Voluntary Prepayment Assessment Program

The NCUA Board approved a voluntary prepayment assessment program for the expenses associated with the Temporary Corporate Credit Union Stabilization Fund (TCCUSF).

The program has been modified from what was proposed on May 19 by the NCUA Board.

Initially, NCUA proposed that participating credit unions could make a voluntary advance to the Stabilization Fund of up to 36 basis points of the credit union’s insured shares, representing about three years of estimated average Stabilization Fund assessments. The minimum contribution was $10,000 from each participating credit union. To go forward with the program, NCUA needed at least $300 million in commitments. The maximum that could be raised if all eligible federally-insured credit unions participated was $2.8 billion.

The NCUA made several modifications to the prepayment program.

• The minimum individual credit union participation amount is the greater of $1,000 or 0.05 percent of insured shares as of March 31, 2011. By lowering the minimum contribution from $10,000 to $1,000, this will allow virtually all credit unions to participate in the program.
  


• The maximum individual credit union participation amount is 0.48 percent of insured shares as of March 31, 2011. NCUA estimates that this is equivalent to 4 years of assessments.
  


• The size of the Program is set at $500 million, which equates to 6.4 basis points. If NCUA receives less than $500 million in commitments, the program will not be initiated. If NCUA receives more than $500 million in commitments, the prepayments will be accepted on a pro rata basis to meet the $500 million target.

NCUA stated that if the $500 million target is raised, this would lower this year's TCCUSF assessment from 24.9 basis points to 18.5 basis points.

Features that are unchanged in the program include: the prepaid balance will be a non-earning asset and NCUA will apply the prepaid account against TCCUSF assessments beginning in 2013.

Credit unions will have to decide by July 29 whether they plan to participate in the program. On August 9, NCUA will e-mail credit unions that submitted agreements to participate in the prepaid assessments about results of aggregate commitments. If NCUA receives the $500 million commitment, NCUA will process a direct debit of the credit union’s account on August 18.

Read the draft Board document.

Read the terms and conditions.

Charter Choice Becomes Easier In Wisconsin

Wisconsin Gov. Scott Walker (R) on Sunday signed the state budget bill that includes a provision intended to make it easier for credit unions to convert to banks.

The provision will require that a majority of a credit union’s voting members approve a conversion to a bank -- instead of a majority of all the credit union’s members. The measure also will allow credit unions to convert directly to stock-owned banks, bypassing the current intermediate step of converting to mutual savings banks.

The provision had been included in a previous state budget bill; but former Gov. James Doyle (D) vetoed it.

To read the legislative language, click here and go to page 410.

Fact Checking CUNA's Testimony on Member Business Lending

I decided to review CUNA's testimony from the June 16th hearing on Credit Union Member Business Lending before the Senate Banking Committee. I had some problems with the numbers and statements from CUNA's testimony.

CUNA states in its testimony that there are 334 credit unions near the cap. CUNA defines being near the cap as having a member business loan to asset ratio greater than 7.5 percent.

Unfortunately, being near the cap does not mean a credit union is subject to the cap. As best as I can determine, the 334 number appears to include credit unions that are not subject to the statutory cap because they have either low-income credit union status or a charter exclusion. It is also unclear whether CUNA includes privately-insured credit unions in its analysis.

NCUA testifies that there are 289 credit unions that are near or at the cap including those with grandfathered regulatory waivers. However, NCUA never defines what is near.

NCUA in its testimony states that 1,177 credit unions that are not subject to the statutory cap. If you exlcude those credit unions that are not subject to the cap, NCUA finds that only 162 credit unions (2.65 percent multiplied by 6,115 credit unions) have a member business loan to asset ratio of at least 9.8 percent of assets at the end of the first quarter.

Additionally, CUNA cites the example of Listerhill Credit Union in Alabama as being impacted by the cap. The only problem is that Listerhill Credit Union has a low income designation. This would mean that the credit union is not subject to the cap.

Furthermore according to CUNA, if S. 509 (The Small Business Lending Enhancement Act ) is enacted, credit unions could lend an additional $13 billion to small businesses in the first year. However, NCUA Chairman Debbie Matz testimony seems to downplay the overly optimistic forecast of CUNA.

NCUA Chairman Matz stated that credit unions could extend several billion more dollars in member business loans in the first few years after the passage of S. 509 and its implementation. In fact, NCUA writes: "If each credit union most likely to qualify immediately for higher MBL limits under the bill increased member business lending by 30 percent, more than $2 billion in credit would be extended." Additionally, she notes that those credit unions that are not near the cap, including those that are not currently making business loans, are likely to increase their member business lending activity and this could result in "an additional $2 billion to $3 billion in credit" over the next few years.

There is a big difference in $13 billion in the first year and several billion in the first few years.

CUNA in its testimony states that many of the business loans made by credit unions would not otherwise have been made by banks or other taxable lenders. But on page 17 of its testimony, CUNA states that to the extent to which credit union business lending crowds out bank business lending, it would mostly be from smaller banks.

For community banks, that is the issue. Credit unions can leverage their tax exemption to crowd out business lending by community banks.

Moreover, Webster First FCU actaully acknowledges that credit union business lending does crowd out lending from other financial institutions. According to Webster First FCU's testimony, "[w]e have assisted many real estate owners who own multi-family units in refinancing their existing mortgages from other institutions."

So, I encourage you to do your own fact checking.

One Credit Union Closed and Another Two Seized by NCUA

NCUA announced on June 24 that it liquidated St. James A.M.E. FCU and placed Borinquen FCU and O.U.R. FCU into conservatorship.

St. James A.M.E. FCU was a low-income faith-based credit union located in Newark, N.J. The members of St. James A.M.E. FCU were assumed by North Jersey Federal Credit Union of Totowa, N.J.

NCUA made the decision to liquidate St. James A.M.E. Federal Credit Union and discontinue its operations as they were 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 North Jersey FCU, the credit union served 831 members and had deposits of approximately $1 million.

At the end of the first quarter of 2011, St. James A.M.E FCU was significantly undercapitalized. It reported that almost 20 percent of its loans were 60 days or more past due.

Borinquen Federal Credit Union of Philadelphia was placed into conservatorship.

Although the $7 million credit union has a net worth ratio of 15.12 percent, the credit union reported that approximately 7.51 percent of its loans were 60 days or more past due.

On June 6, Borinquen FCU entered into a cease and desist order with NCUA.

O.U.R. FCU, a low-income credit union located in Eugene, Oregon, was placed into conservatorship by NCUA.

O.U.R. FCU was significantly undercapitalized with a net worth ratio of 3.86 percent. Less than one half of one percent of all loans were 60 days or more past due.

Read the press release on St. James A.M.E. FCU.

Read the press release on Borinquen FCU.

Read the press release 0n O.U.R. FCU.

Interesting Commentary from Financial Brand

If you have not checked out Jeff Marsico's post on Financial Brand, I recommend that you do.

Jeff found that banks and thrifts have consistently paid higher interest rates on deposits than their credit union peers. He also found that credit unions had higher operating expenses per average asset than banks.

Click here to read.

Exotic Upper Amazon Exploration

I was tipped off to a credit union cruise junket scheduled for next year that involves exploring the Upper Amazon River.

The "Credit Union Thrival and Survival Expedition" is scheduled for July 21 through July 30, 2012.

In promoting the conference, Credit Union Edu Cruises advertises:

"Experience the most unique Credit Union Cruise/Conference ever offered! This is nothing like any credit union educational event that you have ever attended."

It appears that the educational sessions will be about 12 hours.

The registration fee for the conference is $1,750 per attendee. Suites range from $5,901 per person to $6953 per person (based on double occupancy).

This does not include airfare and other expenses to this tropical destination.

I don't believe Congress intended for the the credit union tax subsidy to be used for exotic cruises down the Amazon River.

To read more about this boondoggle cruise down the Amazon, click here.

Problem Credit Unions Grew in May

NCUA reported that the number of problem credit unions increased by 3 in May to 377 – the second most for this credit cycle. In October 2010, there were 378 problem credit unions. A problem credit union is defined as having a CAMEL code of 4 or 5.

Credit unions with less than $10 million in assets accounted for the increase in the number of problem credit unions, while the number of problem credit unions between $10 million and $1 billion declined over the month.

However, assets and shares (deposits) in problem credit unions fell in May. According to NCUA, shares in problem credit unions fell by $900 million in May to $36.0 billion. NCUA reported that 4.75 percent of all insured shares were in problem credit unions.

ABA Testified to Senate in Opposition of CU Business Lending Bill

ABA Chairman Stephen Wilson testified this morning before the Senate Banking Committee at a hearing on credit unions’ member business lending limits.

Wilson told the Committee that ABA-opposed legislation (S. 509) to more than double certain credit unions’ member business lending limits would “allow a credit union to look and act just like a bank, without the obligation to pay taxes or have bank-like regulatory requirements applied to them.”

Wilson explained that credit unions’ claims that the legislation would enable them to meet the needs of small businesses seeking credit are “simply untrue,” as current law already allows credit unions to make all the business loans they want under $50,000.

“The minority who are at or near this cap are a new breed of institution that bears little resemblance to traditional credit unions,” Wilson said.

“These ‘morphed’ credit unions, which seek out large commercial customers, are a far cry from traditional credit unions, which have remained true to their credit union mandate to serve people of small means.”

See the full testimony.

ARC Loans Don't Count Against the Business Loan Cap

In an article in the May issue of Credit Union Magazine, Mark Wolff, CUNA's SVP of Communications, cites the story of Robin Pharo, who runs a green consulting business, as a justification for increasing the member business loan cap from 12.25 percent of assets.

According to the article, she appraoched two banks and a credit union about getting a Small Business Administration ARC loan. The banks did not make the loan, but the credit union, Summit Credit Union, did.

ARC loans were a temporary program authorized by the American Recovery and Reinvestment Act. The ARC loan program offered up to $35,000 in interest-free financing and the loan was 100 percent guaranteed by Small Business Administration.

He uses this as an illustration as to how small businesses would benefit from increasing the cap. [editorial comment: I do wonder whether Summit would have made the loan without the guarantee]

Here is the problem -- ARC loans do not count against the aggregate member business loan cap.

The term member business loan does not include the extension of credit where "the repayment of which is fully insured or fully guaranteed by, or where there is an advance commitment to purchase in full by, any agency of the Federal Government or of a State, or any political subdivision thereof."

If credit unions can make an unlimited number of such loans without it impacted its member business loan cap, there is no need to raise the cap.

Private Student Loans: An Emerging Risk

Are private student loans an emerging risk for credit unions?

Apparently, the Washington credit union regulator believes so.

On May 24, 2011, the Division of Credit Unions sent out a bulletin on Safe and Sound Student Loan Programs. Click here to read the bulletin.

Examiners from the Division of Credit Unions noted that "a few Washington credit unions have adopted student loan programs with very limited research and few controls."

The bulletin advises credit unions to due their due diligence before implementing the program, especially with regard to the underwriting standards of indirect student loan programs offered by third party vendors.

Additionally, the bulletin recommends that credit unions minimize their concentration risk by limiting growth of no more than 10% of the credit union’s net worth per year. The Division of Credit Unions recommends that the concentration limit remain in place until the credit union has at least three years of satisfactory experience with the private student loan program and at least two years of collecting material amounts of the loans.

As of the end of the first quarter of 2011, 385 credit unions held slightly more than $1 billion in private (or non guaranteed) student loans on their books.

Four credit unions report holding non-guaranteed student loans in excess of their net worth -- Huron Area Education FCU, Mass Institute of Technology FCU, CTCE FCU, and Harvard University Employees Credit Union. Ninety-two credit unions have private student loans in excess of 10% of their net worth.

Digital FCU has the most private student loans at almost $65.3 million. Other credit unions with sizable private student loan portfolios are University of Wisconsin Credit Union at $49.7 million and Eastman Credit Union at $44.9 million.

The following table lists the 25 credit unions with the most private student loans (click on image to enlarge).

BCT FCU Placed Into Conservatorship

The National Credit Union Administration (NCUA) assumed control of service and operations at BCT Federal Credit Union of Binghamton, N.Y.

BCT FCU has almost $52 million in assets, at the time of its conservatorship.

It is unclear why NCUA assumed control of this credit union. According to its most recent financial filings, the credit union was well capitalized with a net worth ratio of 12.23 percent. The credit union was profitable and delinquencies seemed very manageable.

Read the press release.

CU Borrowings from Fed Discount Window in 2009

During the financial crisis, credit unions borrowed from the Federal Reserve's Discount Window in 2009 to meet their liquidity needs.

Some of the most active participants were Alaska USA FCU, State Employees' Credit Union (NC), and Scott Credit Union.

For example, Alaska USA went to the Discount Window 260 times in 2009. The average amount borrowed was close to $81 million. State Employees Credit Union accessed the Discount Window 172 times during 2009 and the average amount borrowed was almost $189 million.

To see the amount borrowed on a given day by a credit union in 2009, click here.

Borinquen FCU Under a Cease & Desist Order

Borinquen FCU was hit with a cease and desist order (C&D) by NCUA.

The order cites the credit unions as having serious and persistent record keeping problems and that it failed to obtain or perform an annual audit.

The order also cites the credit union for non-compliance with the Bank Secrecy Act.

To read the order, go here.

CU Payday Loans: Putting Profits Ahead of People?

An investigative article published in the Washington Post on May 27 about credit unions offering payday loans raises doubts about the credit union industry's claim that "credit unions put people ahead of profits."

The investigatative article found that at least 15 credit unions are offering high-cost loans that closely resemble traditional payday loans, including Mountain America FCU in Salt Lake City (see image) and Kinecta FCU in Manhattan Beach (CA).

The article cites the case of Sam Heredia who borrowed $400 every two weeks for the past year from Nix Check Cashing, a subsidiary of Kinecta FCU. This means that Heredia paid $1000 in interest and fees over that year on $400 that was revolved every two weeks. Nix charged Heredia an application fee each time the loan was renewed.

Thomas Glatt, a credit union industry consultant, is quoted as saying:

"Not every credit union is as pure as they could be. If they are offering something similar to what is sold on the street corner, you have to wonder if that is keeping with the credit union philosophy."

While there are credit unions that are responsibly offering payday loan alternatives, it is clear that some credit unions are putting profits first.

Read the Washington Post article.

A longer version of the article appears on the iwatch news website.

Appeals Court: FCUs Subject to NY Mortgage Recording Tax

The Appellate Division of the Supreme Court of New York upheld a lower court decision that Hudson Valley FCU and all other federal credit unions operating in New York are subject to the state's mortgage recording tax.

Hudson Valley sought a declaration that it and other federal credit unions are exempt from the New York State mortgage recording tax (MRT), in connection with mortgages made by them to their members, under the Federal Credit Union Act of 1934 (FCUA) and the Supremacy Clause of the US Constitution.

Contrary to Hudson Valley's contention, the Court found that the mortgage recording tax is a tax on the privilege of recording a mortgage, not a tax on property.

Additionally, the Court "rejected plaintiff’s contention that the FCUA should be interpreted so as to exempt federal credit unions’ mortgage loans, and the right to record them, from the MRT because the imposition of the tax undermines the statute’s main policy of making low-cost credit available to average Americans." The Court noted that at the time the FCUA was enacted, federal credit unions did not have the authority to make home loans. The Court further notes that Congress had amended the FCUA authorizing federal credit unions to make residential mortgage loans, Congress never amended the statute specifically to exempt federal credit unions’ mortgage loans from the mortgage recording tax. Therefore, the Court concluded that it does not have to consider whether federal credit unions have an implied exemption from the MRT under the Supremacy Clause.

To read the decision, click here and go to page 37.

Credit Unions Post $1.7 Billion Profit in Q1 2011

NCUA reported that assets, shares (deposits), and profits were up at federally-insured credit unions during the first quarter of 2011, while loans fell.

Profits Up 63% on Lower Provisioning for Loan Losses

Net income for federally-insured credit unions was $1.7 billion during the first quarter of 2011, up almost 63 percent from the first quarter of 2010 profits of $1.2 billion. The return on average assets (ROA) at credit unions rose by 27 basis points to .74 percent in the first quarter of 2011 from a a year ago. In addition, ROA was up 23 basis points from the end of 2010.

The increase in credit union profits was mainly due to lower provisions for loan and lease losses, which fell from $1.86 billion at the end of the first quarter of 2010 to $1.218 billion at the end of the first quarter of 2011.

However, top line revenue growth was weak for credit unions. Net interest income before provisioning for loan and lease losses was relatively flat posting a year over year increase of $105 million. As a result, the net interest margin for credit unions fell by 8 basis points over the last year to 3.16 percent.

Non-interest expenses were up 4 percent from a year ago to $7.26 billion, while non-interest income was up 7 percent largely due to other operating income. But fee income was virtually flat -- slipping by 1.1 percent to nearly $1.63 billion.

Assets and Shares Up, Loans Down

Credit union total assets stood at $939 billion on March 31, a jump of nearly $25 billion (or 2.72 percent) during the quarter. Credit union shares (deposits) expanded, growing 3.21 percent in the first quarter to $811.7 billion from $786.4 billion.

However, loans fell for the second quarter in a row. Outstanding loan balances were $564.8 billion at the end of 2010 and fell to $560.0 billion at the end of the first quarter of 2011. Only two loan categories posted an increase during the quarter, 1st mortgages and lease receivables.

Credit unions reported granting $57.5 billion in loans during the first quarter of this year; but is below the $68.8 billion granted during the fourth quarter of 2010.

Net Worth Increases, But Ratio Falls

Net worth increased 1.77 percent last quarter to $93.6 billion from $92.0 billion. However, assets grew more rapidly than net worth, which caused the net worth ratio to drop 10 basis points from the prior quarter to 9.96 percent.

Asset Quality Improves

Credit unions reported an improvement in asset quality. At the end of the first quarter, less than $9.1 billion in loans were 60 days or more delinquent. This is down $919 million from one year ago and $810 million from the fourth quarter of 2010.

NCUA reported that 1.62 percent of total loans were 60 days or more delinquent, a 13 basis point improvement from the prior quarter. In addition, the ratio of net chargeoffs to average loans declined to 1.0 percent in the first quarter, a drop of 13 basis points from the 2010 year-end level.

Modified loans were $12.4 billion -- up 6.4 percent from the previous quarter and 44 percent from a year ago.

Credit unions continue to report an increase in foreclosed repossessed assets. Foreclosed and repossessed assets stood at $1.9 billion -- an increase of 2.4 percent from the previous quarter and almost 19 percent higher than a year ago.

Read NCUA's press release.

NCUA Closes Valued Members FCU

The National Credit Union Administration (NCUA) liquidated Valued Members Federal Credit Union of Jackson, Miss. less than a month after the credit union was placed into conservatorship. Magnolia Federal Credit Union immediately purchased and assumed Valued Members Federal Credit Union’s assets, liabilities and members.

Valued Members FCU reported a loss of $784,564 for 2010 and a loss of $669,993 for the first quarter of 2011. The $9 million credit union was critically undercapitalized as of the end of March 2011 with a net worth ratio of 0.17 percent.

Valued Members FCU is the ninth credit union failure in 2011.

Read the press release.