Federally-insured credit unions ended the second quarter 2024 with $2.3 trillion in assets, up 3.5% from a year earlier. About 70% of those assets ($1.62 trillion) is in the form of outstanding loans, which increased just slightly more at 3.6%.
However, many credit unions are feeling pinched by nonperforming loans. On page 5 of this week's issue of Jumbo Rate News you will find 51 such credit unions. As always, there is more than meets the eye. That's why Bauer looks at the entire financial picture before assigning a star-rating.
Credit Unions Not Exempt From Loan Quality Woes
Federally-insured credit unions ended the second quarter 2024 with $2.3 trillion in assets, up 3.5% from a year earlier. About 70% of those assets ($1.62 trillion) is in the form of outstanding loans, which increased just slightly more at 3.6%.
At the same time, the delinquency rate increased 21 basis points (bps) from 63 bps to 84 bps and the net charge-off ratio was up 26 bps to 79 bps at June 30th. As one would expect, provisions for potential loan losses increased as well, by 41.4%.
Insured shares and deposits grew by $36 billion (2.1%), during the 12-month period. However, regular shares were down by $50 billion and were replaced with $123.8 billion in higher yielding share certificates.
NCUA Chairman, Todd Harper, said, “interest rate and liquidity risks have ebbed recently”. Bauer adds the caveat that, it really depends on how well the maturity dates of those certificates coincide with Federal Reserve rate cuts, which began on Wednesday, with a half point cut.
Another indicator of stress from credit union borrowers is an 18.4% year-over-year increase in Payday Alternative Loans (PALs). At $304.5 million, this marks the first quarter that payday alternative loans have surpassed the $300 million mark.
After peaking at over $800 billion in the second quarter of 2022, total loans granted (year-to-date, annual rate) are now down to $500 billion.
Not all credit unions are feeling pinched by nonperforming loans, but the 51 listed on page 5 of this week’s JRN are. In addition to being rated 3-Stars or lower, each credit union listed has high delinquencies (represented by a nonperforming asset ratio of at least 3% AND loan loss reserves sufficient to cover less than 50% of those nonperformers).
As was the case last week with the corresponding bank list (JRN 41:36), we had to change our cutoffs from a year ago. Last year a nonperforming asset ratio of at least 2.7% AND loan loss reserves covering less than 80% of nonperformers gave us 51 CUs (JRN 40:36). Using those same criteria this year would have yielded 94 credit unions.
An additional 19 federally-insured credit unions would have also fallen into this category were they large enough to be rated by Bauer. (Bauer doesn’t rate credit unions with less than $1.5 million in assets.)
For example, N.R. U.S. Employees FCU, Fairmont, WV, with assets of just $641,000 (and dropping), is much too small to be rated by Bauer. Yet, nearly a quarter of its loans are delinquent. Nonperforming loans at this beleaguered credit union are roughly 12% of assets and it has set aside only enough to cover 20% of its delinquencies, should the need arise. With a capital ratio of 10.3%, regulators standards categorize this credit union as “well-capitalized”. But, with a Bauer’s adjusted CR of negative 1.77%, we beg to differ.
1-Star Greater Nevada Credit Union, Carson City, NV is not a stranger to this list. As its name suggests, Greater Nevada CU is a community credit union, open to anyone living or working in the Silver State. With total assets close to $1.8 billion, it is the largest credit union listed on page 5 of thus week's issue of Jumbo Rate News.
To serve its membership, Greater Nevada CU dove heavily into commercial lending… to the extent where commercial loans of $510.661 million account for 38% of its loan portfolio. Of those commercial loans, well over 14% are 60 days or more delinquent. It’s not a good sign when the largest segment of the loan portfolio is also the worst performing, but it could be worse. The other 62% of Greater Nevada’s portfolio, while not pristine, is performing much better than the commercial loans. As a result, the ratio of delinquent loans to total loans is 6.25%. While that is much better than 14%, it is far worse than the peer group average of 0.85%.
A non-performing asset ratio of 4.72% (>3%) and a loan loss coverage ratio of 20.5% (<50%) secured Greater Nevada CU’s spot on this list. A year ago, it looked a bit better with ratios of 3.77% and 23.07%, respectively. Two years ago, with a nonperforming ratio of less than 2%, Greater Nevada would not have appeared on this list at all.
Speaking of heading in the wrong direction, there are a number of new additions to this list since a year ago. 3-Star Lower East Side People’s FCU, New York, NY is among them. Originally established in 1986 to fill a void left by banks that were packing up and leaving the neighborhood, the field of membership for Lower East Side People’s FCU now extends from New York City’s Lower East Side to East Harlem and to the North Shore of Staten Island. Its membership is close to 10,000.
Lower East Side People’s FCU has been witnessing a steady increase in delinquent loans. Since the first quarter of 2023, its nonperforming asset ratio has risen from 1.28% to 5.97%. Its loan loss provisions are only sufficient to cover 21.37% of delinquent loans. It definitely deserves to be on this list.
Lower East Side has two things in its favor, however. Over 54% of its loan portfolio is first mortgage real estate which, as long as they were properly underwritten and, barring any bubbles, are about the safest loans to have. That’s one. The other is that Lower East Side is very well capitalized. It has a regulatory capital ratio of 18.95%. Even if it were forced to write off all of its delinquent loans, it would still be very well capitalized. That’s evidenced by a Bauer’s Adjusted CR of 13.83%. This is why it pays to look at the whole picture.
