Saturday, August 1, 2015

Mile High Lawsuit Against NCUA

The Fourth Corner Credit Union TFCCU), a Colorado credit union chartered to serve the cannabis industry, on July 30 sued the National Credit Union Administration (NCUA) in U.S. District Court in Denver for not approving its application for federal deposit (share) insurance. The credit union is also suing the Federal Reserve Bank of Kansas City.

The 78-page complaint alleges that NCUA deprived TFCCU of Due Process of Law in violation of the Fifth Amendment and the NCUA’s own procedures.

The complaint also claims that NCUA acted arbitrarily, capriciously, not in accordance with law and abused its discretion. Among the claims by TFCCU of NCUA's abuse of regulatory discretion are that NCUA:

improperly concluded that the credit union was unable to satisfy DOJ, FinCEN and BSA enhanced monitoring requirements;
concluded that TFCCU’s business model served a single industry that does not have an established track record and remains illegal at the federal level;
determined that TFCCU did not present adequate evidence of compelling interest and commitment among the members to promote thrift through systematic savings;
concluded TFCCU failed to provide information on the general character and fitness of the credit union’s management;
discriminated against TFCCU, a state chartered credit union, and acting in favor of federally chartered and federally insured credit unions in violation of 12 U.S.C. §1790;
violated 12 U.S.C. §1790d by applying net worth requirements to TFCCU, a new credit union;
engaged in improper ex parte communications relative to TFCCU's pending confidential federal share insurance application;
failed to follow the provisions of its August 13, 2014 supervisory letter regarding the ability of credit unions to provide services to marijuana-related businesses (MRBs);
failed to follow the provisions of its July 18, 2014 supervisory letter regarding the ability of credit unions to provide services
to MRBs in acting on TFCC’s federal share deposit insurance application; and
found the provision of services by TFCCU to MRBs involved an undue risk to the federal share insurance fund.

The complaint concludes that "the NCUA does not trust highly qualified state regulators with superior local knowledge, familiarity with a state spawned industry ... to properly charter, regulate, supervise and examine TFCCU...NCUA concocted an over-the-top denial of the federal deposit insurance application by including a series of baseless and gratuitous findings impugning the reputations" of highly qualified professionals and of Colorado regulators. The complaint further claims that NCUA and the Federal Reserve Bank of Kansas City conspired to block TFCCU's access to the Federal Reserve's payment system.

Thursday, July 30, 2015

Taxi Medallion Lender Progressive CU Q2 Financials

Today, I will examine the financial performance of Progressive Credit Union, the second largest New York-based taxi medallion credit union with almost $692 million in assets.

During the second quarter of 2015, Progressive Credit Union saw a 74 percent increase in loans 60-days or more past due to $6.5 million. As of the end of the second quarter, the credit union reported that 1.04 percent of all loans were delinquent.

Early delinquencies (loans 30 to 59 days past due) rose by almost 37 percent during the quarter to almost $4 million Compared to a year earlier, early delinquencies were slightly less than $1 million.

Progressive reported that outstanding trouble debt restructurings (TDRs) continued to grow during the quarter to nearly $18.8 million (all of these loan are in nonaccrual status). Compared to last quarter and a year ago, outstanding TDRs stood at almost $16.9 million and $0, respectively.

Progressive has reported its provisioning for loan and lease losses increased during the second quarter. Provisions increased from $1.7 million as of March 2015 to $4.2 million at the end of the second quarter. As a result, Progressive reported a smaller year-to-date profit of almost $4.4 million compared to $9 million for the same period a year ago.

As of June, the credit union has allowances for loan and lease losses (ALLL) of almost $11.7 million up from $9.1 million from the previous quarter. This indicates that the credit union is well reserved with a coverage ratio (ALLL to Delinquent Loans) of 179.53 percent.

Progressive Credit Union currently has equity capital of $273.8 million. Its net worth ratio is 39.94 percent.

This means the credit union has a buffer (capital plus ALLL) of over $285 million to absorb expected and unexpected losses.

Wednesday, July 29, 2015

Taxi Medallion Lender Montauk CU Financial Update

Yesterday I reported on the financial performance of Melrose Credit Union. Today, I will look at Montauk Credit Union, which is the smallest of the New York taxi medallion credit unions with $178.5 million in assets.

During the second quarter of 2015, Montauk saw a doubling of loans 60-days or more past due. Delinquent loans rose from $3.2 million at the end of the first quarter to $6.4 million as of June 2015. As of the end of the second quarter, the credit union reported that 3.83 percent of all loans were delinquent.

One encouraging development was a decline in early delinquencies (loans 30 to 59 days past due), although early delinquencies remain elevated. Early delinquencies fell from $53.1 million as of March 2015 to almost $28.1 million as of June 2015.

Montauk reported that outstanding trouble debt restructurings (TDRS) of almost $28.5 million. This compares to outstanding trouble debt restructurings of zero dollars as of last quarter. As of June, troubled debt restructurings were equal to 154.4 percent of the credit union's net worth. Slightly less than $9.8 million of these TDRs are in nonaccrual status.

Due to the rise in problem loans, Montauk has increased its provisioning for loan and lease losses. During the second quarter, provisions increased by almost $3.56 million to $3.66 million. As a result, the credit union reported a loss of approximately $2.9 million for the second quarter and had a year-to-date loss of $2 million.

As of June, the credit union has built its allowances for loan and lease losses (ALLL) to almost $5.6 million up from $2 million from the previous quarter. This caused the credit union's coverage ratio (ALLL to Delinquent Loans) to climb from 63.48 percent to 87 percent over the quarter.

Due to its second quarter loss, Montauk's equity capital fell from $21.4 million to $18.5 million. Its net worth ratio fell from 12.32 percent as of March to 10.34 percent as of June.

The credit union has a buffer (capital plus ALLL) to absorb expected and unexpected losses of slightly more than $24.1 million.

Tomorrow I will report on Progressive Credit Union.

Tuesday, July 28, 2015

Q2 Update on Taxi Medallion Lender Melrose CU's Performance

As I reported earlier, four credit unions that specialize in financing taxi medallions are suing New York City Mayor Bill de Blasio, the city's Taxi and Limousine Commission and Attorney General Eric Schneiderman for allowing Uber to illegally pick up street-hail passengers. These for credit unions expressed concerns that the disruption from Uber could adversely impact their financial performance.

These four credit unions are in the process of releasing their financial data and over the next several days, I will provide a snapshot into each of the individual credit union's performance.

I will begin by looking at Melrose Credit Union, which is the largest of the New York taxi medallion credit unions with $2.1 billion in assets.

During the second quarter of 2015, Melrose saw a sharp increase in problem loans. Loans 60-days or more past due rose from $5.7 million at the end of the first quarter to $55.2 million as of June 2015 -- a percentage change of 863 percent. As of the end of the second quarter, the credit union reported that 2.76 percent of all loans were delinquent.

In addition, Melrose reported an increase in early delinquencies (loans 30 to 59 days past due). Early delinquencies rose from $92.3 million as of March 2015 to almost $149.1 million as of June 2015 suggesting that the credit union has a large pipeline of loans that should become delinquent in subsequent quarters. Compared to a year earlier, early delinquencies were $10.5 million.

Melrose reported that outstanding trouble debt restructurings continued to grow during the quarter to nearly $158.2 million (all of these loan are in nonaccrual status). Compared to last quarter and a year ago, outstanding trouble debt restructurings stood at almost $87.5 million and $0, respectively.

Due to the rise in problem loans, Melrose has increased its provisioning for loan and lease losses. During the second quarter, provisions increased by $11.6 million to $14.95 million. As a result, Melrose reported a second quarter loss of almost $4.6 million; but the credit union is reporting a slim year-to-date profit of $371 thousand.

As of June, the credit union has allowances for loan and lease losses (ALLL) of almost $39.9 million up from $28.3 million from the previous quarter. This indicates that the credit union has a coverage ratio (ALLL to Delinquent Loans) of 72.17 percent.

Also, Melrose Credit Union currently has $371.7 million in equity capital and its net worth ratio is 18.04 percent.

So, the combined cushion (capital plus ALLL) for the credit union to absorb expected and unexpected losses is slightly more than $411 million.

Monday, July 27, 2015

Washington Times Editorial: NCUA Captured by CUs

A recent Washington Times editorial highlights how the National Credit Union Administration (NCUA) is captured by the industry it regulates and puts that industry's interests ahead of the public interests.

According to the Washington Times,
"Regulators are always eager to hop in bed with the regulated. Both the regulators and the regulated make themselves mutually comfortable in the mutual assessment that they’re smarter than everybody else, and feel safer working in the dark.

One late example of how this happy scheme works is the attempt by the National Credit Union Administration to help the credit unions it regulates compete with banks in ways that Congress has consistently prohibited. Some of the things they do can make them look like banks, but credit unions are not banks. Credit unions are exempt, for one important example, from some of the taxes banks must pay."

The National Credit Union Administration now proposes to expand the ability of credit unions to make risky large loans by raising limits imposed by Congress to prevent abuse of their special status. The most aggressive credit unions want to compete with community banks, whose practices are not now within the purview of the regulators.

If this attempt succeeds, the credit unions will, like other captured regulatory agencies, be enabled to work not in the interests of the public, but to advance the interests of the credit unions with whom they share that comfortable bed."

Read the editorial.

Friday, July 24, 2015

CUNA Rebukes NCUA Chairman's Heresy

The Credit Union National Association (CUNA) yesterday denounced heretical statements by National Credit Union Administration (NCUA) Chairman Debbie Matz, as she strayed from the dogma of credit unions being member-owned.

In response to questions regarding NCUA's budget from Representatives David Scott (D-GA) and John M. "Mick" Mulvaney (R-SC) during a congressional oversight hearing on July 23, Debbie Matz stated that she did not believe that credit unions were necessarily representing their members, when credit unions asked NCUA to cut its budget.

CUNA decided that this blasphemy could not go unchallenged.

In a statement from Jim Nussle, CUNA's CEO and president, said: "I certainly hope that NCUA Chair Debbie Matz misspoke at the hearing today. If she didn’t, it’s outrageous that Chair Matz would tell Congress she does not believe credit unions represent their members under the respectful questioning of Representatives Scott and Mulvaney. I can’t believe I need to remind her that the nation’s credit unions are member-owned."

It is obvious that CUNA is hoping that Matz will recant from her heresy that credit unions do not necessarily represent the interests of their members.

But I need to remind CUNA, just because a credit union is member-owned; it does not mean that management's interest is aligned with the interest of the owners. In economics, this is called the principal-agent problem.

Thursday, July 23, 2015

Problem CU Update, Q2 2015

The National Credit Union Administration (NCUA) reported that the number of problem credit unions fell by 7 to 251 credit unions during the second quarter of 2015. Year-over-year, the number of problem credit unions are down by 44 credit unions.

A problem credit union has a CAMEL Code of 4 or 5.

During the second quarter, both total shares (deposits) and assets in problem credit unions fell. Shares in problem credit unions declined by approximately $100 million to $10.2 billion. Assets in problem credit unions are down by roughly $200 million to $11.4 billion.

According to NCUA, 1.09 percent of total insured shares and 1 percent of industry assets are in problem credit unions.

NCUA reported that problem credit unions with at least $1 billion in assets fell from 2 at the end of the first quarter to 1 at the end of the second quarter. However, the number of problem credit unions with between $500 million and $1 billion in assets rose by 1 to 4.
 

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