Lawsuit Filed Against South Florida FCU and Its CEO

The South Florida Business Journal is reporting that South Florida Federal Credit Union and its President and CEO Maggie Martinez were hit with a federal lawsuit from two former employees on September 5.

The complaint alleges that the President and CEO of the credit union retaliated against the two former employees for their cooperation with a regulatory investigation into the CEO’s conduct.

The lawsuit alleges sexual misconduct, nepotism, and racial discrimination.

Read the story.

ABA's Ballentine Talks About Credit Unions

James Ballentine, EVP of Congressional Relations and Public Policy, spoke about removing the credit union tax exemption on Fox Business’ “Markets Now” program.

Watch the video.

Improperly Using an Association to Recruit Members

In a letter on Monday to National Credit Union Administration Chair Debbie Matz, ABA wrote that Kinecta Federal Credit Union in Manhattan Beach, Calif., is “improperly using” a third-party association to recruit members who would not otherwise qualify.

Kinecta allows individuals who are otherwise ineligible to become members by simultaneously joining a consumer group,Consumers Cooperative Society of Santa Monica (CCSSM), and paying a $10 fee that Kinecta passes on to the association.

Kinecta’s online application (see attachment) states “if you are not in any of the categories above, you can join through the Consumers Cooperative Society of Santa Monica. Kinecta will process the enrollment into CCSSM for you. ($10 fee for CCSSM applies).”

“ABA questions whether this transaction meets the requirement of an associational common bond,” the letter said. “Membership . . . needs to be more than the checking of a box on a credit union’s membership application.”

ABA also urged NCUA to notify all federal credit unions about the associational common bond requirement. “Individuals must belong to the association prior to joining the credit union and it is impermissible to sign up an individual for membership in an association at the same time the individual is applying to join the credit union,” ABA said.

Read the letter.

Disclosing Stress Testing Results

In a speech at the National Association of State Credit Union Supervisors’ annual State System Summit, National Credit Union Administration Board Chairman Debbie Matz announced the agency is drafting a proposed rule to require annual stress tests at credit unions with assets exceeding $10 billion.

There are currently four credit unions with at least $10 billion in assets with a fifth credit union nearing the threshold.

However, according to the NCUA press release, the agency has not made a decision about requiring the results of the stress test to be made public.

Section 165(i)(2) of the Dodd-Frank Act requires publication of a "summary" of the results of the stress tests for covered institutions. However, credit unions are not covered by this section of the Dodd-Frank Act, so there is not a legislative mandate to publicly disclose the results.

While Matz acknowledges public disclosure would enhance transparency to members, she is worried that the results can be misinterpreted and lead to inaccurate conclusions about a credit union’s financial health.

But are Chairman Matz's concerns about disclosure overblown?

Federal Reserve Chairman Bernanke in an April 8, 2013 speech noted the benefits of disclosure by stating "the disclosure of stress test results and assessments provides valuable information to market participants and the public, enhances transparency, and promotes market discipline."

Westby Co-op to Buy Loans and Deposits at Bank Branch

Citizens Community Bancorp, Inc. of Eau Claire, Wisconsin, parent company of Citizens Community Federal, and Westby Co-Op Credit Union of Westby, Wisconsin today announced they have entered into a deposit and loan assumption agreement whereby Westby will purchase certain assets from, and assume certain deposit liabilities of, the Bank's Wisconsin Dells branch.

Financial terms were not disclosed and the transaction will need regulatory approval.

Quorum FCU Dives Into Indirect Timeshare Lending

TimeshareLeaks has started to investigate the ongoing relationship between Quorum Federal Credit Union (Purchase, NY) and The Berkley Group, a leading timeshare developer.

Quorum FCU entered the timeshare lending business in late 2009, when it founded a credit union service organization (CUSO) called Vacation Ownership Funding Company (VOFCO). Quorum owns 79 percent of VOFCO.

In its 2009 Annual Report, Quorum wrote about how VOFCO will help to facilitate the relationship between Quorum and the vacation ownership companies and would fuel future growth of the credit union.

In its 2012 Annual Report, Quorum wrote that it "entered into agreements with several vacation ownership companies to provide indirect loans for the purchase of vacation ownership intervals."

TimeshareLeaks noted that between 2010 and 2011 vacation ownership loans grew by 302 percent and between 2011 and 2012 vacation ownership loans almost doubled, growing by 90 percent.

At the end of 2012, the credit union held $103.5 million in vacation ownership loans, which equated to 18 percent of its loan portfolio.

In fact, almost 94 percent of the growth in the credit union's outstanding loan balances between 2009 and 2012 has come from vacation ownership loans.

No wonder Quorum in a 2011 letter opposed a proposed rule by NCUA that would have subjected its CUSO to additional regulatory oversight.

Unrealized Gains or Losses in AFS Securities

The recent rise in medium-term and long-term interest rates has caused many credit unions to report unrealized losses on their available-for-sale (AFS) securities portfolios. While these unrealized losses on AFS securities do not affect current earnings, they do have implications for future earnings if the securities are sold.

According to NCUA, the accumulated unrealized gain or loss on AFS securities at federally insured credit unions went from an unrealized gain of $2 billion as of March 31, 2013 to a unrealized loss of $614 million at the end of the second quarter of 2013.

Alaska USA FCU reported the largest unrealized loss on AFS securities at almost $63 million. See the table below for the 25 federally insured credit unions with the largest unrealized losses on AFS securities. Click on image to enlarge.



For federally insured credit unions that reported holding AFS securities as of June 2013, the median ratio of unrealized gain or loss on AFS securities to total assets was minus .03 percent. However, 54 credit unions had unrealized losses on AFS securities that were at least 1 percent of the credit union's total assets.

The following table list the 25 credit unions with at least $50 million in assets that have the largest exposure to unrealized losses on AFS securities as a percent of assets.

Undercapitalized Credit Unions, June 2013

There were 82 credit unions that were undercapitalized as of June 2013. Seven credit unions were critically undercapitalized and 15 credit unions were significantly undercapitalized.

Click on the images to enlarge.

Housing Authority Inappropriately Used Program Funds to Supprt Credit Union

The U.S. Department of Housing and Urban Development Inspector General (IG) in July 2013 found that the Stark Metropolitan Housing Authority used public housing operating and capital funds for ineligible programs, including its credit union -- Stark Metropolitan Housing Authority FCU (Canton, Ohio).

The report noted that the Housing Authority inappropriately allocated $190,547 to pay the salaries and benefits of credit union employees.

The report also noted that the Housing Authority did not provide documentation to justify paying $1,170,364 in credit union salaries and benefits, $227,500 in annual contributions to the credit union, $18,423 lawn and maintenance expenses; $14,472 in training expenses; and $32,270 in utility expenses.

In addition, the Housing Authority purchased a non-interest bearing account at the credit union despite the Housing Authority's general depository agreement noting that all funds should be deposited in an interest bearing account. As a result, the Housing Authority failed to earn almost $16,000 in interest income.

Furthermore, the IG report found that the Housing Authority provided a significant subsidy to the credit union by leasing its office space to the credit union for $1 per year over 12 years, when the monthly fair market value rental value of the property was approximately $10 per square. The report, using an $8 per square foot rental value, found that the Housing Authority could have earned almost $226,000 in rent from the credit union.

The IG report recommended that the Housing Authority reimburse its operating and capital funds and charge and collect fair market rent from its credit union.

In a related story, the credit union has filed a complaint in Stark County Common Pleas Court claiming the Housing Authority has wrongly attempted to recoup $2 million allocated to the credit union over the years; withheld $100,000 in promised subsidies; and threatened to raise the credit union's rent.

Read the report.

North Dade Community Development FCU Cited for BSA and Money Laundering Deficiencies

The National Credit Union Administration has issued a cease and desist order to North Dade Community Development Federal Credit Union of Miami Gardens, Florida for weaknesses in the credit union's bank secrecy, anti-money laundering, and foreign assets control programs.

The order requires the credit union to stop transacting all business activity for money services businesses not located within the credit union’s geographic field of membership and to suspend transacting business activity for all remaining member money services businesses until an adequate Bank Secrecy Act/Anti-Money Laundering/Office of Foreign Assets Control program is developed and implemented.

NCUA also ordered the credit union to verify that all members are within the credit union’s field of membership; identify all bank secrecy/anti-money laundering/foreign assets control compliance deficiencies; designate a Bank Secrecy Act compliance officer; complete a comprehensive bank secrecy/anti-money laundering/foreign assets control risk assessment; and revise and document board approval for all policies relating to bank secrecy, anti-money laundering, and foreign assets control.

Read the press release.

Read the cease and desist order.

Do CUs Need a Tax Exemption to Survive?

Apparently credit union lobbyists believe the tax exemption is essential for survival.

Politico's Morning Money on September 5 reported that NAFCU's Vice President of Legislative Affairs Brad Thaler in an e-mail to members of Congress wrote: "Simply put, the tax exemption is an issue of survival for credit unions."

That is a pretty sad commentary from credit union lobbyists that the credit union industry cannot be competitive without its government subsidy.

I wonder how many credit union CEOs share this attitude.

ASI Announces Special Assessment for Privately Insured Credit Unions

Both Credit Union Journal and Credit Union Times are reprting that ASI Inc. of Dublin, Ohio announced a special premium assessment for 2013 of 7.5 basis points. In the past five years, ASI has assessed its members a total of 61.50 basis points. The ASI premium will be assessed of all privately insured credit unions of record with ASI as of September 30.

Americans for Tax Reform Confuse CU Tax Exemption with Tax Treatment of Pass-Through Businesses

Americans for Tax Reform last week likened the tax exemption of credit unions to the tax treatment of pass-through businesses, such as partnerships and S-corporations.

Ryan Ellis, who wrote the piece, stated that the only difference is the incidence of the tax.

Unfortunately, Mr. Ellis does not seem to understand the difference in the tax treatment of credit unions versus pass-through businesses.

The owners of partnerships and S-corporations are responsible for paying taxes on the earnings (profits) of the business.

In contrast, credit unions do not pay taxes at the corporate level on their retained earnings (profits), nor do they have an outstanding tax liability that is passed through to their members.

Craftsman CU Closed

The Michigan Department of Insurance and Financial Services today liquidated Craftsman Credit Union of Detroit and appointed the National Credit Union Administration (NCUA) as liquidating agent. Security Credit Union of Flint, Mich., immediately assumed Craftsman’s members and deposits, as well as 50 percent of its loans.

The Michigan Department of Insurance and Financial Services made the decision to liquidate Craftsman Credit Union and discontinue its operations after determining the state-chartered credit union was insolvent and had no prospect for restoring viable operations.

As of June 30th, the credit union was critically undercapitalized with a net worth ratio of 1.46 percent. The credit union reported that 6.54 percent of its loans were 60 days or more past due at the end of the second quarter of 2013. In addition, the credit union reported a loss of almost $2.1 million for the first six months of 2013.

At the time of liquidation and subsequent purchase and assumption by Security Credit Union, Craftsman Credit Union served 6,403 members and had assets of $24.1 million, according to its most recent Call Report.

This is the 12th credit union to be liquidated in 2013.

Read the press release.

NCUA Warns FCUs About Potential Violations of Common Bond Advertising

The National Credit Union Administration has called on federal credit unions to stop advertising that anyone can join a credit union.

“If your credit union is advertising that anyone, without limitation, is able to become a member of your credit union, then you may be in violation of federal law and regulation,” the NCUA said (emphasis in original). “Some overly aggressive marketing campaigns by federal credit unions to facilitate membership through associational groups are providing consumers with misleading information about single and multiple common bond membership requirements.”

The NCUA also reminded credit unions of the limitations on using third-party associations to establish a common bond for membership. “NCUA’s Office of Consumer Protection has begun conducting quality control reviews of federal credit unions that may be improperly using associations to sign up members without a common bond,” the agency said.

NCUA warned that "[u]pholding the membership standards of every federal credit union charter is essential to maintaining the integrity of the federal credit union system."

Read the letter.

Alabama Credit Union to Buy Georgia Bank

The American Banker is reporting that Five Star Credit Union of Dothan, Alabama has agreed to purchase Flint River National Bank in Camilla, Georgia.

Five Star CU will buy all the loans and deposits at the $23 million bank. The credit union is valuing the bank assets at $21 million.

This would be the fifth transaction involving a credit union buying a bank.

Read the story.

Redacted Report Issued on El Paso's FCU Failure

The National Credit Union Administration's Office of the Inspector General (IG) issued a highly redacted Material Loss Review on the failure of El Paso's Federal Credit Union.

The IG report noted senior management displayed a lack of integrity and did not manage the credit union in the best interest of its members. The report pointed out that credit union's fee income was excessive. During the period examined, fee and other operating income as a percent of average total assets averaged 3.73 times higher than its peers.

The report stated that "senior management displayed a lack of competence and training appropriate to their position."

In addition, the credit union had deficiencies with regard to record keeping and internal controls and ineffective oversight by its Board of Directors and Supervisory Committee.

For example, "examiners found problems with the execution of loan collections and charge offs, the sufficiency of Board minutes, identification of delinquent loans, backdating of transactions, and the Credit Union's advertised field of membership."

The report also noted that the Board Chairman received questionable payments associated with Board meetings and expenses.

Read the report.

The Haves and Have Nots

The National Credit Union Administration (NCUA) noted that in the second quarter large credit unions fared better than small credit unions.

NCUA stated that "federally insured credit unions with more than $500 million in assets continued to lead the industry in most performance measures."

These large credit unions, which held more than two-thirds of industry total assets, reported a higher return on average assets and had stronger loan, net worth, and membership growth than smaller credit unions.

For credit union with less than $10 million in assets, membership, net worth and loan growth were negative during the first six months of 2013.

De Novo CU Suspends Services to Bitcoin Accounts

Last week I reported that Tradehill Inc., an exchange for virtual currencies such as Bitcoin, was moving customer accounts to Internet Archive Federal Credit Union of New Brunswick, New Jersey.

Internet Archive FCU has reversed its decision to service accounts linked to Bitcoin.

In an August 29 blog post, the credit union wrote: "Certain operational and regulatory issues came up including some that apply to new credit unions like ours... Until we have further clarity, we are unable to service some of our corporate members."