That's All Folks!

After writing almost 3,000 blog columns for slightly more than 11 years, this will be my last blog entry. 

I have followed credit unions for approximately 25 years over my career. This blog was just one part of my career. 

I am an outsider. I never belonged to a credit union.  For some true believers in the credit union industry, my views may have been heresy. 

My first entry was on June 16, 2009 and it looked at the NCUA Board allowing corporate credit unions to retroactively backdate their capital levels. 

Over the years, I have written about the corporate credit union crisis, the credit union taxi medallion lending debacle, the merger of banks into credit unions, and other issues. 

I have decided that this is the right time to stop writing this blog. 

However, that does not mean that I will quit following credit unions and the National Credit Union Administration. I may even opine on arbitrary actions by NCUA. 

In conclusion, I wish to express my gratitude to the people who have read this blog.

Net Worth at Southern Pine CU Falls by Almost 70 Percent During Q2

Conserved Southern Pine Credit Union (Valdosta, GA) reported an almost 70 percent decline in its net worth during the second quarter of 2020.

Net worth fell from $8.56 million as of March 2020 to almost $2.62 million as of June 2020. The credit union's net worth ratio tumbled from 18.43 percent to 6.23 percent during the same time period.

The $42 million credit union recorded a loss of $5.94 million for the second quarter. Year-to-date, the credit union had a loss of approximately $6.4 million. Most of the second quarter loss can be attributed to $5.82 million in miscellaneous operating expenses.

The credit union's year-to-date return on average assets was negative 27.34 percent as of June 2020.

The credit union was placed into conservatorship on June 11, 2020.

Mortgage Originations at CUs Up 30 Percent in 2019

S&P Global Market Intelligence is reporting that mortgage originations at credit unions was up almost 30 percent in 2019.

According to Home Mortgage Disclosure Data, credit union originated $177.3 billion in home mortgages in 2019. This was up from approximately $137 billion in 2018.

However, credit union market share of mortgages slipped from 6.9 percent in 2018 to 6.7 percent in 2019.

Navy Federal Credit Union (Vienna, VA) was the top credit union mortgage originator in 2019 funding $19.78 billion in mortgages. This was up 20.3 percent from the prior year. Navy FCU is the 19th largest mortgage lender in 2019.

Read more.

NCUA Overstates the Interest Rate Differentials Between Credit Unions and Banks

The National Credit Union Administration (NCUA) is overstating the interest rate differential between banks and credit unions for various loan and deposit products.

NCUA uses data from S&P Global Market Intelligence, which compares the national average rates for 23 common loan and deposit products at banks and credit unions, as well as the average rates for these same products at banks that converted from credit unions.

However, a 2020 paper by a Credit Union National Association economist -- Jordan van Rijn -- and others are critical of previous studies that used naive estimates from institution- and branch-level interest rate data.

The authors write that studies relying on this data are subject to selection bias. The authors note that studies using institution- and branch-level data do not reflect the actual rates paid by households, but the best advertised rate.

In other words, advertised or average rates do not control for household and loan characteristics. Therefore, the authors write that this best advertised rate may significantly differ from the actual rates paid by consumers.

The study, which examines new and used car loan rates, found that credit unions offer lower rates than banks on auto loans, but found that the interest rate differential is smaller than the interest differentials implied by institution- and branch-level data.

The paper compared its results with the data reported by NCUA. It concluded that this selection bias can explain about half of interest rate differential on new auto loans and approximately a quarter of the interest rate differential on used car loans.

Given this selection bias associated with institution- and branch-level data, which leads to an overstating of the interest rate differential between banks and credit unions, NCUA should remove this information from its website.

However, if the agency continues to publish this information, it needs to include a disclaimer that its interest rate differential data do not reflect the actual interest rates paid or received by consumers and the differences are overstated. This disclaimer should be in bold, large type at the very top of the website.

The paper, Financial Institution Objectives & Auto Loan Pricing: Evidence from the Survey of Consumer Finances, can be found on the Social Science Research Network (www.ssrn.com).

NCUA Should Publish Stress Test Results

The National Credit Union Administration (NCUA) should publish a summary of the annual supervisory stress test results for covered credit unions.

The stress test estimates losses, pre-provision net revenues, loan and lease loss provisions, and net income; and the potential impact on the credit union's capital ratio under different scenarios.

Credit unions with at least $15 billion in assets are required to perform the stress test.

However, NCUA does not publish the results from the stress test.

But NCUA should follow the Federal Reserve's example.

On June 25, the Federal Reserve disclosed aggregate results for covered banks.

NCUA should publish information on aggregate losses, pre-provision net revenue, loan and lease loss provisions, and net income for covered credit unions under the different scenarios, as well as the impact on the net worth ratio for covered credit unions.

NCUA should also publish losses by loan types.

Credit union members, as well as the industry, have a right to know the ability of these covered credit unions to absorb losses under these different stress scenarios.

NCUA's Harper Critical of CUs Garnishing Stimulus Payments, Senate Passes Bill Exempting Payments from Garnishment

In a July 13 opinion piece in Credit Union Journal, the National Credit Union Administration Board member Todd Harper criticized those credit unions that had garnished members economic impact payments.

While the CARES Act exempted these stimulus payments from being offset for debts owed to federal and state agencies (except for child support), it did not protect these payments from garnishment or the right of offset.

Harper wrote that these payments were meant to cover daily living expenses of credit union members, who had been impacted by COVID-19.

Credit unions that garnished these payments faced potential damage to their reputation and potentially their business model.

He also pointed out that these credit unions could damage the image of the whole industry.

In related news, the Senate voted unanimously on July 23 to pass a bill (S. 3841) that would exempt the CARES Act economic impact payments from assignment or garnishment.

The legislation must still be passed by the House and signed into law in order to protect these payments from garnishment.

CEOs at Large State Chartered CEOs Earned 12.5 Times Average Employee Compensation

In 2018, Chief Executive Officers at state chartered credit unions with at least $1 billion in assets earned on average 12.5 times the average compensation of their employees.

The median ratio of CEO compensation to average credit union employee compensation was 10.99.

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).

The following table lists the 10 credit unions with the highest ratio of CEO compensation to average employee compensation. Elizabeth Dooley of Educational Employees Credit Union (Fresno, CA) had the highest ratio of CEO compensation to average employee compensation at 41.28.

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.

Average CEO Compensation at Large State Chartered CUs Tops $1 Million for Fifth Consecutive Year

The average compensation for Chief Executives at large state chartered credit unions with at least $1 billion in assets was $1,030,696 for 2018. This is the fifth consecutive year were the average compensation topped $1 million.

The median total compensation for 2018 was almost $838,372.

Total compensation includes base salary, bonus and incentives, other reportable income, retirement and deferred compensation, and nontaxable benefits.

Compensation information was obtained from Schedule J of Form 990s filed by state chartered credit unions with at least $1 billion in assets.

At the time this blog post was written, Form 990s for 2018 were not available for the following credit unions -- Municipal Credit Union (NY), Canvas Credit Union (CO), Rogue Credit Union (OR), and Cobalt Credit Union (IA).

Self-Help Credit Union (NC) filed a Form 990, but did not publish Schedule J.

Sixty-two CEOs reported total compensation of at least $1 million. The following table lists the 10 highest compensated large state chartered credit union CEOs.

Mean and median base compensation was $552,498 and $525,599, respectively. Seven CEOs had a base pay in excess of $1 million.

Mean and median incentives and bonuses were $172,853 and $118,419, respectively. Most large state chartered CU CEOs received some sort of incentive or bonus compensation.

Compensation information for CEOs at federal credit unions was not available as federal credit unions are not required to file Form 990s.

Corrections and Amplifications:

The Form 990 for Patelco Credit Union had an error. It was reported that Erin Mendez had a total compensation for 2018 of $2,470,580. The corrected total compensation for 2018 was $916,565. The error arose from the inclusion of Mr. Mendez's unvested 457(f) plan.
This blog post had earlier stated that 63 CEOs had total compensation of at least $1 million.
An earlier version reported that the base salary for University of Wisconsin CU's Paul Kundert was $1,915,557, which was the correct amount in Schedule J Part II B(1). However, it has been brought to the attention of this blogger that the narrative for Schedule J Part III included a deferred compensation payment in the amount of $1,317,000 in the $1,915,557 figure. Therefore, his base salary was $598,557.

House Adds AML Provisions to Defense Bill

With a bipartisan majority of 336 to 71, the House on July 20 voted to add anti-money laundering (AML) provisions to the 2021 National Defense Authorization Act (NDAA).
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Financial trade groups had urged House Armed Services Committee leaders to include key anti-money laundering provisions in NDAA. The provisions would direct the Financial Crimes Enforcement Network to establish and maintain a registry of beneficial ownership information and also modernize Treasury authorities and certain anti-money laundering requirements.

The groups noted that these provisions will “assist in preventing money laundering, human trafficking, drug smuggling, terrorism financing, fraud and other illicit activity.”

The House still needs to vote on passage of NDAA, as amended.


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NTU Calls Congress to Enact Reforms

In a July 16 letter to Chairman Crapo (R - ID), Ranking Member Brown (D - OH), Chairwoman Waters (D - CA), and Ranking Member McHenry (R - NC), the National Taxpayers Union (NTU), the nation's oldest taxpayer advocacy organization, called on Congress to enact serious reforms before raising the member business loan (MBL) cap for credit unions to address the economic crisis stemming from COVID-19.

NTU wrote that "Congress has a responsibility to demand enhanced transparency from the credit union industry, examine potential abuses that run counter to an institution’s tax-exempt purpose, and strengthen membership rules."

Specifically, the NTU is urging the Congress enact the following reforms:

• to require federal credit unions to file Form 990s;
• to subject federal credit unions to Unrelated Business Income Tax;
• to ensure tax parity with other financial institutions; and
• to address field of membership concerns.

NTU believes that these reforms would strike "a reasonable balance between increasing credit union [business] lending capacity and accountability, transparency and fairness."

NTU stated that it would oppose any legislation to increase the MBL cap, if these reforms are not addressed.

Read the letter.

Togther Credit Union Buys Naming Rights to Plaza

Together Credit Union (St. Louis, MO) is the title sponsor of Ballpark Village's newly completed outdoor plaza.

Ballpark Village is a mixed-use retail, entertainment, office and residential district that spans seven blocks in downtown St. Louis.

The newly opened Together Credit Union Plaza comprises nearly 40,000 square feet of outdoor public gathering space framed by Busch Stadium, OneLife Fitness, Sports & Social St. Louis, Live! by Loews – St. Louis, and Phase 1 dining and entertainment venues along Clark Street.

The Together Credit Union Plaza currently features tabled seating for more than 300 guests and a state-of-the-art LED screen for guests

The price tag of the sponsorship was not disclosed.

Read more.

NCUA Board Upholds FOM Expansion Denial

The National Credit Union Administration (NCUA) Board upheld the denial of a credit union's field of membership (FOM) expansion by the agency's Director of the Office of Credit Union Resources and Expansion (CURE).

As background, an unnamed multiple common bond credit union on January 25, 2019 requested CURE to add the local chapter of an unnamed association to its FOM. CURE on April 5, 2019 notified the credit union that it was deferring action and requested additional information, including whether the local the chapter has a physical location within reasonable proximity of the credit union’s service facility. On May 6, the credit union provided additional narrative and information documenting the chapter's existence and location. On October 29, 2019, CURE denied the FOM expansion request.

There were two reasons for the denial. First, CURE concluded that the local chapter did not exist as a separate legal entity and did not meet the reasonable proximity test. Second, because the group had more than 16,000 members, the group must demonstrate its inability to form its own credit union. CURE stated that the information provided was insufficient to substantiate the group’s claim.

The credit union appealed the denial to the NCUA Board.

In its appeal, the credit union submitted additional evidentiary support and information documenting the local chapter’s existence and the chapter's inability to form its own credit union.

However, the NCUA Board on May 21 affirmed the decision of CURE noting that this new information was not available to CURE during either its initial analysis or its resubmission analysis. The NCUA Board further stated that this Decision and Order does not preclude the credit union from submitting a new FOM expansion request to provide additional, updated information for CURE’s consideration.

Read more.

Application Withdrawn Regarding Collins Community CU's Acquisition of Small Illinois Savings Bank

The Federal Deposit Insurance Corporation is reporting that the application for First Savanna Savings Bank (Savanna, IL) to merge into Collins Community Credit Union (Cedar Rapids, IA) was withdrawn on June 18, 2020.

No explanation was provided for the withdrawal of the application.

This is the fourth application of a credit union acquiring a bank to be withdrawn this year.

Merge Will Create $6 Billion CU

Kinecta Federal Credit Union (Manhattan Beach, CA) and Xceed Financial Credit Union (El Segundo, CA) on July 16 announced that the two credit unions have reached a tentative agreement to merge.

The combined credit union will operate under the Kinecta Federal Credit Union name and charter and will have approximately $6 billion in assets, 300,000 members and 33 locations. It will be the nation’s 35th largest credit union, and California’s eighth largest in terms of asset size.

The merger requires approval by regulatory authorities and Xceed’s membership.

The merger is planned to be completed before the end of the first quarter of 2021.

Read more.

Digital Divide Between Large and Small CUs in the Age of COVID-19

S&P Global Market Intelligence is reporting that larger credit unions are increasing their investment in electronic services leading to a digital divide between large versus small credit unions.

The fallout from COVID-19 is underscoring the need to adopt electronic banking services as a vehicle to connect to members/consumers, as many branches closed their lobbies.

Mobile-based banking services offered by credit unions have steadily gained ground on internet-based banking services in recent years.

For example, 77.3 percent of credit unions offered internet-based banking, while only 48.7 percent provided mobile-based banking services. However, by the first quarter of 2020, the percent of credit unions offering internet-based banking and mobile-based banking services was 79.8 percent and 65.9 percent, respectively.

However, mid-sized and large credit unions are offering the most electronic financial services and are the most tech-savvy.

Over 97 percent of credit unions with more than $100 million in assets offer mobile banking services. But just over half of credit unions with less than $100 million in assets offer such services.

S&P Global Market Intelligence noted that there is a significant gap in e-signature authorizations between smaller credit unions, at 19.01 percent, and mid-sized and large institutions at 63.41 percent, and 70.06 percent, respectively.

Only 41.61 percent of the smallest credit unions permitted new loans to be originated electronically, compared to 92.38 percent of mid-sized credit unions and 95.76 percent of the biggest institutions.

The article makes it clear that these larger credit unions are better positioned to make the investments in technology than smaller institutions.

Read more.

Sharonview FCU to Buy Two S.C. Branches, Deposits and Loans from Bank OZK

Sharonview Federal Credit Union (Indian Land, SC) on July 15 entered into an agreement to with the Bank OZK (Little Rokc, SC) to purchase two branches in South Carolina.

The two branches -- Hilton Head Island and Bluffton -- have combined deposits of $107 million and $3 million in loans.

The deal is expected to close in the fourth quarter, pending regulatory approval.

The price tag of the deal was not disclosed, but the bank expects a small gain on the transaction.

After the transaction closes, Bank OZK will have no branch offices in South Carolina.

Read the Sharonview press release.

Read the Bank OZK press release.

Study Found Mixed Results for Credit-Builder Loans at CU

A recently released report by the Consumer Financial Protection Bureau (CFPB) found mixed outcomes for participants enrolling in credit-builder loan (CBL) program at a credit union.

CBLs are designed to allow individuals with no credit files or poor credit histories to build or repair their credit.

The CFPB’s study examined 1,531 CBL borrowers at a Midwestern credit union. Enrollment took place from September 2014 through February 2015.

About 82 percent of participants that entered the study had a credit score. Among participants who entered the study with a credit score, the average credit score was a subprime 560. Seventy percent of participants had an existing loan when entering the study, and 32 percent had a non-CBL loan from the credit union. Forty-five percent had been delinquent on one or more loans in the past twelve months. Sixty-two percent of participants had annual household income under $30,000. The majority of participants were female, nearly 90 percent were African American, the average age was 43, and about one in four had a college degree.

According to the study, when a borrower opened the CBL, the credit union moved $600 of its own dollars into a locked savings account. Borrowers were then required to make 12 monthly payments of $50 plus interest. After each payment, the lender released $50 to the borrower’s regular savings account. The credit union reported the borrowers’ payment histories to the three major credit reporting agencies: Equifax, Experian, and
TransUnion.

According to the study, CBLs were most likely to have positive outcomes for borrowers with no existing debt or credit score. For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24 percent. Participants without existing debt saw their credit scores increase by 60 points higher than participants with existing debt. Forty-five of the participants entering the study without existing debt made at least one late payment on CBL.

However, the study found that CBLs appeared to cause a slight decrease in credit scores for participants with existing debt.

The CFPB concluded that borrowers with existing debt may have had difficulty making payments on their CBLs and their current debts. The CBL was associated with a higher late-payment rate on non-CBL loans, and nearly four in 10 CBL borrowers made at least one late payment on their CBL.

The CBL was associated with an average increase in participants’ savings balances of $253. This increase was entirely driven by borrowers with existing debt.

“Overall, the results suggest that the CBL worked as intended for people without existing debt, but not for consumers who already had debt,” the bureau found, adding that “CBL delinquency rates serve as a reminder that CBLs may harm some consumers’ credit.”

According to the National Credit Union Administration, 1,509 federally insured credit unions offer credit builder loans, as of March 2020.

Read the study.

PPP Loan Data by Lender Type

The following table has information on the number of Paycheck Protection Program (PPP) loans, dollar amount of loans, and jobs by lender type as of the end of June 2020.

NCUA Should Revise Its Time Period Metrics for Measuring Performance

The National Credit Union Administration (NCUA) uses average time period metrics by which to measure its performance.

For example, the agency sets the goal of resolving troubled credit unions as within an average of 24 months of an initial CAMEL downgrade or making a determination on a completed field of membership application as within the average of 60 days.

Instead of setting the goal as averages, NCUA should set the goal as resolving troubled credit unions within 24 months or making a determination on a completed field of membership application within 60 days.

NCUA currently reports the average time period for resolving problem credit unions or processing field of membership applications; but the agency should also report the median time for these metrics, as averages can be deceptive.

The agency ought to report the number and percent of credit unions that met the agency's goals. The Federal Deposit Insurance Corporation (FDIC) discloses this information, as part of its transparency and accountability initiative.

In addition, NCUA should set a time period goal for making a determination on completed merger applications. I would suggest 60 days, which is the goal set by the FDIC.

Two Georgia CUs in Process of Defecting from Federal Charter

Marshland Community Federal Credit Union (Brunswick, GA) and Interstate Unlimited Federal Credit Union (Jesup, GA) are seeking to convert to state charters.

Marshland Community FCU primary objective in seeking a state charter is to enhance the credit union’s potential for growth. As a state charter, the credit union will be able to extend membership to more people beyond the current areas served by the credit union. Also the change in charter will position the credit union to offer new products and services, improve convenience and potentially open new branches in the future.

The Georgia Department of Banking and Finance approved the charter conversion on May 28.

The credit union is encouraging members to turn in their ballots on the charter conversion no later than July 16.

Marshland Community FCU has $154 million in assets, as of its most recent call report.

Interstate Unlimited FCU stated that the change in charter would better position the credit union to grow and to serve people that they currently could not.

The credit union stated that the conversion would cost approximately $20,000.

The credit union will hold a virtual special meeting on July 27.

Interstate Unlimited FCU has almost $196 million in assets, as of the end of March 2020.

Read more about Marshland's conversion.

Read more about Interstate Unlimited's conversion.

Should FOM Be Eliminated?

After the Supreme Court ruled in favor of NCUA's field of membership rule, the credit union lobby is calling for the end to any membership restrictions for credit unions.

Jim Nussle, President and CEO of the Credit Union National Association, in a recent op-ed called for Congress to eliminate the field of membership (FOM) requirement for credit unions.

Nussle argued that FOM has gone the way of the horse and buggy. He stated that common bond was a tool used to establish the credit-worthiness of members. But today FOM has been replaced by sophisticated modern tools that assess the ability of borrowers to repay their debts.

However, Laurie Stewart, President and CEO of Sound Financial, in an op-ed stated that relaxing field of membership rules is yet another move by the credit union industry and its regulator to create an unlevel playing field between tax-exempt credit unions and taxpaying community banks.

Stewart wrote: "“Eliminating the field of membership requirement is a gross perversion of the mission and purpose of credit unions as conceived by Congress in 1934."

In fact, Congress in 1998 re-affirmed that "a meaningful affinity and bond among members, manifested by a commonality of routine interaction, shared and related work experiences, interests, or activities, or the maintenance of an otherwise well-understood sense of cohesion or identity is essential to the fulfillment of the public mission of credit unions."

Stewart further argued that if credit unions want to act like banks, they should operate under the same rules, regulations and regulators as banks do.

In my opinion, if the field of membership requirement is an anachronism, so is the credit union tax exemption.

UK FCU Acquires Naming Rights to Esports Lounge and Theater

University of Kentucky Federal Credit Union (Lexington, KY) and JMI Sports, the University of Kentucky’s multimedia rights partner, have announced a naming rights partnership with the university for the esports complex in The Cornerstone, a new multiuse facility under construction on campus.

The lounge and theater will be called The UK Federal Credit Union Esports Lounge and Theater.

The naming rights deal will include both interior and exterior signage. UKFCU will also sponsor a feature night throughout the academic year, a speaker series and an esports conference as part of their partnership with UK and JMI Sports.

The naming rights deal is for 13 years. The price tag of the naming rights deal was not disclosed.

Read more.

201 CUs Borrowed from the Federal Reserve During Q2 2018

Credit unions borrowed an aggregate $270.7 million from the Federal Reserve's Discount Window during the second quarter of 2018.

The Federal Reserve reported that 201 credit unions visited the Discount Window 244 times during the quarter.

The average amount borrowed was $1,138,138. The median amount borrowed was $10,000.

The maximum amount borrowed during the quarter was $30,800 by Redstone Federal Credit Union (Huntsville, AL).

The credit union that frequented the Discount Window the most during the quarter were Aurora Credit Union (Milwaukee, WI), which borrowed from the Federal Reserve 15 times, and Redstone FCU (10 times).

The vast majority of the credit unions borrowing from the Discount Window used the primary credit program, which is available for the healthiest institutions. Three credit unions borrowed from the secondary credit program. One credit union used 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.

Over Half of CUs Reported Fewer Members Compared to a Year Ago

Over half of all federally insured credit unions reported a year-over-year decline in membership at the end of the first quarter of 2010, according to the National Credit Union Administration (NCUA).

At the median, credit union membership declined by 0.1 percent over the last year.

NCUA noted that credit unions with declining membership tend to be small with almost 70 percent of the credit unions had less than $50 million in assets.

In 23 states and the District of Columbia (D.C.), the median membership growth rate was negative. That means at least half of the credit unions in those states and D.C. had a year-over-year drop in membership.

At the median, membership at credit unions declined the most in New Jersey at -1.8 percent, Pennsylvania at -1.2 percent, North Dakota at -1.1 percent, and Arkansas at -1.0 percent.

Report: Very Little Progress Has Been Made in Reforming COSSEC

A 2020 Fiscal Plan report of the Financial Oversight and Management Board for Puerto Rico found that very little progress has been made in reforming the Public Corporation for Supervision and Insurance of Cooperatives of Puerto Rico (COSSEC) that was proposed in 2016 and 2017 by the Puerto Rico government.

According to the report, COSSEC’s system is composed of 113 locally-chartered and insured credit unions, holding approximately $8.3 billion in shares and deposits.

However, the Fiscal Plan noted that the island's credit unions face numerous challenges. Puerto Rican cooperatives had increased their investment in Puerto Rico government bonds in the run-up to the government's default on its debt. In addition, COVID-19 and the subsequent 4-month loan moratorium will have a negative impact on many cooperatives’ cash flows in the short term. Approximately, $1 billion in loans have participated in the 4-month loan moratorium.

The 2020 COSSEC Fiscal Plan recommends that COSSEC to develop and commit to a plan to identify and resolve any cooperatives that are currently insolvent and undercapitalized within 24 months.

The report states that COSSEC governance must be overhauled to allow COSSEC to act quickly, decisively, and in the best interests of the safety and soundness of the cooperative system and to ensure depositor protection. The COSSEC Board must be reformed to ensure that it is an independent
body.

Currently, COSSEC’s board is comprised of 9 members, 5 of which are cooperative members and the remaining 4 are government officials. It is being recommended that the board be comprised of 5 members, who cannot have any affiliation or financial ties to a cooperative regulated by
COSSEC or the cooperative movement. The Oversight Board recommended that legislation reforming COSSEC become law by March 2021.

The 2020 COSSEC Fiscal Plan looked at improving transparency in accounting. The legal system currently allows cooperatives to use Regulatory Accounting Principles (RAP). However, RAP does not require disclosure of the current market value of assets under distress.

Additionally, legislation permitted cooperatives to amortize over a 15-year period any losses resulting from the default of Puerto Rico Government Bonds.

The Government must submit legislation that addresses this critical gap by requiring all cooperatives to adhere to GAAP within 5 years. Also, legislation needs to abolish any special accounting treatment for holdings of Puerto Rico Government Bonds.

Furthermore under the current structure, COSSEC is the regulator for both financial and certain non-financial cooperatives in Puerto Rico. However, non-financial cooperatives do not contribute to COSSEC’s resources. The report recommended that the regulatory power over these non-financial cooperatives be transferred to Comisión de Desarrollo Cooperativo with an effective date of no later than the end of Fiscal Year 2023.

To read the document, go to the Financial Oversight and Management Board's documents page.

Consumer Credit Shrinks at CUs in May

The economic disruption caused by the COVID-19 pandemic caused outstanding consumer credit at credit unions to fall for the month of May. However, the pace of decline slowed compared to April's pace, according to data from the Federal Reserve.

Outstanding consumer credit at credit unions declined by $5.7 billion in May to $470.4 billion.

Both revolving and nonrevolving credit fell for May.

Revolving credit slipped from $61.6 billion in April to $60.8 billion in May. This was the fifth consecutive monthly decline in revolving credit at credit unions.

Nonrevolving credit declined by $4.8 billion in May to $409.7 billion after falling by $10.2 billion in April.

Read the G.19 Report.

NCUA to Reinstate Rural District for 18 CUs Impacted by ABA Lawsuit

The National Credit Union Administration (NCUA) announced that it will reinstate rural districts for 18 credit unions that were removed by the American Bankers Association (ABA) lawsuit.

This action was based upon the United State Supreme Court denying ABA's appeal to review the D.C. Circuit Court of Appeal’s decision on the NCUA’s field of membership rules.

The NCUA’s Office of Credit Union Resources and Expansion will contact these 18 credit unions by July 10, 2020, to confirm the reinstatement. No further action will be required for these credit unions.

For any federal credit union with a rural district field of membership application in limbo during the litigation period, the NCUA will resume processing these applications, immediately. The NCUA will also begin accepting new rural district field of membership applications, immediately.

A proposed area would generally qualify as a rural district if it has well-defined, contiguous geographic boundaries, and the total population of the proposed district does not exceed one million. A rural district must also meet the criteria that either more than 50 percent of the proposed district's population resides in census blocks or other geographic units that are designated as rural by either the Consumer Financial Protection Bureau or the United States Census Bureau, or the district has a population density of 100 persons or fewer per square mile.

Read more.

AMAC Adequately Safeguards Personal Identifiable Information at Liquidated CUs

The National Credit Union Administration (NCUA) Office of Inspector General (OIG) conducted a self-initiated audit to assess the NCUA’s Asset Management and Assistance Center’s (AMAC) ability to protect personally identifiable information (PII) found within the records of liquidated credit unions.

NCUA’s liquidation process consists of three phases: liquidation planning, on-site liquidation tasks, and off-site liquidation tasks.

The OIG found that AMAC’s control activities over its liquidation process adequately safeguarded PII during: (1) the pre-liquidation planning process, (2) records maintenance, and (3) destruction of records of liquidated credit unions.

As a result, the OIG did not make any recommendations.

Read the report.

4 out of 5 FICUs Reported Positive Net Income in Q1 2020

Approximately 80 percent of all federally insured credit unions (FICUs) reported a profit for the first quarter of 2020.

At the end of 2019, 89 percent of FICUs were profitable.

The increase in provisions for loan and lease losses due to COVID-19 pandemic related economic disruption and narrower net interest margins caused fewer FICUs to report a profit in the first quarter.

First quarter call report data show that 4,175 FICUs had positive net income.

Net income and size are positively correlated.

Roughly two-thirds of credit unions with less than $10 million in assets were profitable during the first quarter of 2020. In comparison, almost 89 percent of credit unions with at least $1 billion in assets reported a profit.

The following table shows the percent of credit unions that are profitable by asset size.

Heritage FCU to Buy Indiana Community Bank

Heritage Federal Credit Union (Newburgh, IN) has agreed to buy The Elberfeld State Bank (Elberfeld, IN).

Heritage FCU has almost $700 million in assets, as of the last call report.

The Elberfeld State Bank has three branches. The bank has $82.1 million in assets and $71.3 million in assets.

The deal needs the approval of the bank's shareholders and regulators.

The deal is expected to close in the first quarter of 2021.

The price of the transaction was not disclosed.

Read the story.

Net Income at FICUs Fell by 40 Percent Compared to a Year Ago

Net income at federally insured credit unions (FICUs) fell by 40 percent at the end of the first quarter of 2020 compared to a year ago, according to the National Credit Union Administration.

Net income was $2.1 billion as of March 31, 2020. In comparison, net income was $3.5 billion as of March 2019.

The decline in net income was partially due to an increase in provisions for loan and lease losses. Provisions for loan and lease losses were $2.13 billion at the end of the first quarter of 2020, up from $1.6 billion at the end of the first quarter of 2019.

The return on average assets was 0.53 percent as of March 2020, down from 0.95 percent from a year earlier and 0.93 percent at the end of 2019. The median return on average assets was 0.41 percent as of March 2020, down 14 basis from the first quarter of 2019 and 19 basis points at the end of 2019.

Net interest margins at FICUs fell 16 basis points from a year ago to 2.95 percent as of the first quarter of 2020.

As of March 2020, provisions for loan and lease losses as a percent of average assets were up 10 basis points from a year ago to 0.53 percent.

Assets and Shares Post Solid Growth During First Quarter

Assets at FICUs increased by 4.6 percent during the first quarter of 2020 to $1.64 trillion.

Total shares and deposits were up 4.3 percent during the first quarter, while loans grew by just 0.8 percent over the same time period.

FICUs reported a decline in new car, credit card, and payday alternative loans during the first quarter of 2020. First mortgages, used car, and commercial loans grew during the quarter.

As a result of shares growing faster than loans, the loan to shares ratio fell from 83.95 percent as of December 2019 to 81.14 percent as of March 2020.

Most FICUs Are Well-Capitalized

Net worth at FICUs grew by 1.2 percent during the first quarter of 2020 to $180.4 billion. However, the net worth ratio fell by 36 basis points during the first quarter of 2020 to 11.01 percent. One year earlier, the net worth ratio was 11.13 percent.

Slightly more than 98 percent of FICUs had net worth ratio of at least 7 percent as of March 2020 -- the minimum requirement for being well capitalized. Three credit unions had negative net worth ratios as of March 2020.

Delinquent Loans Fell During Q1 2020

FICUs reported $7.1 billion in delinquent loans as of March 2020 -- this is down from $7.8 billion at the end of 2019. The delinquency rate fell 7 basis points during the first quarter of 2020 to 0.63 percent.

Net charge-offs were $1.6 billion as of March 2020, up from $1.5 billion from a year earlier. The net charge-off rate rose by 1 basis point from a year ago to 0.58 percent as of March 2020.

Allowance for loan and lease losses was $10.1 billion at the end of March 2020, up from $9.2 billion a year earlier. The industry's coverage ratio was 142.16 percent as of March 2020.

At the end of March 2020, 168 credit unions had a CAMEL Composite rating of 4 and 4 credit unions had a CAMEL Composite rating of 5.

At the end of March 2020, there were 5,195 FICUs, down from 5,236 FICUs at the end of 2019.

Read the quarterly data summary.

NetFlix Invests $10 Million into Hope CU

Netflix on June 30 announced a $10 million deposit in Hope Credit Union (Jackson, MS).

This deposit is part of a $100 million initiative launched by Netflix to invest in Black communities.

According to Hope CU, this deposit from Netflix will support more than 2,500 entrepreneurs, homebuyers and consumers of color.

Read the press release.