Credit Unions Kept Pace With Mortgages in 2020

on 9:27 AM

 Credit unions kept up with other lenders in mortgages last year, while falling behind in automotive loans.

Data released Tuesday by the FDIC showed the economic effects of the pandemic were similar for banks and credit unions: Big increases in savings, small growth for loans and surprising resilience in returns on average assets.

Credit unions held $384.5 billion in auto loans as of Dec. 31, just 0.9% more than a year earlier, according to the Credit Union Trends Report released Tuesday by CUNA Mutual Group of Madison, Wis.

Meanwhile, auto loans at banks grew 1.7% to $491.7 billion, and auto loans held by captives and others grew 9.1% to $351.7 billion.

Until mid-2019, credit union auto loans were growing much faster than banks. Since then, growth rates at banks have been at least twice that of credit unions.

As a result, credit union market share has shrunk. They ended 2020 with 31.3% of automotive loans, down from 32.1% a year earlier and a post-Great Recession peak of 32.6% in 2018.

New car loans fell 3.8% to $144 billion in 2020 after falling 0.1% in 2019. Used car loans grew 4% to $240.6 billion last year, the same pace as 2019.

Steve Rick, chief economist for CUNA Mutual Group, said he expects new auto loans to resume growth in the second quarter. He said several factors combined last year to drive down automotive lending.

“The pandemic raised job and income insecurity among potential new auto buyers, rapid loan originations two to three years ago precipitate larger loan balance amortization today, new auto sales declined 14% over the last year, members used ‘cash out’ funds from mortgage refinances to pay off auto loans and rapid growth of indirect auto lending has leveled off,” Rick said.

Credit unions fared better with mortgages. They held $523.3 billion in first mortgages on Dec. 31, up 10.9% from the end of 2019. Banks held $2.2 trillion in residential mortgages on Dec. 31, up 0.4% from a year earlier.

Fixed-rate first mortgage loan balances rose 14.2% in 2020, the fastest annual pace since the 17.6% reported during the housing bubble of 2008, according to CUNA Mutual Group.

Like autos, household saving trends cut into balances for credit cards and home equity lines of credit. Credit cards fell 6.4% to $62.6 billion and second-lien real estate loans fell 7.5% to $86 billion “due to members rolling existing loan balances into refinanced first mortgages,” Rick said.

“By year-end, fixed-rate first mortgages made up 33.7% of all loans, the highest in credit union history,” he said. Their share of the portfolio was up from 31% at the end of 2019 and 22.6% at the beginning of the Great Recession in 2007’s fourth quarter.

However, mortgage balances have been highly managed. Banks have tended to sell a much higher percentage of their mortgages, although credit unions have increased their sales in recent years.

A truer picture of the trend is mortgage originations. Credit unions originated $291.1 billion in first mortgages in the 12 months ending Dec. 31, up 63% from 2019, according Callahan & Associates, a credit union company based in Washington, D.C.

Originations for other lenders increased at the same rate to $3.4 trillion, comparing data from Callahan and the Mortgage Bankers Association, also of Washington, D.C.

Those numbers showed credit unions had 8% of the $3.7 trillion in originations last year, about the same share as the year before.

Narrowing interest margins and lower fees have cut into earnings for more than a year, but the pandemic triggered huge loan loss provisions for both banks and credit unions. The provisions cut deeply into earnings, but things could have been worse. Both banks and credit unions ended the year with margins at or slightly below those of 2019’s fourth quarter.

Banks were much more aggressive in making provisions for potential loan losses after COVID-19 was declared a pandemic March 11, 2020.

Banks’ provisions each quarter in 2019 had ranged consistently between an annualized 0.28% and 0.32% of average assets, but in 2020 they ramped up to 1.08% in the 2020’s first quarter and 1.20% in the second quarter. Banks dropped them just as dramatically to 0.27% in the third quarter and 0.07% in the fourth quarter.

Credit unions reacted slower. Their provisions ranged from 0.42% to 0.44% in 2019. In 2020 they rose, but peaked at a relatively lower level: 0.64% in 2020’s second quarter. They have subsided more gradually as well. In the fourth quarter they were 0.30%.

Callahan has estimated credit unions’ annualized return on average assets (ROA) was 0.83% for the three months ending Dec. 31 — just 2 basis points above 2019’s fourth quarter and up from the first-quarter low of 0.53%.

Banks had a similar pattern. Their pre-tax ROA was 1.38% for the fourth quarter, down from 1.49% in 2019’s fourth quarter, but up from the second-quarter low of 0.40%.

PPP rules are changing: What you need to know about the revamped Paycheck Protection Program

on 8:11 AM

 The Biden has announced that the popular Paycheck Protection Program (PPP) will see some rules changes starting on Wednesday, February 24th, reports CNN. These changes are an attempt to help make PPP loans fairer and easier to obtain for minority-owned and very small businesses.

  • Small biz exclusive window: the biggest change to the PPP program will be that small businesses with fewer than 20 employees will now have an exclusive two-week window where only they can apply for PPP loans. This exclusive window will ensure a speedier application process since big businesses will be barred from applying at the same time and flooding PPP loan officers with applications.
  • More money: Previously, the amount of a PPP loan was calculated based on the number of employees a business had. Under the Biden administration changes, sole proprietors, independent contractors, and the self-employed can now qualify for more funding.
  • More inclusive: the new rules also mean more people can apply for a PPP loan, including some felons, people who are delinquent on their federal student loan payments, and Green Card holders.

“While the Paycheck Protection Program has delivered urgent relief to many businesses across the country, the initial round of PPP last year left too many minority-owned and mom and pop businesses out while larger, well-connected businesses got funds quickly,” a Biden administration official told reporters on Sunday.

The Paycheck Protection Program is officially administered by the U.S. Small Business Administration. You can find out more about applying for a PPP loan here.

CUs May Be Headed for Showdown With Harper on Overdraft Rule

on 8:48 AM

 The credit union community and new NCUA Chairman Todd Harper may be heading for a showdown over a proposed rule that changes the agency’s policies on overdrafts. Credit unions and their trade groups support the plan, while Harper and several consumer groups said it would not benefit consumers as they weather the economic impact of the pandemic.

“The proposed change to remove the 45-day limit will be beneficial to credit unions,” Mary Mullens, enterprise risk manager at the Michigan Schools and Government Credit Union, told the agency, in commenting on the proposed rule.

In December, the board approved a proposed rule that would require credit unions to establish specific time limits for members to either deposit funds or obtain a loan to cover each overdraft. Currently, the NCUA rules prescribe a 45-day time limit for members to solve overdraft problems.

When he was chairman, Republican board member Rodney Hood had tried to bring the overdraft rule to the board but was blocked by Harper and then-board member Republican J. Mark McWatters. When Republican Kyle Hauptman replaced McWatters, Hood brought the policy back to the board. Hood and Hauptman voted to approve it, while Harper continued to oppose it.

Since then, Harper, a Democrat has taken over as chairman. And while the chairman generally controls the board’s agenda, Hood and Hauptman could force the issue before the board if they give proper notice in advance of a board meeting.

Harper voiced his opposition at the December meeting. He said, “The reality is that overdraft programs are products of financial exclusion, not financial inclusion.” He said that the board could have taken a bold step toward helping credit union members deal with overdraft but chose not to.

Consumer groups, as well as officials from the Self-Help Credit Union and the Self- Help Federal Credit Union agreed. “By extending the time period for negative balance resolution beyond 45 days, the proposal would expose members to additional overdrafts, overdraft fees, and non-sufficient funds fees during the extended period,” they said.

But Kendra C.J. Rubin, chief legal officer at SEFCU, headquartered in Albany, N.Y, said that the “one-size-fits-all regulatory requirement makes it difficult for individual credit unions to align their overdraft charge-off policies with other charge-off policies.”

Mullins said that the rule will give credit unions the ability to determine an appropriate time frame that meets their “unique situation.”

Christopher McKenna, president/CEO at Cap Com Federal Credit Union, also in Albany said that it is in the best interest of a credit union to be able to determine the length of time to cure an overdraft.

CUNA officials voiced their support for the proposal.

“We believe arbitrarily limiting the ability of credit unions to work with members at this time – especially because of rigid regulatory language – is the wrong course of action and should be corrected,” said Alexander Monterrubio, CUNA’s senior director of advocacy and counsel.

NAFCU also endorsed the proposed rule, with Elizabeth Young LaBerge, the group’s senior regulatory counsel saying, “No consumer protection argument in support of a 45-day time frame, as opposed to a 60- day or 90-day time frame, has been raised and indeed there are no policy reasons for doing so.”

But the consumer groups, including the Center for Responsible Lending, as well as the Self-Help credit unions said that the majority of overdraft fees are paid by a small number of members who can least afford the fees. They said that the groups presented the NCUA board with the risks posed by the proposal when it originally was discussed in May.

They added that President Biden ordered agencies to review any questions of fact, law, and policy in rules, including proposed rules that have not yet taken effect.

As an independent agency, NCUA is not subject to that order, but agency officials have said in the past that they attempt to follow the spirit of such orders.

The consumer groups told the board that the overdraft rule falls under the categories of rules that Biden said should be reviewed.

“NCUA’s proposal clearly raises significant questions of fact and policy given it provides no evidence of its purported benefit and fails to consider the harms it could inflict,” they said.

Credit Union Margins Remain Under Pressure

on 5:01 PM

 Credit union earnings will be continue to be depressed over the next two years because of low interest rates and less non-interest income, according to CUNA’s latest forecast.

CUNA’s economic and credit union forecast released Feb. 12 expects the economy to improve much faster than it forecast in November, but it remains pessimistic about credit union margins.

CUNA estimates return on average assets (ROA) for the 12 months ending Dec. 31 was 0.65%, down from 0.93% for 2019. And, it is predicting that ROA will fall to 0.50% both in 2021 and 2022. The forecast is a product of collaboration between economists at CUNA and at CUNA Mutual Group, both of Madison, Wis.

Last year’s ROA “was propped up by fees from significant sales on mortgages and PPP [Payroll Protection Program] loans,” said Jordan van Rijn, CUNA senior economist and the report’s author. “Overall, the very low interest rates and falling loan to share ratio means that credit unions will be forced to place funds in low yielding investments, and newly disbursed loans will receive tiny interest margins.”

However, CUNA has been underestimating credit union earnings. Its current forecast assumes ROA of 0.66% for the fourth quarter of 2020, up from its November forecast of 0.35%.

Callahan & Associates, the credit union company based in Washington, D.C., last week estimated 0.83% ROA for the fourth quarter, up from 0.81% in 2019’s fourth quarter and 0.79% in 2020’s third quarter.

NCUA call reports for the 10 largest credit unions show their fourth-quarter ROA was 1.01%, up from 0.95% in 2019’s fourth quarter and 0.60% in 2020’s third quarter.

Data from the Top 10 credit unions and Callahan show the improvement came from a sharp drop in loan loss provisions and higher non-interest income, particularly from mortgage sales. NCUA’s full set of fourth-quarter data is expected in early March.

For the broader picture, CUNA forecasts a faster economic recovery this year than it had forecast in November.

Last year, Gross Domestic Product (GDP) fell 3.5%, its worst full-year drop since 1946. The unemployment rate fell from its April peak to 6.3% in January, but the pace of recovery slowed significantly over the past few months.

Yet CUNA cited signs of hope in falling COVID-19 cases, rising vaccinations and President Biden’s plan for an additional $1.9 trillion stimulus package that includes expanded unemployment benefits, support for schools and hospitals, and additional direct payments to households.

“For credit unions, the additional stimulus will dramatically increase savings growth and help maintain relatively healthy portfolio quality, and the recovery and low interest rates will support modest loan and membership growth,” van Rijn said. “However, low interest rates will squeeze earnings and the loan to share and net worth ratios will continue to fall.”

Van Rijn said the most significant changes from its previous November forecast include:

  • The economy will grow 3.5% in 2021, up from its previous forecast of 2.5%.
  • Consumer Price Index inflation will rise 2.1% in 2021, up from its previous estimate of 1.2%.
  • The unemployment rate will fall to 5.5% by year’s end, down from its previous forecast of 7%.
  • Savings will grow 15% this year, up from its previous 8% forecast, and assets will grow 13.5%, up from its previous 7% estimate. Both revisions are based on the additional stimulus expected this year.
  • Credit union portfolio quality is expected to be better than previously anticipated. Delinquency rates will rise only slightly to 0.80% in 2021, down from its previous estimate of 1.10%. Net charge offs will rise to 0.60%, down from its previous forecast of 0.80%.

CUNA’s forecast assumes vaccinations will reach roughly half of the population by the summer, the U.S. will approach herd immunity during the second half of the year, and, “given Democratic control of Congress,” Biden will be able to sign a stimulus plan roughly equal to the one proposed in March or April.

Credit unions can expect continued sluggish growth in loans, and fast growth in savings. As a result, the loan-to-share ratio will fall from 73.6% as of Dec. 31 to 65.6% by the end of this year and 64.4% by the end of 2022.

Total loans were $1.9 trillion as of Dec. 31, up 5% from a year earlier, largely on the strength of mortgages and PPP loans. CUNA expects portfolios will grow another 5% this year and 8% in 2022.

“We expect auto lending to recover and mortgage lending to remain strong,” van Rijn said. “However, headwinds to faster growth include fewer PPP loans and households using stimulus funds and mortgage refinancing to pay down existing debt, such as credit cards.”

Savings grew 20.6% to $1.62 trillion last year. “Stimulus will continue the strong deposit growth at credit unions and CUNA economists anticipate savings growth of 15% for 2021 mostly concentrated in the first and second quarters before falling to 5% in 2022,” he said.

How soon will fee income rebound at credit unions?

on 8:19 AM

 Credit unions are struggling to set expectations for growth in fee income this year.

Third-quarter data from the National Credit Union Administration, the most recent information available, showed a 9.5% year-over-year increase in noninterest income, compared with 5.5% growth in the year ending Sept. 30, 2019. However, that figure — which includes gains from investments in credit union service organizations and other income sources — masks a substantial decline in fee income, which was down by about 12%. That drop reflects the fact that not all credit unions participated in the Paycheck Protection Program or benefitted from the mortgage refinancing boom, both of which generated fee income. Many consumers also had less need for overdraft protections thanks to stimulus checks and expanded unemployment benefits.

The bigger problem is that it’s not clear where growth will come from in 2021.

 Create actions from insights and grow your debit and credit card portfolio

Debit, credit and member transaction data can help you probe additional business opportunities

“Some of those gains we saw last year are neither sustainable nor replicable,” said Steve Reider, CEO of the consultancy Bancography.

Many credit union leaders are hoping an economic rebound later in the year contributes to an increase in interchange income. NCUA data doesn’t separate swipe fees from other noninterest income, but it’s clear that consumer spending dropped substantially in the first half of the year before picking back up somewhat in the summer and fall, suppressing interchange income, said Norm Patrick vice president of PSCU’s Advisors Plus consulting division.

Travel, entertainment, restaurants and gasoline remain four of the biggest categories holding back the payments market, said Patrick.

“Those are four very different segments, but if we could get those back into the positive, that’s really going to help make some traction — in particular on the credit card side — with getting back to normal," he said. "But again, as far as timing and to what extent, the jury is still out.”

Ongoing vaccinations will also contribute to a rebound, added Reider, and credit unions could begin to see the effect of that by summer.

“I believe there’s going to be a massive pent-up summer travel kick, and even people who aren’t vaccinated are going to feel a little bit safer,” said Reider. That’s going to lead to the return of family activities like beach vacations and Disney trips, he said. “All of that occurs on credit cards or debit cards.”

On top of that, said Reider, the vast majority of credit unions are under the $10 billion-asset mark, they’ll receive a larger interchange fee than those above $10 billion, as mandated by law.

Until then, some credit unions are hoping the latest round of PPP funding and ongoing mortgage refinancing can keep noninterest income flowing.

Credit unions have only accounted for a small part of overall PPP loan volumes, with recent figures from the Small Business Administration showing the industry accounts for just 15% of lenders and less than 3% of total loan volumes in 2021.

Still, for credit unions that have participated, the program has provided a hefty dose of revenue.

Evergreen Credit Union in Portland, Maine, earned more than $4.5 million in noninterest income last year, according to call report data from the NCUA, a 13% increase over 2019. But Kate Archambault, the $401 million-asset credit union’s chief financial officer, said those figures are, “a little bit misleading, because most of our noninterest income was down, but we did over $9 million in PPP loans, and that’s what made it up for us.”

Evergreen budgeted an 8.5% increase this year on the assumption that interchange revenues return to normal in the second half and mortgage originations slow as rates rise due to an improving economy. The credit union’s forecast does not include PPP loans, however, since the latest round of the program had not been announced when that budget was set.
Notre Dame FCU in Indiana was also heavy into PPP lending last year, which helped boost noninterest revenues substantially, but CEO Tom Gryp said the fees that came from selling mortgages were just as impactful. Fee income was up by 50% last year to over $7.7 million, and the credit union sold nearly $258 million in first mortgages to the secondary market in 2020, compared to just $105 million the year before.

Gryp predicted similar trends for 2021 “but probably off of the 2020 highs, because [PPP] activity is not as robust as the first round and we expect the refinance pool will start shrinking,” he said. “There’s still going to be purchase activity but the rush of people to refinance their homes will go down because people have already refinanced.”

Some suggested that as the economy rebounds and government stimulus efforts abate, credit unions could see an increase in fee income from overdrafts.

“Our [non-sufficient funds] fee income dropped off almost 22% between 2019 and 2020, and budgeting for 2021 we are still below 2019 levels … so I think it’s going to be a two- to five-year time frame for certain fees to come back up,” said Archambault.

With fee income already down, the pandemic could spur credit unions to put an increased focus on other offerings that generate noninterest revenue, such as insurance and wealth management.
“At the top end of the industry you’ve got some pretty sophisticated offerings, but that 10-20 branch, $700 million - $2 billion[-asset] range, they’ve probably got a lot of room to run in that area, even to the extent that they have a fully built-out offering but they haven’t yet really conquered the cross-sell process,” said Reider. “They may have the product side built and even the delivery side, but they haven’t yet really exploited penetrating deeply into their own member base.”