Friday, August 31, 2012

CU Net Income Up 18.1 Percent from a Year Ago

NCUA reported that credit union earnings were up 18.1 percent to slightly more than $4.2 billion through the first two quarters of 2012.

During the second quarter, net income for federally-insured credit unions grew by 2.9 percent to almost $2.14 billion during the second quarter of 2012. NCUA stated that "increases in fee income and other operating income, accompanied by declines in expenses for interest and loan losses, produced a higher quarterly net income."

Compared to June 2011, provisions for loan and lease losses were down 23.2 percent to $1.825 billion a the end of the second quarter. Interest expenses were down 16.4 percent from a year ago, while non-interest income was up almost 15.9 percent.

The industry’s return on average assets ratio was 86 basis points for the second quarter -- up one basis point from the first quarter.

NCUA noted that the strong increase in earnings caused credit union net worth to increase by $2.1 billion during the quarter to $102.4 billion as of June 30, 2012. As a result, the industry's net worth ratio improved by 15 basis points to 10.16 percent during the quarter.

NCUA reported that outstanding loans expanded by 1.7 percent to $581.7 billion as of June 2012 from $572.0 billion as of March 2012. Total loans on the books of credit unions increased for the fifth consecutive quarter. All loan categories, except for one, posted an increase during the quarter.

During the second quarter, member business lending increased by 1.2 percent to $40.2 billion from $39.7 billion.

Investments held by federally insured credit unions increased by $6.9 billion during the second quarter to almost $282.7 billion.

In addition NCUA reported that total assets increased 0.6 percent to $1,007.6 billion from $1,001.8 billion during the quarter and deposits (shares) rose 0.3 percent to $868.8 billion from $866.0 billion.

The strong growth in loans relative to deposits caused the loan to share ratio to increase by 91 basis points to 66.96 percent during the quarter.

The industry saw a significant improvement is asset quality. Delinquent loans fell from almost $8.3 billion as of March 2012 to just below $7 billion as of June 2012. The delinquent loan ratio fell by 24 basis points to 1.20 percent. NCUA cited that the improvement was due to the agency's new rule regarding troubled debt restructurings.

Credit unions reported net charge-offs of $2.17 billion for the first two quarters of 2012. This is down almost 19 percent from June 2011 levels.

Read the press release.

Wednesday, August 29, 2012

Illinois CU Regulator Suspends CU Operations for 60 Days

The Director for the Division for Financial Institutions of the Department of Financial and Professional Regulation suspended for 60 days the operations of Bagumbayan CU, located in Chicago, Illinois.

The state credit union regulator found that the tiny Chicago-based credit union was in substantial non-compliance with the state’s credit union statute and was operated in the an unsafe and unsound manner.

According to the suspension order, the credit union had reported a loss in each of the last five years and its net worth had fallen by 36 percent over that time period.

The order also notes that the credit union failed to file annual report with the Department and failed to produce financial records during examinations.

The regulator found that the credit union failed to maintain a valid field of membership and added five individuals as members in May 2012, who were not part of its field of membership.

This is the third credit union to have its operations temporarily suspended by the Illinois CU regulator this year. The other two credit unions were USA One National Credit Union, which was closed by the regulator on May 31, and Branch 825 N.A.L.C. Credit Union, which was acquired by Corporate America Family Credit Union.

Read the suspension order.

Tuesday, August 28, 2012

Fact Checking NCUA Video

Last week, NCUA's Chief Economist John Worth released a video comparing anticipated future Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessments for credit unions to anticipated Deposit Insurance Fund (DIF) assessments by the Federal Deposit Insurance Corporation (FDIC).

According to Worth, federally-insured credit unions can expect to pay less in assessments than federally insured banks during the next decade.

However, there are several problems with this NCUA video.

First, the video only compares future assessments for the TCCUSF versus the DIF. The video does not include any projected future assessments to the National Credit Union Share Insurance Fund (NCUSIF). To do a true apples to apples comparison, Worth should have included any NCUSIF assessments along with TCCUSF assessments to determine future assessments paid by credit unions.

Perhaps Worth is assuming future assessments by the NCUSIF will be zero. If so, he should make this assumption explicitly clear.

To form your own expectations about future NCUSIF assessments, there were 399 federally-insured credit unions on the problem credit union list at the end of the second quarter 2012. These credit unions held approximately $30 billion in assets.

Second, it is unclear whether Worth's analysis about future assessments include $5.7 billion in assets set aside to pay claims under the FDIC’s Temporary Liquidity Guaranty Program, which expires at the end of this year. It is expected that these assets, while be transferred to the DIF at the end of this year. If the analysis did not include this transfer, then the amount of future DIF assessments will be lower.

Third, Worth correctly points out that the minimum reserve ratio for the DIF is 1.35 percent of insured deposits. The Dodd-Frank Act raised the minimum reserve ratio for the DIF from 1.15 percent to 1.35 percent. However, the Dodd-Frank Act stated that in setting the assessments necessary to meet the new minimum reserve ratio requirement, the FDIC shall offset the effect raising the minimum reserve ratio from 1.15 percent to 1.35 percent on insured depository institutions with total consolidated assets of less than $10 billion. Once again, did Worth's analysis take into account this offset in determining the amount of assessments paid?

Fourth, FDIC assessment rates are risk-based, while NCUA assesses a flat rate to all federally-insured credit unions. The video does not make it clear as to what FDIC assessment rate is being applied in its analysis. Therefore, NCUA may be overstating the amount of DIF assessments a credit union might pay.

These concerns should caste doubts about the video's conclusion that future assessments will be less for federally-insured credit unions compared FDIC-insured banks.

Friday, August 24, 2012

Chetco Update

Eleven months have elapsed, since NCUA placed Chetco Federal Credit Union of Harbor, Oregon into conservatorship on September 23, 2011.

However, the following two slides show that the financial picture at Chetco continued to deteriorate after being conserved by NCUA.

For the third consecutive quarter, Chetco FCU reported a negative net worth position and it has been critically undercapitalized for four consecutive quarters.

In addition, Chetco reported that over $68 million of its loans or 25.6 percent of its loan portfolio was 60 days or more past due at the end of the second quarter. Almost half of its loans ($33.5 million) were 12 months or more past due, as of June 2012.

Given it financial picture, it is highly unlikely that Chetco will be restored to viability. The time has come for NCUA to end its regulatory forbearance and to close Chetco.

Wednesday, August 22, 2012

Equity or Venture Capital Funding CUSOs

The Michigan Commissioner of Financial and Insurance Regulation has issued an order that will expand the ability of state-chartered credit unions to serve Michigan small businesses.

The order will permit state-chartered credit unions to invest in a credit union service organization (CUSO) that provides investment administration and other services related to small business equity or venture capital funding.

The Office of Financial and Insurance Regulation concluded that allowing state-chartered credit unions to invest in CUSOs that offer these services will better enable state-chartered credit unions to compete with Michigan chartered banks and savings banks.

In addition while federal credit unions cannot exercise this power, the Commissioner noted that Iowa chartered credit unions have this authority.

The state regulator did impose limitations on the amount a state chartered credit union may invest in a CUSO offering small business or venture capital funding. No more than 10 percent of a credit union’s net worth can be invested in a CUSO providing this service and the aggregate investment in any entity or group of related entities cannot exceed 25 percent of the credit union's net worth.

The order has other limitations, including officers and directors of a state-chartered credit union with an ownership interest or investment in the CUSO shall not hold an equity position in a small business financed by the CUSO.

Read the order.

Tuesday, August 21, 2012

CUNA's Outlandish Business Loan Recommendations

The Credit Union National Association (CUNA) made some outlandish member business loan (MBL) recommendations in an August 3 letter to the National Credit Union Administration (NCUA).

First, CUNA requested:
"All the regulatory requirements for MBLs that are not specifically stated in the FCU Act, such as the requirement for the personal guarantee of the borrower(s), loan-to-value ratios, construction and development loan limits, appraisal requirements, and others should be eliminated for well-managed, well-capitalized credit unions that operate successful MBL programs."
CUNA proposed that NCUA should "let well-run, well-capitalized credit unions determine what those limits and ratios should be, consistent with agency guidance and reasonable industry standards."

In other words, CUNA wants NCUA to re-establish its regulatory flexibility program, which the agency recently abolished.

Moreover, credit unions were probably well-served by these limits. For example, loan limits on construction and development loans probably insulated the National Credit Union Share Insurance Fund from severe losses by keeping credit unions from becoming over-exposed to construction and land development loans, which had high default rates after the collapse of the real estate bubble.

In addition, CUNA urged NCUA to revisit the history of primarily making business loan exemption. In 1998, Congress exempted credit unions that had a history of primarily making member business loans from the aggregate member business loan cap.

CUNA claims that NCUA should use a more contemporaneous time period for determining whether a credit union has a history of primarily making business loans. If MBLs are currently among the highest of a credit union's loan categories, then CUNA reasons that the credit union has a history of making business loans.

However, this provision was meant to grandfather those credit unions that had a history of primarily making member business loans from the aggregate business loan cap, when the Credit Union Membership Access Act became law in 1998. Once the aggregate MBL cap became effective, a non-exempt credit union should never make enough MBLs so as be engaged in primarily making member business loans.

Friday, August 17, 2012

FCUs Eligible to Opt-in to Low-Income Designation

ABA obtained through a Freedom of Information Act request the list of federal credit unions that were sent a letter by NCUA stating that they are eligible for low-income designation. The NCUA’s action was included in a White House package of drought-relief measures announced last week.

Credit unions receiving a low-income designation are not subject to the member business loan cap, can accept nonmember deposits, and can receive secondary capital.

The following states did not have any federal credit unions eligible to opt-in as a low-income credit union -- Alaska, Delaware, Hawaii, Iowa, Vermont, and Wisconsin.

As of March 2012, there were 16 credit unions with more than $1 billion in assets, which could opt-in to the low-income designation. In addition, 151 of these credit unions were between $100 million and $1 billion in assets.

The largest credit unions was Security Service FCU in San Antonio, Texas with $6.7 billion as of March 2012. The next largest was Police & Fire FCU in Philadelphia, Pennsylvania with $4 billion in assets.

Three federal credit unions were above the 12.25 percent member business loan cap, while another seven federal credit unions had a member business loan to asset ratio between 9.80 percent and 12.25 percent.

To review the full list click here.

Thursday, August 16, 2012

$35 Merger Fee Rescinded

Earlier this week, I reported the on Educational Systems FCU charging a $35 merger fee to members of Montgomery County Teachers (MCT) FCU.

After receiving complaints from MCT's members over the $35 merger fee, Educational Systems FCU decided to rescind the fee.

Chris Conway, the President and CEO of Educational Systems FCU, wrote; "As an alternative to the account conversion fee, I am instead asking you to invest in MCT by doing more business with the Credit Union."

Also based upon the fee disclosures, Educational Systems should be able to quickly recoup the forgone income from the rescinded merger fee.

Whither the CLF?

The closing down U.S. Central (USC) Bridge in October and ending its Central Liquidity Facility (CLF) agent membership could cause a significant contraction in the CLF's statutory borrowing authority and adversely impact many credit unions access to emergency liquidity.

The CLF was established in 1979, before credit unions had access to the Federal Reserve’s Discount Window or advances from a Federal Home Loan Bank. Currently for most credit unions, there only source to emergency liquidity is the CLF by belonging to a corporate credit union that is in turn part of the agent group headed by USC Bridge.

When the CLF redeems USC Bridge's CLF capital stock, the existing agent group arrangement will terminate. As a result, the roughly 6,000 natural person credit unions that get CLF access through their corporates will no longer have it.

Moreover, the borrowing authority of the CLF could drop by 96 percent after the redemption of U.S. Central Bridge's CLF stock holdings, limiting its ability to address a systemic liquidity event within the credit union industry.

As of May 31, 2012, the CLF had total subscribed capital stock and surplus of $3.85 billion, including about $1.8 billion in stock held by USC Bridge as agent. The statute permits CLF to borrow up to 12 times its total subscribed capital stock and surplus, which translates into approximately $46 billion in borrowing authority.

After the redemption of the stock occurs, the total capital stock and surplus of the CLF will be only about $155 million, which equates to a borrowing authority of around just under $2 billion.

The key policy question is whether the credit union industry will step up to recapitalize the CLF through the purchase of CLF stock by corporate credit unions acting as agent group representatives or the direct purchase of CLF stock by FICUs.

However, the NCUA Board in its proposed emergency liquidity rule noted that many corporate credit unions cannot afford to purchase stock for all their member credit unions, as required by the Federal Credit Union Act and NCUA regulations. A corporate credit union acting as an agent for its members must subscribe to CLF capital stock in an amount equal to 0.5 percent of its paid-in and unimpaired capital and surplus of its members.

It seems that the NCUA Board is counting on natural person credit unions to directly purchase the CLF stock in order to maintain the CLF as a viable liquidity option. I'm skeptical that this is going to happen.

Therefore, many credit unions are going to lose access to the CLF as a source of emergency liquidity and it seems that the borrowing capacity of the CLF will be greatly diminished. This would suggest that the CLF will not be able to adequately meet the liquidity needs of credit unions during a systemic liquidity event.

Wednesday, August 15, 2012

Ownership Structure Is Not Sufficient for Tax Exemption

In a letter to the House Ways and Means' Subcommittee on Oversight, Bill Cheney, CEO and President of the Credit Union National Association, wrote: "[t]he credit union tax status has always been a function of the ownership structure of credit unions; it has never been about the power or mission of the credit union."

Initially cooperative depository institutions were exempt from federal taxation. A 2001 Treasury study states that "[w]hen the federal income tax was first enacted, state chartered credit unions were not specifically exempt. In 1917, however, an administrative ruling by the U.S. Attorney General exempted these credit unions from federal income taxation. The Attorney General ruled that the credit unions closely resembled cooperative banks and similar institutions that Congress had expressly exempted from taxation in 1913 and 1916."

However, in 1951, Congress repealed the tax exempt status of thrift institutions, but retained the credit union tax exemption. Congress found:

  • These cooperative and mutual institutions were in “active competition” with taxable institutions and continuing their tax exemption would be “discriminatory” and;
  • They had evolved into institutions whose “investing members are becoming simply depositors, while borrowing members find dealing with a savings and loan association only technically different from dealing with other mortgage lending institutions in which the lending group is distinct from the borrowing group.”
The same is true today with regard to the credit union industry. 

Furthermore, many other cooperatives are taxed.  Cooperatives organized for economic purposes (not charitable or limited purposes) are taxed under Subchapter T of the Internal Revenue Code.  

Therefore, the ownership structure is not sufficient for being tax exempt.    

Monday, August 13, 2012

Merger Fees Await MCT's Members

All members of Montgomery County Teachers (MCT) FCU over the age of 22 will be charged a one-time $35 account conversion fee as part of MCT's merger with Educational Systems FCU, the acquiring credit union.

MCT FCU was in financial difficulty and was under an enforcement order from NCUA to complete the voluntary merger with Educational Systems FCU.

Educational Systems justifies this fee by saying that there are significant cost associated with this merger including converting computer systems, utilizing financial and legal professionals, and the financial burden of continuing high loan losses from MCT.

Additionally, Educational Systems says that if MCT had not merged with them it would have cost approximately $184 per member to restore MCT to being well-capitalized. So, the members of MCT should be happy that they are only paying a fee of $35.

Read the information sheet on the merger.

Saturday, August 11, 2012

CU Denies Out of Market Credit Card Purchases

The Morning Call published a story about a Pennsylvania credit union that refused to authorize a purchase on a credit card it issued because the purchase was not local.

First Commonwealth Federal Credit Union denied the purchase because it was concerned that the purchase could be fraudulent.

The credit union's CEO recommended that people should carry a second credit card and extra cash, just in case their cards are rejected while traveling.

I do a lot of traveling and have never had my credit card issuer reject a purchase because the purchase was not local. I thought one of the advantages of carrying a credit card is that you don't need to carry extra cash when you travel.

Read the story.

Friday, August 10, 2012

Tiny United Catholic CU Closed

United Catholic Credit Union (UCCU) in Temperance (MI) was closed on August 9 by the Michigan Office of Financial and Insurance Regulation (OFIR), which then appointed the National Credit Union Association (NCUA) as receiver.

NCUA’s Asset Management and Assistance Center will issue checks to individuals holding verified share accounts in the credit union within one week.

An OFIR examination found that UCCU was operating in an unsafe and unsound manner and the credit union was insolvent. Unfortunately, the credit union's financial report is of little value determining the health of the credit union, as it never reported a delinquent loan over the last 5 quarters.

The credit union reported holding assets of $303,261 and served 208 members.

OFIR examiners found instances of alleged criminal activity and are working closely with investigators at the Michigan Attorney General’s office.

United Catholic CU is the eighth federally insured credit union liquidation in 2012.

Read the press release.

Thursday, August 9, 2012

Drought Used as Cover to Eliminate MBL Cap for LICUs

ABA President and CEO Frank Keating in an August 8 letter to NCUA Chairman Debbie Matz stated the devastation from the drought “should not be used as cover for an elimination of the member business loan cap through an expansion of the low-income designation for more than 1,000 eligible credit unions.”

Keating wrote: “While the drought is temporary, the extension of the low-income designation is permanent and skirts congressional intent.”

Keating noted that by NCUA’s own estimates, less than half of the newly eligible low-income credit unions are in drought-stricken areas of the country. He also criticized NCUA for not verifying that LICUs are actually lending to members in low- and moderate-income census tracts, and he cited two examples of credit unions with LICU designations that have no branches in a low-income census tract.

“These examples are why ABA is concerned that the NCUA has taken advantage of a natural disaster to sidestep and leapfrog Congress,” Keating said. “Unfortunately, this is just one more example to add to NCUA’s long history of overreaching and expansive interpretations of statute.”

Read the letter.

Wednesday, August 8, 2012

The Drought and Expansion of CU Business Lending

"You never let a serious crisis go to waste." Rahm Emanuel

As part of an initiative to assist drought-stricken states, the NCUA and the Obama Administration on August 7th announced that 1,003 credit unions are now eligible for a low-income designation, which permits unlimited lending to businesses.

The Federal Credit Union Act provides low-income designated credit unions with an exception to the member business loan cap of 12.25 percent of assets.

Rather than applying for the low-income designation, NCUA sent letters to credit unions notifying them that they were eligible for the low-income designation. All the credit union has to do is opt-in to receive the low-income designation.

The NCUA also intends to assess eligibility each quarter and then notify any newly eligible credit unions of their ability to receive low-income designation.

In addition to unlimited business lending authority, the receipt of low-income designation will allow the credit union to accept non-member deposits and access supplemental capital.

It is estimated that nearly half of the credit unions eligible for low-income designation are headquartered in states identified as having extreme drought conditions.

So, half of the credit unions are in states that are not affected by the extreme drought.

This agency is clearly taking advantage of the opportunity the drought provided.

Read NCUA’s press release. Read the White House Fact Sheet.

More on Failed Telesis Community CU

NCUA has not disclosed how costly the failure of Telesis Community Credit Union will be to the National Credit Union Share Insurance Fund (NCUSIF).

However according to information obtained from a Freedom of Information Act request, Premier America Credit Union purchased and assumed just $72,722,722.06 of Telesis Community's assets. The vast majority of the assets went to the estate, which retained (gross allowances) $205,737,359.83 in assets from Telesis Community Credit Union.

This means that the failure of Telesis Community could be quite costly to the NCUSIF. But it will ultimately depend on the prices the Asset Management Assistance Center can fetch for the loans and other assets.

Monday, August 6, 2012

NCUA Supervisory Actions Up in 2011

The number of supervisory actions issued by NCUA rose sharply in 2011.

The charts at the bottom of this post show the number of supervisory actions issued in 2010 and 2011. Both Preliminary Warning Letters and Letters of Understanding and Agreement jumped sharply in 2011 compared to 2010.

There were 135 Preliminary Warning Letters issued for 2011 -- an increase of 382 percent from 2010.

There were 465 Letters of Understanding and Agreement issued for 2011 up from 333 for 2010. However, don't go looking for these Letters of Understanding and Agreement, because almost all (463) were not published.

The only category of supervisory action that fell for 2011 was Cease and Desist Orders, which were down by 3 to 25 issued for 2011.

Information for the number 2010 supervisory actions can be found in NCUA's 2010 Annual Report. However, 2011 information was obtained by filing a Freedom of Information Act request with NCUA; because the agency did not disclose this information in its 2011 Annual Report.

Thursday, August 2, 2012

NCUSIF Subsidized Capital Notes

NCUA is providing subsidized Section 208 capital notes to two credit unions that are currently under conservatorship.

I filed a Freedom of Information Act request (see letter below) looking for information regarding the maturity date and interest rate terms of the two capital notes.

Note 1 matures on December 31, 2026. It has an initial fixed interest rate of 1.4855 percent through December 31, 2018. Thereafter, the rate is variable and tied to the six-month average of interbank LIBOR rate plus a margin. The margin is 265 basis points and will increase to 365 basis points after December 31, 2022.

Note 2 matures on December 31, 2025. The capital note initially has a fixed interest rate of 0.125 percent plus the seven year fixed rate Treasury Constant Maturity through December 31, 2019. Thereafter, the rate is variable and is tied to the three month LIBOR rate plus a margin. The margin is 200 basis points beginning on January 1, 2020; 300 basis points beginning January 1, 2022; and 400 basis points beginning January 1, 2024.

It is very doubtful that these two credit unions, which were insolvent before the capital injection from the NCUSIF, could have funded themselves from the private sector under such favorable interest rates.

The only conclusion is that these two credit unions received a bailout from the NCUSIF.

Wednesday, August 1, 2012

A M Community CU Liquidated

The Wisconsin Office of Credit Unions placed A M Community Credit Union of Kenosha, Wisc., into liquidation today. The National Credit Union Administration (NCUA) was appointed liquidating agent by the Wisconsin Office of Credit Unions.

TruStone Financial Federal Credit Union of Plymouth, Minn., immediately purchased and assumed A M Community Credit Union’s members, deposits, core facilities, and consumer loans.

A M Community was placed under NCUA conservatorship on February 17 of this year.

A M Community reported losses of $8.2 million for 2011 and $1.5 million for the first six months of 2012. As of June 2012, the credit union was critically undercapitalized with a net worth ratio of 1.66 percent and had a delinquent loan ratio of 14.31 percent.

A M Community had $11.2 million in member business loans, of which almost 48 percent were 60 days or more past due.

At liquidation, A M Community had $121.8 million in assets and served 15,993 members.

A M Community Credit Union is the seventh federally insured credit union liquidation in 2012 and the second Wisconsin credit union to be liquidated this year. Wassau Postal Employees Credit Union was liquidated on May 18, 2012.

Read the press release.

Delay CFPB's Remittance Rule

ABA and four other bank and credit-union trade groups this week urged all House members to sign Reps. Blaine Luetkemeyer (R-Mo.) and Yvette Clarke’s (D-N.Y.) letter urging Consumer Financial Protection Bureau (CFPB) Director Richard Cordray to delay until February 2015 the bureau’s final rule on remittance transfers.

The rule was “intended to provide greater transparency and certainty, smoother error resolution procedures, and increased access to low-cost transfer services for consumers who utilize remittances and international wire transfer services,” the trade groups said in a letter to House members.

Instead, it would “add dramatically to the costs of providing these services, and create mandates that are simply not possible for community-based institutions to implement,” they said. “The end result is likely to be fewer and more costly choices for consumers as credit unions and community banks stop offering these services. This is clearly not what Congress intended.”

The trade groups emphasized that it’s vital for community banks and credit unions, which often operate in rural and underserved areas, to be able to offer such services to the millions of consumers that send billions of dollars to their families in other countries.

“While we strongly support … appropriate consumer disclosures of fees and product terms, the rule … will make it exceedingly difficult and costly for our member financial institutions to continue offering these services,” they said. “If not delayed, and hopefully modified, the CFPB’s remittance rule will result in fewer choices and more costs for consumers.”

Read the trade groups’ and Luetkemeyer-Clarke letters.

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