Utah Central CU Closed

The Utah Department of Financial Institutions appointed the National Credit Union Administration (NCUA) as the liquidating agent for Utah Central Credit Union of Salt Lake City. Chartway Federal Credit Union of Virginia Beach, Virginia, immediately purchased and assumed Utah Central Credit Union’s assets, liabilities and members.

Utah Central has approximately $157 million in assets at the end of the first quarter of this year. The credit union reported a loss of $3.4 million during the first three months of 2011. It was critically undercapitalized with a net worth ratio of 0.69 percent. The credit union reported that 4.58 percent of its loans were 60 days or more delinquent at the end of the first quarter of 2011.

The Salt Lake Tribune quotes Michael Jones, the chief examiner at the Utah Department of Financial Institutions as saying "Utah Central, along with Beehive Credit Union, were the two [cooperatives] that were having the most difficultly due to the decline in the real estate industry."

This is the seventh credit union to be liquidated in 2011 and the second Utah credit union to be closed this year.

Read the press release.

Texans Q1 Financials

NCUA has posted Texans Credit Union financials, which was placed into conservatorship on April 15.

At the end of the first quarter, the credit union was significantly undercapitalized with a net worth ratio of 2 percent. Its net worth ratio fell by 75 basis points during the quarter.

The credit union reported a loss of $11.4 million for the first 3 months of 2011. Its return on average assets was -2.84 percent.

Its provisions for loan and lease losses were $14.4 million, an increase of almost 208 percent from the first quarter of 2010. However, despite the increase in provisions, allowances for loan and lease losses fell as net charge-offs exceeded the increase in provisions.

Texans reported net charge offs of almost $20.5 million during the first quarter. In comparison, the credit union charged off (net) $29.7 million in loans in 2010.

Delinquent loans edged higher during the first quarter. The credit union reported that $53.2 million in loans were 60 days or more delinquent or 5.91 percent of its loans were more than 60 days past due as of March 31, 2011. In comparison, $48.8 million in loans were delinquent at the end of 2010 and its delinquency rate was 5.19 percent.

The combined net charge off and delinquency rate was 14.82 percent at the end of the first quarter.

The credit union also reported holding more than $91 million in foreclosed real estate.

Rural District

In June 2010, the National Credit Union Administration (NCUA) defined for the first time in its regulations what constitutes a rural district.

NCUA's chartering manual states that the rural district requirement is met if:
• The district has well-defined, contiguous geographic boundaries;
• More than 50% of the district’s population resides in census blocks or other
geographic areas that are designated as rural by the United States Census Bureau; and
• The total population of the district does not exceed 200,000 people; or
• The district has well-defined, contiguous geographic boundaries;
• The district does not have a population density in excess of 100 people per square
mile; and
• The total population of the district does not exceed 200,000 people.

In recent months, NCUA has approved five credit unions to serve rural districts -- Dakotaland FCU (Huron, SD), Burlington Northern FCU (Grand Forks, ND), Buckeye Community FCU (Perry, FL), and Black Hills FCU (Rapid City, SD), and Members Choice of Central Texas (Waco, TX).

Some of these rural districts do not appear to meet the statutory requirement of being local and well-defined. For example, in December of 2010, NCUA approved 25 counties in South Dakota to be served by Dakotaland as a rural district.

Perhaps more troublesome is the rural district granted Black Hills FCU. This rural district consists of Pennington, Meade, Haakon, Hughes or Stanley Counties, South Dakota. However, Pennington and Meade Counties are part of the Rapid City Metropolitan Statistical Area (MSA), while Stanley and Hughes Counties are part of the Pierre Micropolian Statistical Area.

According to U.S. Department of Agriculture's Rural-Urban Continuum Code, both Meade and Pennington Counties are defined as metro counties with populations under $250,000. Hughes County is defined as a nonmetro county with an urban population of 2,500-19,999, which is not adjacent to a metro area. Haakon County is defiend a a nonmetro county that is either completely rural or has less than 2,500 urban population, which is adjacent to a metro area, while Stanley County is a nonmetro county that is completely rural or has less than 2,500 urban population; and is not adjacent to metro area.

It does make you wonder what tortured mental gymnastics NCUA went through so that this community would meet the definition of a rural district.

This agency has a history of abusing its community chartering authority and it appears that NCUA is once again straying from its statutory mandate that a community credit union serve "persons or organizations within a well-defined local community, neighborhood, or rural district."

What Does Conservatorship Mean?

Recently, I received an e-mail from a credit union member asking what does the conservatorship of Texans CU mean and what can a credit union member do about the conservatorship.

A conservatorship means that NCUA has assumed control of a credit union in order to ensure a credit union’s financial stability and safe-and-sound operation. In a conservatorship, NCUA attempts to address issues related to a credit union’s financial condition while ensuring uninterrupted services to the credit union's members.

Members should not worry about their funds because their deposits are insured to the federal limit, which is $250,000 per member.

However, when NCUA places a credit union into conservatorship, it removes the credit union's board of directors and senior management.

Furthermore, NCUA does not impose any limits on how long a credit union can be conserved. For example, Keys Federal Credit Union was seized by NCUA on September 24, 2009 and is still under conservatorship nearly 18 months later.

While the goal of the conservatorship is to return the credit union back to the members, this may not always be the outcome. Some credit unions are in such deep financial distress that they ultimately are liquidated or merged into a healthy credit union.

For example, NCUA liquidated St. Paul Croatian FCU after it was placed into conservatorship last April. Family First FCU, which was placed into conservatorship last July 30th, was acquired by Security Service FCU in a purchase and assumption transaction on February 15, 2011.

As for what a member can do, I don't think there is much a credit union member can do about the conservatorship. All you have to do is look at the June 2010 conservatorship of Arrowhead Central CU in California. There were some members and community leaders that opposed the conservatorship; but I don't think their opposition had any impact on NCUA.

NCUA Drops ABA-Opposed Equitable Sharing of TCCUSF Expense Provision

The NCUA Board on Thursday dropped an ABA-opposed amendment on the equitable sharing of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) expense from its final corporate credit union rule. If the proposal had been adopted, it would have shifted a portion of the TCCUSF’s cost from federally insured to non-federally insured corporate members.

Under the proposal, the NCUA Board would ask non-federally insured corporate members to make voluntary payments to the TCCUSF when the board assessed a fund premium on federally insured corporate members. If a non-federally insured member declined to make the requested payment, or made a payment for a lesser amount, the corporate credit union would hold a vote on whether to expel the member.

ABA argued that 1) the TCCUSF’s creation directly benefited the National Credit Union Share Insurance Fund and federally insured credit unions, not non-federally insured credit unions; 2) the proposed amendment exceeds the NCUA’s statutory authority; and 3) the proposed payment by non-federally insured credit unions to the TCCUSF is neither a gift, nor is it voluntary.

Number of Problem Credit Unions Edge Higher in March; But Shares and Assets Fall

At today's NCUA Board meeting, the agency reported that the number of problem credit unions increased in March, but shares (deposits) and assets in problem credit unions fell.

A problem credit union is defined as a credit union that has a CAMEL code of 4 or 5.

The number of problem credit unions edged higher by 6 to 366 credit unions; but shares and assets in problem credit unions fell by $400 million and $500 million, respectively. As of the end of March, problem credit unions held $37.3 billion in shares and $42 billion in assets. NCUA reported that problem credit unions held 4.92 percent of the credit union industry’s insured shares and 4.60 percent of the industry’s assets as of the end of March.

While almost half of all problem credit unions are under $10 million in assets, the bulk of the shares and assets are in larger problem credit unions. There were 11 problem credit unions with $1 billion or more in assets holding $18.9 billion in shares. The number of problem credit unions with between $500 million and $1 billion in assets was unchanged at 5 with $3.3 billion in shares. There were 51 problem credit unions with between $100 million and $500 million in assets holding $11.2 billion in shares.

Har-Co Proceeding with Charter Switch

Credit Union Journal is reporting that Har-Co FCU has submitted its applications to the Office of Thrift Supervision and the Federal Deposit Insurance Corporation to switch from a credit union charter to a mutual savings bank charter.

Credit Union Journal also stated that Har-Co is still waiting for NCUA to approve its member disclosures before proceeding with the balloting.

If members approve the charter switch, the new entity will be called Har-Co Federal Bank.

Read Credit Union Journal story (subscription required).

NCUA Conserved Two Credit Unions, Including $1.6 Billion Texans CU

NCUA on April 15 placed Texans Credit Union and Vensure FCU into conservatorship. The bigger story is the conservatorship of $1.6 billion Texans Credit Union in Richardson, Texas.

Texans was significantly undercapitalized after reporting losses of almost $91 million over the last two years.

Texans held almost $93 million in foreclosed real estate loans at the end of 2010, mostly commercial real estate loans.

I'll provide more details once Q1 financials are released for Texans CU at the end of the April.

Read Texans CU press release.

Read Vensure FCU press release.

Credit Union Borrowings from Fed's Discount Window During 2008

As financial markets became frozen in 2008, two doomed corporate credit unions -- U.S. Central and Western Corporate -- increased their use of the Federal Reserve's discount window to meet their liquidity needs, according to recently released data.

U.S. Central borrowed in aggregate almost $172 billion from the Federal Reserve and Western Corporate borrowed in aggregate approximately $51.6 billion.

In addition, Eastern Financial Florida CU, which was seized by the NCUA in April of 2009, borrowed almost $555 million between October 24 and December 11.

Other credit unions that made regular use of the discount window include Alaska USA FCU ($17.3 billion in borrowings between February 13 and end of 2008), America First FCU ($990 million in total borrowings between October 17 and December 24), and Scott CU ($591 million in borrowings between February 22 and the end of 2008).

To see what credit unions borrowed from the Federal Reserve during 2008, click on this link.

There are two tabs on the excel spreadsheet. The first tab provides you with the date and amount borrowed by a credit union during 2008. The second tab on the excel spreadsheet gives the aggregate amount of borrowings by credit unions during 2008.

The next project will be to look at credit union borrowings from the Federal Reserve in 2009 and 2010, as problems in the corporate credit union system intensified.

Should FCUs Get Subsidized Space in Federal Buildings?

People may not realize that the Federal Credit Union Act authorizes that the Federal government may lease land or space to federal credit unions without charging rent.

Additionally, these federal credit unions may receive free lighting, heating, cooling, electricity, office furniture, office machines and equipment, telephone service (including installation of lines and equipment and other expenses associated with telephone service), and security systems courtesy of the American taxpayers.

The only caveat is that "at least 95 percent of the membership of the credit union to be served by the allotment of space or the facility built on the lease land is composed of persons who either are presently Federal employees or were Federal employees at the time of admission into the credit union, and members of their families, and if space is available."

To be honest, I don't know about the prevalence of this practice. But if credit unions are receiving subsidized rents at federal facilities, then this is an outrage.

Our country's fiscal condition is in dire straits. The federal deficit will be around $1.6 trillion this fiscal year and is projected to be above $1 trillion in next fiscal year. We cannot afford to subsidize the rents for federal credit unions.

This section of the Federal Credit Union Act needs to be repealed and credit unions should be required to pay market rents for the facilities they lease from the Federal government.

NCUA Closes Community Development CU

The National Credit Union Administration (NCUA) placed Mission San Francisco Federal Credit Union of San Francisco, California, into liquidation. Immediately thereafter, Self-Help Federal Credit Union of Durham, North Carolina, purchased and assumed Mission San Francisco’s assets, liabilities and members.

Mission San Francisco FCU was critically undercapitalized at the end of 2010 with a net worth ratio of 0.52 percent. The credit union reported that 15.69 percent of its loans were 60 days or more past due at the end of 2010. The net charge-off rate was 10.40 percent at the end of 2010.

Read the press release.

CU Business Lending Bill Introduced in the House

Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.) introduced the Small Business Lending Enhancement Act (H.R. 1418). The bill would raise the member business-lending cap for certain credit unions from 12.25 percent to 27.5 percent of total assets.

The legislation would raise the cap for well-capitalized credit unions that are approaching the current legislative cap of 12.25 percent of assets (defined as member business loans to asset ratio of at least 9.80 percent) for four consecutive quarters immediately preceding their application date; can demonstrate at least five years experience soundly underwriting and servicing such loans; and have the requisite policies and experience in managing them. Credit unions also would have to satisfy other standards that the National Credit Union Administration Board determines are needed to maintain their safety and soundness.

Sen. Mark Udall (D-Colo.) introduced a similar bill (S. 509) on March 9.

Update on Hawaii State FCU

On February 3 of this year, I wrote about the controversy surrounding the excessive perks the board members of Hawaii State FCU had awarded to themselves and possible conflicts of interest.

This is a follow up on that earlier post.

Members of the credit union appear to have been fed up with the credit union board of directors and voted to oust the board chair Beverly Ing Lee, whose travel agency arranged official board trips frequently at ticket prices higher than what the airlines offered.

Read the story about the election.

Be Careful What You Wish For

I would like to pose the following hypothetical question: What would have happened to the National Credit Union Share Insurance Fund (NCUSIF) and the premiums paid by credit unions in the aftermath of the recession of 2008 and 2009, if there was never a business loan cap?

In other words, assume that the business loan cap of 12.25 percent of assets, which was put in place in 1998, never happened.

I think we would agree that the risk profile of the credit union industry would look fundamentally different in this counter factual world, as credit unions would take on more credit risk and concentration risk. [For example, NCUA is reporting that 3.92 percent of all business loans were delinquent at the end of 2010, which is well above the overall delinquency rate of 1.74 percent.]

Without the business loan cap, it is likely that more credit unions would have had greater exposure to business loans entering the recession of 2008 and 2009, especially commercial real estate and construction loans. This means that those credit unions would have more of their net worth at risk because of the greater concentration in business loans; and would be more exposed to the economic contraction.

As a result of the economic downturn, the dollar volume of delinquencies and charge-offs associated with business loans would increase.

This would probably result in more credit union failures and larger losses for the NCUSIF.

So, the surviving credit unions would see higher premium assessments to restore the NCUSIF back to its normal operating level. There is also the likelihood that insured credit unions would have to expense a portion (and possibly all) of their NCUSIF one percent capitalization deposit as the NCUSIF reserve ratio falls below one percent. This expensing of the one percent deposit would reduce the net worth ratios of these surviving credit unions.

What makes this even worse is that the current flat rate premium assessment system means that sound credit unions would be cross-subsidizing the riskier credit unions. In other words, the less risky credit unions are bearing the cost of the risk assumed by credit unions that took on more credit risk and concentration risk associated with increased business lending.

Therefore, the member business loan cap of 12.25 percent of assets provided a real tangible benefit to credit unions. It limited the losses to the NCUSIF and resulted in smaller premium assessments than what would have been the case if the business loan cap had never been in place.

So while a few credit unions would benefit from the legislative push to increase the business lending authority of credit unions, legislation to raise the business lending cap will ultimately impose greater cost through higher future NCUSIF premiums on most credit unions that have no interest in this increased lending authority.

Three Risk Areas for New Regulations

In a letter to credit unions, NCUA identified three risk areas that will be of particular emphasis for the agency in the coming year -- credit risk, interest rate risk, and concentration risk.

The letter states that NCUA will closely monitor and supervise these risks. But it also provides guidance to where NCUA will or may make changes in its existing regulations.

In March, NCUA issued a proposed rule on the management and mitigation of interest rate risk.

Moreover, the letter indicates that the agency may issue new rules to address credit risk and concentration risk.

NCUA may issue a proposal that will enhance its "business lending regulation to better ensure safe and sound underwriting and credit risk management at credit unions." Also, NCUA wrote that it is working on "a proposal to adjust the Risk Based Net Worth calculation in the Prompt Corrective Action regulation that would place more emphasis on concentration risk factors."

Read the letter.