Friday, March 30, 2012

Loans to Firms with 20 or Fewer Employers Excluded from Cap

Rep. Kurt Schrader has introduced "Restore Main Street's Credit Act of 2012" (H.R. 4293).

While the text of the bill has not been published, the bill proposes to exempt brick-and-mortar businesses with 20 or fewer full-time employees from having their loans count against the aggregate business lending cap placed on credit unions.

According to the Census Bureau, there are roughly 5.2 million firms with fewer than 20 employees in the United States as of 2009. In addition, there are over 21 million businesses without any employees.

This would mean a huge expansion in the amount of business loans that credit unions could grant, as these loans would not count against the cap. It would also significantly increase the risk to the National Credit Union Share Insurance Fund.

Wednesday, March 28, 2012

FCU CEO Compensation Needs to Be Disclosed

On March 23, I published that David Maus, the President and CEO of Public Service Credit Union, had a total compensation package of $11 million for 2010.

This information is available, because state chartered credit unions are required to file Form 990s with the Internal Revenue Service.

However, federal credit unions are exempt from filing Form 990s. So, unless the federal credit union on its own discloses executive compensation, the members are in the dark regarding executive compensation.

In 2008, NCUA's Outreach Task Force in 2008 concluded that since federal credit unions are cooperatives, the NCUA Board should adopt an amendment to its regulations requiring federal credit unions to annually disclose the total compensation of each senior executive officer to their membership; but the Outreach Task Force recommended that the public is not entitled to individual senior executive compensation information.

The NCUA Board has put in place these disclosure requirements for corporate credit unions; however, the NCUA Board has not done so for federal credit unions.

More than 4 years have passed since the NCUA Outreach Task Force published its recommendation. The NCUA Board should move forward in proposing a rule requiring federal credit unions to annually disclose the compensation of senior executives.

Moreover, any proposal should make this information available not only to the members, but to the public.

This would ensure comparable treatment with other tax-exempt entities, especially state chartered credit unions.

It would also help ensure that federal credit unions are fulfilling their public policy objectives.

Without transparency, there is not accountability.

Monday, March 26, 2012

NCUA Closes Shepherd's FCU

The National Credit Union Administration (NCUA) decided to liquidate Shepherd’s Federal Credit Union of Charlotte, N.C. after determining the credit union was insolvent and had no prospect for restoring viable operations.

Shepherd’s Federal Credit Union served 1,397 members and had deposits of approximately $379,000. Chartered in 2010, Shepherd’s Federal Credit Union served members and employees of Unity, the Way of Holiness Christian Church in Charlotte and Clarkton, N.C.

Shepherd’s Federal Credit Union is the fourth federally insured credit union liquidation in 2012.

Read the press release.

Report Critical of Handling REO from CU Failures

NCUA's Inspector General (IG) issued a report critical of the Asset Management Assistance Center's (AMAC) handling of properties associated with the failures of Norlarco and Huron River Area Credit Unions.

The IG report found that AMAC management's analysis was not sufficiently comprehensive to support its decision to hold onto the properties. Specifically, the IG found deficiencies over the valuation process of real estate owned (REO). AMAC did not perform valuations on these properties in accordance with industry standards and did not always maintain proper support for the valuations that were completed. In addition, the IG determined AMAC did not formally complete a cost to carry analysis on REO.

The IG report determined that AMAC management estimated they could manage the loans at a cost of 59 percent of members’ value. However, when factoring in known expenses to carry the properties, the estimated cost to manage the loans is reduced to 33.8 percent. This 33.8 percent does not take into account vandalism, theft, and outside contractor expenses, which would further reduce this recovery percentage.

The IG report noted that AMAC has sold 409 of the approximately 850 properties originally taken over as a result of the liquidation of Norlarco and Huron. As of June 30, 2011, AMAC has sold 409 properties for a total of $41.0 million. These properties had an estimated member value of $95.8 million, which resulted in AMAC realizing 42.8 percent of the member’s value based on sales figures alone, but does not factor in expenses incurred for the properties sold.

The IG report estimated that NCUA should recognize 28.7 percent net realization on all properties obtained through liquidation of Norlarco and Huron River credit unions.

Read the report.

Saturday, March 24, 2012

Telesis Community Placed into Conservatorship

The California Department of Financial Institutions placed Telesis Community Credit Union into conservatorship and appointed the National Credit Union Administration (NCUA) as conservator. Telesis Community Credit Union is a state-chartered, federally insured credit union headquartered in Chatsworth, Calif.

The California Department of Financial Institutions placed Telesis Community Credit Union into conservatorship due to a declining financial condition.

Over the last five years, Telesis Community has reported almost $48 million in losses. The credit union went from $600.9 million in assets at the end of 2007 to $318.3 million in assets.

Over the last year, the credit union's net worth fell from $22.1 million to $17.5 million. As of December 2011, Telesis Community CU had a net worth ratio of 5.48 percent.

The credit union reported that 12.24 percent of it loans were 60 days or more past due. Total delinquent loans stood at $29.8 million at the end of 2011.

Business lending is a significant line of business for Telesis Community. In 2007, Telesis Community reported almost $338 million in business loans. By the end of 2011, Telesis Community had $175.5 million in outstanding business loans and unfunded commitments on its books. Business loans represented approximately 55 percent of the credit union's assets at the end of 2011.

More than $26 million in business loans were at least 60 days past due or 15.07 percent of all business loans were nonperforming. The credit union reported almost $18 million in business loans that had been in default for more than one year.

Additionally, Telesis Community had charged off $5.7 million in business loans in 2011.

Telesis is also under funding pressure. Its line of credit at a corporate credit union was cut from $100 million at the end of 2010 to less than $2.4 million. In addition, the credit union reported that non-member deposits fell from $32 million to $4.1 million.

Read the press release.

Friday, March 23, 2012

Saguache County Credit Union Liquidated

The Colorado Division of Financial Services appointed the National Credit Union Administration (NCUA) as liquidating agent of Saguache County Credit Union of Moffat, Colorado. Immediately following appointment as liquidating agent of Saguache County Credit Union, NCUA entered into an agreement with Aventa Credit Union of Colorado Springs, Colo., to purchase and assume membership shares and certain assets of Saguache County Credit Union.

The Colorado Division of Financial Services made the decision to liquidate Saguache County Credit Union and discontinue its operations after determining the credit union was insolvent with no prospect for restoring viable operations. At the time of liquidation, Saguache County Credit Union served 3,185 members and had assets of approximately $17 million.

As of December 2011, Saguache was critically undercapitalized with a net worth ratio of 1.14 percent. The credit union reported that 8.09 percent of its loans were 60 days or more past due. The credit union reported that its only business loan has been delinquent for at least one year.

Saguache was placed into conservatorship on July 22, 2011.

Saguache County Credit Union is the third federally insured credit union liquidation in 2012.​

Read the press release.

The $11 Million Man

David Maus, the President and CEO of Public Service Credit Union (Denver, Colorado), had a total compensation package in excess of $11 million for 2010.

According to Public Service's Form 990 for 2010, David Maus's base compensation was $9.8 million. On top of his base salary, the Form 990 revealed $1.2 million in retirement and other deferrred compensation.

In comparison, the average base compensation for CEOs at banks with between $1 billion and $2.9 billion in assets in 2010 was $395,000.

This pay package seems to be excessive, especially for a not-for-profit credit union with slightly more than $1 billion in assets at the end of 2010.

Form 990's for tax exempt organizations can be downloaded for free at Guidestar.

Thursday, March 22, 2012

Breaking News: HarborOne Directors Vote to Pursue A Mutual Bank Charter

Banker and Tradesman is reporting that HarborOne Credit Union's board of directors voted unanimously Wednesday evening to pursue a charter change that would make it a mutual cooperative bank.

The $1.8 billion HarborOne now will have to gain regulatory approval, as well as a positive vote from its members.

Read the story,

Another Credit Union Acquiring Bank Branches and Deposits

Pacific Crest Federal Credit Union of Klamath Falls, Oregon announced on March 19 that it has executed a purchase and assumption agreement with PremierWest Bank of Medford, Oregon to transfer two PremierWest Bank branches located in Dorris and Tulelake, California, to Pacific Crest Federal Credit Union.

As part of the transaction, a credit union spokesperson said that the credit union will acquire all the deposits and consumers loans at the two branches.

According to Summary of Deposit data for June 2011, the two branches had slightly more than $16 million in combined deposits.

The two branches were scheduled to be closed April 20, 2012. However, it is now expected that the branches will transition to the credit union late in the second quarter.

The deal still requires regulatory approval.

In 2010, Royal Credit Union (WI) acquired the 11 branches and $177 million in deposits from Anchor Bank (WI).

Read the preass release.

Wednesday, March 21, 2012

Corporate CU Share Guarantee Program to End at Year-end

NCUA announced yesterday that the Temporary Corporate Credit Union Share Guarantee Program will expire on December 31, 2012, as previously scheduled.

The NCUA Board adopted the Temporary Corporate CU Share Guarantee Program in March 2009 to provide additional level of protection for corporate credit union members beyond the current $250,000 standard maximum share insurance amount.

The Share Guarantee Program preserved funding at corporate credit unions and gave NCUA the time to implement a new corporate credit union regulatory regime and to resolve five failed corporate credit unions.

When the Share Guarantee expires on January 1, 2013, NCUA coverage on deposits in corporate credit unions will be limited to the standard maximum share insurance amount of $250,000.

Read the letter.

Tuesday, March 20, 2012

NCUA to Allocate Resources to Areas of Greatest Risk

While NCUA Chairman Matz's speech at CUNA's Government Affairs Conference had the usual applause lines about increased business lending authority and the need for supplemental capital for credit unions, her speech also detailed how the agency is revamping itself to meet challenges confronting credit unions.

Chairman Matz stated that the agency is "reallocating resources toward the highest risks." NCUA's exam program is being overhauled so that small and large credit unions will be treated differently. NCUA examiners will spend "more time in large credit unions which pose the greatest risks to the Share Insurance Fund, and less time in well-performing, smaller credit unions."

She also noted that NCUA has a responsibility to protect credit unions from unacceptably risky actions taken by other credit unions. Credit unions will no longer be given "a pass on adhering to policies which protect safety and soundness." If there are deficiencies, examiners are going to write Documents of Resolution and hold credit unions accountable to address these deficiencies.

She also points out that as credit unions become more sophisticated and complex, the agency needs to hire subject matter experts to address these emerging issues.

My take away from her speech is that if you are a small credit union offering plain vanilla products, you should see less regulatory burden. On the other hand, large credit unions and credit unions offering sophisticated products should expect greater scrutiny.

Read Chairman Matz's speech.

Monday, March 19, 2012

Cherry Blossoms, Hotel Occupancy Tax, and CUNA's GAC

The National Cherry Blossom Festival begins on March 20th and hundreds of thousands of visitors will visit Washington, D.C. to see the delicate pink blossoms. Many of these visitors will also pay the D.C. hotel occupancy tax of 14.5 percent along with local sales taxes; but not federal credit union officials attending the Credit Union National Association's Government Affairs Conference (GAC), which runs from March 18 through March 22.

The Federal Credit Union Act exempts employees and officals from Federal Credit Unions from the hotel occupancy tax, as long as the final payment is made by check, share draft or credit card issued by a federal credit union and the tax exemption forms are presented upon hotel check-in.

In addition, federal credit union officials are exempt from the District's Sales and Use Tax on any purchases that they make while attending this conference.

I'm estimating that the District of Columbia could lose approximately $500,000 in tax revenues over that four day period.

This is just wrong.

Why should these federal credit union officials be exempted from paying the hotel tax, when other people visiting our nation's capital pay this tax?

Friday, March 16, 2012

Reject the Merchant's Suit

ABA, CUNA, NAFCU, and seven other financial services trade groups filed a friend-of-court brief yesterday in the merchant associations' lawsuit charging the Federal Reserve with failure to follow key Dodd-Frank Act requirements when it set the cap on debit card fees.

The lawsuit alleges that the Fed -- under pressure from the banks and credit card industry -- included costs in the debit interchange final rule that the DFA’s Durbin amendment barred.

The trade groups' brief asks the U.S. District Court for the District of Columbia to reject the merchants' suit. The merchants are correct in their assertion that the "final rule is flawed, although for the opposite reasons [they] presented," they said.

The Fed’s final rule implementing the Durbin amendment set draconian price caps that won’t cover card issuers’ costs, let alone permit issuers to exercise their statutory and constitutional right to a reasonable rate of return on their investments, the trade groups said.

The brief noted that the merchants claimed that the price controls would benefit consumers, but evidence is lacking that they led to lower retail prices, or that anyone but the merchants themselves have benefited.

Read the friend-of-the-court brief.

Thursday, March 15, 2012

Number of Problem CUs Rose During 4th Quarter

The number of problem credit unions increased during the fourth quarter of 2011, while deposits (shares) and assets in problem credit unions fell.

The NCUA reported that the number of problem credit union rose from 384 credit unions at the end of the third quarter to 409 credit unions at the end of the fourth quarter of 2011.

Assets and deposits in problem credit unions as of the end of September were $33.9 billion and $30.4 billion, respectively. At the end of 2011, there were $29.4 billion in assets and $26.3 billion in deposits at problem credit unions.

The percentage of the industry's assets and shares in problem credit unions were 2.9% and 3.31% as of the end of 2011.

The number of problem credit unions with $1 billion or more in assets fell by 2 to 7 during the quarter. In addition, there was 6 fewer problem credit unions with between $100 million and $500 million in assets.

On the other hand, the number of problem credit unions with between $500 million and $1 billion increased by 1 to 4 credit unions.

Wednesday, March 14, 2012

Undercapitalized Credit Unions, December 2011

As of December 31, 2011, there were 138 credit unions with $7.2 billion in assets that were classified as undercapitalized. This is down from 165 undercapitalized credit unions as of September 2011.

There were 4 credit unions that were classified as undercapitalized, although their net worth ratios exceeded 6 percent. These 4 credit unions were subject to a risk based net worth standard because they were designated as complex credit unions.

Monday, March 12, 2012

White House Withdrew Carla M. León-Decker Nomination

The White House withdrew the nomination of Carla M. León-Decker to be a Member of the National Credit Union Administration Board for a term expiring August 2, 2017. Carla M. León-Decker was nominated to replace Board Member Gigi Hyland, whose term had expired.

Another Unpublished LUA

The Material Loss Review of Vensure Federal Credit Union revealed that the credit union was subject to an unpublished letter of understanding and agreement (LUA) in 2009.

According to the Inspector General report, examiners identified significant operational and governance deficiencies with Vensure. Examiners considered other options, including a Cease and Desist Order, Conservatorship, Merger, or Liquidation; but decided that an unpublished LUA was the best approach given the cooperation of credit union officials and response to numerous governance issues.

But Section 206 of the Federal Credit Union Act requires these enforcement actions to be published monthly, unless the NCUA Board determines that the publication of the enforcement action would be contrary to the public interest.

I don't know how publishing this agreement or any other written agreement between NCUA and a credit union is contrary to the public interest.

What is contrary to the public interest is not publishing these orders.

Read Vensure's Material Loss Review.

Friday, March 9, 2012

Secondary Capital Is Not Core Capital

Legislation (H.R. 3993) has been introduced that will permit a credit union to count secondary capital as part of its net worth for the purpose of calculating its net worth ratio to meet its statutory Prompt Corrective Action (PCA) requirement.

However, secondary capital is not core capital. Its inclusion as core capital would inappropriately inflate the net worth leverage ratio and would represent a significant divergence in the regulatory capital treatment of credit unions and banks.

The leverage ratio should be based upon core capital, which consists of retained earnings and permanent paid-in capital. Secondary capital lacks an important characteristic that is associated with core capital – permanence. The bill specifies that the secondary capital would be subject to maturity limits as defined by the NCUA Board, which means that the secondary capital could be short-lived. Thus, this form of capital is distinctly different and less reliable than internally generated capital.

Also, H.R. 3993 will create a significant divergence in the regulatory capital treatment between credit unions and other depository institutions. U.S. bank regulators are in the process of adopting the Basel III capital framework. Basel III requires increases in both the amount and the quality of regulatory capital relative to banks’ risks, including a greater reliance on common equity.

In testimony before the House Financial Services Committee, when discussing Basel III, Acting Comptroller Walsh stated "a greater regulatory focus on common equity should make sense for all banks." The secondary capital instruments that could be permitted under H.R. 3993 would not count as common equity under the Basel III framework.

Any capital instrument that can mature should not be categorize as core capital. Secondary or supplemental capital is more analogous to tier-two capital for banks. Therefore, secondary or supplemental capital should be restricted to tier-2 capital to insure consistent treatment with bank capital regulations.

Wednesday, March 7, 2012

Material Loss Review of Vensure FCU

NCUA's Office of the Inspector General (IG) recently released its Material Loss Review of the failure of Vensure Federal Credit Union. The estimated loss from the failure of Vensure to the National Credit Union Share Insurance Fund is $39 thousand; but it could go higher if the Department of Justice seeks to recover Vensure’s earnings related to processing illegal internet gambling ACH transactions.

The IG report found that NCUA's decision to seize Vensure arose from a Department of Justice action against several on-line poker companies. As a result, the Department of Justice seized all funds of one of Vensure’s members - Trinity Global Commerce Corp. (Trinity), a processor of on-line gambling transactions. Trinity was Vensure’s largest depositor at the time and nearly all of Vensure's earnings (nearly 90 percent during 2010) came from transaction fees processing Trinity’s internet gambling transactions.

After Trinity’s funds were seized, Vensure had an Automated Clearing House (ACH) receivable of approximately $877,000 as a result of subsequent return items. When Vensure recognized the loss from the uncollectible ACH receivable, the credit union became insolvent.

In addition, the IG report concluded that Vensure’s management and Board did not operate the credit union in a manner consistent with typical natural person credit unions. Vensure had minimal loans in 2009 and no loans during 2010 and 2011.

The report states that "the significant and rapid increase in Vensure’s fee related income, as well as the size of the individual and cumulative ACH wire transactions given the small size of the credit union, the significant change in the make-up of its management and Board, and its few traditional sources of income, should have triggered ... examiners to expand the scope of their on-site examinations and supervision contacts to thoroughly evaluate the credit union’s income to determine the nature of its source and why it increased so rapidly." But there is no evidence that examiners did a detail review regarding the nature and scope of the business fee income nor questioned the Board and management over the change in Vensure's business model.

Read the report.

Tuesday, March 6, 2012

NCUA as Cheerleader

Once again, NCUA has confirmed my suspicion that this agency is a cheerleader for the credit union industry.

NCUA on March 2 announced the unveiling of a new CU Locator application (App) for iPhone, iTouch, and Android devices.

The agency says in the press release that the "app is just the latest example of how NCUA is connecting credit unions with younger audiences."

But why is NCUA, which is suppose to be the saftey and soundness regulator for credit unions, unveiling a CU Locator App? Shouldn't that be the job of a credit union trade association?

Moreover, is it the role of this agency to connect younger audiences with credit unions?

This is just another example of this agency being too cozy with the industry that it regulates.

Read the press release.

Monday, March 5, 2012

Space Coast CU Number 1 in Consumer Complaints

Space Coast Credit Union is in a galaxy of its own when it comes to consumer complaints.

According to the Florida Bank Complaint Analysis, an annual statewide analysis of consumer complaints conducted by Miami economist and bank consultant Ken Thomas, Melbourne-based Space Coast Credit Union had 48 complaints last year. When controlled for size, Space Coast CU had nearly three times as many complaints than any other institution.

Read the story.

Friday, March 2, 2012

GFA Federal Credit Union to Buy Bank

GFA Federal Credit Union, Gardner, Mass., has agreed to purchase Monadnock Community Bank in Peterborough, N.H., for about $6.4 million in cash, according to press reports. The deal, which is subject to approval by regulators and Monadnock’s shareholders, is expected to close in the fourth quarter of 2012. GFA has assets of about $429 million, while Monadnock's assets were listed at $82 million as of Dec. 31.

Monadnock was initially chartered in 1971 as AWANE Credit Union, with sponsorship by the Automotive Wholesalers Association of New England Inc. AWANE converted to a federal savings bank in May 1996, and changed its name to Monadnock Community Bank in October 2000.

Earlier this year, United FCU of St. Joseph, Michigan acquired the assets and deposits of Griffith Savings Bank of Griffith, Indiana.

Read more.

Thursday, March 1, 2012

Credit Union Profits Soar by 41 Percent

The National Credit Union Administration (NCUA) reported today that profits at federally insured credit unions (FICUs) soared by more than 41 percent in 2011.

FICUs earned $6.4 billion in profits for 2011, even after paying almost $1.9 billion in Corporate Credit Union Stabilization Fund and NCUSIF premium expenses. In comparison, FICUs earned $4.5 billion for 2010. This caused the industry's return on assets (ROA) ratio to rise 18 basis points to 68 basis points at the end of 2011.

Factors having a positive influence on earnings included lower interest expenses, lower loan loss provisions, and higher non-interest income. Factors negatively impacting earnings included higher non-interest expenses and lower interest income.

Due to the strong earnings growth at FICUs, net worth at credit unions grew 6.9 percent reaching $98.4 billion and the net worth ratio climbed from 10.06 percent to 10.23 percent.

Strong Asset and Deposit Growth
Credit union total assets continued to rise, reaching $961.8 billion as of the end of the fourth quarter – up $47.4 billion for the year. Deposits (shares) increased 5.2 percent during the year to $827.4 billion from $786.4 billion.

On the other hand, total loans rose by 1.2 percent reaching $571.5 billion by year-end. Outstanding new vehicle loans fell by 7.3 percent in 2011, while used auto loan balances increased 5.1 percent. Outstanding credit card loans grew by almost 4 percent during 2011. Business lending rose to $39.1 billion as of the end of 2011, an increase of 5.2 percent for the year.

Since deposits grew faster than loans, the loan to deposit ratio for FICUs fell to 69.07 percent from 71.81 percent a year earlier. In addition, cash and short-term investments rose from 16.10 percent to 17.31 percent over the year.

During the fourth quarter, FICUs added 398,000 members and for the year, membership was up by 1.3 million individuals to 91.8 million members.

Delinquencies and Charge-offs Stable
At the end of 2011, credit unions reported $9.1 billion in delinquent loans. This resulted in a loan delinquency ratio of 1.60 percent for the fourth quarter -- a slight 1 basis point increase over the third quarter, but a drop of 16 basis points from a year earlier.

Net charge-offs at FICUs were $5.2 billion for 2011. As a result, the net charge-off ratio during the quarter stayed constant at 0.91 percent.

Read the press release.

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