Tuesday, November 30, 2010

NCUA: Earnings Up Sharply from One Year Ago

The National Credit Union Administration (NCUA) noted that although asset growth was anemic, earnings improved at federally-insured credit unions during the third quarter.

NCUA reported that assets, loans, and shares (deposits) grew by 0.4 percent, 0.1 percent, and 0.3 percent, respectively. Because shares were growing at a faster pace than loans, the loan to share ratio has dropped to 72.71 percent at the end of the third quarter of 2010 from 77.94 percent a year ago.

While loan growth was relatively flat during the quarter, used vehicle loans expanded 1.8 percent. Also, unsecured loans increased 1.4 percent and
real estate loans rose 0.1 percent. However, new vehicle loans declined 3.6 percent.

Credit Union See Improved Profitability

NCUA is reporting that profits at federally-insured credit unions were up almost 72 percent from a year ago to $3 billion, as of September 30, 2010. The return on assets (ROA) was up 17 basis points from a year ago and 5 basis points from the prior quarter to .45 percent.

NCUA attributed the improvement in the ROA to declining cost of funds, lower provision for loan loss expense, and higher fee and other income offsetting higher operating expenses. For example, provisions for loan and lease losses were down almost 24 percent from a year ago to slightly less than $5.3 billion.

Credit Unions Build Net Worth During the Quarter

Stronger earnings during the third quarter helped federally-insured credit unions to build their net worth. NCUA reported that credit union net worth improved by $1.3 billion during the quarter to $90.6 billion. As of the end of the third quarter, the net worth ratio for federally-insured credit unions was 9.97 percent, up 9 basis points from the second quarter.

Asset Quality Appears to Be Stabilizing

Asset quality appears to be stabilizing as the delinquency ratio stood at 1.74 percent compared to 1.76 percent in the first quarter of 2010 and 1.73 percent in the second quarter of this year. As of September 30, 2010, federally-insured credit unions reported holding almost $9.9 billion in loans that were 60 days or more past due.

One exception was the delinquency rate on business loans. As of September 2010, the delinquency rate on business loans was 4.29 percent -- 16 basis points higher than second quarter delinquency rate and 93 basis points above the delinquency rate a year earlier.

Moreover, delinquent business loans represented a disproportionate share of all delinquent loans. Although business loans were approximately 6.2 percent of all credit union loans, delinquent business loans accounted for more than 15 percent of all delinquent loans.

In addition. the net charge-off rate fell by 3 basis points during the third quarter to 1.13 percent. Net charge-offs were slightly more than $4.8 billion as of September 2010 compared to $5 billion a year ago.

NCUA further noted that as of September 2010, nearly 2 percent of all loans were modifications.

Foreclosed and repossessed assets grew 8.3 percent to $1.8 billion in the third quarter. Foreclosed real estate was up 43.7 percent from a year ago and 9.1 percent from the second quarter of 2010 to slightly more than $1.5 billion..

Saturday, November 27, 2010

AFTRA-SAG FCU Asks Members to Move Their Deposits

The Los Angeles Times is reporting that AFTRA-SAG Federal Credit Union has asked its large depositors to withdraw funds from their deposit accounts and move those funds to another institution.

In a letter to members, the credit union wrote: “Due to the unusual economic and market conditions, we are asking you, a select group of our large depositors, to move a portion of your funds to another institution. This request is a temporary one, so we would like to explain why we are making this request: The Credit Union is ‘flooded with cash.’”

The key issue for the credit union is that it is having difficulty generating earnings to keep its net worth ratio above 7 percent, the minimum requirement for being well-capitalized. The credit union reported a loss of $3.9 million for 2009 and through the first 9 months of 2010, the loss was almost $807,000. As a result the credit union is having to shed assets and deposits to keep its net worth ratio above the 7 percent threshold.

Wednesday, November 24, 2010

Debt Reduction Task Force Recommends Eliminating CU Tax Exemption

The Washington, D.C.-based Bipartisan Policy Center's Debt Reduction Task Force last week released a 140-page report outlining a plan to cut $6 trillion from the federal debt by 2020. The task force, co-chaired by former Sen. Peter Domenici (R-N.M.) and Alice Rivlin, former vice chair of the Federal Reserve Board, recommended eliminating a long laundry list of tax expenditures -- including the credit union tax exemption.

The plan, among other things, also includes a one-year payroll tax holiday; a 6.5 percent national sales tax to lower the national debt; a five-year freeze on defense spending; a four-year freeze on nondefense domestic spending; and reductions in farm program spending. The corporate tax rate would be lowered to 27 percent, and individual taxes would have only two rates -- 15 percent and 27 percent.

In recommending either eliminating or scaling back almost all tax expenditures, the Task Force stated that "[w]hile some tax expenditures promote important social and economic goals, others have little economic justification."

The Task Force further states:

"Many tax expenditures,moreover, subsidize activities that generate no clear benefits beyond the rewards that private producers would receive in free markets. These tax expenditures misallocate resources by promoting over-investment in tax-favored industries and over-consumption of tax-favored goods and services. Tax expenditures also raise costs of compliance and administration and contribute to the high current levels of non-compliance. Eliminating almost all tax expenditures allows the Task Force plan to raise sufficient revenues with much lower individual and corporate tax rates than in current law."

To view a list of tax expenditures the Task Force recommended retaining, go to Appendix B on page 130 of the report.

Sunday, November 21, 2010

IG Report: WesCorp to Cost TCCUSF $5.59 Billion

NCUA's Inspector General (IG) released its report on the failure of Western Corporate (WesCorp) FCU. The expected loss to the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) from the failure of WesCorp is $5.59 billion. The report finds ample blame to go around citing WesCorp's management, Board of Directors, and NCUA's Office of Corporate CU examiners (OCCU examiners).

The IG report criticizes WesCorp management and Board of Directors for an aggressive investment strategy that allowed for excessive investments in privately-issued residential mortgage backed securities (RMBS). So by December 31, 2008, nearly 70% ($15.8 billion) of WesCorp‘s $22.7 billion investment portfolio was comprised of privately-issued RMBS.

In addition, the IG report notes that most of the underlying mortgage collateral of WesCorp's investments were located in California. Between August 2004 and February 2008, the portion of the RMBS portfolio having collateral in California ranged between 45 percent and 67 pecent. Wescorp's investment policy provided that up to 75 percent of the underlying collateral of domestic mortgage-related securities in any one state was adequate geographic diversification.

The report also notes that the failed corporate credit union had a large concentration of RMBS with loans serviced or originated by Countrywide Home Loan, Inc.

Additionally, WesCorp's was overexposed in its investment portfolio to privately-issued securities in a higher risk subordinated classes.

Finally, WesCorp pursued a strategy of purchasing privately-issued RMBS collateralized by sub-prime and Alt-A residential mortgage loans. As of December 2008, its RMBS portfolio classified as Alt-A and sub-prime was $13.7 billion and accounted for 60 percent of the total $22.7 billion investment portfolio and 87 percent of the $15.8 million privately-issued RMBS.

But the IG report is also critical of OCCU examiners because they "did not adequately and aggressively address WesCorp‘s increasing concentration of privately-issued RMBS and the increasing exposure of WesCorp‘s balance sheet to credit, market, and liquidity risks."

The IG specificaly noted that "OCCU examiners did not critique or respond in a timely manner to WesCorp‘s growing concentrations of privately-issued RMBS in general and in particular RMBS: (1) backed by higher risk mortgage collateral; (2) concentrated in California; and (3) issued, originated, and serviced by Countrywide."

The evidence suggests that OCCU examiners did not require or even advise management to limit or reduce its concentration of privately-issued RMBS, or its concentration of RMBS backed by Alt-A and sub-prime mortgage collateral and collateral comprised of exotic adjustable rate mortgages until it was too late. In fact, OCCU examiners did not issue a finding or Document of Resolution (DOR) to address this concentration until February 2008, well after the credit and liquidity crisis surfaced.

Friday, November 19, 2010

NCUA to Liquidate Constitution Corporate FCU

NCUA announced that it liquidated Constitution Corporate FCU on November 30 as part of its legacy assets program. Constitution Corporate FCU was placed into conservatorship by the NCUA Board on September 24.

Problem Credit Union Update, October 2010

As of the end of October 2010, NCUA reported that the number of problem credit unions edged higher in October to 378 from 374 in September. A problem credit union is defined as a credit union that has a CAMEL code of 4 or 5.

However, shares (deposits) and assets in problem credit unions during October fell by $900 million to $39.1 billion and to $44.4 billion, respectively. The decline was attributable to a single $1 billion plus credit union migrating from a CAMEL code 4 or 5 to a CAMEL code 3.

As of October, problem credit unions accounted for 5.20 percent of all insured shares in credit unions and 4.91 percent of all assets.

For every month beginning with September 2009, more than 5 percent of the industry's insured deposits have been in problem credit unions; but the October reading of 5.20 percent is at its lowest level since the 5.13 percent of insured deposits as of the end of September 2009.

Thursday, November 18, 2010

NCUA to Collect Between $1.5 and $2.7 Billion in Assessments in 2011 (Updated)

The NCUA Board today provided credit unions with guidance as to the anticipated premium assessment rate for 2011. Credit unions are expected to pay a combined premium rate between 20 and 35 basis points in 2011. NCUA is projecting that it will collect between $1.5 billion and $2.7 billion in premium revenues in 2011.

The premium revenues will be allocated between the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and the National Credit Union Stabilization Fund (NCUSIF). NCUA set the premium range for the NCUSIF between 0 and 10 basis points and the premium for the TCCUSF between 20 basis points and 25 basis points for next year.

NCUA stated that a combined premium assessment of 20 basis points would result in 80 credit unions seeing their capital ratios falling below the standard for being well capitalized or 7 percent abd 32 credit unions would become undercapitalized. Also, 760 credit unions would shift from reporting a profit to a loss.

If the combined premium is 35 basis points, then 148 credit unions will slip below being well capitalized, another 62 credit unions would become undercapitalized, and 1,200 credit unions will go from a profit to a loss.

Wednesday, November 17, 2010

Prize-Linked Savings Accounts

Last night on Marketplace, a story about how a handful of Michigan credit unions are offering prize-linked savings accounts caught my attention.

According to the story, these credit unions have opened about 15,000 new accounts this year and have taken in $18 million in deposits.

The basic premise is to combine a lottery with a savings account. These accounts would pay below market rates; but the prize money comes from the difference between what people would typically earn in interest and the lower interest rate that depositors are being paid.

These accounts are viewed as no-lose lotteries; because your principal is not at risk.

Currently, Michigan is the only state that allows such accounts to be offered by credit unions.

Tuesday, November 16, 2010

The Sky Is Falling

The draft proposal of the co-chairs of the National Commission on Fiscal Responsibility and Reform recommended several options that would eliminate all or many tax expenditures. While not specifically mentioned in the draft proposal, one tax expenditure that may be repealed is the tax exemption for credit unions.

Tax expenditures are defined in the law as "revenue losses attributable to provisions of the federal tax laws which allow a specific exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of liability."

Responding to the co-chair's draft proposal, Bill Cheney, CEO and President of CUNA, wrote the Commission that if "faced with federal income tax liability, a number of credit unions may no longer feel compelled to operate a credit union and could close or convert to for-profit banks."

It is very clear from his statement that he believes that the credit union business model needs its tax exemption to survive or to provide a value proposition to consumers. In other words, CUNA believes the sky is falling.

I find this to be a very sad commentary and I believe there are a number of credit union CEOs that would disagree with his point of view.

Other businesses have lost their tax exemption and have not gone the way of the dodo bird and I suspect that credit unions will also adapt and compete if taxed.

Sunday, November 14, 2010

Are Credit Unions Engaging Their Members?

In publicizing the credit union difference, credit unions regularly talk about their members as owners. However, are credit unions engaging their members as owners or are their members really just customers in the eyes of management?

What got me wondering about this question was a November 4th letter on Cooperative Operating Philosophy from the Farm Credit Administration (FCA), the regulator of the Farm Credit System (FCS), to Farm Credit institutions, financial cooperatives serving agriculture.

The letter encouraged Farm Credit institutions to engage their members as owners.

"Members need to know and understand their rights and benefits of ownership and be informed of the many ways they can exercise those rights and participate in the control of their institution."

While not mandating, the FCA wrote that FCS institutions could engage their members by:

1) posting their bylaws on their website;
2) ensuring that members petition rights are understood and fully supported; and
3) informing members how they may bring matters to the attention of the board or the membership as a whole.

I then went to several credit union websites including Navy FCU, State Employees CU, Altura CU, and Safe CU. I could not find their bylaws or any information on petition rights.

If management is not engaging members to participate in the control of their credit unions or providing them with the necessary information to participate in their institutions, then there may be a principal-agent problem.

Thursday, November 11, 2010

Credit Union Ag Lending to Farmers and Ranchers

I've just returned from the North American Agricultural Lenders Conference in Omaha. While I was there, I had a conversation with Bert Ely, a financial industry consultant, about credit union lending to agriculture. Apparently Bert had gotten an earful from Minnesota and North Dakota bankers about credit union competition for loans to farmers and ranchers.

As a result of our conversation, I decided to take a look at the credit union ag lending scene.

As of June 30, 2010, 184 credit unions reported having agricultural loans on their books equal to almost $1.7 billion.

While in aggregate agricultural lending by credit unions represents a small fraction of all credit going to agriculture, in some local markets credit unions are significant competitors.

The credit union with the largest ag loan portfolio is privately-insured Beacon Credit Union of Wabash, Indiana with almost $324 million in farm loans. Farm loans account for 45 percent of the credit union's total assets. Rouding out the top 5 are Central Minnesota FCU (MN), First Community (ND), Town and Country (ND), and Interra (IN).

The following table (click to enlarge image) identifies the 25 credit unions with the largest agricultural loan portfolios. Also provided is information on the percent of the credit union's assets in farm loans.

Tuesday, November 9, 2010

Vystar CU on MBL Personal Guarantees

Under NCUA's regulations, a credit union making a business loan is required to obtain the personal liability and guarantee of the borrower’s principals as part of the rule’s collateral and security requirements. However, a federal credit union that qualified for NCUA's Regulatory Flexibility (RegFlex) program was exempted from this requirement.

However, during the October 21 NCUA Board meeting, the NCUA Board by a 2 to 1 vote rescinded this exemption for qualified federal credit unions along with other exemptions associated with the agency's RegFlex program.

While most credit unions argued for the continuation of the exemption for RegFlex credit unions citing competitive disadvantages, Vystar Credit Union argued that all credit unions that engage in business lending should be required to obtain these personal liability and guarantees.

Esther Schultz, Chairman of the Board of Vystar Credit Union, wrote:

"Our comment is on the changes related to Member Business Lending and requiring a credit union to obtain a personal liability and guarantee of the borrower's principals as part of the rule's collateral and security requirements. As a state chartered credit union we make Member Business Loans and have consistently adhered to the requirement to obtain these personal liability and guarantees. During this challenging economic time, we have found tremendous value in exercising such guarantees and strongly believe that they are critical to making a prudent Member Business Loan decision. Such guarantees have also enhanced our collection abilities in multiple situations, thereby helping to prevent losses to the credit union. Also, when borrowers have balked at agreeing to such requirements, we consider that to be a red flag indicating that additional due diligence is necessary before a loan decision is made."

Esther Schultz goes on to write saying that NCUA needs strength its rules associated with member business loans because of the risk business loans pose to the credit union insurance fund and credit unions.

"We have been making Member Business Loans for a number of years and we believe making them is important for the credit union industry. We also believe that it is important that credit unions engaged in Member Business Lending obtain the expertise to make such loans and service them properly. Each loan decision is unique in its own way and must be carefully evaluated, monitored and serviced after origination. The longer we make Member Business Loans the more we learn about how to improve our related risk management. Otherwise, it is a risk to the National Credit Union Share Insurance Fund and to all credit unions. We encourage NCUA to continue its efforts to strengthen its governance of Member Business Lending to ensure those credit unions doing so are not placing all credit unions at risk. We remain concerned that some credit unions are engaging in Member Business Lending without obtaining proper expertise to underwrite and service such portfolios."

Friday, November 5, 2010

Redacted Consent Orders

The Washington Department of Financial Institution's Division of Credit Unions is making public consent orders for state chartered credit unions. They should be commended for doing so. With the exception of the most recent order against The Union Credit Union, which failed on October 29th of this year, the state credit union regulator unfortunately has redacted most information from its consent ordersthat would have been of value to credit union members and the public.

The Division of Credit Unions does state on its website that "under Washington State law, examination reports and any information obtained in connection with the examination of a credit union are confidential and privileged and not subject to public disclosure. For this reason, portions of the administrative actions available on this website may be redacted."

Take for example the enforcement action against Global Credit Union in 2009, it is full of redactions.

Page 2 of the consent order reads, as follows:

"IT IS HEREBY AGREED AND ORDERED that the Credit Union cease and desist from [redacted text]." The consent order goes on to enumerate 8 additional items under A, which are all redacted.

Under section 2.a.2) dealing with asset quality, the order says: "The consultant must deliver copies of their report within 60 days of engagement to the Board and Assistant Director. At a minimum, the deliverables must include

i) [redacted]
ii) [redacted]
iii) Suggestions for [redacted]
iv) Suggestions for a [redacted]

The consent order has additional redactions, including key net worth ratios. For example, it redacts the net worth ratio the credit union needs to obtain by December 31, 2010.

The Division even redacted the date of the last exam of the credit union. How is providing the date of the last exam harmful?

I believe the Division of Credit Unions should take a very narrow instead of an expansive view of "confidential and privileged" information. This will result in greater transparency.

Wednesday, November 3, 2010

Retrospective on a Hostile Takeover that Did Not Happen

Alliant Credit Union of Chicago is in the process of acquiring financially troubled Continental Federal Credit Union of Tempe, AZ.

Continental is significantly undercapitalized and is hemorrhaging money. Because of its troubled financial status, the members of Continental will not vote on the merger, which is expected to be completed on January 28, 2011.

This got me wondering about what could have been.

Back in early 2007, Wings Financial (Apple Valley, MN) made a hostile bid to takeover Continental FCU after management and the board of Continental rejected previous advances from Wings.

Wings directly solicited the members of Continental FCU. Wings stated that members of Continental would be $1200 better off, if Wings and Continental merged given the lackluster performance of Continental, and Wings proposed to pay members a pre-merger dividend.

Wings withdrew its offer after NCUA ruled that the dividend would violate the Federal Credit Union Act.

This unsolicited bid caused many within the credit union industry to rally to the defense of Continental FCU's management and board. Credit union trade associations adopted anti-takeover resolutions. (At the end of this post is the resolution adopted by the Arizona Credit Union League).

However, in retrospect, was opposing this hostile bid in the best interest of the members of Continental FCU?


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