Thursday, March 28, 2013

Compensation of Trumark Financial's Directors Up by Almost 29 Percent in 2011

The Form 990s for Trumark Financial Credit Union in Philadlphia, PA showed that director compensation increased by almost 29 percent between 2010 and 2011.

The total compensation for the 9 member board increased from $351,468 in 2010 to $452,567 in 2011. The average compensation went up from $39,052 in 2010 to $50,285 in 2011.

2011 compensation of board members ranged from a low of $33,474 to a high of $65,836.

Pennsylvania is one of several states that allows state-chartered credit unions to compensate their board members.

Tuesday, March 26, 2013

G-fees on Housing GSEs Should Not Be Used to Fund Unrelated Programs

Last Friday, bank and credit union trade groups jointly sent a letter to Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho) supporting an amendment that would prevent Congress from using guarantee fees charged by Fannie Mae and Freddie Mac to fund future unrelated programs.

“G-fees are a critical risk management tool used by Fannie Mae and Freddie Mac to protect against losses from faulty loans, and should be used only to manage the companies’ credit risk,” the letter said. “Increasing g-fees for other purposes effectively taxes potential homebuyers and consumers wishing to refinance their mortgages.”

Monday, March 25, 2013

CEO Compensation at Large State-Chartered CUs, 2011

The average 2011 compensation for CEOs at state-chartered credit unions with $1 billion or more in assets was about $814 thousand. The median CEO compensation was approximately $673 thousand.

The information on credit union CEO pay was pulled from the Form 990s filed by state-chartered credit unions. Federal credit unions do not file a Form 990 and are not included in this write-up.

Information on CEO pay was not available for three state chartered credit unions -- Meriwest, Lake Michigan, and Navy Army. Lake Michigan filed a Form 990; but did not disclose salary information.

There were 17 CU CEOs, whose total compensation exceeded $1 million. Richard Rice at Teachers Credit Union was the highest compensated CEO of a state-chartered credit union receiving almost $3.1 million in 2011.

The CEOs at these large state-chartered credit unions had an average base salary of $423,260 (median salary was $420,014). Alan Kaufman of Melrose Credit Union (NY) had the highest base salary at just over $1 million.

Bonuses or incentive pay for 2011 averaged about $110.4 thousand (median bonus payments was $77.7 thousand). The CEO who earned the largest bonus in 2011 was Kam Wong of Municipal Credit Union (NY) at $660,000.

The average deferred compensation for 2011 was approximately $134.3 thousand (median deferred compensation was $37.8 thousand). David Maus of Public Service Employees Credit Union (CO) received the largest amount of deferred compensation in 2011 in excess of $1.5 million.

Click on images to enlarge.

Thursday, March 21, 2013

Findings fom Telesis Community's Material Loss Review

NCUA's Office of the Inspector General (IG) released the Material Loss Review (MLR) on the failure of Telesis Community Credit Union (Chatsworth, CA) with an estimated loss to the National Credit Union Share Insurance Fund of almost $77 million.

The report blames Telesis Community Credit Union’s management and Board for the credit union's failure and resulting loss to the NCUSIF.

Here are some of the highlights from the report.

A heavy concentration in member business loans, especially commercial real estate loans, led to the credit union's failure. The MLR notes that Telesis Community Credit Union has an exception to the member business loan (MBL) cap of 12.25 percent of assets and "leveraged this exception to originate a number of large business loans with industry and geographic concentrations in areas vulnerable to economic downturns." The report notes that examiners believed that Telesis needed a capital (net worth) ratio of at least 15 percent to support the risk due to its heavily concentrated loan portfolio.

The MLR report also found that Telesis Community Credit Union used wholesale funding -- borrowings from the Federal Home Loan Bank and Western Corporate FCU and brokered certificate of deposits -- to originate its business loans. This resulted in significant borrowing costs. Additionally, the requirement to pledge loans as collateral for its borrowings created pressure to inflate the grading of its loans.

The MLR report noted that the credit union rapidly grew its business loan portfolio and had loans in 29 states. The report concluded that "[s]uch a wide dispersion indicates that management was branching into areas outside of its area of geographic expertise."

The report points out that between 2007 and 2011, the credit union "had difficulty generating income because of high loan losses and decreased loan demand, which resulted in lower loan and fee income." As a result, the credit union saw an erosion in its net worth ratio. To buttress its net worth ratio, management at the credit union adopted a strategy of selling assets, which eliminated healthy loans from its portfolio leaving only the underperforming loans.

The MLR states that given the wide geographic area of its business loan portfolio, the credit union needed "a robust methodology for calculating" its allowance for loan and lease loss. However the credit union’s "calculations included inappropriate assumptions about individually considered loans and relied upon historical trends, which did not reflect actual conditions, to anticipate losses in loan pools." For example, the credit union applied "a zero percent historical loss rate over MBLs based on three-year historical data when current delinquency data internally and industry-wide predicted significantly higher loss rates." The report notes that the ALL was underfunded and examiners and external auditors required $8 million in adjustments.

The report also found that over concentration in MBLs was not the only strategic missteps by management. The MLR is critical of the credit union's decision to acquire two credit union service organizations (CUSOs), AutoSeekers and AutoLand. The report notes that the credit union did not perform appropriate due diligence. In addition, there is the potential of a conflict of interest as the CEO of AutoSeeker was related to the CEO of the credit union. NCUA examiners and Regional officials believed that credit union purchased both CUSOs for the benefit of the related party. The Board minutes show no discussion of conflict of interest.

Another conflict of interest cited in the report dealt with another Telesis CUSO, Business Partners. The report stated that the CEO of the credit union was the Chair of the Board for Business Partners and a credit union EVP was the CUSO's CEO. The report goes on to state that the CUSO held $12 million deposit at Telesis Community, despite the credit union being undercapitalized -- raising doubts that this was an arm's length transaction.

The report further suggests that the credit union's board rubber stamped management's decisions. "The Board tended to follow her [the CEO's] recommendations with little discussion."

One interesting tidbit from the report was that their was infighting between the EVP and CEO as Telesis Community's financial conditions deteriorated. The EVP alleges that "the CEO had acted unethically and threatened retaliatory action against the EVP." However, the director of human resources for the credit union found no evidence to suport the claims.

The report is critical of NCUA examiners finding that enforcement actions were not timely or aggressive. Despite receiving a CAMEL composite rating of 4 in September 2007, NCUA did not sign a Letter of Understanding and Agreement (LUA) with the credit union until June 2010. NCUA amended the LUA in May 2011 to allow NCUA to run the bidding process for a potential merger partner; but did not hold a meeting with bidders until November 2011. However, the credit union could not find an appropriate merger partner. In March 2012, the NCUA approved an NCUSIF-guaranteed line of credit for $73 million. Shortly thereafter, the NCUA authorized a temporary Cease and Desist Order and subsequently the state regulator placed Telesis Community into conservatorship. On June 1, 2012, Telesis Community was placed into liquidation.

Read the report.

Wednesday, March 20, 2013

Troubled Debt Restructuring

Credit unions started reporting information on Troubled Debt Restructurings (TDR) at the end of 2012.

The 5300 Call Report states that a TDR "means a restructuring in which a credit union, for economic or legal reasons related to a member borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. The restructuring of a loan may include, but is not necessarily limited to: (1) the transfer from the borrower to the credit union of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan; (2) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk; or (3) a combination of the above."

At the end of 2012, 3,190 credit union reported a TDR. Outstanding TDRs were approximately $10.5 billion in TDRs with almost $1.8 billion in nonaccrual status. The TDR portion of allowances for loan and lease losses was $1.2 billion.

The following table list the 25 credit unions with the most TDRs. The table includes information on the accrual status of the TDR and Total TDRs as a percent of Net Worth.

It should not come as a surprise that Navy FCU has the most TDRs.

Two credit unions reported TDRs in excess of their net worth plus the portion of loan loss allowances allocated to TDRs -- Appalachian (KY) and PEF (OH).

The following table provides information on the 25 credit unions with the greatest exposure to TDRs as a percent of Net Worth plus TDR portion of loan and lease loss allowances (ALLL). At the end of 2012, 21 credit unions reported an exposure in excess of 100 percent.

Tuesday, March 19, 2013

Outrageous Cost of Charter Choice

It is estimated that HarborOne Credit Union spent $2.4 million to switch to a mutual bank charter. According to an American Banker story, this included $750,000 for legal fees, $520,000 for printing and postage, $260,000 for public relations and $235,000 for signage and stationary, among other things.

But why should a change from a credit union to a mutual bank charter cost so much?

The answer is simple -- NCUA's onerous regulatory burden, which runs up the cost of such charter changes.

Monday, March 18, 2013

HarborOne Members Vote to Become a Mutual Bank

HarborOne Credit Union members voted by a large margin to approve a charter change that will allow the credit union to become a mutual cooperative bank.

HarborOne President and CEO James Blake told The Enterprise on Monday that 62 percent of the 22,433 votes cast were in favor of approving the change to a bank.

Read the story.

Legislative Scrutiny of CUs Will Intensify

An editorial by The Register-Guard newspaper in Eugene, Oregon calls for greater scrutiny of credit unions.

The editorial states that "the emergence of mega-credit unions is weakening the political protection traditionally provided by their small size and member-owned, not-for-profit status. As the distinctions between banks and credit unions blur, legislative scrutiny will intensify."

The editorial notes that one Oregon CU CEO's compensation was "more in line with Wall Street than Main Street."

The editorial ends with "[t]he days when credit unions occupied a small niche in the financial services industry are over. The size and reach of some credit unions ensures that they will be more energetically targeted by competitors and more closely watched by lawmakers. Credit unions won’t like it — but it’s an appropriate consequence of success."

Read the editorial.

Saturday, March 16, 2013

NCUA Closes Two Credit Unions

The National Credit Union Administration (NCUA) liquidated Pepsi Cola Federal Credit Union of Buena Park, Calif. and I.C.E. Federal Credit Union of Inglewood, Calif. NCUA made the decision to discontinue the operations of both credit unions after determining the credit unions were insolvent and have no prospect for restoring viable operations.

While I.C.E. FCU was well capitalized at the end of 2012, it reported losses for 2011 and 2012. Delinquent loan ratio at the credit union increased by 232 basis points during 2012 to 4.65 percent.

Pepsi Cola FCU's year-end 2012 financial statements filed with NCUA are a little suspicious. The credit union is well capitalized with a net worth ratio of 22.45 percent. It reported no delinquent loans. It did report losses for 2011 and 2012.

In both cases, NCUA did an insured depositor payoff.

Read the I.C.E press release and Pepsi Cola press release.

Friday, March 15, 2013

Undercapitalized CUs, Dec. 2012

There were 91 undercapitalized credit unions at the end of 2012.

Seven credit unions were critically undercapitalized. Another fifteen credit unions were significantly undercapitalized.

Nine credit unions were classified as undercapitalized, even though their net worth (capital) ratios were 6 percent or higher. These 9 credit unions were not holding enough net worth relative to their risk-based requirement.

Below is a list of undercapitalized credit unions at the end of 2012. (click on the image to enlarge)

Thursday, March 14, 2013

Privacy Notice Bill Passes the House

The House on March 12 passed by voice vote a bill (H.R. 749) that would amend the Gramm-Leach-Bliley Act by eliminating the requirement to provide an annual privacy notice for federal financial institutions that haven’t made changes to their privacy practices. Institutions that changed their privacy policies during the preceding year still would be required to provide a notice.

The legislation -- introduced by Blaine Luetkemeyer (R-Mo.) on February 15 -- also would eliminate the annual privacy disclosure requirement for state-licensed financial institutions that are subject to state privacy protection laws or regulations -- or become subject to such regulations.

This sensible legislation, which is supported by bank and credit union trade associations, would remove an additional expense for financial institutions and help to make privacy notices more meaningful to consumers.

The Senate still must pass the legislation.

Wednesday, March 13, 2013

Oregonian: Good Time to Hold A Hearing

The Oregonian Editorial Board called for the state legislature "to hold a hearing and solicit public testimony on how credit unions are carrying out their responsibilities to the community."

While calls to tax credit unions were dismissed by the paper, the editorial stated that "credit unions should assure taxpayers and their customers that they will remain customer-focused," especially the largest credit unions that are behaving "more like banks."

The Oregonian Editorial Board was responding to two bills before the state legislature that would have credit unions document how they are serving low- and moderate-income members and would measure credit union services to underserved areas.

Read the editorial.

Tuesday, March 12, 2013

Information Collection for Outside Legal Counsel Proposals

The NCUA on March 11 published an information collection notice that is subject to comment related to its solicitation of proposals for outside legal counsel to assist and advise the NCUA in its various capacities.

The agency wrote that the collection of this information will assist it in further:
  • Standardizing the data it uses to select outside counsel;
  • Considering additional criteria in making its selections; and
  • Improving efficiency and recordkeeping related to its selection process.
The agency is proposing two forms. The first form would look at estimated legal fees, cost and expenses that legal counsel would expect to invoice. The second form would focus on firm profile and expertise, malpractice insurance, price determination and contract solicitation methods, equal opportunity, lobbying, invoices, and conflicts of interest.

The timing of this notice does make you wonder whether it is in response to Representative Issa's inquiry into the agency's hiring of outside legal counsel on a contingency fee arrangement.

Read the Federal Register notice.

Monday, March 11, 2013

Corporate Credit Unions Subsidized by Federal Safety Net

During the Financial Crisis, corporate credit unions received a significant subsidy from the Federal safety net, as the financial conditions of corporate credit unions deteriorated.

Five corporate credit unions failed during the financial crisis because of massive losses on their investment portfolios of risky asset-backed securities. In addition, the equity investments of corporate credit unions in U.S. Central, a wholesale corporate credit union serving retail corporate credit unions, were wiped out by losses at U.S. Central.

Concerns about systemic collapse of the credit union system arising from the mounting problems at corporate credit unions caused NCUA in late 2008 and early 2009 to take a number of actions to stabilize the corporate credit union system, including guaranteeing all uninsured deposits at corporate credit unions and borrowing funds from the U.S. Treasury to stabilize and resolve the five failed corporate credit unions.

As a result of NCUA’s actions, in early 2009 Fitch raised the Support Rating and Support Rating Floor for eight rated retail corporate credit unions, while lowering their individual stand-alone ratings.

On February 10, 2009, Fitch raised the Support Rating, which measures the probability of external support from the government, for all rated corporate credit unions from 4 to 1. A rating of 4 means there is limited probability of support, while a rating of 1 means a very high probability of external support. As a result, the Support Rating Floor was raised 10 notches from B to A+. Before the financial crisis, retail corporate credit unions rated by Fitch had Support Rating Floor of B.

Fitch also affirmed or downgraded the long-term issuer default ratings for these rated corporate credit unions to their support floor of A+. The issuer default rating for each corporate credit union could not fall below the Support Rating Floor. Five corporate credit unions were downgraded from AA- to A+. The other 3 corporate credit unions had their ratings affirmed at A+.

Three of these retail corporate credit unions ultimately failed -- Members United Corporate, Southwest Corporate, and Constitution Corporate; but still had an issuer default rating of A+ just 3 months before being seized by NCUA in September 2010.

In addition, the stand-alone ratings for these corporate credit unions were downgraded twice during the first quarter of 2009 with all ratings eventually falling to E (see table below). The average notch downgrade arising from the February 10 ratings action was 2.75 notches. The average notch downgrade for the eight retail corporate credit unions arising from both February 10 and March 24 ratings actions was 6.5 notches. A rating of E indicates that the corporate credit union has very serious problems and requires external support.

This divergence in the Support Rating Floor and the Individual Ratings shows that these retail corporate credit unions received a very valuable benefit from the Federal safety net.

Friday, March 8, 2013

No Money Down Mortgages

Two Washington, D.C.-area credit unions, NASA FCU and Navy FCU, have been advertising no down payment mortgages with no Private Mortgage Insurance.

NASA FCU will provide 100 percent financing for for a primary residence purchase up to $650,000 in DC, Maryland, and Virginia.

Navy FCU will provide such financing arrangements up to $1 million.

In a story in the Washington Post, Navy FCU stated about 11 percent of its mortgages did not require a down payment.

While I don't know the underwriting standards used by the two credit unions, no down payment loans with no Private Mortgage Insurance are potentially risky, as the borrower has no skin in the game.

A colleague once made this observation -- borrowers who make no down payments are renters with debt.

Wednesday, March 6, 2013

Whistleblower Lawsuit Reveals Undisclosed Enforcement Order

A whistleblower lawsuit filed by the former CEO of Ukrainain National Federal Credit Union reveals that the credit union was under an enforcement order.

The Credit Union Journal (paid subscription) reported that the Letter of Understanding and Agreement required the credit union to adopt a new governance structure, follow its own bylaws, and hire new executives as chief financial officer and chief operating officer.

If this lawsuit had not been filed, this enforcement action would never had been disclosed.

You would assume that members have a right to know that their credit union had regulatory issues, which rose to the level of an enforcement order.

Unfortunately, the National Credit Union Administration continues to cover up for credit unions by not disclosing enforcement orders.

This practice needs to come to an end.

It is a sorry state of affairs when you learn about an enforcement order through a news story reporting on a lawsuit.

Tuesday, March 5, 2013

Amended Rural District Definition

The National Credit Union Administration Board approved a final rule that amends its “rural district” definition for field-of-membership purposes.

The final rule permits an area to qualify as a rural district if its population does not exceed the greater of 250,000 people or 3 percent of the population of the state in which the majority of the district is located. The rule’s practical effect is that it allows rural districts of up to 250,000 people in all states -- up from the current 200,000 threshold.

In the 11 most populous states, however, the rural district’s population threshold could exceed 250,000 but not 3 percent of the state’s population. Those 11 states are California, Texas, Florida, New York, Illinois, Pennsylvania, Ohio, Michigan, Georgia, North Carolina and New Jersey.

However, the term rural district is a misnomer. NCUA's practice to date has been to approve geographic areas as rural districts that include non-rural counties. In some cases, these rural counties appear to act as a bridge to connect one local, well-defined urban area to another.

Read the final rule.

Monday, March 4, 2013


Does an aggressive promotion of skip-a-payment embody a core credit union principle of of promoting thrift?

In the opinion of one credit union CEO, it does not.

According to Bruen's Credit Union Blog, the "aggressive promotion and encouragement to use this program goes against the credit union grain. Skipping payments is hardly a good practice for any member since it keeps them in debit that much longer."

Chuck Bruen, the CEO of First Entertainment Credit Union in California, was reacting to a story about a 400 percent increase in skip-a-payment fees at Alabama's largest credit union, Redstone FCU.

Read the blog post.

Friday, March 1, 2013

Credit Unions Report Record Profits for 2012

NCUA reported today that credit union earnings for 2012 were $8.5 billion, the highest figure ever reported by the industry.

Net income was up 36 percent from the $6.3 billion reported in 2011.

Lower provisions for loan losses, interest expenses, and noninterst income contributed to the record profits. Provisions for loan and lease losses were down almost 25 percent year-over-year to $3.5 billion. Noninterest income was up $2.3 billion for the year to almost $14.6 billion, while interest expenses fell almost $1.5 billion to approximately $7.2 billion.

The return on average assets (ROA) for the credit union industry was 0.86 percent. However, profitability varied across credit union size groups. Credit unions with $500 million or more in assets reported an ROA of 1.02 percent. But credit unions with under $10 million in assets were unprofitable with an ROA of negative 0.02 percent.

The net worth ratio for the industry was 10.44 percent at the end of 2012 -- up 23 basis points from a year ago. Almost 97 percent of the credit union industry reported a net worth ratio of 7 percent or higher, while only 76 credit unions reported a net worth ratio belwo 6 percent.

In 2012, assets were up 6.24 percent, loans increased by 4.59 percent, and deposits (shares) rose by 6.10 percent.

Asset quality improved during 2012, as delinquent loans fell from $9.1 billion at the end of 2011 to $6.9 billion at the end of 2012. The delinquent loan ratio was 1.16 percent -- down 2 basis points from the prior quarter and 44 basis points from a year ago. The agency noted that Troubled Debt Restructurings stood at $10.3 billion at the end of 2012.

click here to read the press release.

Click here to view credit union performance trends.

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