BOSTON – NCUA examiners are focusing increasing resources on verifying the adequacy of loan loss reserves for credit unions, as troubles are spreading to new areas of the credit union portfolio–even as credit unions have moved billions of additional dollars into Allowance for Loan Losses over the past two years.
Examiners are seeing losses spreading from first mortgage loans to credit card portfolios, home equity loans, jumbo mortgages and member business loans, agency officials warned last week.
As a result, NCUA will be looking closely to ensure that there are sufficient funds to cover future loan losses in all these areas and that there is agreement between credit union management and outside auditors and the field examiners, said Anthony Lacreta, acting director of NCUA’s northeast Region One, during America’s CU Conference. "The increase in loan delinquencies worries me," he told credit union executives and directors.
Examiners have increased their scrutiny of the loan loss reserve accounts, making sure they are independently verified. "We’re going to be looking at what you figured into it. Is it appropriate?" said Lacreta, adding that executives should figure in the risks of the regional and local economy when projecting loan loss reserves.
"There’s been a great reluctance on the part of some credit union officials to recognize the actual losses," he said.
NCUA data is showing that loan losses are spreading among credit unions from mortgage portfolios to other areas.
"Unsecured credit card loans is the next area that is going to be suffering," said Lacreta. "Jumbo (mortgages) HELOCs and other loans are going to be the next wave (of losses), especially as unemployment starts to increase."
For credit card loans delinquencies rose from 1.3% in March 2008 to 1.99% in March 2009.
For indirect loans delinquencies rose from 1.11% to 1.33%.
For loan participations delinquencies went from 2.40% to 3.40%.
For business loans delinquencies over one month went from 2.57% to 4%.
First mortgage ARMs have also seen large increases in loan losses from a year ago, he noted.
Examiners are spending more time on exit interviews with managers and chairman. "The joint conferences have become longer and more in depth," he said.
For those credit unions whose net worth has fallen near regulatory minimums, examiners are going to be asking about targets for net income, in order to replenish net worth. "As a not-for-profit you still need to generate profit to replenish or increase net worth," said Lacreta.
Other areas NCUA examiners are playing close attention to:
* is the credit union prepared for the continued economic stagnation?
* concentration of assets, not only mortgage loans by mortgage investments can pose additional risks in combination;
* operational efficiency "Are you trying to have the most efficient operation for your members?"
* what products and services are key to the credit union’s general membership?
* what are the opportunities facing the credit union and is the credit union taking advantage of it?
* due diligence; is management properly assessing the risks of programs, plans and third-party relationships?
