Unprofitable groups up 11%, but no cause for worry seen.

Tightening interest margins drove up the number of unprofitable credit unions at midyear for the first time since 1989.

As of midyear, 727 credit unions were losing money, up 11% from the year-earlier period, according to figures from Veribanc Inc., a consulting firm in Wakefield, Mass. The institutions, which represent $3.4 billion in assets, lost $23.7 million.

The National Credit Union Administration does not regard the increase as "a serious situation," according to Bob Loftus, the agency's director of public and congressional affairs.

The number of "problem" credit unions has fallen to 318 in 1994 from 474 a year earlier, Mr. Loftus pointed out.

"We think whatever small increase there has been is due to investment losses from those credit unions forced to sell or write down investments in a rising interest rate environment," Mr. Loftus said.

That was the case with McGraw Hill Employees Federal Credit Union, said Wayne Hudson, president of the New York-based institution.

The $147.3 million-asset group lost $66,000 in the first six months.

"We had to mark investments to market when we sold them off," he said. The credit union is repositioning its investment portfolio for shorter terms and better yields, and the loss is "no major concern."

Kern Federal Credit Union, Bakersfield, Calif., anticipated tightening margins would lead to losses, said president DeAnn Straub.

The $82 million-asset institution lost about $59,000. in the first six months of the year, according to Veribanc. It has $6.7 million of capital.

The credit union's loan and savings products both are variable rate, and have adjusted to the hikes.

"Things are evening off," she said. "We anticipated this and our capital was in good shape."

William F. Hampel Jr., chief economist for the Credit Union National Association, called the loss of interest income "a snapback from the unusually high net income levels of 1992 and 1993."

The industry's return on assets for June 1994 was about 1.2%, down from 1.4% a year earlier.

Net income will continue to fall and the number of institutions losing money will continue to rise into next year, Mr. Hampel said. But for now, he's not worried about it.

"With credit unions' capital higher than ever, there's no reason for alarm," he said.

So far, most credit unions that have lost money are well-capitalized, Mr. Hampel said.

According to CUNA, 591 of those institutions have a capital-to-assets ratio above 6%, up from 486 last year.

The number of money-losing credit unions with a capital ratio of 6% or less fell to 133 from 173.

Other analysts also saw nothing ominous in the numbers.

"I think that this is a pretty small number of institutions to be losing money," said Warren Heller, Veribanc's research director. As of June 30, there were 12,332 credit unions with $296.8 billion in assets.

He added that the number of credit unions losing money increases in the second half of the year as management charges off more loans.

That number has fallen steadily since 1989.

"We're looking at less than 2% of assets of the industry losing money -- not a scary thing," agreed Ben Ely, an Alexandria, Va.-based consultant.

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