Monday, October 20, 2014

FAQ: When Are CUs Included in Regulatory Analysis of Bank M&A Deals?

Last week, the Federal Reserve published answers to a frequently asked questions (FAQ) document to help bankers understand how the Federal Reserve and the Justice Department evaluate proposed merger and acquisition (M&A) activities.

The FAQ includes a discussion about when the Federal Reserve includes credit unions in the Herfindahl-Hirschman Index (HHI) calculation, which measures market concentration, and under what circumstances would a credit union receive a 100 percent weighting in the HHI calculation.

When are credit unions included in the HHI calculations?

If an application exceeds the delegation criteria in a given market in the initial screen, Board and Reserve Bank staff will consider whether any credit unions should be included in the structural concentration calculations, because they exert competitive pressure on banks in the market. Credit unions are typically included in these calculations if two conditions are met: (1) the field of membership includes all, or almost all, of the market population, and (2) the credit union's branches are easily accessible to the general public. In such instances, a credit union's deposits will be given 50 percent weight.

Under what circumstances would a credit union get 100 percent weight in the HHI calculation?

If a credit union has significant commercial lending and has staff available for small business services (special tellers, lending officers, business-only teller windows, etc.), then its deposits may be eligible for 100 percent weighting. To date, it has been very rare for a credit union's deposits to receive more than 50 percent weight.

Total C&I lending as a percentage of assets is an important factor in this consideration. The C&I lending of a credit union includes C&I loans, unsecured business loans, and unsecured revolving lines of credit for business purposes.

However, business loans secured by real estate and construction loans are not counted as C&I loans.

The FAQ also discusses the circumstances when the Justice Department's Antitrust Division (Division) includes credit unions in its analysis.

The Division may include the deposits of a credit union in the HHI analysis if the credit union meets certain criteria. Similar to the conditions set forth by the Federal Reserve, to be considered an active competitor in retail banking, a credit union must have a community-based field of membership, making it easily accessible to customers looking for banking alternatives in the market. For small business banking, the Division will evaluate factors similar to those considered in the analysis of thrifts to determine whether a credit union is an active competitor. Unlike thrifts, however, credit unions do not provide deposit data to the FDIC. Reliable branch-level data may not be readily available for HHI calculations. Therefore, in such cases, the presence of credit unions that meet these criteria will be considered a mitigating factor in evaluating the competitive effects of a transaction.

Read the FAQ.

Wednesday, October 15, 2014

Community First CU to be Title Sponsor of Jacksonville's Light Boat Parade

Community First Credit Union has agreed to be a title sponsor of Jacksonville's Light Boat Parade for at least the next three years.

Organizers hope to have at least 100 boats participate in the parade. After the boat parade, there will be a fireworks show.

Community First and Gator Bowl Sports declined to disclose the dollar amount for the credit union’s sponsorship.

But is sponsoring a boat parade consistent with the tax-exempt purpose of a credit union?

Read more.

Tuesday, October 14, 2014

Who Benefits When CUs Merge?

A paper by Bauer, Miles, and Nishikawa found gains to the owners/members of the target credit union and to the regulators but not to the acquiring credit union.

The paper examines pre-merger versus post-merger performance of credit unions between between 1995 and 2003. The study treats all mergers as the same whether the merger is between willing partners or a purchase and assumption agreement (P&A) between the acquiring credit union and the National Credit Union Share Insurance Fund (NCUSIF). The paper notes that less than 10 percent of the mergers involved P&As with the NCUSIF.

The paper found that members of the target credit union experienced a net gain from the merger.

The study also found that the performance of acquiring credit unions is little affected by the merger. If an acquiring credit union makes some financial adjustments to a merger, these changes tend to favor borrowers at the expense of savers.

Furthermore, the study found evidence to support the hypothesis that most mergers are instigated by regulators to avert using NCUSIF to resolve failing credit unions. The authors posit that the acquiring credit union may do the merger to avoid any disutility to its members that may arise from impact of the failed credit union on the NCUSIF.

Read the paper.

Monday, October 13, 2014

Free Checking Means Free

The Consumer Financial Protection Bureau (CFPB) is once again doing regulation via enforcement action. This time, the CFPB is cracking down on financial institutions that are deceptively advertising free checking accounts.

CFPB Director Richard Cordray commenting on an October 9 enforcement order against M&T Bank stated that banks and credit unions "cannot misstate to consumers whether a financial product or service is free."

The CFPB wrote that consumers were lured by M&T Bank with promises of “no strings attached” free checking, but the bank failed to disclose key eligibility requirements for the account.

The CFPB noted: "None of the advertisements for Free Checking disclosed either the minimum activity requirement or the automatic conversion of a Free Checking account ... after 90 days of inactivity."

The CFPB press release stated that banks and credit unions are prohibited from deceptively advertising deposit accounts. If an account is described as free or no cost, it cannot, for example, have any maintenance or activity fees, or any fees to deposit, withdraw, or transfer money.

According to the CFPB, the failure to disclose these eligibility requirements is a deceptive act or practice.

Read the press release. Read the consent order.

Saturday, October 11, 2014

County & Municipal Employees CU Closed

The Texas Credit Union Department liquidated County & Municipal Employees Credit Union of Edinburg, Texas, and named the National Credit Union Administration as liquidating agent.

Navy Army Community Credit Union of Corpus Christi, Texas, immediately assumed County & Municipal Employees Credit Union’s members, assets, shares and selected loans.

The Texas Credit Union Department made the decision to liquidate County & Municipal Employees Credit Union and discontinue operations after determining the credit union was insolvent with no prospect for restoring viable operations on its own.

The credit union reported a loss of almost $3.4 million through the first nine months of 2014. As of the end of the third quarter, the credit union was critically undercapitalized with a net worth ratio of 0.85 percent. Also, 21 percent of the credit union's loans were 60 days or more delinquent.

County & Municipal Employees Credit Union had assets of $40.3 million and served 7,173 members, according to the credit union’s most recent Call Report.

County & Municipal Employees Credit Union is the ninth federally insured credit union liquidation in 2014.

Read the press release.

Friday, October 10, 2014

CU Discount Window Borrowings, Q3 2012

During the third quarter of 2012, 48 credit union borrowed from the Federal Reserve's Discount Window.

The Federal Reserve releases this information with a two year lag.

The total number of transactions with the various Federal Reserve Banks during the quarter was 130.

Three credit unions accounted for almost half of the total number of borrowings. These credit union borrowers were Greater Springfield Credit Union (14), Northwest Community Credit Union (23), and Sun Community Federal Credit Union (27). The number of times they borrowed from the Discount Window appear in parenthesis.

The average amount borrowed was almost $4.3 million, while the median amount borrowed was $1.25 million.

The maximum amount borrowed was $50 million by Northwest FCU (Herndon, VA).

With the exception of two credit unions that access the Federal Reserve's seasonal credit program, all other borrowings were through the Federal Reserve's primary crdit program, which is reserved for healthy institutions.

Below is a list of credit unions that borrowed from the Federal Reserve by the date the loan was originated and the amount borrowed.

Wednesday, October 8, 2014

No Opposition, Really?

During the September 18 NCUA Board meeting, an NCUA staffer stated there was no opposition to the expansion of First Service FCU's community charter to eight counties in Columbus, Ohio metropolitan statisitcal area.

According to the official transcript of the meeting, new NCUA Board member J. Mark McWatters asked Leilani Stamper, Consumer Access Analyst for the Office of Consumer Protection: "Is there any opposition to this motion?"

Leilani Stamper replied: "No."

J. Mark McWatters asked: "There’s no opposition?"

Leilani Stamper once again replied: "No."

But how did Leilani Stamper know there was no opposition?

NCUA does not request comments from the public regarding a conversion to a community charter or an expansion of a community charter.

The agency failed to adopt its proposal from 2007 that would have required notice and request for comment for those community charter applications that do not meet the established definitions of a well-defined local community.

The simple fact is that Ms. Stamper cannot know if there was any opposition to this community charter application.


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