ASI Provides More Capital Assistance to Silver State Schools CU

Privately-insured Silver State Schools Credit Union received a capital injection from its insurer, American Share Insurance (ASI).

According to the Las Vegas Review-Journal, ASI provided $4.4 million in capital assistance in December to Silver State Schools CU. ASI had previously provided $22 million in capital assistance to this troubled credit union.

Over the last three years, Silver State Schools Credit Union has reported losses of almost $80.7 million.

Without this capital assistance, Silver State Schools Credit Union would be insolvent.

Breaking News: Texans CU Receives $60 Million in Capital Assistance

It appears that NCUA provided Section 208 assistance to Texans Credit Union (Richardson, Texas) during the fourth quarter.

Texans is reporting $60 million in subordinated debt, which is counted as net worth.

Even with the capital assistance, the credit union is critically undercapitalized.

Without the capital assistance, Texans Credit Union would be insolvent with a net worth of minus $44.7 million.

Exceeding the MBL Cap

How many credit unions are exceeding the cap for member business loans?

That has been a question posed as a possible new report by the NCUA's Office of the Inspector General (IG) for the last couple of years. The report would have also looked at how well NCUA is monitoring and enforcing the Member Business Lending rules.

However, the IG never started this study.

To find out which credit unions are exceeding the cap, I first excluded any CU that was grandfathered in 1998 for the purpose of making business loans or had a history of making business loans. Next, I excluded any credit union that has a low-income designation or is a community development financial institution.

According to my analysis, 13 credit unions at the end of the third quarter of 2011 exceeded the member business loan (MBL) cap of 12.25 percent of assets. Below is the list.

I will acknowledge that Houston Musicians FCU, which has a member business loan to asset ratio of 22.84 percent, may have been recently added to the grasndfathered list.

In a legal opinion letter denying the credit union's request to treat musical instrument loans to professional musicians as consumer loans, NCUA wrote: "{Y]ou mentioned Houston Musicians’ long history of making instrument loans to its members. We encourage you to discuss your credit union’s possible qualification for an exception to the aggregate MBL limit, as either a credit union chartered for the purpose of making MBLs or as a credit union with a history of primarily making MBLs, with the region."

Eastern New York FCU Closed

The National Credit Union Administration (NCUA) liquidated Eastern New York Federal Credit Union of Napanoch, N.Y. USAlliance Federal Credit Union of Rye, N.Y. immediately assumed Eastern New York Federal Credit Union’s members, assets, loans and debts.

NCUA made the decision to liquidate Eastern New York Federal Credit Union and discontinue its operations after determining the credit union was insolvent and has no prospect for restoring viable operations on its own. At the time of liquidation, the credit union served approximately 6,800 members and had deposits of approximately $49 million.

Over the last two years, the credit union had reported a loss of almost $2 million.

Read the press release.

Did A. E. A. FCU Receive Section 208 Assistance?

The financial statements for Yuma-based A. E. A. FCU show that the credit union received a capital injection of $20 million in the form of subordinated debt during the fourth quarter.

As a result, the net worth ratio of this troubled credit union went from minus 6.89 percent at the end of the third quarter to 2.69 percent at the end of the fourth quarter.

I suspect that the $20 million in subordinated debt is Section 208 assistance from NCUA.

I wonder what other moribund credit unions are receiving open bank assistance from NCUA.

Unfortunately, we will not know the answer because NCUA has decided not to disclose this information.

NCUA Overusing Systemic Risk

The National Credit Union Administration (NCUA) has become very fond of tossing about the term "systemic risk" when justifying changes to its regulations.

Sometimes the use of systemic risk is warranted, as in the case of the new corporate credit union regulations. But in other cases, it appears that the this agency has not done the necessary analysis to justify the regulatory change -- so it leans on systemic risk as a justification for the regulatory changes.

The latest example is where the agency justifies it loan participation proposal by stating that "loan participations ... create more systemic risk to the share insurance fund (NCUSIF) due to the resulting interconnection between participants."

I will grant you that loan participations result in greater interconnectiveness between participants; but do loan participations at federally-insured credit unions really rise to the level of systemic importance to the NCUSIF?

According to NCUA, 1,458 federally-insured credit unions reported almost $12.8 billion in outstanding loan participations at the end of the third quarter. This is equal to 2.25 percent of the industry's loan balances.

In addition, there are 117 federally-insured credit unions that have outstanding loan participations (lines 691E and 691L from the Call Report) in excess of their net worth. Outstanding loan participations at these credit unions equal $3.2 billion.

There are only 20 credit unions with a risk exposure greater than 300 percent of their net worth with approximately $764 million in outstandings.

While I recognize that some credit unions have gotten into trouble due to loan participations, I don't believe that at this time loan participations represent a systemic threat to the NCUSIF.

Medical Marijuana Credit Union Bill

Legislation (SB 75) has been introduced in the Colorado Senate authorizing the creation of a financial cooperative modeled on credit unions to serve the medicial marijuana industry.

The bill authorizes a group of medical marijuana licensees or registered medical marijuana patients or both to form a financial cooperative subject to all of the regulatory provisions for credit unions. The common bond is medical marijuana licensees or registered patients.

It has a once a member, always a member provision stating that a member of a financial cooperative who is no longer licensed or registered may still remain as a member of the cooperative.

The legislation requires the financial cooperative to obtain share insurance from the National Credit Union Share Insurance Fund (NCUSIF), a comparable non-federally backed insurer, or self-insure. Currently, the only provider of private share insurance is American Share Insurance (ASI).

However, the bill bans the proposed financial cooperative from calling itself a “credit union.”

This proposed financial cooperative contemplated by this bill is a credit union except in name.

If it looks like a duck, quacks like a duck, and waddles like a duck, it's a duck. Or should I say a credit union.

Read the bill.

Citizens Equity First Increases Early Withdrawal Penalty

Citizens Equity First Credit Union of Peoria (IL) announced that it is increasing the early withdrawal penalty on existing CDs. The early withdrawal penalty on a 5-year CD would increase from 180 days of dividends to 365 days of dividends. The new early withdrawal penalty goes into effect on the March 15.

The story appears on depositaccounts.com blog.

Read more.

Fed's Discount Window, not CLF, Best Source of Systemic Liquidity

ABA wrote NCUA that the Federal Reserve’s Discount Window is the logical governmental backstop to address systemic liquidity events, not the Central Liquidity Facility (CLF).

NCUA issued an advanced notice of proposed rulemaking requesting comments on whether federally insured credit unions (FICUs) should have access to backup federal liquidity sources for use in times of financial emergency and distressed economic circumstances.

For most FICUs, indirect membership in the CLF is their only source of emergency federal liquidity. However, the ability of the CLF to address a systemic liquidity event could be seriously impaired by the 2012 closure of U.S. Central Bridge Corporate Federal Credit Unions and the redemption of its CLF stock. The borrowing capacity of the CLF is equal to 12 times its subscribed capital stock plus surplus.

In its January 18 comment letter, ABA noted that the CLF was created during an era when credit unions did not have access to alternative federal sources of liquidity, such as the Federal Reserve or the Federal Home Loan Banks. Today, FICUs have access to multiple sources of federal emergency liquidity.

ABA commented that the Federal Reserve’s Discount Window is a superior choice of emergency liquidity; because the Discount Window, unlike the CLF, does not have any limitations on its borrowing capacity. ABA wrote that the NCUA Board should encourage FICUs, especially larger FICUs, to apply for access to the Discount Window.

In addition, ABA recommended that NCUA “should take appropriate measures to limit taxpayer exposure to the CLF.” ABA noted that the CLF has been used as a vehicle for the NCUA to dispense financial assistance from the National Credit Union Share Insurance Fund (NCUSIF) to failing credit unions. In its 1997 study, The Department of the Treasury noted that the CLF could advance funds to the NCUSIF without regard to its ability to repay and in a systemic crisis, taxpayers could be put at risk, if these advances are used to shore-up troubled credit unions or a troubled insurance fund.

Read the letter.

NCUA Strikes Back

On January 12, NCUA Regional Director Herbert Yolles sent a letter to all North Carolina state-chartered credit unions advising them that NCUA will be conducting independent insurance reviews separate from the NC Credit Union Department.

This action arose from a legal opinion issued by the state credit union regulator to State Employees' Credit Union allowing the credit union to disclose its CAMEL ratings.

Read the letter below.

27 NCUA Employees Earn Over $200,000

Twenty-seven NCUA employees earned more than $200,000 and 105 employees at the agency earn more than NCUA Chairman Debbie Matz, according to WikiOrgCharts.

The highest paid employee was Bob Fenner, NCUA's General Counsel. The next two highest paid employees at the agency were David Marquis and Melinda Love.

WikiOrgCharts through a Freedom of Information Request created a database that contains profiles of federal employees. The profiles list employees' names, title or job field, agency, and in many cases, their annual base salary. The database can be searched by agency.

To search the database, click here.

Grandfathering and Realtors FCU Don't Add Up

Yesterday, I posted a list of credit unions that were grandfathered from the aggregate member business loan cap of 12.25 percent of assets; because these credit unions were either chartered for the purpose of making member business loans or have a history of primarily making member business loans.

Among the credit unions listed is Realtors FCU (charter # 24806).

This credit union was chartered in 2008 -- a decade after the Credit Union Membership Access Act enacted the business loan cap and grandfathering provisions.

I don't know how it qualifies to be grandfathered.

Official List of Grandfathered Business Lending Credit Unions

In a response to an October 11 Freedom of Inforamtion Act request, ABA has obtained a list from NCUA of credit unions that were either chartered for the purpose of making member business loans or have a history of primarily making member business loans.

Click on this link to see the list.

Wind-Down Letter for U.S. Central Bridge

Almost 3 years after seizing control of the operations of U.S. Central FCU, NCUA has started to write the final chapter of this failed corporate credit union.

On January 10, NCUA sent a letter to its members on the orderly wind-down of the wholesale corporate credit union's services.

The letter notes that NCUA is seeking to minimize service disruptions, while at the same time minimizing the cost to the Temporary Corporate CU Stabilization Fund.

The letter specifically mentions ACH processing through the APEX platform. ACH processing and pricing will remain status quo through June 30, 2012. On July 1, 2012, ACH pricing will be increased by 80 percent. The ACH operations will cease no later than the end of 2012.

Each U.S. Central bridge member are required to develop a plan and timeline for executing its transition from U.S. Central Bridge. The plan must be completed and submitted to the Office of Corporate Credit Unions by February 24, 2012.

More on PCA

A recently released Government Accountability Office (GAO) study provided some interesting insights into NCUA's implementation of prompt corrective action (PCA).

According to the GAO, 560 credit unions between January 1, 2006 and June 30, 2011 triggered PCA with the vast majority (452) occurring after the beginning of 2008.

In general, most credit unions subjected to PCA do not fail; but also a sizable number were no longer independent. GAO tracked the performance of a sample of 275 credit unions subject to PCA from January 1, 2008 through June 30, 2009. It found that 61 percent of these credit unions were no longer independent as of June 30, 2011. Forty percent were merged into stronger credit unions, 19 percent failed, and 2 percent voluntarily liquidated.

Among the remaining 39 percent still in business, slightly more than one-third were still subject to PCA.

The report further found that NCUA's application of PCA became more timely. For credit unions triggering PCA from January 2006 to December 2007, approximately 43 percent were significantly or critically undercapitalized. For credit unions entering PCA after January 1, 2008, less than a quarter (23 percent) were significantly or critically undercapitalized.

While GAO acknowledged an improvement in NCUA's application of PCA, it also found inconsistencies with regard to its implementation. Specifically, GAO noted that almost 19 percent of the credit unions that failed between the beginning of 2008 and the middle of 2011 were not subject to PCA. The report further noted that of the 69 failed credit unions that triggered PCA, many did so at lower capital levels than credit unions that triggered PCA as a whole. In fact, 55 percent of failed credit unions initially triggered PCA at the significantly or critically undercapitalized level. Furthermore, in most cases, PCA was not initiated until less than 180 days prior to failure -- limiting its effectiveness.

The study concluded that tying mandatory corrective actions to only capital-based indicators has drawbacks, as capital-based indicators lag behind other indicators of financial distress.

NCUA Conserves Pennsylvania Community Development CU

The National Credit Union Administration (NCUA) assumed control of service and operations at People for People Community Development Credit Union (CDCU) in Philadelphia.

People for People CDCU served 1,561 members and had $1.1 million in assets.

The low-income designated credit union was significantly undercapitalized as of September with a net worth ratio of 3.63%. The credit union reported a loss of almost $30,000 for the first 3 quarters of 2011.

As of September 2011, 16.64% of its loans were 60 days or more past due.

Read the press release.

GAO Study on Supervison of Corporate CUs and Implementation of PCA

Legislation enacted in 2011 (Public Law 111-382) instructed the Government Accountability Office (GAO) to conduct a study of the National Credit Union Administration’s supervision of corporate credit unions and implementation of prompt corrective action (PCA).

GAO examined the failures of 5 corporate credit unions and 85 credit unions from January 1, 2008 through June 30, 2011.

The report found that poor investment and business strategies contributed to the corporate credit union failures. The study notes that NCUA took a number of steps to stabilize, resolve, and reform the corporate credit union system. However, GAO found:

"While NCUA has estimated the losses to the Stabilization Fund, it could not provide adequate documentation to allow NCUA’s Office of Inspector General or GAO to verify their completeness and reasonableness. Without well-documented cost information, NCUA faces questions about its ability to effectively estimate the total costs of the failures and determine whether the credit unions will be able to pay for these losses."[emphasis added]

In the 85 credit union failures, GAO cited poor management as a key factor.

*Operation risk was cited in 76 of the failures.
*Fraud or alleged fraud at credit unions contributed to 29 of the 85 credit union failures.
*Credit risk played a role in 58 credit union failures.
*Business lending played a role in 13 credit union failures. GAO found that failed credit unions had more business loans as a percentage of assets than peer credit unions that did not fail or the credit union industry.
*Liquidity risk contributed to 31 of the 85 credit union failures.
*Concentration risk was cited in 27 of the failures.

GAO found mixed results with respect to the implementation of PCA and also discovered that other enforcement actions were initiated either too late or not at all for many of the failed credit unions. For example, in 49.4 percent of the 85 credit union failures, "NCUA did not take any formal or informal enforcement action (non-PCA) on credit unions within 2 years prior to their failure." In a another 14.1 percent of the failures, an initial formal or informal non-PCA enforcement action did not occur until 180 days or less before the failure.

GAO recommended that NCUA should (1) provide its Office Inspector General the necessary documentation to verify loss estimates and (2) consider additional triggers for PCA that would require early and forceful regulatory action and make recommendations to Congress on how to modify PCA, as appropriate.

Read the report.

Supervisory Focus for 2012

NCUA issued a letter to all federally insured credit unions with regard to its supervisory focus for 2012.

In the letter, NCUA stated that it "will focus supervisory efforts on credit unions with elevated levels of credit risks, interest rate risks, liquidity risks, and concentration risks."

Read the letter.

United FCU Completes Purchase of Griffith Savings Bank

United Federal Credit Union, headquartered in St. Joseph, Michigan, announced that its purchase of the assets and deposits of Griffith Savings Bank, headquartered in Griffith, Indiana, has been completed effective January 1, 2012. The purchase marks the first time a federally chartered credit union has purchased the assets and deposits of a state-chartered, FDIC-insured mutual savings bank.

Read more here.