Big Losses for Credit Unions in 2021 Precede Small Mergers

Of the seven credit unions that lost more than $1 million in the third quarter, five reported losses before being acquired through mergers.

And while members may be owners at credit unions, the NCUA doesn’t require credit unions to explain where the money goes with the rigor of notes and compensation reporting that banks and other public companies must provide their shareholders.

The five credit unions lost $33.3 million, or an annualized net loss on average assets (ROA) of -13.13% in the third quarter, compared with net income of $596,471 (ROA 0.26%) in 2020’s third quarter.

The biggest loss came from Financial Center Credit Union ($634.4 million in assets, 29,604 members as of Sept. 30). The Stockton, Calif., credit union lost $25 million (ROA -15.68%) after paying $15 million in special dividends to members and $10 million to its foundation before being acquired by Valley Strong Credit Union in Bakersfield, Calif. ($2.7 billion in assets, 192,523 members).

If it had been evenly distributed, the special dividend would have been $506 for each of Financial Center’s members.

Financial Center’s Call Reports showed the third-quarter losses came from the sum of these changes between the third quarter of 2020 and the third quarter of 2021:

• A $15.5 million increase in its “Dividends on Shares.”
• A $3.1 million increase in “Office Operations Expense.”
• A $9.5 million increase in “Miscellaneous Operating Expenses.”
• A $2.2 million decrease in “Employee Compensation and Benefits.” The reports reflected $29,482 as income for the period.

All five of the credit unions were classified by the NCUA as “Well Capitalized” as of September 2020, which means their net worth ratios were at least 7%, but Financial Center was among the two credit unions to maintain that classification in 2021. Its net worth ratio stood at 12.4% on Sept. 30, down from 17.21% a year earlier.

The other four credit unions are:

1. Coulee Dam Federal Credit Union, Coulee Dam, Wash. ($194.8 million, 13960 members), which was acquired after Sept. 30, 2021 by Spokane Teachers Credit Union, Liberty Lake, Wash. ($4.7 billion in assets, 231,868 members).

2. Horizons Federal Credit Union of Binghamton, N.Y. ($141.3 million, 13,047 members), which was acquired Dec. 1, 2021 by Empower Federal Credit Union of Syracuse, N.Y. ($2.7 billion, 220,009 members).

3. Fort McPherson Credit Union, Atlanta ($27.3 million, 3,735 members), which was acquired Oct. 1, 2021 by Georgia’s Own Credit Union, Atlanta ($3.3 billion, 206,237 members).

4. Telbec Federal Credit Union of Beckley, W.V. ($12.7 million, 1,369 members), which is planning on being acquired next year by Bayer Heritage Federal Credit Union of Proctor, W.V. ($620 million, 36,209 members).

Coulee Dam lost $4.2 million (-8.60% ROA) in the third quarter of 2021, down from a gain of $240,747 (0.57% ROA) a year earlier. Its net worth ratio stood at 5.24% (“Undercapitalized”), down from 8.26% in 2020.

Pay and other non-interest expenses were the main sources of the loss.

Other non-interest expenses (besides pay) were $4.1 million, up $3.4 million from a year earlier, primarily from a $3.2 million increase in professional and outside services.

Coulee Dam spent nearly $1.4 million more on employee pay and benefits in the third quarter of 2021 than they did a year ago. If evenly distributed, the bonuses would have been $31,963 per employee. The average pay in 2020 was $71,814.

Horizons lost $1.1 million (-3.12% ROA) in the third quarter of 2021, down from $57,684 in net income (0.18% ROA) a year earlier. Its net worth ratio stood at 9.29% on Sept. 30, down from 10.75% a year earlier.

Horizons had nearly $1.6 million in additional expenses in the third quarter of 2021. The sources of the losses were loan loss provisions, which were up $821,913 from a year earlier and “Miscellaneous Operating Expenses,” which were up $755,558 from 2020.

Fort McPherson lost $1.6 million (-22.76% ROA) in the third quarter of 2021, worsening from a net loss of $93,122 (-1.47% ROA) a year earlier. Its net worth ratio stood at zero (“Critically Undercapitalized”) on Sept. 30, down from 8.1% in 2020.

Most of Fort McPherson’s losses came from sharply higher employee and other non-interest expenses.

Miscellaneous operating expenses rose by $852,466 and Fort McPherson paid an extra $716,052 in employee compensation and benefits in the third quarter of 2021. If evenly distributed among its five full-time employees, they would have received bonuses of $143,210 each. The average pay in 2020 was $116,710.

Telbec lost $1.4 million (-44.14% ROA) in the third quarter in 2021, worsening from a loss of $25,010 (-0.70% ROA) a year earlier. Its net worth ratio stood at 6.96% (“Adequately Capitalized”) on Sept. 30, down from 8.76% in 2020.

Telbec’s loss stemmed from a $1.4 million increase in its “Office Occupancy Expense” in the third quarter. Telbec spent $14,477 on the expense in the first half, and $35,046 for the full year of 2020.