First Family FCU Placed into Conservatorship (Updated)

The National Credit Union Administration (NCUA) seized control of operations at Family First Federal Credit Union of Orem, Utah.

The press release stated that the $139.5 million was placed into conservatorship due to declining financial condition. NCUA said that the credit union "was not adequately capitalized" and "has earnings insufficient to enable it to continue under present management."

NCUA's press release understated the magnitude of the problems at Family First FCU.

According to its June Financial Performance Report, Family First reported a loss of almost $12 million in the first half of 2010. Most of the loss was attributable to almost $10.6 million in provisions for loan and lease losses.

As a result of the loss, the credit union's net worth was wiped out. As of June, the credit union reported a net worth ratio of minus 5.55 percent.

Additionally, $9.26 million or 8 percent of the credit union's loans were at least 60 days or more past due.

Number of Problem Credit Unions Increase in June, But Assets and Shares Fell

NCUA reported today that the number of problem credit unions increased by 15 in June to 366; however, assets and shares in problem credit unions fell during the month. A problem credit union is defined as a credit union with a CAMEL rating of 4 or 5. (click to enlarge images)







NCUA reported that shares in problem credit unions fell by $2.3 billion to $43 billion and assets fell from $51.6 billion in May to $48.8 billion in June. According to NCUA, 5.69 percent of the credit union industry's insured shares (deposits) and 5.30 percent of the industry's assets are in problem credit unions.







NCUA reported that the number of $1 billion plus problem credit unions declined by 1 to 14 during June. Total shares in billion-dollar plus problem credit unions fell from $23.4 billion in May to $21.5 billion in June.

There was no change in the number of problem credit unions with between $500 million and $1 billion in assets at 10. However, there was one less problem credit union with between $100 million and $500 million in assets, bringing the total to 54.

An additional 17 credit unions with less than $100 million in assets was added to the problem list.

NCUA also reported an increase in the number of credit unions with a CAMEL 3 ratings, which indicates some degree of supervisory concern. Credit unions with a CAMEL 3 rating stood at 1,739 as of June -- an increase of 15 credit unions. But there was a significant increase in assets and shares in CAMEL 3 credit unions with assets increasing from $121.9 billion in May to $149.8 billion in June and shares from $105.9 billion to $131.9 billion.

As the following chart shows, most of the increase in shares in CAMEL 3 rated credit unions arose from 4 credit unions with over $1 billion in assets receiving a CAMEL 3 rating. One of the four billion-dollar plus credit union saw an improvement in its CAMEL rating from a 4 or 5 to a 3.

Report Shows Sharp Rise in Administrative Actions at Credit Unions

I would like to acknowledge an excellent piece of investigative journalism that appears in the July 26th The Safety & Soundness Report by Aaron Steinberg (paid subscription).

According to this special report, at least 75 percent of all credit unions are under some type of administrative action letter -- Document of Resolution (DOR), Letter of Understanding and Agreement (LUA), and Cease and Desist Order (C&D).

The report states that "[o]f the 7,500+ CUs, both state and
federal, currently in operation:
• 5,711 are operating under DORs;
• 252 are operating under LUAs; and
• 21 are operating under C&Ds."

The report points out that the number of administrative action letters have grown rapidly, since the beginning of 2008. For example, there were 62 LUAs issued in 2008. LUA issuances climbed to 140 in 2009 and credit union regulators are on a pace to issue 226 LUAs in 2010 (based on January 1 thru June 1 information).

The data for this special report was obtained through a Freedom of Information Act request.

NCUA Strikes Back at Arrowhead Critics

Tired of being a pinata for critics over its seizure of Arrowhead Central Credit Union , the National Credit Union Administration (NCUA) fired back on July 22 stating that the credit union understated its financial problems and released Arrowhead Central's second quarter financial results.

Critics of NCUA's placing Arrowhead Central into conservatorship on June 25th contend that the credit union was on the mend. David Chatfield, the interim president and CEO of the California and Nevada CU Leagues, told Credit Union Journal (paid subscription) that "NCUA's claim the credit union was in declining financial condition flies in the face of the facts... in this case I see little justification for NCUA doing what it did."

In a highly unusual move, NCUA issued a media release writing that the credit union "had previously posted inaccurate information" distorting its true financial condition. NCUA noted that the prior management failed to comply with methodology approved by the credit union’s external CPA for funding its loan loss reserve accounts. This underfunding of its loan loss allowance account caused the credit union to report a profit of almost $2.6 million as of March 31, 2010. However, when the loan loss allowance account was properly funded, the credit union reported a year-to-date loss of more than $1.4 million at the end of the second quarter.

The press release further states that "NCUA determined that Arrowhead Central’s former management team did not charge off loan losses in a timely or consistent manner, and that historical ratios did not consistently reflect actual losses the credit union was experiencing."

Additionally, NCUA points out that since the middle of 2009 the credit union had failed on four previous attempts to file an acceptable net worth restoration plan.

The press release notes that the credit union has been significantly undercapitalized for four consecutive quarters and as of June 30, 2010, its net worth ratio was 3 percent.

Will the release of this information be enough to quell NCUA's critics over its handling of Arrowhead Central?

I don't know.

Response to Elevations CU Banker Bashing Ad

Elevations Credit Union in Boulder, Colorado ran an ad bashing banks in the Boulder County Business Report.

The ad had the following headline "What do you call an executive who loses millions and gets a big bonus?"

The ad's answer was "B@NK#R."

However, I came to a different answer. I immediately thought of Larry Sharp, the former CEO of Arrowhead Central Credit Union that is now under NCUA conservatorship, and Michael Maslak, former head of North Island Financial Credit Union.

According to Arrowhead Central's Form 990 report for 2008, Larry Sharp was paid $66,500 in bonuses and incentive compensation in 2008 even as Arrowhead Central reported a loss of $26 million.

North Island's Maslak was paid $70,000 in bonuses and incentive compensation in 2008. The credit union was in the red -- reporting a 2008 loss of almost $50.2 million.

If you look at the NCUA's IG report on the failure of Cal State 9, it points out that the CFO was paid nearly $400,000 in bonuses between 2006 and 2007 from its indirect HELOC program. This HELOC program ultimately caused the failure of Cal State 9.

The credit union industry needs to look carefully at itself in the mirror. Some credit union executives are being paid large bonuses, even as their credit unions struggle financially.

After all, people who live in glass houses should not throw stones.

Regulatory Headache: Reporting of Small Business Loan Data

Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is going to increase the regulatory burden on financial institutions, as it will require them to gather and disclose information on their lending to small businesses.

This section of the bill defines a financial institution as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” This definition captures banks, credit unions, and other financial entities.

The new Bureau of Consumer Financial Protection, when it becomes operational, will require banks and credit unions to collect and disclose the following small business loan data:

(A) the number of the application and the date on which the application was received;
(B) the type and purpose of the loan or other credit being applied for;
(C) the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;
(D) the type of action taken with respect to such application, and the date of such action;
(E) the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;
(F) the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;
(G) the race, sex, and ethnicity of the principal owners of the business; and
(H) any additional data that the Bureau determines would aid in fulfilling the purposes of this section.

There are two purposes for this data collection in the legislation – (1) the enforcement of fair lending laws and (2) the identification of business and community development needs and opportunities of women-owned, minority-owned, and small businesses.

These new reporting requirements are just another compliance headache for banks and credit unions.

Business Loans Secured by Primary Residence Are Exempt from the Aggregate Cap

Sen. Mark Udall (D-Colo.) proposed an amendment to the small-business lending fund bill (H.R. 5297) that would increase the member business lending cap from 12.25 percent to 27.5 percent of total assets for eligible credit unions. But is this amendment really necessary for credit unions to meet the credit needs of small businesses?

Sen. Udall speaking on the Senate floor on July 13 cited the case of Stacy Hamon to justify the expansion in the credit union’s business lending authority.

One Coloradan that I was particularly compelled by was named Stacy Hamon. Stacy is a small business owner in Thornton, Colorado, who started her own business: 1st Street Salon. Initially, Stacy went to a traditional bank, only to be turned away because credit was in short supply. To make the dream of owning her own business come true, Stacy turned to a credit union, which gave her the loan she needed through a second mortgage on her home. Stacey’s salon has become successful. And when I visited she had plenty of business and had even hired more workers. Those are real American jobs and a shining example of economic expansion that would not have been possible if it weren’t for a credit union that was willing to offer her a small business loan.

However, the Federal Credit Union Act exempts a loan that is fully secured by a lien on a 1- to 4-family dwelling that is the primary residence of a member from the definition of a member business loan. As a result, this loan, which was made to Stacy Hamon, does not count against the aggregate member business loan limit.

Moreover, business loans with a value less than $50,000 or with a governmental guarantee, such as Small Business Administration (SBA) loans, are excluded from the definition of a member business loan and the calculation of the aggregated member business loan limit.

These exemptions from the definition of a member business loan give credit unions sufficient authority to meet the credit needs of small businesses.

Norbel Credit Union To Be Liquidated

Loveland Reporter-Herald is reporting that Norbel Credit Union of Fort Collins, Colorado will be acquired by San Antonio, Texas-based Security Service Federal Credit Union on July 29.

Norbel’s managers and board of directors in a statement to employees decided to put the credit union into liquidation as of July 29 and NCUA will be appointed liquidating agent. Security Service FCU will subsequently acquire Norbel.

Norbel Credit Union was critically undercapitalized with a net worth ratio of 1.38 percent as of the end of March 2010. The credit union is reporting that 7.25 percent of its loans were 60 days or more past due. The credit union reported a first quarter loss of $9.8 million, as it set aside $10.3 million for provisions for loan and lease losses.

Undercapitalized CUs Exceeding Member Business Loan Limit

There are 74 undercapitalized federally-insured credit unions, which report holding outstanding member business loans, that cannot increase the total amount of outstanding member business loans as of March 2010. The Federal Credit Union Act states that an insured credit union that is undercapitalized may not increase the total amount of member business loans outstanding until such time as the credit union becomes adequately capitalized.

Furthermore, the maximum amount of outstanding member business loans must equal 1.75 times the credit union's net worth and cannot exceed 12.25 percent of assets. An exception to the maximum cap of 12.25 percent of assets is granted to an insured credit union chartered for the purpose of making, or that has a history of primarily making, member business loans to its members; or an insured credit union that serves predominantly low-income members or is a community development financial institution is not subject to the 12.25 percent cap.

Out of these 74 undercapitalized federally-insured credit unions, 14 credit unions will need to shrink their member business loan portfolios to be in compliance with the Federal Credit Union Act. Two of these credit unions have subsequently failed -- Tracy FCU and Southwest Community FCU. Below is a list of the 14 credit unions that are exceeding their statutory member business lending limit. (click on image to enlarge)

Arrowhead Central CU Stops Making Member Business loans

An article in the Press Enterprise stated that Arrowhead Central Credit Union, which was placed into conservatorship on June 25, has stopped making business loans, according to the National Credit Union Administration.

NCUA spokesperson John McKechnie stated that "[w]hile Arrowhead is in conservatorship, NCUA has determined this line of business is not in the best interest of members and does not make sense for the credit union."

But this decision to suspend originating business loans should not come as a surprise. According to Federal Credit Union Act, an insured credit union that is undercapitalized may not increase the total amount of member business loans outstanding until such time as the credit union becomes adequately capitalized. As of March, Arrowhead was undercapitalized.

Furthermore, the decision to stop making business loans is necessary to bring the credit union back into compliance with the aggregate member business loan limit of 1.75 times the credit union's net worth. Arrowhead had $29.4 million in net worth. This means that the maximum amount of outstanding member business loans at Arrowhead would be approximately $51.5 million. However, the credit union reported $83.3 million in outstanding member business loans.

Texas Credit Union Department Proposing to be Reimbursed for Excessive Cost from Problem Credit Unions

The Texas Credit Union Commission is proposing that a credit union that engages in questionable behavior be responsible for the excessive cost it imposes on the Texas Credit Union Department. The proposed rule, according to the Commission, is designed to ensure that the Department’s fees and assessments are more equitable for all credit unions. To read the proposed rule, click here.

Southwest Community FCU Closed

The National Credit Union Administration liquidated Southwest Community Federal Credit Union of Saint George, Utah on June 30, 2010.

NCUA entered into an agreement with Chartway Federal Credit Union of Virginia Beach, Virginia, to purchase and assume certain assets and liabilities of Southwest Community Federal Credit Union. At the time of liquidation, Southwest Community Federal Credit Union had approximately $139,094,182 in assets and served 19,041 members.

According to its March 2010 financials, Southwest Community FCU was significantly undercapitalized with a net worth ratio of 3.18 percent. The credit union reported a loss of almost $700,000 during the first quarter after posting a loss of $6.6 million for 2009.

Southwest Community had a net charge-off rate of almost 4 percent for the first quarter and reported that 6.33 percent of its loans were 60 days or more delinquent. Roughly 90 percent of the credit union's delinquent loans were associated with first mortgages. The delinquency rate on the credit union's member business loan portfolio was 9.06 percent.

Southwest Community at the end of the first quarter reported holding slightly more than $6 million in foreclosed and repossessed assets.

NCUA did not disclose the cost of this failure to the NCUSIF.