The Washington Department of Financial Institutions (DFI) closed The Union Credit Union (TUCU) and appointed the National Credit Union Administration (NCUA) as the liquidating agent.
Upon being appointed as liquidating agent, NCUA entered into agreements with Alaska USA Federal Credit Union of Anchorage and Numerica Credit Union of Spokane to purchase and assume certain assets and liabilities of TUCU.
Linda Jekel, Director of DFI's Division of Credit Unions, said: “The Union struggled primarily due to the unemployment of its members. This resulted in a high number of delinquencies, loan charge-offs, negative earnings and low net worth.”
TUCU was insolvent with a net worth ratio of -0.35 percent as of September 2009. The failed credit union reported that 6.78 percent of its loans were 60 days or more delinquent and had losses of almost $474,000 through the first 9 months of 2010.
At the time of liquidation, TUCU had approximately $11,909,715 in assets and served 3,115 members.
This is the 17th federally insured credit union liquidation in 2010.
Saturday, October 30, 2010
Friday, October 29, 2010
Did Politics Influence Which Credit Unions Received TARP Funds?
Did political influence play a role as to which community development credit unions received funds from the TARP Community Development Capital Initiative (CDCI)?
This is the conclusion of a paper published by Linus Wilson at the University of Louisiana at Lafayette.
Forty-eight community development credit unions received almost $70 million in funds through CDCI, although 189 credit unions could have participated in the program. The study does state that it does not know which credit unions applied for the program, so it compares credit unions that received the funding to those that were eligible to receive CDCI funds.
The key finding of the paper was "that credit unions eligible for TARP funds were three times more likely selected for those funds if they were headquartered in the district of member of the U.S. House Financial Services Committee even after controlling for other factors. This indicates that political influence may have driven the selection of credit unions."
The study also concludes that credit unions that received CDCI funds had significantly lower loan-to-deposit ratios relative to other eligible credit unions that did not receive TARP investments. The author found this result to be startling, as these institutions were picked "because they would provide much needed loans to the credit union’s underserved communities.”
Furthermore, the study found mixed evidence as to whether regulators and Treasury selected stronger community development credit unions to receive these funds. The selected credit unions had significantly lower tangible net worth ratios; but also, had lower provisions for loans losses and fewer non-performing assets.
This is the conclusion of a paper published by Linus Wilson at the University of Louisiana at Lafayette.
Forty-eight community development credit unions received almost $70 million in funds through CDCI, although 189 credit unions could have participated in the program. The study does state that it does not know which credit unions applied for the program, so it compares credit unions that received the funding to those that were eligible to receive CDCI funds.
The key finding of the paper was "that credit unions eligible for TARP funds were three times more likely selected for those funds if they were headquartered in the district of member of the U.S. House Financial Services Committee even after controlling for other factors. This indicates that political influence may have driven the selection of credit unions."
The study also concludes that credit unions that received CDCI funds had significantly lower loan-to-deposit ratios relative to other eligible credit unions that did not receive TARP investments. The author found this result to be startling, as these institutions were picked "because they would provide much needed loans to the credit union’s underserved communities.”
Furthermore, the study found mixed evidence as to whether regulators and Treasury selected stronger community development credit unions to receive these funds. The selected credit unions had significantly lower tangible net worth ratios; but also, had lower provisions for loans losses and fewer non-performing assets.
Wednesday, October 27, 2010
Excluding Faith-based Business Loans from the Aggregate Business Loan Cap
Should loans to nonprofit religious organizations be excluded from the member business loan cap of 12.25 percent of assets?
Legislation (H.R. 3380) was introduced in the current Congress that would have done just that and will probably be re-introduced in the next Congress.
While these loans would still be subject to NCUA’s Member Business Loan Rules and Regulations, credit unions would be able to expand their business lending portfolio beyond 12.25 percent of assets by assuming more exposure to such faith-based loans.
However, HR 3380 does not define a nonprofit religious organization. So, if the bill ever becomes law, it will be up to National Credit Union Administration to define what a nonprofit religious organization is and that scares me.
Consider a private university or a radio station affiliated with a religious group, or simply a large religious institution. Any of these might be considered “nonprofit religious organizations.” Lending for projects at institutions such as these could be just as risky as lending to a private organization.
In fact, NCUA has repeatedly stated that business loans are riskier than consumer loans. By excluding faith-based loans from the aggregate business loan cap, this could potentially cause an increase concentration in business loans and thus could pose a safety and soundness concern.
While data on church loan delinquencies are difficult to come by, research by Thomson Reuters found that more than 100 churches nationwide have filed for bankruptcy since early 2009, while the foreclosure rate has tripled in the past three years.
For example, Evangelical Christian Credit Union in Brea, California has foreclosed on more than 20 churches over the past three years. The credit union reported that 8.18 percent of its loans were at least 60 days or more past due as of June 2010.
But a bigger question is why should a certain class of business loans be excluded from the aggregate business loan cap? Is there something socially desirable about faith-based loans, so that we want to promote these loans over other form of business loans?
What’s next, excluding loans to green energy?
I personally believe that policymakers should not be making Swiss cheese of the aggregate business loan cap to advance some social engineering objectives.
Legislation (H.R. 3380) was introduced in the current Congress that would have done just that and will probably be re-introduced in the next Congress.
While these loans would still be subject to NCUA’s Member Business Loan Rules and Regulations, credit unions would be able to expand their business lending portfolio beyond 12.25 percent of assets by assuming more exposure to such faith-based loans.
However, HR 3380 does not define a nonprofit religious organization. So, if the bill ever becomes law, it will be up to National Credit Union Administration to define what a nonprofit religious organization is and that scares me.
Consider a private university or a radio station affiliated with a religious group, or simply a large religious institution. Any of these might be considered “nonprofit religious organizations.” Lending for projects at institutions such as these could be just as risky as lending to a private organization.
In fact, NCUA has repeatedly stated that business loans are riskier than consumer loans. By excluding faith-based loans from the aggregate business loan cap, this could potentially cause an increase concentration in business loans and thus could pose a safety and soundness concern.
While data on church loan delinquencies are difficult to come by, research by Thomson Reuters found that more than 100 churches nationwide have filed for bankruptcy since early 2009, while the foreclosure rate has tripled in the past three years.
For example, Evangelical Christian Credit Union in Brea, California has foreclosed on more than 20 churches over the past three years. The credit union reported that 8.18 percent of its loans were at least 60 days or more past due as of June 2010.
But a bigger question is why should a certain class of business loans be excluded from the aggregate business loan cap? Is there something socially desirable about faith-based loans, so that we want to promote these loans over other form of business loans?
What’s next, excluding loans to green energy?
I personally believe that policymakers should not be making Swiss cheese of the aggregate business loan cap to advance some social engineering objectives.
Monday, October 25, 2010
Loans Going to Nonmembers
In an article in the Las Vegas Review Journal, John Edwards writes about three partners that invested in commercial real estate in Las Vegas and received financing through Ensign FCU, which was later seized by NCUA. The partners defaulted on the loan and NCUA is foreclosing on the property and is suing to enforce the personal guarantees.
The article points out that none of the three partners were members of Ensign and that they were referred to the credit union by a broker. The amount borrowed was $1.4 million.
This raises an important question:
How did these partners qualify to get a $1.4 million loan from Ensign FCU?
Moreover, this is not the first instance of loans going to people who were not credit union members.
NCUA has noted that loans went to people who were nonmembers of Norlarco CU and Huron River Area CU and that both credit unions subsequently failed. Air Force FCU is under a Letter of Understanding and Agreement for serving people who were not qualified for membership.
If this is an emerging pattern of credit unions flaunting their membership requirements, then this is very troubling and requires a closer examination of their preferential tax treatment.
The article points out that none of the three partners were members of Ensign and that they were referred to the credit union by a broker. The amount borrowed was $1.4 million.
This raises an important question:
How did these partners qualify to get a $1.4 million loan from Ensign FCU?
Moreover, this is not the first instance of loans going to people who were not credit union members.
NCUA has noted that loans went to people who were nonmembers of Norlarco CU and Huron River Area CU and that both credit unions subsequently failed. Air Force FCU is under a Letter of Understanding and Agreement for serving people who were not qualified for membership.
If this is an emerging pattern of credit unions flaunting their membership requirements, then this is very troubling and requires a closer examination of their preferential tax treatment.
Friday, October 22, 2010
IG Report: Key Risks Not Adequately Identified or Corrected in U.S. Central's Failure
A report on the failure of U.S. Central Federal Credit Union from the National Credit Union Administration's (NCUA) Inspector General (IG) found that examiners from the Office of Corporate Credit Unions (OCCU) and staff from Office of Capital Markets (OCM) failed to "adequately identify or correct key risks to U.S. Central's investment portfolio." As of June 30, 2010, NCUA stated that the Temporary Corporate Credit Union Stabilization Fund had recorded a loss of $1.45 billion for U.S. Central.
Excessive exposure to risky securities caused U.S. Central's failure.
The study largely did not reveal anything that was not already publicly known about the demise of U.S. Central. The failure of U.S. Central arose from its excessive holdings of private label sub-prime and Alt-A mortgage-backed securities (MBS).
The report noted U.S. Central's business strategy shifted in 2006 towards more aggressive growth. To help fuel this growth agenda, the IG report states that twice in 2006 at the recommendation of management, the Asset/Liability Committee and the Board approved increasing the limits on non-agency MBS that could be held in portfolio. In April 2006, the limits were increased from 7 times capital to 8 times capital. Later that year, limits rose from 8 times to 10 times capital. Setting the limit at 10 times capital meant that approximately half of U.S. Central's assets were in non-agency MBS. In other words, U.S. Central was increasing its exposure to these non-agency MBS just at the time the market for non-prime, non-agency MBS became dislocated.
The report also states that management did not recognize the impact of potential deterioration of the value of the underlying collateral on U.S. Central’s capital and ability to meet its liquidity needs. As U.S. Central’s investment portfolio declined in value, so did its borrowing capacity, as established lenders reduced their lines. As result, U.S. Central became heavily dependent on discount window borrowings from the Federal Reserve Bank of Kansas City in 2008. The report further discloses that the NCUSIF was required to lend U.S. Central $3.7 billion in December, 2008 to ensure that the U.S. Central could met year end liquidity demand.
An interesting nugget from the IG study is that in April 2007, U.S. Central launched Sandlot Funding LLC (Sandlot), an off-balance sheet asset-backed commercial paper (ABCP) conduit, which was the first of its kind in the corporate credit union network. Aside from the bad timing to form an ABCP conduit in 2007, the report questions "whether U.S. Central’s management and Board had the expertise to venture into the business of issuing commercial paper and managing an ABCP conduit."
The IG report concluded: "[W]e believe this growth strategy and accompanying investment decisions to purchase higher yielding securities to such extraordinary levels was contradictory to U.S. Central’s fundamental purpose as a wholesale corporate credit union, which was serving as a secure investment option and a source of liquidity for retail corporate credit unions, and support for the not for profit credit union structure." (page 2).
Examiners failed to identify and correct key risks in timely manner.
The study points out that a corporate credit union that qualifies for Type III supervision, which U.S. Central met the requirement, is assigned an on-site capital market specialist on a full-time basis to monitor and evaluate the corporate credit union's financial condition. (see footnote 7 on page 7)
Prior to the March 2008 examination, there were few criticisms of U.S. Central's management or operations. In fact, OCCU examiners and OCM staff noted no significant concerns regarding U.S. Central’s investment function or its strategy to purchase large amounts of securities backed by sub-prime residential loans. The report cites the following from an earlier exam report.
By the time the OCCU examiners and OCM staff identified and required corrective action on U.S. Central’s investment portfolio related to its concentration of mortgage-backed securities, it was too late. The IG report states that when the Document of Resolution was issued in July 2008, the MBS market had deteriorated to the point where these securities were no longer being actively traded.
The report is critical of the heavy reliance by OCCU examiners and OCM staff, as well as U.S. Central's management, on high credit ratings to determine credit risk in the portfolio.
However, the report does strike a somewhat sympathetic tone noting that NCUA examiners and staff did not have the appropriate regulatory support, such as more specific investment concentration limits, and lacked the regulatory leverage to limit or stop the growth of U.S. Central’s purchase of sub-prime MBS.
Excessive exposure to risky securities caused U.S. Central's failure.
The study largely did not reveal anything that was not already publicly known about the demise of U.S. Central. The failure of U.S. Central arose from its excessive holdings of private label sub-prime and Alt-A mortgage-backed securities (MBS).
The report noted U.S. Central's business strategy shifted in 2006 towards more aggressive growth. To help fuel this growth agenda, the IG report states that twice in 2006 at the recommendation of management, the Asset/Liability Committee and the Board approved increasing the limits on non-agency MBS that could be held in portfolio. In April 2006, the limits were increased from 7 times capital to 8 times capital. Later that year, limits rose from 8 times to 10 times capital. Setting the limit at 10 times capital meant that approximately half of U.S. Central's assets were in non-agency MBS. In other words, U.S. Central was increasing its exposure to these non-agency MBS just at the time the market for non-prime, non-agency MBS became dislocated.
The report also states that management did not recognize the impact of potential deterioration of the value of the underlying collateral on U.S. Central’s capital and ability to meet its liquidity needs. As U.S. Central’s investment portfolio declined in value, so did its borrowing capacity, as established lenders reduced their lines. As result, U.S. Central became heavily dependent on discount window borrowings from the Federal Reserve Bank of Kansas City in 2008. The report further discloses that the NCUSIF was required to lend U.S. Central $3.7 billion in December, 2008 to ensure that the U.S. Central could met year end liquidity demand.
An interesting nugget from the IG study is that in April 2007, U.S. Central launched Sandlot Funding LLC (Sandlot), an off-balance sheet asset-backed commercial paper (ABCP) conduit, which was the first of its kind in the corporate credit union network. Aside from the bad timing to form an ABCP conduit in 2007, the report questions "whether U.S. Central’s management and Board had the expertise to venture into the business of issuing commercial paper and managing an ABCP conduit."
The IG report concluded: "[W]e believe this growth strategy and accompanying investment decisions to purchase higher yielding securities to such extraordinary levels was contradictory to U.S. Central’s fundamental purpose as a wholesale corporate credit union, which was serving as a secure investment option and a source of liquidity for retail corporate credit unions, and support for the not for profit credit union structure." (page 2).
Examiners failed to identify and correct key risks in timely manner.
The study points out that a corporate credit union that qualifies for Type III supervision, which U.S. Central met the requirement, is assigned an on-site capital market specialist on a full-time basis to monitor and evaluate the corporate credit union's financial condition. (see footnote 7 on page 7)
Prior to the March 2008 examination, there were few criticisms of U.S. Central's management or operations. In fact, OCCU examiners and OCM staff noted no significant concerns regarding U.S. Central’s investment function or its strategy to purchase large amounts of securities backed by sub-prime residential loans. The report cites the following from an earlier exam report.
“U.S. Central’s investment function remains conservative with the portfolio consisting of primarily the highest rated securities. Investment transactions are subject to reasonable pre-purchase analysis in accordance with regulatory and policy requirements. Additionally, U.S. Central’s credit function provides adequate ongoing monitoring of all investment exposures which subject the corporate to credit risk.”
By the time the OCCU examiners and OCM staff identified and required corrective action on U.S. Central’s investment portfolio related to its concentration of mortgage-backed securities, it was too late. The IG report states that when the Document of Resolution was issued in July 2008, the MBS market had deteriorated to the point where these securities were no longer being actively traded.
The report is critical of the heavy reliance by OCCU examiners and OCM staff, as well as U.S. Central's management, on high credit ratings to determine credit risk in the portfolio.
However, the report does strike a somewhat sympathetic tone noting that NCUA examiners and staff did not have the appropriate regulatory support, such as more specific investment concentration limits, and lacked the regulatory leverage to limit or stop the growth of U.S. Central’s purchase of sub-prime MBS.
Thursday, October 21, 2010
Problem Credit Unions Rose in September 2010
During the October 21 NCUA Board meeting, NCUA reported that the number of problem credit unions increased, as did assets and shares (deposits) in problem credit unions. A problem credit union is defined as having a CAMEL 4 or 5 rating.
NCUA reported that the number of problem credit unions increased by 14 during the month of September to 374. A year earlier, there were 326 problem credit unions.
Shares and assets in problem credit unions rose by $500 million each in September to $40 billion and $45.3 billion, respectively.
Approximately 5 percent of the industry’s assets and 5.32 percent of shares are in problem credit unions.
The number of $1 billion plus problem credit unions was 13 as of September -- a reduction of one -- and these 13 credit unions held $18 billion in shares (or 45 percent of the shares in problem credit unions). The net increase in problem credit unions came from institutions with $500 million or less in assets, which added 15 credit unions with $1.3 billion in shares.
NCUA reported that the number of problem credit unions increased by 14 during the month of September to 374. A year earlier, there were 326 problem credit unions.
Shares and assets in problem credit unions rose by $500 million each in September to $40 billion and $45.3 billion, respectively.
Approximately 5 percent of the industry’s assets and 5.32 percent of shares are in problem credit unions.
The number of $1 billion plus problem credit unions was 13 as of September -- a reduction of one -- and these 13 credit unions held $18 billion in shares (or 45 percent of the shares in problem credit unions). The net increase in problem credit unions came from institutions with $500 million or less in assets, which added 15 credit unions with $1.3 billion in shares.
Sunday, October 17, 2010
Interesting Thoughts from Credit Union CEO on NCUSIF
Henry Wirz, CEO of SAFE Credit Union in North Highlands, California, expressed some interesting thoughts about the National Credit Union Share Insurance Fund (NCUSIF) in a letter to the Credit Union Journal. He advocated that credit unions should change the way they fund the NCUSIF from the one percent capitalization deposit to expensing premiums. He also writes that having the insurer and regulator under a single entity, NCUA, is a problem. He believes that this structure has contributed to regulatory forbearance.
Below is the letter.
Reprinted with Permission, Credit Union Journal, Oct. 11, 2010.
Below is the letter.
Reprinted with Permission, Credit Union Journal, Oct. 11, 2010.
(Washington league CEO) John Annaloro is right (see related story [paid subcription]). The insurance fund deposit is procyclical. The insurance fund has an operating level of between 1.20 and 1.30% of insured shares. But only about one-sixth of the fund has been expensed by credit unions, the rest is carried as an asset. When a big crisis occurs we have to either take a big expense hit or we amortize the cost over the next seven years as we did with the corporate expense. Either alternative is bad accounting. GAAP calls for matching the expense with the period in which the expense is incurred. We should switch to a premium-based insurance fund and incur an annual premium.
The other problem with the insurance fund is that we have the regulator and the insurance fund as one entity. NCUA has failed to exercise prompt corrective action, because it is in NCUA's best interest to hide failures and to get rid of problems through mergers. The NCUA Inspector General has repeatedly cited NCUA for contributing to credit union failures through bad examination procedures. Granted, the main cause of failures is bad management, but forbearance and lack of prompt corrective action increases the cost of failures and the frequency of failures. NCUA has no incentive to be transparent about the costs of failures because that too is a sign of failure. FDIC is transparent and is prompt with corrective action because FDIC is independent of the regulator.
John Annaloro is right and the rest of the trades should support major changes to the insurance fund. We need a premium-based insurance fund and we need an independent insurance fund. We also need more changes in the NCUA examination and oversight function.
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