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We Analyze Banks & Credit Unions ...very carefully

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As a whole, the nation’s credit unions performed admirably during calendar 2021. However, NCUA Chairman Todd Harper sounded a similar cautionary tone as we heard last week from his bank (FDIC) counterpart.

“The potential for new COVID variants, continuing labor market and supply chain challenges, inflationary pressures, the prospect of rising interest rates, and current geopolitical tensions could negatively affect household finances and ultimately credit union performance going forward. Credit unions and the NCUA, therefore, must remain watchful and ready to respond to these issues.”

Also similar to banks, the number of federally-insured credit unions is now below 5,000 (4,942 to be exact). Membership in credit unions is climbing rapidly though. After adding 5.3 million members over the course of the year, total credit union membership reached 129.6 million.

With credit unions, we see much greater variances in performance based on the size categories. For example, the NCUA reports that the group with assets less than $10 million declined by 120. Understandably, they took with them their assets, loans and members.

The fact is, every category reported declines with the exception of one: the largest. There are now 404 credit unions with assets of $1 billion or more. These 404 credit unions combined hold $1.5 trillion in assets or 74% of total system assets. Loans in this category grew by 11.6% and membership was up 9.2%.

Forty-eight credit unions are now rated 5-Stars that were not last quarter. Of those, nine have assets of less than $10 million, 16 are between $10 and $100 million, 14 have assets of at least  $100 million but less than $1 billion and nine have assets of $1 billion or more.

That’s a pretty good distribution. However, the percent of credit unions with Bauer’s Recommended rating (5-Stars or 4-Stars) has declined for the sixth consecutive quarter.

Additionally, 24 credit unions joined our Troubled and Problematic Credit Union Report (rated 2-Stars or below) with year-end data. That brings the number of institutions on that report to 142, up from 123 a year ago. All of the new additions have assets less than $300 million.

The 52 credit unions listed on page 7 each experienced a minimum of 32.5% growth in shares and deposits during calendar 2021. Note the wide range of asset sizes. Those with N.R. in the rating are too new to rate. Being new raises the expectation of rapid growth, like N.R. Growing Oaks FCU, Goldsby, OK, which was established in 2020.

One credit union that just gained 5-Star status, 5-Star Valley Strong Credit Union, Bakersfield, CA, acquired two other credit unions during 2021. On July 1st, it acquired $186 million asset Zero-Star Solano First FCU, Fairfield, CA. It followed that up with the October 1st acquisition of 4-Star Financial Center CU, Stockton, CA, a $634 million asset institution.

You may remember 1-Star White Earth Reservation FCU, Mahnomen, MN from JRN 39:09 when we reported on credit unions expanding to serve the underserved. Most of White Earth’s growth occurred earlier in the year. Sadly, as its assets, loans and shares grew, its capital ratios suffered. It has been undercapitalized since September 30th.

The majority of the credit unions on page 7 saw deposits and shares grow organically, similar to banks during the same time-frame.

We would be remiss if we did not mention that a second credit union was released from conservatorship less than a month after the first. On February 23rd, the NCUA released the now 1-Star Municipal Credit Union, NY, NY from conservatorship and returned control to its members (JRN 39:09).

On March 17th, the same thing will happen to 2-Star Southern Pine CU, Valdosta, GA. Southern Pine’s capital level has returned to  “Well-Capitalized” by regulatory standards, it is now profitable and its loan quality is improving. If it keeps up the good work, we can expect to remove it from Bauer’s Problem list in the next couple of quarters.

Zero-Star Empire Financial FCU, NY, NY, was not as fortunate. Operating under conservatorship since May 24, 2021, the NCUA shut it down on March 4, 2022. In spite of its “Well-Capitalized” regulatory status, Bauer saw the precipitous deterioration in Empire Financial’s loan quality at year-end 2020. It was downgraded to Zero-Stars at that point. While it showed a slight improvement after the NCUA put it in to conservatorship, it was nowhere near enough, nor was it sustained. And there went the Empire.

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