Another CU Opposes S 2231

Another credit union CEO expressed opposition to Udall bill (S.2231). Dale Kerslake, president and CEO of Cascade Federal Credit Union, Kent, Wash., in a letter to Senate leaders noted that most credit unions are ill-prepared for such expanded business lending authority and far too many credit unions simply can’t afford the additional risks that business lending poses to their balance sheets. Read the letter below.

Bill Would End Frivolous ATM Lawsuits

House Financial Services Committee members Blaine Luetkemeyer (R-Mo.) and David Scott (D-Ga.) on April 17 introduced legislation (H.R. 4367) that would protect banks and credit unions from frivolous lawsuits by repealing the outdated requirement that a placard must be attached to ATMs stating that a fee may be charged.

The placard disclosure is duplicative because the actual fee also appears on the ATM video monitor before the transaction is completed. But if the placard isn’t attached, Regulation E (Electronic Funds Transfer Act) permits successful class-action plaintiffs to recover the lesser of $500,000 or 1 percent of the ATM operator's net worth plus attorneys’ fees and costs.

As a result, some people have removed placards, photographed ATMs without them and filed lawsuits.

In a February letter, ABA and six other trade groups asked the House Financial Services and Senate Banking Committees to pass a bill repealing the placard requirement because such lawsuits were growing precipitously and could reduce both the number of ATMs and consumer convenience.

This is a bill that both banks and credit unions can support.

Read the letter.

Read the bill.

First Tech's Sargent Earned Almost $7.8 Million

Another credit union CEO was handsomely rewarded in 2010.

According to First Technology's 2010 Form 990, Thomas Sargent had a compensation package of almost $7.8 million.

The Beaverton, Oregon credit union reported that Sargent's base compensation was $235,000. In addition, he received $2,974,680 in bonus and incentive pay and$4,491,447 in other compensation.

Texans Reality Check

Credit Union Journal is reporting that that Texans CU turned a profit of $5.9 million for the first quarter of the year.

Credit Union Journal quotes Keith Morton, NCUA Region IV Director and Agent for the Conservator, as saying that "{w]e see significant progress in all of these areas (reduced expenses, streamlined operations, retooled infrastructure, and began the process of returning Texans to the core credit union business model), and we are very encouraged by the credit union’s positive financial results for the first quarter of the year."

While it is true that Texans Credit Union reported a profit, the credit union is still critically undercapitalized and delinquencies continue to rise.

Total delinquent loans rose $5.1 million during the first quarter going from $74.3 million to $79.4 million. Loans more than a year past due went from $4.5 million to $21.3 million and loans 6 to 12 months past due went from $19.8 million to almost $40 million.

Texans Credit Union only charged off $1.1 million during the first quarter. You would expect to see a jump in future charge-offs as you are talking about over $61 million in the six month or more past due bucket.

Moreover, the improvement in profits are due to a significant decline in its provisions for loan and lease losses during the first quarter compared to a year earlier. During the first quarter of this year, provisions for loan and lease losses increased by $807,000 compared to almost $14.4 million a year ago.

Another Credit Union Speaks Out Against Udall Bill

A Michigan credit union executive last week urged Senate leaders in a letter to oppose legislation (S. 2231) would more than double the credit union business-lending cap.

Dennis Moriarity, treasurer-manager of Unity Credit Union located in Warren, Michigan, said he is concerned about the increased risk the bill would impose on credit unions that don’t make business loans, or aren’t interested in exceeding the business-loan limit.

“The exposure is to our reserves and retained earnings, which could eventually be confiscated to pay for the mistakes of lenders who are unfamiliar with the complexity of business lending, or who might ignore risks in pursuit of revenues,” he said.

The risk from increased business-lending authority “could spell doom for many credit unions that, by association, become liable for the decisions of others without any opportunity for input in those decisions,” Moriarity added.

Editorial: Reveal CU CEO Compensation

An April 20 editorial appearing in the Honolulu Star-Advertiser has called on federal credit unions to disclose the pay of their top executives.

Read the editorial (paid subscription).

AEI's Proposal to the Udall Bill

Alex Pollock of the American Enterprise Institute has advanced a modest proposal that would increase competition while ensuring competitive fairness.

Alex Pollock proposes raising the cap on business lending for credit unions, but make such lending taxable.

Read his blog post.

Wings Financial's Parish Earns Almost $7.9 Million

I was tipped off to a another big payday for a credit union CEO and two of his subordinates.

According to Wings Financial's 2010 Form 990, the credit union CEO, Paul Parish, reported a total compensation package of almost $7.9 million. Mark Everson's total compensation package was slightly more than $3.2 million and Paul Dinger's compensation package was almost $3.1 million. (see disclosure below)

Several weeks ago, I reported on the $11 million compensation package for David Maus at Public Service Credit Union.

While credit unions say they are looking out for the little guy, it seems some credit union are looking out for their senior managers.

Understatement of Allowance for Loan Losses

The Texas Credit Union Department noted that it is continuing to see an understatement of loan loss reserves by some credit unions.

The Department wrote in its April newsletter:

"The Department continues to see instances where a credit union’s Allowance for Loan and Lease Losses (ALLL) is materially understated based on management’s own internal analysis of the loan loss exposure. The failure to accurately record the appropriate loan loss expense is frequently the result of budgetary or other earnings considerations. Credit unions should be aware that any intentional failure to fund the ALLL in a timely manner may be classified as an effort to falsify the accounting records."

Property Taxes and CU Managers Pay

The Star-Advertiser on April 16 ran a story on the lack of transparency regarding executive pay at the largest credit unions in Hawaii.

The story about executive pay has become entwined with the credit union industry's efforts to preserve its exemption from Oahu's property tax.

The article notes:

The secretive nature of management pay is raising questions at a time when the industry is lobbying to preserve one of its key public subsidies: an exemption from Oahu property taxes.

The 10 largest credit unions in Hawaii declined or did not respond to a Star-Advertiser request to voluntarily disclose compensation data for their five highest-paid executives.

All of Hawaii's credit unions are federally chartered. Federally chartered credit unions are not required to file Form 990s, like other tax exempt organizations. As a result, the pay package of top credit union management is not disclosed.

In addition, credit unions on Oahu are just not exempt from federal and state income taxes; but also exempt from property taxes. Regardless of the value of the property, credit unions only pay a minimum of $300 for each parcel they own. This amounts to real savings for credit unions.

Credit union advocates will contend that executive compensation and their exemption from property taxation are unrelated. I disagree. As tax exempt organizations, federal credit unions receive a valuable public subsidy and there is a need to ensure that this subsidy is going for its intended purpose and not excessive compensation.

Read the Star-Advertiser story (subscription required).

Not All CUs Are Excited About More Business Lending Powers

The American Banker reported on Friday that the head of a credit union in southern California is speaking out against legislation (S 2231) that would allow credit unions to expand their commercial lending authority.

The article notes that there is a silent majority of credit unions that neither want nor need the legislation.

The credit union CEO in a letter to the Senate wrote that the expansion in business lending authority "could easily become the next crisis in the credit union industry, which will require Congress to bailout the industry and its insurance fund."

Read the article (subscription required).

CU Compensation Practices Come Under Increased Scrutiny

Following up on an earlier story about the pay package of Public Service Credit Union's David Maus, the Denver Post looked at the pay packages of other Colorado credit union CEOs.

"As credit unions grow in size and complexity, they are paying their top executives substantially more, and Colorado is front and center in that trend."

Read more here.

Breaking News: Fitch Says More Business Lending Would Challenge Credit Unions

Fitch Ratings believes credit unions could face significant challenges should they be allowed to make more small business loans. We believe few credit unions might successfully compete with those banks already heavily involved in the small business loan space. Limited experience could increase risk, and while increased business lending exposure might behoove credit unions in the long term, we believe it would ultimately have a measured impact on revenue.

A bill under consideration in Congress would more than double credit unions' current business lending cap of 12.25% to 27.5% of total assets. Credit unions feel an increase would allow additional access to capital for small businesses. However, we believe that in the current environment credit-worthy businesses should experience little to no difficulty securing loans in the banking sector.

Bank lobbyists disagree that loans are hard to come by, underscored by a rebound in commercial and industrial lending. In addition, banking trade groups argue that credit unions do very little business lending, highlighted by the small amount of credit unions in danger of reaching or surpassing their 12.25% limit. Credit unions are also nonprofit organizations, making them income tax exempt. Banks clearly don't enjoy that same tax benefit. And banks and credit unions are also subject to different regulators and government rules.

We feel it would be difficult for credit unions to build up viable business lending activities for several reasons. At the onset, addressing infrastructure and capability would be challenging. As part of business lending, a bank must have and relies upon adequately trained staff (which includes a business credit approval and monitoring infrastructure) and be able to provide competent business cash management services and other ancillary products. We believe smaller credit unions with limited resources might find it difficult to successfully compete in a larger business loan environment.

Fitch rates a limited number of credit unions overall and no retail credit unions. All Fitch-rated credit unions are rated on their support floor based on the level of support received from regulators and the government.

Here is the link to the press release.

Credit Unions and Auto Finance

Credit union increased their market share of auto financing in the fourth quarter of 2011 compared to the prior year, according to a report released by Experian.

Credit unions accounted for 17.34 percent of all autos financed in the fourth quarter of 2011, which is comparable to the market share for the captive auto finsnce companies. Credit unions had 11.04 percent of the new vehicle market and 21.10 percent of the used car market.

According to the Experian report, 33.2 percent of all credit union auto borrowers were nonprime or below in the fourth quarter with 11.09 percent subprime and 3.88 percent deep subprime (a credit score below 550). In comparison, banks reported a slightly higher percentage of subprime and deep subprime borrowers (16.02 percent versus 14.97 percent).

The average loan to value (LTV) for new car loans financed by credit unions in the fourth quarter was 112.39 percent and for used car loans, the LTV was 150.48 percent (the highest among all lenders).

Maus' Pay Package Stuns CU Industry

The Denver Post is reporting on the compensation package for Dave Maus, President and CEO of Public Service Credit Union. The sum of the 2010 pay package -- $11 million -- is so large that it has shocked some within the credit union industry.

Read the story here.

Kansas Court Rules that CU Due Refund on Sales Tax

The Kansas Court of Appeals overturned a Kansas Court of Tax Appeals' decision and said that Cessna Employees Credit Union should be granted a refund on the state's retail sales tax.

At issue is whether the retail sales tax can be applied to the reimbursement of travel, hotel and meals expenses passed on to the credit union as part of its final invoice from a third party vendor.

Cessna Employees CU contracted with Jack Henry and Associates (JHA) for a computer upgrade. JHA invoiced the credit union for the services, hardware and software and separately invoiced the credit union for the Travel Purchases (JHA employees' transportation, meals, and lodging).

Cessna Employees CU was seeking a refund from the Kansas retail sales tax in the amount of $3,333.05 it paid to JHA on the costs of the Travel Purchases. The credit union claimed that JHA's travel expenses were not taxable as part of JHA's gross receipts.

The Kansas Court of Tax Appeals found that that the reimbursement of the seller's travel expenses was part of the total amount of consideration in the transaction for which the taxable goods and services were sold by JHA and thus subject to the retail sales tax.

However, the state appellate court disagreed. The state appellate court found that the reimbursement for travel expenses does not constitute a retail sale and thus not subject to the retail sales tax.

The court wrote: "the reimbursement and associated tax amounts are not ... subject to retail sales tax in Kansas because they were not sold at retail, they were not a part of the sale of goods and services, and they were not a part of the selling price of the goods and services."

Read the decision.

Cost of Resolutions

Unlike FDIC, NCUA does not publish the estimated cost to the insurance fund at the time a credit union is placed into conservatorship or receivership.

Presumably, NCUA has analyzed various cost estimates for different courses of action to the National Credit Union Share Insurance Fund (NCUSIF), as it determines which approach will result in the least cost to the NCUSIF.

In its February 23 letter to the Texas Bankers Association about the conservatorship of Texans Credit Union, this seems to be the case. NCUA Chairman Matz wrote:

"NCUA's goal is to achieve the least-cost resolution ... We carefully evaluated all options before charting this course."

Since NCUA has already done these calculations, as a matter of transparency it should include the estimated cost to the NCUSIF in the press release when it places a credit union into receivership or conservatorship.

SELCO Community and the Exception to the Business Loan Cap

The March 28, 2012 issue of Credit Union Times had a story about how SELCO Community Credit Union (Eugene, OR) had to turn away business customers because of the current member business lending limit of 12.25 percent of assets.

I did some research and discovered that SELCO Community has a low-income designation.

Credit unions that have a low-income designation have an exception to the aggregate member business loan cap.

To obtain the exception, SELCO Community must submit documentation to its state supervisor that it is a low-income credit union. The state supervisor will forward its decision to NCUA. Once granted an exception, it does not expire unless revoked by the state supervisory authority.

The missing detail from the story is whether SELCO Community submitted documentation to its state regulator requesting an exception.

If it had not, SELCO Community only has itself to blame for turning away business owners.

No Plans for Texans

On February 17, I posed the question -- "What Is NCUA's Plan for Texans Credit Union?"

Based upon a February 23 letter NCUA Chairman Debbie Matz sent to Eric Sandberg of the Texas Bankers Association (see below, click to enlarge the image), beyond removing culpable management and the board of directors, NCUA is not in any hurry to resolve this failed credit union.

Chairman Matz wrote that NCUA does "not have any plan to merge this credit union at this time and ... has set no timeframe for completing this resolution process."

So, Texans will for the foreseeable future be among the walking dead.

Nonmember Business Loan Delinquencies

At the end of 2011, there were 829 credit unions that reported holding approximately $6.7 billion in purchased business loans or participation interests to nonmembers.

There were 121 credit unions that reported having at least one nonmember business loan at least 60 days past due. These 121 credit unions had $274 million in delinquent nonmember business loans for a delinquency rate of 4.08 percent. In addition, over 25 percent ($77.7 million) of all delinquent nonmember business loans have been in default for over one year.

The Credit Union of Texas reported holding the most delinquent nonmember business loans at $23.6 million for a delinquency rate of 47.54 percent. Other credit union reporting a large dollar volume of nonperforming nonmember business loans include Patelco with $18.2 million, Royal with $16.6 million, Premier American with $14.2 million and America First with $14 million.

See the table below for the 25 credit unions with the most delinquent nonmember business loans on their books.

There are 44 credit unions that are reporting that at least 10 percent of their nonmember business loans are 60 days past due. Nine credit unions report that more than half of their nonmember business loans are in default.