Planning For PLL
Given the economic experience of the past couple of years, many credit unions were forced to beef up their loan loss reserves. Now, as things appear to be getting better, we are seeing that some credit unions feel they are “overfunded” and are not adding to their reserves. While this may provide some temporary relief to earnings, credit unions cannot plan their long-term business models on the fact that there is no PLL expense or, in some cases, that the expense is negative.
Credit unions have worked hard in this environment to define their target markets, focus their efforts toward them and have learned to do things more efficiently. They should enjoy this brief reprieve. However, credit unions should not become complacent. Rather, they need to continue efforts to position themselves to be better and stronger in the future.
As far as modeling goes, assume that the PLL expense is at the level expected after the allowance for loan loss reaches an adequately funded level. This will provide a more realistic picture of long-term earnings. From a risk-management perspective, consider the experiences from the last couple years in making assumptions about worst-case credit risk exposure, not only from loans but also from investments.
