SEC Issues No-Action Letter on Corporate CU Legacy Assets Guaranteed Securities

Here is the link to the September 24 letter from the NCUA to the Securities and Exchange Commission (SEC) requesting a No-Action Letter from the SEC that the Guaranteed Securities to be issued regarding the resolution of the corporate credit union legacy assets "will be considered to be securities which are (i) guaranteed by an instrumentality of the United States Government for purposes of Section 3(a)(2) of the Securities Act and (ii) obligations guaranteed as to principal or interest by the United States for purposes of Section 3(a)(42)(A) of the Exchange Act, thus qualifying as "exempted securities" as defined in Section 3(a)(l2) of the Exchange Act and therefore not subject to registration under Section 12 of the Exchange Act."

Here is the SEC's No-Action Letter to NCUA.

Credit Unions with Net Worth Ratios Below 6 Percent, June 2010

As of June 2010, there were 182 federally-insured credit unions that had net worth leverage ratios below 6 percent.

A net worth ratio below 6 percent is associated with being undercapitalized.

These 182 credit unions held approximately $26.8 billion in assets.

Fifteen of these 182 credit unions were critically undercapitalized -- net worth ratio below 2 percent. Most of these critically undercapitalized credit unions have either failed or been merged into a healthy credit union.

Below is a list of credit unions with net worth ratios below 6 percent. (click on images to enlarge).

Whistleblower Lawsuit Alleges Financial Improprieties at Hawaii Community FCU

Former Vice President of Finance, Renee Inaba, filed a whistleblower lawsuit against Hawaii Community Federal Credit Union (HCFCU).

The complaint alleges insider enrichment by managers, use of HCFCU funds for personal expenses, and conflicts of interest arising from undocumented relationships with vendors.

The lawsuit claims that while implementing cost cutting measures, Ms. Inaba found "rampant, endemic corruption, financial improprieties, conflicts of interest and breaches of fiduciary duty by managers of HCFCU."

According to the complaint, HCFCU managers went to Mixx Bar and other bars charging the bar tabs for food and drinks to the credit union as a business expense.

Ms. Inaba questioned the propriety of using of credit union funds to fly management and the board to a luxury resort -- the Grand Wailea on Maui. She was rebuffed by management and told "it's not that bad, not like we have corporate jets like the guys on the mainland."

Paragraphs 27 through 32 outlines alleged conflicts of interest associated with the use of vendors for printing, mailing and cleaning services.

The lawsuit further alleges that management had pushed through a prior Board of Directors a compensation package that would benefit the managers at the expense of credit union members. The planned payments would range from planned payments to insiders of $750,000 and over $1,000,000.

If it was not for the lawsuit, members of HCFCU would be clueless about these alleged practices by management, especially management's compensation.

This raises an interesting point -- whatever happened to NCUA's Outreach Task Force recommendation that total compensation to senior executive officers be disclosed to the credit union members annually. NCUA, when it issued the report, stated that such transparency would provide credit union members with information to evaluate a material expense, as well as those officials responsible for establishing the compensation package.

Credit Unions Paid Higher Premiums in 2010 Than FDIC-Insured Banks

I was recently asked how would FDIC premium assessment rates compare to premium rates paid by credit unions.

The short answer is that a well run (CAMEL 1 or 2) and well capitalized credit union had a higher premium assessment rate in 2010 than comparably situated FDIC-insured banks. The same is likely to be true for 2011 and 2012.

Currently, the base assessment rate for FDIC-insured banks ranges between 12 and 16 basis points (depending on supervisory evaluations and financial ratios) for banks that are well capitalized and have a CAMELS composite rating of 1 or 2. But the actual risk-based premium rate includes adjustments for secured liabilities, brokered deposits and capitalization (and unsecured debt), which can increase or lower the premium rate paid. The ultimate range is between 7 and 24 basis points. If you go here, you can see the risk-based premium matrix for FDIC insured banks.

In comparison, credit unions faced a combined NCUSIF and Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessment of 25.82 basis points for 2010.

Going forward, the base assessment rate for FDIC-insured institutions will be raised 3 basis points beginning in 2011. So, the base rate will be between 15 and 19 basis points. But the actual premium rate will be subject to the same adjustments.

NCUA on the other hand stated that the resolution of toxic assets in the corporate credit unions means that "credit unions can expect higher assessments in 2011 and 2012 with assessments anticipated to level off thereafter." Go to page 5 (question 15) of the FAQ.

Therefore, credit unions should anticipate a premium rate higher than the 13.42 basis points they paid in 2010 to the corporate credit union stabilization fund in 2011 and 2012. On top of that, credit unions should prepare for a NCUSIF assessment, which NCUA will disclose in November during its Board meeting.

Moreover, this analysis does not take into consideration the opportunity cost associated with the one percent NCUSIF capitalization deposit, which is a non-earning asset.

NCUA Creates Two Bridge Corporate CUs

The National Credit Union Administration announced the creation of two bridge corporate credit unions to assume operations of U.S. Central Corporate Federal Credit Union (US Central) and Western Corporate Federal Credit Union (WesCorp). The new entities will be known as U.S. Central Bridge Corporate Federal Credit Union and Western Bridge Corporate Federal Credit Union.

NCUA has been running US Central and WesCorp, since placing them into conservatorship on March 20, 2009.

The creation of these two bridge corporate credit unions is part of NCUA's "Good Bank/Bad Bank" model for resolving the toxic assets held by the corporate credit union system.

The bridge corporate credit unions (“good banks”) will purchase and assume “good” assets and member share deposits from the conserved corporate credit unions (“bad banks”).

NCUA stated that the new bridge corporate credit unions will not be able to add new services, will not be able to accept new members, and will focus on payment and settlement services.

Additionally, bridge corporates will not offer investment products other than short-term certificates. The maturities for term deposits will be restricted to 180 days or less. Investments will be restricted to cash held in correspondent accounts or Treasury and Federal Agency Security with maximum (bullet) maturities of 180 days.

NCUA stated that these bridge corporates will have a limited life span, probably no more than 24 months. NCUA believes that this will give the members of the bridge corporate credit union enough time to either charter a new corporate credit unions or sell the operations to another entity.

CU TARP Recipients (Update)

Below is a list of more tax-exempt credit unions that received a taxpayer capital infusion from Treasury through the Community Development Capital Initiative. (See prior postings for the other credit unions that have received a capital infusion from Treasury).

Southern Chautauqua Federal Credit Union (Lakewood, NY) $1,709,000
Fidelis Federal Credit Union (New York, NY) $14,000
Bethex Federal Credit Union (Bronx, NY) $502,000
Shreveport Federal Credit Union (Shreveport, LA) $2,646,000
Carter Federal Credit Union (Springhill, LA) $6,300,000
Workers United Federal Credit Union (New York, NY) $57,000
North Side Community Federal Credit Union (Chicago, IL) $325,000
East End Baptist Tabernacle Federal Credit Union (Bridgeport, CT) $7,000
Community Plus Federal Credit Union (Rantoul, IL) $450,000
Border Federal Credit Union (Del Rio, TX) $3,260,000
Opportunities Credit Union (Burlington, VT) $1,091,000
First Legacy Community Credit Union (Charlotte, NC) $1,000,000
Union Settlement Federal Credit Union (New York, NY) $295,000
Southside Credit Union (San Antonio, TX) $1,100,000
D.C. Federal Credit Union (Washington, DC) $1,522,000
Faith Based Federal Credit Union (Oceanside, CA) $30,000
Greater Kinston Credit Union (Kinston, NC) $350,000
Hill District Federal Credit Union (Pittsburgh, PA) $100,000
Freedom First Federal Credit Union (Roanoke, VA) $9,278,000
Episcopal Community Federal Credit Union (Los Angeles, CA) $100,000
Vigo County Federal Credit Union (Terre Haute, IN) $1,229,000
Renaissance Community Development Credit Union (Somerset, NJ) $31,000
Independent Employers Group Federal Credit Union (Hilo, HI) $698,000
Brooklyn Cooperative Federal Credit Union (Brooklyn, NY) $300,000

IG Report on Ensign FCU Failure

NCUA's Inspector General issued a Material Loss Review on the failure of Ensign FCU in Henderson, Nevada. The expected losses to the NCUSIF from this failure should not exceed $30 million.

Ensign failed because management adopted a high-risk strategy that allowed up to 80 percent of its loan portfolio to be concentrated in real estate secured loans. The combination of rapidly declining real estate values and increasing unemployment caused the delinquency rates by September 2009 to exceed 13.6 percent compared to 0.30 percent two years earlier.

The IG study found that there was little evidence in the monthly Board minutes to suggest that management was actively monitoring the concentration levels and the associated risks.

The report also concluded that management had flawed allowance for loan loss methodology and lenient lending policies allowing loan-to-value ratios on Home Equity Lines of Credit (HELOC) loans up to 100 percent and 40-year terms on mortgages.

Additionally, management failed to implement an effective collection program.

Ensign experienced significant losses in its real estate loan portfolio, as 80 percent of all losses coming from the real estate secured loans.

The report noted that in December 2007, examiners identified violations governing Member Business Loan (MBL) limitations for Construction and Development loans, MBLs to one individual or associated group, and aggregate MBLs, respectively. The credit union was cited for the same violations during a 2004 examination. Ensign also granted certain MBLs in excess of 15-year terms in violatation of the FCU Act.

For example, the credit union approved two large member business loans ($2.2 million and $3.6 million), one of which represented 25 percent of net worth when it was approved, and ultimately foreclosed, costing the Credit Union over $1.5 million in losses due to property devaluations.

The report noted that Ensign exceeded the fixed asset limit. At failure, fixed assets were 11 percent of total assets.

Management also demonstrated poor liquidity strategies. In December 2007, management accepted a $12 million share account from one member and did not establish a contingency plan in the event this money was withdrawn. In January 2009, the member requested to close this account but Ensign did not have sufficient liquidity to process the withdrawal. With NCUA's assistance, Ensign obtained a $12.5 million 30-day loan from the Central Liquidity Fund (CLF).

The IG report states that the credit union signed a Letter of Understanding and Agreement (LUA) on February 26, 2009 and agreed to seek a merger partner. The LUA was never published by NCUA.