SEATTLE - Despite the ongoing credit and housing crises, an economic slump and several financial institution failures, credit union supervisors from two closely watched states say they do not expect any further CU failures based on current conditions.
NASCUS Chairman George Reynolds, senior deputy commissioner for the Georgia Department of Banking and Finance, and Roger Little, deputy commissioner for the Michigan Office of Financial and Insurance Regulation, sat down with Credit Union Journal during the recent annual meeting of the National Association of State Credit Union Supervisors. Both acknowledged they are monitoring numerous trouble spots, but said their due diligence efforts have not changed materially in recent months.
Both Reynolds and Little are on the board of directors for NASCUS, with Reynolds serving as chairman.
Credit Union Journal: What is the general financial condition of credit unions in your states?
Reynolds: Our credit unions are doing well. We are careful when it comes to monitoring. We have seen some impact from real estate, but have not seen large levels of non-performing loans. We are really monitoring home equity lending, because that is one place where credit unions have significant levels of lending.
Little: Our credit unions' statistics are holding steady. We have a number of problem institutions, and a modest uptick in non-performing assets.
CUJ: Do you anticipate any additional failures?
Reynolds: We do not anticipate any credit union failures based on current conditions.
Little: We are not anticipating failures. Last year we had our first conservatorship in 20 years, but that was because of management issues, not financial reasons.
CUJ: Do you anticipate significant CAMEL downgrades?
Reynolds: This is one of those issues we are continuing to monitor. There has been some impact from the recessionary environment we are in. We are being careful and are looking at areas where problems could develop. Some credit unions are getting interested in member business lending. We make sure they do their homework and carefully monitor vendors to ensure financing capabilities.
Little: We do not anticipate any downgrades. The evidence so far shows credit unions are stable.
CUJ: What are your examiners asking in CUs now that they might not have been asking for a year ago?
Reynolds: We are asking about new lending activities and vendor relationships. Also, we are asking about out-of-territory lending. It is important that credit unions be in a position to monitor relationships, and out-of-territory lending makes it more difficult to manage risks, collateral position and compliance with conditions relative to credit.
Little: We are increasing our due-diligence over third-party relationships, director due diligence and governance issues.
CUJ: What new steps have you put into the exam process?
Little: There is nothing new in the exam process, because we have used a risk-based exam process for years.
Reynolds: Maybe we are monitoring new areas of lending, such as member business lending or SBA lending, especially if there is outsourcing involved. It is important there be familiarity and asking the right questions. This is something we are looking at in the exam process, and having more outreach with our credit unions.
Little: We are focusing more on director education and CUSOs. We are scrutinizing those relationships more closely.
CUJ: Are you conducting exams more often?
Reynolds: We have not changed-we still have an 18-month exam schedule, with the larger institutions being examined maybe a little more frequently. If institutions are experiencing problems, we might look more frequently, but that is a modest number.
Little: We have an 18-month exam schedule; 12 months for larger institutions. For those with a CAMEL rating of 3, 4 or 5, and therefore more risk, we examine more frequently. For CAMEL 3 credit unions we are on site every six months, for CAMEL 4 we are there quarterly. We have no CAMEL 5 credit unions.
CUJ: Are you tag-teaming with NCUA or doing any additional exams with NCUA to help provide more active monitoring?
Little: We work jointly with NCUA and have for many years.
Reynolds: We really haven't had a significant increase in the number of institutions that have expressed an interest in joint contact. There are two $1-billion credit unions in Georgia, and we normally go into those with NCUA on a joint basis.
CUJ: For those credit unions that are posting losses, is there a common theme or cause? What are you doing about those situations?
Reynolds: The biggest cause in the interest rate environment-margin has been compressed. Smaller credit unions have had more difficulty in meeting overhead. Real estate has had some impact, especially in inventory of completed houses. Of more concern in the inventory of developed lots, but that is a concern on the banking side more than credit unions.
The decline in housing value has had an impact on borrowers that have leveraged themselves on second mortgages. We are telling credit unions to be mindful of global borrowing-not just with them. Credit unions don't want to have a second mortgage behind an exploding first mortgage.
Little: The low interest rate environment has caused losses, but in our state we are dependent on manufacturing, especially the auto industry, so we have seen some increases in credit unions' loan loss provisions. Expenses and interest rate margin have been the biggest factors.
CUJ: In retrospect, if you could ask for additional information or make exam changes a year ago, would you? If so, what?
Little: Within the last two years, we have had to increase our emphasis on third-party diligence and director diligence. Many institutions have placed a reliance on third parties. Also, we are looking at accuracy in regulatory reporting, because some credit unions were not reporting accurately.
Reynolds: It would have been nice to talk about vendor management 18 to 24 months ago. We could have headed off some issues. We have seen a reliance on vendors without having background information, particularly vendors that deal with lending.
Not as widespread, but still an issue, is loan participations. Credit unions have a due-diligence responsibility, not the other institution, no matter who the institution is or what its reputation is.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
