Problematic CUs at Highest Level Since 2014

Problematic CUs at Highest Level Since 2014

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Federally-Insured Credit Unions rated 2-Stars or below, and therefore relegated to Bauer’s Troubled and Problematic Credit Union Report (T&P), are climbing, slowly but surely. Currently at 150 (out of 4,853), that may not seem like a lot. But, it has increased the last three quarters and now accounts for 3.09% of all federally-insured credit unions. That’s the highest percent we’ve seen since 2014.

Changes in reporting requirements may have nudged a small proportion of ratings down, but the effects of that were minor. A bigger issue, and one that we mentioned last week, is rising early-stage consumer loan delinquencies, particularly credit cards. This week’s bump in interest rates is not going to help that.

But here’s some good news: There are only 47 credit unions that are either rated 1-Star or below and/or are less than “Adequately Capitalized” by regulatory standards. (They can be found on page 7.) This number is actually down from 55 last quarter. Of the credit unions no longer in that situation: ten are rated 2-Stars (and therefore still on the T&P) but are now “Adequately (or Well) Capitalized”. This includes the 2-Star Municipal Credit Union, New York, NY, which had been operating under NCUA conservatorship since May 2019. After much improvement, it was returned to its members in February and we hope to see its recovery continue. The rest were acquired during the second quarter.

Six credit unions newly meet the page 7 criteria. (Look for those in green.) Half were already on Bauer’s T&P last quarter as 2-Star CUs. Another, N.R. Varick Memorial FCU, Uniodale, NY, is too small to rate. (Bauer only rates credit unions with at least $1.5 million in assets.) While not rated by Bauer, Varick Memorial’s regulatory capital classification dropped from “Well-Capitalized” last quarter to “Undercapitalized” this quarter.

At least one of the credit unions on page 7 has already found a rescuer. 5-Star Frontwave CU, Oceanside, CA has announced plans to take over neighboring Zero-Star Barstow Community CU with a merger agreement that is expected to close by year-end. Barstow has been on Bauer’s T&P since year-end 2020 data and has earned Zero-Stars for the latest two quarters. Its members should be pleased.

Barstow has had some difficulty with loan quality, but profitability (or lack thereof) was its primary problem area. It had not had a profitable quarter since 2018 or a profitable year since 2016. And here you see the second biggest problem for struggling credit unions.

The $18 billion dollar income that the industry posted in the first half of 2022 was down more than 15% from a year earlier. Almost 22% of all federally-insured credit unions posted a loss in the second quarter 2022, similar to 2020 but up considerably from 18.6% a year earlier. First-half losses in 2022, reported by 20.2% of the industry, were up from 18.3% in 2021 and 18.7% in 2020.

Another prime example of profitability woes is Zero-Star Moore West FCU, San Leandro, CA, which has not had a profitable quarter or first half since 2019. Sadly, that did not translate to a full year profit. It has not had one of those in recent memory.

Losing money quarter after quarter and year after year is sure to take a toll. Before the pandemic (September 30, 2019 financial data), Moore West FCU was a 5-Star credit Union with $14.5 million in assets, and a capital ratio of 10.2%. It had close to $3 million in loans outstanding and loan quality was good. But the losses kept coming. It lost one star with year-end 2019 data, then another three quarters later (9/30/20 data), and so on. Eventually, last quarter, it made it onto Bauer’s T&P.

Moore West FCU, now rated Zero-stars, had been considered “Well-Capitalized” by regulatory standards through March 2022 data. Not anymore. Moore West FCU is one of two credit unions categorized as “Significantly Undercapitalized” by regulators; the other is Zero-Star St. Johns Buffalo FCU, Buffalo, NY, which has been a fixture on Bauer’s T&P report for years.

In addition, two credit unions are now considered “Critically Undercapitalized”: Zero-Star MSBA Employees FCU, Garden City, NY and Zero-Star Paducah Teachers FCU, KY. Both are also Designated as Low-Income Credit Unions (LICU). While Prompt Corrective Action is required, we have noticed that “prompt”  has a different connotation when it comes to credit unions, particularly LICUs, and each is evaluated on a case-by-case basis.

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