Tuesday, February 9, 2010

Loan Loss Reserve Funding Gap

At the end of the third quarter 2009, NCUA reported that federally-insured credit unions held $8.1 billion in allowances for loan and lease losses versus almost $9.7 billion in loans that were 60 days or more delinquent. Almost $3.26 billion or 33.7 percent of these delinquent loans were 6 months or more past due.

But these industry aggregates mask important information.

Digging into the financial statements of credit unions, I decided to look at the loan loss allowances of individual credit unions and compare them to loans that were more than 6 months past due .
I found that 63 credit unions reported a gap exceeding $1 million between their allowances for loan and lease losses and loans 6 months or more past due. The following table shows that some credit unions are reporting a sizeable gap (click to enlarge).

Texans CU is reporting a gap of $77 million. Other credit unions with large gaps include Space Coast, Self Help, and Evangelical Christian.

This means either the credit unions are expecting the loss rate on these delinquent loans to be very low or that the credit unions are underfunding their loan loss reserve accounts.

If these shortfalls are a result of credit unions underfunding their loan loss reserve account, then some credit unions are engaged in window dressing their performance.

To close this gap would require these credit unions to increase provisions for loan losses in order to build loan loss allowance balances. This would adversely affect earnings and lower the net worth position for these credit unions.


  1. I feel like I'm beating a dead horse, but the coverage ratio (allownace for loan losses / reportable delinquent loans) for credit unions is 83%, which is UP over last year. For FDIC-insured institutions, this number is 60%; unlikely to be the bottom of the freefall that's been happening over the past couple years.

    It would also be appropriate to note again that credit unions report loans at 60 days delinquent, versus 90 days at banks. And, with the credit union industry yielding a 0.26% ROA (higher than banks 0.10%), I would be less concerned about how increasing provisions would affect credit unions.

  2. Nov 1, 2010

    You should dig further into Texans Credit Union. There is A LOT more that has yet to make it to the surface dating from 2004 to today. Eventually, some government official will make his/her career unearthing the schemes and violations of fiduciary responsibility, not to mention the criminal activities that occurred.



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