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.

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.

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.

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.

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.

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.

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.

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.

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)

Oops

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.

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.

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.