Despite Quarterly Losses, CUs Find Hope on the Horizon

The second quarter’s improvement in earnings came with fewer big losses, and a closer look at the big losses that occurred for credit unions provides some hope for further improvement — if the Fed begins cutting interest rates this year.

First, the largest credit union loss appears to be an outlier (or at least not a product of economic conditions). It came from the relatively small Creighton Federal Credit Union of Omaha, Neb. ($66.9 million in assets, 9829 members), which lost $13.5 million in the three months ending June 30, including an unexplained $12.5 “Miscellaneous Non-Interest Expense” in its NCUA call report that CU Times reported on earlier.

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After Creighton, the next biggest second-quarter losses were generated by:

• First Technology Federal Credit Union of San Jose, Calif. ($16.7 billion in assets, 692,891 members), which lost $12.7 million in the second quarter, or -0.30% ROA, compared with gains of 0.21% a year earlier and 0.32% the previous quarter.
• BluPeak Credit Union of San Diego ($1.4 billion in assets, 56,925 members), which lost $6.3 million in the second quarter, or -1.77% ROA, compared with a 0.08% gain a year earlier and a -0.24% loss the previous quarter.
• Multipli Credit Union of Springfield, Mo. ($184.3 million in assets, 10,320 members), which lost $5.4 million in the second quarter, or -11.77% ROA, compared with gains of 0.58% a year earlier and 0.85% the previous quarter.
• Michigan State University Federal Credit Union of East Lansing, Mich. ($7.9 billion in assets, 359,937 members), which lost $4.8 million in the second quarter, or -0.24% ROA, following losses of -0.14% a year earlier and -0.12% the previous quarter.

First Tech’s second-quarter loss of $12.7 million was caused by $48.4 million (-1.15% of average assets) in credit loss expenses under CECL, an increase of $30.1 million (51 basis points) from a year earlier and $19.4 million (62 bps) from the first quarter.

First Tech had $1.3 billion of its $12 billion loan portfolio in commercial loans as of June 30 — almost all backed by real estate. Its call reports show no delinquencies of 60 days or more in its commercial portfolio, but President/CEO Gregory A. Mitchell told CU Times in an email that CECL formulas require the poor conditions in that market to be reflected in its expected losses.

“While core earnings remained at plan, Q2 earnings were negatively impacted by CECL model-driven charges related to our commercial loan portfolio,” Mitchell said. “While delinquencies in First Tech’s portfolio remain very low, market conditions in the commercial real estate remain challenging while with Moody’s, and others, to assume a higher probability and severity of loss across the entire sector.”

Mitchell continued, “Those changes in model assumptions are a likely cause of increased provisions and losses across the spectrum.”

MSUFCU’s $4.8 million loss followed a $2.3 million loss in the first quarter.

Like First Tech, MSUFCUs loss was within the plan, albeit the plan for when conditions are highly unfavorable, especially when first mortgages accounted for $2 billion of its $6 billion loan portfolio as of June 30.

“We have historically held in portfolio all of our mortgage loans,” President/CEO April Clobes said in an interview with CU Times.

Clobes said that with the 500-basis-point increase in the federal funds rate since early 2022, a large portion of the portfolio has been yielding below market rates. She said the credit union’s asset liability management strategy forecast such conditions would lead to losses for two years.

“We’ve had losses for one year,” she said.

Clobes expects recovery will occur this year.

For the full year of 2024, Clobes said the credit union expects its loss will be about $6 million — basically the loss it has already incurred in the first half.

“Instead of reducing our expenses for growth, we will absorb this loss this calendar year,” she said. “Our board has approved that we stay the course.”

“We have the capacity to manage through this,” she said. “That’s what we have capital for. You lose it in a difficult year, and we will build it back up.”

Multipli’s $5.4 million loss is an artifact of a merger, according to its former and current CEOs.

Judy Hadsall retired as president/CEO of Multipli after it was acquired July 8 by River Region Federal Credit Union of Jefferson City, Mo. ($522 million in assets, 31,550 members as of June 30) through a merger that the credit unions announced in January. Hadsall said she received no compensation beyond what she was already owed for her retirement.

NCUA’s June 30 merger report lists the reason for the merger as “poor management.” Hadsall and River Region President/CEO Rick Nichols disagreed strongly.

Hadsall said the credit union had been profitable. She said she and the board had decided the credit union need to scale up and rather than acquiring a smaller credit union, the board decided to be acquired by a larger one.

“It’s getting harder and harder for credit unions our size to compete,” she said. “It made perfect sense for our credit unions to merge.”

But she said there was no immediate crisis.

“We could have continued with $17 million in capital. We were in a good place,” Hadsall said.

She and Nichols said the main reasons for the $5.4 million second-quarter loss were two massive charges stemming from the merger.

First, the board decided to return $2 million to members before the merger. Multipli’s June 30 call report showed its dividends in the second quarter were $1.9 million higher than the first quarter.

Second, she said NCUA required the credit union to realize about $3 million in built-up losses on held-for-investment securities before the merger. Its call report showed its loss on “all other investments” was $3.5 million in the second quarter, up from a mere $2,478 loss in the first quarter.

“She is totally accurate on the expenses,” Nichols said in an email to CU Times.

Multipli’s transition to River Region was completed Sept. 1.

Nichols said Multipli was “a very healthy $180 million credit union with the third highest regulatory capital in the state.”

“They continually post(ed) an ROA over 100 bps and have a consistent field of membership that offers great growth potential with additional resources from a merger,” he said.

Nichols said River Region chose to expand to the Springfield market because of its population growth and its “strategic change” from a state to a federal charter.

“We spoke to Multipli since they are a strong credit union that would kick start the expansion and we philosophically align,” he said.

Nichols also explained the merger to members in a video posted on YouTube July 15.