No Record on Loan Limit Waiver by Quorum

On November 6, I reported that Quorum FCU's timeshare lending may have excessive exposure to a single borrower and wondered if NCUA's Region I Regional Director had granted the credit union a waiver from the aggregate loan to one borrower limit.

I filed a Freedom of Information Act on October 24 with NCUA seeking any information related to a waiver being granted to Quorum FCU by the Regional Director and what was the new lending limit.

On December 9, NCUA replied that "we have no responsive records."

I interpret that to mean Quorum did not apply for a waiver and NCUA is clueless about Quorum's exposure to the timeshare industry.

Furthermore, I was tipped off that Quorum is increasing its exposure to the timeshare industry. Hyatt Residence Club recently announced that its members are now eligible to join Quorum.

Undercapitalized Credit Unions, Q3 2013

At the end of the third quarter of 2013, there were 68 credit unions that were undercapitalized. This is down from 82 credit unions as of June 2013 and 104 credit unions from a year ago.

Three credit unions were critically undercapitalized and 13 credit unions were significantly undercapitalized, as of September 30th.

In addition, several complex credit unions were classified as undercapitalized because their risk-based net worth ratios exceeded their net worth ratios.

Local Government FCU to Partially Fund 10-Day Legislative Fact Finding Trip to India

Local Government FCU (Raleigh, NC) is partially paying the expenses for 10 North Carolina lawmakers to participate in an junket international study trip to India planned for February 7-17, 2014.

According to a State Ethics Commission Advisory Opinion Letter, the funds were donated to The Center for International Understanding at University of North Carolina, which is organizing the trip.

The contributions from Local Government FCU and two other organizations "will cover the cost of the plane flight to India for 10 legislators and meals, lodging, and ground transportation while those participants are in India."

No information was disclosed on the amount donated by Local Government FCU.

This is not the first international fact finding trip funded by a donation from Local Government FCU. In 2013, the credit union helped to pay a portion of the expenses for a trip to China.

However, I wonder how this donation is necessary to enable Local Government FCU to effectively carry on its business or is in the best interest of the credit union's members.

If NCUA had not eliminated its Charitable Contribution Rule in 2012, would this donation have been permissible?

Read the advisory opinion letter.

ABA Comment on NCUA's Stress Test Proposal

In a comment letter to the the National Credit Union Administration (NCUA), the American Bankers Association (ABA) expressed its support for a proposal to subject a federally insured credit union (FICU) with over $10 billion in assets to annual stress testing, just as banks of similar size are required to do under the Dodd-Frank Act.

ABA noted that stress testing is an important and beneficial tool for both institutions and regulators in developing appropriate risk-management decisions and providing valuable information to both parties.

The proposal would require FICUs with assets of $10 billion or more to submit capital plans annually to NCUA. If the supervisory stress test shows that a covered FICU does not have the ability to maintain a stress test capital ratio of at least 5 percent under expected and stressed conditions throughout a nine-quarter stress test period, NCUA will require the credit union to take steps to enhance capital and/or may take other supervisory actions against the FICU.

However, ABA called for NCUA to revise the net ratio to 6 percent, which is “the mandated statutory level to be adequately capitalized”; at 5 percent, a FICU would be “undercapitalized.” This would ensure comparability with the bank stress test, which requires a bank to be adequately capitalized to pass the test.

ABA also said that FICUs should be held to the same public disclosure requirements about the results of their stress tests that banks are. ABA wrote: "Credit union members/owners deserve to have the same information available to them ... so they may determine — with complete and consistently reported information — the best place for their money and business."

If the proposed rule is adopted by the NCUA Board it would immediately affect four credit unions.

Read the letter.

TCCUSF Refund: Not Until After 2021

Although the net remaining assessments range from negative $0.2 billion to $1.6 billion as of the second quarter for the Temporary Corporate Credit Union Stabilization Fund, the transcript from the November 21 NCUA Board meeting indicates that credit unions should not expect a refund anytime soon.

Chairman Debbie Matz: Okay. And for the first time, as you indicated, the range includes a negative number; so will credit unions receive a refund in 2014?

Brian Heitman: No. Even after we make the repayment with settlement proceeds, NCUA will still owe several billion dollars in borrowings to the U.S. Treasury as a result of the Corporate Resolution Program. The Treasury debt must be fully repaid before any remaining funds will be distributed to credit unions. This is not likely to occur prior to expiration of the Stabilization Fund in 2021.

The timing of potential refunds is also contingent upon monetization of the legacy assets after NGN maturity. Disposition options include re-securitization, outright sales, and holding the legacy assets until maturity.

Chairman Debbie Matz: So in other words, credit unions should not expect any refund, if there ever is going to be one, until after 2021? Is that correct?

Larry Fazio: Yes, for the most part.

Private Student Loans, Q3 2013

While a small portion of the credit unions industry's loan portfolio is in private student loans, non-federally guaranteed student loans grew by almost 32 percent over the last year to slightly more than $2.5 billion in outstanding private student loans at federally insured credit unions.

However this growth in private student loans caused NCUA to issue a supervisory letter because "private student loans have unique features and risk characteristics that are unlike most other consumer loan products." The supervisory letter notes some of the unique issues associated with private student loans including that student loans have a deferral of repayment; borrowers often have little credit history; and repayment is often dependent on future employment and income.

For example, at the end of the third quarter of 2013, 39.28 percent of all private student loans ($986 million in private student loans) were in deferral status. This was up from 35.3 percent at the end of the second quarter.

Out of the 623 federally-insured credit unions that reported outstanding private student loans in the third quarter, 44 credit unions reported that all of their loans were currently in deferral repayment status.

NCUA reported that $36.2 million in private student loans were at least 60 days past due with a delinquency rate of 1.44 percent at the end of the third quarter. However, the agency is understating the true delinquency rate because it is including loans in deferral status it its calculation. If the delinquency rate is adjusted for loans in deferral status, the delinquency rate jumps to 2.38 percent.

In addition, another $29.8 million in non-federally guaranteed student loans were between 30 days and 59 days past due.

NCUA also reported that the net charge-offs of private student loans was $11.5 million or 0.68 percent of average private student loans. Once again, the net charge-off rate understates the rate of losses on private student loans; because the agency includes loans in deferral status in its calculation.

The following table shows the 25 credit unions with the most delinquent private student and their deferral adjusted delinquency rate.



Read the letter.

MECU's Acquisition of Advance Bank Finalized

At the close of business on December 12, 2013, Municipal Employees Credit Union of Baltimore, Incorporated (MECU) assumed all of Advance Bank’s deposits and essentially all of its assets subject to completion of certain closing requirements.

Read the statement from Advance Bank.

Bagumbayan Credit Union Placed into Conservatorship

The National Credit Union Administration, in cooperation with the Illinois Department of Financial and Professional Regulation, assumed control of service and operations at Bagumbayan Credit Union in Chicago.

Normal member services will continue uninterrupted through a management agreement between NCUA and Great Lakes Credit Union of North Chicago.

Earlier this year, NCUA placed the credit union under a cease and desist order.

Chartered in 1964, Bagumbayan Credit Union is a federally insured, state-chartered credit union with 44 members and $55,140 in assets, according to the credit union’s most recent Call Report. The credit union provides limited financial services to members of the Bagumbayan community.

Read the press release.

Article Exposes Cozy Relationship Between CU Regulator and Industry

An investigative report by Daniel Wagner, senior reporter for The Center for Public Integrity, exposes the cozy relationship between the National Credit Union Administration (NCUA) and the credit union industry.

The article begins with the newest NCUA Board member, Rick Metsger, attending a luncheon in his honor at Credit Union House, a $4 million party and meeting space on Capitol Hill funded by the industry, shortly after being sworn into office. The event was attended by credit union regulators, leaders, and advocates toasting "one of their own, a fellow-true believer in credit unions who would now police the industry full-time."

The article highlighted the clubby world of the credit union movement where the regulators are ideologically in sync with the companies they regulate. This results in NCUA often acting as a cheerleader and enabler for the credit union industry.

For example, it was NCUA policies at the behest of the credit union lobby that led to the failure of five corporate credit unions requiring a $19.2 billion bailout of the industry.

This coziness between the regulator and the regulated in part arises from the revolving door between NCUA and credit union movement, as all three current NCUA Board members worked in or represented the industry. Wagner wrote: "There are no meaningful safeguards to prevent the NCUA from being completely filled with the industry veterans and allies."

In addition, Wagner points out that credit unions have erected a sprawling advocacy machine to protect their tax exemption, which is funded at the expense of credit union members to the tune of more than $100 million per year.

Read the article.

Rose Bowl Loans, Really?

"Just in case current and former students didn't have enough debt to deal with after their college days are over, a zealous Michigan State Spartans fan might be tacking some more money onto his or her loan balance soon.

The Michigan State University Federal Credit Union is offering Spartans fans a chance to borrow money to be able to make it to the school's first trip to the Rose Bowl since 1988."

However, are loans to the Rose Bowl consistent with the purpose of federal credit unions, which is promoting thrift among its members and creating a source of credit for provident and productive purposes?

Read the story.

ASI and Federal Home Loan Bank Advances

H.R. 3584 would permit privately insured credit unions to join a Federal Home Loan Bank. But what needs to be discussed is the financial viability of a private insurer to a failure of a non-federally-insured credit union with a significant level of secured advances from a Federal Home Loan Bank (FHLB).

Advances provided by the FHLBs are secured and have priority in any financial institution failure. In other words, the interest of deposit insurers -- whether the Federal Deposit Insurance Corporation (FDIC), National Credit Union Share Insurance Fund (NCUSIF), or American Mutual Share Insurance (ASI) -- are subordinated to the claims of FHLBs, which means greater losses for deposit insurers in a failure.

In fact, the FHLB system has never lost a penny on advances in its history.

However, there are major differences between both federal deposit insurers and ASI. Both the FDIC or NCUSIF have large and geographically diversified memberships; but also have the full faith and credit backing of the Federal government.

On the other hand, ASI has a small number of state chartered credit unions as members and lacks geographic diversification. There are 137 privately insured credit unions as of June 30th located in 9 states with almost 95 percent of the deposits of privately insured credit unions concentrated in five states. In addition, ASI does not have any federal backing.

Given ASI's limited resources, a failure of any institution with an exposure to FHLB advances would likely have a significantly larger impact on ASI relative to losses faced by the FDIC or NCUSIF. The cost of such a failure would be difficult for privately insured credit unions to absorb, given the small pool of privately-insured credit unions.

Suncoast Converts to a State Charter; Will Expand Field of Membership

Suncoast Schools Federal Credit Union will convert to a state chartered credit union and expand its field of membership.

A preliminary vote total shows 77 percent of the voting members of the $5.4 billion credit union approved a proposal to convert from a federal charter to a state charter.

In justifying the change from a federal to state charter, the credit union stated that the state's fields of membership rules are more flexible than the federal rule allowing individuals who live within the 15 counties that Suncoast currently serves to be eligible to join the credit union. In addition, Suncoast will is add Sarasota and Highlands Counties to its footprint.

The credit union also noted that the straightforward eligibility criteria provided by the state charter will provide the credit union with greater clarity and consistency in its marketing message.

The credit union noted that it will incur a one time expense associated with the conversion of almost $1 million.

The conversion to a state charter should take place within 90 days and the credit union will be called Suncoast Credit Union.

Read the story.

House Passes Patent Troll Bill

The House of Representatives passed bipartisan legislation that would restrain patent trolls. The bill (H.R. 3309) was supported by banks and credit unions.

Patent trolls are non-practicing entities that bring abusive patent litigation against banks and other businesses.

The bill, which passed by a 325-91 vote, would allow the Patent and Trademark Office to waive the costly fee for a review of the validity of an underlying patent. This provision would help small firms targeted with abusive letters demanding payment for the supposedly infringing patents.

The bill also included an amendment by Rep. Jared Polis (D-Colo.) that would require patent holders to disclose more information about the corporate identity and parent entities in a demand letter. This amendment was supported by bank and credit union trade groups.

On December 4th, ABA, ICBA and CUNA wrote Speaker Boehner and Minority Leader Pelosi in support of the bill. Read the letter.

The bill now moves to the Senate.

IG Report: G.I.C. FCU Failed due to Fraud

NCUA's Office of the Inspector General (IG) determined that fraud led to the failure of G.I.C. Federal Credit Union of Euclid, Ohio.

According to the Material Loss Review, the failure of G.I.C. resulted in an estimated loss of $7 million to the National Credit Union Share Insurance Fund.

The IG report found that the credit union overstated its assets by $8.1 million, primarily through the misstatement of certificates of deposit held as investments and cash held on deposit.

The report noted that several factors contributed to the fraud going undetected, including

• senior management displaying a lack of integrity and not managing the credit union in the best interest of its members;

• supervisory committee failing to obtain supervisory committee audits for three consecutive fiscal years; and

• the Board of Directors of the credit union failing to exercise its responsibilities.

The IG report pointed out that only federal credit unions with $500 million or more in total assets are required to have a financial statement audit performed by a licensed independent auditor. However, the report makes the observation that "smaller credit unions ... often have less sophisticated supervisory committees, Boards of Directors, and/or management." The report suggested that NCUA management review various Material Loss Reviews and consult with various stakeholders whether the $500 million asset threshold is too high.

Read the Material Loss Review.

CUs Increase Their Exposure to Long-term Assets

The third quarter financial data show that credit union industry is increasing its investments in long-term assets at the same time long-term interest rates have begun to rise.

Between September 30, 2012 and September 30, 2013, the net long-term asset to asset ratio for the industry rose by 275 basis points from 32.96 percent to 35.71 percent. The net long-term asset ratio for the industry as of September 30, 2013 is 522 basis points above the 10-year average of 30.49 percent.

Additionally, over the last year, the supervisory interest rate risk threshold to net worth ratio increased by 10.97 percentage points from 262.96 percent to 273.93 percent.

In addition, rising rates have caused the market value of the available for sale portfolio at credit unions to fall. Over the course of the last year, the credit union industry has gone from having an unrealized gain on its available for sale securities portfolio of slightly more than $2.6 billion at the end of September 2012 to an unrealized loss of $1.1 billion on its available for sale securities at the end of September 2013. Credit unions will only have to recognize these losses, if they sell these securities.

As NCUA Chairman Debbie Matz cautioned, credit unions "have been making longer-term investments to increase yield. If credit unions haven’t planned carefully, the value of those investments could decline when rates rise."

Bill Would Grant Privately-Insured CUs Access to Federal Home Loan Banks

Rep. Steve Stivers (R – OH) introduced a bill (H.R. 3584) to amend the Federal Home Loan Bank Act authorizing privately insured credit unions to become members of a Federal Home Loan Bank; but only if the privately insured credit union meets all the eligibility requirements for federal deposit insurance.

However, the bill seems to be more directly targeted at American Mutual Share Insurance (ASI) of Dublin, Ohio, which is the only primary insurer of non-federally insured credit unions.

The number of privately insured credit unions has dropped by one-third over the last decade, from 212 institutions to 137 credit unions as of June 2013. Most of these credit unions are located in five states.

In this case, this trend is not the friend of ASI.

By granting privately-insured credit unions access to the Federal Home Loan Bank system, the bill hopes to make private insurance more attractive for state chartered credit unions that are currently federally insured. This would provide ASI with an opportunity to maintain a critical mass of credit unions to remain viable.



Read the bill.

Net Income Up $1.8 Billion in Q3

Earnings growth slowed in the third quarter for federally-insured credit unions.

Net income at federally insured credit unions increased $1.8 billion in the third quarter, a drop from the $2.2 billion increase recorded in the second quarter and the $2.1 billion increase recorded in the third quarter of 2012.

The credit union industry’s return on average assets ratio stood at an annualized 80 basis points at the end of the third quarter; but down slightly from a year earlier when it was 86 basis points.

Much of the year-over-year decline is due to continued downward pressure on net interest margins created by the current interest rate environment.

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.

Maryland Regulator Approves CU Purchase of Bank

Mark Kaufman, Maryland Commissioner of Financial Regulation, today announced his approval for the purchase and assumption of the assets and liabilities of Advance Bank by Municipal Employees Credit Union (MECU) of Baltimore.

Advance Bank, a federally-chartered mutual savings bank located in Baltimore, Maryland, has two branches and total assets of approximately $54 million.

Credit Union Times is reporting that more than two-thirds of Advance’s customers either live or work in the city of Baltimore, making them automatically eligible for MECU membership. The credit union plans to pay the $5 membership fee for Advance members to become MECU members.

However, for the one-third of Advance’s customers who don’t already qualify to join the cooperative, the credit union stated that it will pay their $5 fee for them to become members of the American Consumer Council, which would make them automatically eligible to become MECU members.

Read the press release.

Lawsuit Alleges Retaliation by San Diego County CU

A former senior executive, Scott Norris, at San Diego County Credit Union (SDCCU) is claiming in a wrongful termination lawsuit that the institution failed to correct problems in its loan-servicing program that affected thousands of customers.

The lawsuit claims that the the credit union engaged in unlawful, and fraudulent, activities. SDCCU had failed to
disclose changes in fees on mortgages required by the Truth in Lending Act ("TILA") and Mortgage Disclosure Improvement Act ("MDIA").

SDCCU had problems with widespread errors with regard to real estate loan servicing. Specifically, the credit union had been improperly processing late charges. The problem dated back to 2005 and approximately 2,000 members of SDCCU was affected by the error, according to the complaint.

Also, the complaint alleges that the plantiff recommended that recast the affected loans, and estimates that the cost to credit union could be approximately $500,000 due to needing to issue refunds to members. In response, Teresa Halleck, CEO of San Diego County Credit Union stated: "We're not going to do that," even if it posed the risk of a class action lawsuit.

The complaint alleges other problems at the credit union.

Read the story.

Read the complaint.

Q3 2011 Discount Window Borrowings

According to data released by the Federal Reserve, 23 credit unions borrowed from the Discount Window in the third quarter of 2011. The total amount of borrowings during the quarter was $68.555 million. These credit unions went to the Discount Window an aggregate of 34 times.

Two credit unions from North Dakota accessed the seasonal credit program for a total of $12.718 million in loans. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as financial institutions that are serving agricultural communities.

The rest of the credit unions used the primary credit program, which is reserved for a financial institution in sound financial condition.

The most frequent borrowers during the quarter were Wright Patman Congressional FCU (VA), Tip of Tx FCU (TX), and North Star Community CU (ND). Each credit union visited the Discount Window three times. (Click on image to enlarge)

International Remittances

The Dodd-Frank Act expanded the scope of the Electronic Fund Transfer Act to provide protections for senders of international remittance transfers.

On October 28, 2013, the Consumer Financial Protection Bureau's (CFPB) regulation governing international remittances goes into effect. The rule applies to banks, credit unions, and money transmitters that offer international transfers to consumers. However, it does not apply to companies that consistently provide 100 or fewer remittance transfers each year, nor does it apply to transactions under $15.

As of June 2013, there were 1,290 credit unions that originated at least one international remittance during the first six months of 2013. Half of these 1,290 credit unions originated 17 or less international remittances during the first half of 2013.

There are 374 credit unions that as of mid-year are on the pace of originating more than 100 international remittances this year and thus would be subject to the CFPB's regulation.

The average asset size of a credit union that would be subject to the CFPB remittance rule is $1.4 billion. However, half of the credit unions have less than $743 million in assets. Thirty-six credit unions have less than $100 million in assets.

The table below list the 25 credit unions that reported the most international remittances originated year-to-date, as of June 2013. (Click on image to enlarge) Three credit unions originated more than 1 million international remittances -- America First (UT), First Entertainment (CA), and CFCU Community (NY).

Credit Unions as Stealth CRE Lenders

An article in GlobeSt.com talks about the growth of credit unions as commercial real estate (CRE) lenders.

The article cites the expansion of CRE lending at NASA Federal Credit Union. According to Andy Stafford, director of Commercial Real Estate at NASA Federal Credit Union, commercial real estate lending at NASA Federal Credit Union is expected to increase by 30 percent to 35 percent in 2013.

The article notes that these loans are not micro transactions; but rather loans ranging in size from $1 million to more than $20 million.

The use of a credit union service organization makes it possible for the credit union to finance larger commercial real estate loans by partnering with other credit unions.

But should we as a society be providing taxpayer subsidized loans to fund commercial real estate projects?

Read the article.

Number of Problem CUs Down; Assets and Shares in Problem CUs Up During Q3

The National Credit Union Administration (NCUA) reported today that the number of problem credit unions fell by 13 during the third quarter to 317. A problem credit union has a composite CAMEL rating of 4 or 5.

However, assets and shares (deposits) in problem credit unions increased during the quarter by approximately $600 million and $300 million, respectively. At the end of the third quarter, problem credit unions had $15.6 billion in assets and $13.7 billion in shares.

The percent of problem credit union shares to total industry shares rose from 1.54 percent at the end of June to 1.58 percent at the end of September. Assets at problem credit unions comprised 1.5 percent of the total industry's assets as of September 30, 2013.

NCUA noted that the number of problem credit unions with $1 billion or more in assets increased from 3 as of June 2013 to 4 at the end of September 2013. Total shares rose from $3.2 billion to $3.9 billion.

On the other hand, the number of problem credit unions with between $500 million and $1 billion in assets fell by 1 to 3 as of the end of the third quarter. Shares in these 3 problem credit unions equalled $1.7 billion.

Charitable Donation Accounts

In a comment letter filed on October 21, ABA clarified a point of fact and urged the National Credit Union Administration to amend a proposal on a federal credit union's funding of a charitable donation account (CDA).

Under the proposal, banks, savings associations, and trust companies may not manage the assets of the CDA, even if acting as trustee. The proposal states: “A regulated trustee or other person who is authorized to make investment decisions for a CDA (‘‘manager’’), other than the FCU itself, must be registered with the SEC as an investment advisor. This will help to ensure proper regulatory oversight of those professionals who owe fiduciary duties to the FCU, and to mitigate counterparty, credit, interest rate, liquidity, and reputational risks associated with funding a CDA.” The implication of the last sentence is that only investment advisors registered with the SEC are subject to proper regulatory oversight, owe a fiduciary duty to their client, and can mitigate the risks associated with funding a CDA.

In fact, banks, savings associations, and trust companies acting in a fiduciary capacity are subject to proper regulatory oversight, do owe a fiduciary duty to their clients and trust beneficiaries, and can mitigate risks associated with funding a CDA. There is, therefore, no reason to restrict the entities that can manage the CDA investments to registered investment advisors alone. Excluding banks, savings associations, and trust companies from managing the CDA’s investments will unnecessarily limit the options for FCUs looking for an investment manager.

In addition, the proposal states that "if an FCU chooses to establish a CDA using a trust vehicle, then the trustee must be an entity regulated by the Office of the Comptroller of the Currency, the U.S. Securities and Exchange Commission (SEC) or another federal regulatory agency." However, this provision would exclude a nondepository state-chartered trust company from acting as a trustee, because it has no federal regulator.

ABA wrote: "There is no reasonable basis for such a restriction on nondepository state-chartered trust companies. All banks, savings associations, and trust companies, whether federally chartered or state chartered, are subject to the highest fiduciary duty when acting as trustee."

Finally, the proposal incorrectly characterized the fiduciary duties of banks, savings and loans, and trusts. “Contrary to the implication in the proposed rule, when providing those services, banks are indeed subject to a fiduciary duty and must act solely in the best interests of the clients or trust beneficiaries,” ABA said. “For these reasons, the proposal should be amended to allow both federal and state banks, savings associations, and trust companies to act as trustee and to manage the investments of the CDA.”

Read the letter.

Amicus Brief Filed in Interchange Fee Case

Bank and credit union trade groups yesterday filed a friend of the court brief in the case over the Federal Reserve’s interchange rule, noting that they oppose the Fed’s rule capping interchange fees but are even more strongly against Judge Richard Leon’s ruling that the fee cap should be lower still.

“The district court’s decision, if affirmed, would make things significantly worse,” the groups said. “It compounds the Board’s legal error through a construction that would require deep cuts -- amounting to many billions of dollars each year -- into issuers’ remaining interchange-fee revenues.”

The groups argued that Leon misinterpreted how much of the card issuer’s cost can be recovered under the statute, that he ignored the statute’s “reasonable and proportional” fee allowance and that he went beyond the law’s requirements on exclusivity. “The district court’s constructions would gravely harm all participants in the electronic debit-card system through reduced services, diminished investment in innovation, increased fees to consumers, and disruptive technological changes -- all with no tangible offsetting economic benefit,” they argued.

In July, Leon said that the Fed’s rule violated congressional intent in the Dodd-Frank Act by setting the interchange fee cap too high and failing to allow merchants to choose multiple unaffiliated PIN and signature networks for each card transaction they process. The case is currently on expedited appeal to the D.C Circuit Court of Appeals.

Read the brief.

Canadian CU Execs Share Views on CU Tax Exemption

Credit Union Times has posted a video from the 4th Annual CU Water Cooler Symposium where two Canadian credit union executives share their thoughts about the U.S. credit union tax exemption.

As background, Canadian credit unions lost their tax exemption in the 1970s.

Gene Blishen, general manager at Mount Lehman Credit Union, commented that paying taxes allow Canadian credit unions to sit at the table. He believes that not paying taxes closes doors for credit unions.

William Azaroff, director of business and community development at Vancity, stated that credit union tax exemption is hindering the ability of credit unions to serve their members.

Click on this link to go to the article and video.

Lack of Specialized Training Related to MBLs

In 2003, the Government Accountability Office forewarned that NCUA faced challenges ensuring that examiners have sufficient training to be adequately prepared for monitoring credit unions as they expanded more heavily into nontraditional credit union activities such as business lending.

However, NCUA did not appear to take this warning to heart in a timely fashion, as Chetco FCU's failure highlights.

According to Chetco's Material Loss Review, "there was a lack of understanding and specialized training for staff regarding the complexity surrounding the origination and monitoring of member business loans."

The report notes that the Examiner-in-Charge (EIC) did not receive any formal training with regard to evaluating business credits. The training records for the EIC involved in supervising Chetco from 2005 to 2011 going as far back as 1999 showed no specific training related to member business lending.

The Inspector General report recommended that "NCUA management ensure that during the Individual Development Plan process, supervisors perform a review of the training courses completed by examiners to ensure that the courses taken are in connection with their assigned responsibilities and to determine whether examiners have been exposed to the right mixture of course material...When critical changes occur in the industry or in the content of courses previously taken, examiners should consider re-taking those refreshed courses."

The report states that in 2010 NCUA created specialized positions to help provide more expertise in the lending area.

Regrettably, the agency belated recognized that it needed specialized personnel to exam credit unions that had moved into nontraditional activities.

Gropaco Members Approve Liquidation

Last week, I reported that the Board of Directors of Gropaco Federal Credit Union (Groveton, NH) recommended that its members support liquidating the credit union.

The Berlin Daily Sun is reporting that the membership of the Gropaco approved the voluntary liquidation of the credit union in a special meeting held on October 12.

The credit union hopes to finalize the liquidation in six months.

Read the story.

Region V Director Overrode Examiners' Attempt to Limit Chetco's MBL Exposure

In case you missed it, there is an interesting excerpt from NCUA's Material Loss Review on Chetco FCU.

NCUA examiners were trying to place limits on the credit union's member business loan (MBL) portfolio; but the Region V Regional Director overrode its examiners granting Chetco's appeal to increase its MBL exposure.

“Examiners issued a DOR and placed restrictions on further MBL lending. In the DOR, examiners required Chetco management to reduce the MBL portfolio as a percentage of net worth to 500 percent by December 31, 2009. Management appealed the reduction of MBL’s, stating that Chetco had approximately $100 million in MBL loan applications in the pipeline prior to the NCUA issuing the DOR. In its appeal, Chetco management requested that the Region:

[e]liminate the quarterly Member Business Loan (MBL)/Net Worth ratio targets and increase the December 31, 2009 limits on the MBL/Net Worth ratio from 500 percent to 600 percent.

In a letter to Chetco management dated March 3, 2009, the Region V Regional Director granted the appeal.”

At the time the Region V Regional Director granted Chetco's appeal, the credit union had a composite CAMEL rating of 3 indicating supervisory concerns.

This does make you question the judgement of the Region V Regional Director, especially when the available evidence showed that Chetco was a supervisory concern and MBL delinquencies were on the rise.

CUNA Mutual Delivers Black Eye to CUs

CUNA Mutual Group has made the decision to discontinue its Life Savings Insurance product, which was first introduced in 1938.

For CUNA Mutual, this was strictly a business decision.

However, for the roughly 1,200 credit unions that offered the product, they are now in the process of informing their members that they will not honor these contracts and credit unions are getting the bad press.

Take for example an ABC News story about a 92-year Minneapolis woman who was notified by her credit union that it was cancelling her insurance policy that she hoped to use to pay for her funeral. (read the story)

The headline to the story read "92-Year-Old's Funeral Insurance Cancelled by Credit Union."

The credit union told this senior citizen that they would give her an extra one percent on her $2000 savings account in lieu of the cancelled policy.

How long would it take for the accumulated interest on this savings account to reach $2,000 -- the amount of the benefit to be paid by the life insurance policy?

Assuming an interest rate of 2 percent, it would take approximately 35 years.

According to the Minneapolis Star-Tribune, approximately 1,500 members of the credit union had their policy cancelled.

So much for people helping people.

Board Recommends Liquidating CU

The board of directors of Gropaco Federal Credit Union of Groveton, NH is recommending that its members approve the voluntary liquidation of the credit union.

The board made the decision because the credit union faces a business environment where costs are outpacing revenues. The credit union has been unprofitable, since 2008.

The action came after months of deliberations and numerous efforts to seek a merger.

Members are scheduled to vote to liquidate the credit union on October 12.

Read the story.

America First CU Sponsors Utah Jazz Dance Team

America First Credit Union is the new presenting sponsor of the Utah Jazz dance team.

While the terms of the deal were not disclosed, a source indicated that such sponsorships usually range between $400,000 and $500,000 per year and require a three year commitment.

Is sponsoring a NBA team's dance squad the appropriate use of the credit union tax exemption?

Read the story.

If You’re Reading This, You Can Join

SCE Federal Credit Union in Irwindale, California appears to be flaunting the requirements that federal credit unions have a common bond.

The credit union's website says:

“Is it easy to join the Credit Union?”

“If you’re reading this, you can join SCE FCU. You only need $15 to open your account ─ $5 goes into your savings and secures your ownership in the Credit Union, and the remaining $10 is a tax-deductible donation to our non-profit SCE FCU Foundation.”

Stating that if you’re reading this, you can join SEC FCU indicates this credit union is open to anyone.

This appears to violate the spirit of a letter that NCUA sent federal credit unions in September regarding impermissible common bond advertisement. NCUA wrote: “If your credit union is advertising that anyone, without limitation, is able to become a member of your credit union, then you may be in violation of federal law and regulation.”

Moreover, a $10 tax-deductible donation to the credit union’s foundation does not meet the requirement of having a common bond.

Click on image to enlarge.

Member Business Loans Caused Chetco's Failure

The Material Loss Review (MLR) of National Credit Union Administration's Office of the Inspector General (OIG) found that Chetco FCU (Brookings, Oregon) failed because of inadequate management and board oversight of the credit union's member business loan program. In addition, the MLR points out that NCUA examiners missed numerous red flags with regard to Chetco's member business lending.

The loss to the NCUSIF is estimated at $76.5 million.

The report noted that Chetco experienced rapid growth in its business loan portfolio, as it took advantage of its exception to the member business loan cap of 12.25 percent of assets and its waivers of Member Business Loan regulations.

Member business loans grew from $33.2 million (21.5 percent of assets) in 2002 to a high of $212 million in 2009, before leveling off to $189.4 million (56 percent of assets) in 2010. This represented an increase in member business loan concentrations from less than 26.6 percent of total loans as of 2002 to over 60 percent as of December 2009.

The report also notes that Chetco's business lending operation expanded outside its local market area to as far away as New Mexico and North Carolina. The credit union used its wholly-owned credit union service organization (CUSO), Commercial Lending Solutions, to facilitate the growth in its business loan operations.

As economic conditions deteriorated in 2007 and 2008, especially the real estate market, delinquencies rose at Chetco. However, Chetco initially tried to use loan renewals and modification to mask the deterioration in its member business loan portfolio. NCUA examiners were tipped off to this practice by a member's complaint.

The MLR notes that Chetco management funded its rapid loan growth through a combination of borrowed funds and deposit products with above-market rates. However, as Chetco's financial condition deteriorated, its sources of liquidity became restricted.

The report further states that Chetco failed to operate its business lending CUSO in a safe and sound manner by intertwining the operations of the Credit Union and CLS with no clear delineation of each entity’s respective employee responsibilities.

The report is critical of NCUA's supervision of Chetco. It notes the lack of resources and time spent performing a comprehensive review of Chetco's business loan portfolio. Examiners did not do adequate examination of member business loan renewals and modifications.

Also, based upon training records going back to 1999, the MLR found that the Examiner-in-Charge of supervising Chetco from 2005 to 2011 had no training specific to member business lending. This is troublesome given the complexity of the credits in Chetco's member business loan portfolio.

Read the Material Loss Review.

Survey: Majority of Iowans Favor Eliminating CU Tax Exemption

A survey of 500 Iowans ranging in ages from 18 to over 65 by Victory Enterprises found that a majority of Iowans (58 percent) were not aware that large credit unions with billions in assets are exempt from paying income taxes on their profits.

Upon learning about the credit union exemption, the majority of survey respondents (53 percent) were in favor of eliminating it. Another 23 percent were not sure what to do about it, and only 20 percent supported keeping it.

The impact of these exemptions on personal income taxes was also a concern among the Iowans surveyed. The majority of the survey respondents (55 percent) believed their personal income taxes were higher when other potential taxpayers enjoy significant tax exemptions or loopholes. Only 26 percent of survey participants disagreed with this position.

Approximately 73 percent of the survey respondents had their primary checking or savings account at a bank, while 18 percent had their primary account at a credit union.

Among individuals who identified a credit union as their primary depository institution, there was some interesting findings.

• 67.8 percent of the people believe their personal income taxes are higher when other taxpayers enjoy significant tax exemptions or loopholes.

• 55.6 percent of respondents did not know that large credit unions did not pay income taxes on their profits.

• 46 percent supported eliminating the credit union tax exemption versus 33.3 percent that supported keeping the tax exemption.

The survey was sponsored by the Iowa Bankers Association.

The margin of error for the survey was 4.38 percent.

Reasonable Compensation

Earlier this year, Washington state enacted legislation that allows a state chartered credit union to pay its directors and supervisory committee members reasonable compensation for their service as directors and supervisory committee members.

The Washington Division of Credit Unions is now in the process of trying to define what constitutes reasonable compensation.

A first draft of a rulemaking document defines what reasonable compensation is not.

"Compensation is not considered reasonable if it is disproportionate to the services provided by the director or supervisory committee member, unreasonable considering the financial condition of the credit union, or is not comparable to compensation paid to organizations of a comparable size, geographic location, and operational complexity."

The Washington Division of Credit Unions further notes that reasonable compensation should not lead to a material financial loss to the credit union.

Cease and Desist Order Issued to Bagumbayan Credit Union

The National Credit Union Administration has issued a cease and desist order to Bagumbayan Credit Union of Chicago.

On three separate occasions in 2012, the Illinois Department of Financial & Professional Regulation suspended the operations of the credit union for substantial non-compliance with the state's credit union act.

The NCUA consent order requires the credit union to undertake several actions, including:

1. Cease and desist allowing unapproved officials to attend board meetings, serve on committees, or perform any and all managerial functions, operational functions, or both.

2. Refrain from implementing any aspects of a proposed business plan involving the establishment of new lines of business, including money remittance services, the sale and/or marketing of insurance product, establishment of non-vessel operating cargo company, or pursuit of loans secured with foreign collateral.

3. Resolve all recordkeeping issues and Bank Secrecy Act violations detailed in exam reports.

4. Ensure secure storage and transmission of all member data consistent with NCUA’s Rules and Regulations for safeguarding member information.

5. Comply with all lawful directives of the state regulator, including all elements of the suspension order issued by that agency.

Read the cease and desist order.

Lake Michigan -- Poster Child for Why CUs Should Pay Taxes

Lake Michigan Credit Union in Grand Rapids, Michigan is a perfect poster child for abolishing the credit union's tax exemption.

The credit union has $2.9 billion in assets at the end of the second quarter 2013.

It reported a profit of $78.3 million for 2012. Its return on assets was 3.04 percent.

Lake Michigan Credit Union operates a used car auto center. What does a car dealership have to do with its exempt purpose?

Now, this highly profitable credit union is advertising anyone can open an account.

Lawsuit Filed Against South Florida FCU and Its CEO

The South Florida Business Journal is reporting that South Florida Federal Credit Union and its President and CEO Maggie Martinez were hit with a federal lawsuit from two former employees on September 5.

The complaint alleges that the President and CEO of the credit union retaliated against the two former employees for their cooperation with a regulatory investigation into the CEO’s conduct.

The lawsuit alleges sexual misconduct, nepotism, and racial discrimination.

Read the story.

ABA's Ballentine Talks About Credit Unions

James Ballentine, EVP of Congressional Relations and Public Policy, spoke about removing the credit union tax exemption on Fox Business’ “Markets Now” program.

Watch the video.

Improperly Using an Association to Recruit Members

In a letter on Monday to National Credit Union Administration Chair Debbie Matz, ABA wrote that Kinecta Federal Credit Union in Manhattan Beach, Calif., is “improperly using” a third-party association to recruit members who would not otherwise qualify.

Kinecta allows individuals who are otherwise ineligible to become members by simultaneously joining a consumer group,Consumers Cooperative Society of Santa Monica (CCSSM), and paying a $10 fee that Kinecta passes on to the association.

Kinecta’s online application (see attachment) states “if you are not in any of the categories above, you can join through the Consumers Cooperative Society of Santa Monica. Kinecta will process the enrollment into CCSSM for you. ($10 fee for CCSSM applies).”

“ABA questions whether this transaction meets the requirement of an associational common bond,” the letter said. “Membership . . . needs to be more than the checking of a box on a credit union’s membership application.”

ABA also urged NCUA to notify all federal credit unions about the associational common bond requirement. “Individuals must belong to the association prior to joining the credit union and it is impermissible to sign up an individual for membership in an association at the same time the individual is applying to join the credit union,” ABA said.

Read the letter.

Disclosing Stress Testing Results

In a speech at the National Association of State Credit Union Supervisors’ annual State System Summit, National Credit Union Administration Board Chairman Debbie Matz announced the agency is drafting a proposed rule to require annual stress tests at credit unions with assets exceeding $10 billion.

There are currently four credit unions with at least $10 billion in assets with a fifth credit union nearing the threshold.

However, according to the NCUA press release, the agency has not made a decision about requiring the results of the stress test to be made public.

Section 165(i)(2) of the Dodd-Frank Act requires publication of a "summary" of the results of the stress tests for covered institutions. However, credit unions are not covered by this section of the Dodd-Frank Act, so there is not a legislative mandate to publicly disclose the results.

While Matz acknowledges public disclosure would enhance transparency to members, she is worried that the results can be misinterpreted and lead to inaccurate conclusions about a credit union’s financial health.

But are Chairman Matz's concerns about disclosure overblown?

Federal Reserve Chairman Bernanke in an April 8, 2013 speech noted the benefits of disclosure by stating "the disclosure of stress test results and assessments provides valuable information to market participants and the public, enhances transparency, and promotes market discipline."

Westby Co-op to Buy Loans and Deposits at Bank Branch

Citizens Community Bancorp, Inc. of Eau Claire, Wisconsin, parent company of Citizens Community Federal, and Westby Co-Op Credit Union of Westby, Wisconsin today announced they have entered into a deposit and loan assumption agreement whereby Westby will purchase certain assets from, and assume certain deposit liabilities of, the Bank's Wisconsin Dells branch.

Financial terms were not disclosed and the transaction will need regulatory approval.

Quorum FCU Dives Into Indirect Timeshare Lending

TimeshareLeaks has started to investigate the ongoing relationship between Quorum Federal Credit Union (Purchase, NY) and The Berkley Group, a leading timeshare developer.

Quorum FCU entered the timeshare lending business in late 2009, when it founded a credit union service organization (CUSO) called Vacation Ownership Funding Company (VOFCO). Quorum owns 79 percent of VOFCO.

In its 2009 Annual Report, Quorum wrote about how VOFCO will help to facilitate the relationship between Quorum and the vacation ownership companies and would fuel future growth of the credit union.

In its 2012 Annual Report, Quorum wrote that it "entered into agreements with several vacation ownership companies to provide indirect loans for the purchase of vacation ownership intervals."

TimeshareLeaks noted that between 2010 and 2011 vacation ownership loans grew by 302 percent and between 2011 and 2012 vacation ownership loans almost doubled, growing by 90 percent.

At the end of 2012, the credit union held $103.5 million in vacation ownership loans, which equated to 18 percent of its loan portfolio.

In fact, almost 94 percent of the growth in the credit union's outstanding loan balances between 2009 and 2012 has come from vacation ownership loans.

No wonder Quorum in a 2011 letter opposed a proposed rule by NCUA that would have subjected its CUSO to additional regulatory oversight.

Unrealized Gains or Losses in AFS Securities

The recent rise in medium-term and long-term interest rates has caused many credit unions to report unrealized losses on their available-for-sale (AFS) securities portfolios. While these unrealized losses on AFS securities do not affect current earnings, they do have implications for future earnings if the securities are sold.

According to NCUA, the accumulated unrealized gain or loss on AFS securities at federally insured credit unions went from an unrealized gain of $2 billion as of March 31, 2013 to a unrealized loss of $614 million at the end of the second quarter of 2013.

Alaska USA FCU reported the largest unrealized loss on AFS securities at almost $63 million. See the table below for the 25 federally insured credit unions with the largest unrealized losses on AFS securities. Click on image to enlarge.



For federally insured credit unions that reported holding AFS securities as of June 2013, the median ratio of unrealized gain or loss on AFS securities to total assets was minus .03 percent. However, 54 credit unions had unrealized losses on AFS securities that were at least 1 percent of the credit union's total assets.

The following table list the 25 credit unions with at least $50 million in assets that have the largest exposure to unrealized losses on AFS securities as a percent of assets.

Undercapitalized Credit Unions, June 2013

There were 82 credit unions that were undercapitalized as of June 2013. Seven credit unions were critically undercapitalized and 15 credit unions were significantly undercapitalized.

Click on the images to enlarge.

Housing Authority Inappropriately Used Program Funds to Supprt Credit Union

The U.S. Department of Housing and Urban Development Inspector General (IG) in July 2013 found that the Stark Metropolitan Housing Authority used public housing operating and capital funds for ineligible programs, including its credit union -- Stark Metropolitan Housing Authority FCU (Canton, Ohio).

The report noted that the Housing Authority inappropriately allocated $190,547 to pay the salaries and benefits of credit union employees.

The report also noted that the Housing Authority did not provide documentation to justify paying $1,170,364 in credit union salaries and benefits, $227,500 in annual contributions to the credit union, $18,423 lawn and maintenance expenses; $14,472 in training expenses; and $32,270 in utility expenses.

In addition, the Housing Authority purchased a non-interest bearing account at the credit union despite the Housing Authority's general depository agreement noting that all funds should be deposited in an interest bearing account. As a result, the Housing Authority failed to earn almost $16,000 in interest income.

Furthermore, the IG report found that the Housing Authority provided a significant subsidy to the credit union by leasing its office space to the credit union for $1 per year over 12 years, when the monthly fair market value rental value of the property was approximately $10 per square. The report, using an $8 per square foot rental value, found that the Housing Authority could have earned almost $226,000 in rent from the credit union.

The IG report recommended that the Housing Authority reimburse its operating and capital funds and charge and collect fair market rent from its credit union.

In a related story, the credit union has filed a complaint in Stark County Common Pleas Court claiming the Housing Authority has wrongly attempted to recoup $2 million allocated to the credit union over the years; withheld $100,000 in promised subsidies; and threatened to raise the credit union's rent.

Read the report.

North Dade Community Development FCU Cited for BSA and Money Laundering Deficiencies

The National Credit Union Administration has issued a cease and desist order to North Dade Community Development Federal Credit Union of Miami Gardens, Florida for weaknesses in the credit union's bank secrecy, anti-money laundering, and foreign assets control programs.

The order requires the credit union to stop transacting all business activity for money services businesses not located within the credit union’s geographic field of membership and to suspend transacting business activity for all remaining member money services businesses until an adequate Bank Secrecy Act/Anti-Money Laundering/Office of Foreign Assets Control program is developed and implemented.

NCUA also ordered the credit union to verify that all members are within the credit union’s field of membership; identify all bank secrecy/anti-money laundering/foreign assets control compliance deficiencies; designate a Bank Secrecy Act compliance officer; complete a comprehensive bank secrecy/anti-money laundering/foreign assets control risk assessment; and revise and document board approval for all policies relating to bank secrecy, anti-money laundering, and foreign assets control.

Read the press release.

Read the cease and desist order.

Do CUs Need a Tax Exemption to Survive?

Apparently credit union lobbyists believe the tax exemption is essential for survival.

Politico's Morning Money on September 5 reported that NAFCU's Vice President of Legislative Affairs Brad Thaler in an e-mail to members of Congress wrote: "Simply put, the tax exemption is an issue of survival for credit unions."

That is a pretty sad commentary from credit union lobbyists that the credit union industry cannot be competitive without its government subsidy.

I wonder how many credit union CEOs share this attitude.

ASI Announces Special Assessment for Privately Insured Credit Unions

Both Credit Union Journal and Credit Union Times are reprting that ASI Inc. of Dublin, Ohio announced a special premium assessment for 2013 of 7.5 basis points. In the past five years, ASI has assessed its members a total of 61.50 basis points. The ASI premium will be assessed of all privately insured credit unions of record with ASI as of September 30.

Americans for Tax Reform Confuse CU Tax Exemption with Tax Treatment of Pass-Through Businesses

Americans for Tax Reform last week likened the tax exemption of credit unions to the tax treatment of pass-through businesses, such as partnerships and S-corporations.

Ryan Ellis, who wrote the piece, stated that the only difference is the incidence of the tax.

Unfortunately, Mr. Ellis does not seem to understand the difference in the tax treatment of credit unions versus pass-through businesses.

The owners of partnerships and S-corporations are responsible for paying taxes on the earnings (profits) of the business.

In contrast, credit unions do not pay taxes at the corporate level on their retained earnings (profits), nor do they have an outstanding tax liability that is passed through to their members.

Craftsman CU Closed

The Michigan Department of Insurance and Financial Services today liquidated Craftsman Credit Union of Detroit and appointed the National Credit Union Administration (NCUA) as liquidating agent. Security Credit Union of Flint, Mich., immediately assumed Craftsman’s members and deposits, as well as 50 percent of its loans.

The Michigan Department of Insurance and Financial Services made the decision to liquidate Craftsman Credit Union and discontinue its operations after determining the state-chartered credit union was insolvent and had no prospect for restoring viable operations.

As of June 30th, the credit union was critically undercapitalized with a net worth ratio of 1.46 percent. The credit union reported that 6.54 percent of its loans were 60 days or more past due at the end of the second quarter of 2013. In addition, the credit union reported a loss of almost $2.1 million for the first six months of 2013.

At the time of liquidation and subsequent purchase and assumption by Security Credit Union, Craftsman Credit Union served 6,403 members and had assets of $24.1 million, according to its most recent Call Report.

This is the 12th credit union to be liquidated in 2013.

Read the press release.

NCUA Warns FCUs About Potential Violations of Common Bond Advertising

The National Credit Union Administration has called on federal credit unions to stop advertising that anyone can join a credit union.

“If your credit union is advertising that anyone, without limitation, is able to become a member of your credit union, then you may be in violation of federal law and regulation,” the NCUA said (emphasis in original). “Some overly aggressive marketing campaigns by federal credit unions to facilitate membership through associational groups are providing consumers with misleading information about single and multiple common bond membership requirements.”

The NCUA also reminded credit unions of the limitations on using third-party associations to establish a common bond for membership. “NCUA’s Office of Consumer Protection has begun conducting quality control reviews of federal credit unions that may be improperly using associations to sign up members without a common bond,” the agency said.

NCUA warned that "[u]pholding the membership standards of every federal credit union charter is essential to maintaining the integrity of the federal credit union system."

Read the letter.

Alabama Credit Union to Buy Georgia Bank

The American Banker is reporting that Five Star Credit Union of Dothan, Alabama has agreed to purchase Flint River National Bank in Camilla, Georgia.

Five Star CU will buy all the loans and deposits at the $23 million bank. The credit union is valuing the bank assets at $21 million.

This would be the fifth transaction involving a credit union buying a bank.

Read the story.

Redacted Report Issued on El Paso's FCU Failure

The National Credit Union Administration's Office of the Inspector General (IG) issued a highly redacted Material Loss Review on the failure of El Paso's Federal Credit Union.

The IG report noted senior management displayed a lack of integrity and did not manage the credit union in the best interest of its members. The report pointed out that credit union's fee income was excessive. During the period examined, fee and other operating income as a percent of average total assets averaged 3.73 times higher than its peers.

The report stated that "senior management displayed a lack of competence and training appropriate to their position."

In addition, the credit union had deficiencies with regard to record keeping and internal controls and ineffective oversight by its Board of Directors and Supervisory Committee.

For example, "examiners found problems with the execution of loan collections and charge offs, the sufficiency of Board minutes, identification of delinquent loans, backdating of transactions, and the Credit Union's advertised field of membership."

The report also noted that the Board Chairman received questionable payments associated with Board meetings and expenses.

Read the report.

The Haves and Have Nots

The National Credit Union Administration (NCUA) noted that in the second quarter large credit unions fared better than small credit unions.

NCUA stated that "federally insured credit unions with more than $500 million in assets continued to lead the industry in most performance measures."

These large credit unions, which held more than two-thirds of industry total assets, reported a higher return on average assets and had stronger loan, net worth, and membership growth than smaller credit unions.

For credit union with less than $10 million in assets, membership, net worth and loan growth were negative during the first six months of 2013.

De Novo CU Suspends Services to Bitcoin Accounts

Last week I reported that Tradehill Inc., an exchange for virtual currencies such as Bitcoin, was moving customer accounts to Internet Archive Federal Credit Union of New Brunswick, New Jersey.

Internet Archive FCU has reversed its decision to service accounts linked to Bitcoin.

In an August 29 blog post, the credit union wrote: "Certain operational and regulatory issues came up including some that apply to new credit unions like ours... Until we have further clarity, we are unable to service some of our corporate members."

Federally Insured Credit Unions Report Brisk Loan Growth, Earn $2.2 Billion

National Credit Union Administration reported that federally insured credit unions saw brisk loan growth and their highest net worth ratio since 2008 in the second quarter.

Loans were up 2.3 percent or $13.8 billion in the second quarter to $613.7 billion with lending growing in nearly every category.
•First mortgage real estate loans rose to $253.8 billion, up 2.1 percent for the quarter and 5.6 percent year-over-year.
•New auto loans expanded to $66.4 billion, up 2.8 percent for the quarter and 10.7 percent for the last four quarters.
•Used auto loans rose to $121.3 billion, up 3.7 percent for the quarter and 9.3 percent for the year ending June 30.
•Net member business loan balances grew to $43.5 billion, up 2.3 percent for the quarter and 8.3 percent for the prior 12 months.

Indirect lending posted strong growth, increasing by $3.7 billion during the quarter to almost $84.4 billion.

Total shares and deposits were almost flat for the quarter, falling by almost $500 million. As a result, the loan to share ratio rose from 65.92 percent to 67.48 percent.

The industry’s net worth ratio stood at 10.5 percent of assets at the end of the second quarter, up 34 basis points from the end of the second quarter of 2012. The ratio is at its highest level since the fourth quarter of 2008. The industry remains well-capitalized, with 96.2 percent of all federally insured credit unions reporting a net worth above 7.0 percent. In the prior quarter, 95.8 percent were well-capitalized. Only 76 credit unions were undercapitalized as of June 2013 with 7 credit unions critically undercapitalized.

Credit union reported that combined delinquencies and net charge-offs rose by $1.1 billion in the second quarter to $8.1 billion. The delinquency ratio of federally insured credit unions for the second quarter of 2013 was 1.04 percent -- up 2 basis points during the quarter. The industry’s net charge-off ratio declined to an annualized 58 basis points at the end of the second quarter. Since the second quarter of 2012, federally insured credit unions’ net charge-off ratio has declined by 17 basis points.

Driven largely by increases in fee income and declines in loan-loss provisions, federally insured credit unions in the second quarter had a net income of more than $2.2 billion. The industry’s return on average assets ratio stood at an annualized 85 basis points at the end of the second quarter, inching closer to pre-crisis norms. Year-to-date, net income was almost $4.4 billion compared to slightly more than $4.2 billion for the same time period last year.

The rise in medium-term and long-term interest rates during the second quarter caused the accumulated unrealized gains/losses in available for sale securities to move from a gain of $2 billion at the end of the first quarter to a loss of $614 million at the end of the second quarter.

The following link summarizes the second quarter performance of federally insured credit unions.

Read the press release.