Posts filed under ‘econony’

Muddled Economic Outlook for CUs Continues to Challenge Industry

The economy continues to send out mixed signals when it comes to the environment in which credit unions will be operating for at least the next year. Unfortunately, the conditions seem to be ideally suited to accelerate the bifurcation of the industry between those credit unions large enough to compensate for historically low interest rates with increased lending and those primarily dependent on investment income.

That is the take of this armchair-economist-wannabe of the NCUA’s first quarter summary of the industry’s financial performance. It paints a picture of an improving economy which will nonetheless continue to squeeze the profits of many small to medium sized credit unions.  For example, credit union share deposits rose 23 percent over the last year to $1.69 trillion (incidentally, money market accounts were up 28.5 percent.) Unfortunately, the statistics underscore that loan demand has not increased nearly fast enough to make money off these deposits. The industry’s loan-to-share ratio currently stands at 68.8 percent down from 81.1 percent in the first quarter of 2020. In the aggregate, credit unions are seeking higher yields by putting some of this money into longer term investments. Investments with maturities of 5-10 years rose $54.4 billion to $86.5 billion. Investments with maturities greater than 10 years increased to $9.4 billion.

The bottom-line is many credit unions continue to be caught in a classic vice in which the economy is growing but not fast enough to nudge up interest rates. Furthermore, the consumer is saving more money than ever before and has even dramatically decreased credit card debt over the last year.

In contrast, the number of federally insured credit unions with assets of one billion dollars increased to 388. These intuitions experienced a net worth increase of almost 14 percent. They now hold 72 percent of the industry’s combined assets and experienced robust loan growth at 8.3 percent.  In contrast, net worth for the industry as a whole decreased from 11 to 10 percent. 

Not surprisingly, consolidation is continuing. The number of federally insured credit unions declined to just over 5,000.  There are now 3,167 federal credit unions and 1,901 state chartered credit unions.

June 7, 2021 at 10:10 am Leave a comment

Is the Fed Squeezing Small Lenders Out of Existence?

Good Morning, folks.

In the 1930’s the Federal Government responded to the collapse of the farming industry by putting in place a government back framework meant to stabilize the farming industry and stem the impact it was having on everyday Americans. Today, the family farm is largely a relic of a bygone era but the government subsidies designed to keep it alive are still alive and well and disproportionately benefiting larger corporations that don’t need the money.

Many of the same trends are taking hold in the banking industry to the detriment of credit unions.

I’m not going out on much of a limb here to say that you should expect your credit union to have to pay more into the Share Insurance Fund in approximately six months. That’s my takeaway from NCUA’s report on the Share Insurance Fund provided at yesterday’s monthly board meeting. It is also the assessment of one Todd Harper who put credit unions on notice that “absent some unknown external event, these forces seem likely to eventually” push the equity ratio below the 1.20 level at which point NCUA must pass around the Share Insurance Hat.

This unfortunate development isn’t all that surprising. This past week many New York credit unions have had the opportunity to listen to Steve Ricks pithy overview of current credit unions economic trends. Members are stocking away savings at unprecedented levels thanks to all of that government stimulus spending. The bad news is that loan demand isn’t keeping pace and investment returns are non-existent. Put this all together and you have the profits of many credit unions, particularly smaller ones, being squeezed even more than they have been in the past. Perhaps as the economy picks up even more, so will loan demand. We will have to wait and see.

But let’s take a look at the big picture. The trend we are seeing is nothing more than the continuation of forces put in place by the Federal Reserve more than a decade ago. When the mortgage meltdown looked as if it might trigger a depression, even Janet Yellen explained that, while she was empathetic to the difficulties faced by community banks, the economy as a whole benefitted from the stimulus resulting from historically low interest rates.

At the time this argument made sense. But by continuing to take extraordinary steps to suppress interest rates, the Fed’s intervention is feeling more like a permanent lifeline to large banks then a short-term necessity. As someone who believes in the free market this doesn’t feel like a fair competition.

May 21, 2021 at 12:48 pm Leave a comment

Some Good News About This Lousy Pandemic

I actually found some good news to talk about regarding this lousy pandemic. 

First, the Treasury Department announced late last week that it was streamlining the loan forgiveness process for loans of $50,000 or less.  This is a lot less than the $150k that has been proposed in legislation advocated for by credit unions, but hey, it’s a start. 

The news that has really cheered me up a tad has to do with the American entrepreneurial spirit.  Despite all the uncertainty we see around us, it appears that it is alive and well.  Who knows?  Maybe the next Microsoft, Apple or Facebook is taking shape right now, perhaps with the help of a credit union loan. 

According to the Census Bureau, there’s been a 93.6% increase in the number of business applications compared to last year.  Furthermore, according to this survey, many of these entrepreneurs are first time business people, many of whom are trying their hand at businesses that have been hardest hit by the pandemic including restaurants and bars.    

Even allowing for the fact that some of this increase in entrepreneurial zest is attributable in part to a not so admirable attempt on the part of some to cash in on PPP loans, cynicism alone does not account for this increase.  As the Economist (subscription required) magazine pointed out recently “the entrepreneurial boom bodes well for the future.  A recovery with lots of start-ups tends to be more job rich than one without, since young firms typically seek to expand” at a quicker pace. 

For me, it’s just good to see that one of the core attributes of the American ethos remains alive and well.  Let’s not ever underestimate the value of small business loans and the importance of continuing to fight for the right of credit unions to provide them to the same extent as the local bank.     

October 13, 2020 at 9:17 am Leave a comment

New York and OCC Battle Over What Is A Bank

When is a bank a bank?  The answer to this question is not simply of interest to your faithful blogger.  It has real important practical consequences for your credit union and the competition it will be facing in the coming years.  Simply put, at what point do the Apples of the world become so intertwined with traditional banking activity that they should be subject to at least some of the same safety and soundness constraints as banks and credit unions?

The answers to some of these questions will begin to be answered sooner than you might think and New York’s Department of Financial Services is playing a leading role in the debate.  Politico has reported that Acting Comptroller of the Currency Brian Brooks plans on shortly allowing payment processors to apply for federal charters with the OCC.  It is not entirely clear from the article, but the OCC is either prepared to argue that payment processors can be licensed under its proposed FinTech charter or can be granted a separate charter unique to their business model.

This news comes as New York is suing the OCC over its authority to charter FinTechs which help process bank transactions but don’t hold deposits.  A case is before the Court of Appeals for the 2nd Circuit.  DFS argues that the OCC has no authority to grant charters to FinTechs because they don’t accept deposits.  The OCC argues that deposit taking is not a mandatory criterion to be chartered by the OCC.

Even as a decision in the lawsuit is pending, the OCC and DFS have continued their increasingly public debate.  On Wednesday (Law360 subscription required) acting OCC Comptroller of the Currency Brian Brooks and DFS Superintendent Linda Lacewell both appeared at a forum sponsored by the Cato Institute.  Brooks took the opportunity to argue that there is nothing in the national bank act which precludes the OCC from chartering non-depositories.

If he is correct, then over time you will see the nationalization of businesses such as mortgage bankers and licensed lenders who have historically been subject to state consumer protection laws which are generally more extensive than federal requirements.

No matter which side ultimately wins the debate, recent events have underscored just how loosely regulated the payment processing industry is, even as it continues to be free of the traditional regulatory oversight imposed on financial institutions. Recently the CEO of one of the most high profile payment processors, German based Wisecard, was arrested after the company was unable to account for $2.1 billion missing from its balance sheet.

September 11, 2020 at 12:46 pm Leave a comment

Are Credit Unions Weathering the Pandemic Storm?

Good morning folks.  Welcome to the unofficial start of Fall.

One of the things I did over the weekend was take a look at the industry’s 2nd quarter numbers, and for what it’s worth, for me they are like this past summer: they weren’t great but it could have been much worse.

For an industry that had to endure the first artificially induced economic coma in our nation’s history, the industry’s numbers reflect pretty much what you would expect minus any signs of more dramatic troubles ahead.  For example, people rush to put money safely away in their deposit accounts.  Total assets increased $132 billion, or 8.8%, over the year ending in the first quarter of 2020, to $1.64 trillion.  In addition, credit union membership continued to increase with aggregate membership increasing to 121.4 million in the first quarter of 2020, an increase of 4 million members.

Losses are up but not as dramatically as one might have anticipated.   The delinquency rate at federally insured credit unions was 63 basis points in the first quarter of 2020, up 6 basis points from one year earlier. The net charge-off ratio was 58 basis points, up slightly from 57 basis points in the first quarter of 2019.

Incidentally, banks are seeing an even larger influx of cash deposits.  Bank deposits expanded by more than $1 trillion for a second consecutive quarter, in fact the insurance fund ratio for banks is in danger of falling below 1.30%.

So, is the industry’s glass half empty or half full?  That largely depends on if you think these numbers reflect the nadir of economic activity or are a portent of things to come.  If you are a member of the “glass half full” group then the numbers released on Friday showing that the unemployment rate continues to decline is proof that the economy is doing better than expected.  If you are a member of the “glass half empty” gang then the numbers demonstrate that while the economy continues to grow so does the numbers of permanent job losses.   Either way, the industry is being buffeted by macro-economic trends to an extent not seen in a decade.

 

September 8, 2020 at 9:48 am Leave a comment

Feds Policy Shift Signals Lower Interest Rates Are Here To Stay  

The Fed has a dual mandate to both foster economic growth and maximum sustainable employment.  Yesterday the Fed made an historic announcement that will have an immediate impact on your credit union.  In a nutshell, the Fed is going to tolerate more inflation and be more sensitive to the short-term employment consequences of future interest rate hikes.  RIP to the Paul Volcker era.

In 2012 the Federal Reserve issued a Statement on Longer-Run Goals and Monetary Policy Strategy.  By the hyper-conservative standards of the Federal Reserve, this statement represented a radical departure from Fed practice by providing forward guidance to the public on the framework it would use when deciding to raise or lower interest rates.

The amended document makes several important changes in emphasis.  First, the Federal Reserve simply can’t cut rates any lower.  By signaling a willingness to tolerate inflation, it is hoping to preempt fears that decreases in unemployment or robust economic growth will result in the Fed immediately raising interest rates.  In the amended statement, the Fed is no longer going to be concerned if inflation consistently runs above the Fed’s 2% target rate.

Furthermore, the Fed is shifting its assumptions about how low unemployment can go before triggering inflation.  Specifically, the Fed commits to assessing “shortfalls in employment” when deciding whether or not to raise interest rates.  The importance of this shift was underscored in a speech by Fed Chairman Powell accompanying the new statement in which he explained that the Fed has been influenced by the fact that historically low unemployment rates have not triggered inflation.  Furthermore, this trend has been a particular benefit to Black and Hispanic individuals who have experienced “life changing gains for many families”.

Just how big a shift does the new Fed policy stance represent?  A lot of commenters have pointed out correctly that these changes put in writing shifts that have already been taking place for several years.  But this analysis misses the importance of the moment.  Inflation was the number one economic threat that the Federal Reserve has battled since the late 1970s.  With the Fed’s announcement yesterday, it announced a paradigm shift in which the Volcker epic has ended.  Going forward, the lack of inflation is to be as feared as much, if not more, than the potential risks of too much inflation.

August 28, 2020 at 9:44 am Leave a comment

Who Pays For PPP Loan Applications?

So much for Those Lazy, Hazy, Crazy Days Of Summer.

On Monday a Federal District court in Florida dismissed a lawsuit brought by an accounting firm which was seeking to force a bank to pay fees it claims it was owed for preparing a PPP application on behalf of one of the bank’s borrowers.  According to Law360, the case is the first to address this key issue.

When Congress created the PPP loan under the CARES Act, it stipulated that agents could assist businesses to apply for loans and stipulated further that payment for this work could not come out of the loan proceeds.  The issue which has vexed both lenders and agents alike is whether this means that lenders must pay agents for their work.  Several proposed class action lawsuits are now pending that address this issue.

In SPORT & WHEAT, CPA, PA, v. SERVISFIRST BANK, INC., et al., Judge T. Kent Wetherell, who sits on a Federal District Court in Florida, ruled in favor of lenders.

The CARES Act does not require lenders to pay the agent’s fees absent an agreement to do so (or create a private right of action for payment) because the statutory language does not even speak to who pays the agent’s fees; it merely provides that the agent cannot collect a fee from anyone in excess of the amount established by the SBA Administrator.

The outcome would have been different had the accounting firm signed an agreement directly with the bank, but it did not do so.

I know there are credit unions out there that have to decide whether or not to pay agent fees.  This represents the first round in what may become contentious and drawn out litigation.  Leave it up to Washington to explain who doesn’t have to pay a bill but not who does.

Things Are Not as Good As They Appear When it Comes to Mortgage Lending

The delinquency rate for one-to-four-unit residential properties increased to a rate of 8.22% of all loans outstanding at the end of the second quarter of 2020.  This represents a 3.8% increase of delinquencies this quarter.  According to the MBA, FHA loans were hit particularly hard, reaching their highest delinquency rate since the MBA started conducting the survey.   Presumably, these numbers do not reflect loans placed on forbearance but not reported to credit agencies.

SPORT WHEAT CPA v SERVISFIRST BANK INC

August 19, 2020 at 9:48 am Leave a comment

What Happens if No One CARES?

With Congress and the President increasingly unlikely to reach agreement on further supporting the economy with an additional infusion of cash, credit unions are entering what will be the most dangerous part of the pandemic for both them and their members.

Regardless of what side of the political spectrum you are on, the fairest assessment of the CARES Act is that it did shield the American economy from the worst effects of the self-induced coma triggered by the COVID lock-downs.  As researchers for the New York Fed recently concluded in the Liberty Street blog

Recent data suggest that the CARES Act and other public and private interventions have been largely successful so far in preventing a wholesale surge in household loan delinquencies. This outcome has been achieved in large part by providing income support, and by allowing borrowers to defer payments through mortgage and student loan forbearance programs and through additional temporary relief provided by auto loan lenders and credit card servicers.

In fact, this is the only way to make any sense of some of the recent economic data we have seen.  On the one hand, historically low interest rates have kept mortgage demand and house values surprisingly high in many parts of the country.  At the same time the recent IPO for the parent company of Rocket Mortgage was met with a lukewarm response.

On the one hand, unemployment has spiked but the New York Fed reports that household debt is declining.  And the PPP officially ended on August 8th with money left unspent even as there is support for continuing aid to small businesses.  The bottom line is that the CARES act, combined with uber-aggressive intervention by the Federal Reserve, brought the economy some breathing space.

Now what?  The credit union statistics released in March painted a picture of a relatively strong industry but we are already seeing an increase in deposits even as credit unions have few options to capitalize on this cash.

All this clearly has several implications for your credit union operations ranging from your capital ratios to forbearance policies.  I would take a look at these FAQs provided by the NCUA providing a list of many of the questions that you will have to be dealing with even more in the coming months.

All this means that, without quick Congressional action we will likely see an acceleration of the industry’s consolidation.

NCUA FINANCIAL TRENDS IN FEDERALLY INSURED CREDIT UNIONS Q1 2020

August 13, 2020 at 10:35 am Leave a comment

President’s Executive Order Raises Tricky Questions For Employers

Hello folks!  Yours truly is back and better than ever after a week in the Adirondacks.  I can think of no better way to get back in the swing of things than to talk about the potential consequences of an Executive Order issued by the President over the weekend.  Whether your idea of a good time is turning on Rachel Maddow or Tucker Carlson, this order raises unique questions for employers.

As many of you have probably already heard, negotiations with Congress over another COVID relief bill are stalled.  In response, the President issued an Executive Order ordering the Treasury Department to forgo collecting the employee’s portion of the payroll tax from September 1st to the end of the year.  This one is a lot trickier than it sounds.

From the day you started working you paid a tax under the Federal Insurance Contributions Act (FICA).  Everyone has fond memories of getting that first paycheck and seeing just how much the government takes from you to fund social security and a portion of Medicare.  Under FICA employers are obligated to withhold 6.2% of an employee’s income and employers are obligated to match that tax.

Pursuant to 26 U.S. Code § 7508A the Treasury Department has emergency powers to issue a forbearance for the collection of FICA.  In issuing the Executive Order the President cites the ongoing COVID crisis as justification for the forbearance.

Here’s where things get a little tricky though.  It is the employers obligation to withhold the employees portion of FICA [26 U.S. Code § 3102 (a)].  The employer sends the combined contributions to the Treasury.  Under the law, an employer is indemnified for withholding the employee portion and can be fined for refusing to do so [26 U.S. Code § 3102 (b)].

Against this backdrop, if the President’s Executive Order takes effect, as a matter of law, employers will remain responsible for the employee portion of FICA which they do not collect.  Remember, this is simply a forbearance on the collection of taxes meaning that all the money is still due, but at a future date.  In a best case scenario, Congress decides to make employers whole; but if not, we are in unchartered water.

The next step in this game of chicken is for the Treasury to issue guidance.  It will hopefully clarify what employers must or may do pursuant to this Executive Order.  In the meantime, let’s hope both sides come to their senses and actually pass a law making everyone’s responsibilities and financial obligations crystal clear.

August 11, 2020 at 9:19 am Leave a comment

How The Fed Intervention Is Hurting Credit Unions

My blog’s a little late this morning because I put aside what I was going to write about after I saw the amount of attention that this opinion piece from Bill Dudley, the former president of the New York Federal Reserve and now a professor at Princeton, is getting. In it he explains why the Feds unprecedented intervention in the economy, which he predicts will soon reach $10 trillion, is a manageable and necessary support, at least in the short term.

He is right. But this is little consolation if you run a credit union or a small community bank. Once again, the Fed is intervening in the economy in a way which helps large businesses and investment banks while doing little to support mainstream lending institutions. It’s time for this to change.

There are two ways to help an economy in trouble. The first and more traditional method is to stimulate economic activity by flooding it with cash. This is what Congress did by printing money and sending it out to consumers. This is analogous to using an economic defibrillator to jolt the economy back to life.

A second much less common approach which the Fed started aggressively using in the Great Recession is to intervene directly into government bond markets to keep interest rates artificially low. This is more analogous to putting the economy on a ventilator since the Fed is so closely intertwined with the economy that it has to cautiously sell off these bonds in a way which doesn’t harm the economy.

In dealing with COVID-19, the Fed has taken this approach to a whole new level. It has set-up mechanisms not only to buy government bonds but corporate bonds as well. This is in addition to setting up facilities to   make loans to businesses too big to qualify for the PPP.

This approach has worked. Despite shutting down the economy, corporations still have cash and the market is booming, in part because there is nowhere else to get any type of return on investments.

But here’s the catch. As Dudley points out, when the Fed engages in such a large amount of purchases, the resulting money has to go somewhere:

“When the Fed buys a financial asset from a private holder, the proceeds received by the seller typically flow back into the banking system. Even if the seller reinvests the proceeds into some financial asset rather than depositing it at a bank, the cash eventually ends up either as an increase in currency outstanding or an increase in bank deposits. Because most people don’t want to hold large amounts of cash, almost all of the money eventually finds its way back into the banking system.”

Don’t banks want to convert all this cheap money into cheap loans? Perhaps, but Dudley points out that in 2008 the Federal Reserve Board was given the right to adjust the interest rate it gives on Fed accounts held by financial institutions. This was done to ensure that all that cheap money didn’t fuel inflation.

All this comes at a very steep price to those of us who believe that for capitalism to work, it can’t be a “Heads the big guys win, Tails the little guys lose” system. Once again credit unions are being driven into Prompt Corrective Action because members need a place to put their cash and interest rates are being kept at artificially low levels.

For the second time in less than a decade policy makers are explaining why this is all necessary. It’s time to start calling the Feds intervention what it is: a justifiable bail-out of larger companies and the institutions that fund them. It’s time Congress consider providing direct funding for credit unions and community banks. After all, the industry should be allowed to fight on a level playing field.

June 22, 2020 at 10:52 am 1 comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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