Nearly a month after the NCUA placed Texans Credit Union in conservatorship, the regulator has begun the process of assessing the adequacy of the cooperative’s allowance for loan and lease losses account.
Based on Texans’ March 31 Call Report, the allowance decreased from $47 million to $41 million. Of the loans reviewed so far, the management team hired by the NCUA to oversee Texans has recommended additional funding. However, significant charge-offs of $21 million reduced the balance, said David Small, NCUA assistant director of public affairs. The net effect was a decrease in the March 31 balance.
"The financial statement reflects known and reasonably estimable losses, but more losses may be recognized over the next few months as we work through assessing all the assets," Small said.
Texans' net worth dropped from 2.75% to 2.00%, according to NCUA data. Small said Texans recognized a significant increase in the provision for loan and lease losses account, which affected the net income number and subsequently decreased net worth.
"This is to be expected as further evaluation of the loans continues through the normal operational scrub that comes with a conservatorship," Small said.
The NCUA placed Texans in conservatorship April 15. The management team is now addressing the operational and balance sheet deficiencies that led to the conservatorship.
"While disappointing at first glance, the first-quarter results for Texans Credit Union confirm the reasons why the National Credit Union Administration placed the institution into conservatorship," said C. Keith Morton, the agent for the conservator and NCUA regional director for Region IV in Austin, Texas. "In working to fix the issues that led to conservatorship, NCUA’s ultimate goal is to return Texans Credit Union to its members." The credit union continues to operate business as usual for its members, he added.
Meanwhile, conserving Texans likely meant that it could not be merged at par or there were circumstances that required immediate intervention, said David Bartoo, president of Merger Solutions Group. There are approximately 14 credit unions over $100 million in assets with net worth under 5%, he noted. One, Arrowhead Credit Union, is conserved, and four others were merged in the last four months.
"The problem with trying to merge out Texans is its size, location and field of membership," Bartoo said. "Unlike USA Federal, which fit very well into the location, size and FOM needs of Navy Federal Credit Union, Texans is nearly twice the size of USA Fed and, outside of [$6 billion Security Service FCU], is too large for another Texas credit union to absorb without significant incentives."
Texans’ scenario seems to mirror the situation of Arrowhead, "which the NCUA has managed very well," Bartoo said, adding that he expects Texans to remain conserved and under NCUA management, not merged into another credit union.
Bartoo pointed out that on the FDIC side, of the banks not merged at par, very few are merged or liquidated with costs up to 10% to 30% of assets.
"I feel that the actions by the NCUA will be done in the best interest of protecting the insurance fund and therefore all the credit unions that pay into it," Bartoo said. "For large credit unions to be conserved, there may be much more than just the 5300 trends and numbers to determine the real issues."
Texans’ commercial lending woes were consistent with the economic rollercoaster during the recent downturns, said Kent Moon, president/CEO of Member Business Lending LLC, a CUSO in South Jordan, Utah. Those lenders, both banks and credit unions, that put a heavy emphasis on loan-to-value are hammered when that ratio diminishes during a downturn, he offered. Recently, most took a substantial hit in income and net worth because of an over-optimism of appraisals.
Moon said while he does not know the specific details surrounding Texans’ troubles, generally speaking, there are five functions credit unions should be proactive on with their commercial portfolios: have very good and competent underwriting, have excellent auditing, be effective in monitoring the portfolio, identify anomalies and be able to react quickly, and develop exit strategies on risky loans.
"Based on what I know about Texans, they focused strictly on loan to value," Moon said. "Credit union data tends to be too optimistic. Because of the varying cycles, you can’t put too much emphasis on data. There needs to be more on historical trends and sustainability of cash flow. This equals well-supplied and adequate reserves."
Moon said the securitization market is where some lenders lost perspective. If some would have focused on historical trends and liquidity reserves and monitored both, issues could have been identified early on. A critical evaluation of loan-to-value is necessary, especially in expansive and competitive markets, he said.
Since Texans was placed in conservatorship by the NCUA, some have wondered who dropped the ball on the credit union’s commercial lending portfolio collapse. Moon said Texans’ condition is everyone’s responsibility. However, traditionally when you see problems of this nature, it usually emanates from a lack of knowledge from the board and their inability to communicate.
"They all like growth, but they may forget to do basic risk assessment over and above loan-to-value," Moon said. "The board must be knowledgeable and committed to helping management achieve very specific goals. Management has to be clear of the goals the board sets."
Rather than a simple vote, Moon suggested an in-depth response that shows if a committee has read the decision and understood it, and even provides additional statements saying why they approve the decision.