Blackhawk Community CU to Build $30 Million HQ Building

Blackhawk Community Credit Union plans to build a new, $30 million headquarters along the Rock River in Janesville, Wisconsin.

The 130,000-square-foot, four-story building will include a 10,000-square-foot Legacy Center, which will house historical artifacts reflecting the history of the community, particularly related to the Janesville GM plant which operated from 1919 to 2009.

The building also is planned to house a new credit union branch, a restaurant, a wellness center, 12 condominiums, law offices, a day care and retail space. It also will include the 10,000-square-foot Lea McGuire Conference Center.

Read the story.

Jefferson Financial FCU To Buy 3 Branches and Deposits from Synovus Bank

Synovus Financial Corp. (Columbus, GA) and Jefferson Financial Federal Credit Union (Metairie, LA) announced on September 26 that Synovus Bank, a subsidiary of Synovus Financial Corp., has entered into a purchase and assumption agreement to sell two branches in Mobile, Alabama, and one branch in Daphne, Alabama, to Jefferson Financial Federal Credit Union.

The purchase and assumption agreement provides for the transfer by Synovus Bank to Jefferson Financial Federal Credit Union of $138 million in loans, $107 million in deposits, and other assets associated with two Synovus Bank branches located in Mobile, Alabama, and the one Synovus Bank branch located in Daphne, Alabama, in exchange for a deposit premium of $14,500,000.

The purchase of the branches is subject to regulatory approval and satisfaction of customary closing conditions and is expected to be completed in the first quarter of 2019.

Read the press release.

Wesom CU Buys Naming Rights to Pauley Pavilion at UCLA

UCLA and Wescom Credit Union (Pasadena, CA) have agreed to a 10-year, $38 million sponsorship deal, which includes renaming Pauley Pavilion.

Going forward, the school's basketball arena will be called the Edwin W. Pauley Pavilion presented by Wescom.

The partnership agreement names Wescom as the exclusive banking partner for the UCLA Campus Life program, the UCLA Alumni Association, UCLA Athletics and the Rose Bowl.

Additional elements of the agreement include establishing a Wescom branch in Ackerman Student Union and installing five Wescom ATMs around campus.

Read the press release.

Senator Warren Introduces Bill to Extend CRA to CUs that Are Not Low-Income

Senator Elizabeth Warren (D - MA) introduced on September 26 legislation, American Housing and Economic Mobility Act, that would extend the Community Reinvestment Act (CRA) to more financial institutions, including credit unions that are not designated as low-income.

The bill will also promote investment in activities that help poor and middle-class communities and will strengthen sanctions on financial institutions that do not comply with the rules.

However, the bill would exclude 2,544 low-income designated credit unions from CRA requirements, including some of the largest credit unions in the country.

The bill further proposes billions of dollars of new investments into affordable housing trust funds.

To pay for the bill, Senator Warren proposes to return the estate tax thresholds to their levels at the end of the George W. Bush administration and to impose more progressive tax rates above those thresholds.

Credit union trade associations, as expected, oppose the extension of CRA to any credit unions.

Read the press release.

Read the bill's text.

Read a summary of the bill.

Marine CU Receive Regulatory Approval for Acquisition of 10 Bank Branches

Marine Credit Union (La Crosse, WI) announced that it has received regulatory approval to acquire 10 Old National Bank branches in Wisconsin.

The transaction is anticipated to close on October 26, and the branches will open as Marine Credit Union on Oct. 29.

The credit union will acquire approximately 16,000 customers with almost $274 million in deposits.

The branches are in Chippewa Falls, Columbus, Dodgeville, Eau Claire, Lancaster, Monroe, New Glarus, Platteville, Prairie du Chien and Stanley, Wisconsin.

Under the terms of the agreement, Marine will acquire approximately $274 million in deposits. Marine also intends to hire all employees who work at the impacted locations.

Read the press release.

Greater Focus on Liquidity Risk Management

Washington State Division of Credit Unions earlier this month announced that its examiners will expand their liquidity analysis of credit unions.

The regulator noted that over the last eighteen months many Washington State chartered credit unions have shown a downward trend in cash and short-term investments.

This trend is not unique to Washington State credit unions. Nationally, the percent of credit union assets in cash and short-term investments has declined over recent years (see graph). As of June 2018, 12.19 percent of assets was in cash and short-term investments. This was below the 10-year average of 14.77 percent.

The Division of Credit Unions wrote that it will analyze credit unions with low liquidity levels to ensure that they have other sources of contingency liquidity to safely manage liquidity pressure.

The credit union regulator further commented that as a basic element of liquidity risk management, credit unions should keep an adequate cushion of highly liquid assets, including an adequate safeguard of cash and cash equivalents.

The Division's examiners will focus on liquidity policy and contingency funding plan, cash flow forecast, and liquidity testing and monitoring.

Read the Bulletin.

Struggling Taxi-Medallion Lender Bay Ridge FCU to Merge into Island FCU

The carnage among taxi medallion lending credit unions continues.

The latest news is the announced merger of Bay Ridge Federal Credit Union (Brooklyn, NY) into Island Federal Credit Union (Hauppauge, NY) on October 1.

According to the press release, the National Credit Union Administration (NCUA) recently approved the merger.

Problem taxi medallion loans sunk Bay Ridge FCU. The $183 million credit union was undercapitalized, as of June 2018. (Click here to read my commentary on Bay Ridge's second quarter 2018 performance).

Bay Ridge FCU had an exception from the aggregate member business loan cap of 12.25 percent of assets, because it had either a history of or chartered for the purpose of making business loans.

The New York City taxi industry has been disrupted by ride sharing companies. As a result, the price of taxi medallions plummeted from 2014 highs in excess of $1 million to as low as $160,000.

On August 31, NCUA liquidated the largest taxi medallion lending credit union, Melrose Credit Union (Briarwood, NY).

Read the press release.

Sound Credit Union to Acquire Bank

Sound Credit Union (Tacoma, WA) announced that it will acquire Washington Bancorp, Inc. (Lynnwood, WA), the holding company for the Bank of Washington.

The transaction will be structured with Sound Credit Union purchasing substantially all of the assets and assuming substantially all of the liabilities of the Bank of Washington.

The transaction has been unanimously approved by the boards of directors of both institutions and is subject to regulatory approval, approval by the shareholders of Washington Bancorp, Inc. and other customary approvals.

The transaction is anticipated to be completed in the first quarter of 2019. It is anticipated that shareholders of Washington Bancorp will receive approximately $6.40 in cash per share.

Sound CU has $1.5 billion in assets. Bank of Washington has $195 million in assets.

This is the first transaction of this kind in Washington State.

Read the announcement.

Potential Class Action Suit Filed Against Apple FCU over OD Practices

Apple Federal Credit Union (Fairfax, VA) sued over its overdraft (OD) practices in a potential class action lawsuit.

According to the complaint, the plaintiff alleges that Apple FCU assessed unlawful OD fees for accounts that were never actually overdrawn and for accounts from which non-recurring debit card transactions were made.

The complaint notes that Apple FCU's account opening documents do not describe the transaction posting order used by the credit union. The complaint states that Apple FCU posts transaction in an order so as to maximize its OD revenues.

The plaintiff claims that over a four year period, "Apple FCU has siphoned over $8,000 out of the Plaintiff's checking account, one $29 OD Fee at a time."

The lawsuit seeks class action status.

Read the lawsuit.

Assets and Shares in Problem CUs Increase During Second Quarter

The number of problem credit unions increased during the second quarter of 2018, according to the National Credit Union Administration (NCUA).

At the end of the second quarter of 2018, there were 210 problem credit unions. In comparison, there were 200 problem credit unions at the end of the first quarter of 2018.

A problem credit union has a composite CAMEL rating of 4 or 5.

Total assets and shares (deposits) in problem credit unions rose during the second quarter. Assets in problem credit unions were $12.9 billion at the end of the second quarter compared to $9.2 billion at the end of the first quarter of 2018. Shares in problem credit unions increased to $11.8 billion as of June versus $8.3 billion as of March 31, 2018.

NCUA reported that 88 percent of problem credit unions have less than $100 million in assets, while almost 2 percent have more than $500 million in assets.

There were two credit unions with more than $1 billion in assets classified as problem credit unions. These two credit unions had $4 billion in shares.

At the end of the second quarter, 1.04 percent of total insured shares were in problem credit unions. As of March 2018, 0.76 percent of total insured shares were in problem credit unions.

NCUA reported that reserves for the National Credit Union Share Insurance Fund (NCUSIF) increased from $935.8 million at the end of the first quarter 2018 to $957 million. As of June 2018, $854.9 million is for specific reserves for natural person credit unions.

NAFCU's Berger Recession Possible in 2019, NCUA Should Assess Premiums

Dan Berger, the chief executive of the National Association of Federally-Insured Credit Unions (NAFCU), is arguing that U.S. economy could be in a recession as soon as the end of 2019.

Appearing on Hill.TV's "Rising", Mr. Berger stated that " [t]he recession could hit end of 2019 — maybe the first quarter of 2020," if a very large bank was to fail.

As background, NAFCU is advocating for the reinstatement of the Glass-Steagall Act, which separated commercial banking from investment banking.

Given Mr. Berger's dire prediction of an imminent recession, the National Credit Union Administration should immediately assess premiums on all federally insured credit unions to ensure that the National Credit Union Share Insurance Fund has adequate resources to resolve credit union failures.

Also by preemptively assessing premiums, this would limit any spike in premium assessments at the very moment that credit unions would have difficulty affording these higher assessments.

Read the story.

Trend Continues: Almost Half of CUs Report Fewer Members

While overall membership in federally insured credit unions continued to grow during the year ending in the second quarter of 2018, almost half of federally insured credit unions reported fewer members at the end of the second quarter of 2018 compared to a year ago, according to the National Credit Union Administration.

Credit unions with falling membership tend to be small with almost 75 percent of federally insured credit unions had less than $50 million in assets.

In 18 states, the median membership growth rate for federally insured credit unions was negative. At the median, membership declined the most in the District of Columbia (-2.9 percent), followed by Pennsylvania (-1.2 percent), North Dakota (-1.0 percent), and Illinois (-1.0 percent).

Paper Examines Private Student Loans at CUs

A paper recently published in the Review of Quantitative Finance and Accounting examined credit unions' entrance into the private student loan market and exposure to private student loans between 2011 and 2015.

Credit unions, unlike banks, have been required by the National Credit Union Administration to report their holdings of private student loans, since 2011.

According to the paper, private student loans have been the fastest growing loan category among credit unions, expanding from $1.03 billion at the end of March 2011 to $3.53 billion at year-end 2015.

The paper found competition with other depository institutions, strong loan demand, educational field of membership, and proximity to campus were all driving forces behind credit unions having more exposure to private student loans.

Here are some of the other findings from the paper.

• There is a positive relationship between the holding of long-term rate sensitive assets and private student loans. The author posits that private student loans typical have variable interest rates. By increasing their holdings in private student loans, credit unions will reduce their interest rate risk.
• Credit unions with a higher loans-to-deposits (shares) ratio were more likely to be involved in private student loans.  
• Lower capitalized credit unions were more likely to be exposed to private student loans.
• As credit unions get larger, they are more likely to have a greater concentration in private student loans.
• Private student loans have a negative and statistically significant effect on a credit union’s return on assets. The paper argues that credit unions that entered the private student loan market had higher non-interest expense, as they added staff and resources to originate and service these new asset class.
• Concentration in private student loans did not affect risk at credit unions. However, this may be due to student loans still being in deferral and not yet seasoned.
• Many credit unions that entered the private student loan market did so through participation loans. However, as participation loans make up a greater share of private student loans, there is an increase in delinquency rates.

Read the paper.

Technology CU Funds $20.5 Million Construction Loan

Technology Credit Union (San Jose, CA) provided a $20.5 million construction loan for a luxury apartment development.

The loan will fund the development of a four-story, 55-unit luxury apartment building with a one-story parking garage.

This is a large loan and indicates that large credit unions and banks are competing for the same commercial customers.

Read the press release.

Regulators Affirm No Enforcement Actions Based Upon Guidance

In an important joint statement issued today, the financial regulatory agencies clarified the role of supervisory guidance in bank supervision, noting that it “does not have the force and effect of law.” Regulators from the Federal Reserve, Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, Consumer Financial Protection Bureau and the National Credit Union Administration affirmed that supervisory guidance is intended to outline expectations and general views regarding appropriate practices for a given subject area, and that they would not pursue enforcement actions based on it.

The agencies highlighted additional ongoing efforts to clarify policies and practices related to supervisory guidance. Specifically, they said they would: limit the use of numerical thresholds or bright-lines when outlining expectations in supervisory guidance; not criticize institutions for “violations” of supervisory guidance; strive to reduce the issuance of multiple guidance documents; and continue working to clarify the role of supervisory guidance in communications with exam teams and supervised institutions. They also noted that seeking public comment on guidance does not signal that the guidance is intended to have the force and effect of a regulation or law.

Read the joint statement.

Georgia Regulator Approves CU's Takeover of Bank

The Georgia Department of Banking and Finance on August 6 approved the merger of Georgia Heritage Bank (Dallas, GA) into LGE Community Credit Union (Marietta, GA).

LGE Community CU has $1.3 billion in assets. Georgia Heritage has two offices and $94 million in assets.

Consumer Credit at CUs Up $7 Billion in July

The Federal Reserve announced on September 10 that outstanding consumer credit for the month of July increased at credit unions.

Outstanding consumer credit at credit unions grew by $7 billion to $448.9 billion.

Revolving credit at credit unions rose from $58.6 billion in June to $59.2 billion in July.

Nonrevolving credit expanded by $6.4 billion in July to $389.7 billion.

PenFed Acquires Ad Agency

Pentagon Federal Credit Union (Tyson, VA) last week announced that it had acquired a Washington-area advertising agency, WHITE64.

The advertising agency led the rebranding of Pentagon Federal Credit Union to PenFed, and launched the PenFed “Great Rates Across America” campaign.

Under the terms of the agreement, WHITE64 will retain its name and operate as a virtually autonomous unit rather than an in-house agency. The price tag of the deal was not disclosed.

Under regulations governing a credit union service organization (CUSO), the National Credit Union Administration (NCUA) designated marketing services as a pre-approved power.

The agency will continue to serve its existing customers, including Washington Metro, Koons Automotive Group, and Luray Caverns. WHITE64 will also look at expanding its clientele and will provide marketing services to other credit unions.

But according to regulation, a CUSO must primarily serve credit unions, its membership, or the membership of credit unions contracting with the CUSO. It is unclear how NCUA will enforce this provision, since it has failed to define primarily.

In addition, the agency will be structured as a limited liability company. This means the income from its operations would be taxed at PenFed's tax rate. In other words, the income from the ad agency will not be taxed.

In conclusion, marketing services are unrelated to a federal credit union's tax exempt purpose. Policymakers should require federal credit unions be treated like other tax exempt organizations and pay taxes on income from unrelated business activities.

Read the press release.

Two CUs Spend Big on Office Buildings

Suncoast Credit Union (Tampa, FL) built a new administrative building with the goal of net zero power consumption.

The 3-story, 101,000-square-foot building has an estimated price tag of $28 million.

According to the Business Observer, the building has more than 1,200 photovoltaic panels on the roof.

Read the story.

Capital Credit Union (Green Bay, WI) paid $6 million for a four-story, 69,700-square-foot office building in Ashwaubenon, Wisconsin.

The $1.4 billion credit union plans to move its information technology, mortgage, training and member services departments into the building.

The credit union will open a branch on the first floor.

Read the story.

Loans Topped $1 Trillion at Federally-Insured Credit Unions

Federally-insured credit unions (FICUs) reported a mid-year profit $6.3 billion, according to the National Credit Union Administration (NCUA). Net income for the second quarter was almost $3.2 billion.

Eight hundred and twenty-six FICUs reported a mid-year loss.

FICUs reported a return on assets of 0.90 percent as of mid-year 2018, unchanged from the first quarter of 2018. The median return on average assets was 0.52 percent as of June 2018.

During the second quarter, net interest margins at FICUs improved by 4 basis points to 3.07 percent; but fee and other operating income as a percent of average assets fell by 2 basis points to 1.37 percent.

In addition, operating expenses as a percent of average assets rose 2 basis points during the second quarter to 23.10 percent.

Net Worth Position of FICUs Improved During Q2

NCUA noted that net worth at FICUs grew by nearly $3.2 million to $157.4 billion. Secondary capital increased by 6.6 percent during the quarter to $248.1 million.

The net worth ratio for the industry increased by 12 basis points during the second quarter to 11.01 percent.

At the end of June 2018, 97.86 percent of federally-insured credit union had a leverage ratio of at least 7 percent. This is up from 97.70 percent as of March 2018. Thirty FICUs had a net worth ratio below 6 percent, four of which have net worth ratios below 0 percent.

Loans Topped $1 Trillion for the First Time

During the second quarter of 2018, loans at FICUs grew at an annualized rate of 12.5 percent to $1 trillion.

Almost all major loan categories were up during the second quarter. The second quarter annualized growth rates were:

• 14.1 percent for new vehicle loans;
• 13.7 percent for used auto loans;
• 8.6 percent for unsecured credit card loans;
• 10.9 percent for first lien residential loans;
• 14 percent for second lien residential loans;
• 15.6 percent for commercial real estate loans; and
• 5.9 percent for non-real estate commercial loans.

Indirect loans expanded at an annual rate of 19.4 percent during the second quarter to $211.4 billion. As of June 2018, indirect loans were 21.09 percent of all loans.

FICUs originated almost $253 billion in loans through the first two quarter of 2018. A year earlier, FICUs granted $237.5 billion in loans over the first two quarters.

Deposits and shares increased by $4.2 billion to $1.2 trillion.

Because loans grew at a faster pace than shares, the loan-to-share ratio increased during the second quarter of 2018 from 80.75 percent to 82.98 percent on June 30th.

Delinquencies and Net Charge-offs Jumped During the Second Quarter

Delinquent loans increased by 5.6 percent during the second quarter to $6.7 billion. The delinquency rate on loans edged higher by 1 basis point to 0.67 percent as of June 2018; but is down from 0.75 percent from a year ago.

Net charge-offs at FICUs more than doubled during the quarter to $2.95 billion as of June 2018. The net charge-off rate on June 30th was 0.60 percent, unchanged from the first quarter of 2018.

Troubled debt restructured (TDR) loans were $8.8 billion as of June 2018, down from $8.95 billion as of March 2018.

FICUs reported almost $9.2 billion in allowance for loan and lease losses at the end of the second quarter, up from $9 billion as of March 31, 2018. FICUs had a coverage ratio (allowance for loan and lease losses divided by delinquent loans) of 136.52 percent as of June 2018.

Quarterly Credit Union Data Summary.

NCUA Chart Book.

39 FCUs Had FOMs Vacated by Court, But A Dozen Have Regained Parts of Vacated Communities

Thirty-nine federal credit unions were notified by the National Credit Union Administration (NCUA) on April 4, 2018 that their fields of membership were vacated by the March 29, 2018 Federal Court decision.

Federal Judge Dabney Friedrich declared invalid and vacated two aspects of the NCUA's field of membership rule -- (1) the inclusion of Combined Statistical Areas with fewer than 2.5 million people, and (2) the dramatic expansion of a “rural district” to include areas with up to 1 million people, up from 250,000 people or 3 percent of the state's population.

Below is the list of 38 credit unions, which was obtained via a Freedom of Information Act request (click on image to enlarge). Hudson River Financial FCU was excluded from the list.

The Freedom of Information Act request also sought information on vacated community charters. Here are some examples of vacated community charters.

The court ruling vacated the community charter conversion of WyHy Federal Credit Union (Cheyenne, WY) to serve the whole state of Wyoming, as a rural district. The credit union changed its charter back to a multiple common bond charter after the court decision.

AmeriChoice Federal Credit Union (Mechanicsburg, PA) had the Pennsylvania counties of Adams, Lebanon, and York removed from its charter, after it expanded its community charter in December 2017 by using a Combined Statistical Area.

TruChoice Federal Credit Union (Portland, ME) expanded its community charter using the invalidated rural district definition in January 2018 to serve the Maine counties of Androscoggin, Cumberland, Franklin, Kennebec, Knox, Lincoln, Oxford, Sagadahoc, Somerset, and York. The court decision scaled back the community charter to two counties -- York and Cumberland.

However, recent decisions by NCUA have allowed a dozen credit unions to regain portions of their vacated community charters thru the end of the second quarter of 2018. For example,

The court ruling vacated the community charter conversion of Hudson River Financial Credit Union (Peekskill, NY) to serve people who live, work, worship, and attend school in and businesses and other legal entities in the counties of Putnam, Rockland, and Westchester in New York. In June 2018, NCUA approved a community charter for Hudson River Financial FCU to serve people who live, work, worship, or attend school in and business and other legal entities in Rockland or Westchester Counties in New York, which are part of the New York, Jersey City, White Plains Metropolitan Division.

NCUA granted Reliant Federal Credit Union (Casper, WY) in December 2017 an expansion of its community charter via its rural district definition to the whole state of Wyoming. The court ruling scaled back the community charter to two counties of Converse and Natrona. But in June 2018, NCUA approved a new rural district for Reliant FCU composed of Big Horn, Campbell, Converse, Crook, Hot Springs, Johnson, Natrona, Niobrara, Park, Sheridan, Washakie, or Weston Counties, Wyoming.

Other credit unions that regained portions of their community charters were DEXSTA FCU, Act 1st FCU, Coloramo FCU, School Systems FCU, Horizon FCU, Missoula FCU, First Peoples Community FCU, Acadia FCU, CinFed FCU, and Great Northwest FCU.

Some Thoughts on Risk-Based Capital Proposal

The National Credit Union Administration (NCUA) Board proposed to amend its definition of a “complex” credit union adopted in the 2015 for risk-based capital purposes by increasing the asset-size threshold from $100 million to $500 million.

According to the Board, the new definition of a complex credit union would exempt an additional 1,026 credit unions from the risk-based capital rule, providing these credit unions with regulatory relief. The NCUA believes that a single asset-size threshold is clearer, more logical, and easier to administer. The Board believes raising the threshold level for a complex credit union from $100 million to $500 million would not pose an undue risk to the National Credit Union Share Insurance Fund (NCUSIF).

Unfortunately, this proposal of raising the asset-size threshold for a complex credit union to $500 million would exclude numerous credit unions engaged in complex and risky activities.

• According to the proposal, increasing the asset-size threshold to $500 million would exclude approximately 800 credit unions with at least 3 complex activities, as identified by NCUA, from the agency’s risk-based capital rule.
• NCUA estimated that 284 credit unions with between $100 million and $500 million in assets would under the current rule need to raise $165 million in capital over what is required by the net worth ratio due to the credit unions’ risk profile.
• Increasing the asset-size threshold to $500 million would exclude 122 credit unions with composite CAMEL codes of 3, 4, or 5 with approximately $21.4 billion in insured shares from the risk-based capital rule, as of March 2018.
• Seven of the 10 costliest failures to the NCUSIF involved credit unions with between $100 million and $500 million in assets would be exempted from the risk-based capital rule.

While I agree with the Board that credit unions between $100 million and $500 million don't pose a systemic risk to the NCUSIF, I do believe that credit unions face the risk of future premium assessments. These credit unions with assets between $100 million and $500 million would not hold enough capital relative to their risk profiles. The losses to the NCUSIF from the failure of these credit unions would be paid for by other credit unions.

A better alternative for identifying a complex credit union would involve looking at the business model of a credit union based upon its assets and liabilities.