ALEXANDRIA, Va. - Credit unions are in Washington this week for CUNA’s GAC looking to talk politics, but they’ll likely find themselves fielding a few questions about their own balance sheets.
Net income at the nation’s credit unions plummeted 53% in the fourth quarter, pushing the industry’s returns down to their lowest in decades, NCUA reported last week. The industry’s return-on-assets, the key profitability indicator, plunged to just 0.35% for the fourth quarter, from 0.75% at the end of the third quarter. The 0.35% mark was the lowest since the 1980s.
The report for 8,101 federally insured credit unions came a day after the Office of Thrift Supervision said the nation’s thrifts had one of their worst quarters ever.
The main cause of the plunge in credit union profits was a massive shift of funds into provisions for loan losses as loan delinquencies and charge-offs are starting to tick up, according to Bill Hampel, chief economist for CUNA. Credit unions set aside $1.1 billion in new loan loss reserves during the period, an increase of more than 50%.
“That’s a significant increase in provision for loan losses in the fourth quarter. That’s the whole story,” the CUNA economist told Credit Union Journal. “It means that credit unions are projecting a big increase in charge-offs.”
Loan delinquencies rose to 0.93% at year- end, from 0.82% at the end of the third quarter, and 0.68% at year-end 2006. Charge-offs also rose slightly to 0.50% at year-end, from 0.46% at the end of the third quarter, and 0.45% at year-end 2006. Delinquencies rose significantly for loan participations and indirect loans, while member bankruptcies soared by 35% for the full year, all portending more problems in the near future.
The combination of factors pushed some of the nation’s biggest credit unions deep into the red for the fourth quarter. The list included: Eastern Financial Florida CU, a $49.5-million loss for the quarter; Wescom CU, a loss of $26.2 million for the period; Meriwest CU lost $11 million; CommunityAmerica CU lost $9.9 million in the quarter; SAFE CU had an $8.4-million fourth quarter loss; and The Credit Union of Texas lost $5.8 million for the quarter.
CUNA’s economics staff projects that the bottom line for credit unions will continue to be thin for the next few months, an average of 0.45% ROA for the first and second quarters, before picking up to around 0.60% for the second half of the year.
The biggest savior, according to Hampel, is net capital rose in credit unions to 11.4%–near an all-time high. This gives CUs a cushion to absorb some of the expected loan losses.
Credit union lending growth was soft in the fourth quarter, rising by 1.2%. Loan growth was a tepid 6.1% for the full year, according to NCUA. Deposits grew by 0.7% for the fourth quarter and by 5.2% for the year.
