Thursday, May 31, 2012

Statement to Oversight Hearing on Tax-exempt Entities

In a statement for the record, the American Bankers Association (ABA) wrote the House Ways and Means’ Oversight Subcommittee yesterday strongly encouraged the subcommittee to include the credit unions’ tax exemption in its ongoing review of tax-exempt organizations.

ABA noted that many credit unions – including 183 with more than $1 billion in assets each – bear no resemblance to the traditional credit unions Congress originally envisioned to be worthy of preferred tax status.

ABA pointed out that Congress reaffirmed in 1998 that the credit union tax exemption is associated with the mission of meeting the financial needs of people of modest means. However, credit unions “steadfastly refuse to define ‘modest means,’ thus evading the simple determination of whether they are fulfilling their mission.” ABA emphasized that credit unions should be required to demonstrate service to people of modest means to assure taxpayers that the tax subsidy is being properly employed.

ABA added that federal credit unions should be required to file Internal Revenue Service Form 990 -- like state-chartered credit unions and most other tax-exempt institutions -- to disclose executive salaries and promote improved corporate governance and greater accountability. Form 990 “would inform Congress, taxpayers, and credit union members about whether this valuable tax subsidy is going towards the credit union mission or is subsidizing credit union management,” ABA said.

ABA pointed out that the credit union tax exemption can no longer be justified for credit unions that have strayed from their mission of serving people of modest means.

“The credit union tax expenditure no longer supports the public policy of providing financial services to low- and moderate-income consumers,” ABA said. “Abolishing [it] would help reduce the U.S. debt and eliminate distortions in the financial services industry.”

Read the statement.

Wednesday, May 30, 2012

Senate FCU Ad Raises Eyebrows

The Huffington Post is reporting on a “GOT BIG PLANS” ad mailed by U.S. Senate FCU to its members. Some readers may find the ad to be offensive.

Read the story.

Fox News on CU CEO Pay and Tax Exemption

View the video.

Tuesday, May 29, 2012

Minnesota CU Buying Bank Branch and Deposits

The Duluth News Times is reporting that North Shore Bank of Commerce has entered into a deal to sell its Cloquet branch office to the Northwoods Credit Union.

The sale includes the bank’s building and the branch’s customers who have checking, savings, certificates of deposit and safety deposit boxes. The branch customers will be automatically transferred to the credit union unless they notify the bank before the transaction's closing date, expected to be July 20.

According to the June 2011 FDIC Summary of Deposit data, the branch had $6.8 million in deposits.

Earlier this year, Pacific Crest Federal Credit Union of Klamath Falls, Oregon announced it had executed an agreement with PremierWest Bank of Medford, Oregon to acquire two PremierWest Bank branches located in Dorris and Tulelake, California.

In 2010, Royal Credit Union (WI) acquired the 11 branches and $177 million in deposits from Anchor Bank (WI).

The sale is awaiting final approval by the Federal Deposit Insurance Corporation and National Credit Union Administration.

Read the article.

Monday, May 28, 2012

Regulatory Burden Causes Small Connecticut CU to Seek Merger

The Hartford Postal Employees Credit Union has decided that it can no longer go it alone. The credit union made the decision to find a merger partner because they don’t have the resources to stay on top of all the different regulations forthcoming from policymakers.

Read the story.

Thursday, May 24, 2012

Problem CU Update

The NCUA reported today that the number of problem credit unions fell by 13 during the first quarter to 396 credit unions. A problem credit union is defined as having a CAMEL rating of 4 or 5.

Deposits (shares) in problem credit unions fell from $26.3 billion at the end of 2011 to $23.7 billion at the end of the first quarter of 2012. Assets in problem credit unions fell by $2.7 billion during the quarter to $26.7 billion. At the end of the first quarter, NCUA reported the percent of the industry’s assets and insured deposits in problem credit unions were 2.7 percent and 2.98 percent, respectively.

NCUA noted that the number of problem credit unions in the $10 million to $100 million asset range fell by 21 during the quarter to 135 credit unions. There was 6 problem credit unions with more than $1 billion in assets -- down by one -- and 44 problem credit unions with assets between $100 million and $500 million -- a net reduction of two.

Credit unions with under $10 million in assets was the only asset size class to experience an increase in problem credit unions during the quarter as the number rose by 11 to 207.

Wednesday, May 23, 2012

Brief Filed in Mortgage Recording Tax Case

ABA and the New York Bankers Association last week filed a a motion “for leave to file the amicus.” If the court grants the motion, we will then file a friend-of-the-court brief asserting that the New York State Court of Appeals should affirm a lower court’s decision to dismiss Poughkeepsie-based Hudson Valley FCU’s claim that federal credit unions and their members are exempt from paying the New York state mortgage recording tax.

“While ABA and the NYBA acknowledge the limited tax exemption provided to federal credit unions by the U.S. Congress in the Federal Credit Union Act, Hudson Valley’s position in this appeal expands that tax exemption beyond its clear terms,” the trade groups’ brief said.

“In doing so, Hudson Valley seeks to obtain an unwarranted competitive advantage over hundreds of other mortgage lenders -- and/or those lenders’ thousands of mortgage loan customers -- who are required to pay the mortgage recording tax … ,” the brief said.

The trade groups asserted in their brief that the Federal Credit Union Act makes it clear that it does not grant tax immunity to credit union borrowers or to credit unions for tax payments made on behalf of those borrowers. “The FCUA also does not exempt either ‘mortgages’ or ‘loans’ from taxation,” they said.

Read the brief.

Tuesday, May 22, 2012

Montgomery County Teachers FCU Issued A Cease and Desist Order

The National Credit Union Administration (NCUA) has issued an order to cease and desist to Montgomery County Teachers Federal Credit Union (MCT FCU)of Derwood, Md.

The consent order requires the credit union to finalize its merger with Educational Systems FCU in leiu of producing a net worth restoration plan. MCT FCU was undercapitalized with a net worth ratio of 4.35 percent.

The order requires MCT FCU to cooperate with Educational Systems during the due diligence process and to give Educational Systems full access to its records.

The credit union was told to cease and desist all actions that could be considered an alternative to a merger.

MCT FCU is to refrain from imposing unreasonable conditions and restrictions in the merger agreement including hiring MCT FCU's employees, placing directors on Educational Systems' board, and limiting changes to member services.

Also, MCT FCU is to ensure the financial statement audit is completed and all accounts are reconciled by May 31, 2012; and it addresses operational deficiencies and strengthen internal controls.

Read the order.

Too Much of a Good Thing

Recent news stories have highlighted that some credit unions are starting to turn away deposits, as they struggle with excess liquidity.

The Vashon Beachcomber reported that Puget Sound Cooperative Credit Union (PSCCU) has put a halt to new business accounts at its Vashon branch because it is too flush with cash with little loan demand.

PSCCU's chief executive stated that the credit union is considering writing letters to members who have $500,000 or more in their accounts and asking them to lower their balances. The CEO contends that this will allow the credit union "to receive the deposits of more members.”

The credit union opened the branch a little more than a year ago and attracted almost $20 million in deposits. Over the last year, total deposits at the credit union have grown by more than 36 percent.

As a result, the net worth ratio of the credit union has fallen from 9.31 percent to 6.95 percent. But an alternative calculation to measure compliance with regulatory capital standards states that the credit union's net worth ratio is 7.83 percent. So instead of being adequately capitalized, the credit union is still well capitalized.

The Minneapolis Star Tribune reported that Star Choice Credit Union recently mailed a short letter to about 20 customers informing them that it will no longer pay interest on the amounts they have above $100,000 in their money-market accounts.

"With the recent inflow of money, we have found that we can no longer pay market or above market rates on these accounts," President Daniel Christiansen said in the letter.

According to the Credit Union National Association, 17 credit unions offering money-market accounts dropped interest rates on all or parts of the balances to zero last year.

Read the Vashon Beachcomber story.

Read the Minneapolis Star Tribune article.

Monday, May 21, 2012

Large State Chartered CU CEO Compensation, 2010

The following table summarizes the base compenation and total compensation for large ($1 billion or more in assets) state chartered credit unions from their 2010 Form 990s.

Federal credit unions do not have to file Form 990s.

Total compensation includes base compensation plus bonus and incentive pay plus other reportable compensation plus retirement and other deferred compensation plus nontaxable benefits.

I was unable to locate the Form 990 for three credit unions -- Meriwest, Lake Michigan, and Spokane Teachers.

The average base compensation for these large state chartered credit unions was $542,731. The median base compensation was $402,566.

The average and median total compensation for these executives was $1,021,181 and $610,420, respectively.

Saturday, May 19, 2012

Banks and CUs on Patent Reform

Attorney Eliot Williams -- testifying for seven financial services trade groups -- told the House Judiciary Committee on May 16 that several changes would improve the Patent and Trademark Office's proposed regulations to create a transitional program for reviewing business-method patents under the America Invents Act.

The “program offers a less-costly … more efficient alternative to litigation, so that businesses acting in good faith do not have to spend the millions of dollars it costs to litigate a business-method patent of questionable validity,” said Williams, a partner with Baker Botts LLP in Washington, D.C.

He suggested, among other things, that the Patent and Trademark Office amend the definition of “technological invention” to shift the burden of persuasion to the patent holder; reduce the application fee for petitions that small entities file; and interpret "financial products or services" broadly.

Read the testimony.

Friday, May 18, 2012

Wausau Postal Employees CU Liquidated

The Wisconsin Office of Credit Unions liquidated Wausau Postal Employees Credit Union of Wausau, Wis., and appointed the National Credit Union Administration (NCUA) as liquidating agent. NCUA immediately signed an agreement with $1 billion CoVantage Credit Union of Antigo, Wis., to purchase and assume Wausau Postal Employees Credit Union’s assets, liabilities, and membership.

Wausau Postal Employees Credit Union’s declining financial condition led to its closure and subsequent purchase and assumption. At the time of liquidation, the credit union served 845 members and had $8.4 million in assets.

According to its March financial data, the credit union was well capitalized with a net worth ratio of 11.65 percent. However, the credit union reported that 6.63 percent of its loans were delinquent.

Read the press release.

Interest Rate Risk

In a letter to federally-insured credit unions, NCUA wrote that beginning September 30, 2012 certain credit unions will be required to adopt a written policy on interest-rate risk (IRR) management and a program to implement it effectively.

The rule will apply to all credit unions with assets in excess of $50 million or credit unions with assets equal to or greater than $10 million but do not exceed $50 million and the sum of first mortgage loans held and investments with maturities exceeding five years is equal to or greater than 100 percent of the credit union's net worth at quarter end.

While this interest-rate risk rule only applies to federally-insured credit unions, I assume that it will trickle down to privately-insured credit unions. So, the following discussion includes both privately-insured and federally-insured credit unions.

As of December 2011, there were 2,235 credit unions with assets in excess of $50 million. Additionally, 1,067 credit unions with between $10 million in assets and $50 million in assets will need to comply with this rule.

There were 448 credit unions with more than $50 million in assets that did not exceed the Supervisory Interest Rate Risk Threshhold of more than 100 percent of their net worth in first mortgages and investments with maturities in excess of 5 years.

Among all credit unions subject to the final rule, the average ratio of first mortgages plus long term investments to net worth was 275 percent of net worth, while the median ratio was 207 percent of net worth.

However, some credit unions have significant exposure to first mortgages and long term investments. There were 20 credit unions at the end of 2011 that reported holding more than 10 times their net worth in first mortgages and investments with maturites over 5 years. But it should be noted that 19 of these 20 credit unions were undercapitalized. Several of these credit unions have either failed or been acquired.

An additional 170 credit unions have between 5 and 10 times their net worth in first mortgages and investments with maturities in excess of 5 years.

On average, the larger the credit union the greater the exposure of their net worth to long-term investments and first mortgages. Credit unions with over $1 billion in assets reported an average ratio of 315 percent. Credit unions with assets between $500 million and $1 billion in assets had a ratio of 293 percent. Credit unions with assets under $500 million but greater than $100 million reported an average ratio of 269 percent. The average ratio was 195 percent for credit unions with between $50 million and $100 million in assets,

Wednesday, May 16, 2012

Herb Yolles v. State Employees' Credit Unions

The NCUA’s Office of the Inspector General (IG) has determined that the agency’s regional director, Herb Yolles, did not make false statements about State Employees’ Credit Union (Raleigh, N.C.), the nation’s second largest credit union.

The IG launched the investigation after Jim Blaine, President of State Employees’ CU (SECU), requested a review of statements made by Yolles in a December 6 letter to Jerrie Jay, administrator of the N.C. Credit Union Division.

The IG limited its investigation to two statements by Yolles: (1) Jay's statement that NCUA intended to terminate SECU’s NCUSIF share insurance and (2) Jay or someone in her office providing an early draft of a Document of Resolution (DOR) to the credit union prior to the exit interview.

On the first allegation, the IG found:
"A careful consideration of the exchange between Jay and Yolles at the September 19 meeting indicates that Jay was inquiring whether NCUA had initiated the process of terminating SECU’s share insurance status, not “announcing” it. However, given the leading nature of Jay’s questions and the heatedness of their exchange, we can see how Yolles might have concluded that Jay’s statements amounted to an announcement. Therefore, we cannot conclude that Yolles’ statement in his December 6 letter, viz., that Jay announced that NCUA had initiated the process of termination of NCUSIF insurance of SECU share accounts, meets the definition of a false statement under 18 U.S.C. § 1001."

On the second allegation, the IG concluded:
"The investigation substantiated that Jay attached a copy of the draft DOR to her email ... on July 18, 2010. Consequently, the evidence does not support a finding that Yolles’ statement in the December 6, 2011, letter was false."
Read the results on the IG investigation.

Monday, May 14, 2012

Boards and CU CEO Pay

The May 13 Denver Post has an interesting follow up article on whether Public Service CU's board was a rubber stamp of the pay package for Public Service's CEO David Maus.

Raymond Lopez, a professor of finance at Pace University in New York, called the contract "over the top" and "ridiculous."

While Robert Wilson, an attorney with Berenbaum Weinshienk in Denver, defended the expertise of credit union volunteer boards saying that "[t]he directors in the big credit unions are sophisticated."

Read the story.

Thursday, May 10, 2012

Realtors FCU Throwing in the Towel

The Credit Union Journal (subscription required) is reporting that Realtors FCU (Rickville, MD) is seeking to merge with $2.2 billion Northwest FCU in Herndon, Virginia.

Realtors FCU was chartered in 2008 by the National Association of Realtors and operated as a virtual credit union.

However, Realtors FCU during its brief history posted losses of $2.6 million for 2010, $2 million for 2011, and $414,000 for the first quarter of 2012.

As of March 31, the credit union was adequately capitalized with a net worth ratio of 6 percent. The credit union reported a sharp increase in delinquent loans during the first quarter, as the delinquent loan ratio jumped from 1.53 percent at the end of 2011 to 9.16 percent.

Realtors FCU's members will vote on the merger by electronic ballot and at a May 18 special meeting.

Core Credit Union Business Model

The core credit union business model is consumer lending, not business lending - that is the message from two recent NCUA press releases regarding A. E. A. FCU and Texans CU.

NCUA stated that the agency was in the process of returning these two conserved credit unions "to the core credit union business model."

What these two credit unions have in common is that they both shifted their focus from being consumer lenders and embarked into a disastrous foray in commercial lending. This ultimately required the NCUA to seize the credit unions and to porvide both credit unions with capital assistance.

Read Texans CU preass release. Read A. E. A. FCU press release.

Tuesday, May 8, 2012

NCUA Chairman Comments on HarborOne's Charter Decision

NCUA Chairman Debbie Matz in an article appearing in the Boston Globe has inappropriately weighed in on HarborOne Credit Union's decision to seek a mutual bank charter.

The article quotes her as saying "[t]here is no reason to think that members will be better served by a bank than a credit union."

She makes additional comments regarding HarborOne's justification for seeking a mutual bank charter. She points out that the credit union is not near its member business loan cap and the credit union could petition its state regulator for a larger community charter.

NCUA Chairman Debbie Matz also seems disappointed that there is not organized opposition to obstruct this charter conversion. It almost appears that she is trying to incite opposition.

While Chairman Matz may not like a credit union opting for a mutual savings bank charter, it is the law.

Credit unions and their members have the right to choose whether they want to remain credit unions or to become banks.

As the regulator that oversees this process, NCUA needs to be impartial and Chairman Matz should have said no comment -- keeping her opinions to herself.

Read the Boston Globe story.

Monday, May 7, 2012

Debt as Net Worth

If you have not read yesterday's Bank Lawyer's Blog, you should.

The blog takes aim at NCUA's Section 208 net worth assistance that is being used to keep insolvent credit unions open.

"Counting debt as net worth is a great trick. The FSLIC used it in connection with the Southwest Plan in the late 1980s, which allowed the FSLIC to hide the fact that it was technically insolvent, until Congress finally caught on and punished the FSLIC by merging it out of existence and transforming its operating head, the independent Federal Home Loan Bank Board, into the OTS (recently abolished by Dodd-Frank). Could the NCUA be following down FSLIC's weed-strewn road to perdition?"

Read the post.

Saturday, May 5, 2012

Chetco Update

Chetco FCU (Harbor, OR) released its first quarter financial data and reported a massive loss and was insolvent.

Chetco, which is currently under NCUA conservatorship, reported a loss of $19.4 million for the first quarter, as the credit union added almost $18.4 million in provisions for loan losses.

The credit union is insolvent with a negative net worth of $18.4 million. Its net worth ratio was minus 6.94 percent.

Chetco reported $66.7 million in loans that were 60 days or more past due with over $33 million in loans 12 months or more past due. As of March 31, over 24 percent of its loans were delinquent.

Additionally, Chetco reported $11.5 million in other real estate owned.

Credit Union Journal is reporting that NCUA has provided Chetco with $10 million in capital assistance.

Thursday, May 3, 2012

Developer Sues Bethpage FCU

A homebuilder is suing Bethpage Federal Credit Union for $55 million claiming that the credit union reneged on a promise to fund a condominium project in Port Jefferson.

The complaint alleges that Bethpage FCU pulled out of its commitment to provide a $10 million construction loan for a 43-condo development called Liberty Meadows and caused a 15 month delay in the project.

The developer notes that the credit union provided both verbal and e-mailed promises that it would fund the project.

The project moved forward with a loan from Valley National Bank.

Read the story in the Long Island Business News.

Wednesday, May 2, 2012

Silver State Schools Posts Loss of $3.5 Million

Silver State Schools Credit Union reported a $3.5 million loss in the first quarter as the credit union continues to struggle with its portfolio of delinquent mortgage loans.

During the first quarter, Silver State Schools charged off $15 million in loans and increased provisions for loan losses by $6.8 million.

At the end of the first quarter, the credit union reported that $37.1 million in loans were 60 days or more past due.

Read the story in the Las Vegas Review-Journal.

Tuesday, May 1, 2012

BECU Surpasses $10 Billion in Assets

Boeing Employees Credit Union (BECU) of Tukwila, Washington is the fourth credit union to exceed the $10 billion asset threshold.

As of March 31, 2011, BECU reported almost $10.6 billion in assets – an increase of almost $620 million during the quarter.

The other three credit unions that are greater than $10 billion in assets are Navy FCU (VA), State Employees’ CU (NC), and Pentagon FCU (VA).

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