Credit Union Loan Delinquency Analysis and Unemployment Trends
October 2017

Recent economic data indicate that the national unemployment rate is slowly receding from the peak of the Great Recession. Economists continue to debate whether the economy is actually adding jobs or whether more people are leaving the labor market altogether, thereby lowering the denominator in the unemployment rate calculation. Despite the debate, the general sentiment among most economists is that labor market conditions are slowly improving. Loan delinquency rates, measured with less subjectivity then the unemployment rate, are also creeping down across the country. These reports are welcome news to the financial services sector after 5 long years of difficult macroeconomic conditions.

Figure 1. Loan Delinquencies by Region.

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Perceptions of macroeconomic conditions are frequently influenced by national reports citing headline economic statistics. While measurements of economic conditions at the national level are informative, Credit unions operate in substantially more regional environments. Because of this, it is often helpful to evaluate regional trends in the data. In this note we present data on unemployment and credit union loan delinquency rates in six major regions of the United States.

Our analysis uses data from quarterly call reports from Q1 2000 through Q2 2013. We aggregate individual credit union call report data to the regional level using credit union asset sizes as weights. In this way, our analysis captures the economic exposure of the total assets in the credit union sector to regional economic conditions. Loan delinquencies are calculated as the total amount of loans reported delinquent between 30-59 days, 60-179, 180-359, or greater than 360 days divided by the total amount of loans outstanding. Relevant loan categories include mortgages, unsecured credit cards, lease receivables, other real estate loans, and student loans. We exclude auto loans due to a lack of sufficient historical data. Monthly unemployment rate data from the BLS are averaged to the quarterly level and aggregated to the regional level also using credit union asset sizes as weights. The six aggregate regions we evaluate are the NorthEast, MidAtlantic, South, MidWest, West, and SouthWest.

Figures 2-6 plot regional unemployment and loan delinquency rates through time. Not surprisingly, the data indicate a strong relationship between the two data series. For example, in the MidAtlantic region, unemployment and loan delinquency demonstrate a correlation of over 90%. The region with the lowest correlation between unemployment and delinquency is the West region at 85% – still a tight correlation by any standard. Each of the Figures documents the large increase in unemployment and delinquency rates experienced during the Great Recession. While the plots are instructive in demonstrating the tight correlation between unemployment and loan performance, they are less instructive in making regional comparisons.

Figure 8 plots the unemployment rate by region while Figure 1 plots loan delinquency rates by region. The plots reveal meaningful regional variation. For example, the Southwest region’s asset-weighted unemployment rate grew from 5.3% in the summer of 2006 to 13.5% in the first quarter of 2010. The spike in unemployment in this region is undoubtedly a function of trouble in the housing market, adversely impacting construction, mortgage, and other housing-related sectors. Over the same period, the Midwest region saw unemployment grow from a low of 4.2% to a high of 7.8%, a more muted trend than the Southwest.

Differences in regional unemployment are manifest in differences in delinquencies. Delinquencies increased from 0.35% in the summer of 2006 to over 2.5% for the Southwest region, while the Midwest region’s delinquency rate grew from 0.75% to 1.5%. These regional patterns highlight the importance of evaluating regional trends, as opposed to headline national statistics. It is also important to note that because our calculations are asset-weighted, some of the differences can be attributed to variation in credit union asset sizes across each Sector. However, the benefit of asset-weighting is that it captures the fraction of the total sector’s assets that were exposed to disparate economic conditions.

The plots also reveal differences in the velocity of the economic recovery across the regions. Despite peak-level delinquency rates of 2.5%, the Southwest region currently boasts rates below 1% for the first time since the Q2 2008. Meanwhile, delinquency rates in the South region remain somewhat elevated at 1.3% only down 70 basis points from a high of 2% at the height of the crisis. The slow recovery for delinquencies in the South corresponds to a relatively slow recovery in unemployment, from 10.4% at the peak to an elevated 2013 Q2 level of 7.5%. The West region has the lowest level of delinquencies at 0.8% despite experiencing the second highest level of delinquency rates at the peak of the crisis at 2.15%. This corresponds to a current cycle-low unemployment rate of 6.6%.

Overall, the analysis indicates that local economic conditions are an important consideration in the performance of credit unions. While this statement should come as no surprise to credit union executives, a regional analysis of the data serves as a helpful reminder of just how tight the correlation between unemployment and loan delinquency rates can be.

 

Figure 2. Loan Delinquency Rates and Unemployment in the Northeast Region.

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Figure 3. Loan Delinquency Rates and Unemployment in the MidAtlantic Region.

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Figure 4. Loan Delinquency Rates and Unemployment in the South Region.

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Figure 5. Loan Delinquency Rates and Unemployment in the Midwest Region.

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Figure 6. Loan Delinquency Rates and Unemployment in the West Region.

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Figure 7. Loan Delinquency Rates and Unemployment in the Southwest Region.

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Figure 8. Unemployment Rates by Region.

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