Section 208 Net Worth Assistance Becomes Effective Today

Today, Section 208 assistance from NCUA can count as net worth for problem credit unions.

However, there are some of us that are worried that Section 208 assistance may be abused.

Marvin Umholtz expressed such concern in CU Strategic Hot Topics. He wrote:

"The NCUA Board would be relatively unrestricted in its ability to pick winners and losers by injecting or withholding financial assistance. Channeling NCUSIF dollars to pet credit unions to keep them afloat is not an appropriate long-term safety and soundness policy. Although this correspondent generally believes that regulators need to have a full tool box, Section 208 is based on the faulty premise that politicians, including the NCUA Board and their agency’s bureaucrats, will allocate capital better than the marketplace. One can hope that an uptick in the NCUA Board’s use of Section 208 does not lead to the creation of a too-sick-to-fail credit union supervisory culture. The folly of “pretend net worth” should be self evident, but the savings and loan crisis decades ago provided tangible evidence of how not and why not to do it. Delayed resolution is often much more costly."

This is why ABA had requested that this assistance only be used to facilitate a merger between a healthy credit union and a failing credit union.

As it currently stands, no one knows under what circumstances the agency will extend Section 208 assistance.

To minimize this potential for abuse, the agency needs to clearly articulate the rules of the road as to when such assistance would be extended. Rules are preferable to discretion.

Birmingham Financial FCU Placed into Conservatorship

The National Credit Union Administration (NCUA) assumed control of service and operations at Birmingham Financial Federal Credit Union of Birmingham, Ala.

Birmingham Financial FCU is a low-income credit union and serves 429 members.

According to its call report, Birmingham Financial experienced a significant contraction between the first quarter and the second quarter of this year as its assets fell from almost $5 million to $1.3 million. The credit union reported holding almost $4.2 million in nonmember deposits as of March 31 of this year. As of June, the credit union reported holding only $200,000 in nonmember deposits.

Through the first six months of 20111, the credit union reported a loss of almost $108,000. The credit union reported a loss of $54,000 for 2010.

As of June 30, loans 60 days or more past due were $235,360. In other words, 26.91 percent of its loans were 60 days or more past due. An additional $187,242 of loans were 30 days to 60 days past due.

Read the press release.

Problem CU Update

NCUA reported that the number of problem credit unions increased in September, while assets and deposits (shares) in problem credit unions fell.

A problem credit union has a CAMEL rating of 4 or 5.

At the end of September, there were 384 problem credit unions – a net increase of 15 during the month. This is the highest number of credit unions on the problem list so far this year.

According to the NCUA, there were 9 credit unions with over $1 billion in assets on the problem list -- down from 10 in August. However, 4 credit unions with between $100 million and $500 million in assets, 7 credit unions with between $10 million and 100 million in assets, and 5 credit unions with under $10 million in assets were added to the problem list.

Assets and deposits in problem credit unions as of the end of September were $33.9 billion and $30.4 billion, respectively. This was down from $34.8 billion in assets and $30.9 billion in deposits in August. The percentage of the industry's assets and shares in problem credit unions were 3.4% and 3.88% as of September.

The decline in assets and deposits in problem credit unions in August can be attributed to one $1 billion plus credit union no longer being rated as a CAMEL 4 or 5. The removal of this credit union from the problem list more than offset the increase in assets and deposits at the 16 credit unions that were added to the problem list.

NCUA to Engage in Capital Forbearance

According to a report appearing on CUNA News (Tuesday, October 25), NCUA is advising its examiners to temporarily engage in capital forbearance due to the possible inflow of deposits.

The guidance was issued to examiners in preparation of Bank Transfer Day.

CUNA News reported that NCUA told its examiners that the inflow of new funds could depress the net worth ratios of credit unions. The agency, according to the news report, noted that the call report allows credit unions alternative ways to calculate their net worth ratios.

If anyone has seen this guidance from NCUA, please forward it to me so that I can publish the document.

New Bethpage Customers Get A Better Deal

Tapping into consumer frustration about fees, Bethpage FCU is guaranteeing fee free checking accounts for the life of the accounts; but only if you are a new customer.

According to an article appearing in a New York Times blog, "new customers opening a Bethpage Bonus checking account can be assured of a lifetime of no debit card fees, no monthly maintenance fees, no transaction fees, no minimum balance fees and no fees charged by Bethpage for use of other banks’ A.T.M.’s. Plus, there are no fees for online, mobile or telephone banking."

While new customers get this deal, the existing customers of Bethpage apparently do not.

This reminds me of the Ally Bank commercial where the kid wants ice cream and is turned away because the ice cream is only for new people. Another kid comes along and gets a chocolate ice cream cone. When the first kid say he is new, he is told that the other kid is newer than you.

If Bethpage is not going to "dance with the one that brung ya", maybe the existing customers of Bethpage should shop around.

CU Managed by NCUA Board Nominee Received TARP Funds

The credit union managed by Carla Leon-Decker, President Obama's nominee to the NCUA Board, received TARP funds.

D.C. Federal Credit Union was the recipient of $1.522 million investment on September 29, 2010 through the Community Development Capital Initiative program.

Go to the TARP Transaction Report (page 18 or 26).

Two Nominations -- A Study in Contrast

President Obama's nominees to serve on the FDIC Board versus the NCUA Board are a study in contrast.

President Obama nominated Thomas Hoenig to serve as the Vice Chairman of the FDIC Board. Dr. Hoenig was the President and Chief Executive Officer of the Federal Reserve Bank of Kansas City from 1991 to 2011. Dr. Hoenig first joined the Federal Reserve Bank of Kansas City in 1973 as an economist in the banking supervision area.

On the other hand, the President nominated Carla M. León-Decker for the NCUA Board. Ms. León-Decker is the President and CEO of the D.C. Federal Credit Union. From 1994 to 2000, she served at the PAHO/WHO Federal Credit Union, initially as Operations Manager and later as President and CEO. Before that, she was a branch manager at the Transportation Federal Credit Union where she served from 1988 to 1994. Ms. León-Decker is a credit union development educator and Co-Founder and Director of the Network of Latino Credit Unions & Professionals.

Tom Hoenig has a strong background as a bank regulator, while Carla León-Decker has no regulatory experience.

Occupy Wall Street, Boycotts, and Credit Unions

Occupy Wall Street protesters have aligned themselves with an event calling on individuals to boycott large banks and move their funds to credit unions.

The event, Bank Transfer Day, is encouraging people nationwide to remove their funds from large banking organizations on or by November 5. Kristen Christian is the creator of this event.

The event’s Facebook page says: “In a stand of solidarity, on November 5th we will transfer our money & close our accounts with these major banking institutions to take our business to credit unions (or local banks if a credit union isn't available).”

Some credit union trade groups are viewing this event as an opportunity and are reporting a surge in traffic on their credit union locator sites. But I'm not sure all credit union CEOs share the same outlook.

Weak loan demand and a surge in deposits over the last couple of years has caused the loan to deposit (share) ratio for credit unions to fall from 83.58 percent at the end of 2007 to 69.44 percent as of June 2011.

Without a profitable means of deploying the potential inflow of funds, this potential movement in deposits from banks to credit unions could become a drag on credit unions as they incur higher cost associated with opening these accounts, face a potential assessment to rebuild the NCUSIF equity ratio, and see their capital (net worth) ratios fall.

330 LUAs Went Unpublished in 2010

There is an interesting table in The 2010 Annual Report see below) that shows that NCUA only published 3 letters of understanding and agreement, while 330 letters of understanding and agreement went unpublished.

NCUA issued 28 cease and desist orders. However, only one cease and desist order was published in 2010.

The Federal Credit Union Act requires that the NCUA Board publish and make available to the public “any written agreement or other written statement for which a violation may be enforced by the Board unless the Board, in its discretion, determines that publication would be contrary to public interest.”

It appears that NCUA is abusing its regulatory discretion to suppress the publication of information about enforcement orders against credit unions.

I have a hard time believing that in 99 percent of these supervisory actions that it was contrary to the public interest to publish these actions.

Areas of Regulatory Concern

In a letter to credit union directors on the mid-year performance of the credit union industry, NCUA stated that credit unions with elevated levels of credit, interest rate, concentration, and strategic risk will be subjected to greater regulatory scrutiny.

Credit risk remains a supervisory concern as it constrains the performance of many credit unions. While the overall delinquency and charge-off rates have declined through mid-year 2011, delinquencies in real estate, business, and participation loans remain high. Additionally, loan modifications are increasing. Modified loans have a high rate of re-defaulting and this could become delinquent in the future.

Interest rate risk is also a supervisory concern. NCUA notes that many credit unions are holding a significant amount of long-term, fixed-rate loans, as well as low-rate loan modifications. NCUA also is concerned that some credit unions are beginning to chase yields by purchasing investments with longer maturities. At the same time, most member shares are in short-term accounts and 58 percent of credit union share balances are less stable, rate-sensitive accounts.

Concentration risk is another supervisory concern, especially with regard to real estate loans and investments. NCUA advises that sound risk mitigation and diversification strategies are necessary to prevent loan concentrations from reaching unsafe levels.

Finally, strategic risk will be a focus of credit union examinations. This will include looking at management philosophy, plans, decisions, and actions, such as performing initial and ongoing due diligence of third-party vendors. A recent NCUA Inspector General report noted that 23 percent of 26,000 unresolved documents of resolution dealt with management issues.

Read the letter.

ABA Testified Against Increased Lending Cap

The American Bankers Association testified today before the Senate Subcommittee on Financial Institutions and Consumer Credit, expressing strong opposition to legislation that would more than double the business lending cap for qualifying credit unions, effectively turning them into tax-exempt banks.

ABA Chairman-Elect Albert C. Kelly, Jr., testified that the “Small Business Lending Enhancement Act of 2011 (H.R. 1418)” would permit credit unions within 80 percent of their member business lending cap to increase it to 27.5 percent of assets – more than double the current limit. Kelly is also chairman and chief executive officer of SpiritBank, headquartered in Bristow, Okla.

“This would allow qualified credit unions to significantly increase their business lending at the expense of making consumer loans,” Kelly said. “This increase in business lending would shift some business loans to tax-exempt credit unions from tax-paying banks, causing an increase to the federal deficit just when Congress is looking for ways to reduce the government debt.”

Credit unions already have sufficient lending authority to make small business loans, with business loans under $50,000 not counting against the current cap of 12.25 percent.

“These exemptions mean that credit unions already have unlimited ability to fund small business loans, without the need to seek increases in their member business lending limits,” Kelly said. “This proposed increase is only directed at larger loans and would benefit only a few large, aggressive credit unions. Just 96 credit unions out of 7,292 total are within 80 percent of their congressionally-mandated cap.”

For those credit unions seeking to expand their business lending, the option to convert to a mutual savings bank charter is readily available.

“Instead of trying to broaden tax-advantaged lending, increasing the deficit in the process, credit unions that seek to expand business lending opportunities can reach out with credit in their communities by converting to a mutual savings bank charter,” he said. “This charter provides the flexibility credit unions desire and would put these credit unions on equal footing with banks with respect to taxes and regulatory oversight.”

Royal CU Acquires Mortgage Servicing Rights from Failed Bank

Royal Credit Union has agreed to acquire the servicing rights of The RiverBanks’ mortgage loans.

The Minnesota bank regulator closed The RiverBank on October 7.

The transaction, which will take place on October 14, 2011, brings approximately 4,200 additional mortgage loans and members to Royal Credit Union. The outstanding balances of the mortgage loans are worth almost $600 million.

According to Mark Willer, Chief Operating Officer of Royal Credit Union, almost all of the mortgage customers of The RiverBank are within Royal Credit Union's field of membership.

"Less than 20 of the 4200 River Bank customers were outside our field of membership," said Willer. "Our Bylaws are being amended to specifically include these Riverbank customers within our field of membership."

The transfer is expected to be completed by October 17, 2011. The terms of the transaction were not disclosed.

While such bank/credit union transactions remain rare, this is the second transaction between Royal Credit Union and a bank. Less than a year ago, Royal Credit Union acquired 11 branches and 20,000 customer accounts from Anchor Bank.

Also, United FCU (St. Joseph, MI) has announced that it has entered into an agreement to purchase and assume the deposits and assets of Griffith Savings Bank.

HAR-CO Members Vote to Become A Mutual Savings Bank

The membership of HAR-CO Federal Credit Union has approved the Board’s proposal to convert from a federal credit union charter to a federal mutual savings bank charter.

Over 58 percent of voting members casted ballots in favor of the proposal.

HAR-CO reported that over 5,000 of its members voted on the proposal.

HAR-CO will continue to operate as a credit union until it receives final regulatory approvals. It expects the closing of the charter conversion transaction will take several months to complete.

Read the announcement.

NCUA Ineffective in Follow Up on Unresolved Exam Issues

An audit by NCUA's Office of the Inspector General (IG) found that NCUA needs to improve its follow-up process with regard to Document of Resolution (DOR).

The audit report concluded that "neither NCUA's Office of Examination and Insurance (E&I) nor the five regional offices effectively monitored or followed up on unresolved DOR items." This failure to follow up on these DORs represented "missed opportunities to mitigate losses" to the share insurance fund.

A DOR is issued by NCUA examination staff outlining "plans and agreements reached with credit union officials to reduce identified areas of unacceptable risk." The DOR will identify persons responsible and timeframes for correction.

The audit noted that in five of ten credit union failures reviewed by the IG, the same DOR issues were repeated over several examinations at the same credit union and these unaddressed DOR issues contributed to the failure of these credit unions.

The IG audit further notes that 4,653 federally insured credit unions had over 26,000 unresolved DOR items at the end of 2010. Fifty-seven percent of the credit unions had a composite CAMEL rating of 2 during their last exam.

Twenty-three percent of these credit unions had unresolved DOR items related to management issues. The report noted that 88 percent of the management-related DOR issues were associated with "Management Understanding/Response” and “Management Practices” risk factors.

The IG audit notes that a number of these unresolved DOR issues have been around for a long time. Fifty-even were over 10 years old; 776 were 5-10 years old; 2,305 were 3-5 years old; 3,098 were 2-3 years old, 9,055 were 1-2 years old, and 10,870 were less than one year old.

The IG stated that examiners failed to take timely corrective actions with regard to unresolved DORs. These actions could have included a CAMEL ratings downgrade or a stronger supervisory action.

Read the report.

Not All CUs Want Expanded Business Lending

Not everyone in the credit union industry is eager to see an expansion in the business lending powers for credit unions.

Check out these two recent blog posts on 1st Thought on Everything Credit Union about member business lending, especially since there is a hearing on Wednesday, October 12 on increasing the business lending authority of credit unions.

The first blog posting focuses on Telesis Community CU. This credit union was one of the biggest advocates for greater business lending authority and has seen a sharp deterioration in its financial performance due to bad commercial loans.

The second blog post is on "Not Everyone is Whacky About MBL."

NCUA Proposal Would Artificially Inflate Corporate CU Leverage Ratio

In a comment letter filed with NCUA on October 5, the American Bankers Association opposed excluding Central Liquidity Facility (CLF) stock subscriptions from the definition of net assets, which is the denominator of the leverage ratio for corporate credit unions.

NCUA is proposing to deduct CLF stock subscription from net assets, because it believes CLF stock subscription poses negligible credit risk and will help address systemic liquidity needs of natural person credit unions.

However, deducting CLF stock subscription is an accounting gimmick that would artificially inflate the leverage ratio for corporate credit unions, making them appear less risky than they really are.

The four percent leverage ratio requirement is intended to ensure that credit unions maintain a minimum amount of capital as protection against risks that are not captured by risk-based capital standards, risks that by definition are unknown or unknowable. The leverage ratio is a recognition that risk models are subject to significant error, which the recent financial turmoil affecting banks and credit unions alike made all too clear. The leverage ratio should not be influenced by fallible estimates of the riskiness of the assets.

Additionally, if NCUA believes that the credit risk posed by CLF stock subscription, is negligible, then this is best addressed through the risk-based capital requirements for corporate credit unions and not the leverage ratio.

Moreover, arguments that the proposed definitional change in net assets is necessary to meet the systemic liquidity needs of natural person credit unions ignores the fact that credit unions have other alternative sources of liquidity already available to them.

First, credit unions can meet their liquidity needs by becoming members of the Federal Home Loan Bank (FHLB) system. As of June 2011, NCUA is reporting that 1,047 federally-insured credit unions were FHLB members.

Second, almost all credit unions, except for the smallest, can make arrangements with the Federal Reserve to access the discount window to meet emerging liquidity needs.

Read ABA's Comment Letter.

ASI Assesses 15 Basis Point Premium on Privately Insured Credit Unions

For the third year in a row, American Mutual Share Insurance Corporation (ASI) levied a special premium on privately insured credit unions.

The Board of Directors of ASI announced a special premium assessment for 2011 in the amount of 15 basis points of total shares. The premiums were assessed on September 30, 2011, and were based on the total shares reported as of June 30, 2011.

ASI noted that the special assessment was due to lower yields on its government bond portfolio and more aggressive funding of its loss reserves.

Read ASI's press release.

Technology Credit Union Begins Process to Become A Mutual Savings Bank

The Board of Directors of Technology Credit Union have provided notice to its membership that it is considering asking its members to approve a charter change from a credit union to a mutual savings bank.

The $1.5 billion credit union located in San Jose, California listed expanded commercial lending authority, the ability to access sources of capital, and no limitations as to who it can serve as reasons for seeking the change in charter.

Membership of the credit union are being invited by the Board of Directors to provide written comments about the charter change proposal. Comments must be received by October 29. On November 2, the Board will decide whether to move forward with the charter change proposal based upon comments received from the membership.

CUNA Overstates Number of CUs Impacted by Business Loan Cap

CUNA is inflating the number of credit unions that are near or will be near the business loan cap.

In a September 20 letter to House Capital Markets and Government Sponsored Enterprises Subcommittee Chairman Scott Garrett and Ranking Member Maxine Waters, CUNA wrote that 355 credit unions are near or will be near the business loan cap of 12.25 percent of assets.

Specifically, CUNA wrote:

"Today,there are approximately 175 credit unions that are essentially at the cap (> 10% of total assets); another 180 credit unions are quickly approaching the cap and will likely be capped within 2-3 years (7.5% - 10% of total assets)."

I tried to replicate CUNA's analysis and could not get their numbers.

As best as I can tell, CUNA's analysis includes credit unions, which were either chartered for the purpose of making member business loans or have a history of primarily making member business loans. Furthermore, CUNA's analysis appears to include credit unions that either have a low-income designation or are community development financial institutions. These credit unions are excepted from the aggregate business loan cap.

According to footnote 12 of NCUA Chairman Debbie Matz's testimony on June 16, 2011, there were 120 credit unions, which were either chartered for the purpose of making member business loans or have a history of primarily making member business loans. Additionally, 59 of the 120 credit unions have a low-income designation.

That means there are 61 credit unions that were chartered for the purpose of making member business loans or have a history of primarily making member business loans, which are not low-income.

Using credit union call report data supplied from Highline FI, I found that 56 credit unions with a low income designation have a member business loan to asset ratio greater than 10% as of June 2011. This reduces the number of credit unions that are impacted by the cap to 119. Additionally, assuming that the 61 credit unions, which were chartered for the purpose of making member business loans or have a history of primarily making member business loans, were above the 10% threshold, this means only 58 credit unions are actually impacted by the cap -- not 175 credit unions.

Furthermore, I only found that 99 credit unions, which are not low-income designated, have an member business loan to asset ratio between 7.5% amd 10% of assets.

In conclusion, it appears that CUNA's analysis greatly inflates the number of credit unions impacted by the bsuienss loan cap.