Wednesday, December 28, 2011

Cleveland Fed: CU Industry Health Appears to Be Good

The Federal Reserve Bank of Cleveland recently published a paper on the health of federally-insured credit unions.

The paper concludes that

"the health of the credit union industry appears to be good. Capital as a percent of assets stands at 10.1 percent at midyear 2011. On the other hand, asset quality, while improving, continues to be a concern. Delinquent loans as a share of total loans has improved, falling from a peak of 1.84 percent in 2009 to 1.58 percent at midyear 2011—well above the pre-financial-crisis loan-delinquency rate of 0.68 percent at the end of 2006."

Read the paper.

Thursday, December 22, 2011

Commission: Repeal Honolulu's CU Property Tax Exemption

The Preliminary Report of the Real Property Tax Advisory Commission for the City and County of Honolulu has recommended a complete repeal of the property tax exemption for credit unions.

The Commission estimated that the tax benefit to credit unions operating in the City and County of Honolulu from the exemption was $1,473,000.

The Commission noted that it heard from credit unions imploring the Commission not to repeal the current exemption. Some credit unions justified not repealing the exemption because they provided "financial services to their memberships which normally cannot be accessed at traditional financial institutions."

Other credit unions claimed that the exemption allowed them "to enhance the earnings of their members and reduce the cost of loans made to their members." In other words, real property taxpayers are being asked to subsidize credit unions members.

The Commission believes that all real property owners who benefit from County services should pay something for those services. Therefore, credit unions real property should be subject to the property tax based on an assessment ratio of the fair market value of the credit union’s real property.

Comments on the Report are being accepted through January 9.

Read the Report.

Wednesday, December 21, 2011

Buying the Naming Rights Farm

Community Choice Credit Union bought itself a headache when it agreed to buy the naming rights to Veterans Memorial Auditorium in Des Moines, Iowa.

The credit union agreed to pay $2.5 million over the next 10 years to rename the auditorium the Community Choice Credit Union Convention Center (CCCUCC).

This is the same credit union that recently unveiled an "unbanking" ad campaign.

However, the renaming of Veteran Memorial was greeted with a less-than-enthusiastic response.

An anti-name change Facebook group called on the boycotting of the Community Choice CU and the CCCUCC.

The negative community response caused Polk County and Community Choice CU officials to rework the agreement. The proposed new name for the auditorium will be Veterans Memorial Community Choice Credit Union Convention Center.

I wonder if Community Choice CU ever thought that buying the naming rights to this auditorium would have generated such bad publicity and made them the target of an unbanking campaign.

Check out the article.

Check out updated article.

Monday, December 19, 2011

NCUA Closes Birmingham Financial FCU

The National Credit Union Administration (NCUA) liquidated Birmingham Financial Federal Credit Union (BFFCU) of Birmingham, Alabama. ēCO Credit Union of Birmingham, Alabama immediately assumed BFFCU’s members, assets, loans and debt.

Birmingham Financial was a low-income designated credit union with approximately $1.2 million in deposits. NCUA placed the credit union into conservatorship on October 27 of this year.

NCUA made the determination that the credit union was insolvent without any prospect for restoring viable operations on its own.

BFFCU is the 15th federally insured credit union liquidated in 2011.

Read the press release.

Exit Fee

The Credit Union National Association (CUNA) is advocating for an exit fee to be paid by credit unions that convert either to a mutual savings bank charter or private insurance.

CUNA contends that these institutions should be required to pay their fair share of the future Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessments.

However, NCUA does not believe it has the authority to assess an exit fee. In an August 29 letter to the National Association of State Credit Union Supervisors, NCUA wrote that legislative language creating the TCCUSF stated that premiums charged shall be stated as a percentage of insured shares and the premium rate will be identical for each credit union.

The legislation is silent on the issue of an exit fee.

If Congress intended for converting credit unions to pay an exit fee, it would have included the language in the statute.

There is precedent. In 1989, Congress explicitly stated that a financial institution leaving the Savings Association Insurance Fund (SAIF) for the Bank Insurance Fund (BIF) would be subject to an exit fee. (See Section 206 of the Financial Institution Recovery, Reform, and Enforcement Act of 1989.)

The fact that Congress omitted such language in the legislation creating the TCCUSF means Congress did not intend for converting credit unions to pay for the TCCUSF.

Thursday, December 15, 2011

Number of Problem CUs Edged Higher in November, But Shares and Assets Down

The NCUA reported that the number of problem credit union increased by 5 during November to 399 – the most problem credit unions during the current credit cycle.

A problem credit union has a CAMEL rating of 4 or 5.

The shares (deposits) at problem credit unions fell by $2.4 billion to $28 billion and assets at problem credit unions declined by $2.7 billion to $ $31.2 billion during the month. The decline in shares and assets at problem credit unions can mainly be attributed to a single billion-dollar plus credit union no longer being on the problem credit union list.

NCUA noted that 3.58 percent of all insured shares and 3.1 percent of the industry’s assets are in problem credit unions.

Almost 85 percent of all problem credit union have less than $100 million in assets, while 3 percent of the problem credit unions are larger than $500 million.

NCUA also announced that it will discontinue its monthly update on the status of the insurance fund and will return to a quarterly presentations.

Tuesday, December 13, 2011

No Savings to Consumers from Durbin Amendment

The Electronic Payments Coalition released a study that shows that merchants are not passing along the savings from the price controls imposed on debit card transactions by the Durbin Amendment.

The report found that at least 76 percent of retailers included in the research have raised prices or kept them the same since the Durbin Amendment became effective on October 1. Retailers have reaped a windfall profit of about $825 million since the beginning of October.

The Electronic Payments Coalition includes credit unions, banks, and payment card networks that move electronic payments quickly and securely between millions of merchants and millions of consumers across the globe.

Read the study.

Monday, December 12, 2011

Bonus Dividends

It is that time of the year when credit unions begin announcing bonus dividends.

For example, Founders FCU of Lancaster, S.C. on November 11 announced a bonus dividend of $10 million. The amount of the bonus dividend paid to each member is based upon the account balances as of October 31, 2011.

While credit unions like Founders are using these bonus dividend announcements to generate good publicity, the reality is that these credit unions probably mispriced their products and services.

In other words, these credit unions charged too much on their loans, paid too little on their deposit accounts, or collected too much in fee income.

I believe it would be preferable to pay a higher interest rate or APY on deposits than to pay a bonus dividend. This would encourage people to save more and they would receive the benefits of compounding interest.

A bonus dividend based upon balances on a specific date in the past, while it will put cash into peoples' pockets, will not affect the financial decisions of individuals.

Also, if a credit union is going to pay a bonus dividend, it should be based upon the level of patronage by the credit union member over the course of the year, not a snapshot of balances on a specific date.

Sunday, December 11, 2011

Cross Collateralization II

St. Petersburg Times today wrote about the use of cross collateralization clauses by credit unions.

"Using a little known tactic, credit unions are repossessing customers' cars after they default on credit card payments or other unsecured loans."

Read the article.

Friday, December 9, 2011

Undercapitalized Creit Unions, September 2011

At the end of the third quarter, 165 credit unions were designated as being undercapitalized. These undercapitalized credit unions held slightly more than $9.7 billion in assets.

Below is the list of undercapitalized credit unions with net worth ratio, net worth classification, net worth, and assets. (click to enlarge images)

Tuesday, December 6, 2011


The Credit Union National Association said that it significantly overestimated the number of individuals that joined credit unions between September 29 and November 4.

Initially, CUNA estimated that credit unions added 650,000 new members. CUNA is now reporting that credit unions added 214,000 new members in October.

CUNA said the discrepancy probably arose from ambiguous language in its survey.

Read the Chicago Tribune story.

Municipal Deposits and Community Reinvestment Act

Several cities in the U.S. Northwest -- Seattle, Portland, and Eugene -- are considering plans to shift funds from large banks to locally-owned financial institutions, including credit unions.

The proposed changes in their financial arrangements arose from the Bank Transfer Day movement.

But before transferring city funds, these cities should analyze the commitment of financial institutions to serve their local communities.

All banks currently are subject to the Community Reinvestment Act and must document how they are serving their local markets or communities. Banks are examined with regard to their compliance with the Community Reinvestment Act.

On the other hand, credit unions (with the limited exception of state chartered credit unions in Massachusetts and community chartered credit unions in Connecticut) are not covered by the Community Reinvestment Act. Therefore, credit unions are not required to document how they are serving their local communities.

As Preeti Vissa, Community Reinvestment Director of The Greenlining Institute, wrote in the American Banker's Bank Think Blog, "the awkward truth is that we don't know nearly enough about the extent to which credit unions overall serve low- and moderate-income consumers. They aren't required to collect and report details on the incomes or other characteristics of members, and because they aren't covered by the Community Reinvestment Act, they do not have to report much of the information that is required from banks."

Because of this lack of transparency, city governments should only deposit taxpayer funds into financial institutions that are covered by the Community Reinvestment Act.

Saturday, December 3, 2011

NCUA Liquidates O.U.R. FCU

The National Credit Union Administration (NCUA) liquidated O.U.R. Federal Credit Union of Eugene, Ore. Northwest Community Credit Union of Springfield, Ore., immediately purchased and assumed certain O.U.R. Federal Credit Union assets and member shares.

NCUA made the decision to liquidate and discontinue the operations of O.U.R. Federal Credit Union after determining the credit union was insolvent and has no prospect for restoring viable operations on its own. At the time of liquidation and subsequent purchase by Northwest Community Credit Union, the former credit union served 1,379 members and had deposits of approximately $4.25 million.

O.U.R. FCU was a low-income designated credit union. As of September, the credit union reported its net worth at minus $2.147 million. It had a net worth ratio of -65.95 percent. The credit union reported a loss of $2.3 million through the first three quarters of 2011.

O.U.R. FCU was the fourteenth credit union to be liquidated in 2011.

Read the press release.

Friday, December 2, 2011

Credit Union Report $4.61 Billion in Profits through the First 3 Quarters

NCUA reported that the net income of federally-insured credit union through the first 3 quarters of 2011 surpassed total net income for the industry for all of 2010.

Credit unions reported earning $1 billion in the third quarter bringing year-to-date net income to $4.61 billion. Factors having a positive impact on credit union profits in the third quarter included lower provisioning for loan and lease losses, lower interest expenses, and higher non-interest income. Factors that negatively impacted credit union income during the quarter included premium assessment to the Corporate Credit Union Stabilization Fund and lower interest income.

The industry's annualized return on assets (ROA) ratio stood at 66 basis points at the end of the third quarter, down slightly from 77 basis points in the second quarter. However, if ROA was adjusted for the premium assessment to the Corporate Credit Union Stabilization Fund, the return on assets would have been 92 basis points at the end of the third quarter.

Credit unions added $1 billion to their net worth during the third quarter. As of September 30, 2011, credit unions reported $96.6 billion in net worth. The net worth ratio for the industry increased 1 basis point during the quarter to 10.15 percent.

Federally-insured credit unions saw both an increase in assets and members during the third quarter. Assets rose by $8.7 billion to $951.1 billion. Credit unions reported adding more than 450,000 members during the third quarter, growing to 91.4 million individuals. In all, membership has increased by almost 1 million during the first 9 months of 2011.

NCUA reported shares (deposits) rose by $7 billion to $819.2 billion and loans increased by $3.1 billion to $567.1 billion. This was the second consecutive quarterly increase in total loans. However, since shares rose more rapidly than loans, the loan to share ratio fell by 21 basis points to 69.23 percent.

New auto loans and other real estate loans continued to decline, while used vehicle loans, unsecured loans, and first mortgage real estate loans rose during the quarter.

Asset quality was virtually unchanged during the quarter as the delinquency rate rose by 1 basis point to 1.59 percent. Loans 60 days or more past due rose from $8.9 billion as of June 2011 to approximately $9 billion as of September 2011; however, delinquent loans were well below the $9.9 billion reported a year earlier.

The pace of net charge-offs slowed during the third quarter. Net charge-offs were $1.2 billion during the third quarter. This was 6 percent below the level of net charge-offs reported during the second quarter of 2011. As a result, the industry's net charge-off ratio fell by 4 basis points during the quarter to .91 percent of average loan balances as of September 30, 2011.

Read the press release.

Wednesday, November 30, 2011

BCT FCU Liquidated

NCUA liquidated BCT FCU of Binghamton, N.Y. Visions Federal Credit Union of Endicott, N.Y., immediately assumed BCT Federal Credit Union’s assets, liabilities, and member shares.

NCUA made the decision to liquidate BCT Federal Credit Union and discontinue operations after determining the credit union was insolvent and has no prospect for restoring viable operations on its own. At the time of liquidation and subsequent purchase by Visions Federal Credit Union, the former credit union served approximately 3,900 members and had deposits of approximately $41.3 million.

BCT reported a loss of almost $9.6 million as it set aside almost $9.5 million in provisions for loan losses as of September 2011.

This loss caused BCT to become insolvent (net worth of -$3.2 million) with a net worth ratio of -8.44 percent as of the end of September. However, BCT's call report shows that the credit union had a net worth ratio of 12.80 percent as of June 2011.

The credit union reported charging off almost 50 percent of its loan portfolio in the third quarter.

Read the press release.

Tuesday, November 29, 2011

NCUA Sues Wachovia over the Failures of U.S. Central and WesCorp

The National Credit Union Administration (NCUA) has filed suit in Federal District Court in Kansas against Wachovia and its subsidiaries.

NCUA’s complaint alleges that there were numerous material misrepresentations made by the sellers, issuers and underwriters in the offering documents of securities sold to two failed corporate credit unions -- U.S. Central and WesCorp. These misrepresentations caused the corporate credit unions that bought the securities to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial.

Read the press release.

Read the complaint.

Monday, November 28, 2011

Charter Choice, Obstructionism, and Lawsuits

Several items related to charter choice recently caught my attention.

The first was an update on a lawsuit filed by First Basin Credit Union of Odessa, Texas. The second was a letter to the editor of Credit Union Times by the CEO of First Entertainment Credit Union (Hollywood, CA) cautioning credit union trade associations from meddling in the the internal affairs of credit unions exercising their rights to switch charters.

First Basin Credit Union is seeking $24 million in damages over its aborted attempt to switch to a bank charter.

According to Credit Union Times, First Basin has amended its complaint and is seeking damages from the Texas Credit Union League, the National Center for Member Trust, and North Carolina-based Self-Help Federal Credit Union.

First Basin Credit Union claims that the defendants manufactured the dissident group – Save First Basin – that opposed First Basin’s conversion and caused damages to the credit union.

The lawsuit has been going on for over three years.

Chuck Bruen, the CEO of First Entertainment Credit Union, wrote Credit Union Times that if the California Credit Union League (the League) moves forward with its plan to educate members over Technology Credit Union's decision to seek a mutual savings bank charter, things could get awfully messy.

He points out that NCUA oversees all member communications by a converting credit union. This information is "pre-screened and pre-approved by the NCUA." (emphasis added)

So, how can the member be misinformed?

He further notes that the League is not a neutral by-stander. The League will decide what information will be made available to educate the members and the presentation of the information is unlikely to be "fair and balanced."

The letter states that this attempted obstructionism could become unsavory and may expose the League to legal liability.

Wednesday, November 23, 2011

Liquidating Western Bridge

NCUA is currently in the process of soliciting bids to acquire the assets and business lines of Western Bridge Corporate Federal Credit Union (San Dimas, CA). NCUA expects the selection process to be completed by the end of 2011.

I have heard from a reputable source that NCUA discouraged banks with large correspondent banking operations from bidding on Western Bridge. By doing so, NCUA has probably increased the cost to the Temporary Corporate Credit Union Stabilization Fund associated with Western Bridge's liquidation.

As of August, Western Bridge reported holding $10.5 billion in assets. No other corporate credit union is close to Western Bridge in size. Therefore, a corporate credit union acquiring all of Western Bridge would experience a substantial dilution of its net worth ratio. On top of that, NCUA's new corporate credit union regulations will make it more difficult for a corporate credit union to generate the returns needed so that this investment would exceed any hurdle rate.

As a result, it is unlikely that Western Bridge can be sold intact. If Western Bridge is broken up and sold off in pieces, NCUA will not fetch as high a value for the assets and operations of Western Bridge.

So, by excluding banks from the bidding process that could have acquired the entire corporate credit union, NCUA has potentially raised the cost on all credit unions associated with the liquidation of Western Bridge's failure.

Monday, November 21, 2011

PenFed's Complimentary Associational Membership

A banker forwarded to me a credit card solicitation that executive management at his bank received from Pentagon Federal Credit Union for a PenFed Premium Travel Rewards American Express Card. (see image below)

The application has a checked box stating "Establish a Complimentary VOICES membership for me. This entitles me to join PenFed."

The application also has a checked box stating "Free $5 Opening Deposit."

So, Pentagon Federal Credit Union qualifies the applicant for membership by signing them up with Voices for America's Troops and paying their membership fee to the association. In addition, PenFed pays the fee for joining the credit union.

There is no common affinity or interaction among the people responding to this solicitation. PenFed is making a joke out of the common bond requirement.

In my opinion, PenFed is a credit union in name only and should have its tax exemption repealed.

Friday, November 18, 2011

Premium Assessments for 2012

The NCUA Board on Thursday announced the range of potential assessments that federally-insured credit unions will pay in 2012 to the National Credit Union Share Insurance Fund (NCUSIF) and the Temporary Corporate Credit Union Stabilization Fund (TCCUSF).

NCUA expects 2012 premium assessments to the NCUSIF to range between 0 basis points and 6 basis points. Premium assessments to the TCCUSF will range between 8 basis points and 11 basis points in 2012.

Thursday, November 17, 2011

Cease and Desist Order Against People for People Community Development CU

The National Credit Union Administration issued an Order to Cease and Desist to People for People Community Development Credit Union of Philadelphia. The order requires the credit union to take the following actions:

1. Complete a financial statement audit;
2. Charge off uncollectible loans;
3. Properly fund the Allowance for Loan and Lease Losses;
4. Collect on delinquent loans guaranteed by a third party;
5. Reconcile general ledger accounts monthly; and
6. Establish and maintain a Bank Secrecy Act compliance program.

The $1.1 million credit union was significantly undercapitalized as of September 30, 2011. The low-income designated credit union reported that 16.64% of its $519 thousand in loans were 60 days or more past due and that it had a net charged-off rate of 19.23%.

Read the order.

Problem Credit Union Update

The NCUA reported today that the number of problem credit unions increased during October, while assets and shares in problem credit unions were unchanged.

The number of problem credit union increased by 10 during October to 394 – the largest number of problem credit unions during the current credit cycle.

The growth in problem credit unions was associated with credit unions with less then $100 million in assets. Five credit unions with less than $10 million and 6 credit unions with between $10 million and $100 million in assets were added to the problem list during October. On the other hand, there was on fewer credit union with between $100 billion and $500 million in assets on the problem list by the end of October.

However, shares (deposits) and assets at problem credit unions were unchanged at $30.4 billion and $33.9 billion, respectively. NCUA noted that 3.89 percent of all insured shares and 3.4 percent of the industry’s assets are in problem credit unions.

A problem credit union has a CAMEL rating of 4 or 5.

Wednesday, November 16, 2011

Cross-Collateralization Clauses

A dirty little secret of the credit union industry is the use of cross-collateralization clauses in their loan documents. These clauses are sometimes referred to as dragnet or anaconda clauses.

Although some banks employ such clauses, these clauses are more prevalent among credit unions. It is estimated that over 70 percent of all credit unions use loan documents that include these clauses.

A cross-collateralization clause makes collateral that secures one loan serve as collateral for all loans the credit union has made or will make to the borrower. This effectively transforms all loans into secured loans.

Unfortunately, many borrowers are not aware of these cross-collateralization clauses until it is too late.

So, know before you owe.

Monday, November 14, 2011

NCUA Announces Two Settlements over the Sale of Risky MBS

NCUA has reached settlements with Citigroup and Deutsche Bank Securities over the sale of risky residential mortgage-backed securities to five failed corporate credit unions.

The settlements total $165.5 million. Citigroup agreed to pay $20.5 million, while Deutsche Bank Securities will pay $145 million. As part of the settlement, neither Citigroup nor Deutsche Bank Securities admitted fault.

The settlement will help lower future assessments paid by credit unions associated with the five failed corporate credit unions.

Read NCUA press releases on Citigroup Settlement and Deutsche Bank Securities Settlement.

Bank Transfer Day Black Box

The Credit Union National Association (CUNA) claims that more than 40,000 consumers joined credit unions on November 5, “Bank Transfer Day.”

CUNA extrapolated the results to the entire industry based upon the results from a survey sent to 1,100 credit unions.

However, CUNA conveniently failed to disclose the participation or response rate to this survey.

Why all the mystery?

Is it due to a low response rate?

A high response rate helps to ensure that survey results are representative of the credit union industry. Without a good response rate, the survey is unlikely to produce accurate and useful results.

Furthermore, the results of the survey may be suspect because of a self-selction bias associated with the credit unions that responded to the survey. A self-selection bias is possible whenever the group being surveyed has any form of control over whether to participate in the survey. Therefore, it is possible that the the credit unions that responded to the survey are disproportionately represented by credit unions that added members on Bank Transfer Day, not those that did not add members.

The failure to disclose the response rate and the potential of self-selection bias raises doubts about the accuaracy and usefulness of the survey's results.

Wednesday, November 9, 2011

Silver State Schools: A Cautionary Tale on Net Worth Assistance

Privately-insured Silver State Schools Credit Union last week released its third quarter financial statements and the credit union's financial condition continues to deteriorate.

But this commentary is not directed at Silver State Schools, but rather is a cautionary tale about net worth assistance.

Silver State Schools is reporting $24.2 million in net worth (capital) and a net worth ratio of 3.85 percent. However, slightly more than $22 million of its net worth is in the form of a subordinated loan from Silver State School's insurer, American Share Insurance (ASI).

Without this assistance, the credit union would be critically undercapitalized.

Moreover, if Silver State School's financial woes persist, ASI will most likely start taking impairment charges against its net worth assistance to Silver State Schools.

What has transpired with Silver State Schools and ASI has relevance to all credit unions.

Beginning on October 31, NCUA now has the authority to provide net worth assistance to troubled credit unions.

As I wrote on October 31, NCUA needs to clearly articulate under what circumstances such assistance will be extended, especially since the NCUA stated that it will not disclose which credit unions receive this assistance.

Monday, November 7, 2011

Farm Lending by Credit Unions

Since I'm at ABA's National Agricultural Bankers Conference, I thought it would be appropriate to revisit the issue of agricultural lending by credit unions.

Credit unions have a relatively small piece of the agricultural lending market, but have been growing their agricultural loan portfolios.

According to industry data, there are 289 credit unions that report some form of outstanding agricultural credit on their books as of June 2011. These credit unions have approximately $1.92 billion in outstanding agricultural loans. This includes $1.08 billion in farmland loans and $840 million in farm production loans.

However, only 47 credit unions have a material presence in agricultural lending. Material presence is defined as having at least $5 million in outstanding agricultural loans.

In the first six months of 2011, credit unions originated 6,716 farm production loans worth $437 million and 1,162 farmland loans worth $167.2 million.

The top three states with respect to credit unions making agricultural loans are North Dakota with approximately $527 million in farm credit, Indiana with $500 million in farm loans, and Minnesota with almost $344 million in farm loans on their books.

The credit union with the largest farm loan portfolio is Beacon Credit Union in Indiana at $366.5 million. The following table identifies the 10 credit unions with the largest farm loan portfolios (includes purchased loans or participation interests to nonmembers). Click on the image to enlarge.

Saturday, November 5, 2011

Thrivent Financial Bank Plans to Become A Credit Union

Credit Union Times is reporting that Thrivent Financial Bank plans to switch to a credit union charter.

According to the article, Thrivent Financial Bank reconsidered its business model because of the costly new regulatory demands of Dodd Frank Act on a insurance company that owns a bank and the introduction of the Federal Reserve as a regulator.

The change in charter still requires the final approval of the Thrivent's board of directors and from various regulatory agencies.

ABA supports charter choice and believes that the board and management know what is in the best interest of its financial institution and customers.

Read the Credit Union Times article.

Friday, November 4, 2011

Bank Transfer Day Shows that the Time Has Come to End CU Tax Exemption

Credit unions have embraced Bank Transfer Day with gusto advocating that consumers should move their accounts from banks to credit unions.

According to a survey of 5,000 credit unions by the Credit Union National Association, approximately 650,000 customers have joined a credit union, since September 29.

This just illustrates the point that many tax-exempt credit unions have evolved into direct competitors with taxpaying banks and should have their preferential tax treatment revoked.

The principle of tax equity states equals should be treated the same by the tax code. Therefore, institutions that are engaged in the same lines of business and are in competition with one another for the same customers should be subject to the same tax treatment.

For example, Congress in 1951 repealed the tax exemption for cooperative banks and mutual savings associations because it found that these institutions were in active competition with taxable institutions and continuing their tax exemption would be discriminatory.

Additionally, the President's Economic Recovery Advisory Board (PERAB) last year came to the same determination when it set forth as a policy option the repeal of the credit union tax exemption. PERAB wrote:

"Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions."

So, the potential legacy of Bank Transfer Day may be the demise of the credit union tax exemption.

Wednesday, November 2, 2011

Where Is the 2010 Corporate CU Stabilization Fund Audit?

We have entered the eleventh month of 2011 and NCUA still has not produced its 2010 audited financial statement for the Temporary Corporate Credit Union Stabilization Fund.

Where is it?

This appears to be a replay of the almost 18 month delay before NCUA released its 2008 Annual Report and audited financial statements for National Credit Union Share Insurance Fund and other funds operated by the agency.

NCUA needs to clearly communicate why it is taking so long to produce an audited financial statement for the Stabilization Fund.

If there are issues with the audit of the Stabilization Fund, credit unions, which are on the hook for paying the expenses for the Stablization Fund, have the right to know.

Monday, October 31, 2011

Section 208 Net Worth Assistance Becomes Effective Today

Today, Section 208 assistance from NCUA can count as net worth for problem credit unions.

However, there are some of us that are worried that Section 208 assistance may be abused.

Marvin Umholtz expressed such concern in CU Strategic Hot Topics. He wrote:

"The NCUA Board would be relatively unrestricted in its ability to pick winners and losers by injecting or withholding financial assistance. Channeling NCUSIF dollars to pet credit unions to keep them afloat is not an appropriate long-term safety and soundness policy. Although this correspondent generally believes that regulators need to have a full tool box, Section 208 is based on the faulty premise that politicians, including the NCUA Board and their agency’s bureaucrats, will allocate capital better than the marketplace. One can hope that an uptick in the NCUA Board’s use of Section 208 does not lead to the creation of a too-sick-to-fail credit union supervisory culture. The folly of “pretend net worth” should be self evident, but the savings and loan crisis decades ago provided tangible evidence of how not and why not to do it. Delayed resolution is often much more costly."

This is why ABA had requested that this assistance only be used to facilitate a merger between a healthy credit union and a failing credit union.

As it currently stands, no one knows under what circumstances the agency will extend Section 208 assistance.

To minimize this potential for abuse, the agency needs to clearly articulate the rules of the road as to when such assistance would be extended. Rules are preferable to discretion.

Friday, October 28, 2011

Birmingham Financial FCU Placed into Conservatorship

The National Credit Union Administration (NCUA) assumed control of service and operations at Birmingham Financial Federal Credit Union of Birmingham, Ala.

Birmingham Financial FCU is a low-income credit union and serves 429 members.

According to its call report, Birmingham Financial experienced a significant contraction between the first quarter and the second quarter of this year as its assets fell from almost $5 million to $1.3 million. The credit union reported holding almost $4.2 million in nonmember deposits as of March 31 of this year. As of June, the credit union reported holding only $200,000 in nonmember deposits.

Through the first six months of 20111, the credit union reported a loss of almost $108,000. The credit union reported a loss of $54,000 for 2010.

As of June 30, loans 60 days or more past due were $235,360. In other words, 26.91 percent of its loans were 60 days or more past due. An additional $187,242 of loans were 30 days to 60 days past due.

Read the press release.

Thursday, October 27, 2011

Problem CU Update

NCUA reported that the number of problem credit unions increased in September, while assets and deposits (shares) in problem credit unions fell.

A problem credit union has a CAMEL rating of 4 or 5.

At the end of September, there were 384 problem credit unions – a net increase of 15 during the month. This is the highest number of credit unions on the problem list so far this year.

According to the NCUA, there were 9 credit unions with over $1 billion in assets on the problem list -- down from 10 in August. However, 4 credit unions with between $100 million and $500 million in assets, 7 credit unions with between $10 million and 100 million in assets, and 5 credit unions with under $10 million in assets were added to the problem list.

Assets and deposits in problem credit unions as of the end of September were $33.9 billion and $30.4 billion, respectively. This was down from $34.8 billion in assets and $30.9 billion in deposits in August. The percentage of the industry's assets and shares in problem credit unions were 3.4% and 3.88% as of September.

The decline in assets and deposits in problem credit unions in August can be attributed to one $1 billion plus credit union no longer being rated as a CAMEL 4 or 5. The removal of this credit union from the problem list more than offset the increase in assets and deposits at the 16 credit unions that were added to the problem list.

Wednesday, October 26, 2011

NCUA to Engage in Capital Forbearance

According to a report appearing on CUNA News (Tuesday, October 25), NCUA is advising its examiners to temporarily engage in capital forbearance due to the possible inflow of deposits.

The guidance was issued to examiners in preparation of Bank Transfer Day.

CUNA News reported that NCUA told its examiners that the inflow of new funds could depress the net worth ratios of credit unions. The agency, according to the news report, noted that the call report allows credit unions alternative ways to calculate their net worth ratios.

If anyone has seen this guidance from NCUA, please forward it to me so that I can publish the document.

Tuesday, October 25, 2011

New Bethpage Customers Get A Better Deal

Tapping into consumer frustration about fees, Bethpage FCU is guaranteeing fee free checking accounts for the life of the accounts; but only if you are a new customer.

According to an article appearing in a New York Times blog, "new customers opening a Bethpage Bonus checking account can be assured of a lifetime of no debit card fees, no monthly maintenance fees, no transaction fees, no minimum balance fees and no fees charged by Bethpage for use of other banks’ A.T.M.’s. Plus, there are no fees for online, mobile or telephone banking."

While new customers get this deal, the existing customers of Bethpage apparently do not.

This reminds me of the Ally Bank commercial where the kid wants ice cream and is turned away because the ice cream is only for new people. Another kid comes along and gets a chocolate ice cream cone. When the first kid say he is new, he is told that the other kid is newer than you.

If Bethpage is not going to "dance with the one that brung ya", maybe the existing customers of Bethpage should shop around.

Sunday, October 23, 2011

CU Managed by NCUA Board Nominee Received TARP Funds

The credit union managed by Carla Leon-Decker, President Obama's nominee to the NCUA Board, received TARP funds.

D.C. Federal Credit Union was the recipient of $1.522 million investment on September 29, 2010 through the Community Development Capital Initiative program.

Go to the TARP Transaction Report (page 18 or 26).

Friday, October 21, 2011

Two Nominations -- A Study in Contrast

President Obama's nominees to serve on the FDIC Board versus the NCUA Board are a study in contrast.

President Obama nominated Thomas Hoenig to serve as the Vice Chairman of the FDIC Board. Dr. Hoenig was the President and Chief Executive Officer of the Federal Reserve Bank of Kansas City from 1991 to 2011. Dr. Hoenig first joined the Federal Reserve Bank of Kansas City in 1973 as an economist in the banking supervision area.

On the other hand, the President nominated Carla M. León-Decker for the NCUA Board. Ms. León-Decker is the President and CEO of the D.C. Federal Credit Union. From 1994 to 2000, she served at the PAHO/WHO Federal Credit Union, initially as Operations Manager and later as President and CEO. Before that, she was a branch manager at the Transportation Federal Credit Union where she served from 1988 to 1994. Ms. León-Decker is a credit union development educator and Co-Founder and Director of the Network of Latino Credit Unions & Professionals.

Tom Hoenig has a strong background as a bank regulator, while Carla León-Decker has no regulatory experience.

Thursday, October 20, 2011

Occupy Wall Street, Boycotts, and Credit Unions

Occupy Wall Street protesters have aligned themselves with an event calling on individuals to boycott large banks and move their funds to credit unions.

The event, Bank Transfer Day, is encouraging people nationwide to remove their funds from large banking organizations on or by November 5. Kristen Christian is the creator of this event.

The event’s Facebook page says: “In a stand of solidarity, on November 5th we will transfer our money & close our accounts with these major banking institutions to take our business to credit unions (or local banks if a credit union isn't available).”

Some credit union trade groups are viewing this event as an opportunity and are reporting a surge in traffic on their credit union locator sites. But I'm not sure all credit union CEOs share the same outlook.

Weak loan demand and a surge in deposits over the last couple of years has caused the loan to deposit (share) ratio for credit unions to fall from 83.58 percent at the end of 2007 to 69.44 percent as of June 2011.

Without a profitable means of deploying the potential inflow of funds, this potential movement in deposits from banks to credit unions could become a drag on credit unions as they incur higher cost associated with opening these accounts, face a potential assessment to rebuild the NCUSIF equity ratio, and see their capital (net worth) ratios fall.

Monday, October 17, 2011

330 LUAs Went Unpublished in 2010

There is an interesting table in The 2010 Annual Report see below) that shows that NCUA only published 3 letters of understanding and agreement, while 330 letters of understanding and agreement went unpublished.

NCUA issued 28 cease and desist orders. However, only one cease and desist order was published in 2010.

The Federal Credit Union Act requires that the NCUA Board publish and make available to the public “any written agreement or other written statement for which a violation may be enforced by the Board unless the Board, in its discretion, determines that publication would be contrary to public interest.”

It appears that NCUA is abusing its regulatory discretion to suppress the publication of information about enforcement orders against credit unions.

I have a hard time believing that in 99 percent of these supervisory actions that it was contrary to the public interest to publish these actions.

Friday, October 14, 2011

Areas of Regulatory Concern

In a letter to credit union directors on the mid-year performance of the credit union industry, NCUA stated that credit unions with elevated levels of credit, interest rate, concentration, and strategic risk will be subjected to greater regulatory scrutiny.

Credit risk remains a supervisory concern as it constrains the performance of many credit unions. While the overall delinquency and charge-off rates have declined through mid-year 2011, delinquencies in real estate, business, and participation loans remain high. Additionally, loan modifications are increasing. Modified loans have a high rate of re-defaulting and this could become delinquent in the future.

Interest rate risk is also a supervisory concern. NCUA notes that many credit unions are holding a significant amount of long-term, fixed-rate loans, as well as low-rate loan modifications. NCUA also is concerned that some credit unions are beginning to chase yields by purchasing investments with longer maturities. At the same time, most member shares are in short-term accounts and 58 percent of credit union share balances are less stable, rate-sensitive accounts.

Concentration risk is another supervisory concern, especially with regard to real estate loans and investments. NCUA advises that sound risk mitigation and diversification strategies are necessary to prevent loan concentrations from reaching unsafe levels.

Finally, strategic risk will be a focus of credit union examinations. This will include looking at management philosophy, plans, decisions, and actions, such as performing initial and ongoing due diligence of third-party vendors. A recent NCUA Inspector General report noted that 23 percent of 26,000 unresolved documents of resolution dealt with management issues.

Read the letter.

Wednesday, October 12, 2011

ABA Testified Against Increased Lending Cap

The American Bankers Association testified today before the Senate Subcommittee on Financial Institutions and Consumer Credit, expressing strong opposition to legislation that would more than double the business lending cap for qualifying credit unions, effectively turning them into tax-exempt banks.

ABA Chairman-Elect Albert C. Kelly, Jr., testified that the “Small Business Lending Enhancement Act of 2011 (H.R. 1418)” would permit credit unions within 80 percent of their member business lending cap to increase it to 27.5 percent of assets – more than double the current limit. Kelly is also chairman and chief executive officer of SpiritBank, headquartered in Bristow, Okla.

“This would allow qualified credit unions to significantly increase their business lending at the expense of making consumer loans,” Kelly said. “This increase in business lending would shift some business loans to tax-exempt credit unions from tax-paying banks, causing an increase to the federal deficit just when Congress is looking for ways to reduce the government debt.”

Credit unions already have sufficient lending authority to make small business loans, with business loans under $50,000 not counting against the current cap of 12.25 percent.

“These exemptions mean that credit unions already have unlimited ability to fund small business loans, without the need to seek increases in their member business lending limits,” Kelly said. “This proposed increase is only directed at larger loans and would benefit only a few large, aggressive credit unions. Just 96 credit unions out of 7,292 total are within 80 percent of their congressionally-mandated cap.”

For those credit unions seeking to expand their business lending, the option to convert to a mutual savings bank charter is readily available.

“Instead of trying to broaden tax-advantaged lending, increasing the deficit in the process, credit unions that seek to expand business lending opportunities can reach out with credit in their communities by converting to a mutual savings bank charter,” he said. “This charter provides the flexibility credit unions desire and would put these credit unions on equal footing with banks with respect to taxes and regulatory oversight.”

Tuesday, October 11, 2011

Royal CU Acquires Mortgage Servicing Rights from Failed Bank

Royal Credit Union has agreed to acquire the servicing rights of The RiverBanks’ mortgage loans.

The Minnesota bank regulator closed The RiverBank on October 7.

The transaction, which will take place on October 14, 2011, brings approximately 4,200 additional mortgage loans and members to Royal Credit Union. The outstanding balances of the mortgage loans are worth almost $600 million.

According to Mark Willer, Chief Operating Officer of Royal Credit Union, almost all of the mortgage customers of The RiverBank are within Royal Credit Union's field of membership.

"Less than 20 of the 4200 River Bank customers were outside our field of membership," said Willer. "Our Bylaws are being amended to specifically include these Riverbank customers within our field of membership."

The transfer is expected to be completed by October 17, 2011. The terms of the transaction were not disclosed.

While such bank/credit union transactions remain rare, this is the second transaction between Royal Credit Union and a bank. Less than a year ago, Royal Credit Union acquired 11 branches and 20,000 customer accounts from Anchor Bank.

Also, United FCU (St. Joseph, MI) has announced that it has entered into an agreement to purchase and assume the deposits and assets of Griffith Savings Bank.

Monday, October 10, 2011

HAR-CO Members Vote to Become A Mutual Savings Bank

The membership of HAR-CO Federal Credit Union has approved the Board’s proposal to convert from a federal credit union charter to a federal mutual savings bank charter.

Over 58 percent of voting members casted ballots in favor of the proposal.

HAR-CO reported that over 5,000 of its members voted on the proposal.

HAR-CO will continue to operate as a credit union until it receives final regulatory approvals. It expects the closing of the charter conversion transaction will take several months to complete.

Read the announcement.

NCUA Ineffective in Follow Up on Unresolved Exam Issues

An audit by NCUA's Office of the Inspector General (IG) found that NCUA needs to improve its follow-up process with regard to Document of Resolution (DOR).

The audit report concluded that "neither NCUA's Office of Examination and Insurance (E&I) nor the five regional offices effectively monitored or followed up on unresolved DOR items." This failure to follow up on these DORs represented "missed opportunities to mitigate losses" to the share insurance fund.

A DOR is issued by NCUA examination staff outlining "plans and agreements reached with credit union officials to reduce identified areas of unacceptable risk." The DOR will identify persons responsible and timeframes for correction.

The audit noted that in five of ten credit union failures reviewed by the IG, the same DOR issues were repeated over several examinations at the same credit union and these unaddressed DOR issues contributed to the failure of these credit unions.

The IG audit further notes that 4,653 federally insured credit unions had over 26,000 unresolved DOR items at the end of 2010. Fifty-seven percent of the credit unions had a composite CAMEL rating of 2 during their last exam.

Twenty-three percent of these credit unions had unresolved DOR items related to management issues. The report noted that 88 percent of the management-related DOR issues were associated with "Management Understanding/Response” and “Management Practices” risk factors.

The IG audit notes that a number of these unresolved DOR issues have been around for a long time. Fifty-even were over 10 years old; 776 were 5-10 years old; 2,305 were 3-5 years old; 3,098 were 2-3 years old, 9,055 were 1-2 years old, and 10,870 were less than one year old.

The IG stated that examiners failed to take timely corrective actions with regard to unresolved DORs. These actions could have included a CAMEL ratings downgrade or a stronger supervisory action.

Read the report.

Sunday, October 9, 2011

Not All CUs Want Expanded Business Lending

Not everyone in the credit union industry is eager to see an expansion in the business lending powers for credit unions.

Check out these two recent blog posts on 1st Thought on Everything Credit Union about member business lending, especially since there is a hearing on Wednesday, October 12 on increasing the business lending authority of credit unions.

The first blog posting focuses on Telesis Community CU. This credit union was one of the biggest advocates for greater business lending authority and has seen a sharp deterioration in its financial performance due to bad commercial loans.

The second blog post is on "Not Everyone is Whacky About MBL."

Wednesday, October 5, 2011

NCUA Proposal Would Artificially Inflate Corporate CU Leverage Ratio

In a comment letter filed with NCUA on October 5, the American Bankers Association opposed excluding Central Liquidity Facility (CLF) stock subscriptions from the definition of net assets, which is the denominator of the leverage ratio for corporate credit unions.

NCUA is proposing to deduct CLF stock subscription from net assets, because it believes CLF stock subscription poses negligible credit risk and will help address systemic liquidity needs of natural person credit unions.

However, deducting CLF stock subscription is an accounting gimmick that would artificially inflate the leverage ratio for corporate credit unions, making them appear less risky than they really are.

The four percent leverage ratio requirement is intended to ensure that credit unions maintain a minimum amount of capital as protection against risks that are not captured by risk-based capital standards, risks that by definition are unknown or unknowable. The leverage ratio is a recognition that risk models are subject to significant error, which the recent financial turmoil affecting banks and credit unions alike made all too clear. The leverage ratio should not be influenced by fallible estimates of the riskiness of the assets.

Additionally, if NCUA believes that the credit risk posed by CLF stock subscription, is negligible, then this is best addressed through the risk-based capital requirements for corporate credit unions and not the leverage ratio.

Moreover, arguments that the proposed definitional change in net assets is necessary to meet the systemic liquidity needs of natural person credit unions ignores the fact that credit unions have other alternative sources of liquidity already available to them.

First, credit unions can meet their liquidity needs by becoming members of the Federal Home Loan Bank (FHLB) system. As of June 2011, NCUA is reporting that 1,047 federally-insured credit unions were FHLB members.

Second, almost all credit unions, except for the smallest, can make arrangements with the Federal Reserve to access the discount window to meet emerging liquidity needs.

Read ABA's Comment Letter.

Tuesday, October 4, 2011

ASI Assesses 15 Basis Point Premium on Privately Insured Credit Unions

For the third year in a row, American Mutual Share Insurance Corporation (ASI) levied a special premium on privately insured credit unions.

The Board of Directors of ASI announced a special premium assessment for 2011 in the amount of 15 basis points of total shares. The premiums were assessed on September 30, 2011, and were based on the total shares reported as of June 30, 2011.

ASI noted that the special assessment was due to lower yields on its government bond portfolio and more aggressive funding of its loss reserves.

Read ASI's press release.

Technology Credit Union Begins Process to Become A Mutual Savings Bank

The Board of Directors of Technology Credit Union have provided notice to its membership that it is considering asking its members to approve a charter change from a credit union to a mutual savings bank.

The $1.5 billion credit union located in San Jose, California listed expanded commercial lending authority, the ability to access sources of capital, and no limitations as to who it can serve as reasons for seeking the change in charter.

Membership of the credit union are being invited by the Board of Directors to provide written comments about the charter change proposal. Comments must be received by October 29. On November 2, the Board will decide whether to move forward with the charter change proposal based upon comments received from the membership.

Monday, October 3, 2011

CUNA Overstates Number of CUs Impacted by Business Loan Cap

CUNA is inflating the number of credit unions that are near or will be near the business loan cap.

In a September 20 letter to House Capital Markets and Government Sponsored Enterprises Subcommittee Chairman Scott Garrett and Ranking Member Maxine Waters, CUNA wrote that 355 credit unions are near or will be near the business loan cap of 12.25 percent of assets.

Specifically, CUNA wrote:

"Today,there are approximately 175 credit unions that are essentially at the cap (> 10% of total assets); another 180 credit unions are quickly approaching the cap and will likely be capped within 2-3 years (7.5% - 10% of total assets)."

I tried to replicate CUNA's analysis and could not get their numbers.

As best as I can tell, CUNA's analysis includes credit unions, which were either chartered for the purpose of making member business loans or have a history of primarily making member business loans. Furthermore, CUNA's analysis appears to include credit unions that either have a low-income designation or are community development financial institutions. These credit unions are excepted from the aggregate business loan cap.

According to footnote 12 of NCUA Chairman Debbie Matz's testimony on June 16, 2011, there were 120 credit unions, which were either chartered for the purpose of making member business loans or have a history of primarily making member business loans. Additionally, 59 of the 120 credit unions have a low-income designation.

That means there are 61 credit unions that were chartered for the purpose of making member business loans or have a history of primarily making member business loans, which are not low-income.

Using credit union call report data supplied from Highline FI, I found that 56 credit unions with a low income designation have a member business loan to asset ratio greater than 10% as of June 2011. This reduces the number of credit unions that are impacted by the cap to 119. Additionally, assuming that the 61 credit unions, which were chartered for the purpose of making member business loans or have a history of primarily making member business loans, were above the 10% threshold, this means only 58 credit unions are actually impacted by the cap -- not 175 credit unions.

Furthermore, I only found that 99 credit unions, which are not low-income designated, have an member business loan to asset ratio between 7.5% amd 10% of assets.

In conclusion, it appears that CUNA's analysis greatly inflates the number of credit unions impacted by the bsuienss loan cap.

Friday, September 30, 2011

CFPB Said What

If you have not checked out Tom Brown's commentary on the Consumer Financial Protection Bureau (CFPB) and auto financing for service members, I believe you should.

According to the post, "the CFPB thinks it’s a problem that service members can’t take their financed vehicles with them when they get deployed overseas."

I think most, if not all, lenders would think this is not a good idea.

Banks and credit unions that serve the armed forces need to pay close attention to this development.

Read Tom Brown's Commentary.

Wednesday, September 28, 2011

Material Loss Review on Southwest Corporate FCU

The failure of Southwest Corporate FCU (Southwest) will cost the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) $141 million, according to a recent report released by NCUA's Office of Inspector General (IG).

The IG report found that the failure of Southwest can be attributed to management's implementation of an aggressive investment strategy that led to a significant concentration of investments directly in privately-issued residential mortgage backed securities (MBS) and additional indirect exposure through U.S. Central Federal Credit Union’s investments in MBS.

Between March 2004 and July 2007, Southwest increased its direct concentration of privately-issued MBS 263% from $1.39 billion to $5.05 billion. This growth in its private-label MBS was fueled by an increase in Southwest's investment policy limit from 400% of capital in 2004 to 900% of capital in 2006.

In 2007, approximately two-thirds of Southwest’s $4.8 billion MBS exposure was collateralized by riskier non-prime mortgages, just when the housing market became dislocated.

Moreover, its MBS exposure was heavily concentrated in one state -- California. The California concentration represented 319 percent of Southwest’s capital.

The IG report also criticized NCUA Office of Corporate Credit Unions (OCCU) staff. It found that staff did not adequately and timely address the risks associated with Southwest’s direct concentration of and indirect exposure to privately-issued MBS. The report also criticized OCCU staff for not taking exception to the geographic concentration of Southwest's private-label MBS portfolio.

Read the report.

NCUA No Need for Cost-Benefit Analysis on All Proposed Rules

In a speech to NASCUS State System Summit, NCUA Board member Michael Fryzel was dismissive of the notion that the agency should conduct a cost-benefit analysis regarding every regulation the agency proposes.

Board member Fryzel said:

"I also do not believe we should write a report on the cost-benefit analysis of every regulation NCUA proposes. Doing so would be too burdensome, or necessitate hiring additional employees. In any event, the intended benefits are generally obvious in the regulations we propose, and, indeed, many comments point out potential costs -- we need not duplicate those efforts."

However, the Office of Management and Budget (OMB) in September 2003 wrote:

"A good regulatory analysis should include the following three basic elements: (1) a statement of the need for the proposed action, (2) an examination of alternative approaches, and (3) an evaluation of the benefits and costs—quantitative and qualitative—of the proposed action and the main alternatives identified by the analysis."

OMB goes on to write that good analysis is transparent and provides specific references to all sources of data.

It is unacceptable for NCUA to state that the intended benefits of the proposed rule are obvious and that commenters can point out the potential costs.

Furthermore, Fryzel's comment places the agency on a possible collision course with Senator Shelby of Alabama. Senator Shelby recently introduced the Financial Regulatory Responsibility Act of 2011 (S 1615).

According to the press release, "the legislation holds financial regulators accountable for rigorous, consistent economic analysis on every new rule they propose. It requires them to provide clear justification for the rules, and to determine the economic impacts of proposed rulemakings, including their effects on growth and net job creation. This bill also improves the transparency and accountability of the regulatory process and reduces the burdens of existing regulations. In addition, the legislation mandates that if a regulation’s costs outweigh its benefits, regulators are barred from promulgating the rule."

Monday, September 26, 2011

Net Worth Assistance Coming to Troubled Credit Unions

The NCUA Board approved net worth assistance for credit unions that are in danger of failing.

Section 208 of the Federal Credit Union Act allows the Board, in its discretion, to make loans to, or purchase the assets of, or establish accounts in insured credit unions the Board has determined are in danger of closing or in order to assist in the voluntary liquidation of a solvent credit union.

ABA believed that this assistance should only be provided in the case of a merger of a failing credit union into a healthy credit union. It was not meant to be used as a vehicle to prop up credit unions that are in danger of failing.

According to NCUA Chairman Matz's December 2010 testimony, she pointed out that when a healthy credit union acquires a failing credit union, this resoluted in a delusion of the healthy credit union's net worth. Without the ability of counting assistance from NCUA as net worth, this "necessitates more outright liquidations instead of mergers," which would increase the resolution cost.

However, NCUA disagreed with ABA's viewpoint. NCUA wrote that there was no language limiting section 208 assistance to situations only involving a merger. Therefore, section 208 assistance can be provided directly to a troubled credit union and be counted as part of a credit union’s net worth.

Furthermore, NCUA stated that it would not disclose the name of credit unions receiving section 208 assistance and will not include a line item regarding section 208 assistance in the 5300 Call Report.

NCUA wrote that if it made public information about credit unions receiving section 208 assistance, there was a strong possibility that members may perceive the credit union as weak and unstable. Let me make one thing clear -- if a credit union is getting section 208 assistance, it is because it is weak and unstable.

Perhaps, the news media will mount a legal challenge to NCUA's decision to not disclose which credit unions receive section 208 assistance.

Saturday, September 24, 2011

Chetco FCU Placed into Conservatorship

The National Credit Union Administration (NCUA) assumed control of service and operations at Chetco Federal Credit Union of Harbor, Ore.

Chetco FCU had approximately $333 million in assets at the end of June 2011.

Chetco FCU reported a loss of almost $17 million for 2010 and a loss of $212,215 for the first six months of 2011.

As of the end of June 2011, the credit union was undercapitalized with a net worth ratio of 5.02 percent. Chetco reported that $57.8 million in loans that were 60 days past due or 19.02 percent of its loans were delinquent.

Part of Chetco's problems arose from loan participations. Chetco FCU had $70.5 million in outstanding loan participations (about 23 percent of its loan portfolio) and almost 17.5 percent of these loan participations were delinquent.

The credit union reported holding $10.1 million in foreclosed real estate loans.

Read the press release.

Thursday, September 22, 2011

Problem CU Update

NCUA reported today that the number of problem credit unions, assets in problem credit unions, and deposits (shares) in problem credit unions fell in August.

A problem credit union has a CAMEL rating of 4 or 5.

At the end of August, there were 369 problem credit unions -- down from the recent high of 381 credit unions in June.

Assets and shares in problem credit unions were to $34.8 billion and $30.9 billion, respectively. The percentage of the industry's assets and shares in problem credit unions were 3.5% and 3.96%.

The decline in assets and deposits in problem credit unions in August arose from one $1 billion plus credit union and two credit unions with between $500 million and $1 billion no longer being rated as a CAMEL 4 or 5. These three institutions accounted for a combined $5.7 billion decline in deposits on the problem list.

Wednesday, September 21, 2011

NCUA Tapped Line of Credit at Treasury on July 27

According to the August 29 transcript from the NCUA Board meeting, NCUA tapped its line of credit at the Treasury in July.

NCUA Chief Financial Officer, Mary Ann Woodson, stated:

"On July 27 NCUA borrowed $3.5 billion from Treasury to satisfy the balance of the bridge note payable and other miscellaneous obligations which were paid on October 1, excuse me, which were paid on August 1, 2011."

Mary Ann Woodson also acknowledges that NCUA anticipates borrowing a total of $5.5 billion from the Treasury of its $6 billion line of credit to meet near-term cash flow needs.

While credit unions will ultimately repay this borrowing, tax-exempt credit unions are receiving valuable assistance from the U.S. Treasury and ultimately the American taxpayer.

This borrowing does not count other assistance that came from the Treasury. For example, Treasury lent funds to the Central Liquidity Facility that were funneled to two corporate credit unions to keep them afloat and prevent a systemic collapse of the credit union industry.

So whether credit unions want to recognize it or not, they were bailed out.

Tuesday, September 20, 2011

NCUA Announces Upcoming Regulatory Agenda

In a speech on September 19 before the National Association of Federal Credit Unions, NCUA Chairman Debbie Matz announced the forthcoming regulatory agenda for the NCUA.

Debbie Matz said in her speech: "[M]y goal is to target risky behaviors in credit unions, not credit unions themselves."

The NCUA chair stated that the agency will move forward with its plans to finalize its CUSO transparency and interest rate risk rules. Additionally, Chairman Matz noted some new proposed regulations that will be issued this fall or next year.

First, NCUA Board plans to consider a Loan Participation Protection rule, which will cover both originators and buyers of loan participations. NCUA will require originators to keep some “skin in the game” so as to provide "a disincentive for the kinds of reckless behavior that puts the Share Insurance Fund at risk." The proposed rule would also require participating credit unions to investigate these loans thoroughly – not just at origination, but over the life of the loan.

Second, NCUA will propose an Investment Concentration Exposure Limits rule, which will be aimed at limiting concentrations in the riskiest investments, like private-label mortgage-backed securities and collateralized debt obligations.

Third, NCUA will propose extending six of the seven remaining Regulatory Flexibility (RegFlex) provisions to all federal credit unions. The seven remaining RegFlex provisions are:

1. charitable contributions;
2. nonmember deposits;
3. ownership of fixed assets;
4. zero coupon securities;
5. borrowing repurchase transactions;
6. commercial mortgage related securities; and
7. purchase of obligations from federally-insured credit unions.

Ms. Matz also called on credit unions to lobby Congress for the authority to issue secondary capital and lifting the business loan cap.

Read the speech.

Saturday, September 17, 2011

Governor Perry Calls for Lifting Business Loan Cap

Speaking before the Iowa Credit Union League’s annual convention, Governor Rick Perry called for the federal government to lift the 1998 cap that limits credit union business loans to 12.25 percent of their assets, which he called arbitrary.

Read more.

Friday, September 16, 2011

Unpublished Enforcement Actions

On September 1, the NCUA's Office of the Inspector General (IG) issued two Material Loss Reviews on the failures of Certified FCU and Constitution Corporate FCU. The reports noted that both credit unions were under enforcement actions at the time of their failure.

The IG report on Certified FCU states that credit union was issued a Letter of Understanding after its June 2009 examination.

In a separate IG report, a Letter of Understanding and Agreement (LUA) was issued to Constitution Corporate FCU following its August 2008 examination. The consent order "contained several provisions pertaining to policies and strategies to address liquidity, credit concentration limits, and capital adequacy concerns."

However, these enforcement actions were never published. According to a footnote in the Certified FCU Material Loss Review, when an enforcement order is unpublished, the administrative remedy is considered an informal action.

I know that I sound like a broken record on this subject. But if NCUA believes that credit unions are owned and controlled by their members, then publish the enforcement actions. The members have a right to know.

Wednesday, September 14, 2011

Credit Union Mergers

A recent Federal Reserve Bank of San Francisco's Economic Letters on credit union mergers concluded that credit union mergers have shifted from, on average, only benefiting merger targets to also benefiting acquirers to some extent.

The paper looks at 9,412 credit union mergers from 1984 to 2009. The paper put credit union mergers into three categories -- absorptions, in which targets had less than 10% of the acquirer’s assets; acquisitions, in which targets had 10–50% of the acquirer’s assets; and mergers of equals, in which targets had more than half of the acquirer’s assets.

The study found that absorptions accounted for 69% of targets, but only 33% of target assets; acquisitions accounted for 25% of targets and 40% of target assets; and mergers of equals accounted for 6% of targets and 22% of target assets.

The study found that "in the first year after mergers, aggregate noninterest expenses fell by 0.02 percentage point in absorptions, 0.13 in acquisitions, and 0.20 in mergers of equals."

The study also found that five years after a merger of equals the cost savings had been completely dissipated, while acquisitions had retained a larger portion, if not all, of their cost savings.

Read the article.

Tuesday, September 13, 2011

Efficiency Ratio, June 2011

The California Department of Financial Institutions (DFI) announced that it is incorporating the efficiency ratio into its examination of state chartered credit unions.

The state regulator noted that examiners often commented on credit union efficiency, but were not able to quantify performance. Using the efficiency ratio will give examiners another tool to better identify and communicate the earnings performance of credit unions.

Specifically, the efficiency ratio measures the cost of generating an additional dollar of revenue. The efficiency ratio equals total non-interest expense divided by [(total interest income - total interest expense) + fee income + other operating income + other non-operating income].

The DFI stated that the efficiency ratio has a long history of being used within the financial services industry as a key earnings metric, although NCUA does not consider it a key ratio. The DFI , however, stated that the efficiency ratio is only a part of the picture and does ignore non-financial considerations by credit unions.

As of June 2011, the unweighted average efficiency ratio for the credit union industry was 90.53%. The median efficiency ratio for the credit union industry was 86.10%.

As a general rule, the larger the credit union, the lower the efficiency ratio.

Below is some benchmarking statistics by asset size groups as of June 2011.

For credit unions with $1 billion or more in assets, the average efficiency ratio was 66.30% but half had an efficiency ratio in excess of 66.59%. Credit unions with an efficiency ratio at or below 60.10% were in the top (first) quartile. Star One Credit Union had the lowest efficiency ratio at 27%, while Indiana Members Credit Union had the highest efficiency ratio at 93.10%.

For credit unions with assets between $500 million and $1 billion, the average and median efficiency ratios were 73.60% and 73.94%, respectively.

For credit unions with assets between $250 million and $500 million, the average and median efficiency ratios were 76.61% and 77.91%, respectively.

For credit unions with assets between $100 million and $250 million, the average and median efficiency ratios were 79.90% and 80.08%, respectively.

For credit unions with assets between $50 million and $100 million, the average and median efficiency ratios were 83.29% and 84.05%, respectively.

For credit unions with assets between $10 million and $50 million, the average and median efficiency ratios were 87.17% and 87.4%, respectively.

For credit unions under $10 million, the average and median efficiency ratios were 103.16% and 93.75%, respectively.

Friday, September 9, 2011

Special Premium for Privately Insured CUs

American Mutual Share Insurance Corporation (ASI) announced a Special Premium Assessment for 2011 of 15 basis points on total shares (deposits) as of June 30, 2011. The premium will be assessed of all primary insured credit unions of record on September 30, 2011, subject to final regulatory approvals.

The premium assessment does not apply to excess share insurance policyholder credit unions insured by Excess Share Insurance Corporation (ESI) or ASI.

ASI stated that the special premium assessment was due to lower yields on its government bond portfolio and weaknesses at a small number of member credit unions in select markets, which have required a more aggressive funding of loss reserves by ASI.

Read the press release.

Thursday, September 8, 2011

Material Loss Review Issued on Constitution Corporate FCU

NCUA's Office of the Inspector General (IG) issued its report on the failure of Constitution Corporate FCU. NCUA estimated as of July 2011 that the failure of Constitution Corporate FCU resulted in a loss of $145 million to the Temporary Corporate Credit Union Stabilization Fund.

This IG report is similar to the other IG reports that examined the failures of other corporate credit unions.

The Material Loss Review cites that management and Board failed to identify and manage their risk exposure to the mortgage-backed securities (MBS) prior to the market dislocation in mid 2007. At that time, Constitution Corporate had significant holdings of private label MBS including Alt-A and subprime paper.

Constitution Corporate's decision to expand its investments into private label MBS was driven by the need to be rate competitive with other corporate credit unions that were actively soliciting Constitution Corporate's members.

The IG report notes that:

1. there was an over-reliance on credit ratings by management when purchasing securities and monitoring credit risk in the investment portfolio;

2. management did not set prudent sector concentration limits;

3. management did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of MBS held in the investment portfolio; and

4. management did not recognize the risk they were undertaking with significant investments in complex MBS, with a substantial portion of these securities backed by subprime assets.

The report also criticizes NCUA for failing to assess or timely identifying key risks associated with Constitution Corporate FCU's investment portfolio, until it was too late.

Read the report.

Wednesday, September 7, 2011

IG Report: Ethic Breaches Played a Role in Certified FCU's Failure

The Inspector General (IG) found that Certified FCU failed because of weak internal controls, weak board oversight, and inadequate risk management practices. The failure of Certified FCU resulted in a loss of $9 million for the National Credit Union Share Insurance Fund.

The IG report found that improprieties and fraud played a major role in the credit unions failure. According to the IG report, allegations of fraud and improprieties first surfaced through anonymous telephone calls to the NCUA in April and May of 2005. However, a 2005 investigation by NCUA found no evidence to substantiate the fraud allegations, although they determined the CEO had abused his position to enrich himself personally at the credit union’s expense and potentially engaged in money laundering. The report notes that NCUA officials failed to take decisive action about these ethical breaches and the CEO stayed in his position until May 2010.

A 2010 forensic review found evidence that there was a breach in the fiduciary duties by the CEO, including check kiting and receiving "potential kick backs from vendors and from loan origination fees and commissions paid to one of the Credit Union’s loan officers."

For example,

"The CEO had a consulting company, which contracted for a 20 percent share of commissions paid to the loan officer’s mortgage servicing business. The loan officer generated low quality loans with high origination fees, which were then approved by the CEO. The loan origination fees were paid by Certified in the form of commissions to the loan officer’s company, which then paid the CEO’s consulting business its 20 percent share."

Additionally, the report notes that the credit union failed to manage liquidity risk. High cost nonmember deposits, which I've previously written about with respect to other credit union failures, rose to 18 percent of total deposits increased the liquidity problems confronting the credit union, especially given its heavy concentration of fixed rate real estate loans.

Additionally, the IG report found that NCUA examiners failed to:

1. adequately assess the management component of CAMEL rating system;

2. adequately consider external audit findings and reviews when developing their examination procedures; and

3. appropriately apply remedies when their fraud investigation unearthed serious safety and soundness concerns due to the CEO’s business practices and ethical behavior.

Read the IG Report.

Tuesday, September 6, 2011

Association Bond Satisfies Field of Membership Issues Related to Rare CU Bank Merger

Credit Union Journal (paid subscription) is reporting that United FCU is using an associational common bond as a vehicle to allow all the depositors of Griffith Savings Bank to join the credit union.

The depositors of Griffith Savings Bank by joining the American Consumer Council become eligible for membership in United FCU, thereby satisfying the field of membership issues related to this rare transaction. The transaction is still awaiting regulatory approval.

This is just another example of how some credit unions have used an associational common bond to make a mockery out of the concept of a common bond and to allow them to serve the public at large.

Friday, September 2, 2011

Credit Unions Performance in the 2nd Quarter

NCUA is reporting that key indicators for federally insured credit unions (FICUs) either stabilized or improved in the second quarter of 2011.

FICUs reported net income of $1.88 billion for the second quarter bringing year-to-date profits to $3.58 billion. The return on assets rose from 74 basis points at the end of the first quarter to 77 basis points at the end of the second quarter. In comparison, the return on assets was 41 basis points a year ago.

Net interest margin was virtually unchanged increasing by 1 basis point during the quarter to 3.17 percent, while net operating expenses as a percent of average assets was unchanged at 2.43 percent. The low interest rate environment caused the cost of funds as a percent of average assets to fall 25 basis points from December 2010 to 0.96 percent as of June 2011. FICUs also reported reducing their provisions for loan and lease losses during the second quarter.

The stronger earning at FICUs caused the net worth of FICUs to increase by 2 percent during the quarter to $95.6 billion. Coupled with slower asset growth, the net worth ratio for FICUs rose by 17 basis points to 10.14 percent at the end of the second quarter.

Credit unions reported that assets and shares (deposits) at credit unions rose during the quarter. Assets increase by 0.3 percent to $942.5 billion, while shares increased by 0.1 percent to $812.2 billion.

NCUA noted that loans edged higher by 0.7 percent during the second quarter to $564 billion -- reversing three consecutive quarter of declining loan volume. Outstanding new car loans and other real estate loans fell during the second quarter, while used car loans, first mortgages, and credit card loans increased during the quarter.

NCUA reported that almost $8.9 billion in loans was sixty days or more past due -- down from $9.1 billion in the first quarter. The delinquent loan ratio fell for the second consecutive quarter to 1.58 percent, a 5 basis point reduction from the first quarter. However, loans that are 12 months or more past due rose during the quarter from $1.54 billion to $1.59 billion.

Credit unions reported a slowing in the pace of charge-offs during the second quarter. Charge-offs for the second quarter were less than $1.5 billion compared to slightly more than $1.6 billion for the first quarter of 2011.

Read the press release.

Monday, August 29, 2011

Stabilization Fund Assessment Is 25 Basis Points

The NCUA Board approved a 2011 Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessment of 25 basis points of insured shares (deposits) -- at the top of the range estimated last November by the agency. NCUA estimates the assessment will raise $1.956 billion.

The assessment is based upon June 30, 2011 insured shares and is due by September 27.

NCUA acknowledged during the Board meeting that it tapped its $6 billion line of credit from Treasury -- borrowing $3.5 billion in July.

According to analysis by NCUA staff, the 25 basis point assessment will reduce annualized return on assets for credit unions by 21 basis points. NCUA estimates that 811 credit unions that had reported a profit may now experience negative net income for the year with the impact falling disproportionately on smaller credit unions.

Additionally, the assessment will cause 81 credit unions to slip from being well capitalized. Twenty-four credit unions will become undercapitalized and 3 credit unions will become critically undercapitalized with a net worth ratio under 2 percent.

NCUA, also, reported that 2012 assessments for the TCCUSF will be 9 basis points based upon June 2011 insured shares. This will raise approximately $700 million.

NCUA revealed that projected assessments over the remaining life of the TCCUSF are between $1.9 billion and $6.2 billion, based upon projections from Blackrock's model. Credit unions prior to this assessment had already made payments of $1.3 billion to cover TCCUSF expenses.

Furthermore, NCUA does not anticipate a National Credit Union Share Insurance Fund (NCUSIF) premium assessment for this year; but given the more uncertain economic outlook for 2012, NCUA stated that NCUSIF premiums could range from zero to 7 basis points next year.

Read the Board Action memo.

Friday, August 26, 2011

Violating Confidentiality Provisions

On May 27th, I wrote about Visions FCU publishing in its newsletter the names of members, who caused Visions a financial loss, that the credit union was going to expel at a special meeting.

I've obtained a copy of a NCUA letter (see below), not from the person that filed the complaint, that states this practice by Visions does not appear to comply with Part 716 of the Gramm-Leach-Bliley Act and the disclosure of this information in its newsletter appears to represent a violation of the confidentiality provision of the FCU Bylaws.

NCUA stated in its letter that "this is a regulatory compliance violation that will be addressed and corrected in the upcoming 2011 examination."

It seems to me that since this practice has been going on for some time (I wrote about this practice in a 2005 ABA Bankers News column), NCUA should hit Visions with a cease and desist order, which is published on NCUA's website, and a civil money penalty.

Click on images to enlarge.

Thursday, August 25, 2011

Common Bond and Equal Credit Opportunity Act

The Equal Credit Opportunity Act (ECOA), which became law on March 23, 1976, says that it is illegal to discriminate in any credit transaction on the the basis of race, color, national origin, religion, sex, marital status, or age.

Congress was very specific that it viewed race, color, national origin, religion, sex, marital status, or age as protected classes in our society.

So, this raises an interesting policy question -- should credit union regulators charter a credit union with field of membership which is based solely upon a protected class, such as religion or national origin?

Tuesday, August 23, 2011

CUNA Would Like Former Director Threshold Raised to $100,000

In a letter to the Internal Revenue Service (IRS) regarding the redesign of the Form 990, the Credit Union National Association (CUNA) requested that $10,000 reporting threshold for former directors be increased to $100,000.

Part VII of the Form 990 requires the reporting organization to list any former director who had served in such capacity in the prior five years and received over $10,000 for services provided as a director.

CUNA justifies increasing the reporting threshold because of the recordkeeping burcden on small credit unions. Additionally, CUNA notes that this would create a uniform reporting threshold among all individuals for compensation reporting purposes.

However, raising the threshold to $100,000 would reduce transparency and accountability.

I can understand why CUNA took this position. It is difficult to maintain the fiction that credit union directors are volunteers, especially when some credit unions are providing generous director compensation.

Thursday, August 18, 2011

Kansas CU Regulator Assumes Control of CU

The Salina Journal is reporting that the board of directors of the Enterprise Credit Union voted earlier this week to transfer control of the credit union to the Kansas Department of Credit Unions.

John Smith, the administrator of the Kansas Department of Credit Unions, said that during the Department’s examination of the credit union, it uncovered some accounting irregularities. The Department decided to engage a public accounting firm to conduct an audit of the credit union’s books.

Enterprise Credit Union has 577 members and $1.8 million in assets.

Read the article.

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