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.