Monday, March 31, 2014

Undercapitalized Credit Unions, Q4 2013

There were 61 undercapitalized credit unions at the end of 2013. This down from 68 credit unions at the end of the third quarter of 2013 and 91 credit unions at the end of 2012.

Five credit unions were critically undercapitalized and 7 were significantly undercapitalized.

Click on images to enlarge.

Friday, March 28, 2014

Loss from Taupa Lithuanian Credit Union Failure Is $33.5 Million

The Material Loss Review (MLR) of Taupa Lithuanian Credit Union (Cleveland, Ohio) by the National Credit Union Administration's Office of the Inspector General (IG) found that fraud caused the failure of credit union.

According to the MLR, the Ohio Department of Financial Institutions liquidated Taupa Lithuanian on July 15, 2013 and the loss to the National Credit Union Share Insurance Fund from Taupa Lithuanian's failure is estimated at $33.5 million.

The IG report states that Taupa Lithuanian failed primarily due to management fraudulently overstating assets and understating shares. Specifically, examiners discovered assets overstated by approximately $15.5 million, which Taupa management fraudulently reported as cash on deposit at Corporate One Federal Credit Union, and noted an $18 million share understatement, altered documents, inaccurate Call Reports, and other suspicious transactions.

The report also notes that examiners missed numerous red flags, such as excessive amounts of cash on deposit, the discovery of an unaccounted for bag of coins under the sink, an overdrawn employee account for an extended period, an overdrawn line of credit at the corporate credit union, and an evasive CEO. The report said that these red flags should have warranted expanded examination procedures.

In NCUA's November 2011 review of the state examination working papers from 2010, NCUA's examiner-in-charge noted that what was happening at Taupa Lithuanian was eerily similar with what transpired at failed St. Paul Croatian FCU. Specifically, the examiner-in-charge commented:

[M]BLs, policy updates, investment & record keeping errors, NO delinquency & NO charge offs in over 10 years, this CU looks, sounds & acts like St. Paul's Croation [sic] waiting to happen all over again.

Read the MLR.

Wednesday, March 26, 2014

Disregarding Membership Requirements

I received the following e-mail from a banker who wanted to share her experience about a credit union disregarding membership requirements.

"What was so interesting and really drove home the point, was this weekend, I purchased another car. But this time in Vancouver, Washington (I live in Southern Oregon, so purchasing a car in Vancouver in itself is odd) The dealer ran the financing through a credit union in Washington…that I have no affiliation with…. I paid no membership fee, I didn’t open an account, didn’t sign a “signature card” and honestly I can’t even tell you the name of the credit union…but apparently their membership is so broad that simply purchasing a car in Washington made me, a Southern Oregonian eligible for their membership." (emphasis added)

I hope there are some credit unions that find this development somewhat disconcerting.

Monday, March 24, 2014

CUs Generate More Revenues from Checking Accounts Than Banks and Thrifts

Moebs Services found that checking accounts at credit unions collected three times the fee revenue of bank checking accounts and five times the revenues of thrift checking accounts.

The results are from a survey of 2,890 Financial Institutions by Moebs Services between January 2, 2014 and January 10, 2014.

Checking account revenues at credit unions was 78 basis points (bps). In comparison, revenues on checking accounts for banks and thrifts were 25 bps and 15 bps, respectively.

Moebs Services noted that while credit unions have the reputation for low prices, they traditionally do not waive service fees. As a result, credit unions collect more revenues from their checking accounts than banks and thrifts.

Go to Moebs Services website.

Saturday, March 22, 2014

Parsons Pittsburg CU Closed

The Kansas Department of Credit Unions liquidated Parsons Pittsburg Credit Union of Parsons, Kansas, and named the National Credit Union Administration as liquidating agent.

Golden Plains Credit Union of Garden City, Kansas, immediately assumed Parsons Pittsburg Credit Union’s members, assets, shares and loans.

The Kansas Department of Credit Unions made the decision to liquidate Parsons Pittsburg Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations on its own. At the time of liquidation and subsequent purchase by Golden Plains Credit Union, Parsons Pittsburg Credit Union served 1,466 members and had assets of $13.4 million, according to its most recent Call Report.

The Administrator of the Kansas Department of Credit Unions placed Parsons Pittsburg Credit Union into conservatorship on January 24, 2014, and named NCUA as agent to handle the credit union’s day-to-day operations.

This is the third federally insured credit union to be liquidated in 2014.

Read the NCUA press release.

Friday, March 21, 2014

Bethpage FCU Buying Naming Rights to College Stadium

Bethpage Federal Credit Union will pay $1.5 million for the naming rights to a newly renovated stadium at Long Island University in Brookville, New York.

The new Bethpage Federal Credit Union Stadium facilities will open in the fall of 2014. It will feature an all-new, high-tech press box and sound system, signage, bleachers and grassy-hill seating for picnicking.

Bethpage FCU is the largest credit union in New York with $5.4 billion in assets and earned almost $44 million in profits for 2013.

But as I've previously pointed out, is the buying of naming rights to stadiums the propoer use of the credit union tax exemption?

How would we feel if the American Red Cross or Habitat for Humanity bought the naming rights to arenas or stadiums? I think most people would agree that this would represent a misuse of the tax exemption.

Read more.

Thursday, March 20, 2014

Is This a Local Community?

The National Credit Union Administration in December went rogue when it approved a community charter conversion for Red River Employees FCU of Texarkana.

The community charter includes 11 Arkansas counties and 13 Texas counties.

It stretches from Hot Springs, Arkansas to the the eastern suburbs of Dallas, Texas.

With a land area of almost 15,000 square miles, this geographic region would be the 10th largest state, if it was a state.

The area consists of rural counties, two full metropolitan statistical areas, a portion of a third metropolitan statisical area, and six micropolitan statistical areas.

In addition, the region is comprised of 8 different commuting zones, which are a spatial measure of the local labor market and economy.

The evidence would suggest that this geographic region would have a hard time meeting the requirement of being local.

Tuesday, March 18, 2014

Projected TCCUSF Assessments Range From Minus $2 Billion to Minus $600 Million

Total projected assessments associated with the Temporary Corporate Credit Union Stabilization Fund declined $2.2 billion at the upper end between July and December 2013, the National Credit Union Administration announced today, the sharp drop due largely to the JPMorgan Chase settlement in November 2013.

The current projected range for total future remaining assessments is now between negative $2 billion and negative $600 million. At the end of the second quarter of 2013, the total range was negative $200 million to $1.6 billion. The overall rate of change in the assessment range is consistent with recent trends, and the continued improvement in the performance of the legacy assets underlying the NCUA Guaranteed Note program.

Read the press release.

Excise Tax on Excessive Executive Compensation

In the draft tax reform plan released by Dave Camp, there is a provision (Section 3803) that would impose an excise tax on excessive compensation of tax exempt organization's executives.

Under current law, the deduction allowed to publicly traded C corporations for compensation paid with respect to chief executive officers and certain highly paid officers is limited to no more than $1 million per year. Similarly, current law limits the deductibility of certain severance-pay arrangements (“parachute payments”). No parallel limitation applies to tax-exempt organizations with respect to executive compensation and severance payments.

Under the proposed provision, a tax-exempt organization would be subject to a 25-percent excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. The excise tax would apply to all remuneration paid to a covered person for services, except for payments to a tax-qualified retirement plan.

The excise tax would also apply to excess parachute payments paid by the organization to such individuals. Under the provision, an excess parachute payment generally would be a payment contingent on the employee’s separation from employment with an aggregate present value of three times the employee’s base compensation or more.

The committee gave several reasons for the imposition of an excise tax on executive compensation.
  • Current law generally has no limit on excessive compensation paid by a tax-exempt organization to its senior management other than the limitation on private inurement, the consequence of which can be revocation of the organization’s exemption.
  • The provision is consistent with the limitation on the deductibility of executive compensation by taxable publicly traded corporations.
  • The tax exemption represents a significant benefit to tax-exempt organizations from the Federal government and excessive compensation would divert resources from the organizations exempt purpose.
This would suggest to me that all credit unions, not just state-chartered credit unions, would have to file a Form 990 to ensure compliance with this provision when it becomes law. If my suspicion is correct, this provision, when enacted, would improve corporate governance at federal credit unions and would provide federal credit union members with their first glimpse into the compensation practices of federal credit unions.

Saturday, March 15, 2014

Court Order Lifted Suspension of Three Alabama One CU Employees

Earlier this month, I reported that four employees at Alabama One Credit Union in Tuscaloosa were suspended by the Alabama Credit Union Administrator.

A judge's order lifted the suspension against three credit union employees, who filed a civil suit claiming that they were wrongfully suspended.

Read more.

Thursday, March 13, 2014

Bank Switching to CU: Extrememly Difficult, If Not Impossible

In a letter to House Ways and Means Committee Chairman Dave Camp, the National Association of Federal Credit Unions (NAFCU) wrote that the "[n]ext time a banker complains to you about credit unions, we would urge you to ask them if they have looked at converting to one."

However, this disingenuous and unscrupulous statement cannot go unchallenged.

While I believe in charter choice, there are many issues that make converting from a bank to a credit union extremely difficult, if not impossible.

One complication deals with common bond or field of membership. Banks are open to the public, while credit unions have a defined field of membership.

While a small bank in a limited geographic area may be able to meet the field of membership requirement, a larger bank would have difficulties.

Another common bond operational issue -- would the converting bank have divest part of its customer base to comply with the field of membership requirements?

I guess there are ways around the field of membership issue. The converting bank could form an association or become a partner of the American Consumer Council so as to qualify all its customers as members. But this just makes a mockery out of the field of membership requirements.

In addition, most people with any financial acumen would note the relative difficulty of this transaction for a stock entity.

A stock organization converting to a credit union would have to first compensate its shareholders for their ownership interests. This would effectively wipe out the capital of the entity that is converting to a credit union.

On top of that, bank balance sheets are fundamentally different from credit unions. Many banks are commercial lenders, while most credit unions are consumer lenders. A bank converting to a credit union would most likely exceed the aggregate member business loan cap and would need to shrink its business loan portfolio most likely by shedding these loans (probably at a loss) to comply with the law.

Furthermore, banks hold assets that credit unions are not allowed to hold. Once again, a requirement to divest these assets could mean that the bank is selling these assets in an unfavorable environment at fire sale prices.

I think most people would agree that an entity that has no capital and is divesting assets at a possible loss would pose a significant threat to the National Credit Union Share Insurance Fund.

Do you think the National Credit Union Administration is going to charter such an entity?

The last point I would like to make is proposing that a taxpaying bank switch to a tax-exempt credit union could put the credit union tax exemption at risk.

Wednesday, March 12, 2014

Bifurcated Performance

At the end of 2013, large federally insured credit unions are doing well financially, while small credit unions under $10 million in assets as a group are struggling.

The 426 credit unions with more than $500 million in assets held $716 billion in combined assets or 67 percent of industry's total assets at the end of 2013.

These large credit unions reported a higher return on average assets than credit unions as a whole. They also reported stronger growth in net worth, deposits (shares), loans, and membership.

On the other hand, the 2,181 credit unions with under $10 million in assets had less than one percent of the industry's assets. They posted a negative return on average assets for 2013. The growth rate of net worth for these credit unions fell during 2013, as did membership, assets, and deposits.

Tuesday, March 11, 2014

Tax Expenditure from Not Taxing CU Income

The Office of Management and Budget released its latest estimate of the size of the income tax expenditure associated with the credit union tax exemption.

Between fiscal years 2015 and 2019, the income tax expenditure will equal $12.81 billion. It will grow from $1.97 billion for fiscal years 2015 to $3 billion for fiscal year 2019.

Monday, March 10, 2014

CLF Transparency, NOT!

I have been stonewalled by the National Credit Union Administration (NCUA) regarding two Freedom of Information Act (FOIA) requests for information about the Central Liquidity Facility (CLF).

The first FOIA was seeking a white paper submitted to Congress with recommendations to reform the CLF. Specifically, the Office of General Counsel’s 2013 Regulation Review states “NCUA prepared and submitted to Congress a whitepaper outlining certain recommendations for statutory changes that will enable CLF to move forward as a meaningful resource for the industry.”

The response from NCUA to this request was "[w]e have no responsive records." In other words, the agency cannot find the document, which it acknowledges was prepared and submitted to Congress. I guess NCUA deleted the whitepaper after it was sent to Congress.

The second FOIA request was seeking transactional information regarding credit union borrowings from the Central Liquidity Facility through the Credit Union System Investment Program (CU SIP) and the Credit Union Homeowners Affordability Relief Program (CU HARP) between November 1, 2008 and May 15, 2009. The transactional information requested was the name of the credit union, the amount borrowed, the interest rate on the borrowing, date of the borrowing, and whether the borrowing is associated with CU SIP or CU HARP.

NCUA denied my request in full. NCUA stated that "[t]he withheld information qualifies for protection under FOIA exemption 5 U.S.C. Sec.552(b)(8), protecting matters from disclosure that are contained in or related to examinations, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of inancial institutions."

NCUA did throw me a bone by providing aggregate information regarding CU borrowings under CU SIP and CU HARP (see below and click image to enlarge).

My request is similar to the request from Bloomberg for information about banks and other financial institutions that had borrowed from the Federal Reserve discount window during the financial crisis. Bloomberg's FOIA request was denied. However, Bloomberg sued the Federal Reserve and the Federal Reserve was required to release the data.

In addition, I do not know how these borrowings from the CLF had anything to do with examinations, operating, or condition reports of the natural person credit unions. The funds borrowed from the CLF under these two programs were required to be deposited into two floundering corporate credit unions that ultimately failed and were guaranteed in full.

This is just another example of NCUA abusing the exemptions under FOIA to deny the public access to relevant information.

Friday, March 7, 2014

Wisconsin Exception to Business Loan Cap: Community First Approved, Landmark Denied

Two Wisconsin credit unions applied to the state regulator for an exception from the aggregate business loan cap.

The Wisconsin Department of Financial Institution’s Office of Credit Unions approved Community First Credit Union’s (Appleton, WI) request for an exception from the aggregate business loan cap up to 18 percent of assets.

The state credit union regulator denied Landmark Credit Union’s (New Berlin, WI) application for an exception from the aggregate business loan cap.

See the activity report.

Thursday, March 6, 2014

Fort Knox Improperly Using an Association to Serve Anyone

ABA wrote National Credit Union Administration Chairman Debbie Matz that Fort Knox Federal Credit Union, Radcliff, Ky., is improperly using a third-party association to recruit members who would not otherwise qualify. Fort Knox FCU allows individuals who are otherwise ineligible to become members by simultaneously joining a consumer group at no charge.

“The addition of individuals through [the group] contradicts congressional intent that there needs to be a genuine affiliation between credit union members in order for credit unions to fulfill their public mission,” ABA said, adding that NCUA should “order Fort Knox to cease its advertising that allows individuals who are otherwise ineligible for membership to join the credit union.”

ABA also urged NCUA to prohibit all federal credit unions from using these practices to circumvent the common bond requirement for membership.

Read the letter.

Wednesday, March 5, 2014

561 Credit Unions Were Late in Filing Their Call Reports

The National Credit Union Administration reported that 561 federally insured credit unions filed their fourth-quarter Call Reports late or made corrections after the January 24th deadline.

However, this was a substantial improvement from a year earlier when 1,744 credit unions failed to file on time.

For the first three quarters of 2013, an average of 1,048 credit unions filed late each quarter.

NCUA has warned credit unions that beginning with the 1st quarter 2014 Call Report credit unions would face civil money penalties for filing late call reports.

Read the press release.

Fort Worth City CU Sued for Wrongful Fraud Accusation

The deputy city marshal falsely charged with fraud in October is suing the Fort Worth City Credit Union for at least $1 million.

Deputy City Marshal Mike Martinez was arrested and charged with fraud in October, on accusations that he withdrew $500 from another person’s account. The withdrawal, however, was discovered later to be a clerical error by the credit union

Read more here.

Tuesday, March 4, 2014

Landmark CU Completes Acquisition of Bank

Landmark Credit Union (New Berlin, WI) announced on March 3 the completion of its acquisition of Hartford, Wisconsin-based Hartford Savings Bank. The acquisition adds over 8,800 new members and $155 million in assets to Landmark Credit Union.

Read the press release.

Monday, March 3, 2014

CU Profits Were $8.14 Billion for 2013

The National Credit Union Administration (NCUA) reported that credit unions reported a profit of $8.14 billion for 2013, down from $8.461 billion for 2012. Credit union return on average assets fell by 7 basis points from a year ago to 78 basis points. NCUA attributed much of the year-over-year decline to downward pressure on net interest margins, which were down 12 basis points.

Loans posted their 11th quarterly increase, rising to $645.2 billion -- up 8.0 percent compared to the end of 2012. Deposits (shares) at credit unions rose to $910 billion at the end of 2013, compared to $878 billion at the end of 2012. As a result, the loan to deposit ratio rose to 70.9 percent, the highest level since the end of 2010.

NCUA noted that the credit union industry's net worth ratio reached 10.78 percent -- its highest level since first quarter of 2009. NCUA reported that 97 percent of credit unions were well-capitalized with a net worth ratio at or above the statutorily required 7.0 percent.

Delinquency and net charge-off rates were largely unchanged between the third and fourth quarter 2013; but down from the end of 2012.

However, NCUA Chairman Matz expressed concern about the continued growth in long-term investments at credit unions. Chairman Matz noted that "[t]he growth in 5-to-10 year investments of nearly 60 percent is cause for concern."

NCUA wrote that the "[e]xposure to long-term assets has tripled since year-end 2007. During 2013, investments greater than 3 years increased by 32.6 percent, rising to $118.4 billion, an all-time high. Long-term investments as a share of assets stood at 11.8 percent, up from 9.4 percent at the end of 2012 and up from 3.4 percent at the end of 2009."

Read the press release.

Review summary sheet.

NAFCU Overstates the Impact of Taxing CUs

The National Association of Federal Credit Unions (NAFCU) last week released a dubious study claiming that taxing credit unions would hurt the economy by reducing GDP and job growth.

The study states that the annual reduction in GDP would equal $14.8 billion per year and 150,000 jobs would be lost per year, if credit unions were taxed. The study contends that this will occur because reduced competition in the financial services industry will result in higher loan rates and lower savings rates, which will depress personal income and reduce spending.

The NAFCU study also said that the taxation of credit unions would actually increase the federal deficit by almost $1 billion per year as federal tax revenues would fall by more than the revenues collected from taxing credit unions. Oh really.

But why should higher loan rates and lower savings rates be the outcome of taxation?

As a financial cooperative, credit unions claim they operate in their members best interest and have a choice regarding the pricing of their products.

I would contend that some, maybe many, credit unions would not change their pricing policy even after being taxed. They would recognize that it is not in their members best interest to raise loan rates and cut to savings rates and would accept a lower return and a slower pace of growth.

I recognize that there are some credit unions that would try to shift a portion of their tax burden onto their members; but I doubt that the full tax could be passed through to the credit union members. However, these credit unions are putting their profits and growth ahead of their members.

In addition, I believe that even after being taxed there would still be intense competition in the financial services industry. Technology is eroding barriers of entry, making the market place for deposits and loans more competitive.

In conclusion, the study grossly exaggerates the economic impact of the taxation of credit unions.

Saturday, March 1, 2014

Alabama CU Regulator: Four Employees Suspended at Alabama One, Interim CEO Appointed

The Alabama Credit Union Administration has suspended four employees with Alabama One Credit Union in Tuscaloosa as part of a fraud investigation.

An interim CEO has been appointed at Alabama One Credit Union according to Larry Morgan, Administrator for the Ala. Credit Union Administration.

Read the story.

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