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).

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.

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.

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.

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.

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.

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.

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.

NCUA Provides Update on Minority Depository Institution CUs

Minority Depository Institution (MDI) credit unions lagged behind all federally insured credit unions (FICUs) with respect to most performance metrics for 2019 except net worth ratio, according to the National Credit Union Administration (NCUA) 2019 Annual Report to Congress.

The following table looks at select performance metrics for all FICUs versus MDI CUs for 2019

Also, here is some demographic information about MDI CUs.

As of December 31, 2019, there were 514 federally insured credit unions (FICUs) with the MDI designation in 36 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Approximately 10 percent of all FICUs are MDIs.

The number of MDI credit unions declined by 16 between 2018 and 2019, mirroring the general long-term trend of consolidation in the financial services sector.

MDI credit unions tend to be smaller institutions. Eighty-seven percent reported total assets of $100 million or less at the end of 2019. Fifty-seven percent had less than $10 million in assets. The average asset size was $78.86 million.

Additionally, 79 percent of MDI credit unions had a low-income designation.

Read more.

Consumer Credit at CUs Fell in April Due to Pandemic Economic Disruption

The Federal Reserve reported on June 5 that outstanding consumer credit at credit unions fell in April, according to its G. 19 report.

Total outstanding consumer credit declined from $489 billion in March to $476.7 billion in April, due to economic disruptions arising from COVID-19. This would translate to an annualized decline in consumer credit at credit unions of $147.4 billion.

Both revolving and nonrevolving credit at credit unions declined in April.

Revolving credit fell by $2.6 billion in April to almost $61.7 billion. This is the fourth consecutive monthly decline in outstanding revolving credit at credit unions.

Nonrevolving credit tumbled in April by $9.6 billion to approximately $415.1 billion.

Fewer Problem CUs During the First Quarter of 2020, NCUSIF Reserves Up

The number of problem credit unions fell during the first quarter of 2020, according to the National Credit Union Administration (NCUA).

There were 175 problem credit unions at the end of the first quarter of 2020. In comparison, there were 190 problem credit unions at the end of 2019.

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

Shares (deposits) in problem credit unions declined from $9.7 billion at the end of 2019 to $9.4 billion, as of March 2020. At the end of first quarter of 2020, 0.77 percent of total insured shares were problem credit unions compared to 0.79 percent of total insured shares at the end of 2019.

Most problem credit unions were small credit unions.

NCUA reported that almost 88 percent of the problem credit unions have less than $100 million in assets, while 1.7 percent of problem credit unions have more than $500 million in assets.

However, almost 45 percent of insured shares in problem credit unions were in credit unions with $500 million or more in assets.

In addition, NCUA stated that reserves at the National Credit Union Share Insurance Fund increased during the first quarter of 2020 from $117 million to $177.7 million.

A Snapshot of Y-o-Y Performance of the 10 Largest CUs

The 10 largest credit unions at the end of 2019 saw in aggregate increases in provisions for loan and lease losses and allowance for loan and lease losses in the first quarter of 2020 compared to a year earlier. Net income at these 10 credit unions in aggregate fell year-over-year.

These 10 credit unions accounted for almost 18 percent of the industry's assets.

In aggregate, provisions for loan and lease losses grew by 47.2 percent Boeing Employees Credit Union posted the largest year-over-year percentage change in provisions for loan and lease losses of almost 389 percent.

Net income fell by a combined 55 percent year-over-year at these 10 credit unions. two credit union reported a year-over-year increase in net income, while two credit unions posted losses in the first quarter of 2020 after posting positive earnings a year earlier. The credit union with the largest year-over-year percentage decline in net income was Alliant Credit Union of 341 percent.

Allowance for loan and lease losses grew year-over-year by a combined 19.5 percent. Alliant CU posted the largest year-over-year percentage change, followed by Pentagon FCU.

Consumer Credit at CUs Increased in March

The Federal Reserve reported on May 7 that outstanding consumer credit at credit unions grew in March, according to its G.19 report.

Outstanding consumer credit at credit unions increased by $4.1 billion in March to $489 billion.

Revolving credit at credit unions fell by $900 million in March to $64.3 billion.

However, outstanding nonrevolving credit rose by $5 billion in March to $424.7 billion.

OMWI Report: Men Outnumber Women in Leadership Positions at Large CUs

Recently, the National Credit Union Administration Office of Minority and Women Inclusion (OMWI) released its 2019 Annual Report.

The report provides information on diversity practices at credit unions.

While a slight majority of credit union managers and chief executive officers are women, female managers and CEOs outnumber men only in credit unions with less than $100 million in assets. Men primarily run credit unions with $100 million or more in assets.

NCUA reported that in 2019, 118 federally insured credit unions (76 federal and 42 state-chartered) submitted Credit Union Diversity Self-Assessments. This was up from 81 credit unions in 2018.

According to the Self-Assessment survey, 55.6 percent of responding credit unions reported a leadership and organizational commitment to diversity, while 48.2 percent reported taking steps to implement employment practices to demonstrate that commitment. But only 29.0 percent of the reporting credit unions were monitoring and assessing their diversity policy and practices.

The Self-Assessment survey found that few credit unions had developed solid business practices with regard to supplier diversity (7.7 percent) and transparency of diversity and inclusion practices (17.2 percent).

NCUA stated that 44 credit unions that did the self-assessment in both 2018 and 2019 reported a year over year improvement in their diversity practices.

However, these self-assessment results should not be generalized to the entire industry, as the results are probably skewed by sample selection bias.

Read the report.

132 CUs Borrowed from Fed's Discount Window in Q1 2018

During the first quarter of 2018, 132 credit unions borrowed from the Federal Reserve's Discount Window.

Credit unions accessed the Federal Reserve's Discount Window 183 times during the first quarter of 2018 and borrowed an aggregate $243.7 million.

The average amount borrowed was $1,331,754 during the first quarter of 2018. However, the median amount borrowed was $10,000.

The maximum amount borrowed during the quarter was $42 million by United Nations Federal Credit Union (Long Island City, NY).

While most credit unions only visited the Discount Window once during the quarter, two credit unions were active borrowers from the Federal Reserve. Aurora Credit Union (Milwaukee, WI) visited the Discount Window 19 times during the quarter, followed by True North Federal Credit Union (Juneau, AK), which borrowed 17 times from the Discount Window.

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

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

Consumer Credit Up at CUs during February 2020

The Federal Reserve reported that outstanding consumer credit at credit unions rose during February 2020, according to it G.19 report released on April 7.

Outstanding consumer credit at credit unions increased by $2.4 billion during February 2020 to $484.9 billion.

Revolving credit at credit unions contracted by almost $700 million during February to $65.2 billion. This is the second consecutive monthly decline in revolving credit balances at credit unions.

Nonrevolving credit expanded by approximately $3.1 billion to $419.7 billion during February.

Read the G.19 Report.

89 Percent of CUs Profitable During 2019

The National Credit Union Administration reported that 89 percent of federally-insured credit unions reported positive net income during 2019.

All credit unions with at least $1 billion in assets were profitable during 2019.

The following table shows the number and percent of credit unions that were profitable for 2019 by asset size group. There is an inverse relationship between asset size and the percent of credit unions by asset size group reporting positive net income.

The median return on average assets reached 60 basis points during 2019, up 4 basis points from a year earlier.

However, it is likely that the economic disruptions arising from COVID-19 will adversely impact the industry's profitability for this year.

CUs in 22 States and DC Had Negative Median Membership Growth in 2019

At least half of the federally-insured credit unions in 22 states and the District of Columbia reported a decline in membership for 2019, according to the National Credit Union Administration.

At the median, credit union membership declined the most in Pennsylvania at minus 1.2 percent for 2019, followed by credit unions in Arkansas at negative 1 percent.

The data show that there is a positive relationship between median state membership growth and median state deposit (share) growth in 2019. The R-squared is 0.4793. This indicates that almost half of the observed variation in median state share growth can be explained by median state membership growth. (click on image to enlarge)

Nationally, year-over-year membership growth at the median credit union was unchanged for 2019.

Most credit unions that reported a year-over-year decline in membership tend to be small with over 70 percent of the credit unions reporting a decline in membership have less than $50 million in assets.

Read more.

Commercial Share Accounts Up 16.6 Percent in 2019

Commercial share (deposit) accounts at credit unions grew by 16.6 percent during 2019 to $40.8 billion.

At the end of 2013, credit unions reported $16.3 billion in commercial share accounts.

The following graph shows the growth of commercial accounts between 2013 and 2019, which is up 150 percent.