Thursday, September 30, 2010

More Credit Unions Gain Access to TARP Funds

The U.S. Department of the Treasury announced that 22 additional credit unions received secondary capital in the form of subordinated debt from the Community Development Capital Initiative. The aggregated amount invested by Treasury was almost $32.7 million.

Below is a list of credit unions along with the amount invested.

Lower East Side People's Federal Credit Union (New York, NY) $ 898,000
Atlantic City Federal Credit Union (Lander, WY) $ 2,500,000
Neighborhood Trust Federal Credit Union (New York, NY) $ 283,000
Gateway Community Federal Credit Union (Missoula, MT) $ 1,657,000
Union Baptist Church Federal Credit Union (Fort Wayne, IN) $ 10,000
Buffalo Cooperative Federal Credit Union (Buffalo, NY) $ 145,000
Tulane-Loyola Federal Credit Union (New Orleans, LA) $ 424,000
Alternatives Federal Credit Union (Ithaca, NY) $ 2,234,000
Liberty County Teachers Federal Credit Union (Liberty, TX) $ 435,000
UNO Federal Credit Union (New Orleans, LA) $ 743,000
Butte Federal Credit Union (Biggs, CA) $ 1,000,000
TULIP Cooperative Credit Union (Olympia, WA) $ 75,000
Phenix Pride Federal Credit Union (Phenix City, AL) $ 153,000
Pyramid Federal Credit Union (Tucson, AZ) $ 2,500,000
Cooperative Center Federal Credit Union (Berkeley, CA) $ 2,799,000
Prince Kuhio Federal Credit Union (Honolulu, HI) $ 273,000
Community First Guam Federal Credit Union (Hagatna, GU) $ 2,650,000
Brewery Credit Union (Milwaukee, WI) $ 1,096,000
Tongass Federal Credit Union (Ketchikan, AK) $ 1,600,000
Santa Cruz Community Credit Union (Santa Cruz, CA) $ 2,828,000
Community Federal Credit Union (San Francisco, CA) $ 350,000
Fairfax County Federal Credit Union (Fairfax, VA) $ 8,044,000

I was shocked to learn that Fairfax County FCU is a community development financial institution. Fairfax County is the second richest county in the country with a 2008 median household income of almost $107,000, according to the Census Bureau.

Tuesday, September 28, 2010

IG Report on Clearstar Financial CU Failure

The NCUA's Inspector General (IG) issued its Material Loss Review on the failure of Clearstar Financial Credit Union in Reno, Nevada.

The failure resulted in an estimated $12.2 million loss to the National Credit Union Share Insurance Fund (NCUSIF).

The IG found that "Clearstar failed because its Board and management did not implement proper risk management policies and procedures related to credit and concentration risk. Specifically, management originated and funded a significant amount of loans that were both poorly underwritten and to many borrowers that had poor credit histories."

In order to accelerate growth in its loan portfolio, liberal credit policies, minimum underwriting standards, and excessive loan modifications were approved and implemented. The credit union was extending 100 percent financing for RV, new and used motorcycle loans, jet ski and real estate loans. Its lending policy allowed loan-to-value ratio on indirect auto loans of up to 135 percent.

The report noted that Clearstar "used modified borrower classification matrixes that allowed them to approve loans to borrowers that were of a much higher credit risk than industry standards." (See Table 1 in the IG Report).

Additionally, a large portion of the loans originated between 2004 and 2008 were through an indirect loan program in partnership with new and used automobile and recreational vehicle (RV) dealers. The report notes that approximately 34 percent of the indirect vehicle loan portfolio was considered subprime.

A December 2008 examination found that "approximately $22.5 million (approximately 20 percent) of Clearstar‟s loan portfoilo had credit scores of less than 600, with a probability of default ranging from 21 to 57 percent."

Moreover, the report also cited that management in late 2008 to slow the flow of collection issues from delinquent loans started to extend an inordinate number of delinquent loans even when it was obvious that borrowers did not have the ability to meet their obligations.

As a result of the poor credit administration and assumption of excessive credit risk, between July 2007 and September 2009, Clearstar charged off in excess of $9 million in loans, which ultimately contributed to the credit union's failure. Fifty-three percent of the charge-offs were associated with indirect auto loans.

Saturday, September 25, 2010

Corporate CU Legacy Plan Unveiled

NCUA on Friday unveiled its plan to deal with the toxic assets on the books of corporate credit unions.

As part of its plan, NCUA assumed control of United Corporate Federal Credit Union of Warrenville, Illinois; Southwest Corporate Federal Credit Union of Plano, Texas; and Constitution Corporate Federal Credit Union of Wallingford, Connecticut.

In March 2009, NCUA placed U.S. Central Federal Credit Union in Lenexa, Kansas and Western Corporate Federal Credit Unions in San Dimas, California into conservatorship.

NCUA determined that these five corporate credit unions are not financially viable institutions because they are critically undercapitalized with high concentrations of distressed long-term assets. Without permanent government guarantees, those five corporates have no reasonable prospects of returning to independent operations.

The legacy plan unveiled by NCUA will seek to isolate the legacy assets at these corporate credit unions bu using a "Good Bank/Bad Bank" model.

"The legacy assets stay in the current charter, the “bad bank”. NCUA charters a new bridge corporate, the “good bank” which will purchase the good assets and assume the liabilities and share deposits from the conserved corporate. Simultaneous to this purchase and assumption, the conserved corporate is placed into an asset management estate."

After isolating the legacy assets, NCUA will securitize these assets. The new securities will have a guarantee from the NCUA.

For the securitization process to be successful, NCUA wrote in a letter to credit unions that "it is imperative that, at least in this interim period, credit unions maintain excess liquidity within the corporate system."

NCUA expects the cost to credit unions to conservatively range between approximately $8.3 to $10.5 billion.

Treasury secretary, Timothy F. Geithner, agreed to postpone the deadline for the credit union industry to cover the cost of the mortgage-related losses at corporate credit unions until June 2021. Previously, they had until 2016.

Thursday, September 23, 2010

Two Credit Unions Get TARP Funds

Hope FCU (Jackson, MS) and Genesee Co-op FCU (Rochester, NY) have received TARP funds in the form of subordinated debt through the Community Development Capital Initiative. Hope FCU and Genesee Co-op FCU received $4,520,000 and $300,000, respectively.

Wednesday, September 22, 2010

Credit Union Participations

As of June 2010, credit unions reported $12.4 billion in outstanding loan participations.

The majority of the loan participations were business loans. Participations in member business loans (minus construction and development (C&D) loans) was slightly more than $3.1 billion and nonmember business loan participations (minus C&D loans) exceeded $4 billion. Federally-insured credit unions also reported holding almost $462 million in C&D participations.

Outstanding participations in real estate and consumer loans were $2.9 billion and $1.1 billion, respectively.

NCUA has cautioned credit unions to do their due diligence when engaging in loan participations due to the high delinquency rate ($4.14 percent) associated with participation loans.

The following table lists the 50 credit unions with the largest amount of loan participations and the percent of loan portfolio comprised of loan participations. (click on image to enlarge)

Monday, September 20, 2010

NCUSIF Premiums for 2011

The NCUA Board stated that at its November meeting it will provide federally-insured credit unions with an estimate of their 2011 premium assessments for the NCUSIF and Corporate Credit Union Stabilization Fund.

Going to pages 1 and 2 of the NCUA's Board Action Memorandum, NCUA staff provides three different scenarios for the NCUSIF equity ratio through the end of 2011 -- optimistic, base, and pessimistic.

NCUA staff estimates that by the end of 2011 the NCUSIF equity ratio will fall below 1.20 percent of insured shares under the base and pessimistic scenarios, which would require the Board to implement a NCUSIF Restoration Plan. The NCUSIF equity ratio is expected to equal 1.17 percent at the end of 2011 under the base scenario and is anticipated to equal 1.12 percent under the pessimistic scenario. Under the optimistic scenario, the NCUSIF equity ratio will equal 1.22 percent.

Assuming that the NCUA Board will maintain the NCUSIF equity ratio at 1.30 percent, then potential NCUSIF premium assessments could range between 8 basis points to 18 basis points. However, the cost and pace of credit union failures and the rate of share (deposit) growth could cause a change in premiums.

The estimated range of premiums does not take into considerations premiums associated with the Corporate CU Stabilization Fund.

Saturday, September 18, 2010

Problem Credit Union Update

NCUA reported that the number of problem credit unions increased in August; however, assets and shares (deposits) in problem credit unions fell. A problem credit union is defined as having a CAMEL Code of 4 or 5.

As of August, there were 360 problem credit unions -- an increase of 10 credit unions -- holding $39.5 billion in shares (or 5.26 percent of all credit union insured shares) and $44.8 billion in assets (or 4.95 percent of assets). (click on images to enlarge)

Additionally, NCUA reported that the number of $1 billion plus problem credit unions increased from 13 to 14 in August. These billion-dollar plus credit unions account for almost 48 percent of the shares in problem credit unions.

The percent of assets and shares in problem credit unions has declined over the last couple of months peaking in May at 6.23 percent of shares and 5.75 percent of assets.

However, a troubling sign was the increase in assets and shares in CAMEL 3 credit unions (a CAMEL 3 credit union has some supervisory issues). Shares in CAMEL 3 credit unions rose $9 billion in August to $141.1 billion and assets increased $9.2 billion to $159.3 billion.

Since May 2010, the percent of the industry's assets in CAMEL 3 credit unions have grown by more than 400 basis points from 13.58 percent to 17.62 percent.

Thursday, September 16, 2010

NCUSIF Premium of 12.42 Basis Points (Update 1)

The National Credit Union Administration (NCUA) Board voted on September 16 to impose an assessment of 12.42 basis points of insured deposits as part of a Restoration Plan for the National Credit Union Share Insurance Fund. The premium is expected to raise $933 million returning the NCUSIF’s equity ratio to 1.30 percent using the most current data for insured shares.

NCUA will send federally-insured credit unions an invoice for the premium in late October or early November. The payment will be due by November 22, 2010.

As of August 31, 2010, increased loss provisions resulted in a decline in the NCUSIF’s equity ratio to 1.176 percent. NCUA reported that "realized losses in failed credit unions and continued increase in negative trends in credit union CAMEL codes have resulted in the NCUSIF recording $642 million in provision for insurance loss expenses year-to-date through August. This provision for insurance loss expense, combined with low earnings on NCUSIF assets, resulted in a $570 million reduction in the NCUSIF’s Retained Earnings." Additionally, NCUA is expecting the provision for insurance loss expense at $350 million for the remainder of 2010.

Because the equity ratio of the NCUSIF declined below 1.20 percent, NCUA must establish and implement a plan to restore the equity ratio to 1.20 percent. The premium assessment is the Restoration Plan.

NCUA staff considered a smaller premium but concluded that given projected losses and insured deposit growth the NCUSIF equity ratio would fall below 1.20 percent requiring another restoration plan.

NCUA estimates that the premium will cause the projected industry ROA for 2010 to fall by 10.4 basis points and will lower the aggregate net worth ratio by 9 basis points from 9.88 percent to 9.79 percent.

Additionally, 392 federally-insured credit unions out of the 5,332 (7.35%) credit unions with positive core net income at June 30, 2010 may experience negative core net income for 2010 due to the premium. Sixty credit unions out of the 6,997 (0.9%) with a net worth ratio over 7 percent as of June 30, 2010 may see their net worth ratio fall below 7 percent and 19 credit unions may see their net worth ratio slip below 6 percent -- becoming undercapitalized.

Earlier this year, NCUA levied an assessment of 13.4 basis points of insured deposits in June to repay borrowings from Treasury associated with the Temporary Corporate CU Stabilization Fund.

Therefore, the combined NCUSIF premium and the Stabilization Fund assessment will equal 0.2582 percent of insured shares. This combined assessment will reduce the industry's ROA for 2010 by 22 basis points, causing 855 credit unions to possibly experience a loss for 2010.

At the November Board meeting, NCUA will provide an estimate for a combined range for the NCUSIF premium and Corporate Stabilization Fund assessment in 2011.

Tuesday, September 14, 2010

Could Credit Unions Face Higher Net Worth Requirements?

Credit unions should pay careful attention to proposed changes in capital requirements coming out of Basel; because credit unions may face higher minimum net worth requirements in the future.

The Basel Committee on Banking Supervision has agreed that banks should hold more capital in the future to avoid the type of turmoil seen in recent years. At present, banks must have a risk-based capital ratio of at least 8 percent and a leverage ratio of at least 4 percent. Under the Basel Committee agreement, the risk-based capital floor will rise to 10.5 percent and the capital-to-asset ratio will either be replaced or augmented with a new capital-to-risk-weighted-asset minimum of 7 percent. These are the new standards for being adequately capitalized. Banking regulators will apply higher cut-offs to be well capitalized.

These new requirements will be phased in over time. However, U.S. banking regulators may move quicker than the proposed Basel Committee timeline to meet Dodd-Frank Act deadlines.

U.S. regulators have until Jan. 1, 2013, to implement the agreement. In the past, U.S. bank regulators have applied these requirements to all banks and I suspect this will be the case with these proposed capital standards.

But why am I saying that this may mean higher future net worth requirements for credit unions.

Section 1790d(c)(2)(A) of the Federal Credit Union Act, which deals with Prompt Corrective Action, states that “[i]f … the Federal banking agencies increase or decrease the required minimum level for the leverage limit, the [NCUA] Board may correspondingly increase or decrease 1 or more of the net worth ratios … in an amount that is equal to not more than the difference between the required minimum level most recently established by the Federal banking agencies and 4 percent of total assets.”

In order for this adjustment to occur, two conditions must be met. First, the NCUA must determine, in consultation with the Federal banking agencies, that the reason why the agencies changed the required minimum level for the leverage limit also justifies the proposed adjustment in net worth ratio for credit unions. Second, NCUA must determine that the resulting net worth ratios for credit unions is sufficient to carry out the purpose of this section of the Federal Credit Union Act.

While NCUA has some discretion associated with adjusting the net worth ratio for credit unions, deciding not to adjust the minimum net worth requirement when the Federal bank regulators have raised the minimum capital requirements for banks may come at enormous political cost to the agency.

Therefore, I believe credit unions should begin to prepare for higher future minimum net worth requirements.

Monday, September 13, 2010

Round Up the Usual Suspects

Like Captain Renault in Casablanca the credit union industry’s first response to proposals to eliminate their tax exempt status is to “round up the usual suspects” and the usual suspects are bankers or their trade association. They cannot believe that policymakers can independently arrive at a conclusion that banks and credit unions with similar characteristics should be treated equally for tax purposes.

The President’s Economic Recovery Advisory Board (PERAB) listed eliminating the credit union tax exemption as one of the many tax-reform options.

“Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons,” the report said. “Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions.”

This reform would ensure that businesses with similar characteristics are treated equally.

However, the editor of Credit Union Times weighed in saying that “[i]t was highly disappointing–and frankly disrespectful–to see the bankers’ shtick that taxing credit unions would "level the playing field" in the report. Not only is it obvious the bankers likely weighed in on this report, but it also shows a complete lack of understanding of the other restrictions credit unions operate under.”

There was a similar response from the credit union industry when in 2008 Treasury released its Blueprint for a Modernized Financial Regulatory Structure.

Treasury wrote: "Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions. While credit union size is not a perfect proxy for this trend, the increasing share of credit union assets held by larger credit unions indicates movement toward a broader focus."

Believing that the Blueprint was part of a nefarious plot by the banking industry to bring about the demise of the credit union industry, CUNA filed a request under the Freedom of Information Act (FOIA) for all material from the banking industry associated with the Blueprint.

In filing the FOIA request, CUNA wrote: “The general public and nearly 90 million credit union members have a right to know if special interests have attempted to influence Treasury policy, as expressed in the Blueprint, in order to eliminate not-for-profit cooperative financial institutions.”

However, more than two years later, I have not heard a peep from CUNA about its FOIA request and what they found.

Sunday, September 12, 2010

Unites SA Federal Credit Union Settles Lawsuit

The San Antonio Express is reporting that United SA Federal Credit Union has agreed to a conditional $500,000 settlement of a class-action lawsuit that alleged the credit union illegally obtained credit scores of about 7,500 former members from Trans Union after the members closed their accounts.

Friday, September 10, 2010

ASI to Levy Special Assessment of 15 Basis Points

Credit Union Journal (paid subscription) is reporting that privately-insured credit unions will be assessed a special premium assessment of 15 basis points by American Share Insurance (ASI) for 2010.

The premium will be assessed on all primary insured credit unions of record on September 30 and based on the total shares reported as of June 30.

This is the second consecutive special premium assessment by ASI. Last year, ASI levied a special assessment on privately insured credit unions to help replenish reserves drained by losses at Cumorah CU, a Las Vegas credit union that failed in 2009, and by a $22 million capital infusion into Silver State Schools CU, Nevada’s largest credit union.

ASI, according to Credit Union Journal, is justifying the special premium assessment due to weaker earnings arising from lower yields on its government bond portfolio and more aggressive funding of its loss reserves for problems at some privately insured credit unions.

Thursday, September 9, 2010

Process of Conversion Should Be Simplified

In a September 2 letter to the Presidential Commission on Fiscal Responsibility and Reform, ABA President and CEO Ed Yingling said: "The recent changes in the nature of the credit union industry make a re-examination of [its] tax status appropriate.”

Yingling added that "as an intermediate step bank-like credit unions could be required to become taxpaying entities by converting to a mutual thrift charter. This process of conversion should be simplified and encouraged."

The letter is below (click to enlarge image).

Thursday, September 2, 2010

First American CU Closed by Regulators

The National Credit Union Administration (NCUA) was appointed liquidating agent of First American Credit Union of Beloit, Wisconsin by the Wisconsin Office of Credit Unions on August 31, 2010. NCUA immediately signed an agreement with First Community Federal Credit Union of Parchment, Michigan, to assume the assets and liabilities of First American Credit Union.

First American CU was significantly undercapitalized and reported 13.57 percent of its loans were 60 days or more past due. Slightly more than 27 percent of its business loans were delinquent as of June 2010. Approximately 68 percent of all delinquent loans at First American were business loans.

At closure, First American Credit Union had $136.9 million in assets and served over 17,447 members.

First American Credit Union is the 15th federally insured credit union liquidation in 2010.

Wednesday, September 1, 2010

NCUA Amends Complaint Against WesCorp

The National Credit Union Administration Board, in its role as Conservator of Western Corporate Federal Credit Union (“WesCorp”), amended its complaint against the former board of directors and officers of the failed corporate credit union alleging breach of fiduciary duties, gross negligence, fraud, and unjust enrichment. NCUA contends that breach of fiduciary duties resulted in massive losses at WesCorp. Click here to read the complaint.

Here are some of the highlights from the complaint.

In paragraph 113, the complaint states that "the Director Defendants and the Officer Defendants breached these duties of care by, among other things, departing from the traditional corporate credit union business model and following a strategy of maximizing investment income by leveraging WesCorp’s balance sheet and developing a large portfolio concentration of private label MBS, particularly Option ARM MBS. In doing so, they failed to adequately inform themselves of the additional credit risk created and failed to take steps to mitigate that credit risk."

Paragraph 120 cites that "each of the Director Defendants and the Officer Defendants was grossly negligent in performing his or her duties in allowing WesCorp to pursue a highly leveraged strategy of investing in private label MBS without understanding the risks of a high concentration of such securities in its portfolio and without taking steps to mitigate those risks through appropriate concentration limits and investment policies."

Furthermore, paragraph 121 cites that the defandants were grossly negligent because they ignored the prospect that real estate prices would fall and that they allowed WesCorp to borrow huge sums of money and invest the proceeds in private label MBS, especially Option ARM securities.

Paragraphs 126 and 127 point out that Swedberg and Siravo mislead the board about the intent of the original Supplemental Executive Retention Plans (SERPs), the necessity for the changes and the true nature of the SERP amendments.

Paragraphs 144 through 147 allege that the former Chief Financial Officer was not entitles to certain payments in excess of $1.4 million and thus was unjustly compensated.

The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.