Late-2005 Rush To File Bankruptcies Pushes Earnings To A 20-Year Low

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Last fall's deluge of personal bankruptcy filings, just as the new bankruptcy law was to take effect, caused credit unions to set aside millions of dollars in additional loan loss reserves and pushed down fourth-quarter earnings to a 20-year low, according to NCUA.

Credit unions reported an 80% spike in member bankruptcies for the fourth quarter, causing them to add $850 million to their loan and lease loss reserves, according to data compiled by Callahan & Associates based on fourth quarter 5300 Call Reports. For the fourth quarter alone, credit union loans subject to bankruptcy soared by 33% to a new high of $2.6-billion, indicating there are more bankruptcy-related delinquencies and charge-offs due to come.

The additional bankruptcy filings also helped push up fourth quarter operating expenses by 33%, further eating into net income.

This pushed down the key profitability indicator, return on average assets, or ROA, to just 0.64% for the fourth quarter, and to a 10-year low of 0.85% for the full year. Credit unions had reported a healthy 0.93 ROA for the first three quarters of 2005.

"That's really where the hits came from," said Jeff Taylor, senior economist for NAFCU, of the flood of fall bankruptcies. The affects of the new bankruptcies will continue into the first quarter, but a slower pace, he predicted.

The spike in bankruptcy charge-offs-credit unions reported a 50% increase for the fourth quarter-was due to a storm of 300,000 personal bankruptcy filers in the two weeks prior to the Oct. 17 effective date of the new bankruptcy law, as debtors sought to file under the old law, which made it easier to erase debts under bankruptcy. About a third of those new filers were credit union members. The two-week flood of new filings helped push the full-year total to a new record of more than 1.5 million bankruptcies.

"We got blasted," said Mike Vadala, president of The Summit FCU, Rochester, N.Y. "It hurt our year."

He said The Summit FCU reported a 54% increases in charge-offs for 2005, almost all of it due to the rash of new bankruptcies in the six weeks before the new law took effect. This forced the $380-million credit union to double its loan loss reserves to $200,000 for the fourth quarter.

Navy FCU reported an almost doubling in member bankruptcies for the months of October and November, immediately after the flood of new filings, according to Phil Bugge, manager of specialized collections. As a result, the credit union giant reported a 158% surge in fourth quarter charge-offs. Part of that, Bugge explained, was also because Navy Fed changed its charge-off policy to record charge-offs faster.

"October and December (filings) were extremely high, due to the effect of the new law," said Bugge, who added that the resultant backlog in the bankruptcy courts means NFCU wasn't receiving some of the September and October filings until November and December.

But, he added, Navy Fed is already seeing signs of a slowdown in bankruptcies and their effects, the main purpose of the new law.

For one thing, they're seeing more people file for Chapter 13 to reorganize, instead of erase, their debts, meaning the credit union will recover more debts owed by bankruptcy filers.

For another, they're seeing more members filing to reaffirm, or voluntarily repay, some of their debts, particularly car loans, after filing for bankruptcy. That's because the new law has accelerated the reaffirmation process, he said. Under the new law, a member in bankruptcy must file an intent on his or her loans within 30 days, otherwise the credit union can repossess the vehicle. Under the old law, they had up to 90 days. In January, Navy Fed reported a 158% increase in reaffirmations vs. January of 2005.

Storm clouds arose in other areas for credit unions in the fourth quarter, according to NCUA. Share growth slowed to a crawl with less than a third of 1% growth for the three months, one of the slowest periods in history. That cut share growth for the full year to just 3.8%, the lowest since 1994.

Loan growth also slowed in the fourth quarter to just 1.4%, bringing full year loan growth to 10.6%.

At year-end credit unions reported average net capital of 11.2%, a ten-year high.

And the number of credit unions continue to drop, with 319 credit unions disappearing through merger or liquidation, cutting the total number of U.S. credit unions to less than 9,000 for the first time in five decades.

2005, STATISTICALLY

ALEXANDRIA, Va.-NCUA has released the following statistics for federally insured credit unions between Jan. 1 and Dec. 31, 2005 follows:

* Assets increased 4.9% to $678.7 billion from $646.9 billion.

* Loans increased 10.6% to $458.2 billion from $414.3 billion;

* Shares increased 3.8% to $577.4 billion from $556.1 billion.

* Investments decreased 7.31% to $148.0 billion from $159.6 billion;

* Net worth increased 7.6%, to $76.3 billion from $70.9 billion.

* Membership increased 1.5% to 84.8 million members.

MORTGAGE RATES UP AGAIN

McLEAN, Va.-Long-term mortgage rates inched up again last week to their highest level this year, according to Freddie Mac. The average for the 30-year, fixed-rate mortgage increased to 6.28% this week, from 6.24% last week; while the average for the 15-year, fixed-rate loan rose to 5.91%, from 5.83%. ARM rates also moved higher, with the five-year ARM rising to 5.95%, from 5.89% last week; and the average for the one-year average going to 5.36% from 5.34%.

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