Sunday, January 30, 2011

FCUs Access to Federal Courts Could Be Constrained

An opinion by the U.S. District Court for the District of Maryland stated that federally chartered credit unions cannot gain access to the federal courts by claiming state citizenship.

Pentagon FCU (PenFed) sought to move a civil suit from Maryland state court to federal court in Maryland claiming Virginia citizenship. Federal law states that federal district courts “have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between citizens of different States.” PenFed claimed that a federally chartered credit union should be deemed to be a citizen of the state in which its “principal place of business” is located for diversity purposes.

However, Judge Roger W. Titus disagreed and wrote: “Congress has chosen to confer citizenship status on some federally chartered corporations, but not on federal credit unions. In the absence of congressional action, this Court cannot confer state citizenship on PenFed.” The Judge remanded the case back to the Circuit Court for Montgomery County.

The decision in Northern Virginia Foot & Ankle Associates LLC v. Pentagon Federal Credit Union could have broader implications because it affects federally chartered credit unions as a class of institutions.

Read the decision.

Friday, January 28, 2011

ABA Opposes NCUA's Equitable Sharing of TCCUSF Expenses Proposal

In a comment letter filed with National Credit Union Administration (NCUA), ABA opposed the NCUA’s proposed amendment to its corporate credit union regulation that would require all corporate credit unions members -- both federally insured and non-federally insured -- to share the Temporary Corporate Credit Union Stabilization Fund’s expenses equally.

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 opposed the proposed amendment because it shifts a portion of the TCCUSF’s cost from federally insured to non-federally insured corporate members. The comment letter stressed that: the TCCUSF’s creation directly benefited the National Credit Union Share Insurance Fund and federally insured credit unions, not non-federally insured credit unions; the proposed amendment exceeds the NCUA’s statutory authority; and the proposed payment by non-federally insured credit unions to the TCCUSF is neither a gift, nor is it voluntary.

To read ABA's comment letter, click here.

Thursday, January 27, 2011

Will Merger-related Share Adjustments Become the Norm?

Effective January 27th, NCUA is going to require new information to be reported in credit union mergers explaining whether a share adjustment will be paid to members of the merging credit union. While the rule does not require such share adjustment payments, these payments may become the norm.

Section 708b.103(a)(5) of the rule will require, where the net worth ratio of the merging credit union exceeds the net worth ratio of the continuing credit union by more than 500 basis points, an explanation of the factors used in establishing the amount of any proposed adjustment or in determining no adjustment is necessary.

The NCUA Board contends that where a net worth disparity exists, the merging credit union members need to know how any merger dividend, if a merger dividend is offered, was calculated. However, the NCUA Board stated that the disclosure of this information is not intended to require a share adjustment payment.

But the discussion ot the final rule shows that some within the credit union industry see it quite differently. Despite NCUA's statement that the regulation does not mandate a share adjustment payment, I suspect the case can easily be made that such disclosures will cause the members at a credit union with a higher net worth ratio to seek compensation for the dilution of their ownership interests in return for their support of the merger.

Also, the rule will require that any "merger-related financial arrangement" be disclosed. A merger-related financial arrangement is defined to include any
increase in direct or indirect compensation to board members or senior management officials that exceeds the greater of 15 percent or $10,000.

To read the rule, click here.

Wednesday, January 26, 2011

SNL Publishes Two Part Series on Credit Union Failures

SNL Financial (Charlottesville, Virginia) recently published a two part series on credit union failures.

While there have been fewer credit union failures than bank failures since the beginning of 2009, the credit union industry saw a higher proportion of its assets fail. This higher proportion of assets in failed credit union is attributable to the conservatorship of the largest corporate credit unions.

The first article examined the failures of consumer credit unions. (click here to read) The second article looked at the failures of corporate credit unions. (click here to read)

Permission to link to the articles granted by SNL Financial.

Tuesday, January 25, 2011

State Chartered CU Compensation, 2008

I've recently received a request to update a post regarding the total compensation of senior management at large state chartered credit unions.

Below is the compensation data from Form 990 filings for these large state chartered credit unions (click on the images to enlarge).

I was not able to locate the Form 990 for several credit unions and federal credit unions are excluded from this analysis because they are exempt from filing Form 990s.

Total compensation includes base compensation, bonus and incentive compensation, other compensation, deferred compensation, and nontaxable benefits.

Friday, January 21, 2011

More on NCUA's PCA Proposal

NCUA Chairman Matz is recommending that Congress modify the net worth standards to grant prompt corrective action (PCA) forbearance for qualifying credit unions.

Qualifying credit unions will need to demonstrate that the decline in net worth was due to share growth – what the agency has sometimes referred to as “induced growth” – and not due to poor management or material unsafe and unsound practices.

Credit union officials have argued that rapid inflows of deposits due to “flight to safety” might lower net worth ratios and trigger PCA restrictions. These industry officials have suggested that the capital constraints PCA imposes will force credit unions to turn away deposits and reduce services so as not to dilute or decrease their net worth ratios.

We need to remember that the purpose of PCA is to curb aggressive growth. Rapid growth is a common attribute of depository institutions that failed.

Furthermore, the Government Accountability Office in 2004 wrote:

“[A]ctive asset management is a major component of the operations of any financial institution. Credit union managers are expected to manage the growth of their institutions so that an influx of member deposits would not cause the credit union to become subject to PCA.”

Moreover, ABA wrote in 2003:

“ABA finds the NCUA’s concept of “induced growth” somewhat illogical. Surely one of the few things truly controllable by a financial institution is the ability to limit too rapid growth.“

Therefore, the decline in the net worth ratio – whether it is from inflow of deposits or poor management – should not have any bearing on net worth requirements for prompt corrective action.

Wednesday, January 19, 2011

State Employees' CU Seeks to Set the Record Straight

Earlier this week, I did a post based on a column by Gretchen Morgensen of The New York Times. Jim Blaine, President of State Employees' Credit Union, wrote Ms. Morgensen seeking to set the record straight. Jim Blaine asked that I publish his letter. Below is his letter.

REF: Article: Arbitration, Litigation, Aggravation

Dear Ms. Morgenson:

Was, of course, surprised to find from your article that State Employees’ Credit Union was an abuser of widows and orphans! Certainly not how SECU is generally viewed, nor an impression supported by the facts in the case.

Believe your readers would like to know:

1) Ms. Cohen purchased the investment in question from XCU Capital brokerage in September 2005. Ms. Cohen has never had an account with SECU.

2) The XCU Capital brokerage investment representative on the transaction, Mr. James Trujillo, was working through USE Credit Union in San Diego, California.

3) In September 2007, XCU Capital was acquired by the brokerage firm LPL located in Boston, Massachusetts. Individual brokerage accounts were transferred from XCU Capital to LPL.

4) In January 2008, SECU acquired the corporate brokerage “shell” of XCU, after all accounts had been transferred, and our “due diligence” found no existing complaints/liabilities associated with XCU Capital.

5) The brokerage charter was moved to North Carolina and renamed SECU Brokerage Services in May 2008. Ms. Cohen does not have an account with SECU Brokerage.

6) Ms. Cohen’s complaint was filed in May 2009. (So much for our liability research!)

7) SECU, under California law, has been placed in the position to arbitrate/litigate this matter. A position which continues to amaze us! All parties currently characterize themselves as victims!

The merits of this case do need to be resolved, but hopefully you can understand our concern with the implications of your article. We would like to yell slander, libel, retraction, apology; but perhaps from the New York Times perspective, the word “treasonable” best applies. Treasonable? Yes, treasonable, since many of your critics say The Newspaper has lost its way, is past its prime, and the quality of journalism represented by your article certainly gives “aid and comfort” to your enemies!

Definitely not up to “the standard of the Times”, nor Pulitzer quality. You smeared us all.

Jim Blaine
State Employees' Credit Union

Credit Unions with the Lowest Borrower to Member Ratios

As of September 2010, NCUA reported that the borrowers to members ratio for federally-insured credit unions was 49.73 percent. The borrowers to members ratio is calculated by dividing the total number of loans outstanding by the total number of members.

The following table (click to enlarge) ranks the 50 credit unions (minimum of $100 million in assets) with the lowest borrowers to members ratios, as of September 30, 2010. The credit union with the lowest borrowers to members ratio is Latino Community in Durham, N.C. with a ratio at 9.03 percent.

Readers should be cautious not to make a generalization that credit unions with low borrower to members ratios are not meeting the credit needs of their members.

Monday, January 17, 2011

Columnist Scrutinizes CU Legal Tactics

Just because a business has the words "credit union" in its name does not necessarily mean it is looking out for your best interest.

A January 16 column by Gretchen Morgensen, a columnist for the New York Times, highlights this point.

The column focuses on a questionable brokerage recommendation of an employee of State Employees Credit Union (S.E.C.U.) located in Raleigh (NC) -- the second largest credit union in the country -- and the credit unions's use of the legal process to thwart arbitration adding significant cost to the investor seeking relief.

At the heart of the issue is whether the investment recommended by the S.E.C.U. employee to an octogenarian widow, who died 3 years later, was suitable. The widow invested $1 million in a real estate investment, which ultimately lost $700,000.

In 2009, an arbitration claim was filed against S.E.C.U. seeking to recover losses as well as $2.6 million in damages for alleged claims of senior citizen financial abuse and for legal fees.

Notes taken by an S.E.C.U. employee in 2005 stated that the widow “confuses easily.” But in response to the complaint, State Employees CU stated that the widow was a sophisticated real estate investor.

However in June 2010, the credit union, using legal tactics outside of the Finra arbitration process, brought a counterclaim in Superior Court in San Diego.

Arthur S. Leider, president of Investors Arbitration Specialists in San Diego, who represents the trust set up by the widow, contends that the credit union lawsuit was a form of harassment meant to impose additional cost to the investor seeking relief.

Sunday, January 16, 2011

NCUA Renews Call for Net Worth Reform

NCUA Chairman Debbie Matz renewed her call to reform prompt corrective action (PCA) and net worth standards for credit unions.

In a January 14 letter to Sen. Tim Johnson (D - SD), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, NCUA Chairman Matz justifies the need to change the net worth standards for credit unions by stating: “Some financially healthy, well-capitalized credit unions that offer desirable products and services are discouraged from marketing them out of concern that attracting share deposits from new and existing members will inflate the credit union‘s asset base, thus diluting its net worth for purposes of PCA.”

The letter recommends two changes to the net worth standards for credit unions.

First, she proposes to allow qualifying credit unions to exclude assets that carry zero risk, such as short-term U.S. Treasury securities, from the definition of total assets, when calculating the credit union’s leverage net worth ratio. This accounting gimmick of allowing credit unions to deduct zero risk-weighted assets from total assets would inflate the net worth leverage ratio of credit unions. The leverage ratio does not just address credit risk; but also protects credit unions from other factors that can affect their financial conditions, such as interest-rate exposure, liquidity risks, and management’s overall ability to monitor and control financial and operating risks.

Second, she is seeking authority to allow qualifying credit unions to issue supplemental capital. The form of supplemental capital would be subject to regulatory prescriptions that address safety and soundness, protect investors, and preserve the cooperative credit union governance model.

However, legislation (S. 4036) signed into law at the end of the last Congress directed the Government Accountability Office (GAO) to examine how NCUA implements prompt corrective action. We should at least wait to see what the GAO study finds.

To read NCUA's letter, click here.

Thursday, January 13, 2011

2010 Ended with 368 Problem Credit Unions

NCUA reported today that the number of problem credit unions declined by 4 in December to 368; but was up by 17 from a year ago. A problem credit union is defined as a credit union that has a CAMEL code of 4 or 5.

Between the end of November and the end of December, shares (deposits) and assets in problem credit unions rose by $600 million to $38.9 billion and $400 million to $43.8 billion, respectively. NCUA reported that problem credit unions held 5.08 percent of the credit union industry’s insured shares (down 64 basis points from a year ago) and 4.84 percent of the industry’s assets (down by 60 basis points from a year ago).

Between November and December, the number of problem credit unions with $1 billion or more in assets fell by 2; but shares in these credit unions increased by $900 million to $17.7 billion. The number of problem credit unions with between $500 million and $1 billion in assets was unchanged at 6; but shares rose by $400 million during the month to $3.9 billion. There were 4 fewer problem credit unions with between $100 million and $500 million in assets (57 credit unions) and shares declined by $1.1 billion to $12.5 billion.

Twenty-eight credit unions failed in 2010, the same as 2009.

Tuesday, January 11, 2011

NCUA's Inconsistency on Disclosures

Sometimes I can only shake my head in disbelief over the actions of the NCUA.

On December 9, NCUA in testimony advocated for an increase in the business lending authority for credit unions, which means a possible reduction in consumer loans. Then on December 17, NCUA put in place mandatory disclosure rules regarding credit union conversions to a mutual savings bank or bank-credit union mergers requiring a clear and conspicuous disclosure of how the merger or conversion will affect the members’ ability to obtain non-housing-related consumer loans. This disclosure should specify possible reductions in some kinds of loans to members.

While NCUA is concerned that converting to a mutual savings bank or merging into a bank will mean less consumer loans, NCUA appears unconcerned that lifting the business loan cap will reduce the amount of consumer loans going to members.

Excuse me, but doesn't increasing the ability of credit unions to make more business loans relative to their assets mean that credit union members' ability to obtain non-housing-related consumer loans will be affected.

If NCUA really believes that it is important that members know that a conversion to a mutual savings bank or merger into a bank could possible cause a reduction in some kinds of loans, shouldn't NCUA require such a disclosure of credit unions if they plan to increase the percentage of their loan portfolio going to business loans?

Moreover, shouldn't the credit union receive the consent of the members before the credit union embarks on a business lending expansion?

After all, NCUA has openly stated that business lending is riskier than consumer lending. So, allowing credit unions to increase their concentration in business lending could materially impact the interest of credit union members.

Unfortunately, we have not heard a peep out of NCUA about such disclosures regarding an increase in business lending.

I suspect the real motive behind NCUA's disclosure requirement for credit union conversions to a mutual savings bank charter or a credit union merger into a bank is to prejudice the vote in these transactions.

Monday, January 10, 2011

Fitch Withdraws Ratings of Alaska USA FCU

Fitch announced on January 7 that it was withdrawing its ratings of Alaska USA Federal Credit Union.

Fitch state that it withdrew the ratings "due to a lack of information provided by the company. While public information is available through regulatory filings, Fitch views the information currently available from all sources to be below the necessary threshold to maintain ratings on the company."

Friday, January 7, 2011

CUNA Mutual: 2011 Another Challenging Year for Credit Unions

Dave Colby of CUNA Mutual's Chief Economist stated that 2011 will be another challenging year for credit unions.

Accoring to Colby, "[t]he past two years were extremely challenging to CU leadership ... I am sorry to report that I believe 2011 will be just as challenging as 2009 and 2010."

While Colby believes that credit quality issues will become less of a drag on credit union performance, more premium assessments, regulatory costs and reduced non-spread revenue opportunities will adversely impact credit union performance in 2011.

He noted that the biggest challenge facing credit unions is growing loans, as consumers continue to deleverage.

Click here to read the Credit Union Trends Report.

Wednesday, January 5, 2011

Will Emergency Mergers Increase in 2011?

The pace of emergency or involuntary mergers by National Credit Union Administration (NCUA) should increase in 2011.

The Federal Credit Union Act gives NCUA the authority to perform an emergency merger if it determines that a credit union is insolvent or in danger of becoming insolvent and the the NCUA Board finds that an emergency requiring expeditious action exists, no other reasonable alternatives are available, and the action is in the public interest.

The reason why I believe there will be an increase in emergency mergers is that in the last year changes in the regulatory and legislative landscapes have made emergency mergers easier to do.

First, at the end of the 111th Congress, a bill (S. 4036) passed Congress that amended the definition of net worth allowing capital assistance to a troubled credit union provided by NCUA under Section 208 to count as net worth. This capital assistance will make these troubled credit unions more attractive as merger partners.

Second, in June of last year, NCUA created three categories under which a credit union would meet the standard of being "in danger of insolvency" as part of the agency's emergency merger powers.

1. The credit union’s net worth is declining at a rate that will render it insolvent within 24 months.

2. The credit union’s net worth is declining at a rate that will take it under
two percent net worth within 12 months.

3. The credit union’s net worth is significantly undercapitalized -- net worth ratio between 2 percent and less than 4 percent -- and NCUA determines that there is no reasonable prospect of the credit union becoming adequately capitalized (net worth ratio of at least 6 percent) in the succeeding 36 months.

When these objective measures of "in danger of insolvency" are combined with the new legislative authority to provide capital assistance, the result should be an acceleration in the pace of emergency mergers by NCUA.

Monday, January 3, 2011

NCUA's Legislative Priorities in the 112th Congress

As the 112th Congress convenes this week, NCUA Chairman Matz has identified four legislative priorities for the agency:

1. Supplemental or alternative capital for healthy credit unions;
2. Increasing the member business loan limit for qualified credit unions;
3. The authority to examine third-party vendors; and
4. Extension of the statute of limitations provision applicable to actions filed by NCUA as conservator/liquidating agent of a credit union.

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