Improving Financial Conditions in Q1 2013

The financial performance of federally-insured credit unions continued to improve in the first quarter of 2013, according to information released by the National Credit Union Administration (NCUA).

For the first quarter, federally insured credit unions had a net income of almost $2.2 billion.

The industry’s return on average assets ratio was a healthy 83 basis points -- down 3 basis points from the prior quarter. However, the low interest rate environment continued to squeeze the net interest margins at credit unions, which fell by 16 basis points in the quarter to 2.77 percent.

Credit unions’ total assets grew by $33.6 billion in the first quarter to $1.06 trillion, while the industry's net worth rose to $108.8 billion, up $2.1 billion for the quarter. Because asset growth outpaced net worth growth, credit unions’ net worth ratio fell slightly during the quarter to 10.31 percent.

At the end of the first quarter of 2013, 95.8 percent of the industry remains well-capitalized reporting a net worth ratio above 7.0 percent. However, 92 credit unions were undercapitalized with net worth ratios below 6 percent, a net gain of 17 credit unions from the end of 2012.

Federally-insured credit unions reported their eighth consecutive quarter of loan growth. Total outstanding loans grew by $2.3 billion in the first quarter to $599.9 billion. On the other hand, deposits (shares) at federally-insured credit unions increased by $32.0 billion in the first quarter to nearly $910.0 billion. As the result, the loan-to-share ratio fell 214 basis points to 65.92 percent.

Asset quality continued to improve. The delinquency ratio of federally insured credit unions declined in the first quarter, shedding 14 basis points to 1.02 percent. Credit unions’ net charge-off ratio also dropped significantly by 12 basis points, to 0.61 percent. This improvement in asset quality caused credit unions to significantly reduce their provisions for loan losses.

NCUA Chairman Debbie Matz expressed concern about the unevenness of industry's performance, as larger credit unions outperformed the industry.

Matz said: "The 423 largest credit unions had a return on average assets of 100 basis points for the quarter. In comparison, 2,279 credit unions with less than $10 million in assets had a return on average assets of negative 14 basis points, and 3,007 credit unions with $10 million to $100 million in assets had a return on average assets of 30 basis points."

To review a summary of first quarter data, click here.

To read the press release.

2013 Insured Depositor Payoffs Ahead of Last Year's Pace

So far this year, the pace of credit union failures involving insured depositor payoffs is running ahead of last year's pace.

In 2013, six of the seven credit union liquidations have involved insured depositor payoffs. It would have been seven out of seven; but Kinecta acquired I.C.E. Federal Credit Union several days after NCUA had liquidated the credit union.

In comparison, there were only six credit union failures in 2012 that involved insured depositor payoffs.

As a general rule, insured depositor payoffs tend to be more expensive to the insurance fund than purchase and assumption agreements.

There are several possible reasons for the 2013 pace to be ahead of the 2012 pace. These failures arose out of the blue and did not give NCUA adequate time to shop the failed credit union. The insured depositor payoffs involved small credit unions that have very little franchise value and thus were not attractive to potential bidders.

I will be interested to see if this trend of insured depositor payoffs continues for the remainder of 2013.

CFE FCU Pays Almost $4 Million for Arena's Naming Rights

Another credit union has bought the naming rights to an arena.

The latest credit union is Central Florida Educators' (CFE) Federal Credit Union in Lake Mary, Florida. The $1.4 billion credit union paid $3.95 million over 7 years for the naming rights to a 10,000 seat arena at the University of Central Florida.

Going forward, the arena will be known as the CFE Federal Credit Union Arena -- or the CFE Arena for short.

While buying the naming rights will help to improve the credit union's brand visibility, is this the intended purpose of the credit union's tax exemption?

I don't believe so.

Read the press release.

Arrowhead Central CU Emerges from Conservatorship

Arrowhead Central Credit Union (San Bernardino, CA) emerged from conservatorship almost 3 years after NCUA assumed control of the credit union. NCUA placed Arrowhead Central Credit Union into conservatorship on June 25, 2010. Arrowhead Central CU is the first credit union since 2007 to emerge from NCUA conservatorship.

Read NCUA's press release.

Sub S Taxation Is Not the Same as CU Tax Exemption

In case you missed it, Tom Bengtson unloaded both barrels on an April 2013 article, "Banks and Credit Unions: Competition Not Going Away," appearing in the Federal Reserve Bank of St. Louis Regional Economist.

Bengtson writes that "[w]hile the article is generally an even-handed description of the competitive landscape for banks and credit unions, the authors veer off course in their description of the tax differences between banks and credit unions."

The paper stated that banks organized as S corporations and credit unions are similarly exempt from taxation.

Let's just say that this comparison got Tom Bengtson's goat.

"To suggest that a sub S bank and credit union have equal tax treatment is extremely misleading. From a practical perspective it is a lie and I don’t understand why two professionals at the Federal Reserve Bank of St. Louis would propagate such nonsense.

To suggest that sub S business owners (banks and otherwise) don’t pay federal income taxes is an insult to every sub S business owner out there, including your’s truly."

To read his commentary, click here.

Tiny Texas Credit Union Liquidated

The National Credit Union Administration (NCUA) liquidated Electrical Workers #527 Federal Credit Union of Texas City, Texas.

NCUA made the decision to liquidate Electrical Workers #527 Federal Credit Union and discontinue its operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

The credit union posted a loss of $295,220 in the first quarter of this year after reporting a loss of $122,290 for all of 2012. As of March 31, 2013, its net worth ratio was -36.07 percent.

Electrical Workers #527 Federal Credit Union was a low-income designated credit union serving 527 members and had assets of $622,857.

This is the seventh credit union to fail this year. The last Texas credit union to fail was Women's Southwest FCU of Dallas (TX) on October 31, 2012.

Read the press release.

Accounting Change Would Increase Burden on Community Banks and Credit Unions

Federal bank regulators have weighed in on the Financial Accounting Standards Board’s (FASB) proposed changes relating to classifying and measuring financial instruments. In a joint comment letter, the Federal Reserve, FDIC, National Credit Union Administration, and OCC found that many aspects of the FASB's Exposure Draft do not "achieve the FASB’s simplification objective; in certain cases the Exposure Draft would reduce the overall usefulness of financial reporting."

Among these concerns are that the guidance’s application “could have the unintended consequence of requiring relatively simple traditional lending products . . . to be measured entirely at [fair value through net income].” They also said that the guidance would “significantly increase complexity and operational burden for all financial institutions, but particularly for community banks and credit unions, without commensurate benefit to financial statement users.”

Read the letter.