A recent Federal Reserve Bank of San Francisco's Economic Letters on credit union mergers concluded that credit union mergers have shifted from, on average, only benefiting merger targets to also benefiting acquirers to some extent.
The paper looks at 9,412 credit union mergers from 1984 to 2009. The paper put credit union mergers into three categories -- absorptions, in which targets had less than 10% of the acquirer’s assets; acquisitions, in which targets had 10–50% of the acquirer’s assets; and mergers of equals, in which targets had more than half of the acquirer’s assets.
The study found that absorptions accounted for 69% of targets, but only 33% of target assets; acquisitions accounted for 25% of targets and 40% of target assets; and mergers of equals accounted for 6% of targets and 22% of target assets.
The study found that "in the first year after mergers, aggregate noninterest expenses fell by 0.02 percentage point in absorptions, 0.13 in acquisitions, and 0.20 in mergers of equals."
The study also found that five years after a merger of equals the cost savings had been completely dissipated, while acquisitions had retained a larger portion, if not all, of their cost savings.
Read the article.
Wednesday, September 14, 2011
Tuesday, September 13, 2011
Efficiency Ratio, June 2011
The California Department of Financial Institutions (DFI) announced that it is incorporating the efficiency ratio into its examination of state chartered credit unions.
The state regulator noted that examiners often commented on credit union efficiency, but were not able to quantify performance. Using the efficiency ratio will give examiners another tool to better identify and communicate the earnings performance of credit unions.
Specifically, the efficiency ratio measures the cost of generating an additional dollar of revenue. The efficiency ratio equals total non-interest expense divided by [(total interest income - total interest expense) + fee income + other operating income + other non-operating income].
The DFI stated that the efficiency ratio has a long history of being used within the financial services industry as a key earnings metric, although NCUA does not consider it a key ratio. The DFI , however, stated that the efficiency ratio is only a part of the picture and does ignore non-financial considerations by credit unions.
As of June 2011, the unweighted average efficiency ratio for the credit union industry was 90.53%. The median efficiency ratio for the credit union industry was 86.10%.
As a general rule, the larger the credit union, the lower the efficiency ratio.
Below is some benchmarking statistics by asset size groups as of June 2011.
For credit unions with $1 billion or more in assets, the average efficiency ratio was 66.30% but half had an efficiency ratio in excess of 66.59%. Credit unions with an efficiency ratio at or below 60.10% were in the top (first) quartile. Star One Credit Union had the lowest efficiency ratio at 27%, while Indiana Members Credit Union had the highest efficiency ratio at 93.10%.
For credit unions with assets between $500 million and $1 billion, the average and median efficiency ratios were 73.60% and 73.94%, respectively.
For credit unions with assets between $250 million and $500 million, the average and median efficiency ratios were 76.61% and 77.91%, respectively.
For credit unions with assets between $100 million and $250 million, the average and median efficiency ratios were 79.90% and 80.08%, respectively.
For credit unions with assets between $50 million and $100 million, the average and median efficiency ratios were 83.29% and 84.05%, respectively.
For credit unions with assets between $10 million and $50 million, the average and median efficiency ratios were 87.17% and 87.4%, respectively.
For credit unions under $10 million, the average and median efficiency ratios were 103.16% and 93.75%, respectively.
The state regulator noted that examiners often commented on credit union efficiency, but were not able to quantify performance. Using the efficiency ratio will give examiners another tool to better identify and communicate the earnings performance of credit unions.
Specifically, the efficiency ratio measures the cost of generating an additional dollar of revenue. The efficiency ratio equals total non-interest expense divided by [(total interest income - total interest expense) + fee income + other operating income + other non-operating income].
The DFI stated that the efficiency ratio has a long history of being used within the financial services industry as a key earnings metric, although NCUA does not consider it a key ratio. The DFI , however, stated that the efficiency ratio is only a part of the picture and does ignore non-financial considerations by credit unions.
As of June 2011, the unweighted average efficiency ratio for the credit union industry was 90.53%. The median efficiency ratio for the credit union industry was 86.10%.
As a general rule, the larger the credit union, the lower the efficiency ratio.
Below is some benchmarking statistics by asset size groups as of June 2011.
For credit unions with $1 billion or more in assets, the average efficiency ratio was 66.30% but half had an efficiency ratio in excess of 66.59%. Credit unions with an efficiency ratio at or below 60.10% were in the top (first) quartile. Star One Credit Union had the lowest efficiency ratio at 27%, while Indiana Members Credit Union had the highest efficiency ratio at 93.10%.
For credit unions with assets between $500 million and $1 billion, the average and median efficiency ratios were 73.60% and 73.94%, respectively.
For credit unions with assets between $250 million and $500 million, the average and median efficiency ratios were 76.61% and 77.91%, respectively.
For credit unions with assets between $100 million and $250 million, the average and median efficiency ratios were 79.90% and 80.08%, respectively.
For credit unions with assets between $50 million and $100 million, the average and median efficiency ratios were 83.29% and 84.05%, respectively.
For credit unions with assets between $10 million and $50 million, the average and median efficiency ratios were 87.17% and 87.4%, respectively.
For credit unions under $10 million, the average and median efficiency ratios were 103.16% and 93.75%, respectively.
Friday, September 9, 2011
Special Premium for Privately Insured CUs
American Mutual Share Insurance Corporation (ASI) announced a Special Premium Assessment for 2011 of 15 basis points on total shares (deposits) as of June 30, 2011. The premium will be assessed of all primary insured credit unions of record on September 30, 2011, subject to final regulatory approvals.
The premium assessment does not apply to excess share insurance policyholder credit unions insured by Excess Share Insurance Corporation (ESI) or ASI.
ASI stated that the special premium assessment was due to lower yields on its government bond portfolio and weaknesses at a small number of member credit unions in select markets, which have required a more aggressive funding of loss reserves by ASI.
Read the press release.
The premium assessment does not apply to excess share insurance policyholder credit unions insured by Excess Share Insurance Corporation (ESI) or ASI.
ASI stated that the special premium assessment was due to lower yields on its government bond portfolio and weaknesses at a small number of member credit unions in select markets, which have required a more aggressive funding of loss reserves by ASI.
Read the press release.
Thursday, September 8, 2011
Material Loss Review Issued on Constitution Corporate FCU
NCUA's Office of the Inspector General (IG) issued its report on the failure of Constitution Corporate FCU. NCUA estimated as of July 2011 that the failure of Constitution Corporate FCU resulted in a loss of $145 million to the Temporary Corporate Credit Union Stabilization Fund.
This IG report is similar to the other IG reports that examined the failures of other corporate credit unions.
The Material Loss Review cites that management and Board failed to identify and manage their risk exposure to the mortgage-backed securities (MBS) prior to the market dislocation in mid 2007. At that time, Constitution Corporate had significant holdings of private label MBS including Alt-A and subprime paper.
Constitution Corporate's decision to expand its investments into private label MBS was driven by the need to be rate competitive with other corporate credit unions that were actively soliciting Constitution Corporate's members.
The IG report notes that:
1. there was an over-reliance on credit ratings by management when purchasing securities and monitoring credit risk in the investment portfolio;
2. management did not set prudent sector concentration limits;
3. management did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of MBS held in the investment portfolio; and
4. management did not recognize the risk they were undertaking with significant investments in complex MBS, with a substantial portion of these securities backed by subprime assets.
The report also criticizes NCUA for failing to assess or timely identifying key risks associated with Constitution Corporate FCU's investment portfolio, until it was too late.
Read the report.
This IG report is similar to the other IG reports that examined the failures of other corporate credit unions.
The Material Loss Review cites that management and Board failed to identify and manage their risk exposure to the mortgage-backed securities (MBS) prior to the market dislocation in mid 2007. At that time, Constitution Corporate had significant holdings of private label MBS including Alt-A and subprime paper.
Constitution Corporate's decision to expand its investments into private label MBS was driven by the need to be rate competitive with other corporate credit unions that were actively soliciting Constitution Corporate's members.
The IG report notes that:
1. there was an over-reliance on credit ratings by management when purchasing securities and monitoring credit risk in the investment portfolio;
2. management did not set prudent sector concentration limits;
3. management did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of MBS held in the investment portfolio; and
4. management did not recognize the risk they were undertaking with significant investments in complex MBS, with a substantial portion of these securities backed by subprime assets.
The report also criticizes NCUA for failing to assess or timely identifying key risks associated with Constitution Corporate FCU's investment portfolio, until it was too late.
Read the report.
Wednesday, September 7, 2011
IG Report: Ethic Breaches Played a Role in Certified FCU's Failure
The Inspector General (IG) found that Certified FCU failed because of weak internal controls, weak board oversight, and inadequate risk management practices. The failure of Certified FCU resulted in a loss of $9 million for the National Credit Union Share Insurance Fund.
The IG report found that improprieties and fraud played a major role in the credit unions failure. According to the IG report, allegations of fraud and improprieties first surfaced through anonymous telephone calls to the NCUA in April and May of 2005. However, a 2005 investigation by NCUA found no evidence to substantiate the fraud allegations, although they determined the CEO had abused his position to enrich himself personally at the credit union’s expense and potentially engaged in money laundering. The report notes that NCUA officials failed to take decisive action about these ethical breaches and the CEO stayed in his position until May 2010.
A 2010 forensic review found evidence that there was a breach in the fiduciary duties by the CEO, including check kiting and receiving "potential kick backs from vendors and from loan origination fees and commissions paid to one of the Credit Union’s loan officers."
For example,
Additionally, the report notes that the credit union failed to manage liquidity risk. High cost nonmember deposits, which I've previously written about with respect to other credit union failures, rose to 18 percent of total deposits increased the liquidity problems confronting the credit union, especially given its heavy concentration of fixed rate real estate loans.
Additionally, the IG report found that NCUA examiners failed to:
1. adequately assess the management component of CAMEL rating system;
2. adequately consider external audit findings and reviews when developing their examination procedures; and
3. appropriately apply remedies when their fraud investigation unearthed serious safety and soundness concerns due to the CEO’s business practices and ethical behavior.
Read the IG Report.
The IG report found that improprieties and fraud played a major role in the credit unions failure. According to the IG report, allegations of fraud and improprieties first surfaced through anonymous telephone calls to the NCUA in April and May of 2005. However, a 2005 investigation by NCUA found no evidence to substantiate the fraud allegations, although they determined the CEO had abused his position to enrich himself personally at the credit union’s expense and potentially engaged in money laundering. The report notes that NCUA officials failed to take decisive action about these ethical breaches and the CEO stayed in his position until May 2010.
A 2010 forensic review found evidence that there was a breach in the fiduciary duties by the CEO, including check kiting and receiving "potential kick backs from vendors and from loan origination fees and commissions paid to one of the Credit Union’s loan officers."
For example,
"The CEO had a consulting company, which contracted for a 20 percent share of commissions paid to the loan officer’s mortgage servicing business. The loan officer generated low quality loans with high origination fees, which were then approved by the CEO. The loan origination fees were paid by Certified in the form of commissions to the loan officer’s company, which then paid the CEO’s consulting business its 20 percent share."
Additionally, the report notes that the credit union failed to manage liquidity risk. High cost nonmember deposits, which I've previously written about with respect to other credit union failures, rose to 18 percent of total deposits increased the liquidity problems confronting the credit union, especially given its heavy concentration of fixed rate real estate loans.
Additionally, the IG report found that NCUA examiners failed to:
1. adequately assess the management component of CAMEL rating system;
2. adequately consider external audit findings and reviews when developing their examination procedures; and
3. appropriately apply remedies when their fraud investigation unearthed serious safety and soundness concerns due to the CEO’s business practices and ethical behavior.
Read the IG Report.
Tuesday, September 6, 2011
Association Bond Satisfies Field of Membership Issues Related to Rare CU Bank Merger
Credit Union Journal (paid subscription) is reporting that United FCU is using an associational common bond as a vehicle to allow all the depositors of Griffith Savings Bank to join the credit union.
The depositors of Griffith Savings Bank by joining the American Consumer Council become eligible for membership in United FCU, thereby satisfying the field of membership issues related to this rare transaction. The transaction is still awaiting regulatory approval.
This is just another example of how some credit unions have used an associational common bond to make a mockery out of the concept of a common bond and to allow them to serve the public at large.
The depositors of Griffith Savings Bank by joining the American Consumer Council become eligible for membership in United FCU, thereby satisfying the field of membership issues related to this rare transaction. The transaction is still awaiting regulatory approval.
This is just another example of how some credit unions have used an associational common bond to make a mockery out of the concept of a common bond and to allow them to serve the public at large.
Friday, September 2, 2011
Credit Unions Performance in the 2nd Quarter
NCUA is reporting that key indicators for federally insured credit unions (FICUs) either stabilized or improved in the second quarter of 2011.
FICUs reported net income of $1.88 billion for the second quarter bringing year-to-date profits to $3.58 billion. The return on assets rose from 74 basis points at the end of the first quarter to 77 basis points at the end of the second quarter. In comparison, the return on assets was 41 basis points a year ago.
Net interest margin was virtually unchanged increasing by 1 basis point during the quarter to 3.17 percent, while net operating expenses as a percent of average assets was unchanged at 2.43 percent. The low interest rate environment caused the cost of funds as a percent of average assets to fall 25 basis points from December 2010 to 0.96 percent as of June 2011. FICUs also reported reducing their provisions for loan and lease losses during the second quarter.
The stronger earning at FICUs caused the net worth of FICUs to increase by 2 percent during the quarter to $95.6 billion. Coupled with slower asset growth, the net worth ratio for FICUs rose by 17 basis points to 10.14 percent at the end of the second quarter.
Credit unions reported that assets and shares (deposits) at credit unions rose during the quarter. Assets increase by 0.3 percent to $942.5 billion, while shares increased by 0.1 percent to $812.2 billion.
NCUA noted that loans edged higher by 0.7 percent during the second quarter to $564 billion -- reversing three consecutive quarter of declining loan volume. Outstanding new car loans and other real estate loans fell during the second quarter, while used car loans, first mortgages, and credit card loans increased during the quarter.
NCUA reported that almost $8.9 billion in loans was sixty days or more past due -- down from $9.1 billion in the first quarter. The delinquent loan ratio fell for the second consecutive quarter to 1.58 percent, a 5 basis point reduction from the first quarter. However, loans that are 12 months or more past due rose during the quarter from $1.54 billion to $1.59 billion.
Credit unions reported a slowing in the pace of charge-offs during the second quarter. Charge-offs for the second quarter were less than $1.5 billion compared to slightly more than $1.6 billion for the first quarter of 2011.
Read the press release.
FICUs reported net income of $1.88 billion for the second quarter bringing year-to-date profits to $3.58 billion. The return on assets rose from 74 basis points at the end of the first quarter to 77 basis points at the end of the second quarter. In comparison, the return on assets was 41 basis points a year ago.
Net interest margin was virtually unchanged increasing by 1 basis point during the quarter to 3.17 percent, while net operating expenses as a percent of average assets was unchanged at 2.43 percent. The low interest rate environment caused the cost of funds as a percent of average assets to fall 25 basis points from December 2010 to 0.96 percent as of June 2011. FICUs also reported reducing their provisions for loan and lease losses during the second quarter.
The stronger earning at FICUs caused the net worth of FICUs to increase by 2 percent during the quarter to $95.6 billion. Coupled with slower asset growth, the net worth ratio for FICUs rose by 17 basis points to 10.14 percent at the end of the second quarter.
Credit unions reported that assets and shares (deposits) at credit unions rose during the quarter. Assets increase by 0.3 percent to $942.5 billion, while shares increased by 0.1 percent to $812.2 billion.
NCUA noted that loans edged higher by 0.7 percent during the second quarter to $564 billion -- reversing three consecutive quarter of declining loan volume. Outstanding new car loans and other real estate loans fell during the second quarter, while used car loans, first mortgages, and credit card loans increased during the quarter.
NCUA reported that almost $8.9 billion in loans was sixty days or more past due -- down from $9.1 billion in the first quarter. The delinquent loan ratio fell for the second consecutive quarter to 1.58 percent, a 5 basis point reduction from the first quarter. However, loans that are 12 months or more past due rose during the quarter from $1.54 billion to $1.59 billion.
Credit unions reported a slowing in the pace of charge-offs during the second quarter. Charge-offs for the second quarter were less than $1.5 billion compared to slightly more than $1.6 billion for the first quarter of 2011.
Read the press release.
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