Credit Union Industry Financial Update at Mid-Year

According to mid-year statistics released by NCUA last week, federally-insured credit unions posted strong share (deposit) and asset growth during the first half of 2008. Shares grew by 8 percent through the first six months of 2009 to $735.5 billion and assets increased by 7.3 percent to $870.1 billion.

However, credit unions barely reported any loan growth as loans increased from $566 billion to $570 billion during the first half of the year. Used automobile loans grew 2.8 percent and first mortgage real estate loans and lines of credit grew 3.2 percent, while new automobile loans declined 2.8 percent and other mortgage loans declined 3.2 percent.

Credit unions added about $1 billion in equity capital during the first half of the year to $85.8 billion. However, the growth in capital did not keep pace with the growth in assets during the first six months of 2009. As a result, the net worth leverage ratio for credit unions slipped from 10.62 percent to 10.03 percent by mid-year; but was higher than the 9.67 percent reported at the end of the first quarter.

Credit unions reported a net income of $1.168 billion as of June 2009 – 42 percent below the $2 billion in profits reported for the comparable six month period in 2008. The return on average assets was .28 percent, as of the end of the second quarter in 2009. Strong growth in non-interest income – up almost 95 percent from June 2008 levels to slightly more than $8.6 billion as of mid-year 2009 – helped to offset cost associated with the NCUSIF stabilization expense and higher provisioning for loan and lease losses. Provisions for loan losses almost doubled from the comparable period in 2008 to slightly less than $4.6 billion.

The recession took a toll on asset quality as loans 60 days or more past due grew to $9 billion. In comparison, allowance for loan and lease losses was $7.5 billion. Credit unions have added almost $1.3 billion to their loan loss allowance accounts during the first half of 2009. This is comparable to the increase in loans 60 days or more past due over the same time period.

As a percent of total loans, delinquent loans increased by 21 basis points during the first half of the year to 1.58 percent of all loans. The delinquency rate on real estate loans at credit unions was 1.62 percent as of June 30, 2009 – 42 basis points higher than it was at the end of 2008. However, the delinquency rate for interest only and payment option mortgages went from 3.72 percent to 5.73 percent during the first half of 2009. Business loans 60 days or more past due were 3.03 percent – up 80 basis points since the beginning of the year.

Net charge-offs were almost $3.3 billion as of mid-year 2009 – almost 72 percent higher than the prior June’s level. During the first half of 2009, the ratio of net charge-offs to average loans grew from 0.85 percent to 1.15 percent.

Exotic Car Loans

Credit Union Times broke a story about an exotic car loan program operated by American First Credit Union in Orange County, California.

American First CU had an indirect lending relationship with Lamborghini of Orange County and had made loans through the dealer for three to four years.

The article references a lawsuit where American First Credit Union is suing a member who defaulted on a 2008 Lamborghini Gallardo, and owes nearly $226,000 plus interest

“For those with loads of disposable income, Gallardo has to be on the sports-car shopping list,” says the Arizona Republic. The manufacturer’s suggested retail price is between $185,000 and $225,000.

Additionally, American First CU is suing Reality TV star Simon Barney, who stars along with wife Tamra in The Real Housewives of Orange County, over a delinquent exotic car loan for a 1989 Ferrari.

Lamborghinis, Ferraris. Is this what the credit union tax exemption is meant to subsidize?

I really don’t believe that the tax exemption should go to finance exotic car loans for those individuals with loads of disposable income.

This is simply outrageous.

Tax Subsidized Rock Concert

Visions Federal Credit Union of Endicott, New York is sponsoring a free rock concert during Binghamton University’s Annual University Fest 2009 on August 29, 2009.

The sponsorship of the rock concert is part of the credit union’s efforts to reach out to Gen Y.

Now, a free concert sponsored by a credit union may be “really cool.”

But dude, should a credit union be using its tax subsidy to finance a rock-n-roll concert?

Spreading Its Wings

Wings Financial FCU (Apple Valley, MN) is proposing to convert to a state charter so that it can expand its membership base.

Currently, Wings Financial FCU has a Trade-, Industry-, and Profession-wide charter serving a national air transportation field of membership. But employment in the airline industry is down substantially, since the beginning of this decade, limiting the growth prospects for Wings Financial FCU.

By converting to a state chartered credit union, Wings Financial would be able to add to its field of membership individuals who live, work or worship in the 13 county Minneapolis/St. Paul metro area and still retain its national air transportation field of membership.

If Wing’s membership approves the switch from a federal to state charter, this would be the second billion-dollar plus credit union to do so this summer in order to take advantage of more liberal state field of membership requirements. Mid-Florida converted to a state charter earlier this summer.

Crawl Before You Walk

Speaking before the National Associations of State Credit Union Supervisors, NCUA Board Member Gigi Hyland suggested credit unions “should crawl before they walk” when increasing their capacity to make business loans, and that Congress should consider raising the current cap on member business loans of 12.25 percent of assets “in stages” for safety and soundness reasons.

Upon hearing about this remark, CUNA President and CEO Dan Mica blew a gasket.

“What Board Member Hyland suggests is addressed in the Kanjorski-Royce bill by raising the business lending cap to only 25 percent. We would like to see the cap taken off of member business lending by credit unions,” Mica stated.

I guess Dan Mica equates going from a business loan cap of 12.25 percent of assets to 25 percent of assets as crawling.

I beg to differ. Such an expansion in business lending capacity is a giant leap.

Breaking News - Zombie Update

Five months ago, NCUA placed Western Corporate (WesCorp) into conservatorship. According to its most recent regulatory filings posted with NCUA, WesCorp reported a capital ratio of minus 15.94 percent.

This breaking news just in, Western Corporate FCU is still dead!

Knee Jerk Response to Budget Proposal

Pennsylvania Auditor General Jack Wagner sent a list of recommendations including taxing credit unions to Gov. Ed Rendell and the General Assembly to consider as alternatives to raising state income taxes to resolve the state’s budget impasse that has been in effect since July 1.

The Pennsylvania Credit Union Association’s (PCUA) knee jerk reaction was to write the Auditor General that removing the credit union tax exemption would seriously harm the credit union business model.

The PCUA is implicitly acknowledging that credit unions need their market distorting preferential tax treatment from the government to be competitive.

NCUA Borrowed $10 Billion in June from the Treasury

The Federal Financing Bank (FFB) reported NCUA’s Central Liquidity Facility (CLF) borrowed $10.025 billion during the month of June.

Ten billion dollars of the borrowed funds were lent from the CLF to the NCUSIF, which then lent the proceeds to U.S. Central and Western Corporate FCUs – the two failed corporate credit unions.

The two 6-month notes for $5 billion each that mature on December 21, 2009 were borrowed by the CLF at a taxpayer subsidized rate of 0.456 percent.

The rate on 6-month Treasury bill on June 22 was 0.34 percent.

I doubt that these two failed corporate credit unions could borrow at a rate of 11.6 basis points above comparable Treasury debt.

That is a pretty sweet deal.

NCUA Closes Community One FCU

NCUA closed $159 million Community One FCU of Las Vegas on Tuesday, August 11th.

Community One was hard hit by the deteriorating Las Vegas economy. Between June of 2008 and June of 2009, as losses grew at the credit union, Community One’s net worth ratio slipped from 7.10 percent to 0.55 percent.

According to NCUA press release, America First FCU was the winning bidder for Community One and was authorized to purchase and assume the assets and shares (deposits) of Community One.

What was not disclosed by NCUA in its press release was the cost of this failure to the NCUSIF; how much of the assets were assumed by America First; and did America First pay a premium for Community One and if so, how much?

As a matter of public policy, NCUA needs to provide more transparency regarding its handling of credit union failures.

Costly Failures Due to Nonmembers

The NCUA’s Inspector General (IG) Reports on the failures of Norlarco Credit Union (Fort Collins, Colo) and Huron River Area Credit Union (Ann Arbor, Mich) highlight the role of nonmembers in the failures of the two credit unions.

The IG found that Huron River Area CU was granting Florida construction loans to borrowers that were outside of its field of membership, which fueled uncontrolled loan growth at the credit union. Florida construction loans were made to borrowers throughout the United States, including Puerto Rico. Applicants purportedly “joined” the credit union, under the aegis of Learn and Earn, LLC. The IG report stated:

"Florida construction loan applicants were not legal members of Huron. NCUA and the Michigan SSA indicated two steps were required to admit an employer or other organized group into Huron‟s FOM. The first step required Huron‟s Credit Union Service Organization (CUSO), Learn and Earn Credit, LLC, to submit a written request for services to Huron. Learn and Earn Credit, LLC met this requirement. The second step required Huron to request, from the SSA, a bylaw amendment to add Learn and Earn Credit, LLC, as an “other organized group”. Huron did not request the amendment; therefore, the Michigan SSA determined Learn and Earn, LLC, was not a legal member of Huron. Consequently, the applicants for Florida loans who were members of Learn and Earn, LLC, were not eligible for membership with Huron. We believe this relatively unrestricted FOM contributed significantly to the rapid and uncontrolled loan growth." (emphasis added)

With respect to Norlarco CU, the IG found management abused its field of membership in order to help fulfill its $30 million per month in Florida construction loan commitments. Norlarco used three Colorado-based associational groups to qualify individuals for membership:

• Rocky Mountain Bird Observatory,
• Boys & Girls Clubs of Larimer County, and
• Legacy Land Trust.

When NCUA examiners pulled a sample of the credit union’s Florida construction loans, they found that over 43 percent of the borrowers resided in the Miami-Dade County, Florida. The last time I looked Miami was not geographically located on the east slope of the Rocky Mountains.

Moreover, Norlarco management sent letters to the borrowers stating that Norlarco would close their accounts at the completion of their construction loans. This letter clearly indicated that these individuals were members only in name and that the credit union had no intention of establishing a banking relationship with these borrowers.

The abuse of its field of membership requirement fueled a rapid and uncontrolled expansion in the credit union’s Florida construction loan program, which ultimately contributed to the credit union’s failure.

This does raise an interesting question – are other credit unions getting into trouble because they have forsaken the requirement that members have an affinity with each other?

What Kind of Chairman Will Ms. Matz Be?

The Senate today confirmed Deborah Matz as NCUA Chairman.

Reviewing her written remarks before the Senate Banking Committee on July 22 provides some insight into how she might steer the agency.

Beyond safety and soundness, Ms. Matz stated that she would encourage “credit unions to reach out to serve all eligible members.” She pointed out that a major accomplishment from her previous tenure on the NCUA Board was getting credit unions “to reach out to those in their field of membership who may fall prey to unscrupulous lenders.” She also noted that she helped to create the Office of Small Credit Union Initiatives, which provides technical and financial support to small credit unions which serve low income populations. Therefore, a push to serve underserved and low income communities will likely be a priority of her administration.

But also, serving all eligible members is code for expanded business lending by credit unions. In a 2002 speech to Pennsylvania Credit Union League, she said “member business lending may be an opportunity to expand services and income while meeting the needs of members.” So, I would suspect that she will look at avenues to greatly increase the ability of credit unions to serve business customers.

As for the biggest problem confronting the credit union industry – the restructuring of the corporate credit union system, Ms. Matz will limit the investment authority of corporate credit unions, which she believes is too broad and permissive. She also will champion reducing concentration risk in corporate credit unions; but we don’t know where she stands on requiring stronger capital standards for corporate credit unions.

A final point, Ms. Matz had served as an officer of a large suburban Washington, D.C. credit union until June of last year. This experience will undoubtedly influence her decisions. Hopefully, it won’t compromise her independence.

Looking Out for the Little Guy – Right?

The National Consumer Law Center (NCLC) found that some credit unions were offering “sham” alternatives that were very similar to loans offered by traditional payday lenders.

This is disturbing because credit unions were established to be an alternative to usurious money lenders.

For example, NCLC reported that Kinecta Federal Credit Union in California purports to offer 15 percent loans but when fees are included this brings the APR to 275 percent on an annual basis. The APR on a $400 14-day loan from Nevada Federal Credit Union comes to an annual rate of 455 percent.

Other federal credit unions in Nevada, Utah and Texas have lent their names to loans offered by credit union service organizations that are charging triple-digit rates.

NCLC also found that some state credit unions, including Prospera Credit Union, are charging triple-digit payday loans.

So much for looking out for the little guys.