When Common Bond Means Struggling Together

When Common Bond Means Struggling Together

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We may be tired of hearing that “we’re all in this together”, but for credit union members (who are also owners) their common bond makes it true. In good times, this common bond is a source of strength: a group that works at a certain company or industry, or even lives in a particular community, can pool its deposits together for the benefit of all.

However, in bad times, especially when unexpected, a credit union can suffer along with its members. A perfect example was when Uber and Lyft decimated the value of taxi cab medallions. That situation affected a relatively few number of credit unions, mostly in and around NYC.

The 57 credit unions listed on page 7 are struggling now. They are either: rated 1-Star or below; or are less than adequately capitalized (or both) based on third quarter 2020 financial data. While 57 institutions accounts for only 1% of the industry, the number is up from 48 the previous quarter and just 39 a year ago.

We want to take a closer look at a few that are newly rated 1-Star. Let’s start with Friends FCU in Norman, OK (just South of Oklahoma City). Friends FCU is open to anyone who lives, works or worships within a designated geographic area. Its fate is tied to the region as a whole rather than an industry. And although it is newly rated 1-Star, its decline began pre-COVID. During the five quarters between 3rd quarter 2019 through 3rd quarter 2020, Friends FCU’s capital ratio dropped from 8.7% to 6.0% and its Star-Rating from 3-Stars to 1-Star.

Friends FCU’s loan portfolio is comprised of auto loans (83%) and unsecured loans (17%). Non-performing loans dwarf those of its peers. It and its 1,500 members are a reflection of current circumstances in and around Norman.

Now let’s turn our attention to New York, which we know has been a COVID hotspot. Empire Branch NA of Le Carr in NYC has been relegated to Bauer’s Troubled and Problematic Credit Union List for four years now as a 2-Star Credit Union. With a capital ratio of just 4.6%, not only is it undercapitalized, but it also lost a star. Its field of membership includes as many as 5,000 but it currently has fewer than 1,900 members.

Over three-quarters of Empire’s loans are unsecured, the rest are auto loans. Five and half percent of its loan portfolio is delinquent and Empire has not posted a profit in years.

Next, we go to the Deep South to West Jefferson FCU, Marrero, LA, a credit union dedicated to employees and contractors of the West Jefferson Medical Center or Doctors Offices, and family members. Sixteen hundred of a potential 3,000 are members.

West Jefferson FCU has done a better job at diversifying its loan portfolio than the other three we’ve discussed, but not by much. It has 10% invested in Real Estate and the rest, you guessed it: autos (62%) and unsecured (28%). Its delinquent loan ratio more than doubled in the 12 months ended 9/30/2020.

We’re just going to look at one more today. Another similar story, this one in California. Bauer’s Troubled and Problematic Credit Union List, Pomona, CA, is a municipal credit union not far from Los Angeles. With only $4.3 million in assets and fewer than 800 members, it is the smallest of the four. Pomona Postal was rated 3-Stars (Adequate) four short quarters ago, but like the state of California, it has gone downhill fast. Pomona Postal has limited its lending to automobiles and unsecured, almost half and half. Pomona Postal reported zero delinquent loans at 9/30/2020... but only because it charged them off.

A year ago, things were quite different. Since September 30, 2019, its capital ratio dropped from 15.4% to 6.9% and its delinquency to asset ratio went from 2.2% to zero. What remains constant is that it continues to lose money. It will have to remedy that situation if it hopes to turn itself around.

Theoretically, any of these credit unions can still turn the tide. Although, that is not an easy task in the best of times. It is infinitely more difficult in the current environment.

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