Losses Keep on Coming at U.S. Central

U.S. Central released its third quarter results and recorded a $308.5 million net loss. Continued deterioration in the quality of its investment portfolio resulted in other than temporary impairment (OTTI) charges of $320 million in the quarter.

Year‐to‐date through September, net losses totaled $1.3 billion. The losses in 2009 are the result of OTTI charges, which totaled $1.3 billion through the first nine months.

U.S. Central is heavily invested in non-agency residential mortgage backed securities and asset backed securities – 90 percent of its securities portfolio.

Moreover, the quality of its securities portfolio has declined. At the end of 2008, 7.4 percent of its portfolio was below investment grade. As of the end of September, 37.3 percent of its investment portfolio was not investment grade.

As a result of OTTI charges recorded in 2008 and the first nine months of 2009, U.S. Central’s retained earnings were fully exhausted, all paid-in capital was fully depleted, and membership capital shares were depleted by $1.1 billion (88.7 percent) as of September 30, 2009.

The additional losses will spur another round of capital adjustments for retail corporate credit unions, and in turn, some natural person credit unions will have to recognize further impairments to their investments in retail corporate credit unions.

Below is U.S. Central’s balance sheet. (Click on the image to enlarge).

WesCorp Raises $1.5 Billion

Reuters reported that Western Corporate (WesCorp) Federal Credit Union on Wednesday sold $1.5 billion of notes. The notes are guaranteed by the National Credit Union Administration under the Temporary Corporate Credit Union Liquidity Guarantee Program.

WesCorp was placed under conservatorship on March 20 of this year.

Below are the terms of the debt offering.

BORROWER: WESTERN CORPORATE FEDERAL CREDIT UNION*
AMT $1.5 BLN
COUPON 1.75 PCT
NON-CALLABLE
MATURITY 11/2/2012
ISS PRICE 99.875
YIELD 1.793 PCT
SPREAD 35.9 BPS MORE THAN TREAS
MOODY'S Aaa
S&P TRIPLE-A

*GUARANTEED BY THE NATIONAL CREDIT UNION ADMINISTRATION.

What Risk Does Silver State Schools Pose to ASI?

After my recent posting on the failure of Cumorah CU, I was e-mailed the third quarter financial statement of Silver State Schools CU (Las Vegas, NV) filed with American Share Insurance, a private insurer of credit unions. Silver State Schools at $883 million is the largest privately insured credit union in the country.

As most people are aware, Nevada has been one of the hardest hit real estate markets in the country. Approximately 2/3rd of all mortgage loans in Nevada are underwater.

This information does not bode well for Silver State Schools CU, since it is heavily invested in real estate loans. Slightly more than $501 million of its $771 million loan portfolio is in real estate loans.

To draw your own conclusion about the risk Silver State Schools poses to American Share Insurance, you might review its financial information, which is posted below. Click on the images to enlarge.

Cumorah Credit Union Seized

Nevada officials on Friday shut down privately insured Cumorah Credit Union, which serves 15,000 members of The Church of Jesus Christ of Latter-day Saints. The assets and deposits were assumed by Credit Union 1, a $574 million institution based in Rantoul, Illinois.

George Burns, commissioner of the Financial Institutions Division. stated that none of Cumorah's members will lose their deposits because of the credit union failure.

Cumorah is the first privately insured Nevada credit union to fail since the financial crisis began. Deposits were insured by American Share Insurance.

"Due to inadequate capital and mounting loan losses, it was necessary to take possession of Cumorah Credit Union," Burns said in a statement.

In an administrative order, Burns said Cumorah was "operating in an unsafe and unsound manner" and was "in imminent danger of insolvency." Burns also cited lack of capital or net worth, poor liquidity, inadequate earnings and "excessive loan risk."

Paul Simons, the CEO of the Credit Union 1, disclosed that Cumorah ran into problems when its commercial real estate loans started to become delinquent.

The State of Privately Insured Credit Unions

As of June 30, 2009, there were 156 privately insured credit unions, representing about 2 percent of all credit unions in the country.

Nine states currently permit state chartered credit unions to be privately insured; but most privately insured credit unions are located in 5 states. Ohio had the most privately insured credit unions with 63 as of June 2009; followed by Illinois with 29, Idaho with 18, Indiana with 17, and California with 15.

However, the bulk of the assets in privately insured credit unions were concentrated in five states:
• 25.6 percent, California;
• 20.4 percent, Nevada;
• 20 percent, Illinois;
• 15.7 percent, Ohio; and
• 12.3 percent, Indiana.

Assets, Shares and Loans Increase

Assets, shares (deposits), and loans at privately insured credit unions grew over the last year. As of June 2009, privately insured credit unions held slightly more than $12.2 billion in assets and $10.7 billion in shares and deposits. Total loans were $8.2 billion. Compared to a year ago,

• Assets were up 3.8 percent;
• Shares and deposits grew by 4.8 percent; and
• Loans increased by 2 percent.

Thirty-two credit unions were larger than $100 million in assets with 9 exceeding $550 million. Sixty-one privately insured credit unions are smaller than $10 million in assets.

Privately Insured Credit Unions Lose $68.9 Million thru June

Privately insured credit unions reported a loss of $68.9 million through the first six months of 2009. In comparison, these same institutions reported a profit of $25.4 million for the same time period in 2008. The return on average assets for privately insured credit unions was -1.14 percent as of June 2009 compared to 0.44 percent one year earlier.

Approximately 47 percent of privately insured credit unions were unprofitable as of June 2009. Losses at unprofitable credit unions were $82.5 million through the first six months of the year.

Privately insured credit unions in California and Nevada have been particularly hard hit by the recession. Only one privately insured credit union in each state did not report a loss through the first six months of this year. California privately insured credit unions reported losses of almost $28.2 million. In Nevada, losses were $45.5 million.

Net Worth Falls, But Most Are Well Capitalized

The net worth of privately insured credit unions fell by 6.2 percent from a year ago to almost $1.275 billion. The average equity to asset ratio for privately insured credit unions was 10.35 percent, while the median equity capital ratio was 12.89 percent.

The vast majority of privately insured credit unions are well capitalized. Only 7 privately insured credit unions, if they were subjected to prompt corrective action, would not meet the regulatory requirement of adequately capitalized.

Credit Quality Deteriorates

Asset quality fell over the last year at privately insured credit unions. Loans 60 days or more delinquent increased from $81.9 million as of June 2008 to $152.8 million a year later – an increase of 86.5 percent. An additional $127.8 million loans were in one month to two month delinquency bucket.

The percent of loans that were two or months delinquent stood at 1.87 percent at the end of the second quarter of 2009, up from 1.02 percent a year earlier.

Total charge-offs more than double from a year ago to almost $60.7 million. Foreclosed and repossessed assets were up almost 183 percent to $40.1 million.

Kern Schools Confidential Supervisory Agreement

Credit Union Journal (subscription required) reported today that NCUA has imposed a supervisory agreement on Kern Schools FCU to rebuild its capital.

Credit Union Journal wrote that "the confidential agreement with NCUA was disclosed yesterday by Vincent Rojas, the departing CEO."

The story states that NCUA has given the credit union 24 months to restore its capital ratio to 7 percent -- the minimum requirement to be well capitalized.

Enforcement actions, such as written agreements, ceased and desist orders, and prompt corrective action capital directives, taken against banks by federal banking regulators have been public information since 1989.

The Federal Credit Union Act requires enforcement actions to be made public unless the Board determines it is not in the public interest to release this information.(emphasis added)

How would the publishing of this supervisory agreement be contrary to the public interest?

At the minimum, shouldn't Kern Schools members know whether their credit union is subject to an enforcement action?

Moreover, we know there are 326 problem credit unions from NCUA's Chairman Deborah Matz's testimony from last week.

So, how many other supervisory agreements have been not disclosed by NCUA?

What is this agency covering up?

U.S. Central Raises $4 Billion

Last Thursday, I commented on NCUA Chairman Matz's testimony. In her testimony, she stated that "WesCorp and U.S. Central are preparing to utilize external sources of funding through offering issuances guaranteed by the NCUSIF for terms of two to three years."

Well, last Wednesday U.S. Central tapped the capital markets and raised $4 billion through a public offering of medium-term notes. The offering was guaranteed through NCUA’s Temporary Corporate CU Liquidity Guarantee Program. The offering included a combination of a two-year floater ($500 million at three-month LIBOR + 0); two-year fixed ($1.5 billion at swaps + 0); and three-year fixed ($2 billion at swaps + 5).

An interesting commentary on the U.S. Central debt issuance can be found at Unrealized Losses blog. According to the blog, investors received a better yield than credit unions that have invested in CDs issued by corporate credit unions.

Matz on Emerging Concerns

NCUA Chairman Deborah Matz identified three areas of emerging concerns for the agency during an October 14 hearing before the Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions – interest rate risk, member business lending, and growing number of troubled credit unions.

With regard to interest rate risk, Chairman Matz stated:

Given the refinancing activity that typically occurs during a period of low interest rates, NCUA has observed an increasing level of fixed rate real estate loans … NCUA is concerned with the increasing interest rate risk associated with a high level of fixed rate, long-term assets should rates rise rapidly.

As for member business lending, she testified:

NCUA has been monitoring the increasing level of member business loans within the credit union community, presently at $27.1 billion. While this figure represents only 3.11 percent of total credit union industry assets, NCUA is concerned with the increasing levels of delinquent member business loans, as well as an increasing concentration of large credit unions with supervisory concerns which are holding member business loans. As an example, a review of 71 credit unions with identified supervisory concerns was conducted as of June 30, 2009. These credit unions averaged $1.1 billion in assets and 62 of them reported member business loans. By way of contrast, in 2005, only 50 of these same credit unions held member business loans. These credit unions hold higher levels of member business loans than the industry as a whole, both in 2005 and today… For this group, delinquent member business loans increased from 0.17 percent to 8.34 percent in the last 42-month period, compared to the credit union trend of 0.47 percent to 3.19 percent during this same timeframe… NCUA is concerned with the additional risks to operations member business loans can pose when coupled with other operational concerns. NCUA will be proactively monitoring member business loan exposure and plans to issue additional guidance in the near future.

The agency is also concerned about the growing number of problem credit unions. A problem credit union has a CAMEL 4 or 5 rating. Chairman Matz noted:

There are currently 326 troubled credit unions holding $42.2 billion in assets, representing 4.2 percent of all credit unions and 4.9 percent of all credit union assets. While the number of troubled credit unions increased in the current year, the pace of that growth was slightly lower than in 2008. Troubled credit unions with over $100 million in assets have grown at a faster rate than those with assets under $100 million.

As of September 30, 2009, 66 credit unions with assets over $100 million were considered troubled credit unions, compared to 12 in 2007. NCUA anticipates the overall number of troubled credit unions is likely to increase through the end of 2010 and into 2011.

Later in her testimony, she expressed concern about the number and size of CAMEL 3 credit unions is increasing. A CAMEL 3 credit union exhibits some degree of supervisory concern. These credit unions exhibit a combination of weaknesses that may range from moderate to severe and generally are less capable of withstanding business fluctuations and are more vulnerable to outside influences.

The number of CAMEL 3 credit unions with assets greater than $100 million represented only 7.30 percent of total credit unions as of year-end 2007; however, this ratio increased to 13.48 percent as of September 30, 2009. Similarly, total assets for this group of credit unions increased to 10.43 percent of aggregate industry assets as of September 30, 2009, up from only 3.97 percent in 2007. While credit unions rated a CAMEL 3 have not quite reached the threshold of a troubled credit union, … they require enhanced and timely supervision to ensure corrective measures are implemented.

In response to these emerging trends, NCUA has shortened the examination cycle from 18 months to 12 months. It also has hired an additional 50 field examiners in 2009 and plans to hire 57 more examiners in 2010.

Matz on Corporate Credit Unions

On Wednesday, October 14th, NCUA Chairman Deborah Matz testified before the Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions on the state of the credit union industry. Below are excerpts from Chairman Matz’s testimony on corporate credit unions.

The downturn in the residential mortgage-backed securities market had a devastating impact on the twenty-eight corporate credit unions ... While the majority of the investments were AAA or AA rated, even highly rated securities were not immune to the market contagion. In 2005 and 2006, significant levels of non-agency residential mortgage-backed positions in the ALT-A sector, with mezzanine ALT-A tranches, were added to the portfolios of the two largest corporate credit unions – Western Corporate Federal Credit Union (WesCorp) and U.S. Central Federal Credit Union (U.S. Central). The subsequent market downturn which began in 2007 forced both WesCorp and U.S. Central to reflect significant losses when performing a valuation of their investment portfolios.

The impact of the losses at U.S. Central reverberated through the rest of the corporate credit unions ... As the losses at U.S. Central exceeded retained earnings, the paid-in capital and membership capital accounts held by the retail corporates were depleted to absorb the losses ... The losses flowed through to natural person credit unions. Where losses exceeded retained earnings at the retail corporate credit union, than the paid-in capital and membership capital accounts invested by natural person credit unions were depleted.

NCUA is in the process of drafting significant revisions to its corporate credit union rule ... It is NCUA’s goal to issue the proposed rule for comment in November 2009 and have in place a new regulatory framework for the corporate credit union system by mid-2010 ... WesCorp and U.S. Central are preparing to utilize external sources of funding through offering issuances guaranteed by the NCUSIF for terms of two to three years. This action will provide liquidity within the credit union system during the regulatory transition period, and enable NCUA to consider alternatives in the disposition of the distressed assets on the corporate credit union balance sheets.

S&P: NCUA Corporate CU Efforts Preserve Liquidity, More Capital Will Be Needed

Standard & Poor’s on October 9th wrote that NCUA’s actions have preserved confidence in the credit union system by stemming the liquidity crunch within the corporate credit union system; but have not “addressed some of the structural aspects of the system that are likely to evolve, and that could significantly alter the current framework.”

Standard & Poor’s believes that the

“[e]vents of the past 18 months may shake members' faith in the cooperative nature of the system, which had been a major factor supporting the corporates' creditworthiness. Specifically, the burden of premium assessments on the members may appear too great when compared to the benefits of membership. Ultimately, we believe that the system will need capital to offset the increasingly likely losses stemming from mortgage-related structured securities.”

NCUA Offers Guidance on Converting to a Credit Union

NCUA has posted on its website information on bank-to-credit union conversions.

NCUA writes: “While unusual, such conversions may be possible for some financial entities. This document provides guidance on various issues that may arise when a non-credit union entity (NCE) is considering conversion to a credit union charter.”

NCUA does acknowledge that it would be quite difficult for a stock organization to change to a credit union charter.

The document explains some unique characteristics associated with the credit unions, such as field of membership requirements, volunteer directors, and lending practices.

I find it quite ironic, even unseemly, that an agency that has gone out of its way to erect obstacles limiting credit unions from exercising their freedom to select the charter that best meets their customers’ needs would post on its website a resource guide on how other financial institutions can become a credit union.

NAFCU Capital Proposal: Meet Charles Keating

Let me state upfront that I am an equal opportunity skewer of credit union trade associations.

In an earlier post, I criticized CUNA’s alternative capital recommendation, which would increase the level of interdependency risk within the credit union system, by allowing credit unions to make capital investments in other credit unions.

The National Association of Federal Credit Unions has set forth its own alternative capital proposal, which would let individual members of a credit union invest in alternative capital instruments issued by their credit union, even though the draft language makes it clear that this investment by members would be uninsured and available for loss.

A credit union insider contacted me stating that this proposal smelled a lot like Charles Keating and Lincoln Savings and Loan and the worthless bonds they pushed on customers.

In case your memory needs refreshing, Lincoln Saving and Loan's branch personnel convinced customers of the savings and loan to replace their federally-insured deposits with higher-yielding bonds issued by American Continental, the parent company of Lincoln. American Continental went bankrupt in April 1989 and about 23,000 customers were left with worthless bonds. Many of these investors lost their life savings. These customers later said they were never properly informed that the bonds were uninsured and very risky given the financial condition of American Continental.

I’m not saying this is going to happen; however, customers who trust their credit union can easily be duped into buying these risky capital investments, which may be entirely inappropriate for them.

CU Members Reject Rare CU- Bank Merger Plan

The members of KV Federal Credit Union have rejected plans to merge with a local bank.

Officials at KV Federal Credit Union and Kennebec Savings Bank confirmed Thursday that credit union members voted against the proposal to convert their credit union to a bank and merge with Kennebec Savings.

Click here to read the full story.

HMDA Data Shows CUs Gaining Market Share

According to recently released 2008 HMDA data by the Federal Reserve, credit unions have not experienced a significant reduction in home-lending activity over the past couple of years. As a result, credit unions have seen an increase in their market share of one-to-four family site-built HMDA loans, especially junior liens.

Credit union market share of first lien mortgage originations more than doubled from 2.6 percent in 2004 to 5.5 percent in 2008.

Junior lien market share experienced an almost four-fold increase from 7.6 percent to 28.3 percent. Because less than five percent of all junior liens at credit unions were for home purchases, the collapse in the housing market did not adversely impact credit union originations of junior liens.

Members' Own FCU Closed

The National Credit Union Administration (NCUA) liquidated The Members’ Own Federal Credit Union of Victorville, California.

Alaska USA Federal Credit Union purchased and assumed The Members’ Own Federal Credit Union’s assets, loans and shares.

The Members’ Own Federal Credit Union’s declining financial condition led to its closure and subsequent purchase and assumption by Alaska USA Federal Credit Union.

The Members’ Own Federal Credit Union had $85 million in assets and served 11,000 members.

West Texas CU Fails

The National Credit Union Administration (NCUA) announced that Security Service Federal Credit Union (San Antonio, TX) has purchased the assets and assumed the shares of liquidated West Texas Credit Union of El Paso, Texas.

The Texas Credit Union Department liquidated West Texas Credit Union on September 30, 2009 and discontinued its operation after determining the credit union was insolvent with no prospects for restoring viable operations.

At the time of liquidation, West Texas Credit Union had approximately $78 million in assets and served 25,000 members.