WesCorp Reports Loss of $1.19 Billion for 2009

WesCorp, which has been operating under NCUA conservatorship since March 20, 2009, recorded a net loss of $1.19 billion for 2009, including the effect of cumulative other-than-temporary-impairment (OTTI) amounting to $1.23 billion. For the month of December 2009, the corporate credit union reported a loss of $328.5 million.

WesCorp is operating with a Prior Undivided Earnings Deficit of $4,925,584,461 guaranteed by the National Credit Union Share Insurance Fund (NCUSIF). Its capital ratio at the end of 2009 was minus 25.35 percent.

Problem Credit Union Update

NCUA reported that the number of problem credit unions, credit unions with CAMEL 4 and 5 ratings, grew by 80 credit unions in 2009 from 271 to 351.



Assets in problem credit unions increased from $19.7 billion at the end of 2008 to $48.1 billion at the end of 2009.

Shares (deposits) in problem credit unions increased from $16.3 billion to $41.6 billion. As a result, the percentage of insured shares (deposits) in problem credit unions rose over the year from 2.70 percent to 5.82 percent.



NCUA is reporting that at the end of 2009, there were 9 credit unions with over $1 billion in assets on the problem list, up from 5 in 2008. Twelve credit unions holding $500 million to $1 billion in assets were on the problem list, up from 4 credit unions. For credit unions between $100 million and $500 milion in assets, there was an increase of 38 on the problem credit union list in 2009 to 54 credit unions.

Credit unions with $100 million or more in assets accounted for almost 95 percent of the increase in shares ($23.9 billion) in problem assets over the last year.

Alternative Capital – Not A Panacea

Alternative capital may not be a panacea for the capital woes of credit unions.

In a December 7, 2009 letter to Chairman Barney Frank, NCUA Chairman Deborah Matz noted a trend where some well-capitalized credit unions were discouraging consumer deposits because rapid deposit growth could negatively impact their net worth ratio subjecting the credit unions to prompt corrective action. With the exception of low income credit unions, the only vehicle for credit unions to build capital or net worth is retained earnings. Chairman Matz proposed allowing qualified credit unions to issue some form of alternative capital to supplement retained earnings.

What is alternative capital?

Alternative capital may include – uninsured certificate of deposits, subordinated debt, membership capital shares (MCS), and members’ paid-in capital.

However, under Basel capital rules, uninsured certificates of deposit and subordinated debt would not count as core capital, but rather as tier 2 capital. This would not provide the capital relief that credit unions are seeking.

The capital instruments that would most likely be viewed as core capital are membership capital shares and members’ paid-in capital.

Membership capital shares have some of the prerequisites to be counted as core capital: MCS can only be withdrawn, when membership is terminated. Moreover, credit unions have a legal right to refuse to pay out these minimum amounts if net worth levels are inadequate. However, MCS are currently covered by federal insurance from the NCUSIF, which disqualifies MCS as core capital. To be counted as capital, membership capital shares would have to become uninsured.

Therefore, member paid-in capital appears to offer the best prospect as a source of core alternative capital. Member paid-in capital is permanent, perpetual, and uninsured. Also, dividends would be treated as non-cumulative. Since, these funds are at risk, credit unions would have to pay a significantly higher dividend rate to compensate these investors for their risk.

However, several aspects may make members’ paid-in capital unattractive to credit unions.

First, in general, depositors are risk-averse. Therefore, credit union members are unlikely to put their money at risk.

Second, members’ paid-in capital is illiquid, because this investment cannot be sold.

Third, members’ paid-in capital may attract professional depositors who would want to force the credit union to go public.

More on Virginia CU Bank Merger Bill

On January 15, I wrote that a bill was introduced in Virginia that would create a two way street allowing state chartered credit unions to merge with banks and state banks to merge with state or federal credit unions.

The Virginia Credit Union League has come out in opposition to the bill. The League believes the bill fails to protect members' rights and doesn't address a number of complex issues related to the merger, consolidation, or acquisition of not-for-profit, member-owned credit unions.

The argument about protecting members’ rights is a red herring. There are ample protections for members, and members are more than capable of determining what is best for them financially. In fact, members voted down a proposed merger in Maine, because they decided it didn’t meet their needs.

What credit union managers are really terrified of is that members would accept a good tender offer for their equity stake in a credit union, and take the money and run.

Humble Pie

In a recent letter to Congress, ABA wrote that National Credit Union Association statistics show that the number of credit unions with business loan programs have fallen 14.3 percent between December 2008 and September 2009.

Bill Hampel, Credit Union National Association chief economist, told BNA that the statistics on the drop in credit unions making business loans were “absolutely wrong.”

Are you ready to eat humble pie?

Below is the schedule from NCUA on Miscellaneous Information, Programs and Services at all federally-insured credit unions. (Click to Enlarge).

As the schedule shows, the number of credit unions offering business loans fell from 1,954 as of December 2008 to 1,674 as of September 2009.

Truliant Expects to Aggressively Grow Business Loans

The Winston-Salem Journal last week ran a story about Truliant FCU holding a news conference to promote an expansion in credit union business lending authority.

The story says that Truliant could provide up to $325 million in business loans, if the member business loan cap was raised from its current level of 12.25 percent of assets to 25 percent of assets.

Currently, the credit union can make only up to $159 million in business loans.

However as of September 2009, the credit union reported slightly more than $77 million in business loans on an asset base of slightly more than $1.3 billion. That translates into a member business loan ratio of 5.87 percent of assets.

The credit union said it "is 12 to 18 months away from reaching its current business-loan cap."

This would mean business loans may double during this short period.

History has shown with banks as well as credit unions that institutions that experience rapid growth may not have adequate internal controls to manage such growth.

Moreover, such a rapid expansion in business lending should make other credit unions and credit union supervisors wary, especially given the performance of its business loan portfolio.

The credit union reported that slightly more than $10.4 million in business loans was 2 months or more past due, of which $8 million was over 6 months delinquent.

Another $4.38 million in business loans was 1 to 2 months past due.

That means almost 20 percent of all its business loans are at least one month past due.

Additionally, slightly more than $1.2 million of business loans have been charged off (net of recoveries) through the first 9 months of 2009.

Hopefully, this information provides a more complete picture about Truliant's business lending program.

Bill Would Allow Banks and Credit Unions to Merge

Legislation has been prefiled in Virginia, which will create a two way street allowing state chartered credit unions to merge with banks and state banks to merge with state or federal credit unions.

Below is the text of the bill.

HOUSE BILL NO. 482

A BILL to amend the Code of Virginia by adding in Article 5.2 of Chapter 2 a section numbered 6.1-44.26 and a section numbered 6.1-225.27:1, relating to acquisitions and mergers involving banks and credit unions.

Be it enacted by the General Assembly of Virginia:

1. That the Code of Virginia is amended by adding in Article 5.2 of Chapter 2 a section numbered 6.1-44.26 and a section numbered 6.1-225.27:1 as follows:

§ 6.1-44.26. Mergers involving credit unions.
"Bank" includes a state bank, a bank authorized to do business under the laws of another state, and a national bank.
"Federal or state credit union" includes a state credit union, a credit union authorized to do business under the laws of another state, and a federal credit union.
"State bank" means a bank incorporated under the laws of the Commonwealth.
"State credit union" means a credit union authorized to do business under Chapter 4.01 (§ 6.1-225.1 et seq.).

B. Notwithstanding the provisions of §§ 6.1-58.1, 6.1-60.1, and 6.1-225.57, or any other provision of this chapter, upon compliance with the applicable provisions of the Virginia Stock Corporation Act (§13.1-601 et seq.) and the Virginia Nonstock Corporation Act (§13.1-801 et seq.), and subject to the prior approval of the Commission:

1. A state credit union may merge or consolidate with a bank; and

2. A state bank may merge or consolidate with a federal or state credit union.

C. If the resulting entity is to do business as a state bank, the Commission shall not approve the merger or consolidation unless the applicant meets the standards established by § 6.1-13. If the resulting entity is to do business as a state credit union, the Commission shall not approve the merger or consolidation unless the applicant meets the standards established by §6.1-225.14. In either case, the order granting a certificate of authority to do business shall designate the main office of the resulting entity.

D. The resulting entity shall be permitted to operate all offices of the merging or consolidating entities that could have been established de novo by the resulting entity or that were in operation at least five years prior to the date of the order permitting the merger or consolidation. Within one year of such merger or consolidation, the resulting entity shall conform its assets and operations to the provisions of law regulating the operation of state banks if the resulting entity is operated as a state bank or to the provisions of law regulating the operation of state credit unions if the resulting entity is operated as a state credit union. The Commission may grant the resulting entity additional one-year periods, not to exceed a total of four additional years, in which to conform its assets and operations as provided herein.

§ 6.1-225.27:1. Mergers involving banks.

A. As used in this section:
“Bank” includes a state bank, a bank authorized to do business under the laws of another state, and a national bank.
"Federal or state credit union” includes a state credit union, a credit union authorized to do business under the laws of another state, and a federal credit union.
"State bank" means a bank incorporated under the laws of the Commonwealth.
“State credit union” means a credit union authorized to do business under this chapter.

B. Notwithstanding the provisions of §§ 6.1-58.1, 6.1-60.1, and 6.1-225.57, or any other provision of this chapter, upon compliance with the applicable provisions of the Virginia Stock Corporation Act (§13.1-601 et seq.) and the Virginia Nonstock Corporation Act (§13.1-801 et seq.), and subject to the prior approval of the Commission:

1. A state credit union may merge or consolidate with a bank; and

2. A state bank may merge or consolidate with a federal or state credit union.

C. If the resulting entity is to do business as a state bank, the Commission shall not approve the merger or consolidation unless the applicant meets the standards established by § 6.1-13. If the resulting entity is to do business as a state credit union, the Commission shall not approve the merger or consolidation unless the applicant meets the standards established by § 6.1-225.14. In either case, the order granting a certificate of authority to do business shall designate the main office of the resulting entity.

D. The resulting entity shall be permitted to operate all offices of the merging or consolidating entities that could have been established de novo by the resulting entity or that were in operation at least five years prior to the date of the order permitting the merger or consolidation. Within one year of such merger or consolidation, the resulting entity shall conform its assets and operations to the provisions of law regulating the operation of state banks if the resulting entity is operated as a state bank or to the provisions of law regulating the operation of state credit unions if the resulting entity is operated as a state credit union. The Commission may grant the resulting entity additional one-year periods, not to exceed a total of four additional years, in which to conform its assets and operations as provided herein.

Some Thoughts on Business Loan Legislation

The Credit Union National Association is arguing that legislation expanding the ability of credit unions to make business loans would increase business loans by $10 billion at credit unions and help create 108,000 jobs.

However, is this actually a net expansion of business loans for the economy or just a shifting of loans from banks to credit unions?

My thinking is that it is the latter.

I suspect given the economy, credit unions are only going to make prudentially sound loans to creditworthy business customers, just like banks.

Moreover, I doubt their regulators would permit them to go hog wild and make business loans to weak or marginal credits.

There might be some differences in judgment as to creditworthiness on the margin; but overall, banks and credit unions would continue to compete for the same customers.

So, the net impact is that this bill will not increase the size of the business loan pie.

Kern Central Closed

The National Credit Union Administration (NCUA) was appointed liquidating agent of Kern Central Credit Union (Kern Central) of Bakersfield, California, by the California Department of Financial Institutions (DFI).

As of September 2009, Kern Central was significantly undercapitalized and reported a year-to-date loss of almost $2.2 million.

At liquidation, Kern Central had approximately $34.9 million in assets and served approximately 8,400 members.

Self-Help FCU assumed the assets and deposits of Kern Central.

Future Premium Assessments: NCUSIF Versus FDIC

Recently, NCUA Chairman Deborah Matz was asked at a credit union conference in California whether credit unions should consider avoiding future NCUA premium assessments by converting to a bank or thrift charter. She responded that NCUA’s assessments are miniscule compared to FDIC premium assessments. She also made a huge point about banks prepaying 3 years of assessments in December.

I would like to address NCUA Chairman Matz’s comment.

It is true that FDIC-insured banks prepaid 3¼ years of assessments on December 30, 2009. These prepaid assessments appear as an asset on the books of the banks, just like the one percent NCUSIF capitalization deposit of credit unions. The purpose of the prepaid assessment is to provide FDIC with sufficient working capital to handle an anticipated elevated level of bank failures this year.

However, as premiums come due over the next 3 years, the FDIC will bill each bank for the quarter’s assessment based on the bank’s actual assessment rate and deposits at that time. That amount will be deducted from the bank’s prepaid assessments balance.

Currently, the base assessment rate ranges between 12 and 16 basis points (depending on supervisory evaluations and financial ratios) for banks that are well capitalized and have a CAMELS composite rating of 1 or 2. But the actual risk-based premium rate includes adjustments for secured liabilities, brokered deposits and capitalization, which can increase or lower the premium rate paid. Beginning in 2011, the base assessment rate will go up by 3 basis points. These premium rates will remain in effect until 2018, when FDIC expects the insurance fund to be fully recapitalized. The FDIC believes that premiums at this level will be sufficient to return the insurance fund to its normal operating level, without borrowing from the government.

By way of comparison, NCUA at its November 2009 Board meeting estimated credit unions will be assessed a premium of between 15 and 40 basis points in 2010.

I have not seen where NCUA provides any estimates regarding assessment rates for credit unions after 2010. However, Congress in 2009 authorized NCUA to borrow up to $6 billion from the government to stabilize the corporate credit union system. Federally-insured credit unions are responsible for repaying these borrowings. Depending on the ultimate cost of stabilizing corporate credit unions, some have estimated that federally-insured credit unions could pay an annual assessment of approximately 14 basis points a year thru 2016.

I hope this provides some needed clarity without demagoguery.

Velocity CU's Members Approve Conversion to Private Insurance

According to an article published by the Austin American-Statesman, members of Velocity Credit Union, one of the largest credit unions in Central Texas, have voted to drop the company's federally backed deposit insurance in favor of coverage from a private company, ASI.

Approval of a conversion of federal to nonfederal insurance requires the affirmative vote of a majority of the credit union’s members who vote on the proposition, provided at least 20 percent of the total membership participates in the voting.

The vote is still awaiting certification by the National Credit Union Administration. If approved, Velocity CU will become the second Texas credit union to opt for private insurance.

If the conversion receives regulatory approval, NCUA rules state that "the credit union will, at any time before the effective date of conversion, permit all members who have share certificates or other term accounts to close the federally-insured portion of those accounts without an early withdrawal penalty."

In a related story, Credit Union Journal (paid subscription) is reporting that ASI is in negotiations with NCUA to wind down its business (see second paragraph).

If this true, then was the vote to convert to ASI an exercise in futility?

Commercial Lending Undid HeritageWest

More details are coming out about the failure of HeritageWest FCU in Utah.

Ronald L. Burniske, president and CEO of Virginia Beach-based Chartway FCU, which acquired HeritageWest FCU, told the Virginian-Pilot that HeritageWest's difficulties arose from a loss of focus on consumer lending and its move into lending to commercial builders.

In a separate interview with Credit Union Times, Burniske pointed out that "any number of CUs, unlike banking counterparts, lack internal expertise to handle large scale real estate or commercial development endeavors, factors that undid the $311 million HeritageWest FCU."

Beer Summit, Part 2

In a comment to my December 14, 2009 post on nonmember business loans, Robbie Wright wrote:

“Your statement to the reporter is a little misleading, insofar as the "non-members" are members of the originating institution. By selecting large CU's, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I'd bet you a beer that their %'s are inline with the industry.”

So, I decided to run the numbers looking at nonmember business loans as a percent of total assets.

I used data from the third quarter for federally-insured credit unions. I excluded any credit union from the analysis that did not report holding a nonmember business loans. If I included all credit unions this would have lowered the average and median and I want to be as fair as possible.

As of September 30, 2009, 713 credit unions reported outstanding nonmember business loans.

The average ratio of nonmember business loans as a percent of total assets was 2.76 percent with a median of 1.50 percent. Seventy-five percent of credit unions held less than 3.66 percent of assets in nonmember business loans.

Below is the ratio of nonmember business loans to total assets for the 10 credit unions holding the most nonmember business loans.

Patelco (CA), 10.27%
Premier America CU (CA), 13.64%
Western FCU (CA), 7.98%
Schoolsfirst (CA), 1.75%
America First (UT), 2.48%
Langley (VA), 7.14%
California Coast (CA), 5.95%
Keypoint (CA), 12.52%
Royal CU (WI), 9.43%
Travis (CA), 5.93%

Eight of these 10 credit unions are in the top 25 percent of credit unions holding nonmember business loans as a percent of total assets.

This would suggest that their holdings of nonmember business loans are not representative of credit unions holding nonmember business loans or the industry as a whole.

So, when we have our beer summit, I’ll have a Yuengling.

NCUA Closes HeritageWest FCU

The National Credit Union Administration liquidated HeritageWest Federal Credit Union of Tooele, Utah, and accepted Chartway Federal Credit Union’s offer to purchase and assume the credit union.

Chartway Federal Credit Union purchased and assumed HeritageWest Federal Credit Union’s assets, loans and shares.

At closure, HeritageWest Federal Credit Union had $311 million in assets and served 40,000 members.

Information on the cost to the NCUSIF was not released.