A troubled debt restructuring (TDR) describes a situation where a creditor grants a concession to a borrower that it would not otherwise approve – usually because of financial difficulties experienced by that borrower. Concessions include such actions as reductions in rate, reduction of accrued interest, etc. As of 12/31/2012, roughly 45% of all credit unions had loans qualifying as TDRs on their books.
This week’s Chart of the Week focuses on TDRs, specifically looking at the comparison of individual credit union HealthScores to the ratio of TDRs to total loans.
While it would be easy to assume that any credit union with a sizable percentage of TDRs relative to the total loan portfolio would more than likely be “unhealthy” as compared to peers, the chart suggests that in many cases credit unions with high TDR percentages maintain sound financial health. These credit unions more than likely maintain their overall financial health by proactively monitoring the health of the loan portfolio and rapidly responding to loans exhibiting deteriorating performance.
It should be noted, however, that the chart shows credit unions with a higher degree of health, such as those with scores 4 and above, have far smaller portfolio percentage of TDRs than do average credit unions. It also clearly illustrates the fact that most credit unions with a high level of TDRs are correspondingly less healthy than their peers.