NCUA Releases Q2 Financials

The National Credit Union Administration reported that deposit (share) growth slowed for federally-insured credit unions in the second quarter of 2010, while net worth remained steady.

Loan to Share Ratio Drops 34 Basis Points

Share (deposit) growth slowed to 0.6 percent during the second quarter, after growing at an annual rate of almost 11 percent in the first quarter of 2010.

Loans growth was virtually flat, edging up 0.1 percent to $566.4 billion during the second quarter. Balances on credit card loans, other unsecured loans, used vehicle loans, and first mortgage loans grew during the second quarter, while new vehicle loans and leases fell.

Because deposit growth was 6 times larger than loan growth during the quarter, the industry's loan to share ratio dropped 34 basis points to 72.82 percent.

For the first time, the industry's assets surpassed $900 billion -- reaching almost $904 billion.

The aggregate net worth ratio for the credit union industry held steady at 9.9 percent and more than 95 percent of federally insured credit unions still exceed the statutory requirement of being well capitalized.

ROA of 0.41 Percent

Credit unions reported second quarter net income of $782 million, yielding a year-to-date (YTD) profit of $1.83 billion. The aggregate YTD return on assets for federally-insured credit unions was 0.41 percent as of the end of the June -- 6 basis points beneath its March 2010 level.

Net interest income was up 26 percent from a year earlier to $10.9 billion. Lower interest expenses coupled with lower provisions for loan and lease losses more than offset the decline in interest income.

Non-interest income was less than $5.6 billion, while non-interest expenses grew by 2 percent over the last year to $13.65 billion at the end of the second quarter.

Two Consecutive Quarters of Lower Charge-off and Delinquency Rates

As of June, NCUA reported that 1.73 percent of credit union loans were 60 days or more past due – down 10 basis points from December 2009 and 3 basis points from March 2010. Participation loans and business loans are reporting the highest level of delinquent loans at 4.14 percent and 4.07 percent, respectively.

The net charge-off rate fell for the second consecutive quarter to 1.16 percent as of June 30, 2010.

Credit unions reported holding $1.65 billion in foreclosed and repossessed assets. Foreclosed real estate loans account for 85 percent of all foreclosed and repossessed assets.

GM Gives CU Members A Price Discount

GM, a.k.a. Government Motors, is offering members of participating credit unions a discount on their next new vehicle they purchase from GM. To read about the program, click here.

According to the FAQ, an eligible credit union member can purchase vehicles at a preferred price, which is below the MSRP (manufacturers suggested retail price). To qualify for the discount, the member must keep the vehicle for at least 6 months. The program also does not impose any limits on how many eligible new and unused vehicles per year that can be purchased or leased.

Since GM was bailed out by the American taxpayer, is it fair that only credit union members are being given a special price discount?

I don't think so.

NCUA's August 10 Letter on Arrowhead Central CU

Below is NCUA's August 10 letter to John Husing and Donald Driftmier about the conservatorship of Arrowhead Central Credit Union. (click on the image to enlarge)

The letter stated that the timing of the conservatorship was to prevent Arrowhead from selling its highest-performing loans to an out-of-state institution.

CUNA's Qualified Opposition to Dodd Frank Act

In a June 23 letter to Congress, the Credit Union National Association (CUNA) made it clear that if the debit interchange fee language was not part of the financial reform legislation, it "would not oppose H.R. 4173."

This means that CUNA was willing to accept increased regulatory burden for credit unions, if the Durbin interchange amendment was dropped. Why did CUNA do this?

However, CUNA's own analysis shows that this legislation will result in 35 new rules affecting credit unions. And the number of potential rules could grow as the new Bureau for Consumer Financial Protection ramps up.

I pointed out to credit union directors and executives at the 33rd Annual National Directors' Convention in Las Vegas the huge threat this new Consumer Bureau poses to their institutions.

"All banks and credit unions – large and small – will be required to comply with rules and regulations set by this new Consumer Bureau, including rules that identify what the bureau considers to be “unfair, deceptive, or abusive.” This agency will have broad powers to dictate the terms for everything from mortgages and credit cards to checking accounts and debit cards.

This new Consumer Bureau can require credit unions and community banks to submit whatever information it decides it needs and can examine community banks and credit unions at its discretion on a “sampling basis.” Thus, the new legislation will result in enormous new compliance burdens for banks and credit unions and a new regulator looking over your shoulders.

All banks and credit unions, regardless of size, will have to comply with extensive new disclosure and reporting requirements created by the bill. For instance, this new agency is given sweeping authority to require whatever disclosures it thinks are necessary to permit consumers to understand “the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.”

Moreover, this new Consumer Bureau will not have to take into consideration the safety and soundness implications of its new rules and regulations it proposes."

I do not know what political calculus went into CUNA's decision to say it would not oppose the bill, if it had been minus the Durbin interchange language.

But I think there were enough problems with the Dodd-Frank Act and the new burdens it would impose on banks and credit unions alike to warrant opposition even if the Durbin amendment had not been part of the bill.

Indirect Lending

NCUA issued a letter to credit unions about indirect lending programs. The "letter details the risk management practices that are appropriate and necessary to soundly manage an indirect lending program."

NCUA notes that rapid growth in indirect lending programs may cause a "material shift in a credit union’s balance sheet composition."

NCUA warns that a poorly managed program or a program with weak controls can quickly lead to increase credit risk, liquidity risk, transaction risk, compliance risk, and reputation risk. NCUA writes that it "has seen seemingly healthy credit unions fail in a matter of months due to indirect lending programs that spun out of control."

The letter states that NCUA examiners are looking for red flags or warning signs associated with a credit union's indirect lending program. This includes increasing amounts of repossessed autos or increasing indirect lending delinquency and loan losses. Additionally, NCUA is looking for other warning signs such as incentive programs tying loan officer bonuses to indirect loan volume (see failure of Cal State 9 CU) or high concentration of indirect loans to assets or net worth.

According to NCUA data, federally-insured credit unions reported holding $73.8 billion in indirect loans on their books as of March 2010. This translates into 13.05 percent of all credit union loans.

Among credit unions with at least $50 million in outstanding indirect loans, 94 credit unions report having indirect loans that were at least 3 times the credit union's net worth as of the end of the first quarter of 2010. The following table lists the twenty-five credit unions that have the greatest exposure to indirect lending as a percent of their net worth. (click on image to enlarge).

One Cent Overdraft Fee

Coastal FCU announced earlier this week that starting Sunday, August 15 it would implement an overdraft forgiveness program that would allow members to reduce their overdraft fee to just a penny.

According to its website, members of Coastal FCCU could avoid a $28 overdraft fee, if the member either corrects the overdraft before 11:00 PM that same day or had a small overdraft that did not take their end-of-day account balance into the negative by more than $10.

However, any account that remains negative by more than $10 after 11:00 PM would be charged a fee of $28 per overdraft.

If I was an enterprising reporter, the first question I would ask Coastal is whether the credit union will notify members via e-mail or text message or other means that they have overdrawn their account and have until 11 PM to correct the deficiency.

According to Moebs Research Service, nearly seven out of eight people do not balance their checking accounts. This probably means members do not know their current balances and would be unaware of overdrawing their accounts.

So, in reality, which fee -- one cent or $28 -- is the member more likely to pay, if not notified of the overdraft?

NCUA Board ‘Black Friday’ for Corporate Credit Unions Expected

Below is a commentary published by Marvin Umholtz (permission granted by author) from his August 14 CU Strategic Hot Topic newsletter.

Another potentially surprising story making the rounds concerned the expectation that as part of its legacy asset strategy the National Credit Union Administration (NCUA) Board www.ncua.gov won’t wait until its September 16th meeting to take decisive action to place one or more additional troubled corporate credit unions into conservatorship. This past week Credit Union Times www.cutimes.com reporter Heather Anderson contacted this correspondent in her research for a story expected to appear in the August 18th edition based upon a ‘Black Friday’ scenario. That is one news story that this correspondent can hardly wait to read.

This correspondent has no special connections at NCUA or anywhere else that provided an inside scoop about what the NCUA Board might be about to do. The following comments on the subject are speculation based upon knowledge of the industry and the corporate credit union crisis. “Black Friday” is a reference to those events associated with the stock market in the past when stock prices dropped dramatically. In the retail trade, “Black Friday” is that day after Thanksgiving that the stores get into the black on revenues. Generically, “Black Friday” also denotes any type of day of reckoning – which would surely fit the speculation about an NCUA Board takeover of the most troubled corporate credit unions. At its September 16th meeting, the NCUA Board is expected to adopt the new stricter corporate credit union regulations, announce the legacy asset plan, and assess the 2010 NCUSIF premium.

The longer the NCUA Board goes without announcing its legacy asset plan, the more likely it is that there is not going to be one. Unless the U.S. Treasury and/or the Federal Reserve step in and take the legacy assets off of the books for the National Credit Union Share Insurance Fund (NCUSIF), the Temporary Corporate Credit Union Stabilization Fund (TCCUSF), the Central Liquidity Facility (CLF), and the conserved corporate credit unions (U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, and perhaps other soon–to-be conserved troubled corporate credit unions), NCUA might not be able to reconcile its market, legal, and accounting goals to provide a least cost solution to the industry and give the corporate credit unions clean balance sheets.

Unlike Austin Powers’ lost mojo, the NCUA Board is unlikely to find the accounting black magic needed to make everything all right. Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board (FASB) www.fasb.org requirements are very unforgiving. In other words, the NCUA Board is likely stuck with the losses one way or another and NCUSIF or TCCUSF premium assessments would represent the only remaining plan to deal with the legacy assets since selling them off into the market just locks in actual losses. Let’s re-state that – retail credit unions are ultimately stuck with the cost, whatever it turns out to be.

The NCUA Board is racing against time in terms of the “unusually uncertain” economy, too. The market for mortgage-backed securities has not gotten better and is not expected to do so for many years due to the slogging economy and the deeply troubled U.S. housing market. Projected legacy asset losses are rapidly turning into actual credit losses. The NCUA Board’s original corporate stabilization actions were largely designed to buy time to find a lesser cost and more orderly fix in order to avoid a “catastrophic loss scenario” and “the demise of the credit union system” (NCUA’s own words from its last video presentation posted on its website).

As the economy continues to drag and even appear to worsen, the agency might now believe that waiting will not help the situation – thus the shift in thinking to take more immediate action to conserve some or all of the remaining corporate credit unions. Speculation about whether the NCUA Board plans to seize just the “bad” assets or all the assets provides for interesting permutations on the “Black Friday” scenario. Many corporate credit unions still rely heavily on the income streams from the performing legacy assets and would likely miss them if removed.

Rather than a catastrophic “Black Friday,” perhaps the speculated NCUA Board intervention would instead produce an environment for the phoenix-like rise from the ashes by the few corporate credit unions with the best chances to survive under the new capital expectations and payment system-focused business model. It would certainly make it easier for retail credit union officials to decide to recapitalize among fewer, healthier corporate credit unions than to try to recapitalize the entire system – especially if they were active members of one of the most troubled corporate credit unions and are still pained by their devastating past contributed capital losses. Plus, although this correspondent has not studied every corporate credit union’s website for detailed clues to its revised business plan under the new restrictions, none have loudly touted any plans yet that are economically and competitively viable moving forward.

For all practical purposes, the corporate credit union network is already in conservatorship since the NCUA Board’s stabilization program and capital waivers are the only things keeping it from collapsing. The NCUA Board’s formal conservatorship of the remaining troubled corporate credit unions might be a blessing in disguise – injecting some additional certainty into an uncertain situation. On the other hand, it is still hard to imagine a retail credit union’s board of directors getting past the losses that it has already suffered to recapitalize any corporate credit union. Many board members still don’t fully grasp the enormity of the corporate credit union crisis and those that do are madder than hell. Most never knew that the industry’s interconnected structure would leave them holding so large a toxic bag.

It would not be desirable for any speculation about the potential conservatorship of more corporate credit unions to cause a run on deposits and give the NCUA a new liquidity problem. As long as the NCUA’s deposit insurance and corporate stabilization 100% deposit guarantees are in place, the corporate credit unions – whether they are troubled or among the healthier ones – can operate safely under NCUA’s wing indefinitely. On the “Inside the Washington, DC Beltway” theory that any good crisis should not be wasted, the NCUA might indeed be positioning itself to pull the plug on the legacy assets and tackle additional corporate credit union conservatorships to force a quick transition to the next incarnation sooner rather than later. One can always hope that the rising phoenix will fly rather than crash and burn. And for the industry’s sake, one can also hope that the NCUA Board’s actions – whatever they end up being – result in the rebirth of a phoenix and not of an albatross.

The corporate credit union crisis and the resulting deposit insurance premium costs are on the minds of everyone in the industry. It has been a real shock to many credit union board directors. There appear to be no easy solutions. The credit union and corporate credit union deposit insurance funds need to be risk rated and should probably transform over time to be more like bank deposit insurance coverage funded by expensed premiums rather than the 1% NCUSIF investment. Until this funding structure changes, a high risk-taking credit union and a very risk-avoiding credit union pay the same relative rate. As the corporate credit union crisis so painfully demonstrated, the less risky are on the hook for the losses at the most risky.

Los Angeles Business Journal: Credit Unions Come Up Short

Credit unions have a reputation as small, conservative and community minded – not the kinds of financial houses that get rocked when the economy turns down.

But that reputation may no longer be deserved.

Los Angeles County has lost 20 credit unions, more than 11 percent of the total, since the beginning of last year, primarily because of failures or mergers, according to a Business Journal analysis of regulators’ data.

Click here to read the rest of the Los Angeles Business Journal article "Credit Unions Come Up Short."

Credit Unions Grandfathered from Business Loan Cap

Recently, I was asked by a reader if I knew which credit unions were grandfathered by the Credit Union Membership Access Act from the aggregate member business loan cap of 12.25 percent of assets because they had a histroy of primarily making business loans or were chartered for the purpose of making business loans.

While I have never seen an official list, the following table (click on table to enlarge) provides an unofficial list of credit unions that I believed were grandfathered. The list was constructed by looking at the financial statements of credit unions during the mid-to-late 90s.

According to NCUA's regulations, credit unions that have a history of primarily making member business loans, is defined to mean "either member business loans comprise at least 25% of the credit union’s outstanding loans (as evidenced in any call report filed between January 1995 and September 1998 or any equivalent documentation including financial statements) or member business loans comprise the largest portion of the credit union’s loan portfolio (as evidenced in any call report filed between January 1995 and September 1998 or any equivalent documentation including financial statements)."

CLF Should Be Subject to Same Transparency Reporting Requirements as Fed's Discount Window

The National Credit Union Administration’s Central Liquidity Facility (CLF) should be subject to the same transparency reporting requirements that applies to the Federal Reserve as dictated by Section 1103 of the Dodd Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203).

Section 1103 requires the Federal Reserve to disclose in timely manner information concerning the borrowers and counterparties participating in emergency credit facilities, discount window lending programs, and open market operations.

For discount window loans extended on or after July 21, 2010, the Federal Reserve will publicly disclose the following information, generally about two years after a discount window loan is extended to a depository institution:

• The name and identifying details of the depository institution;
• The amount borrowed by the depository institution;
• The interest rate paid by the depository institution; and
• Information identifying the types and amounts of collateral pledged in connection with any discount window loan.

The CLF was established in 1978 to provide emergency liquidity to credit unions and receives an annual appropriation from Congress. Since the CLF performs the same function of providing temporary liquidity as the Federal Reserve’s discount window, the CLF should be subject to the same disclosure requirements as mandated by Section 1103 of the Dodd Frank Act.

Also, any emergency credit facility, such as the Temporary Corporate Credit Union Stabilization Fund, should be subject to this disclosure requirement. NCUA disclosed that on June 14 the Stabilization Fund borrowed $810 million from the Treasury and these borrowings were to be deposited into corporate credit unions this summer, in order to raise liquidity within the corporate credit union system.

While the Dodd Frank Act does not require NCUA to disclose the name of credit unions borrowing from the CLF or other lending facilities, the agency should voluntarily comply with the requirements of Section 1103 of the Dodd Frank Act. Doing so would show the public that NCUA is serious about transparency and complying with the spirit of the law.

GTE FCU: Most Unreadable Credit Card Agreement

According to analysis by CreditCards.com, GTE FCU in Tampa, Florida has the most unreadable credit card agreement.

CreditCards.com examined more than 1,200 agreements and graded every statement using a standard common in the teaching and textbook industries: the FOG Index.

The credit card agreement from GTE FCU required that an individual have a reading comprehension level of 18.5 years or the equivalent of a post graduate degree. Click here to see the video of people trying to read GTE's credit card agreement.

Eight of the 10 most unreadable agreements were from credit unions. However, the 10 most readable agreements were from credit unions.

Hot Money

Last week while addressing the 33rd Annual National Directors’ Conference, NCUA Board member Gigi Hyland expressed concern about interest rate sensitive money comprising a greater percent of credit union shares (deposits).

Between year-end 2000 and the first quarter of 2010, share certificates and money market shares went from 41 percent of total shares to 50 ¼ percent of shares. During the same time interval, regular shares slipped from 34 ¼ percent of total shares to 27.6 percent. (See slides 16 and 17 of her presentation).

NCUA views such interest rate sensitive funds, as money market shares and share certificates, as potentially non-core sources of funding. In other words, the prospect of earning a few more basis points could cause these funds to depart the credit union, creating a liquidity issue.

Adding to NCUA’s anxiety is that credit unions are increasing their concentration in long-term assets. Federally-insured credit unions’ net position in long-term assets has gone from 22.67 percent of assets at the end of 2000 to 31.84 percent as of March 2010.

The following table lists the 25 credit unions with at least $50 million in shares as of March 2010 that have the highest concentration of shares in share CDs and money market shares. Evangelical Christian CU has slightly more than 91 percent of its shares in either money market shares or share CDs. (Click on image to enlarge).

One institution on the list, St. Paul Croatian, was seized by NCUA during the second quarter.

Should Credit Unions Pay to Play?

Here is an idea that deserves debate by banks and credit unions alike.

Is it time to reconsider the tax exemption for credit unions that want to act like banks?

There are some credit unions that are seeking powers that go beyond the current charter for credit unions. These institutions want to do more business lending, to have access to alternative capital, and to engage in other activities that are currently not permissible or limited by the credit union charter.

However, these expanded powers move a credit union further away from its original purpose and the rational for the tax subsidy.

If a credit union wants greater ability to make business loans – in other words, exceed the aggregate member business loan cap of 12.25 percent – or the ability to raise alternative capital, the trade-off is that a credit union voluntarily surrenders its tax exemption. On the other hand, if a credit union is content with the limitations of its charter, its tax exempt status would be preserved.

Pay to play is a win for traditional credit unions, because they keep their tax exemption. It is a win for credit unions that want greater authority, because it creates a pathway to engage in those powers.

I would be interested in hearing what credit union leaders think.

Veritas FCU Hit With Enforcement Action

The National Credit Union Administration (NCUA) has published a Letter of Understanding and Agreement (LUA) entered into with the officials of Veritas Federal Credit Union, Franklin, Tennessee.

The LUA identifies corrective actions needed at the credit union. Adverse conditions identified in the LUA include:
 Weak management – failure to address prior LUA and DOR;
 Weak internal controls;
 Out of balance general ledger conditions;
 No Supervisory Committee audit and no complete member account verification since 2008 – prior to relocation of the credit union from California to Tennessee; and
 Inadequate Allowance for Loan and Lease Loss account balance – required funding is expected to drop Net Worth from 7.6% to 4.9%.

For example, the LUA has instructed the $33 million credit union by the end of August to start repossession and foreclosure actions on loans that are at least 90 days delinquent. It is requiring the credit union's ALCO Committee to meet monthly. The credit union has agreed to hire an outside party to reconcile WesCorp settlement accounts and the ATM accounts.

Certified Federal Credit Union Closed

The National Credit Union Administration liquidated Certified Federal Credit Union (Certified) of Commerce, California on July 31, 2010. NCUA immediately signed an agreement with Vons Employees Federal Credit Union (Vons) of El Monte, California, to assume the assets and liabilities of Certified.

At closure, Certified had $37.6 million in assets and served over 8,580 members.

Through the first half of 2010, Certified FCU reported a loss of nearly $10 million. Almost 13 percent of its loans were at least 60 days past due. The credit union was insolvent with a net worth ratio of -17.11 percent as of June 2010.