Wednesday, July 27, 2011

United FCU to Acquire Griffith Savings Bank

United Federal Credit Union headquartered in St. Joseph, Michigan, and Griffith Savings Bank, headquartered in Griffith, Indiana, have jointly announced the signing of a definitive agreement under which United FCU will purchase substantially all of the assets and assume deposits and other liabilities of Griffith.

Under the terms of the Agreement, $1.3 billion United FCU will purchase all loans, investments, real estate, accrued interest receivables, and other banking-related assets of Griffith and will assume all deposits, Federal Home Loan Bank advances, and accrued interest payable of approximately $81 million.

Griffith intends to liquidate following the closing and distribute any remaining net assets at the time of liquidation to its depositors. Although the amount of the distribution cannot be determined at this time, depositors who retain accounts at United FCU will be credited with their pro rata distribution upon Griffith’s liquidation. Other depositors will be sent their distributions.

Last year, Royal Credit Union purchased 11 branches from Anchor Bank along with deposits and loans.

Read the press release.

Tuesday, July 26, 2011

Non-member Deposits

The Material Loss Review on the failure of Beehive Credit Union noted that high cost non-member deposits rose to 18 percent of the credit union's deposits.

This got me thinking about how prevalent are non-member deposits as a source of funds for credit unions.

Federal credit unions are allowed to accept non-member deposits, as are state chartered credit unions. [Editorial note: This acceptance of non-member deposits seems to be at odds with the basic principle of a credit union as a membership organization.]

NCUA's regulations specify that the maximum amount of all public unit and non-member shares that a federal credit union can receive cannot, at any given time, exceed 20 percent of the total shares or $1.5 million, whichever is greater. However, this threshold can be waived by a NCUA Regional Director.

But if a federal credit union qualifies for reg flex designation, the federal credit union is exempted from the maximum amount of non-member deposits a credit union can accept. Also, credit unions that are designated as serving predominately low-income members are not subject to the cap on non-member deposits.

As of March 31, 2011, 831 credit unions reported accepting non-member deposits, worth slightly less than $2.4 billion. Almost 70 percent (576 credit unions) were not designated as serving predominately low-income members.

For these 831 credit unions, non-member deposits were about 1 percent of their total deposits.

The following analysis focuses on those credit unions without a low-income designation. Some of these credit unions reported substantial holdings of non-members deposits.

For example, ESL Federl Credit Union reported $316 million in non-member deposits, which represented 12.6 percent of its total deposit base.

There are 13 credit unions that report at least 10 percent of their total shares and deposits are from non-members. First General Credit Union has more than 25 percent of its deposits from non-members.

Additionally, some credit unions appear to be paying above market interest rates for these non-member deposits. According to its financial statement, Granite FCU reported paying an interest rate of 4.45 percent on non-member deposits.

Table 1 lists the 25 credit unions with at least $50 million in assets and not a low-income designation that have the largest holdings of non-member deposits.

Table 2 lists the 25 credit unions with at least $50 million in assets and not a low-income designation that have the most non-member deposits as a percent of total deposits and shares.

Friday, July 22, 2011

Saguache County Credit Union Placed into Conservatorship

NCUA assumed control of Saguache County Credit Union in Moffat, Colorado.

The Commissioner of the Colorado Division of Financial Services appointed NCUA as conservator for Saguache County Credit Union due to the credit union's declining financial condition.

As of June 30, Saguache County Credit Union reported $17.7 million in assets and 3,165 members.

The credit union reported a loss of almost $205,000 for the first six months of 2011.

The credit union's net worth ratio was 2.19 percent -- making it significantly undercapitalized. It reported that 5.05 percent of its loans were at least 60 days or more past due.

Read the press release.

Problem Credit Union Update, June 2011

NCUA reported 381 problem credit unions as of June -- the fourth consecutive monthly increase and the highest total since the beginning of the financial crisis in 2008. A problem credit union is defined as having a CAMEL code of 4 or 5.

As of June, assets and deposits (shares) in problem credit unions were April to $39.8 billion and $35.5 billion, respectively.

Since the end of last year, problem credit unions are holding a smaller percentage of the industry's assets and shares. At the end of 2010, 5.13 percent of shares and 4.79 percent of assets were in problem credit unions. As of June, NCUA reported that 4.51 percent of all insured shares and 4.13 percent of the industry's assets were in problem credit unions.

There were 11 credit unions with $1 billion or more in assets on the problem list holding $18.7 billion in shares. This is unchanged from May.

Four credit unions with between $500 million and $1 billion were rated a CAMEL 4 or 5, while 47 credit unions with between $100 million and $500 million were on the problem list.

Thursday, July 21, 2011

TCCUSF to Borrow Up to $4 Billion from Treasury

The NCUA Board today approved that the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) may borrow up to $4 billion from Treasury through the end of 2011.

The borrowings will be used to retire the Asset Management Estate (AME) $36 billion in promissory notes to the bridge corporate credit unions and to address any additional cash needs that may arise from the ultimate resolution of the bridge corporate credit unions.

NCUA expects to borrow between $3.1 billion and $3.5 billion from the U.S. Treasury to retire these promissory notes.

Later this year $2 billion in Medium Term Notes are coming due. Funding needed to retire these liabilities will be brought to the Board at a later date.

Read the board action memo.

Prohibition on Paying Interest on Demand Deposit Accounts Ends Today

The ban on banks paying interest on business checking accounts ended today.

Section 627 of the Dodd-Frank Act repealed the prohibition on banks paying interest on demand deposit accounts, which became effective one year after the enactment of the legislation.

When interest rates were higher, I regularly heard from bankers about credit unions paying interest on business checking accounts, as credit unions were never subject to this prohibition.

Banks now have the option of paying interest on demand deposit accounts.

This measure should help community banks compete with credit unions for business customers, especially once rates begin to rise.

Tuesday, July 19, 2011

NCUA Sues RBS Securities over Failure of WesCorp

The National Credit Union Administration (NCUA) filed a second lawsuit against RBS Securities, Inc. alleging violations of federal and state securities laws and misrepresentations in the sale of securities to the failed Western Corporate Federal Credit Union (WesCorp). NCUA is seeking damages in excess of $629 million.

NCUA “claims the sellers and underwriters of the questionable securities made numerous material misrepresentations in the offering documents. These misrepresentations caused WesCorp to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial. The mortgage-backed securities experienced dramatic, unprecedented declines in value, effectively rendering WesCorp insolvent.”

NCUA anticipates filing additional lawsuits over the failure of five corporate credit unions.

Read the press release.

Monday, July 18, 2011

Countercyclical Capital

Credit unions may face countercyclical capital requirements as a result of Section 616(c) of Dodd-Frank Act.

Section 616(c) states:

"Each appropriate Federal banking agency shall seek to make the capital standards required under this section or other provisions of Federal law for insured depository institutions countercyclical so that the amount of capital required to be maintained by an insured depository institution increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the insured depository institution."

While this provision addresses insured depositories regulated by the Federal banking agencies, Section 216(c)(2) of the Federal Credit Union Act discusses adjustments in credit union net worth levels. The NCUA Board may adjust the net worth ratio if the Federal banking agencies change the minimum leverage ratio.

In deciding to adjust the net worth level, the NCUA Board must determine, in consultation with the federal banking agencies, that the reason for the change in the required minimum level for the leverage limit also justifies the adjustment in net worth ratios and determines that the resulting net worth ratios are sufficient to resolve the problems of insured credit unions at the least possible long-term loss to the NCUSIF.

Thursday, July 14, 2011

IG Report on Beehive's Failure

NCUA's Office of the Inspector General released it material loss review on the failure of Beehive Credit Union. The NCUA estimates the loss to the National Credit Union Share Insurance Fund (NCUSIF) at $27.6 million, but the final cost will not be known until all assets are sold.

The IG concluded that Beehive Credit Union's management and Board of Directors' weak oversight and risk management policies, coupled with inaccurate financial reporting related to delinquencies and reserves, contributed directly to Beehive's failure.

For example, examiners in their 2008 examination report noted weak risk management practices related to underwriting, including unsigned tax returns, the lack of sufficient employment and income verification to demonstrate repayment ability, inadequate lot loan documentation, and unsupported property valuations.

The report cited that management did not effectively plan, manage, or control liquidity risk. Specifically, management allowed real estate concentrations to rise to over 66 percent of total loans, with most loans at fixed rates. Management also allowed high-cost nonmember deposits to rise to 18 percent of total deposits.

The IG report noted that brokered loans were the main source of Beehive's construction and lot loans as of September 2008. The report also states that a growing percentage of the real estate loans were Construction Take Back loans , which were inherently high-risk, because it provided funding primarily to members who could not obtain permanent outside financing after the construction phase of the project was completed.

In addition, the IG wrote that the Utah and NCUA examiners could have mitigated the loss to the NCUSIF had they performed timelier supervisory contacts and not allowed a 32-month gap in supervision to occur. The IG believed this supervisory lapse may have prevented examiners from detecting the deficiencies and curtailing the risky lending practices that eventually led to Beehive's insolvency.

Read the report.

Tuesday, July 12, 2011

Vensure FCU Closed

The National Credit Union Administration (NCUA) liquidated Vensure Federal Credit Union of Mesa, Arizona. NCUA placed the credit union into conservatorship on April 15 of this year and made the decision to close Vensure FCU after determining the credit union was insolvent and has no prospects for restoring viable operations. At the time of liquidation the credit union served 140 members and had deposits of approximately $8.1 million.

Vensure FCU is the twelfth federally-insured credit union liquidation in 2011.

Read the press release.

CU Exposure to State and Local Government Debt

The Great Recession and subsequent sub-par recovery has significantly stressed the finances of state and local governments. This has increased the probability that some municipalities may default on their obligations and bondholders will experience losses on these investments.

For example, Nouriel Roubini's consulting firm has estimated that about $100 billion of state and local debt will default over the next five years, with about $20 billion in actual losses.

Recently, the Office of the Comptroller of the Currency has begun asking bank risk management officers to evaluate the potential for defaults and losses on their municipal bonds. Additionally, examiners are looking for insight into interest-rate risks banks could face from their municipal bond portfolios.

The following analysis looks at credit union exposure to state and local government debt.

As of March 31, 2011, there were 106 credit unions that reported holding state and local government bonds. While few credit union reported holding state and local debt, these institutions are significantly larger than the average credit union (asset size of $735 million versus an industry average of almost $130 million).

While the risk from local government debt to the National Credit Union Share Insurance Fund appears to be minimal at this time, there are some credit unions that have significant exposure to state and local government debt. Seven credit unions report that their exposures to state and local governments exceed their net worth, including to $4 billion-plus credit unions (Bethpage and Alaska USA).

The following table lists the 25 credit unions with the greatest exposure to state and local government debt as a percent of the credit union's net worth (click on image to enlarge).

Friday, July 8, 2011

Borinquen FCU Closed

The National Credit Union Administration liquidated Borinquen Federal Credit Union of Philadelphia. NCUA made the decision to liquidate Borinquen Federal Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

The credit union was placed into conservatorship on June 24 of this year.

Borinquen FCU is the eleventh credit union to be closed this year.

Read the press release.

Large State Chartered CU Executive Compensation, 2009

Below is the compensation data from Form 990 filings for large state chartered credit unions for 2009 (click on the images to enlarge).

I was unable to find information for 6 state chartered credit unions as their Form 990s were not available through GuideStar. Also, federal credit unions are excluded from this analysis because they are exempt from filing Form 990s.

Total compensation includes base compensation, bonus and incentive compensation, other compensation, deferred compensation, and nontaxable benefits.

The CEO with the largest compensation package is Gordon Simmons of Service Credit Union (NH). Simmons received slightly more than $2 million in total compensation. The credit union official with the second highest compensation package is David Maus of Public Service Employees Credit Union (CO).

Tuesday, July 5, 2011

Failure Not An Option Is Bad Policy

In a speech before the National Association of Federal Credit Union's Annual Conference on June 30th, NCUA Chairman Debbie Matz stated that creative remedies that prevented the failure of large troubled credit unions staved off significant losses to the National Credit Union Share Insurance Fund (NCUSIF).

She decided that the failure of these large credit unions would not happen on her watch.

Debbie Matz said: "I was adamant. Failure was not an option."

These creative solutions included finding merger partners, replacing CEOs, and prescriptive enforcement actions.

In addition, some of these large troubled credit unions were placed into conservatorship. By conserving these credit unions, NCUA manages these zombies and the NCUSIF does not have to recognize the losses.

To use an overused expression, NCUA kicked the can down the road.

But conservatorship is just another word for forbearance. And let me be clear, I believe forbearance is wrong whether it is practiced by a bank regulator or a credit union regulator.

Through the use of forbearance, this agency is keeping open institutions that should be closed.

For example, why is A.E.A. FCU of Yuma, Arizona still open?

According to A.E.A. FCU's latest call reports, its net worth ratio has been negative for two consecutive quarters. Somehow I don't think control of this credit union will be returned to its members anytime soon, if ever.

This question can be asked about other credit unions that have been conserved.

When failure is not an option for large credit unions, NCUA is admitting that these credit unions are "too big to fail." This is bad public policy and sends the wrong signal to credit unions and the marketplace. Moreover, this policy is contrary to congressional intent that "too big to fail" must end.

Sunday, July 3, 2011

Banks and Credit Unions Work Together on Patent Reform

On June 29, the American Bankers Association and the Credit Union National Association along with 11 other trade associations wrote to the Senate leadership encouraging them to bring House-passed patent-reform legislation (H.R. 1249) to the floor as soon as possible. The legislation includes provisions (Section 18) supported by the banking and credit union industries to create a procedure to re-examine business-method patents as an alternative to costly litigation.

Here is the text of the letter.

We are writing to encourage you to bring H.R. 1249, the “Leahy-Smith America Invents Act,” to the Senate floor at your earliest possible convenience and send the bill to the President’s desk to be signed into law. H.R. 1249 closely mirrors the Senate bill that passed earlier this year by an overwhelming 95-5 vote.

Patent reform is essential legislation: enactment will spur innovation creating jobs and ensure that the Patent and Trademark Office (PTO) has the tools necessary to maintain our patent system as the best in the world. We strongly support the improved re-examination procedures in H.R. 1249, which will allow the experts at PTO to review low-quality business-method patents against the best prior art. Equally important, the bill provides the PTO with increased and predictable funding. This certainty is absolutely critical if the PTO is to properly allocate resources and hire and retain the expertise necessary to benefit the entire user-community.

This bill has been nearly a decade in the making and is supported by a vast cross-section of all types of inventors and businesses. It is time to send patent reform to the President for signature, and we strongly encourage the Senate to take up and pass H.R. 1249 without delay.

Friday, July 1, 2011

Conversion Chatter

If you have not done so, I encourage you to read Rob Garver's article in American Banker Magazine entitled Conversion Conversation.

Several experts are predicting that there is a wave of conversions that are ready to come.

The article cites issues confronting credit unions that makes charter choice more desirable, including future premium assessments, lack of access to capital, and limited growth opportunities.

Read the article.

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