Summit FCU's Edgy Anti-Bank Ad Brings Unwanted Scrutiny

Social media experts are saying that an edgy bank bashing ad by Summit Federal Credit Union of Rochester, N.Y. missed the mark.

The story appearing on the American Banker website (no relationship to the American Bankers Association) compared Summit's ad to a negative political campaign ad and noted that Summit did not offer any details on how it is different.

"One reason that Summit may have shied away from direct comparisons is that the credit union itself levies a wide range of the sorts of service charges that customers loathe —from fees for inactivity to those for monthly account maintenance, paper statements and early account closures.

Nor did efforts to contact the credit union indicate that it is particularly responsive to callers. American Banker spent many minutes on hold on Summit’s customer service line trying to reach a representative. Its call was then transferred to a voice mail recording. Ultimately, a Summit representative responded to a request for feedback about its video in an email message stating that it declined to comment."

Section 208 Bait and Switch

When NCUA finalized its rule allowing Section 208 assistance counting as net worth, the agency wrote: "there is nothing in the statutory change that states that section 208 assistance can only be counted as net worth when a merger is involved."

However, the hearing transcript record paints a different picture. In her oral statement, NCUA Chairman Matz stated the following regarding Section 208 assistance:

"The first amendment would strengthen the ability of NCUA to complete emergency mergers. A recent change in merger accounting would dilute the net worth of the recipient credit union, thus discouraging the merger. Often, as a result, the troubled credit union has to be liquidated. We are requesting that NCUA assistance
to the failing credit union be counted as capital by the surviving credit union, as in the past. This would reduce the costs to the Insurance Fund and provide members of troubled credit unions with continued services from healthy credit unions."

No where in her testimony did she say that Section 208 assistance would be used to keep open a failing credit union by injecting it with capital from the share insurance fund. It is clear from her testimony this assistance was meant to make it easier for NCUA to complete emergency mergers by preventing the dilution of the net worth ratio of healthy credit unions.

Once Burned, Twice Shy

What has been the willingness of large credit unions to recapitalize the corporate credit union system after the corporate credit union debacle?

The data suggests that large credit unions are less likely to invest in a corporate credit union and if they invest, they will not hold as large of an exposure to corporate credit unions.

Our analysis compares the capital holdings (membership and paid-in capital) of large natural person credit unions as of December 2007 (defined as pre-crisis) and September 2011 (post-crisis). A large natural person credit union is defined as a credit union with at least $100 million in assets as of September 2011.

As of September 2011, there were 1,429 credit unions with at least $100 million in assets that were also in existence on December 2007.

Two privately insured credit unions were removed from the analysis due to missing data on their equity holdings in corporate credit unions at the end of 2007. Also, 54 credit unions never owned any capital in a corporate credit union on the two dates and were removed from the analysis. This left 1373 credit unions.

Out of this 1373 credit unions, 1,352 credit unions had an equity position in a corporate credit union at the end of 2007 with an aggregate investment of $2.62 billion. By September 2011, the number of credit unions holding capital in corporate credit unions had fallen to 932 -- a decline of almost 31 percent -- with an aggregate capital investment of $965 million.

In addition, 1,099 credit unions reported reducing the amount of capital they held in corporate credit unions between December 2007 and September 2011, while 233 large credit unions increased their capital investments in the corporate credit union system. Forty-one credit unions did not change the size of their capital investments in corporate credit unions.

There also appears to be an inverse relationship between the size of the credit union and its willingness to invest in a corporate credit union. Only 59 percent of credit unions with assets in excess of $1 billion had a capital investment in a corporate credit union as of September 2011, while 69 percent of credit unions with between $100 million and $500 million in assets were member-owners of a corporate credit union.

Comment on NCUA's Reg Relief Rule

The National Credit Union Administration Board (the Board) proposed a rule extending regulatory relief to all federal credit unions (FCUs) to engage in activities that were previously only granted to FCUs that had received Regulatory Flexibility (RegFlex) designation – FCUs that are well-capitalized and are not supervisory concerns. As a consequence, this proposed rule will extend certain regulatory authorities to undercapitalized and weak FCUs.

While the American Bankers Association (ABA)is supportive of efforts to lower regulatory burdens, ABA believes that it is inappropriate to extend such regulatory relief to FCUs that are undercapitalized or represent supervisory concerns. Specifically, ABA believes the Board should not expand the authorities of undercapitalized FCUs by allowing them to invest in undeveloped land or accept nonmember deposits. Such an expansion could jeopardize the viability of an undercapitalized FCU and pose a risk to the National Credit Union Share Insurance Fund (NCUSIF). Additionally, ABA believes the Board should retain its charitable contribution and donation rule, which it is proposing to eliminate.

Read the letter.

NCUA's 2011 Section 208 Assistance Already Partially Impaired

The National Credit Union Administration (NCUA) last week released its 2011 audited financial report for the National Credit Union Share Insurance Fund (NCUSIF).

Footnote 5 shows that the Section 208 net worth assistance of $80 million that NCUA provided two credit unions (A.E.A. FCU of Yuma, AZ and Texans CU of Richardson, TX) is already partially impaired. According to Footnote 5,

"As of December 31, 2011, the NCUSIF had two outstanding capital notes due from insured credit unions. The capital note receivables totaled $80.0 million and the related allowance for loss was $10.0 million, for a net capital note receivable of $70.0 million as of December 31, 2011."

Additional impairment charges are likely with this $80 million in NCUSIF capital notes.

This should make the 2012 audited financials a must read.

Audited Financial Statements.

People for People CDCU Liquidated

The National Credit Union Administration (NCUA) announced the liquidation of People for People Community Development Credit Union (CDCU) of Philadelphia. TruMark Financial Credit Union of Philadelphia immediately purchased and assumed People for People CDCU’s members and loans.

People for People CDCU was placed into conservatorship on January 6 of this year,

NCUA made the decision to liquidate People for People CDCU and discontinue its operations after determining the credit union was insolvent and has no prospect for restoring viable operations on its own. As of December 2011, the credit union had a delinquent loan to net worth ratio of 175.02 percent.

People for People CDCU is the second credit union to be liquidated in 2012.

Read the press release.

NCUA Seizes A M Community CU

The National Credit Union Administration (NCUA) assumed control of service and operations at A M Community Credit Union headquartered in Kenosha, Wis.

A M Community Credit Union is a state-chartered, federally insured credit union that serves anyone who lives or works in Wisconsin’s Kenosha and Racine counties, as well as any employee of Chrysler Corporation. The credit union has assets of $125 million.

The credit union reported a loss of $8.2 million for 2011. At the end of 2011, the credit union was significantly undercapitalized with a net worth ratio of 2.78 percent.

The credit union reported that 11.74 percent of its loans were 60 days or more past due.

Read the press release.

What is NCUA's Plan for Texans Credit Union?

This is a question being asked by credit union officials and bankers. Read Texas Bankers Association's letter to NCUA Chairman Matz.

As background, Texans Credit Union (Richardson, Texas) was placed into conservatorship by NCUA on April 15, 2011. During the third quarter of 2011, the credit union became critically undercapitalized. In November 2011, Texans received special capital assistance from NCUSIF in the form of $60 million in subordinated debt; otherwise Texans would have been insolvent. Even after the capital assistance, Texans was still critically undercapitalized at the end of the fourth quarter.

It appears that NCUA is engaged in regulatory forbearance. I know there are some within the credit union industry who believe that this capital infusion and forbearance is good news and if given enough time, the NCUA-controlled Texans might experience a turnaround. (read Chip Filson's latest commentary).

However, allowing an insolvent credit union or bank to continue to operate as a fully functioning depository institution is unfair to its competitors.

Moreover, the odds are that this forbearance will fail and it will only raise the cost of Texans' resolution to the NCUSIF.

But time may be running out for Texans Credit Union.

According to the Federal Credit Union Act and NCUA's regulation, the NCUA Board must place a credit union into liquidation if it remains “critically undercapitalized” for a full calendar quarter, on a monthly average basis, following a period of 18 months from the effective date the credit union was first classified “critically undercapitalized.”

If the ultimate outcome is liquidation, credit union officials should ask NCUA why it did not move sooner and how much more did the delay add to the losses of the NCUSIF.

Also, from what I've heard, NCUA has rejected bids for Texans from credit unions. As I understand it, the obstacle to getting the deal done was that the acquirer wanted NCUA to enter into a loss sharing agreement and NCUA refused to enter into such an arrangement.

I don't understand NCUA's resistance to a loss sharing arrangement. Many of FDIC's transactions involving failed banks included such arrangements.

If NCUA is worried that it can't fetch a good price for Texans, it should expand the pool of potential bidders. There are probably some banks that would be interested in bidding for Texans.

HarborOne Considering a Mutual Bank Charter

The Board of Directors of HarborOne Credit Union of Brockton, Massachusetts is considering a possible charter conversion in which HarborOne would change from a credit union to a Massachusetts-chartered mutual co-operative bank. As a mutual co-operative bank, HarborOne will be owned by and operated for the benefit of its depositors in a manner similar to the way a credit union is owned by and operated for the benefit of its members.

HarborOne cites three reasons for pursuing a mutual co-operative bank charter:

1. Greater flexibility to expand customer base;
2. Increased lending authority; and
3. Access to additional capital.

MoneyWatch: No Valentine for CEFCU

Last month, I did a post on Citizens Equity First Credit Union (CEFCU) switching the early withdrawal penalty terms on its existing CDs. The story was first reported on DepositAccount.com.

Allan Roth of MoneyWatch dug deeper into this story and his February 14th commentary was not a love note to CEFCU. Roth ripped CEFCU over this practice, as well as Fort Knox FCU.

He wrote that the language allowing CEFCU to change the early withdrawal penalty for existing contracts was buried in section 14, page 22 of the 40 page deposit account agreement, which the credit union "knew few of their members would read and understand." Roth noted that inserting this language into the deposit account agreement made the terms of the CD a virtual etch-a-sketch for the credit union.

Read more of Allan Roth's commentary.

NCUA: Disclosing CAMEL Rating Could Undermine Confidence in CUs

In a letter to North Carolina credit unions, David Marquis, NCUA Executive Director, argues that disclosing a credit union's CAMEL rating could jeopardize the public confidence in credit unions and could lead to a run on credit unions.

Marquis wrote that releasing a credit union's CAMEL rating raises many difficult questions.

 What if some credit unions release their CAMEL ratings, but others do not? Will media coverage imply that credit unions which do not release CAMEL ratings are less safe than others? Could this potentially cause runs on credit unions?

 Does a released CAMEL rating imply an official government body’s endorsement for one credit union versus another? Will consumers only choose credit unions with the highest possible CAMEL rating as safe, and withdraw from all others?

 What happens if a credit union’s publicly disclosed CAMEL ratings decline over time? Would that credit union stop publishing its ratings, and if so, would the public assume the credit union now has something to hide? Would members fear their credit union is becoming less stable, and thus pull out all their money?

 What if a state CAMEL rating differs from NCUA’s CAMEL rating, as happens on occasion? Does releasing only one of two ratings truly provide full transparency to the public?

 After publicizing CAMEL ratings, will other formerly confidential information be next? Should Documents of Resolution be published?

Out-of-State Branches

While credit unions have the image of being local financial institutions, many credit union operate regional branch networks. And in few cases, a credit union's branch network is almost national.

According to information from Highline FI, 347 credit union in 2011 operate branches in more than one state. Navy FCU has the most out-of-state branches with 142.

Texas and Virginia have the most out-of-state (foreign) credit unions operating in their states with 44 and 32 credit unions, respectively. (see image below)

California reported the most branches owned by credit unions headquartered in another state with 100.

Washington, D.C., Nevada, and Arkansas have the highest percentage of branches in their states owned by foreign credit unions. In Washington, D.C., 43.65% of the branches are owned by out-of-state credit unions; 26.67% of Nevada branches and 19.53% of Arkansas branches are foreigh owned.

Other states with at least 10 percent of their branches belonging to out-of-state credit unions are New Hampshire, Mississippi, Georgia, Kansas, Kentucky, New Jersey, Virginia, and Colorado. (see image below)

Repeal Outdated ATM Disclosure Requirements

ABA, CUNA and five other trade groups asked the House Financial Services and Senate Banking Committees to pass a bill repealing the outdated requirement that a placard must be attached to ATMs stating that a fee may be charged.

The disclosure is duplicative because the actual fee also appears on the ATM monitor, the trade groups said in a letter. The "requirement ... has encouraged a large and growing number of frivolous lawsuits across the nation" that could reduce both the number of ATMs and consumer convenience, they said.

The trade groups explained that if the placard isn't attached, Regulation E permits successful class action plaintiffs to recover the lesser of $500,000 or 1 percent of the ATM operator's net worth plus attorneys’ fees and costs.

Read the letter.

Inconvenient Truth

Congress in 1998 reaffirmed that the credit union tax exemption is not only tied to their structure, but also tied to a mission of meeting the the financial needs of consumers, especially those of modest means.

Congress found:

"Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means."(emphasis added)

But the credit union lobby finds this linkage between their tax exemption and having a mission to serve people of modest means as a major inconvenience.

Many credit unions and their trade associations keep trying to distance themselves from this truth.

The Credit Union National Association (CUNA) regularly points out that credit unions are tax exempt because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors, but you will rarely hear CUNA mention the second condition for the tax exemption -- serving consumers, especially people of modest means.

Since the tax exemption is tied to the mission of serving people of modest means, credit unions should demonstrate whether they are fulfilling this mission. Unfortunately, no one knows how credit unions are doing in serving people of modest means; because they are not required to measure their performance.

If you do not measure, you cannot know whether you are accomplishing this mission requirement.

But any attempt to measure credit union service to people of modest means is met with hostility by the credit union industry.

I suspect that the reason the credit union industry is unwilling to collect this information on who credit unions serve is that they don't want to face the inconvenient truth, as the Treasury Department recognized in 2008, that "[s]ome credit unions have arguably moved away from their original mission of making credit available to people of small means." And if these credit unions are no longer fulfilling their mission, this raises the thorny question -- why are they still tax exempt?

Troubled Credit Union Mergers in 2011

NCUA approved the merger of 56 financially troubled credit union during 2011.

A merger is defined as a troubled credit union merger if the following three reasons are cited by NCUA when approving the merger: Poor Management, Poor Financial Condition, and Loss/Declining Field of Membership.

Nine mergers were due to Loss/Declining Field of Membership. Thirty-two mergers were due to poor financial conditions, while 15 mergers were the result of poor management.

The average asset size of the merger target was $16.5 million, while the median asset size of a troubled credit union was $6.2 million.

The largest troubled credit union that NCUA approved for acquisition was Synergy One with almost $183 million in assets.

UNITEHERE Missed TARP Dividend Payment

UNITEHERE Federal Credit Union (Workers United FCU) of New York City missed its interest/dividend payment on its capital investment of $57,000 from the TARP Community Development Capital Initiative (CDCI), according to a report from the Department of Treasury. UNITEHERE is the first credit union to miss an interest/dividend payment.

Five banks have also missed CDCI interest/dividend payments, although one bank subsequently made up its missed payment.

Overstating the Number of CUs Approaching MBL Cap

In a February 1 letter to the House Committee on Small Business, CUNA's President and CEO Bill Cheney wrote that "approximately 525 credit unions are either approaching or very close to the business lending cap."

CUNA gets to this number by defining a credit union as approaching or very near the cap as any credit union with a member business loan to total asset ratio of 5 percent or more. (see page 16 of CUNA's October 12, 2011 testimony).

However, CUNA is exaggerating the number of credit unions that are approaching the business loan cap of 12.25 percent of assets.

I doubt that a credit union with a member business loan to asset ratio of 5 percent would be viewed as approaching the cap. I'm not sure a member business loan to asset ratio of 9 percent would be considered approaching the cap.

Moreover, I was unable to come up with the 525 number. I divided the call report entry associated with account code 400A in Schedule A by the entry associated with account code 010 from the Statement on Condition to derive the member business loan to asset ratio. I excluded grandfathered credit unions and credit unions with a low-income designation.

The number of credit unions with a member business loan to total asset ratio at or above 5 percent was approximately 350 -- so CUNA is overstating the number of credit unions appproaching the cap by almost 50 percent.

On Walls

In a passionate defense of charter choice and the end of obstructionism, Henry Wirz, the President and CEO of SAFE Credit Union (North Highlands, CA) wrote in a Credit Union Times Viewpoint column (January 11, 2012): "Any movement that has to wall in its members will fail."

This statement caused me to think of the former East Germany. It built the Berlin Wall to keep East Berliners from fleeing to West Berlin and freedom.

But this former Soviet Bloc country decayed from within and failed. The Berlin Wall was torn down. Unfortunately, many former East Germans paid a heavy price due to the years of oppression.

NCUA appears to be following the same example. This agency has erected regulatory barriers that seeks to wall in credit unions it regulates.

But by limiting credit unions ability to exercise their right of charter choice, NCUA has no incentive to innovate or change. This will eventually impose a heavy cost on credit unions.

Chairman Matz, tear down this wall.