More Credit Unions Slip Into Undercapitalized Status

Credit union income remained remarkably healthy overall in the third quarter, but signs of distress are rising among smaller credit unions.

The nation’s 5,244 credit unions earned $3.6 billion in the three months ending Sept. 30, down 7% as interest income contracted and loan loss provisions rose, according to a CU Times analysis of NCUA quarterly data released Dec. 4.

The effects of the quarter were harshest for small credit unions.

Small credit unions, in this case, refers to credit unions with less than $1 billion in assets, which as of Sept. 30 encompassed 4,876 credit unions with 44.2 million members and $535.2 billion in assets — about 30% of the nation’s total $1.81 trillion in assets and 35% of its 125.1 million members.

Losses occurred among 1,006 small credit unions, up from 602 losing money in 2019’s third quarter. Among the credit unions, 301 had lost money in both quarters.

Ten medium-sized credit unions (the 298 with $1 billion to $3.9 billion in assets) also lost money, compared with none a year earlier.

No losses occurred among the nation’s 70 large credit unions, those with $4 billion or more in assets.

Distress could also be seen by the rising number of undercapitalized credit unions of all statutory gradations (any with net worth ratios below 6%). There were 48 credit unions as of Sept. 30, up from 32 a year ago and 43 in June. Altogether, the 48 had $5.4 million in assets and 771,037 members on Sept. 30, less than 1% of the movement’s total.

They included three “Critically Undercapitalized” (less than 2%), six “Significantly Undercapitalized” (2% to 3.99%), and 39 with a plain “Undercapitalized” (4% to 5.99%).

The number of “Adequately Capitalized” credit unions (6% to 6.99%) also rose. They numbered 92 on Sept. 30, up from 44 a year ago and 78 in June.

On the other hand, “Well Capitalized” (7% or above) fell by 98 over the past year to stand at 5,104 on Sept. 30.

Among the critically and significantly undercapitalized credit unions, loan loss provisions accounted for the bulk of the loss.

For well capitalized credit unions, loss provisions took an annualized 0.50% of average assets from ROA.

All but two of the undercapitalized credit unions were small.

One of the exceptions was Municipal Credit Union, based in New York City ($3.8 billion, 590,229 members), that graduated from being classified “significantly undercapitalized” as of September 2019 with a net income ratio of 3.87%, to “undercapitalized” with a net worth ratio of 4.65%. It had net income of $15.3 million in the three months ending Sept. 30, up 50% from a year earlier.

MCU was placed into conservatorship by the NCUA in May 2019 following widespread fraud and corruption that led to more than $18 million in financial losses and $109 million in write-down losses.

Large credit unions were much more aggressive in taking loan loss provision in the third quarter, but still managed to emerge with better returns. Net income and loan loss provisions for the three months ending Sept. 30 compared with a year earlier were:

Small credit unions (less than $1 billion in assets) earned $872.7 million, -6.8% (ROA 0.66%, -15 bps). Their loan loss provisions were $334.3 million, -5.1%. They had $535.2 billion in assets, 44.2 million members as of Sept. 30.

Medium credit unions ($1 billion to less than $4 billion) earned $1.2 billion, -1.8% (ROA 0.84%, -16 bps). They had $566.4 billion in assets, 38.3 million members as of Sept. 30.

Large credit unions ($4 billion or more) earned $1.5 billion, -10.9% (ROA 0.87%, -28 bps). They had $705.6 billion in assets, 42.7 million members as of Sept. 30.