Common Bond of 50 Years of Age or Better

In preparation for a speech, I became aware of a common bond for U.S. Eagle Federal Credit Union (Albuquerque, NM), formerly U.S. New Mexico Federal Credit Union, comprised of people who are 50 years of age or better and residents of New Mexico.

However, a common bond of being 50 years of age or better is overly broad and poorly defined.

Age by itself is not sufficient to show a commonality of interest or interaction among individuals. Also, what does better mean?

Simply said, this group fails to meet the requirement for a common bond.

But what is even more dumbfounding is how the National Credit Union Administration approved this common bond.

This is just further confirmation that this agency is ä rubber stamp for the industry.

NEFCU Launches Anti-Bank TV Commercial

Newsday is reporting on a new TV commercial by Nassau Educators FCU (NEFCU) that takes a shot at bankers as uncaring.

The commercial shows three bankers dancing and singing "If I Only Had a Heart" from The Wizard of Oz.

However, after reading online reviews about NEFCU, a couple of the reviews of the $2 billion credit union would question whether this credit union had a heart.

Read the story.

Matz's Comment Undermines Integrity of Rulemaking Process

Despite being in the middle of the risk-based capital proposal comment period, National Credit Union Administration (NCUA) Chairman Debbie Matz announced on March 9 that the agency will issue later this year a proposal to count supplemental capital in full in its risk-based capital numerator.

This announcement seems to undermine the rulemaking process.

NCUA put out for a 90 day comment period its proposed rule with comments due by April 27.

As part of the risk-based capital proposal, the NCUA Board requested comments to several questions about supplemental capital, including "[s]hould additional supplemental forms of capital be included in the risk-based capital ratio numerator and how would including such capital protect the NCUSIF from losses?"

It appears that the agency has already made up its mind on this topic. It will count supplemental capital as part of the risk-based capital ratio numerator.

So much for seeking input from the public on this issue. This agency is making a mockery of rulemaking process.

The agency should have remained silent on this issue until the comment period ended.

Read the proposed rule.

Read Matz's speech.

Insight CU Pays $400,000 to be Preferred CU for Lake-Sumter State College

Insight Credit Union (Orlando, FL) has been named the preferred credit union for Lake-Sumter State College (LSSC).

The agreement will provide $50,000 annually over the next eight years to the LSSC Foundation.

In addition to the financial support, the partnership will provide for a co-branded debit card; creation and facilitation of a financial literacy program for faculty, staff and students; and specific support for the athletics department, theater program and the LSSC Foundation.

Read the press release.

Navy FCU to Spend $114.6 Million to Expand Its HQ Operations

Navy Federal Credit Union will invest $114.6 million to expand its headquarters operation in the Town of Vienna in Fairfax County.

The investment will include a new four-story, 234,000-square foot office building and a parking deck on a 10.8-acre site. An elevated walkway will connect the new building to the rest of the headquarters campus.

Governor McAuliffe also approved a $1 million grant from the Governor’s Opportunity Fund to assist Fairfax County with the project.

Furthermore, additional funding and services to support Navy FCU’s employee training activities will be provided through the Virginia Jobs Investment Program.

Read the Governor's press release.

Read Fairfax County Economic Development Authority press release.

Max CU Employee Shares Customer Personal Information on Facebbok

An employee of Max Credit Union in Montgomery, Alabama reportedly posted a customer's personal information on Facebook.

Max officials say the accused employee has been placed on leave pending the outcome of the investigation.

Read the story.

Should Federal Reserve Governor Have CU Background?

Representative Pete Aguilar (D - CA), who was a former executive for Arrowhead Central Credit Union in San Bernardino, CA, responding to a question from Credit Union Times stated that he believes that someone with a credit union background should be on the Federal Reserve Board.

Credit Union Times: There was a provision in the Terrorism Risk Insurance Act that was recently reauthorized, which required the president to nominate a person with a community banking background to the Federal Reserve board.

Do you think someone with a credit union background should be on the Fed board as well?

Aguilar: I do. I think many governmental bodies would benefit from hearing different perspectives.

We’ve seen that within the California regulatory structure, the California Department of Financial Institutions had a deputy specifically related to credit unions.

I think institutionalizing that and making sure that you are hearing different perspective from an important industry is always a good thing.

However, at this time, I don't believe it is appropriate to have someone with credit union background on the Federal Reserve Board.

Comparing the California Department of Financial Institutions to the Federal Reserve is a faulty comparison. The California Department of Financial Institutions supervises state chartered credit unions. State chartered credit unions are stakeholders of the California Department of Financial Institutions. On the other hand, the Federal Reserve does not examine credit unions.

Also, many of the regulations that impact credit unions that were formerly under the jurisdiction for the Federal Reserve have been transferred to the Consumer Financial Protection Bureau.

Moreover, credit unions are able to share their perspectives with the Federal Reserve as several credit unions currently belong to the community depository institution advisory council.

A final thought, do credit unions think that a person with community banking background should be on the National Credit Union Administration Board?

Read the story.

CUs Rev Up Auto Lending

Forbes has an article that looks at the accelerating growth in auto lending by credit unions.

The article points out that "credit unions have increased their auto lending by nearly 30 percent since 2012, including a 16 percent increase last year."

The article notes that improving economic conditions have fueled this growth in auto lending at credit unions.

Read the article.

Over Half of All CUs Saw A Decline in Membership for 2014

According to the National Credit Union Administration, 53 percent of federally insured credit unions had fewer members at the end of the fourth quarter of 2014 than a year earlier.

The median membership growth rate for the last year was negative 0.3 percent.

The NCUA noted that more than 75 percent of the credit unions with a decline in membership had less than $50 million in assets.

In 27 states, the median membership growth rate for federally insured credit unions was negative. Pennsylvania had the lowest median membership growth rate at -1.8 percent, followed by New Hampshire at -1.6 percent.

Other states that saw median membership growth rate fall by more than 1 percent year-over-year were Virginia (-1.5 percent), New Jersey (-1.4 percent), Maryland (-1.2 percent), Ohio (-1.1 percent), and Montana (1.0 percent).

Read the press release.

Oregon Bill Would Allow Directors to Be Paid

The movement to pay credit union directors continues to move forward at the state level.

Oregon is the latest state to introduce a bill (SB 582) that would permit a credit union to pay directors and supervisory committee members reasonable compensation for directors’ or committee members’ services.

In 2013, Tennessee and Washington enacted legislation allowing credit unions in those states to pay their directors.

In addition, SB 582 would remove the requirement to open a share account as a condition of membership. I will comment more on this part of the bill at a later date.

Read the analysis of the bill.

Read SB 582.

Supreme Court Upholds Rule Requiring Overtime for Loan Officers

The Supreme Court upheld a Department of Labor rule that required lenders to pay mortgage loan officers overtime, finding in a unanimous decision that the Administrative Procedures Act (APA) does not require federal agencies to employ notice-and-comment rulemaking when it issues a rule interpreting an existing regulation.

In the case of Perez v. Mortgage Bankers Association, the court overturned a lower court ruling that the department could not change its determination of exemption under the Fair Labor Standards Act without going through a formal rulemaking process. The Supreme Court rejected the precedent relied on by the lower court, arguing that it would impose obligations on federal agencies not envisioned by the text of the APA.

The Labor Department had ruled in 2006 that mortgage loan officers were exempt employees under the FLSA, but it reversed itself in 2010. The Mortgage Bankers Association sued DOL, arguing that the government could not “significantly revise” its “definitive interpretation” without conducting an official rulemaking with notice and comment.

Read the decision.

Matz: Count Subordinated Debt as Supplemental Capital for Risk-Based Capital Ratio

In a speech to the Credit Union National Association's Government Affairs Conference, the National Credit Union Administration Chairman Debbie Matz stated that in 2015 the agency will allow complex credit unions to count subordinated debt as supplemental capital for the risk-based capital ratio.

She noted that this will require three changes. "First, we would need to provide consumer protections. Second, we would need to change the order of Share Insurance Fund payout priorities to recognize that supplemental capital accounts are not insured. And third, we would need to set prudent standards for credit unions to offer subordinated debt to supplement their risk-based capital."

Furthermore, she stated that the agency is exploring "ways to increase access to secondary capital for low-income credit unions this year. This could include regulatory relief to make secondary capital more attractive to potential investors in low-income credit unions, whether federally or state-chartered."

I will be interested in seeing NCUA's legal analysis on how credit unions, other than low-income credit unions, have the legal basis to count subordinated debt as supplemental capital.

Read the speech.

NCUA's Treatment of ALLL in Risk-Based Capital Proposal Differs from Bank Standards

In its risk-based capital proposal, the National Credit Union Administration is proposing to remove the 1.25 percent of risk asset limit on the amount of the allowance for loam and lease losses (ALLL) that can be included in the risk-based capital ratio numerator.

However, this position differs from the stance taken by the Basel Committee on Banking Supervision (the Committee).

In a 1991 amendment to the Basel Capital Accord, the Committee noted:

"General provisions or general loan-loss reserves are created against the possibility of losses not yet identified. Where they do not reflect a known deterioration in the valuation of particular assets, these reserves qualify for inclusion in tier 2 capital. Where, however, provisions or reserves have been created against identified losses or in respect of an identified deterioration in the value of any asset or group of subsets of assets, they are not freely available to meet unidentified losses which may subsequently arise elsewhere in the portfolio and do not possess an essential characteristic of capital. Such provisions or reserves should therefore not be included in the capital base."

In other words, if the loan loss reserves are established for identifiable losses, then they do not possess the essential characteristic of capital -- the ability to absorb unidentified losses -- and should not be included in the capital base.

The Committee further noted in the original 1989 Capital Accord that "it is not always possible to distinguish clearly between general provisions (or general loan-loss reserves) which are genuinely freely available and those provisions which in reality are earmarked against assets already identified as impaired."

This inability to distinguish between identified and unidentified losses resulted in capping the amount of ALLL being counted as Tier 2 capital at 1.25 percent of risk assets.

The proposal would overstate the amount of Tier 2 capital available to absorb losses and will make the comparison of bank versus credit union risk-based capital ratios more difficult.

Read the 1989 Capital Accord.

Read the 1991 amendment.

Former NCUA Chairman's Comments on Risk-Based Premiums Miss the Mark

Former National Credit Union Administration (NCUA) Chairman Dennis Dollar is quoted in a featured column in CU Today making the case that there is no need for risk-based National Credit Union Share Insurance Fund (NCUSIF) premium.

Dollar argues that "[t]he NCUSIF is already risk based in that the credit unions with the highest level of assets contribute the most to the fund, and those with the least assets contribute the least."

While it is true that larger credit unions hold larger one percent NCUSIF capitalization deposits than smaller credit unions and contribute the most to the NCUSIF, size has nothing to do with risk-based premiums.

Risk-based premiums are based upon the risk profile of the credit union. Credit unions that pose less risk to the NCUSIF will pay a lower premium rate, while riskier credit unions would pay higher premium rates. Unfortunately, former Chairman Dollar's comment misses this point.

For example, assume you have two credit unions with $200 million in insured deposits. One credit union is concentrated in commercial loans and has a high delinquency rates, while the other has a more traditional credit union lending profile of auto and home mortgage loans with few delinquencies. Under the present system, both institutions are contributing the same amount to the NCUSIF.

But does that make sense?

No. The credit union with a greater concentration in business loans and high delinquency rates should contribute more to the NCUSIF than the other credit union with a more conservative risk profile.

Moreover, Dennis Dollar states that "the present system has worked so well for decades and survived the financial crisis in great shape."

I think many observers would disagree with Dollar's assessment that the present system worked well.

The current system for funding the NCUSIF is pro-cyclical. During a severe economic downturn, credit unions face the threat of writing down all or part of their NCUSIF capitalization deposit at the very moment that credit union earnings and capital come under pressure.

In fact as you will recall, NCUA went to Congress seeking a bailout of the NCUSIF. Credit unions were looking at a 91 basis point hit to the NCUSIF in 2009. The legislation shifted the cost of the corporate credit union debacle from the NCUSIF to the Temporary Corporate Credit Union Stabilization Fund, which has borrowed funds from the U.S. Treasury to cover the expenses of resolving five failed corporate credit unions.

MBL Bill Re-introduced

Reps. Ed Royce (R-Calif.) and Gregory Meeks (D-N.Y.) yesterday re-introduced a bill (H.R. 1188) that would raise the member business-lending cap for certain credit unions from 12.25 percent to 27.5 percent of total assets.

The legislation would raise the cap for well-capitalized credit unions that have a history of member business lending, have operated near the current cap for at least one year and have received approval from the National Credit Union Administration.

Similar bills have failed to move forward in previous Congresses and I suspect the same fate awaits this bill.

Read the bill.

Credit Union Profits Up 8 Percent for 2014

The National Credit Union Administration (NCUA) reported that credit union profits were up 8 percent for 2014 to $8.8 billion.

The return on average assets ratio stood at 80 basis points at the end of 2014, up two basis points higher than at the end of 2013. NCUA noted that higher net interest margins, lower operating expenses, and slightly higher non-operating income as a percent of average assets positively contributed to return on average assets. However, lower fee and other income and higher provisions for loan and lease losses as a percent of average assets negatively impacted return on average assets.

Outstanding loan balances at federally insured credit unions grew 10.4 percent between the end of 2013 and the end of 2014 reaching $712.3 billion. This was the largest year-over-year percentage increase since the end of 2005. NCUA reported all major loan categories saw an increase.

Overall, share and deposit accounts at federally insured credit unions were $951 billion at the end of 2014, compared to $910 billion at the end of the fourth quarter of 2013.

As a result of loans growing at a faster pace than shares, the loan-to-share ratio rose to 74.9 percent, the highest level since the end of 2009

The strong earnings at credit unions caused net worth to grow. Aggregate net worth ratio was 10.97 percent at the end of the fourth quarter, up 20 basis points from the end of 2013 and the highest level since the third quarter of 2008.

The vast majority (97.7 percent) of federally insured credit unions remain well-capitalized at the end of 2014. In comparison, 97.2 percent of credit unions were well-capitalized at the end of 2013.

The delinquency ratio fell to 0.85 percent from 1.01 percent at the end of 2013. The net charge-off ratio was down seven basis points from a year ago to 49 basis points.

In addition, credit unions became less interest rate sensitive as the net long-term asset ratio fell from 35.91 percent at the end of 2013 to 33.62 percent as of December 2014.

Read the press release. Review the Financial Trends Report.

CU Inks Scoreboard Sponsorship Deal

Firstmark Credit Union agreed to a five-year sponsorship deal for the new 44-feet wide by 24-feet tall Alamo Stadium digital scoreboard in San Antonio.

The high school stadium seats 23,000 and will host numerous events.

Terms of the deal were not released.

Read the story.

Bleak Future for Small Credit Unions

The National Credit Union Administration (NCUA) painted a bleak outlook for small credit unions in its proposal to raise the asset threshold for small entities to $100 million in assets.

NCUA described these small credit unions with less than $100 million in assets as competitively disadvantaged and generally facing significant challenges.

NCUA compared the performance of federally insured credit unions (FICUs) with less than $100 million in assets to credit unions with more than $100 million in assets between 2001 and 2013 across a number of performance metrics.

NCUA found that smaller credit unions lagged behind the performance of their larger peers across these different measures during this time period.

For example, NCUA concluded that smaller credit unions consistently demonstrated an inability to grow their deposit base at a rate that keeps pace with larger credit unions making it more difficult for these smaller entities to cover their fixed costs.

NCUA also found that "FICUs with less than $100 million in assets as of the end of the year 2000 had their membership shrink by 0.5 percent annually over the next 13 years. In contrast, FICUs with more than $100 million in assets as of the end of the year 2000 grew their membership by 2.3 percent annually over the same period."

Also, these smaller credit unions had higher operating expenses per unit of assets and per dollar of loan originations relative to their larger peers and were less profitable. NCUA found that the earnings gap between small and large credit unions averaged 40 basis points over this time period.

NCUA further noted that challenges related to lagging deposit growth, stagnant membership, and high operating costs have caused credit unions with less than $100 million in assets to merge and/or fail at higher rates.

My general takeaway from NCUA's analysis is that many smaller credit unions will have difficulty fulfilling their mission and remaining independent in the long-run.

Read the proposal.

More on Troubled Centra Health Credit Union

An unsealed search warrant describes a potential theft of approximately $1.7 million from the $10.4 million Centra Health Credit Union located in Lynchburg, Virginia.

In January, I reported that the credit union's board placed three employees on administrative leave.

As a result of the potential theft, the credit union's net worth fell from $1.7 million at the end of the third quarter to $327 thousand as of the end of 2014. Its net worth ratio as of December 2014 was 3.13 percent, making the credit union significantly undercapitalized.

The credit union's financial performance report shows that it went from a profit of $51 thousand as of September 2014 to a loss of $1.35 million at the end of 2014.

Read the search warrant.