What Was the Value of Progressive CU's Open Charter?

The 2018 Annual Report of Pentagon Federal Credit Union (McLean, VA) has information on the value of the open field of membership charter of Progressive Credit Union (New York, NY) to Pentagon FCU.

An open field of membership charter allows anyone to join a credit union.

This open charter was transferred to Pentagon FCU after the emergency merger of Progressive CU into Pentagon FCU.

In Note 14 (Subsequent Events), Pentagon FCU reported an increase of intangible assets of approximately $108 million associated with the emergency merger.

The increase in the value of intangible assets was derived from the contractual right of Pentagon FCU to use Progressive CU's open field of membership charter.

FSOC: CUs Post Strong Performance; But Challenges Persist

The Financial Stability Oversight Council (FSOC) in its 2018 Annual Report stated that the credit union industry posted relatively strong performance due to solid loan demand and a strengthening economy.

FSOC noted the credit union industry performance has bifurcated. Larger credit unions have fared better than smaller credit unions across many performance measures.

FSOC also commented that credit unions continue to struggle with interest rate risk.

It wrote that some credit unions appear to be reaching for yield by lengthening the term of their investments in order to boost near-term earnings. However, these credit unions' financial performance could be adversely impacted, if short-term interest rates rise faster than expected. But it seems that this risk is retreating as markets are anticipating fewer rate hikes from the Federal Open Market Committee in 2019.

The report further noted that credit unions' exposure to localized economic distress can present unique challenges, as they are closely tied to specific geographic areas or business organizations.

For example, credit unions exposed to the taxicab industry, which has been disrupted by ridesharing companies, have undergone significant financial distress. As of the second quarter of 2018, there were seven credit unions with with $3.0 billion in taxi medallion loans either on their balance sheets or sold to other credit unions. Two of these credit unions with total assets more than $1.5 billion and specializing in taxi medallion loans were placed into conservatorship in the first half of 2017 and liquidated in the third quarter of 2018.

Read the report.

Quorum's Annual Report Provides More Insight into Taxi Medallion Exposure

The 2017 Annual Report of Quorum Federal Credit Union (Purchase, NY) provides greater insight into the credit union's taxi medallion participation loan portfolio.

At December 31, 2017, Quorum had almost $64.4 million of loans collateralized by taxi medallions, primarily from New York City and Chicago. However, the credit union does not breakdown the distribution of loans by geography.

The credit union reported an increase in provisions for loan losses for taxi participation loans of $8.1 million during 2017. The credit union also reported net charge-off of taxi medallion participation loans of $2 million during 2017. As a result, the credit union saw its allowance for loan and lease losses associated with taxi medallion participation loans increase from $19.6 million at the beginning of 2017 to $25.7 million at the end of 2017. Approximately 75 percent of the credit unions allowances for loan and lease losses were for taxi medallion participation loans.

At the end of 2017, Quorum stated that the fair value of a taxi medallion was $365 thousand in New York City and $93 thousand in Chicago. The credit union used a third-party valuation specialist to value the underlying collateral of taxi medallions, which was used to determine specific reserves on impaired taxi medallion loans. However, these valuations seem to be too high given recent transaction data from Chicago and New York City.

Quorum stated that at the end of 2017, $21.7 million in taxi medallion loans were current, another $3.6 million were 30-to-89 days delinquent, and almost $39.2 million were 90 days or more past due.

The credit union noted $409 thousand in troubled debt restructured (TDR) taxi medallion participation loans in 2017, after reporting $18.5 million in TDR taxi medallion participation loans in 2016. The credit union reported that all modifications in taxi medallion loans in 2016 and 2017 dealt with maturity and interest rate adjustments.

However, the credit union warned that further deterioration in the value of medallions may result in higher delinquencies and losses.

According to the Annual Report, $47.3 million in taxi medallion loans are scheduled to mature in 2018 and another $13.2 million in 2019. The remainder will mature in 2020 or later.

In closing, I wish more credit unions would post their audited financial statements, so that credit union members and analysts could get more granular information on their performances.

Read Note 4 of the Annual Report for more info.

68.5 Percent of Quorum's Taxi Medallion Loans Were Current at the End of 2016

According to Quorum Federal Credit Union's 2016 Annual Report, approximately 68.5 percent of its taxi medallion loans were current.

While Quorum never originated a taxi medallion loan, the credit union participated in taxi medallion loans for 13 years. The credit union ended its taxi medallion participation loan program in 2013. These taxi medallion participation loans were primarily in the cities of New York and Chicago; but the credit union did not divulge the portion of taxi medallion loans in each city.

Quorum stated that it owned primarily 90 percent of these taxi medallion loans originated by parter credit unions.

As of December 31, 2016, Quorum Federal Credit Union (Purchase, NY) had $72.6 million of loans collateralized by taxi medallions.

Taxi medallion loans delinquent by 30 days or more totaled $22,871,000. Almost $20.9 million of the these delinquent loans were 90 days past due or in nonaccrual status.

Quorum's financial notes stated that the credit union increased its provisions for taxi medallion loans in 2016 by almost $19.1 million. The credit union ended 2016 with almost $19.6 million in loan loss reserves for taxi medallion loans, of which $19.2 million were specific reserves.

To estimate its underlying value of the collateral, Quorum engaged a third party specialist. According to the third party specialist, the fair value of a taxi medallion is $489,000 in New York City and $91,000 in Chicago. The $91,000 valuation for Chicago is higher than what other lenders have valued their taxi medallion loans.

While Quorum estimated the December 2016 fair value for New York City and Chicago taxi medallions, the credit union had not at the end of 2016 written down the value of these loans to their current fair value.

Quorum Federal Credit Union reported that almost $35.2 million in taxi medallion loans are scheduled to mature in 2017, $20.5 million will mature in 2018, and $13.3 million will mature in 2019. The remainder of the taxi medallion participation loans will mature in 2020 or later.

However, the credit union cautions that disruption in the value of taxi medallions could cause an increase in losses on these loans.

Read the Annual Report.

Outstanding Enforcement Orders Down by 21 Percent at the End of 2015

The total number of outstanding enforcement actions for federally insured credit unions at the end of 2015 was down by approximately 21 percent from a year earlier.

The following table appeared in the National Credit Union Administration's 2015 Annual Report (click on image to enlarge). It shows the number of outstanding enforcement actions at year end by type of action against federal credit unions (FCU) and federally insured state chartered credit unions (SCCU) between 2010 and 2015. LUA stands for Letters of Understanding and Agreement.

The 2015 Annual Report noted: "The total number of enforcement actions at federal credit unions decreased by 24.5 percent, from 290 outstanding at the end of 2014 to 219 at the end of 2015. Total enforcement actions against federally insured, state-chartered credit unions decreased 14.6 percent, from 164 as of the end of 2014 to 140 at the end of 2015."

Total outstanding enforcement actions peaked in 2011 at 631 and has steadily declined, as the economy improved and federally insured credit unions worked to address problems.

NCUA Provides Update on CLF Membership and Borrowing Arrangements at Fed's Discount Window

The National Credit Union Administration's Emergency Liquidity rule required all larger credit unions establish access to
a federal source of liquidity by the end of March 2014.

These federal sources of liquidity are the Federal Reserve’s Discount Window, NCUA’s Central Liquidity Facility (CLF) or both.

According to the 2014 Annual Report of the NCUA, the number of credit unions that were members of the CLF increased from 158
credit unions at the end of 2013 to 248 credit unions by the end of 2014. With the growth in CLF membership, the CLF's borrowing authority increased by $2.2 billion to $5.1 billion.

On the other hand, the number of federally insured credit unions that had arrangements with the Federal Reserve’s Discount Window increased, from 483 in 2013 to 663 by the end of 2014.

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.

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.

PenFed Discloses Senior Management Pay, Other FCUs Should Do the Same

As readers of this blog know, I have be an advocate of credit union transparency with regard to the pay of senior executives.

State chartered credit unions disclose the compensation of their senior management in their Form 990 filings with the Internal Revenue Service.

On the other hand, federal credit unions are not required to file Form 990s. As a result, credit union members and taxpayers do not have the ability to evaluate the pay of senior management and to determine if this valuable tax exemption that credit unions receive is being diverted into excessive compensation of senior federal credit union officials.

However, I was very pleased to see that Pentagon Federal Credit Union is disclosing the pay of senior management.

In Note 15 of its 2013 Annual Report, Pentagon Federal Credit Union discloses the compensation package of its CEO and 8 other senior executives.

Also, Note 15 discusses how the credit union sets the pay for senior management at the credit union.

The only criticism is that Pentagon Federal Credit Union could have provided more granularity with regard to pay by separating salary (or base pay) from bonus.

Other federal credit unions should follow Pentagon Federal Credit Union's example and disclose the compensation of their senior management.

2011 Annual Report Has No Info on Enforcement Actions

Unlike its 2010 Annual Report, NCUA's 2011 Annual Report, which was released on July 3rd, has no information on the number of enforcement actions taken by the agency against credit unions in 2011.

Not only does NCUA not publish enforcement actions against individual credit unions (except for the rare case), the agency is not providing summary statistics on such enforcement actions.

This is a regrettable step backwards with respect to transparency by NCUA.

In comparison, the other banking regulators disclose such enforcement actions against individual banks and provide summary statistics on enforcement actions in their annual reports to Congress.

Read the 2011 Annual Report.

NCUA Misses Another Deadline

Another April 1st has passed and NCUA has once again missed its deadline for publishing its Annual Report.

The Federal Credit Union Act states that “[n]ot later than April 1 of each calendar year, and at such other times as the Congress shall determine, the Board shall make a report to the President and to the Congress. Such a report shall summarize the operations of the Administration and set forth such information as is necessary for the Congress to review the financial program approved by the Board.”

I’m not talking about its 2009 Annual Report. We are still waiting for NCUA to publish its 2008 Annual Report.

It is more than one year late.

If the NCUA Board cannot meet this simple deadline, how can it be expected to handle the added responsibility of regulating an increase in credit union business lending authority?