The Federal Reserve boosted short-term interest rates by three-quarters of a percent on Wednesday. That completes the removal of the 1.5% easing of credit (March 2020) intended to “stimulate” the economy during the Covid-19 shutdown. The target Fed Funds rate now stands between 1.5 and 1.75% and Jumbo CD rates are following.
New projections put the Fed Funds rate somewhere between 3% and 4% by the end of this year and possibly over 4% the end of 2023. That’ll give us something to look forward to.
In the meantime, NCUA Chairman Todd M. Harper reported, “Lending remained strong, and we continued to see low delinquency and charge-off rates.” That is true, but… the percent of federally-insured credit unions on Bauer’s Troubled and Problematic Credit Union Report, those rated 2-Stars or less OR not at least Adequately Capitalized, is at its highest level since 3Q’2014.
Recommended credit unions (those rated 5-Stars or 4-Stars) dipped below 82% for the first time in almost four years. Eighty-two percent is still impressive and, as a whole, the industry still looks good.
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Change from 1 year Ago |
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| Assets | Up | 8.7% |
| Loans | Up | 11.7% |
| Shares/Deposits | Up | 8% |
| Net Interest Margin | Unchanged | 2.57% |
| Delinquencies | Down | .04% |
| Chargeoffs | Down | .04% |
But not all C.U.s are sharing in that good fortune. On page 7 we list 55 federally-insured credit unions that are either a) less than “Adequately Capitalized” by regulatory standards and/or b) rated 1-Star or Zero-Stars by Bauer. The number of credit unions that fall into this category has grown by 10 (22%) since a year ago. By adding 2-Star CUs into the mix, the number of CUs relegated to Bauer’s Troubled and Problematic C.U. Report now stands at 150.
One that stands out in particular is Zero-Star Paducah Teachers F.C.U., Paducah, KY, which dropped to our lowest rating during the first quarter. Paducah lost over 40% of its capital bringing its capital ratio (CR) down to just 6.5%. It also posted a loss of $634,000, which may not sound like a lot, but it is over 70% of Paducah’s new reported capital. Then we look at its loan portfolio. Paducah has about $12.2 in total loans outstanding. Almost 40% of those are secured by used vehicles. Not only does Paducah report that $700,00 of those vehicle loans are 60 days or more delinquent, it also charged off over $90,000 worth in the first quarter.
Unsecured loans, which account for another 18% of Paducah’s loan portfolio are not fairing much better. The result of poor underwriting is a negative Bauer’s Adjusted CR (-4.7%) and a Texas Ratio that is flirting with 100%.
Another credit union that saw a precipitous 1st quarter drop is Zero-Star Revere Municipal Employees FCU, Revere, MA. While Revere does not share the poor loan quality issues that plague Paducah, it lost a similar amount of its capital during the first quarter. With a CR of just 4.57% and a regulatory capital classification of “Under-Capitalized” we were not surprised to learn that Revere found an acquirer.
As of May 31st, the 2,415 members of Revere Municipal EFCU now belong to 4-Star St. Jean’s Credit Union. Established in 1910, St. Jean’s is headquartered in nearby Lynn, MA and has a branch in Revere at the Wonderland Marketplace in Revere as well as two in Salem, MA and one in Newburyport. These new ly acquired members bring St. Jean’s membership close to 20,000 and its assets to about $333 million.
Only one credit union is currently considered “Critically Undercapitalized” by regulatory Prompt Corrective Action (PCA) standards. With a negative capital ratio of (-2.68), that distinction belongs to Zero-Star MSBA Employees FCU, Garden City, NY. MSBA was one of two to fall into this category at year-end. The other, JACL Credit Union, Glendale, AZ closed for business in February.
MSBA is both a Minority depository Institution and a Limited Income Credit Union, so it will be given every opportunity to either correct its ills or find another, preferably Black-Owned (as it is now), institution to acquire it.