Almost 59 Percent of Large CUs Rely on Fee Income to be Profitable

Credit unions are increasingly relying upon fee income for their profitability.

Almost 59 percent of all credit unions with at least $100 million in profits as of June 30, 2013 would have been unprofitable if it were not for the contribution of fee income.

For half of these credit unions with $100 million or more in assets, fee income represents at least 16.77 percent of total revenues. Total revenues is defined as total interest income plus total noninterest income minus total interest expenses.

For one quarter of these credit unions, fee income as a percent of total revenues is at least 23.66 percent.

The following table lists the twenty-five credit unions with the highest ratio of fee income to total revenues through the first six months of 2013. All twenty-five of these credit unions had fee income to total revenues ratio in excess of 40 percent.



Given the reliance on fee income for their profitability, a November 22 article by SNL noted that credit unions "could face tough choices should fees come under additional scrutiny by regulators or consumers."

Minority CUs More Likely to be Problem CUs

Problem credit unions are disproprtionately minority credit unions.

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

According to a report issued by NCUA's Office of Minority & Women Inclusion, there were 805 credit unions (12 percent of the all federally insured credit unions) as of mid-year 2013 that self-identified as a minority financial institution.

The report noted that 107 minority credit unions had a CAMEL composite rating of 4 or 5.

As of June 30, 2013, there were 330 credit unions with a CAMEL rating of 4 or 5.

So while minority credit unions account for only 12 percent of all federally insured credit unions, they accounted for almost one-third (32.42 percent) of all troubled credit unions.

Northern Piedmont FCU Sues Employees of Failed CU

Northern Piedmont Federal Credit Union (Culpepper, VA) has filed a lawsuit against three employees of failed Lynrocten Federal Credit Union (Lynchburg, VA).

According to the complaint, Northern Piedmont entered into multiple loan-participation agreements with Lynrocten.

From 2009 through 2011, Northern Piedmont wired more than $3 million to Lynrocten. Court documents further state Northern Piedmont has subsequently lost “at least $1,695,793.24.”

According to court documents, Northern Piedmont states it learned from NCUA investigators that only one loan allegedly supporting the loan-participation agreements was legitimate.

Read the story.

Polish Combatants CU Liquidated

The Ohio Division of Financial Institutions has liquidated the Polish Combatants Credit Union of Bedford, Ohio, and appointed the National Credit Union Administration as liquidating agent.

The Division of Financial Institutions made the decision to liquidate Polish Combatants Credit Union and discontinue its operations after determining the credit union had no prospect for restoring viable operations.

Polish Combatants Credit Union served 52 members and had assets of $120,450, according to the credit union’s most recent Call Report. Chartered in 1957, Polish Combatants served Polish veterans of World War II.

Polish Combatants Credit Union is the thirteenth federally insured credit union liquidation in 2013.

Read the press relase.

No TCCUSF Assessments for 2014

NCUA is reporting that there will be no Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessments for 2014.

NCUA staff has set the range of post-2013 TCCUSF assessments between minus $200 million and $1.6 billion.

In addition, NCUA announced that the range of NCUSIF assessments for 2014 will be between 0 and 5 basis points.

California Coast CU to Pay $3.25 Million for Naming Rights to SDSU's Open Air Theater

California Coast Credit Union has agreed to buy the naming rights to the 4,600-seat Open Air Theatre at San Diego State University pending the approval of the California State University’s Board of Trustees.

The $1.8 billion credit union will pay the university $3.25 million over 10 years under the agreement.

The on-campus amphitheater would be renamed the Cal Coast Credit Union Open Air Theatre starting January 1, 2014.

I have commented on several different occasions that I believe the buying of naming rights by credit unions to arenas and theaters represents a misuse of the credit union federal tax exemption.

Read the story.

NCUA Receives over $1.4 Billion in JPMorgan Chase Settlement

The National Credit Union Administration today joined the U.S. Department of Justice and other governmental plaintiffs in a $13 billion settlement with JPMorgan Chase and affiliated companies over sales of faulty mortgage-backed securities.

As part of the settlement, NCUA will receive $1.417 billion. The settlement resolves four lawsuits filed by NCUA as liquidating agent against JPMorgan Chase, Bear Stearns and Washington Mutual for losses incurred by failed corporate credit unions as a result of the purchases of the faulty securities.

NCUA Board Chairman Debbie Matz said: “This resolution, combined with the $335 million already recovered, will enable NCUA to greatly reduce the assessments that all credit unions have to pay."

Read the press release.

Texas Trust CU Says Adios to International Remittance Business

Texas Trust Credit Union (Mansfield, Texas) is a casualty of the Consumer Financial Protection Bureau's new international remittance rule.

The credit union announced on its website that it can no longer offer international wire transfers, due to recent regulatory changes.

The credit union's September call report stated that the credit union had originated 146 international remittances through the first nine months of 2013.

See the announcement.

No Dog Sled Required

I came across an ad by Alaska USA (see below) that said Anyone in Washington can be a member of Alaska USA Federal Credit Union.

Apparently, Alaska USA picked up Washington state as part of its field of membership when it took over a financially troubled Washington chartered credit union in 2010.

Under NCUA's emergency merger powers, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any field of membership restrictions.

What is troubling is that the community charter comprises a whole state. NCUA field of membership regulations currently prohibit a federal credit union from having a community charter that encompasses a whole state.

I would feel better if NCUA had found a Washington state credit union that already served all of Washington state as a merger partner than merge the troubled credit union with a federal credit union.

Fryzel: Goldilocks Risk-Based Capital Requirement

In a speech to the American Association of Credit Union Leagues, NCUA Board Member Michael Fryzel outlined his thoughts regarding risk-based capital requirements for credit unions.

While Fryzel noted that credit unions are not covered by Basel, the capital regime of credit unions is required to be “comparable” to that of the banking industry.

Fryzel's goldilocks moment came when he stated: "I advocate neither an overly stringent nor an overly permissive approach. I advocate “right sizing” NCUA’s risk-based capital rules."

He goes on to state that an undeniable lesson from the financial crisis is that capital needs to be ample, durable, and readily deployable to shore up a balance sheet under duress.

Moreover, the amount of capital (net worth) required by a credit union will ultimately depend on the activities pursued by a credit union.

Read the speech.

G-Fees Should Not Be Use as a Piggy Bank

As the congressional budget conference looks for ways to cut spending and increase revenue, bank and credit union trade groups urged them not to consider Fannie Mae and Freddie Mac’s guarantee fees, or g-fees, as a potential revenue source. Congress used a 10 basis point increase in the 2011 g-fee to fund two months of payroll tax relief, for example, which the groups said is already affecting potential homebuyers and refinancers.

“G-fees are a critical risk management tool used by Fannie Mae and Freddie Mac to protect against losses from faulty loans,” the groups said. “Increasing g-fees for other purposes effectively taxes potential homebuyers and homeowners looking to refinance their mortgages.” They added that using g-fees as a revenue tool would constrain congressional options as the House and Senate take up housing finance reform in the coming months.

Read the letter.

How Have CU Farm Loans Performed?

Yesterday, I wrote about the level of farm lending at credit unions. Today, we will review how farm loans have performed at credit unions.

As of June 30, 2013, credit union reported slightly less than $14.2 million in delinquent farm loans. A loan is deemed delinquent, if it is 60 days or more past due. The delinquency rate was 0.62 percent.

Four credit unions accounted for over 40 percent of the industry's total delinquent farm loans.

• Greater Oregon (OR) had $1.9 million in delinquent farm loans (65.2 percent of its farm loan portfolio).
• North Star Community (ND) had $1.5 million in delinquent farm loans (3.45 percent of its farm loan portfolio).
• Whitefish Community (MT) had almost $1.3 million in delinquent farm loans (35.3 percent of its farm loan portfolio).
• Amplify (TX) reported $1 million in delinquent farm loans (97.2 percent of its farm loan portfolio)

Credit unions reported only $286,000 in net farm loan charge-offs through the first six months of 2013.

The strong performance of the agricultural loan portfolio at credit unions is not surprising given the strength in the farm economy. The U.S. Department of Agriculture reported that net farm income is forecasted to be $120.6 billion in 2013, up 6 percent from 2012’s estimate of $113.8 billion. After adjusting for inflation, 2013’s net farm income is expected to be the second highest since 1973.

Credit Union Agricultural Lending

This week I am at the National Agricultural Bankers Conference and thought it would be interesting to look at credit unions engaged in agricultural lending.

As of June 2013, there were 297 credit unions reporting at least one agricultural loan on their books. These credit unions reported holding 19,671 farmland and agricultural production loans with a value of almost $2.3 billion.

Credit unions had slightly more than $2.1 billion in agricultural loans that counted as member business loans and $175 million in agricultural loans were to nonmembers.

Approximately $1.3 billion of the loans were farmland loans, while $986 million of the loans are for agricultural production.

During the first six months of 2013, credit unions originated $227 million in farmland loans and $536 million in agricultural production loans.

There were four states, which reported credit union ag lending in excess of $100 million -- North Dakota ($659.5 million), Indiana ($604.9 million), Minnesota ($421.9 million), and Wisconsin ($183.9 million).

The credit union with the most farm loans on its books is privately-insured Beacon Credit Union in Wabash, Indiana. The credit union has almost $446 million in agricultural loans. The next largest credit union ag lender is Central Minnesota Credit Union in Melrose, Minnesota with almost $269 million in farm loans.

There were 46 credit unions that had a material exposure to agricultural lending. Material exposure is defined as having at least $5 million in outstanding agricultural

The table below lists the 10 credit unions with the most agricultural loans.

$22 Million Business Loan Participation

I received the following e-mail yesterday morning from LPC Services regarding a $22 million member business loan participation from a credit union. (click on image to enlarge)



A $22 million participation is a large business loan.

It does beg the question -- should a loan of that size receive a taxpayer subsidy?

More on Quorum FCU's Timeshare Lending

TimeshareLeaks.com has recently dug into the timeshare loans made by Quorum FCU of Purchase, New York.

TimeshareLeaks.com has looked at Quorum's relationship with Diamond Resorts International, The Berkley Group, and Bluegreen Corp.

From the public SEC filings of Diamond Resorts International and Bluegreen Corporation's parent company, BFC Financial, we are able to see the extent of Quorum's lending to the timeshare industry.

For example, the August 10-Q filing for Diamond Resorts International noted that Diamond Resorts had an $80 million credit facility through Quorum, which initially started as a $40 million credit facility dated on April 30, 2010. As of June 30, 2013, only $26.3 million of the $80 million funding facility was still available.

Bluegreen Corporation had entered into a $30 million credit facility with Quorum FCU. As of June 30, 2013, slightly less than $10.4 million of the credit facility was still available for borrowing.

Interestingly, the credit union only has $65.5 million in net worth, as of June 2013.

It appears that Quorum FCU is both overly exposed to a single borrower and also a single industry.

It does make you wonder if Quorum has been granted a waiver by NCUA Region I Regional Director from the aggregate loan to one borrower limit.

Patent Trolls and Privacy Notices

While the banking and credit union industries are going to disgree regarding the issues of taxation and expanded business lending authority for credit unions, there are a number of issues that we can come together to work on that benefits both banks and credit unions.

The latest examples are two joint trade association letters that were sent to Congress regarding patent trolls and privacy notices.

The trade groups wrote House Judiciary Committee Chairman Bob Goodlatte (R-Va.) commending his bipartisan Innovation Act to restrain “patent trolls” -- non-practicing entities that bring abusive patent litigation against banks and other businesses. Goodlatte’s bill would enhance pleading standards to make it harder to bring frivolous patent infringement claims, allow waivers for costly fees to investigate a patent’s validity and limit discovery costs borne by targeted business. The trade groups urged Goodlatte to add provisions that would distribute liability more equally between suppliers and end users. They also recommended that the validity review process be expanded to patents filed since 2011, and they suggested additional changes to address the concerns of targeted businesses. Read the letter.

Additionally, bank and credit union trade groups wrote Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Kent.)about bringing up legislation (S. 635) regarding redundant privacy notices. The letter stated: "As you know, Gramm-Leach-Bliley requires all financial institutions to annually provide their customers with annual privacy notices,... even if there has been no change to the policies in the prior 12 months. S. 635 would change this by eliminating the annual notice requirement if the institution has not “changed its policies and practices” in the prior 12 months and shares information with third parties in accordance with specified GLBA requirements. In addition, S.635 also ensures that even if there is no change in the company’s privacy policies, consumers will still have electronic access to the institution’s current policies. In brief, we believe this common sense measure would reduce the significant costs institutions incur providing unnecessary disclosures and more importantly give our customers a break from redundant notices."

Read the letter.

Mayfair FCU Placed into Conservatorship

The National Credit Union Administration today assumed control of service and operations at Mayfair Federal Credit Union in Philadelphia.

Chartered in 1936, Mayfair Federal Credit Union serves a low-income community in Philadelphia. Mayfair Federal Credit Union has 1,527 members and $14.3 million in assets, according to the credit union’s most recent Call Report.

The credit union reported a delinquent loan ratio of 14.08 percent as of September 30, 2013. The delinquent loan ratio was up from 9.46 percent in June 2013.

Mayfair Federal Credit Union is the fourth federally insured credit union placed into conservatorship during 2013.

Read the press release.

Michigan Credit Union Buys Bank Branch and Deposits

Credit Union Journal is reporting that Honor Credit Union of St. Joseph, Michigan is purchasing the Decatur branch of Edgewater Bank and its 850 customers and $14 million in deposits.

The credit union has a community charter serving 14 counties and was able to qualify all of Edgewater Bank's Decatur branch customers for membership because they resided in the community.

The terms of the deal were not disclosed.