Tuesday, June 30, 2015

Alabama One CU Sues Alabama Public Officials Alleging Conspiracy and Abuse of Power

The soap opera surrounding Alabama One Credit Union (Tuscaloosa, AL) took another turn yesterday.

The credit union, which is currently under an administrative order from its state regulator, filed a federal lawsuit against Alabama public officials, including a state senator and a senior aide to the governor, local attorneys, and others, alleging conspiracy and abuse of power emanating from Gov. Robert Bentley’s office to coerce tens of millions of dollars in legal settlements.

The credit union alleges a conspiracy involving Governor Bentley’s chief legal advisor, David Byrne; State Sen. Gerald H. Allen; the current and former administrators of the Alabama Credit Union Administration, and private attorneys in Tuscaloosa, who allegedly improperly influenced the state officials.

The suit alleges that the public officials grossly abused their power and state positions solely to enrich a political and personal friend – Tuscaloosa plaintiff’s attorney Justice D. “Jay” Smyth, III, who allegedly orchestrated the scheme to pressure and coerce Alabama One into settling five frivolous lawsuits that he and cohorts had filed against the credit union. (read the press release)

In a related story, Credit Union Times is reporting that a former board member of Alabama One CU has filed a class action lawsuit against the credit union seeking the removal of current management. The complaint charged the defendants with violations of state law, breaches of fiduciary duty, waste of corporate assets, conspiracy, and reckless or intentional misrepresentation and suppression of material fact.

Read the complaint.

Monday, June 29, 2015

Quality of Credit Union Annual Reports Varies Greatly

There is a lot of variability in the quality of annual reports issued by larger credit unions.

Some credit unions provide detailed financial information to their members in their annual reports. which includes audited financial information. Some of the better annual reports that I have reviewed have been issued by Quorum FCU, Pentagon FCU, Navy FCU, State Employees' CU, and University of Wisconsin CU.

However, other credit unions provide their members with very little information about their financial performance in their annual reports.

For example, Truliant FCU (Winston-Salem, NC) in its 2014 annual report only discloses summary balance sheet information. There is not any information from the income statement or statement of cash flows. The credit union does not provide any notes that elaborate further on the credit union's financial performance.

Another disappointing 2014 annual report is from University Federal Credit Union (Austin, TX). But it provides a little more information than Truliant FCU.

The same is true for Richmond, Virginia-based Virginia Credit Union's 2014 annual report.

If credit unions truly believe their members are owners, they should be making their audited financial statements available to their members on their websites.

Saturday, June 27, 2015

Problem Alabama CU Merged into Mutual Savings CU

The National Credit Union Administration in May approved the merger of Secure First Credit Union (Birmingham, AL) into Mutual Savings Credit Union (Birmingham, AL).

The reason cited for the merger was poor management.

On March 17, Secure First was placed under an enforcement order by the Alabama Credit Union Administration (see blog post).

Thursday, June 25, 2015

NCUA: Monthly Membership Fees Impermissible

The National Credit Union Administration (NCUA) issued a legal opinion letter that federal credit unions (FCUs) may not charge a periodic membership fees.

The letter was in response to my inquiry whether federal credit unions may charge monthly membership fees.

The NCUA wrote that the Federal Credit Union Act (FCUA) permits FCUs to charge a uniform, one-time entrance fee to members under Section 109 of the FCUA.

The legal opinion letter goes on to state that FCUs may also charge other fees for account services and other financial products. These fees are legally distinct from a membership fee.

However, the letter states that these fees and charges, however, may not be membership fees that serve as a condition on continued membership.

So, it will be interesting to see what NCUA does with regard to Arizona FCU's charging a $3 monthly membership fee, since the beginning of 2013.

Read the letter.

Wednesday, June 24, 2015

Credit Union Named as Defendant in New York Lawsuit regarding Online Nursing Classes Scam

New York Attorney General Eric T. Schneiderman has filed a lawsuit in Albany County Supreme Court and has obtained a temporary restraining order against The College Network and its owner, Gary Eyler.

The suit charges that The College Network and Eyler induced prospective nursing students to pay thousands of dollars for ineffective study guides through false and deceptive business practices. The suit alleges that The College Network, headquartered in Indiana, preyed on as many as 2,000 New York consumers who sought to obtain associate degrees in nursing.

In addition, the lawsuit names Franklin, Tennessee-based Southeast Financial Credit Union (“Southeast”), which partnered with The College Network to provide financing to consumers to purchase The College Network’s so-called “program.” According to the complaint, Southeast until the Fall of 2014 provided the bulk of the loans to The College Network customers.

In fact, the complaint notes that many customers were not aware that the loans were from a credit union and did not discover this information until long after signing the loan documents.

The complaint states that Southeast was aware that The College Network had defrauded many customers.

The complaint notes that Southeast was informed by many customers that they were misled by The College Network and was asked by customers that their financial agreements be cancelled and Southeast stop automatic monthly payment deductions.

The complaint alleges Southeast falsely advised customers that that they were obligated to pay their loans in full, although customers did not receive services or products they purchased.

The lawsuit seeks to permanently prohibit Southeast Financial Credit Union from attempting to collect debts connected to the alleged misconduct.

Read the lawsuit.

Once Again, NCUA's 2014 Annual Report Lacks Info on the Number of Enforcement Actions

The National Credit Union Administration (NCUA) released its Annual Report yesterday and once again did not publish the number of preliminary warning letters, the number of letters of understanding and agreement (published and unpublished), and the number of cease and desist orders issued to credit unions for 2014.

On the other hand, the other federal banking agencies provide summary statistics regarding enforcement actions taken against institutions they supervise in their annual reports to Congress.

I do not understand why this agency is averse to releasing this information. Does NCUA believe releasing this information would caste credit unions in a negative light?

Read the 2014 Annual Report.

Monday, June 22, 2015

Director Compensation Becomes the Law in Oregon

Oregon has become the latest state to allow credit unions to pay their directors.

On June 16 Governor Kate Brown signed into law a bill (S 582) that will permit state chartered credit unions to provide reasonable compensation to directors and supervisory committee members.

In addition, the bill eliminates the requirement that a person purchase a share as a condition for membership at a state-chartered credit unions. This provision will potentially result in credit unions losing their mutuality. In other words, borrowers and savers are not necessarily the same individuals.

Also, the bill removes the requirement that the state Department of Consumer and Business Services approve new branches and clarifies that foster children are eligible for membership.

Saturday, June 20, 2015

Op-Ed Questions CU Tax Exemption after Golden 1 Pays $120 Million for Naming Rights to Arena

Seizing on the news that Golden 1 Credit Union has purchased the naming rights to a new sports arena in Sacramento, California Bankers Association President and CEO Rodney Brown penned an op-ed -- published Wednesday in The Sacramento Bee -- challenging the credit union industry’s outdated tax exemption.

Brown noted that Golden 1 is the nation’s sixth largest credit union and reportedly purchased the naming rights for $120 million over the next 20 years. “Six million dollars annually for the right to have your name in bright lights on a sports arena is a sizable amount of money, but for a ‘nonprofit’ corporation that pays zero dollars in state or federal income tax, it’s probably not too much of a stretch,” he said.

Brown explained how credit unions have leveraged their tax exemption to grow aggressively and noted that the tax exemption is poorly targeted, often going to upper-income customers. He also highlighted the fact that California banks in 2013 paid $600 million in state taxes, and credit unions -- if they were taxed -- would have paid $111 million.

“There is no longer any valid reason why these large, bank-like credit unions should retain their tax exemption, a message we will continue to promote while supporting our local, state and national economies,” Brown concluded.

Read the op-ed.

Friday, June 19, 2015

NCUA Proposes Changes to MBL Regulations

The National Credit Union Administration (NCUA) yesterday proposed substantial changes to its member business loan (MBL)regulations removing non-statutory requirements.

The agency proposed to exempt from the MBL cap of 12.25 percent of assets participations in loans to non-members.

The proposal eliminates the current rule’s prescriptive underwriting criteria and waiver requirements in favor of a principles-based approach to regulating commercial loans. Explicitly, the proposal eliminates loan-to-value requirements, aggregate limits on construction and development loans and the requirement of a personal guarantee. The proposed rule gets rid of the minimum experience requirement of two-years in making and administering business loans.

Also, the proposed rule exempts from the requirements of proposed §723.3 (board of directors and management responsibilities) and §723.4 (commercial loan policy) credit unions with both assets less than $250 million and total commercial loans less than 15 percent of net worth that are not regularly originating and selling or participating out commercial loans (qualifying credit unions). In other words, these qualifying credit unions would be alleviated from the burden of having to develop a full commercial loan policy and commercial lending organizational infrastructure. According to NCUA, nearly 700 credit unions that currently engage in a small level of commercial lending would be exempt from the requirement to establish a policy.

Furthermore, there are two types of loans that are not commercial loans subject to the proposed safety and soundness provisions but they are MBLs and thus, must be counted against the credit union’s net member business loan balance. Specifically, loans secured by a 1- to 4- family residential property that is not the borrower’s primary residence, and loans secured by a vehicle manufactured for household use that will be used for a commercial purpose are generally not commercial loans, but they are MBLs.

Read the proposal.

Wednesday, June 17, 2015

Golden 1 Credit Union Pays $120 Million for Naming Rights to NBA Arena

Golden 1 Credit Union bought the naming rights to an arena where the NBA Sacramento Kings play.

According to an announcement, the new arena will be branded as "Golden 1 Center."

The Sacramento Bee is reporting that the deal is for $120 million over 20 years.

This deal shows that the credit union tax subsidy is being abused.

Read the story

Michigan State University FCU Breaks Ground on 186,350 Square Foot Building

Michigan State University FCU announced that it broke ground on a 3-story, 186,350 square foot building at its headquarters campus.

This is a second building to be constructed at its corporate campus -- doubling the size of its headquarters.

The cost of the project is estimated at $46 million.

Tuesday, June 16, 2015

ABA, ICBA Oppose Back-Door Increase in CU Business Lending

The American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA) wrote to the House Appropriations Committee on June 11 opposing the use of the congressional spending process as a back door for a credit union-backed provision to further expand their member business lending powers.

The gambit in question would expand the exemption for business loans secured by a 1-to-4-family dwelling to include those dwellings that are not primary residences.

Currently, any business loan fully secured by a 1-to-4 family dwelling that is the primary residence of a credit union member is exempted from the member business loan cap of 12.25 percent of assets.

Credit unions claim that the proposal would merely create parity in loan classifications between credit unions and commercial banks.

However, the two bank trade groups wrote that the proposal would allow credit unions to finance rental housing businesses without counting these loans toward the 12.25 percent MBL asset cap. ABA and ICBA wrote: "Rental housing loans are business loans; their purpose is to generate income."

"Congress must not allow credit unions to further encroach into business lending, altering the fundamental character of their charter and expanding their already significant tax subsidy," ABA and ICBA said. "At a minimum, a change of this significance should not be considered without observing regular order and appropriate debate."

Read the letter.

Monday, June 15, 2015

Union Files Complaint with NLRB over CU's Retaliation Against Employees

BFG Federal Credit Union (Akron, OH) is accused of laying off workers that helped organize a union at the credit union.

The Office and Professional Employees International Union Local 1794 has filed charges with the National Labor Relations Board against the credit union, alleging the employer had "discriminatorily" laid off employees "in retaliation" for forming a union. This was one of 12 charges against credit unions, including the employer threatening workers with the loss of pay, pension and other benefits if they voted for a union.

Workers voted to organize earlier this year in January.

Read the story.

Saturday, June 13, 2015

Arizona State CU Sponsors Northern Arizona University Athletics

The Northern Arizona University Athletics Department announced a five-year partnership with Arizona State Credit Union, beginning July 1, 2015.

The Credit Union will serve as the Gold Sponsor for all ticketed athletic events.

This partnership will run through 2020, with an option to extend for another five years at that time.

No information was disclosed on the cost of the partnership.

Read more.

Friday, June 12, 2015

NCUA: Over Half of CUs Lost Members

As of the end of the first quarter, the National Credit Union Administration (NCUA) reported that over half of all credit unions experienced a year-over-year decline in membership.

The median membership growth rate was negative 0.4 percent.

Nationally, 53 percent of federally insured credit unions lost membership over the year, and 75 percent of those credit unions with declining membership had assets of less than $50 million.

Median membership growth was negative in 23 states. Pennsylvania and Virginia had the lowest median growth rate at minus 1.9 percent each.

UW CU Revises Up Investment Loss Contingency Charge

University of Wisconsin (UW) Credit Union has raised its investment loss contingency charge.

The loss is blamed on investment position the credit union held with Pennant Management.

Last year, UW Credit Union received notice from Pennant of fraudulent loans Pennant allegedly acquired from First Farmers Financial, LLC (First Farmers). As of September 29, 2014, UW Credit Union’s position in the First Farmers Repurchase Agreement B Fund totaled $52.977 million.

Last November, I reported that UW Credit Union's potential loss from the fraudulent investment at $13 million.

However, according to its 2014 audited financial statement's Note 13, UW Credit Union has recorded a valuation allowance of $35.160 million.

As a result of this contingency loss charge, UW Credit union reported a net loss of $15.2 million for 2014.

Read the Annual Report. Read the audited financial statements.

Wednesday, June 10, 2015

Quorum FCU Restructures Timeshare Loan Program to Avoid Regulatory Limits

According to Quorum Federal Credit Union's 2014 Annual Report, the Purchase, NY-based credit union restructured its vacation ownership or timeshare loan program to circumvent regulatory limits.

As I previously reported, Quorum Federal Credit Union, beginning in 2009, entered into financing agreements with several vacation ownership companies to provide loans for the purchase of timeshares and rapidly grew its timeshare loan portfolio. (Read here and here)

According to Note 4, the National Credit Union Administration (NCUA) directed the credit union to reduce its exposure to vacation ownership loans.
In 2014, the NCUA directed the Credit Union to reduce their vacation ownership loan portfolio by June 30, 2015. The limitation applied to the Credit Union’s holdings is a result of the NCUA determining that these loans meet the definition of an eligible obligation as opposed to indirect loans. The aggregate limit for eligible obligation is 5% of unimpaired capital and surplus. As of December 31, 2014, if the Credit Union were required to reduce its holdings, approximately $91,842 of vacation ownership loans would need to be sold. As a result, this amount of loans has been classified as loans held for sale in the consolidated statement of financial condition at December 31, 2014.

So, outstanding vacation ownership loans fell from $135,413,000 at the end of 2013 to $43,526,000 at the end of 2014.

However, Note 4 further points out that the credit union made changes to its vacation ownership loan program so that it qualifies as indirect loans and thus not subject to any specific regulatory limits.
During 2015, the Credit Union proposed certain changes to the vacation ownership loan program and the NCUA has acknowledged that the proposed changes to the program will qualify future loans as indirect loans. There is no regulatory limit specific to indirect loans, and therefore the Credit Union anticipates continuing the vacation ownership loan program with such loans qualifying as indirect loans. Similar to other loan types, these loans will follow the concentration guidelines adopted by the Board of Directors and will be subjected to examination by the NCUA.

Monday, June 8, 2015

NCUA Assisted Mergers

There have been 19 National Credit Union Administration (NCUA) assisted mergers of credit unions since the beginning of 2011.

The most recent assisted merger was New Mexico Correctional Employees FCU (Santa Fe, NM). According to NCUA's Office of the Inspector General, this assisted merger resulted in a loss to the National Credit Union Share Insurance Fund (NCUSIF) of $2.5 thousand.

Below is the list of other 18 credit unions that received assisted mergers and the estimated losses to the NCUSIF.

​Macon County School Employees ​(Decatur, ​IL), $84.5 thousand; ​
T​ombstone Federal Credit Union (​T​ombstone, AZ)​, $900 thousand;
Jayhawk Federal Credit Union (Lawrence, ​KS), $450 thousand;
​Union Settlement Federal Credit Union (​New York, ​NY), $150 thousand;
Oldham Family Alliance Federal Credit Union (​Baltimore, ​MD), $150 thousand;
S J H Employees' Credit Union (​Springfield, ​IL), $378 thousand;
​Southside Credit Union (​San Antonio, ​TX), $50 thousand;
Zane Trace Federal Credit Union (Zanesville, ​OH), no information;
​Greater Oregon Federal Credit Union ​(Burns, ​OR), $3.99 million;
Kunia Federal Credit Union​ (Waipahu, ​HI), $1.21 million;
H.B.E. Credit Union (Seward, NE), $332.061 thousand;
​H.A.A. Federal Credit Union (​Houston, ​TX), $50.254 thousand;
​C.D. Federal Credit Union ​(Concord, ​CA), no information;
​California Pacific Federal Credit Union (Concord, ​CA), no information;
​Branch N.A.L.C. (​Oak Brook, ​IL), $229.65 thousand;
​CR Community First ​(Eagle Butte, ​SD), no information;
El Barrio Federal Credit Union​ (​New York, ​NY), $185 thousand; and
South DeKalb Church Federal Credit Union ​(Decatur, ​GA), $330 thousand.

Several of these assisted mergers appear to impose no additional losses on the NCUSIF. This raises the question regarding what other types of assistance is being offered by NCUA. A NCUA spokesperson declined to comment on the other types of assistance citing that these mergers were supervisory matters.

Thursday, June 4, 2015

A Bronx Cheer for Pentagon FCU

Last year I applauded Pentagon Federal Credit Union for voluntarily publishing the compensation of its CEO and 8 senior managers in its 2013 Annual Report (see commentary).

Unfortunately, Pentagon Federal Credit Union did not maintain its commitment to transparency.

Unlike its 2013 Annual Report, the credit union's 2014 Annual Report does not include compensation information for senior management.

As a result, the credit union's members and taxpayers do not have the ability to evaluate the pay of senior management and to determine if its valuable tax exemption is being diverted into excessive compensation of senior executives.

For failing to publish senior executives' compensation, Pentagon Federal Credit Union deserves a Bronx Cheer.

Wednesday, June 3, 2015

Wall Street Journal: Treasury Report Finds Some CUs Vulnerable to Money Laundering

A confidential report from the Treasury Department’s Financial Crimes Enforcement Network has identified more than 50 credit unions that have increased vulnerability to potential money laundering.

The Wall Street Journal wrote:
"The report was based on data analysis and didn’t accuse the credit unions of any wrongdoing. One problem, according to a copy of the report reviewed by The Wall Street Journal, is their exposure to check-cashing companies and other similar firms that fall into a category called money-services businesses.

Those businesses in many cases are increasingly turning to credit unions for banking services because they have been driven away from big global banks, which have been stung by a series of fines and probes into money laundering over the past several years."

Read the Wall Street Journal story (subscription required).

Tuesday, June 2, 2015

Credit Unions Report Strong Loan Growth, Net Income Up 5.7% Y-o-Y

The National Credit Union Administration (NCUA) reported strong loan growth at federally insured credit unions during the first quarter of 2015.

Total loans at federally insured credit unions reached $721.9 billion in the first quarter of 2015, an increase of 1.3 percent from the previous quarter and 10.6 percent from the first quarter of 2014. The growth in lending in the first quarter was fueled by auto lending. According to Experian Automotive, credit unions’ share of the total auto finance marketplace expanded from 15.7 percent to 16.9 percent in the first quarter of 2015 compared with the same period a year earlier.

Shares (deposits) grew by $33.6 billion during the first quarter to $984.4 billion.

Because shares grew at a faster rate than loans during the first quarter, the loans-to-shares ratio at the end of the first quarter was 73.3 percent, a slight decline from the previous quarter but 4.1 percentage points higher than the end of the first quarter of 2014.

Federally insured credit unions continued to move away from long-term investments in the first quarter of 2015. The net long-term asset ratio fell from 33.84 percent in 2014 to 32.51 percent at the end of the first quarter of 2015.

Federally insured credit unions reported net income of $2.2 billion in the first quarter, an increase 5.7 percent from the first quarter of 2014. This is the 21st straight quarter of positive net income.

Federally insured credit unions’ return on average assets ratio (ROAA) stood at an annualized 78 basis points at the end of the first quarter, a decline of two basis points from the previous quarter. Net interest margin and fee income as a percent of average assets negatively impacted ROAA during the quarter, while lower operating expenses and higher non-operating income as a percent of average assets positively contributed to ROAA.

The aggregate net worth ratio was 10.81 percent at the end of the first quarter, up 20 basis points from a year earlier; but down 15 basis points from the end of the fourth quarter of 2014. NCUA reported that 97.5 percent of federally insured credit unions were well-capitalized as of the end of the first quarter of 2015, while less than 1 percent of credit unions were undercapitalized.

Delinquency and net charge-off ratios for federally insured credit unions declined to their lowest first-quarter levels in eight years. The delinquency ratio fell to 69 basis points from 81 basis points at the end of the first quarter of 2014. The net charge-off ratio declined to an annualized 47 basis points year-to-date from 50 basis points at the end of the first quarter of 2014.

However, performance data show that large credit unions continue to outperform smaller credit unions. Credit unions with assets of less than $10 million recorded negative loan and membership growth in the first quarter.

Read the press release. Read the financial trends. Read financial summary.

Monday, June 1, 2015

America First FCU Trying to Regain Communities It Previously Lost in Court Decision

The National Credit Union Administration (NCUA) in March and April approved applications of Riverdale, Utah-based America First FCU to add underserved areas located in Davis and Weber Counties of Utah aiding the credit union to regain communities it had previously lost.

As background, NCUA in 2003 granted America First FCU a six-county community charter serving Tooele, Salt Lake, Summit, Morgan, Weber, and Davis counties. The American Bankers Association (ABA) sued NCUA that the six counties did not constitute a local well-defined community.

A December 8, 2004 decision by Federal Judge Kimball stripped America First FCU of its six-county community charter finding no evidence that the community was local.

After the court decision, NCUA in early 2005 granted America First a new community charter for Salt Lake County.

But later in 2005 NCUA approved the adoption of several underserved areas by America First that allowed the credit union to regain portions of the area it had lost.

ABA in November 2005 sued NCUA in the same Federal court based on statutory language that specified that only multiple common bond credit unions could adopt underserved areas. NCUA promptly withdrew its underserved area approval for America First FCU.

The NCUA Board in June 2006 amended its underserved area field of membership policy, which limited underserved areas to multiple common bond credit unions.

According to a response to a Freedom of Information Act request, NCUA stated that the credit union switched from a community charter to a multiple common bond charter on August 21, 2014. However, America First's June 2012 profile on NCUA's website states that the field of membership type was multiple common bond.

By switching to a multiple common bond field of membership, the credit union was allowed to add these two underserved areas.

But this raises another issue -- the credit union still lists Salt Lake County as part of its field of membership. So, how is Salt Lake County still part of America First's field of membership, if it is a multiple common bond credit union?

Membership at federal credit unions is limited to one of the following common bonds -- single common bond credit union, multiple common bond credit union, or community credit union.

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