NCUA Wants Ability to Examine Third-Party Vendors

A legislative priority for NCUA in the next Congress is the ability to examine third-party vendors, such as credit union service organizations (CUSOs).

In her December 9th testimony, NCUA Chairman Debbie Matz stated:

"NCUA is the only regulator subject to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that does not have authority to perform examinations of vendors which provide services to insured institutions. Credit unions are increasingly relying on third-party vendors to support technology-related functions such as internet banking, transaction processing, and funds transfers. Vendors are also providing important loan underwriting and management services for credit unions. The third-party arrangements present risks such as threats to credit risk, security of systems, availability and integrity of systems, and confidentiality of information. Without vendor examination authority, NCUA has limited authority to minimize risks presented by vendors."

The Government Accountability Office (GAO) back in 2003 expressed concerns writing that "the lack of such authority could limit NCUA’s effectiveness in ensuring the safety and soundness of credit unions."

In fact, GAO's warnings became a reality in recent years. For example, third-party vendors were cited as playing a role in several high profile credit union failures -- Cal State 9 CU, Norlarco CU, and Huron River Area CU.

It seems prudent that NCUA should be granted this authority to examine third-party vendors.

Credit unions are making greater reliance on these third-party vendors. Without the ability to examine these entities, credit unions are increasingly exposed to operational and reputational risk.

Until NCUA is granted this authority, NCUA should put in place a moratorium on granting new authorities for third-party vendors such as CUSOs.

A.E.A. FCU Placed into Conservatorship

NCUA announced that A.E.A. FCU of Yuma, Ariz. was placed into conservatorship.

A.E.A. Federal Credit Union was placed into conservatorship due to declining financial condition. The credit union was significantly undercapitalized with a net worth ratio of 2 percent as of September 2010.

NCUA cited that the credit union has earnings insufficient to enable it to continue under present management. The credit union reported a 2009 loss of almost $25.9 million and a year-to-date loss of nearly $4.7 million.

As of September 2010, the credit union reported that 19.12 percent of its loans were 60 days or more past due. The credit union’s difficulties stemmed from problems in its commercial loan portfolio, where $45.5 million in business loans were 60 days or more past due. This translates into 64.27 percent of its business loans being delinquent.

Recently, Bill Liddle, who formerly managed AEA's business loan department, his wife and local businessman Frank Ruiz were indicted by a grand jury in an alleged kickback scheme related to business loans made to Ruiz.

Assets and Deposits at Problem Credit Unions Decline During November

During its update on the NCUSIF, NCUA reported that the number of problem credit unions declined by 6 during November to 372; but is up by 21 since the end of 2009. A problem credit union is defined as a credit union that has a CAMEL code of 4 or 5.

Between the end of October and the end of November, shares (deposits) and assets in problem credit unions fell by $800 million to $38.3 billion and $1 billion to $43.4 billion, respectively. NCUA reported that problem credit unions held 5.10 percent of the credit union industry’s insured shares and 4.80 percent of the industry’s assets.

The number of problem credit unions with assets of $1 billion or more was unchanged during the month at 12, although shares fell by $100 million to $16.8 billion.

Problem credit unions with between $500 million and $1 billion in assets fell by 2 during November to 6. This decline in problem credit unions in the $500 million to $1 billion asset size category led to a $1.1 billion reduction in aggregate shares to $3.5 billion.

NCUA noted that the number of problem credit unions with between $100 million and $500 million in assets increased by 1 to 61 and aggregate shares increased by $500 million to $13.6 billion.

Beehive CU Closed

The National Credit Union Administration (NCUA) was appointed liquidating agent of Beehive Credit Union of Salt Lake City, by the Utah Department of Financial Institutions; and Security Service Federal Credit Union of San Antonio, Texas, immediately purchased and assumed Beehive’s assets, liabilities and members.

At closure, Beehive had approximately $145 million in assets and served 18,000 members.

The Commissioner of Utah Department of Financial Institutions took possession of Beehive Credit Union in order to protect members and the public, finding, among other things, that the credit union had a negative net worth and was not in a safe or sound condition to transact business. Its net worth ratio was -0.38 percent at the end of the third quarter of 2010 and 5.66 percent of its loans were 60 days or more past due.

This is the 18th federally insured credit union liquidation in 2010.

NCUSIF Assessments Will Be More Pro-Cyclical Than FDIC Assessments

During yesterday's Federal Deposit Insurance Corporation (FDIC) Board meeting, the FDIC stated that assessments for banks will be less pro-cyclical under its new system than assessments under the National Credit Union Share Insurance Fund (NCUSIF) system.

FDIC was responding to issues raised by two bank trade associations about competitive imbalances regarding the change in the minimum DIF reserve ratio which would exceed the top statutory reserve ratio of 1.50 percent for the NCUSIF.

Below is FDIC's discussion.

"Two trade groups also noted that the National Credit Union Share Insurance Fund (NCUSIF) reserve ratio is limited by statute to 1.5 percent and argued that a higher DIF reserve ratio could exacerbate competitive imbalances. The presence or absence of a cap on fund size is but one of several statutory differences between FDIC-insured institutions and federally insured credit unions. The FDIC has proposed lower assessment rates that would go into effect when the reserve ratio reaches 1.15 percent. The FDIC believes that these assessment rates are sufficiently moderate that any competitive effect is likely to be small. Moreover, this difference is likely to be more than offset by the lower assessment rates that the FDIC should be able to maintain during a downturn. 2010, for example, credit unions paid on average slightly less than 26 basis points of insured shares. Since almost all credit union deposits are insured, insured shares are analogous to domestic deposits as an assessment base. In comparison, the FDIC estimates that, in 2010, banks and thrifts will have paid an average assessment rate of slightly less than 18 basis points on a domestic-deposit-related assessment base. (Emphasis added) Under the assessment rates that the FDIC proposed in the October NPR, banks and thrifts would pay much lower average assessment rates during a future crisis similar in magnitude to the current one. The proposed system is less pro-cyclical than both the existing system and the NCUSIF system, which is a positive feature when considered across a complete business cycle.

The new system with a higher designated reserve ratio will result in less pro-cyclical assessments compared to the NCUSIF system. That means that FDIC-insured banks will pay slightly more in premium assessments than NCUSIF-insured credit unions during good times; however, banks will pay lower assessment rates during economic downturns than credit unions, when insured institutions can least afford to pay high deposit (share) insurance assessment rates.

In fact, even under FDIC's existing system, federally-insured credit unions in 2010 paid a higher average assessment rate than FDIC-insured banks -- slightly less than 26 basis points versus slightly less than 18 basis points.

Modified Business Loans

As I reported earlier, NCUA stated that as of September 2010 federally-insured credit unions had modified approximately $11.2 billion in loans. NCUA reported that modified business loans accounted for almost $1.9 billion of the $11.2 billion in loan modifications.

Evangelical Christian CU (Brea, CA) has the most modified business loans at almost $159 million. The following table provides a listing of the credit unions with the most modified business loans. (click to enlarge the image)













NCUA also reported that the delinquency rates on modified commercial real estate loans and on modified non-real estate business loans were 24.18 percent and 18.54 percent, respectively.

America First in Riverdale, Utah reported having the most delinquent modified business loans at $43.59 million in business loans -- all were commercial real estate loans. The following table provides a ranking of the 25 credit unions with the most delinquent business loans. (click to enlarge image)

Loan Modifications, September 2010

NCUA reported that federally insured credit unions had approximately $11.2 billion in loan modifications on their books as of the end of September 2010. In other words, 1.98 percent of all loans on the books of credit unions have been modified.

The following table ranks the top 50 credit unions -- both federally insured and privately insured -- with at least $25 million in outstanding total loans as of September 30, 2010 that have the highest percentage of modified loans. (click on image to enlarge)

As of the end of the third quarter, thirty-eight credit unions reported having at least 10 percent of their outstanding loans modified with Beehive Credit Union in Utah reporting that almost 28 percent of its loans (dollar volume) have been modified.