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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.