PPPLF Advances to CUs Topped $410 Million at the End of May

Thru May 31, 16 credit unions received slightly more than $410 million in advances from the Federal Reserve's Paycheck Protection Program Liquidity Facility(PPPLF).

Current outstanding advances were almost $409.6 million.

The Federal Reserve disclosed the data on June 10th.

The Federal Reserve created the PPPLF to bolster the effectiveness of the Small Business Administration's Paycheck Protection Program (PPP).

The PPPLF extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

Small Business Administration-qualified PPP lenders—both depository institutions and non-depository institutions—are eligible to borrow under the PPPLF.

The following tables list the credit unions with PPPLF advances and the current amount of aggregate outstanding advances.

Coronavirus and Liquidity Planning

The Texas Credit Union Department in its March Newsletter is encouraging credit unions to review their liquidity outlook, asset liability management practices and Liquidity Contingency Funding Plan to ensure that they have adequate liquidity to meet member loan demand and share withdrawal requests.

The regulator wrote that "[a] number of your members will likely need lending assistance or will be making savings withdrawals to get thru these challenging times."

As part of the credit union's Contingent Funding Plan, each credit union should address:

• its policies to manage a range of stress environments, identification of some possible stress events, and identification of likely liquidity responses to such events;
• its lines of responsibility within the credit union to respond to liquidity events;
• its management processes that include clear implementation and escalation procedures for liquidity events;
• its outside sources of liquidity for contingency needs; and
• the frequency the credit union will test and update the plan.

NCUA's Harper Discusses Liquidity, Consumer Debt, and Succession Planning

Speaking before the Credit Union National Association Government Affairs Conference on February 26, National Credit Union Administration Board Member Todd Harper discussed three issues on the horizon that will impact credit unions.

First, Harper focused on liquidity. Harper noted that the industry's loans-to-shares ratio bottomed out in 2012 and 2013 at approximately 66 percent, but it has since rebounded due to strong loan growth. The ratio now is about 84 percent nationally and in some states like Vermont and Wisconsin, it exceeds 90 percent. He cautioned that credit unions of all sizes need to maintain ample access to cash to withstand unexpected emergencies.

Second, Harper addressed the issue of consumer debt. He pointed out the total household debt is higher than before the Great Recession. While he stated that asset quality remains good at credit unions, there are some warning signs. The percentage of credit cards that are 90 days or more past due exceeded 5 percent. He warned that if a recession occurs, delinquencies and charge-offs will rise. He told the credit union attendees that they should be carefully evaluating new credit risk and taking steps to mitigate delinquencies in their consumer loan portfolios.

Third, Harper addressed the issue of succession planning. He stated that approximately 20 percent of credit unions do not have a succession plan. He commented the lack of succession plan is one of the top two reasons for credit union mergers. He then pointed out that a large proportion of credit union CEOs and executives are Baby Boomers, who will be part of a retirement wave. He encouraged the credit union officials to raise the issue of succession planning in board discussions to ensure the survival of their credit unions.

Other topics he discussed included diversity and inclusion and compliance with consumer financial protection.

Read the speech.

NCUA's Harper Says the Agency Lacks Rigor on Consumer Compliance

The National Credit Union Administration’s current method of examining and enforcing consumer protection laws and regulations for institutions with less than $10 billion in assets is “not comparable to our sister agencies,” NCUA Board Member Todd Harper said in a Washington speech on September 10. He noted that bank regulators conduct regular risk-focused consumer compliance exams and assign separate consumer compliance ratings.

“Decades ago, the NCUA conducted full consumer financial protection compliance reviews as part of its examination program, but the agency has increasingly focused on safety and soundness over time,” Harper said. “NCUA’s different approach to consumer financial protection reviews runs counter to the congressionally mandated mission of the Federal Financial Institutions Examination Council.”

Harper noted that more rigorous examination and enforcement of consumer compliance regulations could potentially address principal-agent issues at credit unions by aligning management’s actions with the best interests of members.

Harper also criticized the NCUA board’s recent vote to delay its 2015 risk-based capital rule, cautioning that without it, a potential economic downturn could amplify losses to the National Credit Union Share Insurance Fund. He added that he is concerned about the liquidity of federally insured credit unions.

Read the speech.

Troubling Proposal from NCUA

The National Credit Union Administration is proposing that an FCU will be required to develop and maintain a written plan if its public unit and nonmember shares, taken together with borrowings, exceed 70 percent of paid-in and unimpaired capital and surplus.

This proposal ignores that the reliance on volatile and expensive nonmember deposits and borrowed funds could expose the National Credit Union Share Insurance Fund (NCUSIF) to a loss.

For example, Beehive Credit Union, which failed, held up to 18 percent of its deposits in high-cost nonmember deposits. The Material Loss Review of this failure noted that these high-cost nonmember deposits partially contributed to the $27.6 million loss to the NCUSIF.

According to the Material Loss Review of Chetco Federal Credit Union. the credit union's management failed to develop an adequate liquidity plan to address rapid loan growth. The report noted that management funded its rapid loan growth through a combination of borrowed funds and deposit products with above-market rate. But as Chetco's financial condition deteriorated, a corporate credit union reduced its line of credit, subjecting the credit union to liquidity risk. The failure of Chetco resulted in an estimated loss to the NCUSIF of $76.5 million.

The NCUA Board should require all FCUs to develop and maintain written plans when an FCU is relying on high-cost, volatile nonmember shares and borrowings to fund its operations above a de minimis threshold.

States with the Highest Median Loan-to-Share Ratios, 3Q 2018

Nationally, the median loan-to-share (deposit) ratio for credit unions was 69 percent at the end of the third quarter of 2018.

However, there are a number of states where credit unions have much higher median loan-to-share ratios. There are eight states with median loan-to-share ratios equal to or greater than 80 percent.

Here is a list of states with loan-to-deposit ratios of at least 80 percent (click on image to enlarge).

Recently, some credit union regulators have expressed concerns that credit unions with high loan-to-share ratios could be exposed to increased liquidity risk.

Wisconsin CUs Need to Proactively Manage Liquidity Risk, Says Regulator

The Wisconsin Office of Credit Unions wrote Wisconsin credit unions in December that it will heighten its analysis of credit unions' liquidity management.

The state regulator noted that the loan-to-share (deposit) ratio for Wisconsin credit unions was 97.16 percent at the end of the third quarter of 2018.

The letter stated that the increase in loans has stressed liquidity for many credit unions.

Credit unions were advised that examiners will expand their analysis of credit unions with low levels of liquidity. This analysis will include looking at how a credit union measures, monitors, and manages liquidity and liquidity risk.

Things examiners will look at include balance sheet composition, funding sources and the reliance on borrowed money and nonmember deposits, projections on asset and loan growth for 2019, liquidity policy and contingent funding, and communication of liquidity events to senior management and directors.

While the state regulator acknowledges that there is not a one-size fits all approach to managing liquidity risk, it expected that credit unions to document their practices to ensure that liquidity levels are within established limits and that management and staff are proactively managing liquidity.

Read the letter.

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.

Additional Thoughts on Melrose

While I have commented on Melrose Credit Union's solvency, I have not focused enough attention on Melrose's liquidity position.

During the fourth quarter, Melrose, which is in conservatorship, had a deposit outflow of $102 million, as deposits fell from almost $1.716 billion to approximately $1.614 billion.

The credit union has $737.1 million in deposits that mature in less than one year.

In addition, it reported uninsured deposits of almost $41 million. These uninsured deposits pose a flight risk.

On the other hand, Melrose Credit union had $58.6 million in cash at the end of 2016. Its cash on hand fell by almost $124 million during the quarter

Cash and short-term investments were 3.92 percent of assets at the end of 2016. This was down from 9.66 percent on September 30, 2016; but higher than the 1.50 percent at the end of 2015.

The credit union reported uncommitted lines of credit of $175.7 million. This is down from $249.3 million from a year earlier. However, I am not sure that these lines of credit will be available.

Also, Melrose should have established a contingent emergency borrowing authority with either the Central Liquidity Facility (CLF) or the Federal Reserve.

The National Credit Union Administration does not comment on whether a credit union is a member of the CLF.

Furthermore, the conservatorship of Melrose may have closed its access the Federal Reserve's Discount Window.

Moreover, Melrose as of the end of 2016 has borrowed $55,643,796 from a Federal Home Loan Bank (FHLB). These advances from a FHLB are secured with assets and over-collateralized.

If Melrose is liquidated by NCUA, these advances from a FHLB would increase the size of the loss to the National Credit Union Share Insurance Fund, as FHLBs have super lien priority. This means that FHLBs claims come before the NCUSIF.