Call Report Software Now a Thing of the Past.

In September 2009, the NCUA will require that the quarterly Report of Officials and 5300 Call Report information be submitted on their new web-based system as opposed to using the quarterly software. NCUA is hosting several webcasts to provide you with information related to the switch. The first webcast will be Wednesday, August 12, 2009 at 1:00 PM EDT. To register, go to http://event.on24.com/r.htm?e=153687&s=1&k=D7CCC63C961E35B7BD87B6ED7DF01A01

The NCUA has also put out a FAQ document that should answer most of your questions. Here's the link http://www.ncua.gov/DataServices/Data/5300/09July/OnlineFAQ.pdf.

If you are the person responsible for preparing the "Call Report" or 5300 data, we just want to take a minute to thank you for all your hard work. It's a Herculean effort each quarter, and chances are, no one at your credit union appreciates what you go through. Today, we salute you, Call Report Preparer. Sure, there is great danger of paper cuts. Ink on your hand? You bravely soldier right through. Lunch? Maybe after you calculate net charge-offs. You are the REAL Real (Wo)Men of Genius. We crack a can of sugar-free, decaffeinated iced tea to you, the Call Report Preparer.

Horizontal Analysis.

When I mentioned to a co-worker that I was going to work on my Horizontal Analysis, she asked me if that meant that it was "nappy" time again. The common response to that is "very funny, but don't quit your day job to do stand-up". My response was "that's funny! you ought to quit your job to do stand-up". As of this writing, she is still here . . . but I'll keep you posted. I asked everyone to laugh at every little thing she says.

A Horizontal Analysis can take many different forms and is a fundamental tool that many finance and accounting professionals use to analyze the balance sheet and income statement. If you download all of your general ledger accounts and put them side by side in a spreadsheet, you can easily and quickly spot trends. It is also used to detect potential errors. For instance, if a GL account balance suddenly spikes up or down one month; it's worth a look to see if something was posted incorrectly. The possibilities are endless! I know what you're thinking . . . "those finance and accounting types lead VERY interesting lives!!!"

A pretty good example and definition can be found at http://www.accountingformanagement.com/horizontal_analysis_or_trend_analysis.htm

Stay tuned. One of these days, we'll talk about VERTICAL Analysis.

Credit Union Bond Renewal. Do Some Homework.

Deciding which carrier to use for your Credit Union Bond can be a challenge. For several reasons, it would be a huge mistake to just automatically renew your bond with your current carrier. Number one is cost. I can speak from personal experience that you can save upwards of 30% for equal, possibly better, coverage just by shopping around. Just to put things in perspective; a $30 million credit union saved $9,ooo just by making a switch. The CEO testifies that claims were paid without a hassle and service was excellent.

But you just love your Rep, and you couldn't do that to him/her? If they are charging you 30% more than they should, they aren't doing you any favors.

Get several quotes, find out which services they offer, etc. When they discover that you are shopping around, your current carrier may miraculously find a way to reduce your premium. In any case, make an informed decision.

The NCUA has approved about a dozen carriers. A list can be found here: http://ncua.gov/Resources/AdministrativeOrders/Bonds.aspx

A personal story. I was having dinner with my wife and this guy walks in and loudly proclaims: " I think all insurance agents are crooks". A man quickly rushes up to the guy and shouts "You take that back!" The guy replies, "Why? ... are you an insurance agent?", the man, in a rage, hollers back, "No, I'm a crook".

"WAR" Against Overdraft Fees is Brewing.

I don't mean to nag, but even Wall Street is becoming concerned about the effect on bank earnings due to changes in overdraft fee regulation. An article that appeared in the July 25th Wall Street Journal indicated that 54% of TCF Bank's noninterest income is from "service charges" (read NSF fees) and that "TCF should let shareholders know the likely impact on earnings". Take a minute to calculate the potential impact of reduced overdraft fees on your bottom line. Please check with your doctor before doing this exercise, a high stress level is a likely outcome. Something like 90% of all credit unions would be in the red without fee income.

As I mentioned in my July 1st blog post, Congress has asked the Fed to restrict NSF fees, and according the the Journal, the Fed is responding. As we all know, when the APR on an NSF fee relative to the amount overdrawn is calculated, it can be astronomical. Politicians aren't turning a blind eye to overdraft fees any longer, and the Feds have proven that they can move fast when implementing new Regs. In addition, battling "unfair" fees is exactly what the President's new Consumer Financial Protection Agency is being set up to do.

A two-fold action plan: 1. Get your state League and lawmakers involved in the issue. Let them know that reduced overdraft fees will lead to higher fees on other services, lower rates on savings, and higher borrowing costs. 2. Be prepared to find ways to make up the lost fee income. The Fee War is coming, be prepared for the battle.

A Soapbox Moment . . . a little self-regulation might be in order. Yes, members can benefit from Courtesy Pay if used properly. No, we shouldn't "mother" our members, they should be allowed to make their own financial decisions. But let's be honest, some of our less-fortunate members can get themselves in trouble with Courtesy Pay and may be too embarrassed to ask for help . Not everything that is legally permissible is ethical.

Got a Minute? How About 52?

So, I'm making my adjustments to Northern Michigan living, and I can assure you that this is beautiful country. If you have never been "up north", it would definitely be worth a trip. When the trees change colors in the Fall, it's an amazing sight to behold. After mentioning the lack of variety of radio stations in these parts, my AVP said to me "what do you mean?, we have both kinds of music . . . Country AND Western". However, I like more of a variety.

That little story was just a convoluted way of trying to deny that I'm just a nerd that listens to NPR radio. On my long commute up, I ran across an interview with author and educator Parker Palmer on NPR. The 70 year-old wise-man spoke to how the economic downturn is changing, for the better, the way people interact with each other and how many business managers, CEOS, and others are realizing that conducting their lives and businesses in an ethical manner pays off in the long run. It definitely applys to the credit union movement philosophy. And it's "chock-full" of great insight on life.

The interview is found on their "Speaking of Faith" segment, but is more secular in nature. If you have an uninterrupted hour to yourself, it's definitely worth a listen. Here's the link http://speakingoffaith.publicradio.org/programs/2009/rv-palmer/

Banks Introduce 75-Cent Surcharge For Using Word 'Bank'

Executives from the nation's 50 largest banks announced Monday that, effective July 1, all customers will be assessed a 75-cent surcharge each time they use the word "bank." "Now, each time a customer uses the word 'bank' in either its spoken or written form, 75 cents will be automatically deducted from his or her account," said Kenneth Nordland, 54, president of the American Banking Association. "For instance, if you say, 'I bank with Bank of America,' that would cost you $1.50." Nordland added that customers wishing to avoid the penalty are encouraged to use the alternate phrase "financial institution."

Just kidding.

^TNX Creep. Interest Rate Chronicles

Ok, so Fed Chairman Bernake said that the Feds will be leaving the Fed Funds Rate alone until the unemployment situation starts to improve. Unfortunately, that doesn't appear to be ready to happen anytime soon. And unlike his predecessor, Alan Greenspan, there is infinitely more openness about what the Feds will be doing with the rate. This kind of takes out all the fun of trying to guess what the Federal Reserve is up to.

But, we still have the bond market to concern ourselves with, and because mortgage rates move with the ten-year bond rates (symbol ^TNX), it's definitely worth our time to watch the direction the bond market moves. As investors become more confident about the market, they can stomach a bit more risk, hence a move out of the safe and loving arms of U.S. Treasuries and into other investments. The reduced demand effectively causes treasury rates to move higher. As of this writing, the ten-year is creeping upward towards a 52 week high. Take a look at the Yahoo Finance chart for TNX, you will see where we are headed.
http://finance.yahoo.com/echarts?s=%5ETNX#chart1:symbol=^tnx;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

You might want to purchase some video games for your mortgage department - if rate go too much higher, refinances might dry up and they'll have nothing to do all day.

Regulation B. Equal Credit Opportunity Act.

RISK LEVEL = HIGH

Purpose: to promote the availability of credit and prohibit discrimination to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (protected class). Also to notify members of approval or denial of their application; to report credit history in the names of both spouses on an account; to collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans; and to provide copies of appraisal reports if requested.

Regulators mainly look for two types of discrimination. 1.Discrimination against an individual. We are all familiar with this type of discrimination and should know the repercussions, and 2.Disparate Impact or practices that have the effect of discrimination against a protected class. There is considerable risk to the credit union because under Disparate Impact, proof of discriminatory motive is not required. For example, let's say an examiner reviews your loan portfolio and finds that the percentage of loans to minorities is lower than that of the percentage of minorities in your field of membership. Did you know this? You should, and you should take action to rectify the situation.

An examiner is required to report incidences of discrimination to the Justice Department. Can I state the obvious? You don't want this.

Recommendation: conduct your own "due diligence". Download your loan (especially mortgages) demographic information and analyze the info. If you can show that you have taken steps to determine whether or not your portfolio may have a Disparate Impact against a protected group, and have taken action to attempt to rectify the matter, you could save not only monetary penalties, but reduce reputation risk as well.

The entire Reg can be found at: http://www.fdic.gov/regulations/laws/rules/6500-2900.html Have fun with that!

An aside on the economy:
"President Obama is going to be working in the broadcast booth during the All-Star Game. Everybody says, 'Oh, that's cute.' But let me tell you something. You know the economy is bad when the President has to take a second gig." --David Letterman

Collections, Colonoscopy. What's the Diff?

It's a fact of life. No one likes to talk about a Colonoscopy or Collections. It just seems too unpleasant. But like that unmentionable medical procedure, it is hard to understate how important a good collection department is to your (fiscal) health. It's no fun, but you should thoroughly review the collection process on a monthly basis. Set up a sub-committee if you don't have the time.

If you have been around the financial industry for any length of time, you know that an effective collections policy and procedure often makes the difference between operating at a profit or a loss. That said, please keep in mind that your collectors are not miracle workers. While collectors are often your unsung heroes, if a loan is bad when you book it, there is little a collector can do to rescue the day.

Some basic effective collection rules: 1. Your telephone is your most effective collection tool - make a courtesy call as early as ten days delinquent. A follow up call AS SOON AS the member misses a "promised payment" is imperative. 2. Be nice and treat people with dignity and respect. Bad things happen to good people and in many cases, your member may just need some coaching to get through difficult times. 3. It's collections 101 that "your first loss is your smallest loss". Be careful when restructuring a loan, if you have to repossess the property at a later date, you could end up with a higher deficiency balance. 4. Do a charge-off "autopsy" on all charged-off loans. Why did the loans end up as a loss? Look for trends by loan officer, lack of collection follow-up, high loan-to-value, liberal loan policies, poor underwriting, etc. The key is to avoid making the same mistakes over and over.

Just a rhetorical question, please do not answer . . . how does one decide that one wants to become a Proctologist? Or a collector for that matter.

Loans are Down. What is it Costing You?

If you are like most credit unions, your total loans outstanding are down from last year (or behind budget this year). But what does that mean in dollars and cents? Here's an easy way to ballpark it. Let's say the spread between your average loan rate and your average deposit rate is four percent (that's about average). Your lost income for each million dollars in reduced loans outstanding is (4% x $1million) $40,000 per year.

So how do you find your credit union's rate spread and loans outstanding? It's all public record. Go to http://www.ncua.gov/DataServices/FindCU.aspx. Search for your CU, click on Financial Performance Report, then ask for a two page FPR report. Your loans outstanding will appear on the Financial Summary Report, and your interest spread will be on the Ratios Report (use "Net Interest Margin/Avg Assets - it'll get you close). June's ratios won't be available for a while, so March will do. Need some help? Just post a comment below, I'll take a look for you.

Is your Interest Margin is lower than your peer group? Unless you are comfortable with your profit margin, or lack thereof, you might want to take a close look at your loan and deposit pricing. Many credit unions are finding that rates just don't matter right now, especially on the deposit side.

Riddle: What did the clueless CEO say to his Board about the credit union's high net worth ratio? CEO: "We'll keep offering the highest deposit rates and lowest loan rates until it's all gone"
OK, it's not quite a riddle that will win a $100 prize from Reader's Digest, but you get the drift.

Mortgage Disclosure Improvement Act Reminder

A reminder: beginning July 30, the Federal Reserve Board's new Mortgage Disclosure Improvement Act (MDIA) goes into effect. The rule will change the way the Truth In Lending Act (TILA) is disclosed to consumers. Your mortgage people should be on top of this by now. More information can be found in an article by Richard Triplett at http://www.allregs.com/ealerts/updates090526_MortgageDisclosureImprovementAct-2MonthsEarly.htm.

Totally unrelated:

"Banks are hurting. I opened a new account, and the lady asked me for a toaster." --Bill Maher

"Good news for GM today. They emerged from bankruptcy and the newly appointed CEO said that the company will now build cars that Americans want. After hearing this, GM employees said, 'You can tell this guy's new around here.'" --Conan O'Brien

Your ALM Software is a Tool.

As you know, interest rates are historically low, and due to the Fed's recent purchases of long-term bonds, some say rates are artificially low. This may skew your Asset Liability Management (ALM) analysis results towards the favorable side, so take caution when putting long-term mortgages or mortgage-related investments on the books. Rates are expected to hold steady through the summer, but can move up quickly once the economy turns around.

There are numerous ALM topics to discuss at your ALCO meetings, but here are a few . . . 1. A three-year income simulation; will net income be recover within a reasonable amount of time in a rising rate environment? 2. What will happen to your Net Worth if rates rise suddenly? 3. Projected repayment speeds on Mortgages will slow if rates go up (who would want to refinance if their rate is lower than the market?) are you in a position to hold mortgages for the longer term?

Your ALM software results can only take you so far. Spend some time reviewing your credit union's unique position in the marketplace and use ALM analysis as a tool to help make decisions regarding which products you will need to focus your marketing efforts on. Don't be afraid to sell to Freddie and Fannie to control the number and types of Mortgage loans you keep on your credit union's books.

Incidentally, if I had a choice, I'd prefer to be called Freddie rather than Fannie, even if I were a girl. But that's just me.

Dern-Near Free Money From the SBA.

Could your Loan Department manager sell an SBA loan product that is interest-free to the borrower, has deferred payments for 12 months, and has no SBA fees associated with them? What if the loan has a five-year payback . . . remember we are talking zero interest here. What if I told you that the loan is 100% guaranteed by the SBA - AND the SBA pays the credit union Prime plus 2% on behalf of the borrower? You'd say "it sounds too good to be true", yes? Oh, but you have wandered into Obama Land where life is wonderful all the time.

It's called America's Recovery Capital (ARC) Loan Program. The ARC loan, which began in June 2009, is meant to help small businesses pay on existing debt and provide temporary financial relief so they can keep their doors open. There is a maximum loan amount of $35,000. What's more . . . non-SBA lenders can become ARC lenders. True story.

This is an excellent time to dip your toe into the business loan ocean. Even if ARC loans are the only business loans you ever make, it's hard to argue that this isn't a product your credit union should seriously consider offering. Not just offer, but SELL! Better hurry, the program runs out in September, 2010 or until funding runs out, which ever comes first.

You can find your nearest SBA district office at www.sba.gov/localresources/index.html.

Obama and the Dems: Shim the Jamb Plumb.

Many of the new regulations that the Obama administration has proposed will begin shifting banks back to the "old" way of doing business, . . . closer to the way credit unions have always done business.

A side note: When I was a kid, my Dad built our family home. A sticker on the new windows read "Shim the Jamb Plumb" when installing. To me it sounded like a bunch of random words; I even thought it might be a joke. Funny stuff! But, it means you should be sure the window is level at the bottom. Hence the above headline. It's more fun to say "shim the jamb plumb" than that old worn-out sports reference, "level the playing field", am I right?.

Proposed banking rule changes include stricter capital requirements (credit union capital requirements are already more strict than bank's) and a requirement to require originators of asset-backed securities to retain at least a 5% interest in securitized loans. This 5% rule should help "keep in check" the "gunslinger" mentality of banks who made risky loans only to dump them off their balance sheet. Also, due to a FASB rule, banks may soon have to bring billions of these loans, currently held in subsidiary companies, back on to their balance sheet. This and the 5% requirement may have the effect of leveling the playing field (sorry, old habits) by allowing for fewer loans to be booked while still staying within capital limits.

What does all of this mean to the credit union industry? Once the economy begins to heat-up and turn around, credit unions may be in a position to grab some market share back from the banks in our historical "niche", consumer loans. Start forming (improving) great relationships with reputable auto dealers and realtors in your market, it just may pay off in the long run.

Interest Rate Chonicles. Treasury Auction Watch.

So you love these low interest rates? Great news, then! The economy continues to suffer and last week's data showed the U.S. economy lost almost half a million jobs in June, as a result, it is widely expected that the Federal Reserve will keep interest rates near zero for some time. I hope you're happy.

Interest rates on short-term Treasury bills fell in Monday's auction (july 7th,2009). The rate on six-month bills dropped to the lowest level since late December, while three-month bills also dipped. Rates had been climbing due to increased confidence in the economy.

There also will be a $19 billion 10-year bond sale on Wednesday and an $11 billion 30-year auction on Thursday. As discussed in our June 18th, 2009 blog, mortgage rates closely follow the 10-year bond rates. Want to predict the future? Impress your friends? If the 10-year demand is low, rates will move up and mortgage rates will likely follow and vice versa. The chart that demonstrates this trend is worth a second mention and can be found at http://www.hsh.com/images/forgetfed.gif.

Amendments to Regulation D - The Forgotten Regulation

I was reading the recent amendments to Reg D (Reserve Requirements of Depository Insititutions) the other day and I heard this thump!. It took me a second to realize that it was my head hitting the desk. It's not a particularly interesting Regulation, even by Regulation standards. Nonetheless, there are a couple of minor changes that will affect you.

About the Reg: Reg D seems to be a grab-bag kind of regulation. When someone comes up with a rule that doesn't fit nicely into another Reg, someone says - "just give it to Reg D, he doesn't have much to do". The Feds use the reporting requirements of Reg D to track the money supply, it details some restrictions related the sale of securities, sets the amount of money fiancial institutions must set aside (reserve requirements), and restricts the number and types of transfers and withdrawals from savings accounts.

Here's a Trivia Question: What makes a savings account different from a demand (checking) account? Both can pay interest, and both can be accessed with a check, debit card, etc. So how are they different? I'll bet your CEO doesn't know the answer - just for fun, ask him.

The answer appears right here -> While normally you allow your members to withdraw money upon demand from their savings account, by regulation you must reserve the right to require a seven day notice for a withdrawal from savings (it should be in your disclosure). Money in a checking account must be made available on demand. Also, the types and number of withdrawals that may be made from a savings account is limited. This is where one of the new Reg D revisions come into play: the final amendment increased from three to six the number of third party transfers or withdrawals that can be made from a savings account each month. Six, wow, six. Other amendments include interest on "excess balance deposits" held a Federal Reserve Banks.

What about reserve requirements? Chances are, you have enough cash in your vault to satisfy the requirement. All credit unions are required to file a periodic Reg D 2900 report that helps you determine your reserve requirement. Hey, what was that thud?

Here is a link to the revisions: http://www.federalreserve.gov/newsevents/press/monetary/20090520b.htm

The End of Courtesy Pay as We Know It?

On May 27th, 2009, three influential members of congress wrote a letter to Ben Bernanke requesting that the Federal Reserve "immediately address manipulative clearing practices" related to overdraft fees. Consider this: Today, President Obama sent Congress a bill that would create the Consumer Financial Protection Agency, which he said would better protect Americans from unscrupulous practices. And NSF fees are in the cross hairs.

Not too worried about it? Most credit unions would be in the red without fee income, and quite often Courtesy Pay and NSF fees provide the lion's-share of non-interest income. There is some talk of disclosing fees as a finance charge - this would mean you can no longer charge, say, $25.00 on a $50.00 transaction. Take a look - how would your income statement be impacted if you lost 10%, 20%, 50% or more of your NSF fee income? You might be surprised. A contingency plan may be in order.

My guess? SOME kind of "consumer protection" is inevitable related to NSF fees. Probably an "Opt In" requirement as well as restrictions on "series of fees" (fees caused by fees). But you might not want to go with my guess . . . I had some serious money on Hillary.

Here's the link to the letter. Read it and weep. http://www.federalreserve.gov/SECRS/2009/June/20090604/R-1343/R-1343_060209_21124_293484117638_1.pdf