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.

NCUA Board Proposes Expansion in Nonmember Deposit Cap

The National Credit Union Administration (NCUA) Board on May 23 proposed a rule that would significantly expand the ability of a federal credit union (FCU) to use public unit and nonmember deposits to fund its operation.

The proposed rule increases the current nonmember deposit limit from 20 percent of total shares to 50 percent of paid-in capital and unimpaired capital and surplus less any public unit and nonmember shares.

Public units include the federal government, states and territories, counties and municipalities and tribal entities.

NCUA acknowledged in its proposal that the 20 percent cap dates to the late 1980s and was imposed “because of the asset/liability management problems related to public unit and nonmember shares that arose at certain FCUs, which resulted in material losses for the National Credit Union Share Insurance Fund.”

Under the proposal, designated low-income FCUs, which account for 57 percent of all FCUs, would be able to accept deposits from any nonmember up to the 50 percent level.

The proposal would require a federal credit union to develop a specific use plan if its nonmember shares, combined with its borrowings, exceeds 70 percent of paid-in and unimpaired capital and surplus.

Comments on the proposal are due 60 days after publication in the Federal Register.

Read the proposed rule.

Taxi Medallion Lending CU's Request for Renewal and Extension of Nonmember Deposit Exemption Denied in 2018

The National Credit Union Administration (NCUA) Board on April 10, 2018 upheld a Regional Director's denial of a taxi medallion lending credit union's request for a renewal and extension of an exemption from the nonmember deposit cap.

NCUA's regulation caps nonmember deposits at 20 percent of total shares or $3 million, whichever is greater. But a credit union can seek an exemption from the nonmember deposit limit from the Regional Director.

While the credit union was unnamed in the document, the evidence suggests the credit union appealing the regional director's decision was Progressive Credit Union.

As background, the credit union in 2015 was granted a two-year exemption from the nonmember deposit cap, which would expire at the end of 2017. The credit union in July 2017 sought an additional two-year exemption, but the Regional Director proposed extending the exemption until June 1, 2018 to give the credit union time to develop a plan to end its reliance on costly and volatile nonmember deposits, as a primary source of liquidity. The credit union appealed the denial and the Board heard the case on March 14, 2018.

The credit union claimed that the denial of the exemption by the Regional Directors was another example of retaliation against the credit union.

According to the document, the credit union was not in sound financial condition.

• It had a composite CAMEL rating of 4 due to its declining financial health. 
• The credit union was experiencing a steep decline in its net worth.
• The Regional Director expressed concerns about volatility on the liability side of the credit union's balance sheet, as nonmember deposits were 30 percent of the credit union's deposit base. All of the nonmember deposits were from credit unions. 
• The credit union used an allowance for loan and lease methodology that may not reflect current market conditions with regard to medallions.
• The credit union showed an unwillingness to diversify its business model.

Region 1 contended that the credit union was in denial about the scope and depth of its problems.

Read the denial.

Nonmember Business Loan Delinquencies

At the end of 2011, there were 829 credit unions that reported holding approximately $6.7 billion in purchased business loans or participation interests to nonmembers.

There were 121 credit unions that reported having at least one nonmember business loan at least 60 days past due. These 121 credit unions had $274 million in delinquent nonmember business loans for a delinquency rate of 4.08 percent. In addition, over 25 percent ($77.7 million) of all delinquent nonmember business loans have been in default for over one year.

The Credit Union of Texas reported holding the most delinquent nonmember business loans at $23.6 million for a delinquency rate of 47.54 percent. Other credit union reporting a large dollar volume of nonperforming nonmember business loans include Patelco with $18.2 million, Royal with $16.6 million, Premier American with $14.2 million and America First with $14 million.

See the table below for the 25 credit unions with the most delinquent nonmember business loans on their books.

There are 44 credit unions that are reporting that at least 10 percent of their nonmember business loans are 60 days past due. Nine credit unions report that more than half of their nonmember business loans are in default.

Beer Summit, Part 2

In a comment to my December 14, 2009 post on nonmember business loans, Robbie Wright wrote:

“Your statement to the reporter is a little misleading, insofar as the "non-members" are members of the originating institution. By selecting large CU's, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I'd bet you a beer that their %'s are inline with the industry.”

So, I decided to run the numbers looking at nonmember business loans as a percent of total assets.

I used data from the third quarter for federally-insured credit unions. I excluded any credit union from the analysis that did not report holding a nonmember business loans. If I included all credit unions this would have lowered the average and median and I want to be as fair as possible.

As of September 30, 2009, 713 credit unions reported outstanding nonmember business loans.

The average ratio of nonmember business loans as a percent of total assets was 2.76 percent with a median of 1.50 percent. Seventy-five percent of credit unions held less than 3.66 percent of assets in nonmember business loans.

Below is the ratio of nonmember business loans to total assets for the 10 credit unions holding the most nonmember business loans.

Patelco (CA), 10.27%
Premier America CU (CA), 13.64%
Western FCU (CA), 7.98%
Schoolsfirst (CA), 1.75%
America First (UT), 2.48%
Langley (VA), 7.14%
California Coast (CA), 5.95%
Keypoint (CA), 12.52%
Royal CU (WI), 9.43%
Travis (CA), 5.93%

Eight of these 10 credit unions are in the top 25 percent of credit unions holding nonmember business loans as a percent of total assets.

This would suggest that their holdings of nonmember business loans are not representative of credit unions holding nonmember business loans or the industry as a whole.

So, when we have our beer summit, I’ll have a Yuengling.