Managing board expectations in this regard is important.  Boards need to understand the impact of allowance overfunding and how it influences net income.  One simple step to address this would be to compare end-of-year provision for loan loss to actual charge offs.  Another option that could provide more detailed information would be to take your current level of charge offs and run out your budget with charge offs in place of provision for loan loss.  These analyses would help a credit union’s management and board to get a better feel for the sustainability of earnings once the ALL is no longer overfunded and PLL starts to rise.

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