Pig-in-a-Poke

In a February 24 letter to Treasury Secretary Timothy Geithner, NCUA Chairman Debbie Matz wrote that NCUA is prepared to enhance the regulation of member business lending, if a statutory increase in the member business lending (MBL) cap should become law.

“Let me assure you: If legislative changes increase or eliminate the current aggregate MBL cap, NCUA would promptly revise our regulation to ensure that additional capacity in the credit union system would not result in unintended safety and soundness concerns,” stated Chairman Matz.

She goes on to write:

“As one of the most important changes, NCUA would only permit credit unions to increase their MBL capacities on a gradual basis by adopting a tiered approval process. In addition to other regulatory changes, the agency would develop procedures to fully monitor MBL growth.”

This letter is full of assurances, but short on specifics.

What Ms. Matz is asking Treasury Secretary Geithner to do is buy a pig-in-a-poke.

Should Honolulu Credit Unions Pay More Than $100 in Property Taxes?

Currently, credit unions, as well as other nonprofit organizations, only pay $100 in real property taxes to the City of Honolulu regardless of the assess value of the property.

However,the Hawaii Credit Union League opposes a proposal by the City of Honolulu that would either eliminate or raise the minimum real property tax on credit unions and other nonprofit organizations to help address the city's $140 million budget deficit.

For example, HawaiiUSA Federal Credit Union's corporate office at 1226 College Walk are assessed at $16.9 million, but it only pays $100 in property taxes on this property. This $1.1 billion credit union's reported profits of $8.7 million for 2009.

I think HawaiiUSA FCU can afford to pay its fair share in property taxes.

After all, the only tax that federal credit unions are subject to is a real property tax and even that is contingent on local law.

Why Should FCU Officials Be Exempt from Washington D.C. Taxes?

Nearly 5,000 credit union activists are attending CUNA's Government Affairs Conference and the big loser is the city of Washington, D.C.

Why am I saying the District of Columbia is a big loser?

Over the four day event, the city may lose $500,000 or more in tax revenues.

Representatives from Federal credit unions attending this conference are exempt from the city's hotel and occupancy tax, which is currently 14.5 percent. (click to enlarge)


With convention room rates ranging from a low of $246 at the Hampton Inn or Hilton Garden Inn to $326 at the Capitol Hilton, that means each night the city loses between $35.67 and $47.27 in tax revenue per Federal credit union attendee.

Moreover, these officials from federal credit unions are also exempt from the city's sales tax when conducting business with vendors at the conference. (click to enlarge)


It seems very bizarre that federal credit union officals are subsidized by the taxpayers of the District of Columbia to come to Washington to lobby Congress to preserve their preferential tax treatment and to expand their powers, when struggling families visiting our nation's capital are subject to these taxes.

That just doesn't seem to be fair.

Silver State Schools Receives Open Bank Bailout from ASI

Nevada's largest privately-insured credit union, Silver State Schools, received an open bank rescue from its private insurer, American Share Insurance (ASI).

The Las Vegas Review-Journal reported that Silver State Schools received a $22 million financial bailout from ASI.

Silver State School's CEO Dave Rhamy in announcing the open bank assistance from ASI wrote:

"In December, I wrote to you of Silver State School’s plan to immediately increase our reserves through a cooperative effort with our deposit insurance provider. I am pleased to announce that we have successfully completed this transaction. This capital infusion bolsters our general reserves now, and positions us to continue to help our members as we move forward."

It is being reported that the transaction will allow the credit union to meet the requirement of being adequately capitalized.

Problem CU Update

NCUA today released new figures on the number of problem credit unions, credit unions with CAMEL 4 and 5 ratings.

The number of problem credit unions grew by 6 in January to 357. Over the last twelve months, problem credit unions increased by 80. (click image to enlarge)

Assets in problem credit unions were $48.3 billion in January.

Shares (deposits) in problem credit unions were $42 billion. As a result, the percentage of insured shares (deposits) in problem credit unions was 5.82 percent. (click to enlarge)

NCUA is reporting that at the end of 2009, there were 9 credit unions with over $1 billion in assets on the problem list with $15.8 billion in shares. Eleven credit unions holding $500 million to $1 billion in assets were on the problem list. For credit unions between $100 million and $500 milion in assets, there were 57 credit unions on the problem list. (click to enlarge)

Outreach Task Force: Senior Executive Officer Compensation

The NCUA's Outreach Task Force issued a report in Feruary 2008 which stated NCUA and federal credit unions (FCUs), both natural person and corporates, would benefit from the collection of senior executive compensation data.

The Outreach Task Force concluded that since FCUs are cooperatives, the members/owners have a right to know the total compensation paid to senior officials. The Outreach Task Force believed that increased transparency will improve accountability and be more consistent with prevailing public policy.

Therefore, the Task Force recommended that the NCUA Board take the following actions:
• collect FCU and federal corporate credit union senior executive officer
compensation;
• publish aggregate data on senior executive officer compensation in the Annual
Report or other NCUA publication(s); and
• promulgate a regulation requiring FCUs and federal corporate credit unions to
annually disclose individual senior executive officer compensation to their
members.

NCUA is putting some of the recommendations into effect. NCUA is proposing that corporate credit unions release information on senior management compensation to their members.

The next step will be to propose rules for FCUs, which requires senior executive officer compensation to be disclosed to members. State chartered credit unions already disclose this information in their annual Form 990 filing with the Internal Revenue Service.

Also, I'm hopefully that when NCUA finally releases its Annual Report for 2008, it will include information about senior executive officer compensation and that this information is disclosed in a format where it can be meaningfully analyzed.

Did Mountain High Merger Require Assistance from NCUSIF?

In December, NCUA approved the merger of insolvent Mountain High FCU (Provo, Utah) into America First FCU (Riverdale, UT).

Mountain High had almost $43 million in assets and reported a negative net worth of nearly $3.1 million at the end of 2009. Loans 60 days or more past due were $10.1 million at the end of 2009.

The credit union press has reported that this merger was an emergency merger. But beyond that, there is not much details.

So, credit unions should be interested in having the following questions answered by NCUA.

Did this merger receive any assistance from the NCUSIF?

If yes, what is type of assistance?

And what is the likely cost to the NCUSIF?

Velocity Reverses Course on Private Insurance

On January 6, I wrote that members of Velocity CU had voted to switch from being federally-insured to privately-insured by American Share Insurance (ASI).

However, in a February 9 letter, Velocity announced that it decided to remain federally-insured with NCUA.

The credit union said that one of its primary reasons for considering a conversion to ASI was to avoid future premium assessments. Velocity paid approximately $675,000 in premiums to the National Credit Union Share Insurance Fund in 2009.

The rationale for selecting ASI was that ASI had not ordered a single assessment in its 35 years of doing business and ASI had assured Velocity that premium assessments were highly unlikely for the foreseeable future based upon the financial performance of privately insured credit unions.

But Velocity had a change of heart after finding out that ASI announced an assessment 0.15 percent on deposits at privately-insured credit unions.

"Frankly, we were surprised and disturbed by the timing of ASI’s announcement and by their decision to assess the credit unions they serve. Given ASI’s surprise assessment, we have reconsidered our recommendation to convert to the private insurer," wrote Debbie Mitchell and Carl Lynch, respectively CEO and Chairman of Velocity.

While Velocity CU decided to remain federally-insured, SafeAmerica CU in Pleasanton, CA became privately-insured at the end of 2009 citing the cost of future corporate credit union bailouts as the reason for getting a divorce from NCUA.

Are we going to see more credit unions flee from the NCUA over the future cost of the corporate credit union bailouts? However, I will leave that topic for a future posting.

Loan Loss Reserve Funding Gap

At the end of the third quarter 2009, NCUA reported that federally-insured credit unions held $8.1 billion in allowances for loan and lease losses versus almost $9.7 billion in loans that were 60 days or more delinquent. Almost $3.26 billion or 33.7 percent of these delinquent loans were 6 months or more past due.

But these industry aggregates mask important information.

Digging into the financial statements of credit unions, I decided to look at the loan loss allowances of individual credit unions and compare them to loans that were more than 6 months past due .
I found that 63 credit unions reported a gap exceeding $1 million between their allowances for loan and lease losses and loans 6 months or more past due. The following table shows that some credit unions are reporting a sizeable gap (click to enlarge).

Texans CU is reporting a gap of $77 million. Other credit unions with large gaps include Space Coast, Self Help, and Evangelical Christian.

This means either the credit unions are expecting the loss rate on these delinquent loans to be very low or that the credit unions are underfunding their loan loss reserve accounts.

If these shortfalls are a result of credit unions underfunding their loan loss reserve account, then some credit unions are engaged in window dressing their performance.

To close this gap would require these credit unions to increase provisions for loan losses in order to build loan loss allowance balances. This would adversely affect earnings and lower the net worth position for these credit unions.

Economy Takes a Toll on Kern County CUs

Here is a story about the economy taking a toll on Kern County, California credit unions.

Bulk of the losses incurred by Kern County credit unions reside at Kern Schools FCU, which reported a loss of $40.6 million. The credit union as of the end of 2009 was undercapitalized.

In an October 20, 2009, I reported that Kern Schools was under a supervisory agreement to rebuild its capital.

California Inland Empire Credit Unions Face Lean Times

The Press-Enterprise reported that California's Inland Empire credit unions are confronted with lean times.

According to NCUA, San Bernardino-based Arrowhead Credit Union finished 2009 with a net loss of $44.5 million; while Riverside-headquartered Altura and Moreno Valley-based Visterra each posted a net loss of just over $10.4 million.

At the end of 2009, Arrowhead CU is undercapitalized, while Altura and Visterra are adequately capitalized.

Bill Would Exempt Enforcement Actions from Public Disclosure

Legislation (House Bill 2830 and Senate Bill 6369) has been introduced in Washington state to update the the regulation of credit unions in the areas of examination and supervision, penalties, and corporate governance.

The credit union blogosphere has reacted passionately to a provision that would make it "unlawful for any person to knowingly make or disseminate a false report or other misrepresentation about the financial condition of any credit union."

But I believe they are missing an even more important provision. The bill would exempt regulatory enforcement actions by the state credit union regulator from public disclosure.

If this bill becomes law with this provision, history is doomed to repeat itself.

In 2007, state regulators secretly put Norlarco CU into conservatorship. Members of Norlarco CU only found out about the secret conservatorship of their credit union after the Coloradoan broke the story.

As Bert Ely wrote in his January Farm Credit Watch:

"If enforcement orders are not publicized, how can the owners of a mutual institution know that their institution is in trouble? How can these owners know that they need to take action, specifically by replacing directors and managers, if regulators do not tell them there are problems? In stockholder-owned institutions, a declining share price often will signal problems, but owners of cooperatives do not get such a signal."

As the Coloradoan opined in an August 26, 2007 editorial that credit union members should be kept in the loop, otherwise they will become vulnerable to uninformed rumors.