Florida CU Regulator Approves Florida CU's Acquisition of Georgia Bank

The Florida Office of Financial Regulation on December 23 approved the application of First Commerce Credit Union (Tallahassee, FL) to purchase certain assets and assume certain liabilities of The Citizens Bank (Nashville, GA).

First Commerce will purchase approximately $193 million in assets and assume approximately $186 million in liabilities.

Both the Georgia Department of Banking and Finance and the Florida Office of Financial Regulation approved First Commerce's request to expand its field of membership in relation to the proposed transaction.

The expanded field of membership includes people who live in the following GA counties of Atkinson, Berrien, Clinch, Colquitt, Cook, Lanier, and Tift (subject to an aggregate maximum of 5,500 new members per calendar year based on this expansion). AND all then-current customers of The Citizens Bank, as of the date of the successful purchase by the credit union.

At closing all customers of The Citizens Bank will temporarily become members of First Commerce. However with six months after the transaction being consummated, all depositors and borrowers of The Citizens Bank will have: (1) opted-in to become a member of the credit union; (2) not opted-in but will maintain a non-member deposit account with the credit union; or (3) not opted-in and their account relationship has been closed, paid off, or moved to another institution.

The purchase and assumption agreement still requires the authorization of the National Credit Union Administration and the Federal Deposit Insurance Corporation.

Centricity CU Donates $1 Million for Artificial Turf, Receives Naming Rights to Stadium

The Duluth News Tribune is reporting that Hermantown Community Schools has received a $1 million donation from Centricity Credit Union (Hermantown, MN), which will help pay for converting the football field to artificial turf at Hermantown High School.

Hermantown superintendent Kerry Juntunen said that in exchange for the donation, the stadium will carry the Centricity name for 15 years.

Read more.

Article Looks at Pay of CEO at AmeriCU

Syracuse.com is reporting that Mark Pfisterer, CEO of AmeriCU Credit Union (Rome, NY), earned $2.5 million in 2018 after earning $7.97 million in 2017.

The article noted that his 2018 salary was comparable to the salaries paid CEOs at much larger banks in the region. The CEO of $120 billion M&T Bank (Buffalo, NY) was paid $4.77 million in 2018, while the CEO of $9.6 billion NBT Bancorp (Norwich, CT) earned $2.2 million in 2018.

In comparison, AmeriCU had $1.7 billion in assets.

The article also compared his compensation to other tax exempt organizations in upstate New York.

Read more.

OIG Examines Joint Examination Process with State CU Regulators

The National Credit Union Administration (NCUA) Office of Inspector General (OIG) conducted an audit to assess the NCUA’s joint examination process with state supervisory authorities (SSAs).

The report found NCUA provides shared oversight of federally insured state-chartered credit unions (FISCUs) and that the NCUA effectively monitors FISCUs using off-site monitoring tools. However, the OIG determined there are aspects of the joint examination process with the SSAs that need improvement.

The OIG found that NCUA’s regional offices did not have updated operating agreements with each individual SSA that defined roles and responsibilities for joint on-site examinations of FISCUs. The OIG determined that NCUA had 18 signed operating agreements on file and 11 unsigned operating agreements on file. There were no operating agreement on file with 16 SSAs. Five state do not have FISCUs. The OIC concludes that because NCUA did not having updated and useable operating agreements with each SSA, there could be confusion regarding roles and responsibilities during joint on-site examinations. The OIG concluded that having an executed operating agreement in place would help bring consistency to the working relationship and across the joint examination process.

The OIG also determined supervisory examiners did not consistently document their decisions on follow-up actions recommended by examiners after completing WCC 26 reviews. OIG believed that it is a prudent and sound practice to consistently document supervisory examiner decisions regarding examiner recommendations. Doing so would ensure that examiners’ supervisory concerns would be consistently communicated and addressed.

The OIG recommended that NCUA management create a formal process to capture supervisory examiner decisions regarding recommended follow-up actions taken or not taken from work classification code 26 reviews to ensure concerns identified by examiners are properly documented. NCUA management agreed with the recommendation and indicated they will implement a formal process that addresses the recommendation by December 31, 2020.

Read more.

Wisconsin CU Regulator Removes MBL Cap for Two CUs

The Wisconsin Office of Credit Unions removed the member business loan (MBL) cap for two credit unions -- Summit Credit Union (Madison, WI) and Landmark Credit Union (New Berlin, WI).

The aggregate MBL cap for Wisconsin credit unions is 12.25 percent of assets.

According to a spokesperson for the Wisconsin Department of Financial Institutions, Summit CU was granted an exception to the aggregate MBL cap on August 19, 2016 for 18 percent of assets. The cap was removed on November 1, 2019.

Landmark CU was granted an exception to the aggregate MBL cap on April 8, 2015 for 15 percent of assets; it was subsequently raise to 18 percent of assets on March 31, 217 and removed on November 18, 2019.

Arizona FCU Buys Naming Rights to Theatre

Arizona Federal Credit Union has entered into an agreement with Live Nation to buy the naming rights to the former Comerica Theatre in Phoenix.

The venue will now be called Arizona Federal Theatre.

The terms of the agreement were not disclosed.

Read more.

Idaho Central CU Buys Naming Rights to Plaza at Ski Resort

Idaho Central Credit Union (Chubbuck, ID) has bought the naming rights to a plaza at ski resort.

The plaza outside of Bogus Basin’s JR Simplot Lodge will now be called Idaho Central Credit Union Plaza.

The 17,000 square foot plaza features a seating area, fireplaces, landscaping, and the Double R Ranch BBQ Smokehouse.

The sponsorship agreement is for multiple years, but the exact terms and price were not disclosed.

Read more.

89 Percent of CUs Profitable During First 3 Quarters on 2019

The National Credit Union Administration reported on December 17 that 89 percent of all federally insured credit unions were profitable during the first three quarters of 2019.

In comparison, 88 percent of all federally insured credit unions were profitable during the first 3 quarters of 2018.

All federally insured credit unions in Alaska, Maine, Nevada, New Hampshire, and Vermont reported positive net income during the first 3 quarters of this year.

Only 75 percent of credit unions in Arkansas were profitable.

Read more.

NY Times Examines Taxi King Role in the Bubble and His Relationship to CU

A December 5 New York Times investigative report on the rise and fall of New York's Taxi King, Evgeny A. Freidman, examines the role of Freidman in creating the taxi medallion bubble and his relationship to Progressive Credit Union.

This article is part of an investigative series on the disruption of New York City's taxi industry.

According to the article, Freidman turned to a family friend, Robert Familant, who was the CEO of Progressive Credit Union, to help finance his plans to take on more risk to increase the industry's profit and drive up the value of taxi medallions.

The article noted that between 1997 and 2004, Progressive’s loans enabled Freidman to buy about 100 medallions to expand his taxi fleet. The article further noted that Freidman during this time became a licensed broker helping some drivers to buy medallions, usually with loans from Progressive.

In 2006, Freidman embarked on a new strategy to increase the value of his taxi medallions. New York City was auctioning 54 medallion loans for $350,000. He won all 54 medallions by bidding $477,666.50 apiece.

According to the reporter, Progressive helped finance the purchases.

Records show that Freidman used this strategy at three additional auctions.

By overpaying, this inflated the value of taxi medallions enabling Freidman to borrow even more from lenders.

This inflating of the value of taxi medallions burdened purchasers of medallions with more debt.

This story would suggest that taxi medallion lending credit unions along with other lenders probably contributed to the taxi medallion bubble with their lending practices.

Read more (subscription may be required).

BankBeat Publisher: Time Is Right for A Serious Fight Against CUs

Tom Bengston, the publisher of BankBeat, wrote on December 16 that the time is right for a serious fight against credit unions.

He argues that in states where the credit union charter is more liberal than the federal charter, banker advocacy efforts should seek to rollback these state charters putting them on a par with the federal charter.

Second, Bengston states that "bankers in all states should work to level the taxation playing field for smaller institutions." But instead of taxing all credit unions, Bengston advocates banker efforts should focus on exempting smaller banks from taxation.

Finally, he proposes that the net income of larger credit unions should be subject to taxation. He notes that this would place these large credit unions on equal footing with large banks. Bengston suggests that the line for larger credit unions could be drawn at $500 million or $1 billion in assets.

Read the article.

University CU Receives Naming Rights to College Athletic Pavilion

Saint Mary's College will rename its sports pavilion after University Credit Union (Los Angeles, CA), as part of the partnership agreement.

The rebranded 3,500 seat pavilion, which is the home to the Saint Mary's men's basketball, women's basketball and volleyball teams, will be called University Credit Union Pavilion.

The agreement also includes sponsorship opportunities with the Athletic Department.

In addition, University Credit Union will provide multiple ATM locations throughout the campus, a future branch on campus and additional funding to the existing food pantry as well. An affinity alumni debit/credit card program will exist with benefits and incentives.

The price tag of the partnership and naming rights was not disclosed.

Read more.

At Least Half of CUs in 18 States and DC Had Fewer Members Compared to a Year Ago

The National Credit Union Administration (NCUA) reported on December 17 that almost half of the credit unions at the end of the third quarter 2019 had fewer members than a year earlier.

Credit union membership increased at the median by 0.1 percent compared to a year ago.

Most credit union reporting a year-over-year decline in membership tend to be small with almost 70 percent having less than $50 million in assets.

Eighteen states and the District of Columbia reported that at least half of their credit unions saw a decline in membership compared to a year ago.

At the median, credit union membership declined the most in Pennsylvania at negative 1.4 percent followed by Illinois at minus 1 percent.

In addition, NCUA reported that year-over-year median shares and deposits growth was negative at four states -- New Jersey (-2.1 percent), Connecticut (-0.7 percent), Arkansas (-0.6 percent), and North Carolina (-0.3 percent). Both Kentucky and Pennsylvania reported no change in median shares and deposits growth.

The following chart depicts the relationship between median year-over-year membership growth by state and median shares and deposits growth by state.

Read more.

NY CUs Gain Access to State's Banking Development District Program

New York Governor Andrew Cuomo on December 12 signed into law legislation, S.727-A/A.3320, that will allow credit unions to participate in the state Banking Development District (BDD) Program.

The BDD Program was created in 1997 to encourage financial institutions to establish branches in economically distressed communities throughout New York where there is a demonstrated need for banking services.

Institutions that are approved for a BDD designation are eligible to receive up to $10 million in subsidized public deposits and other benefits, including below market-rate deposits from New York state. These deposits are intended to lower the financial risk that the branch may incur when opening in an underserved community.

The legislation will mark the first time in state history that credit unions will be permitted to receive public deposits.

Read the memo on the legislation.

Coalition Wrote Senate to Pass the SAFE Act

A coalition of financial services and housing groups in a letter to Senate Banking Committee leaders on December 12 wrote urging them to provide a safe harbor for depository institutions seeking to serve legitimate cannabis related businesses in states where such activity is legal.

The groups urged lawmakers to pass the SAFE Banking Act—the bipartisan bill that was passed by the House earlier this year by a vote of 321 to 103—or a similar measure in the coming days.

‌“A safe harbor will enable law enforcement and states to effectively monitor and regulate businesses while simultaneously bringing billions into the regulated banking sector,” the groups wrote. “The SAFE Banking Act is a critical first step to ensure that legal cannabis marketplaces are safe, legal, and transparent.”

Read the letter.

Tucoemas FCU Settles EEOC Discrimination Lawsuit

The U.S. Equal Employment Opportunity Commission (EEOC) announced on December 13 the resolution of a sex, age and retaliatory discrimination lawsuit against Tucoemas Federal Credit Union (Visalia, CA).

The credit union has agreed to pay $450,000, along with certain injunctive relief, to resolve the complaint.

According to the EEOC, Tucoemas FCU failed to hire three qualified internal female applicants over the age of 50 and instead hired a younger male applicant with no prior credit union experience. The charge further claims the company retaliated against two of the female employees after they filed complaints with the EEOC, constructively forcing one employee to quit and firing another.

In addition to monetary relief, Tucoemas FCU has agreed to: retain an external equal employment opportunity consultant to monitor compliance with Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 (ADEA), and the decree; review and if necessary revise policies and procedures against all discrimination and retaliation prohibited by Title VII and the ADEA; provide training to all employees on sex and age discrimination and retaliation; and establish a centralized tracking system for recruitment, hiring, promotions, terminations, and sex and age discrimination complaints.

Read more.

Appeals Court Denies ABA's Request for a Rehearing En Banc of FOM Lawsuit

Credit union trades are reporting that the U.S. Court of Appeals for the D.C. Circuit denied the American Bankers Association’s appeal for a rehearing en banc of its lawsuit regarding the National Credit Union Administration’s field of membership (FOM) rule.

Highlights from December NCUA Board Meeting

The National Credit Union Administration (NCUA) Board on December 12 voted to delay for two-years the implementation of its risk-based capital rule until January 1, 2022.

The risk-based capital rule was scheduled to go into effect on January 1, 2020.

In addition, the normal operating level for the National Credit Union Share Insurance Fund (NCUSIF) will remain at 1.38 percent of insured deposits for 2020.

By law, the normal operating level must be set between 1.20 percent and 1.50 percent of insured deposits.

According to staff analysis, setting the normal operating level at 1.38 percent will preserve public confidence in the NCUSUIF, will prevent the impairment of the one-percent NCUSIF capitalization deposit, and will keep the NCUSIF equity ratio from falling below 1.20 percent during a moderate recession over a five-year period.

Also, the Board approved the agency's budget for 2020 and 2021. The combined operating, capital, and Share Insurance Fund administrative budgets for 2020 will be $347.4 million. The combined budgets for 2021 will be $360.1 million.

The agency's budget does not include a proposal from Board member Harper to increase staffing in the Office of Consumer Financial Protection, who would develop a dedicated consumer compliance examination for large, complex credit unions.

Read the proposal.

Is Your Institution Ready for the End of LIBOR?

The London InterBank Offer Rate (LIBOR) is likely to cease being an active index by the end of 2021.

I have not seen any guidance issued by the National Credit Union Administration on this issue; however, the Office of the Comptroller of the Currency (OCC) in its most recent Semi-Annual Risk Perspective for Fall 2019 stated the cessation of LIBOR may increase operational risk and other risks at financial institutions.

The OCC recommended that financial institutions perform an accurate inventory of balance-sheet assets, liabilities, and off-balance sheet contracts that could be affected by a movement to an alternative index, including assets serviced by third party providers. This inventory would allow a financial institution to determine its potential exposure to the end of LIBOR.

Additionally, the OCC noted that the anticipated end of LIBOR poses compliance and reputation risks associated with transitioning customers to a new rate or offering new products or services that are tied to a new and untested index. The agency advised that financial institution's risk assessment "should include analysis of customer impact, repapering contracts, updating system applications, revising and testing models, and ensuring appropriate contractual fallback language and disclosures to clients."

The OCC noted that many products may be affected by the transition away from LIBOR including adjustable rate mortgages, private student loans, credit cards, reverse mortgages, and home equity lines of credit.

The OCC wrote that disclosures and communication with consumers about the end of LIBOR and the adoption of an alternative reference rate need to be easily understood. Also, financial institution should limit expected pricing issues with observable and objective rules.

In addition, management should determine whether third-party providers are on track to modify their systems.

Read more.

Verve, a Credit Union Receives Regulatory Approval to Acquire a Chicago Bank

The Wisconsin Department of Financial Institutions approved on November 12 Verve, a Credit Union (Oshkosh, WI) purchase and assumption of South Central Bank (Chicago, IL).

ABA Says FOM Rule Seriously Flawed, NCUA Tells Appeal Court Rehearing Unwarranted

In a December 9 letter to the National Credit Union Administration (NCUA), The American Bankers Association (ABA) reiterated its strong opposition to two proposed amendments that would further expand the already loose fields of membership (FOM) from which credit unions can draw their customers.

NCUA proposed to re-adopt a recently repealed provision of its rules defining any combined statistical area as a single local community, provided it has a population of 2.5 million people or less.‌

NCUA also objected to the expansion of the population threshold to 1 million people for a rural district. ABA contended that this would allow whole states to be treated as rural districts.

NCUA also proposed to reaffirm its elimination of a requirement for credit unions serving a core-based statistical area to serve the urban core of the community, which would effectively allow credit unions to engage in redlining by allowing them to construct fields of membership consisting of wealthier suburbs without lower-income core neighborhoods.‌

ABA, which previously challenged the NCUA’s field of membership rule in federal court, noted that “these proposals are seriously flawed” and called for them to be withdrawn or significantly revised.

In a related news, NCUA on November 21 filed its response to the ABA’s petition for an en banc rehearing of its lawsuit challenging the NCUA's 2016 FOM rule.

In its en banc petition, ABA argued the three-judge panel’s decision “stretches Chevron deference beyond its limits.”

NCUA argued the unanimous panel correctly concluded that NCUA reasonably interpreted the terms “local community” and “rural district” under Chevron. NCUA claimed that it reasonably relied on population size, commuting patterns, population density, and economic activity to determine whether an area is a “local community” or “rural district.”

NCUA argued that the three-judge panel's decision does not warrant rehearing en banc.

Read ABA's comment letter.

Survey: Compliance Worries Rise in 2019

U.S. banks and credit unions are reporting increased anxiety levels over compliance obligations, according to a survey released on December 4, 2019 by Wolters Kluwer.

This year’s regulatory and risk management indicator score was 95, up 10 points from 2018.

Specific points of high concern contributing to the overall indicator score were the effects of new Home Mortgage Disclosure Act rules, overall risk management concerns, and ongoing challenges from compliance change management.

The report cited that nearly eight in 10 respondents will continue to prioritize cybersecurity risk over the next year. Other areas being prioritize over the next 12 months were credit risk, compliance risk, third-party risk and operational risk, which all saw double-digit percentage increases.

Among top obstacles in implementing effective compliance programs, 47 percent of respondents stated manual compliance processes and 45 percent cited inadequate staffing.

The survey was conducted nationwide between August 7 and September 3, 2019 and generated 704 responses.

Read the press release.

Credit Unions Lag in Employee Efficiency

A study by Moebs Services found that credit unions lag behind banks and thrifts in employee efficiency.

The study looked at assets per employee at banks, thrifts, and credit unions.

Moebs Services found that assets per employee were $9.7 million at thrifts, $8.8 million at banks, and $5.0 million at credit unions.

According to Moebs Services, credit unions with between $5 billion and $10 billion in assets are the most efficient with assets per employee of $7.1 million per employee. Banks and thrifts with between $25 billion and $50 billion in assets were the most efficient with assets per employee at $10.2 million per employee.

Consumer Credit for CUs Basically Flat for October

The Federal Reserve on December 6 is reporting that outstanding consumer credit at credit unions was basically unchanged as of October 2019.

Outstanding consumer credit at credit unions was $483.7 billion in October. In September, consumer credit was $483.6 billion.

Revolving credit at credit unions increased by $300 million during October to $64.7 billion.

On the other hand, outstanding nonrevolving credit was down $200 million to $419 billion.

FICUs Post Solid Financials in Third Quarter 2019

The National Credit Union Administration is reporting that assets, loans, and deposits at federally insured credit unions (FICUs) increased during the third quarter 2019.

At the end of the third quarter of 2019,

• assets were $1.54 trillion -- up from $1.52 trillion at the end of second quarter
• loans were $1.087 trillion -- up $20.5 billion during the quarter; and 
• deposits and shares were $1.29 trillion -- up $12.5 billion during the quarter.

Because loans grew faster than deposits, the loan-to-share ratio rose during the quarter to 84.11 percent from 83.33 percent.

The total number of FICUs was 5,281 -- down 94 from the start of this year and 27 during the third quarter.

Net income at FICUs was $11 billion through the first nine months of 2019.

The industry's return on average assets (ROA) was 0.98 percent -- up 1 basis point from the end of the previous quarter.

Factors improving profitability were higher net interest margins and Fee and other income, while higher operating expenses had a negative impact on the industry's ROA.

Net interest margins at credit unions edged higher to 3.19 percent as of September 2019 from 3.18 percent as of June 2019. Fee and other income as a percent of averaged assets rose 3 basis points during the quarter to 1.35 percent. Higher operating expenses eroded profitability of FICUs by 3 basis points.

The aggregate net worth for FICUs was $175.2 billion as of the end of the third quarter. This was up $3.8 billion during the quarter. As of September 2019, the industry's net worth ratio was 11.39 percent -- up 12 basis points from the prior quarter.

As of September 2019, 98.41 percent of credit unions had a net worth ratio of at least 7 percent -- the requirement for being well capitalized. Six credit unions had a net worth ratio below 2 percent as of September 2019.

Delinquent loans were $7.3 billion as of September 2019. This was up from $6.8 billion as of June 2019. As a result, the delinquency rate rose by 4 basis points during the quarter to 0.67 percent at the end of the third quarter.

Net charge-offs were $4.4 billion during the first 3 quarters of 2019. As of September 2019, the net charge-off rate was 0.55 percent -- almost unchanged from the prior quarter at 0.56 percent.

Chart Pack.

Read the quarterly summary.

CFPB Remittance Proposal Will Provide Reg Relief to Certain Banks and CUs

The Consumer Financial Protection Bureau (CFPB) on December 3 issues a proposed remittance rule that will provide regulatory relief to certain banks and credit unions.

The CFPB proposed a change to permanently allow depository institutions to estimate certain fees and exchange rates when making disclosures to their customers. Institutions are currently allowed to do so under a temporary provision of the rule, which is set to expire in July 2020.

In addition, the proposed rule would increase the threshold at which institutions are considered to be “remittance transfer providers” from 100 to 500. The CFPB noted that increasing this safe harbor threshold would reduce the regulatory burden on more than 400 banks and almost 250 credit unions that send a relatively small number of remittances each year.

According to CFPB analysis, all credit unions and a majority of the banks affected by the change in the safe harbor threshold have less than $10 billion in assets.

Read proposed rule.

Arizona Federal Credit Union Completes Acquisition of Pinnacle Bank

Arizona Federal Credit Union (Phoenix, AZ) completed its acquisition of Pinnacle Bank (Scottsdale, AZ) on November 30, 2019.

It is anticipated that the integration of computer systems, accounts, services, processes and branches will be completed in the third or fourth quarter of 2020.

Read more.

Report: CU Branches Not a Direct Substitute for Bank Branches

A report the the Federal Reserve stated that credit union branches are not direct substitutes for bank branches, especially in rural America.

The study examined the closure of bank branches between 2012 and 2017. The report found that the number of bank branches declined by 7 percent across all counties during the time period studied.

While urban communities lost more branches than rural areas, the study noted that the effect of branch closures tends to be magnified in rural areas.

Participants in listening sessions described instances in which credit unions moved into or expanded their operations in the community in response to the closure of the local bank branch. Participants, who used a credit union, commented that credit unions were able to meet some of their financial needs.

However, some participants noted areas where their local credit union did not meet their financial needs.

For example, participants raised concerns about "a lack of robust small business account and credit products, overly restrictive lending policies, a lack of direct deposit services for employers, and low maximum cash withdrawal limits."

The study was not sure if these challenges identified by participants were due to the fact that the institutions cited were credit unions or these credit unions were smaller financial institutions with a more limited product and service offering.

The report also noted that when a bank branch is closed, the effects are not just limited to financial services access. Communities lose an important source of financial advice and civic leadership.

Read the study.

Suncoast CU to Acquire Apollo Bank

Suncoast Credit Union (Tampa, FL) announced today that it signed a definitive agreement to purchase Apollo Bank (Miami, FL).

Suncoast CU has $10.4 billion in assets. Apollo Bank has 5 branches and $746 million in assets.

This is the largest bank to be acquired by a credit union.

The purchase price was not disclosed.

The transaction is expected to close in 2020, subject to customary closing conditions and shareholder and regulatory approvals. The Boards of both financial institutions previously approved the purchase.

Read more.

Ent CU Settles Overdraft Fee Class Action Lawsuit

Ent Credit Union (Colorado Springs, CO) has settled an overdraft fee class action lawsuit, according to The Colorado Springs Business Journal.

The terms of the agreement remain confidential; however, the credit union stated that all impacted members will receive refunds on all identifiable overdraft fees and insufficient funds fees (NSF fees) raised in the lawsuit.

The credit union stated that the excess overdraft fees and NSF fees were primarily caused by software issues that were unknown to the credit union until the lawsuit was filed.

Read more.

WSJ: CUs Have Outgrown Down-Home Reputation

An article in the Wall Street Journal says that credit unions have outgrown their down-home reputation.

The article notes that large credit unions "are using their newfound financial heft to compete aggressively for business."

The article points out that following the financial crisis, credit union regulators took a more hands-off approach compared to other federal banking regulators. The best example of this hands-off approach is the continued delay of the National Credit Union Administration's risk-based capital requirement for credit unions with at least $500 million in assets.

The article states that the National Credit Union Administration does not see large concentrations in high-risk activities at the nation's credit unions, but analysts are uneasy how these large credit unions might fare in a recession.

Read the article (subscription required).

Texas CU Regulator Says Complaints Up 4 Percent for Fiscal Year 2019

The Texas Credit Union Department announced that the number of complaints against credit unions increased for fiscal year 2019.

For fiscal year 2019, the state regulator stated there were 363 complaints -- up from 349 complaints for fiscal year 2018.

The top five complaint areas were:

• Credit Report Issues (24.5 percent);
• Account/Loan Balances (10.7 percent);
• Customer Service (10.5 percent);
• Fraud/Unauthorized (9.1 percent); and
• Fee Related (7.2 percent).

Read the Newsletter.

Moebs Study: Banks Paying Higher Deposit Rates Than CUs

A study by Moebs Services found that banks are paying higher deposit rates than credit unions.

The study found that for the first time since 2007 total interest expense divided by assets at credit unions is less than banks. So far this year, banks are 90 basis points (BPs), while CUs are 83 BPs or 7.8 percent less.

However, the study found that credit unions with greater than $10 billion in assets are paying 116 BPs, while similarly-sized banks are paying 91 BPs.

In contrast, community banks are paying 66 BPs compared to only 43 BPs by credit unions.

MIDFLORIDA CU Completes Acquisition of Bank

MIDFLORIDA Credit Union (Lakeland, FL) completed its acquisition of Community Bank and Trust of Florida (Ocala, FL).

The transaction closed on November 9, 2019.

Proposed Class Action Lawsuit Alleges CU Violated Fair Credit Reporting Act

A proposed class action lawsuit claims that California Coast Credit Union (San Diego, CA) violated the Fair Credit Reporting Act.

The lawsuit alleges that the credit union incorrectly reported certain financial obligations on closed or discharged accounts to Experian.

The complaint was filed on November 19 in US District Court for the Southern District of California.

Does Your CU Treat Members as Owners?

Credit unions claim that their members are owners.

However, credit union governance practices suggest otherwise.

Federal credit unions are averse to disclosing executive compensation.

Unlike state chartered credit unions, which disclose executive compensation information in individual Form 990s, there is no such requirement for federal credit unions.

However, Robert Hoel in a Filene Research Institute report, Power and Governance: Who Really Owns Credit Unions?, wrote: "Denying credit union owners and the general public executive compensation information in a direct and straightforward manner is difficult to justify objectively. Because transparency is a powerful tool for detecting and preventing insider abuses."

Hoel commented that the National Credit Union Administration "may want to require credit unions to include specific compensation information in call reports and make the information available to credit union members at annual meetings."

In a related matter, credit unions don't give credit union members the ability to have a non-binding say on executive pay, stockholders in publicly traded companies have the right to cast an advisory vote on executive compensation.
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Collins Community CU to Acquire Small Illinois Bank

Credit Union Times is reporting that Collins Community Credit Union (Cedar Rapids, IA) announced it plans to acquire First Savanna Savings Bank (Savanna, IL).

Collins Community CU will acquire the assets and liabilities of First Savanna Savings Bank.

First Savanna Savings Bank has $12.3 million in assets. Collins Community Credit Union has $1.2 billion in assets.

Financial terms of the cash deal were not disclosed.

Read the story.

GTE to Issue Almost $185 Million in Auto ABS

GTE Credit Union (Tampa, FL) is planning to issue $184.8 million in prime auto loan asset-backed securities, according to a presale report by S&P Global Ratings. This is the first auto loan securitization by GTE CU.

The deal is expected to close Nov. 26.

The credit quality of the underlying pool, which consists of prime automobile loans, had a weighted average non-zero FICO score of 727.

Robust levels of credit enhancement mitigate the collateral pool's extremely high geographic concentration in and around the Tampa region of approximately 98 percent.

The loan pool has a high concentration of loans with maturities greater than 72 months comprising over 62 percent of the aggregate pool. Approximately 31 percent of the pool is comprised of loans with original terms of 73-75 months, and another 31 percent has terms of 75-84 months.

The underlying pool of auto loans has a weighted average loan-to-value ratio of approximately 92.93%, and approximately nine months of weighted average seasoning.


Read more.

Fewer Problem CUs, But Shares and Assets Up at the End of Q3 2019

The number of problem credit unions edged lower during the third quarter of 2019, according to the National Credit Union Administration (NCUA).

At the end of the third quarter of 2019, there were 200 problem credit unions. In comparison, there were 204 problem credit unions at the end of the second quarter of 2018.

A problem credit union has a composite CAMEL rating of 4 or 5.

Total assets in problem credit unions were $11.2 billion at the end of the third quarter. Assets in problem credit unions were $11 billion at the end of the second quarter.

Shares (deposits) in problem credit unions rose during the third quarter to $10.1 billion from $9.8 billion as of June 2019. At the end of September 2019, 0.84 percent of total insured shares were in problem credit unions. In comparison, 0.82 percent of total insured shares were in problem credit unions as of June 2019.

Most problem credit unions were small credit unions.

The number of problem credit unions with less than $10 million in assets fell by 4 to 99 during the third quarter. But the number of problem credit unions with more than $10 million in assets was unchanged during the quarter.

NCUA reported that 89 percent of problem credit unions have less than $100 million in assets, while 1.5 percent of problem credit unions have more than $500 million in assets.

Banks Top CUs in Customer Satisfaction

The American Customer Satisfaction Index (ASCI) is reporting that banks topped credit unions in customer satisfaction.

This is the first time in the history of the index where banks scored higher than credit unions.

After being tied last year, customers gave banks a satisfaction score of 80 out of 100, while credit union customers rated their satisfaction at 79 out of 100, a 2.5-point dip from 2018.

Banks either tied or outpaced credit unions on every individual element of the satisfaction rating.

What is especially telling is that credit unions lag behind banks with regard to digital satisfaction.

Read the press release.

OIG: NCUA Assisted in the Merger of an Alabama CU

In its Semiannual Report to Congress, the Office of the Inspector General (OIG) of the National Credit Union Administration (NCUA) reported that the failure of Monroe Education Employees Federal Credit Union (Monroeville, AL) imposed an estimated loss to the National Credit Union Share Insurance Fund of $335,530.

The credit union failed due to insufficient management, poor internal controls, recordkeeping errors, high loan delinquencies and charge-offs, and undercapitalization.

At the time of the assisted merger, Monroe Education Employees FCU had $4.4 million in assets and 1,578 members.

The failed credit union was merged with Gulf Winds Credit Union (Pensacola, FL) on July 29, 2019.

Read more.

Truliant Is Not the Only "TRU" Financial Brand

Truliant Federal Credit Union (Winston Salem, NC) is suing SunTrust Banks and BB&T Corp. for trademark-infringement.

BB&T and SunTrust announced that when the merger is completed the combined entity would be called Truist Financial Corporation.

Truliant claims that the proposed name will create digital marketplace confusion, especially in the Charlotte and Triad markets.

But Truliant never protected its trademark from other financial institutions with TRU in their name.

Here is a list of active credit unions with TRU at the start of their names -- Trumark Financial (Fort Washington, PA), TruNorth (Ishpeming, MI), TruService Community (Little Rock, AR), TruStar (International Falls, MN), TruStone Financial (Plymouth, MN), TruWest (Tempe, AZ), TruChoice (South Portland, ME), TruGrocer (Boise, ID), and Truity (Bartlesville, OK).

This list does not include other financial services firms with TRU at the start of their names.

For example, TruWest says on its website that it makes the TruDifference. TruChoice on its website advertises TruAccounts, TruLoans, and TruRates.

It appears that Truliant is not the only TRU financial brand.

NCUA Will Seek Information on CUs' Exposure to LIBOR

The National Credit Union Administration (NCUA) is proposing to add two questions to Form 4501A (Profile) regarding a federally insured credit union (FICU) exposure to London Interbank Offered Rate (LIBOR).

NCUA claims that these questions are needed to identify FICUs that have LIBOR instruments or use LIBOR as a reference rate.

Examiners will use this information to assess a FICU's readiness related to the discontinuation of the LIBOR index after 2021.

NCUA does not expect these questions will impose additional burden on FICUs in filling out the Form 4501A.

Read the Federal Register notice.

NCUA Should Seek Feedback on CAMEL Ratings

The National Credit Union Administration (NCUA) should seek feedback from credit unions and other stakeholders concerning the current use of CAMEL ratings by the agency.

The Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System are currently seeking feedback on how the agencies use their CAMELS ratings in enforcement action and application processes.

The two banking agencies stated that this effort is consistent with the agencies' commitment to increase transparency, improve efficiency, support innovation, and provide opportunities for public feedback.

For example, the two banking regulators are looking for input on the extent that they appropriately communicate and support each rating after an on-site examination or at the end of an examination cycle, including communicating the effect of each rating or finding on the composite rating.

The bank regulators are also interested in how the CAMELS rating system vary from one examination, or examination cycle, to the next.

Bank regulators want to know whether the CAMELS rating system is sufficiently flexible to reflect differences between financial institutions such as size, business models, risks, and internal and external operating environments.

Another area that bank regulators want input on is steps, if any, the agencies should take to promote the consistent use of CAMELS ratings in applications and enforcement matters.

These are just some of the topics that the bank regulators are seeking feedback on.

NCUA would benefit from receiving this feedback from stakeholders on its use of CAMEL ratings.

Read the Federal Register notice.

Kern School FCU Applies to Switch to State Charter

Another large credit union has applied with a state regulator to flee the federal charter.

Kern Schools Federal Credit Union (Bakersfield, CA) applied on August 15 to convert to a state charter, according to the California Department of Business Oversight.

Kern Schools FCU has almost $1.7 billion in assets, according to its most recent call report.

Schools Financial's Merger Notice

Beyond the usual happy talk about how the merger will benefit credit union members, the merger notice of Schools Financial Credit Union (Sacramento, CA) includes information about merger-related compensation and distribution of net worth to members.

Schools Financial Credit Union is proposing to merge with Schoolsfirst Federal Credit Union (Santa Ana, CA).

First, the credit union states that a vote for the merger will result in an up to $4 million special dividend distribution from net worth to the credit union's members. The distribution will take place on a one-time (pro-rata) basis, with individual dividends being calculated based on average month-end deposit balances in the six (6) month period from June 1, 2019 to November 30, 2019.

Second, the notice disclosed the merger-related compensation for five employees of Schools Financial. Tim Marriott, President/CEO of Schools Financial CU, could earn up to a maximum $8,011,532 in merger-related compensation. However, the notice states that the the likely amount of compensation could be significantly lower.

Also, all employees of Schools Financial Credit Union, except Mr. Marriott, are being offered retention bonuses to help ensure a smooth transition and successful integration of the merger.

The date of the member's vote is December 12, 2019.

Merger Notice.

Indiana Bank to Acquire Privately Insured CU

In a rare transaction, an Indiana bank will acquire an Indiana credit union.

ABA Newsbytes is reporting that First Bank of Berne, a $711 million community bank based in Berne, Ind., will acquire the $18.7 million Adams County Credit Union in Monroe, Indiana.

Adams County Credit Union is privately insured by American Share Insurance.

Therefore, this merger will not be hindered by the National Credit Union Administration's burdensome bank-credit union merger regulations.

Details regarding the transaction were not disclosed.

Financial Institutions Need to Prepare for Climate Risk

Recently, two Federal Reserve officials spoke on the impact of climate-related risks to financial institutions.

Kevin Stiroh, Executive Vice President at the Federal Reserve Bank of New York, noted that there were two climate-related risks confronting financial institutions -- physical risk and transition risk.

Stiroh stated: "Physical risk is the potential for losses as climate-related changes disrupt business operations, destroy capital and interrupt economic activity. Transition risk is the potential for losses resulting from a shift toward a lower-carbon economy as policy, consumer sentiment and technological innovations impact the value of certain assets and liabilities."

In a speech at a San Francisco Federal Reserve Bank conference, Federal Reserve Governor Lael Brainard noted that severe weather events could impact clearing and settlement activities and increase the demand for cash.

Brainard cautioned that financial institutions need to "manage risks surrounding potential loan losses resulting from business interruptions and bankruptcies associated with natural disasters, including risks associated with loans to properties that are likely to become uninsurable or activities that are highly exposed to climate risks."

She stated: "For example, if prices of properties do not accurately reflect climate-related risks, a sudden correction could result in losses to financial institutions, which could in turn reduce lending in the economy."

Brainard commented that this decline in asset prices could result in a negative wealth effect, which could affect economic activity.

Brainard also noted that low-income communities are particularly vulnerable to climate-related disasters, as these communities have less liquid savings to meet emergencies arising from the loss of income and property.

Both officials stated that the Federal Reserve expects financial institutions to have risk management systems that appropriately identify, measure, monitor, and manage climate risks and build resiliency into their business models.

Read Stiroh's speech.

Read Lael Brainard's speech.

Bill Would Exempt Veteran-Owned Businesses from MBL Cap

Sens. Dan Sullivan (R-Alaska) and Mazie Hirono (D-Hawaii) introduced a bill on November 12 to exempt loans made to veteran-owned businesses from a credit union’s member business lending (MBL) cap, the Veterans Member Business Loan Act (S. 2834).

The MBL cap is 12.25 percent of assets.

A similar bill was introduced earlier this year in the House of Representatives.

Auto Loans Are Getting Riskier

Some auto loan metrics indicate car loans are getting riskier.

The Wall Street Journal is reporting that more car loan borrowers are underwater.

According to Edmunds, 33 percent of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity. In comparison, underwater borrowers were 28 percent five years ago and 19 percent a decade ago. The average amount owed by these underwater borrowers through the first 9-months of 2019 was about $5,000.

The amount owed on the trade-in is wrapped into the new auto loan.

To help make the loan payments more affordable, the length of auto loans is becoming longer. But that also means that a smaller share of the monthly payment is going to pay down the principal, which could leave the borrower further underwater when this vehicle is traded-in.

Consumer Credit Growth Slows at CUs during September

Outstanding consumer credit grew at credit unions during September, albeit at a slower pace, according to the Federal Reserve.

September consumer credit at credit unions was $487 billion, up from $485.8 billion in August.

Consumer credit grew at an annualized pace of $92.7 billion during August. The annualized growth in consumer credit tumbled to $13.6 billion during September

Revolving credit at credit unions increased by approximately $100 million during September to $64.4 billion.

Nonrevolving credit at credit unions increased by almost $1 billion during September to $422.6 billion.

Review the G.19 Report.

TransUnion: CUs Are Capturing A Greater Share of Auto Loans

A TransUnion blog is reporting that credit unions are capturing a growing share of the auto finance marketplace.

Between 2013 and 2018, credit unions’ market share of the auto loans rose 8 percent.

TransUnion cited several factors contributed to this market share gain.

TransUnion reported that credit unions took advantage of banks tightening their underwriting of auto loans between the third quarter of 2016 thru the fourth quarter of 2017. Credit unions gained market share across all credit tiers, except subprime.

In addition, credit unions were undercutting their competition with respect to interest rates on auto loans and extended the terms of these loans. TransUnion found that credit unions were capturing 55 percent of the share of auto loans with maturities between 76 and 84 months and 53 percent of the share of loans beyond 85 months in maturity. While extending the maturity of the auto loan makes car payments more affordable, consumers will pay more in interest over the life of the loan.

Credit unions have increased their share of used car financing to grow their auto finance market share.

TransUnion also observed that credit unions are dominating the auto refinance market.

Read the blog post.

NCUA Board Upholds Denials of Secondary Capital Plans

The National credit Union Administration Board in October upheld the Supervisory Review Committees (SRC) affirmation of the denials of two unnamed low-income credit unions' applications to accept secondary capital by Regional Directors.

In one appeal, the Board on September 9, 2019 denied a request for an oral hearing from a low-income credit union (LICU); but agreed to consider the merits of the appeal on the basis of the written record.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

In its October 24 decision, the Board found that there was ample evidence that the LICU's secondary capital plan was unsound.

The Board viewed that the LICU's secondary plan reflected inadequate due diligence.

The pro forma financial statements lacked detail and had material omissions, which did not allow the agency to properly evaluate the safety and soundness of the plan.

Moreover, the secondary capital plan failed to adequately align with the LICU’s forecasts and strategic plan. Specifically, both the Region and the SRC have determined, and the Board agrees, that because there is a negative spread between the projected interest rate for the secondary capital loan and the average rate of return for the assets in the safety net plan, this negative spread will become a stress on earnings and a duration mismatch between funding sources.

The Board concluded the SRC was correct in affirming the Regional Director's denial.

In the other appeal, the Board on August 8, 2019 granted the LICU's request to present its case orally before the Board. The hearing was held on September 24.

Chairman Hood and Board Member Harper considered this appeal. Board Member McWatters was recused from this matter.

The credit union contended that its secondary capital plan that met the criteria in §701.34(b)(1). Therefore it should receive the requested capital. The LICU stated that the three deficiencies identified by the Region were subjective and should not be a valid basis for denying the secondary capital plan.

The Region, on the other hand, argued that the five enumerated criteria provide for the minimum components that are required to be included in a secondary capital application.

The SRC found ample support for the Region’s assessments that the LICU's secondary capital plan was not sound, and concluded the denial of the plan was reasonable.

In its October 11 decision, the Board did not find the LICU's arguments to be persuasive. The Board stated it should not substitute its judgment for the SRC. Therefore, the Board affirmed the SRC decision.

The Board stated that in both cases the credit unions choose to reapply for secondary capital. But if they decide to re-apply, the agency encourages ongoing dialogue to address deficiencies discussed in previous denials.

Chart of the Day: PFI of Retail Consumers and Small Businesses

The following chart from Raddon Research shows the primary financial institution (PFI) of retail consumers and small businesses.

Kansas Bill to Tax Large CUs Won't Move Forward

The Sunflower State Journal is reporting that a joint House-Senate committee on financial institutions in the Kansas Legislature on October 29 recommended against the bill taxing large credit unions.

The bill (SB 239) would have levied a 2.25% tax on the business lending income of credit unions with assets of more than $100 million. It would have assessed another 2.125% tax on such income in excess of $25,000.

A second bill (SB 238) that would allow banks to deduct business loan interest from their net income moved forward with no recommendation from the committee.

Republican state Sen. Rob Olson, chair of the joint committee, said he expected the bill to be considered in the upcoming session, but noted the bill still needs quite a bit of work.

Read the article (subscription required).

NCUA Board Member Harper Calls for Dedicated Consumer Compliance Exam for Large, Complex CUs

National Credit Union Administration (NCUA) Board Member Todd M. Harper on October 30 is requesting public comment on his proposal to create a dedicated consumer compliance exam program for large, complex credit unions.

The NCUA’s current compliance examinations covering consumer financial protection laws in credit unions with total assets of $10 billion or less differs from other financial institutions regulators. Other regulators complete regularly scheduled, risk-focused consumer compliance reviews and assign a separate consumer compliance rating outside of the CAMEL process for institutions under their jurisdiction.

Harper noted the NCUA’s approach to consumer financial protection reviews also runs counter to the congressionally mandated mission of the Federal Financial Institutions Examination Council, which works to develop uniform standards and processes across all financial institution regulators.

Harper would like to add three new full-time employees in the NCUA’s Office of Consumer Financial Protection in 2020, who would develop and later launch a dedicated consumer compliance examination program for large, complex credit unions.

Read the press.

Early CECL Adopter CU Saw 4 -Fold Increase in Loan Loss Reserves

S&P Global Market Intelligence provided insights into the impact of the current expected credit loss (CECL) accounting standard on one credit union's balance sheet.

Georgia United Credit Union (Duluth, GA) adopted the CECL standard in the first quarter of 2019.

The $1.2 billion credit union reported a 324.5 percent increase in allowances for loan and lease losses between the first quarter of 2019 and the fourth quarter of 2018 to $24.7 million. Its allowances for loan and lease losses to loans ratio went from 0.59 percent as of December 2019 to 2.51 percent as of March 2019.

The credit union's CFO noted that $15 million of the reserve build was tied to troubled commercial loans.

The credit union reported a 10.7 percent decline in net worth to $142.2 million over the same time period. Its net worth ratio fell from 11.71 percent at the end of 2018 to 10.10.24 percent at the end of March 2019.

According to an industry consultant, credit unions, on average, are under-reserved by a factor of two and will need to increase their loan loss reserves under CECL.

Read the article.

Study: Most State CU Regulations Are Very Difficult to Read

A paper appearing in the Journal of Accounting - Business & Management found that majority of state credit union regulations are very difficult to read.

The paper, Pawnshops Regulatory Environment: A Readability Analysis (April 2018), compared the readability of pawnshop regulations to credit union regulations in 42 states.

States excluded from the analysis are Arkansas, Delaware, Idaho, Iowa, New York, North Dakota, South Dakota, and Wyoming; because the state does not have credit union regulations or state level pawnshop regulations.

The paper contends that the readability of regulations could be a barrier to a small business' success, as the ability to navigate regulations are a function of human capital.

The paper used FRE score to calculate the readability of the state regulation, which looks at the average number of syllables per word and the average number of words per sentence.

The FRE score will range from 0 to 100 -- higher the score, the easier to read. The following table shows FRE score by reading level.

The paper found that most state credit union regulations were at a college graduate reading level. Twenty-five states had a reading level of college graduate. The mean FRE score was 28.78.

All state credit union regulations required a minimum reading level of college.

The state with the most readable credit union regulation was Maine, while California had the most difficult to read credit union regulation. The following table shows the reading level of each states' credit union regulation with FRE score in parenthesis. Click on the image to enlarge.

The findings from this study suggest that state credit union regulators should look at improving the readability of their regulations, especially for small credit unions with limited financial and human capital resources.

Class Action Lawsuit Alleges Philadelphia FCU Charged Multiple NSF Fees on Same Item

Philadelphia Federal Credit Union (Philadelphia, PA) is being sued in state court over improper overdraft (OD) fees.

The class action complaint alleged that Philadelphia credit union assessed multiple insufficient fund (NSF) fees on the same item.

The complaint stated that the imposition of multiple NSF fees on a single transaction by the credit union was a breach of contract and breach of the covenant of good faith and fair dealing, and violated Pennsylvania's Unfair Trade Practices and Consumer Protection Laws.

The lawsuit is seeking monetary damages, restitution, and declaratory relief.

Read the complaint.

NCUA Board Finalized Nonmember Shares Rule, Proposes FOM Rule Implementing Court Decision

The National Credit Union Administration Board finalized its rule expanding credit unions access to nonmember and public unit shares (deposits).

According to the final rule, a federal credit union may accept public unit and nonmember shares in an amount up to 50 percent of the credit union’s net amount of paid-in and unimpaired capital and surplus, less any public unit or nonmember shares, or $3 million, whichever is greater.

The original proposal had eliminated the current alternative limit of $3 million. The Board, however, thought the elimination of the current alternative limit of $3 million would adversely impact some small credit unions.

In addition, the Board is proposing changes to its community charter regulations to align it with the August 2019 opinion issued by the District of Columbia Circuit Court of Appeals.

A federal credit union would be allowed to designate a combined statistical area or an individual contiguous portion of such an area, as a well-defined local community, provided the chosen area has a population of 2.5 million or less.

The Board added a provision to address concerns raised by the Appeals Court about potential discrimination in the field-of-membership selection process in combined statistical areas and core-based statistical areas.

Read the press release.

Bank Stockholders Approve Acquisition by Teachers CU

New Bancorp, Inc. (New Buffalo, MI), the holding company of New Buffalo Savings Bank, announced that on October 22, 2019 its stockholders overwhelmingly approved the acquisition of the assets and assumption of the liabilities of New Bancorp and New Buffalo by Teachers Credit Union (South Bend, IN) at its stockholders’ meeting.

Subject to the receipt of the required regulatory approvals and the satisfaction of customary closing conditions, the parties hope to close the transaction in the first quarter of 2020.

Read the press release.

Few Options to Offset Costs for CUs Topping $10 Billion Asset Threshold

S&P Global Market Intelligence recently wrote that large credit unions have few options available for offsetting the regulatory burden of breaching the $10 billion asset threshold.

This article should be of interest for credit unions that are within several years of the $10 billion asset threshold. As of June 2019, there were three credit unions with at least $9 billion in assets and another 5 credit unions with between $8 billion and $9 billion in assets.

The article notes that credit unions, which topped the $10 billion threshold, have seen a drop in fee revenue due to the Durbin Amendment and an increase in compliance cost, as the credit unions become subject to oversight by the Consumer Financial Protection Bureau and increased regulation by the National Credit Union Administration.

Credit unions that have topped the $10 billion asset threshold have seen an up to 50 percent decline in debit card interchange revenues due to the Durbin Amendment.

The article also states that credit unions that top the $10 billion asset threshold may lack the ability to scale up rapidly to offset these new costs, as they tend to grow organically.

Read the article.

Washington Updates

House passed a bill backed by bank and credit union trade groups and a bipartisan group of House members called on the Office of Financial Research (OFR) study the potential impact of the current expected credit loss (CECL) accounting model.

The House on October 22 voted 249-173 to pass the Corporate Transparency Act (H.R. 2513). The bill is supported by both bank and credit union trade groups. The legislation, sponsored by Rep. Carolyn Maloney (D-N.Y.), would direct the Financial Crimes Enforcement Network to create a national database that banks could use to verify a business’s beneficial ownership information. The bill was amended before passage to include legislation championed by Rep. Emanuel Cleaver (D-Mo.) that would modernize the existing anti-money laundering/Bank Secrecy Act framework by, among other things, enhancing bank-law enforcement communications.

Also, a bipartisan group of 28 House members last week called on the Financial Stability Oversight Council to require that the OFR study potential financial stability effects of the CECL model for loan loss accounting, which goes into effect for large reporting companies in January. ‌

Specifically, the lawmakers called on OFR to study CECL’s procyclical characteristics and their effects on access to credit and market volatility; the effects of CECL on the solvency and leverage of financial institutions; and the effects of procyclicality on institutions complying with CECL, including contagion risk during times of economic stress. Read the letter.

CU Overdraft Fees Up 3.4 Percent from a Year Earlier

Moebs Services is reporting that the median overdraft fee at credit unions rose 3.4 percent over the past year ending on June 2019.

The median overdraft fee at credit unions was $30 as of June 2019, up from $29 a year earlier.

In comparison, the median overdraft fee at banks increased by 6.7 percent over the past year to $32.

Unsurprisingly, the study found that there was a year-over-year decline in the volume of overdrafts at both credit unions and banks. The volume of overdrafts were down 1.2 percent at credit unions versus 6.8 percent at banks.

Michael Moebs, Economist and CEO of Moebs Services, contends that history shows that overdraft revenues will either stagnate or decline with the increase in overdraft fees.

Think Again, Banks Beat CUs on Deposit Rates

The Credit Union Journal is reporting that analysis of industry data shows that credit unions do not pay the best rates on deposits.

According to an analysis by The Kafafian Group, the median cost of interest bearing liabilities at banks with between $1 billion and $10 billion in assets were 1.25 percent versus 95 basis points for comparable sized credit unions.

In addition, another analysis of deposit rates in 15 metropolitan areas found that banks are paying more than credit unions for deposits.

These findings contradict the assumption that credit unions offer better deposit rates than other financial institutions.

The article provides some explanations for this, including regulatory changes making core deposits more attractive at the largest of banks.

Read the article (subscription may be required).

Ent CU to Start Construction on 7-Story HQ Building

Ent Credit Union (Colorado Springs, CO) will break ground on its seven-story, 330,000 square-foot headquarters building on October 23.

The new headquarters building will house the credit union' call center, consumer and mortgage lending, information technology, finance and accounting, human resources, member services, and administrative and executive teams.

The cost of the project was not disclosed.

Read more.

The Financial Brand: CU Marketing Expenses Study

A study by The Financial Brand provides interesting metrics on credit union marketing expenditures.

The study examines promotional and educational expenses at 227 credit union with at least $250 million in assets between 2015 and 2018.

The report noted that the average marketing spending in 2018 as a percent of assets was 0.12 percent. However, 31.3 percent of credit unions spent at least 0.15 percent on marketing expenses as a percent of assets.

The study also looks at marketing expenses per member. The following graph shows marketing expenses per member by asset size for 2018.

Read more.

Harris Poll: Most Americans Support Taxing Large Credit Unions

A majority of Americans across all political parties said they would support ending federal and state tax exemptions for large credit unions, according to a Harris Poll survey commissioned by the Florida Bankers Association.

Sixty-eight percent of those surveyed agreed that a tax exemption for these institutions was unfair, and 70 percent said they would support congressional action to require credit unions with more than $500 million in assets to pay income taxes.

Three-fourths of respondents also agreed that tax-exempt institutions should not be permitted to acquire local community banks.

The poll also showed opportunity for more consumer education about the credit union tax exemption, with just 18 percent of respondents correctly stating that credit unions are tax-exempt. Thirty-seven percent believe credit unions do pay taxes and 45 percent were unsure.

Harris Poll surveyed 2,040 U.S. adults ages 18 and older, of which 1,668 are registered voters. The survey was conducted from September 26 thru September 30.

Read more.

Tax Foundation Calls for Repeal of CU Tax Exemption

The credit union industry has strayed from its original tax-exempt purpose and its tax exemption can no longer be justified, according to a research note published on October 16 at the nonpartisan Tax Foundation.

“Ending the exemption would make the tax code more efficient and provide lawmakers with revenue that could be used to offset other improvements in the tax code,” Erica York, an economists at the Tax Foundation.

York noted that the credit union tax exemption was historically justified by three purposes: serving customers with a common bond and customers with moderate means, as well as providing services difficult to obtain at banks. She cited evidence showing the erosion of common bond, that credit unions are increasingly serving high-income customers and that their services now resemble those offered by banks.

“The tax exemption for credit unions is not justifiable under principles of sound tax policy, nor under the rubric that lawmakers have used in the past to evaluate the tax-exempt status of financial institutions,” she concluded.

Read the research note.

CU CEOs Earned Almost 14 Times the Average Pay of CU Employees

In 2017, chief executive compensation at large state chartered credit unions was on average 13.81 times the average employee salary and benefits.

The median ratio of chief executive compensation to average employee salary and benefits was 10.29.

To calculate average credit union employee compensation, the analysis divided the Call Report line item Employee Compensation & Benefits by Full Time Equivalent Employees. Full Time Equivalent Employees = The Number of Full Time Employees + (0.5 times the Number of Part Time Employees).

A large state chartered credit union had at least $1 billion in assets, as of December 2017.

The CEO with the highest compensation to average employee compensation ratio was Mark Pfisterer of AmeriCU (Rome, NY) at 99.6 times the average employee compensation at AmeriCU.

The following table lists the 10 chief executives with the highest compensation to average employee compensation ratio.

However, this data should not be used to compare the compensation of bank CEOs to their employees. The information reported by publicly-traded banks uses median employee pay, while this analysis substitutes average employee compensation for median compensation, because median compensation is not available.

Median employee compensation would be lower than average employee compensation. In other words, if median compensation was used, the ratio of CEO compensation to median employee compensation would be higher.

Desert Financial Buys Naming Rights to University Arena

Desert Financial Credit Union (Phoenix, AZ) bought the naming rights to an arena at Arizona State University.

Under the terms of the five-year agreement, Desert Financial Credit union will pay $1.5 million per year for the naming rights to the arena.

The arena is currently home to men’s and women’s basketball, wrestling, gymnastics and volleyball.

The arena will be renamed from the Wells Fargo Arena to the Desert Financial Arena.

Read more.

Unsealed Complaint: CU Board Members Incurred Significant Expenses

An unsealed complaint states that multiple Board members at Municipal Credit Union (New York, NY), including Sylvia Ash, regularly incurred significant expenses each year paid by the credit union.

These expenses included conferences at foreign destinations, food and drink, and donations to charitable organizations of their choice.

The complaint states that Ash between 2012 and 2016 received annually tens of thousands of dollars in reimbursements and other benefits from the credit union.

Ash, who is charged with obstructing a Federal probe of Kam Wong the former CEO of Municipal CU, served on Municipal CU's Board from 2008 until she resigned on about August 15, 2016. From about May 2015 until her resignation, Ash was the Chair of the credit union's Board.

Kam Wong on December 2, 2018 pled guilty to embezzlement and impeding a criminal investigation into the embezzlement.

Pages 7 and 8 of the complaint outlined the benefits and gifts received by Ash.

For example, in 2015 Municipal Credit Union spent approximately $63,408 for the benefit of or at the direction of Ash. These expenses included airfare and hotels at multiple conferences for her and a guest in Cancun, Greek Isles, and San Juan. The credit union also paid for tickets to sporting events for Ash. in addition, Municipal Credit Union paid her phone and cable bills.

Even after she left the credit union Board, Ash continued to have her expenses paid by the credit union.

In October 2016, she attended a credit union conference in Las Vegas. The credit union paid her and a guest's expenses including 3 tickets to a Brittany Spear's concert.

In June 2017, Ash was a guest of another credit union Board member for a conference in Cuba of the Caribbean Confederation of Credit Unions. Her expenses were picked up by the credit union.

While Ash and her fellow board members were not paid, they were handsomely rewarded with significant in-kind benefits.

This is probably not an isolated instance. Credit union regulators need to examine the corporate governance practices of credit unions to ensure that credit union officials are not incurring excessive expenses.

Read the complaint.

188 CUs Borrowed from Discount Window in Q3 2017

The Federal Reserve reported that 188 credit unions borrowed from the Discount Window 255 times during the third quarter of 2017.

The aggregate amount borrowed was almost $176.3 million during the third quarter -- up from slightly more than $152.7 million borrowed in the previous quarter.

The average amount borrowed by credit unions was $691.3 thousand. The median Discount Window borrowing was $10,000.

The maximum amount borrowed was $25 million by Chevron FCU (Oakland, CA).

The most frequent borrowers from the Discount Window were True North FCU (Juneau, AK), North Star Community CU (Maddox, ND), Aurora CU (Milwaukee, WI), and United Business and Industry FCU (Plainville, CT).

The vast majority of the credit unions borrowing from the Discount Window used the primary credit program, which is available for the healthiest institutions. One credit union used the secondary credit program. Four credit unions borrowed multiple times from the seasonal credit program, which assists small depository institutions in managing significant seasonal swings in their loans and deposits.

The Federal Reserve is required by law to disclose with a two year delay information on borrowings from the Discount Window.

Digital FCU Agrees to Settle Overdraft Lawsuit

Digital Federal Credit Union (Marlborough, MA) will pay $1.8 million to settle lawsuit for improperly charging overdraft fees.

Digial FCU will also forgive $766,000 in overdraft fees charged, but not yet collected.

The settlement will benefit individuals who had a checking account with Digital FCU and were charged an overdraft fee on any transaction between June 15, 2012 and June 15, 2019 or members who were charged an overdraft fee on an ATM or debit card transaction between June 15, 2017 and Sept. 1, 2018.

In addition, the credit union agreed to change the way it assesses overdraft fees for a period of three years. The credit union will change from the available balance to ledger balance. It is estimated that this change will result in estimated savings of $467,000 from fewer overdrafts per year.

The final approval hearing is scheduled for December 19, 2019.

Read more.

Former Officials at Municipal CU Charged by Federal Law Enforcement

Two former officials at Municipal Credit Union (New York, NY) were charged by Federal authorities for obstruction of justice and financial fraud.

Sylvia Ash, presiding judge of the Kings County Supreme Court, Commercial Division, and former chair of the board of directors of Municipal Credit Union (MCU), was charged in Manhattan federal court with conspiracy to obstruct justice and obstruction of justice, arising from a scheme to seek to influence and impede an ongoing federal investigation into fraud and corruption at MCU associated with former CEO Kam Wong. Ash made false and misleading statements, as well as she deleted and concealed relevant text messages.

Joseph Guagliardo, a/k/a “Joseph Gagliardo,” a former New York City Police Department Officer and former member of MCU’s supervisory committee, was charged separately with embezzlement, fraud, and controlled substance offenses arising from abuse of his position as a member of the supervisory committee.

Municipal Credit Union is currently under conservatorship with the National Credit Union Administration.

The defendants are presumed innocent unless and until proven guilty.

Read the press release.

What Was the Value of Progressive CU's Open Charter?

The 2018 Annual Report of Pentagon Federal Credit Union (McLean, VA) has information on the value of the open field of membership charter of Progressive Credit Union (New York, NY) to Pentagon FCU.

An open field of membership charter allows anyone to join a credit union.

This open charter was transferred to Pentagon FCU after the emergency merger of Progressive CU into Pentagon FCU.

In Note 14 (Subsequent Events), Pentagon FCU reported an increase of intangible assets of approximately $108 million associated with the emergency merger.

The increase in the value of intangible assets was derived from the contractual right of Pentagon FCU to use Progressive CU's open field of membership charter.

Illinois CU Fined for Failure to Take Timely Remedial Actions

The Illinois Department of Financial and Professional Regulation, Division of Financial Institutions assessed a civil money penalty against SmartChoice Credit Union (Spring Valley, IL) for its failure to take timely remedial action with respect to specific violations.

During a December 31, 2014 exam, a Document of Resolution (DOR) was issued noting that required Financial Crimes Enforcement Network (FinCEN) searches had not been completed.

A follow up contact was completed on April 30, 2015, the issue had not be resolved and another DOR was issued.

During another full exam at the end of 2015, the issue was unresolved.

A 2017 contact with the credit union further noted the issue had not been addressed. Also, the Examiner in Charge obtained evidence from a 2018 FinCEN report that the credit union had not downloaded the reports from FinCEN to complete a search.

The state regulator fined the credit union $1,000 -- the maximum amount permissible for credit unions with less than $10 million in assets.

Read the enforcement order.

Iowa Lawmakers Discuss Taxing CUs at State Level

State lawmakers highlighted the challenges of taxing credit unions at the state level at a banker convention.

According to BankBeat, a panel of lawmakers at the recent Iowa Bankers Association Annual Convention pointed out that state chartered credit unions could switch to a federal charter, if taxed at the state level.

The Federal Credit Union Act exempts federal credit unions from all state and local taxes, except property taxes.

Lee Hein, chairman of the House Ways and Means Committee, stated: "Credit unions have options. They can move to a federal charter, so that makes taxing credit unions not such an obvious solution."

Gary Carlson, chairman of the House Commerce Committee, commented: "If they all go to a federal charter, we do not achieve our goal of leveling the competitive playing field."

While I think the threat of switching charters for Iowa credit unions are overblown because the state charter is more liberal than the federal charter, this perceived threat shows that Congress needs to solve this issue.

Read more.

California Public Bank Bill Becomes Law

California Governor Gavin Newsom signed into law on October 2 a bill authorizing local governments to charter public banks.

The bill (AB 857) will take effect in January and permits the chartering of two public banks per year. The maximum number of public banks at any one time will be capped at 10.

According to the bill, a public bank will be organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation.

Any public bank would be required to obtain FDIC insurance to obtain a charter.

The bill authorizes public banks to accept deposits from local agencies; but prohibits public banks from competing with local financial institutions.

Proponents for the bill argue that public banks will be able to address local needs, such as the financing of affordable housing, small businesses, and infrastructure.

However, voters don't appear to be clamoring for public banks. Last year voters in Los Angeles rejected the option of creating a public bank.

Read the bill.

Outstanding Consumer Credit Growth at CUs Accelerated in August

The Federal Reserve is reporting that outstanding consumer credit growth accelerated at credit unions in August.

Total consumer credit balances at credit unions increased by approximately $7.7 billion for August to $485.8 billion. In comparison, outstanding consumer credit at credit unions grew by $2 billion in July.

The growth in consumer credit at credit unions was fueled by an expansion in nonrevolving credit. Nonrevolving credit includes loans for motor vehicles, mobile homes, education, boats, trailers, and vacations.

Nonrevolving credit balances rose by almost $8 billion during August to $421.6 billion.

On the other hand, revolving credit edged lower by almost $200 million to $64.3 billion during August.

Read the G.19 Report.

ABA Challenges Appellate Court Decision in FOM Case

The American Bankers Association (ABA) on October 4 filed a petition for the full D.C. Circuit Court of Appeals to review its decision in the association’s challenge the National Credit Union Administration’s 2016 field of membership (FOM) rule. In August, a three-judge panel of the court upheld much of rule while remanding a portion related to redlining concerns. The request for a rehearing by the full “en banc” panel of judges is the next step in the legal process

ABA argued that the three-judge panel’s decision “stretches Chevron deference beyond its limits” in ruling that NCUA could define a “local community” as a combined statistical area inhabited by up to 2.5 million people or define an entire state as a “rural district.” The panel concluded that when a statute directs an agency to define a term through regulation, this act suggests that Congress did not intend the terms to be applied according to their plain meaning, whereas Supreme Court precedent holds that an agency’s authority “go[es] no further than the ambiguity will fairly allow.”

“Rehearing en banc is warranted to realign this Court’s Chevron jurisprudence with that of the Supreme Court,” ABA explained. Under the Supreme Court’s Chevron doctrine, courts defer to administrative agencies’ interpretation of statutes they administer where Congress has not specifically addressed the question at issue. ABA also said the decision was incompatible with judicial review under the Administrative Procedure Act and thus warranted review.

Report: CUs Buying Banks Pays Off as Growth Strategy

S&P Global Market Intelligence is reporting that credit unions buying banks as part of a growth strategy appear to be paying off.

Membership and deposit (share) growth at credit unions that acquired banks has outpaced membership and deposit growth of the rest of the industry.

Since the fourth quarter of 2015, membership and deposit growth at credit unions that acquired a bank was 22.7 percent and 45.9 percent, respectively.

For credit unions that did not acquire a bank, membership and deposit growth over the same time period was 15.1 percent and 25.3 percent, respectively.

The study found that only one credit union saw a decline in membership in the quarter following the closing of the acquisition. However, 7 credit unions reported a decline in shares and deposits in the quarter after the acquisition was completed.

Read more.

GreenState CU Buys Naming Rights to Fieldhouse

GreenState Credit Union (North Liberty, IA) bought the naming rights to the fieldhouse attached to Xtream Arena (Coralville, IA), according to The Gazette.

The credit union, formerly University of Iowa Community Credit Union, will pay $1.4 million over 10 years for the naming rights.

The 53,000 square-foot fieldhouse will be called GreenState Family Fieldhouse.

Read more.

Landmark CU Pays $8 Million for Property for Future HQ

Landmark Credit Union (New Berlin, WI) paid $8 million for a property in Brookfield that will be the future home of its corporate headquarters, according to BizTimes.

The $4.3 billion credit union plans to build a a five-story, 158,000-square-foot headquarters building on the property.

The credit union may opt to build an additional 148,000-square-foot office building in the future.

Read more.

NCUA Hood Says There Is No One-Size -Fits-All Solution to NYC Taxi Medallion Loans

In a September 3, 2019 letter to Representative Alexandria Ocasio-Cortez, National Credit Union Administration (NCUA) Chairman Rodney Hood responded to her and other members of the New York City (NYC) congressional delegation inquiries about taxi medallion loans by credit unions and efforts to modify loans for financially struggling taxi medallion owners.

Chairman Hood wrote that he shared her concerns for taxi drivers, but noted that there is no one-size-fits-all approach to resolving these challenges.

Chairman Hood wrote at the end of 2014, when medallion prices peaked, there were 8 federally insured credit unions that originated the vast majority of the loans secured by New York City taxi medallions. Those 8 credit unions held a combined $3.9 billion in assets. Today, six of those eight credit unions have either been liquidated or merged and are no longer in business. Only one of the six credit unions that are no longer in business was found to have engaged in indirect lending on a small portion of its taxi medallion portfolio.

Chairman Hood noted that in 2015 the average outstanding taxi medallion balance was less than $350,000.

The letter noted that that these credit unions had some deficiencies in their underwriting standards and ignored repeated warnings from the agency about the dangers of excessive concentration in taxi medallion loans.

Chairman Hood further wrote that NCUA is updating its examination scope requirements to ensure credit unions analyze a borrower's ability to repay the loan and to ensure the agency addresses, through informal and formal enforcement actions, any cases where the credit union is not properly undertaking this analysis. Those updated procedures will become effective with the release of the 2020 examination program.

The letter stated that bad actors should be held accountable and NCUA is aggressively pursuing institution-affiliated parties, who have violated the law, breached their fiduciary duties, and engaged in unsafe and unsound practices. However, the agency found no evidence that credit unions engaged in market manipulation.

Hood stated that NCUA, as liquidating agent for Melrose and LOMTO, is actively identifying distressed borrowers in an effort to rework their loans, where possible, including payment reductions, lower interest rates, and term adjustments. But Hood acknowledges that these efforts are complicated by the sharp decline in value of taxi medallions and, in some cases, the high level of cash-out refinancing activity that took place on individual loans.

The letter is below (click on images to enlarge).