NCUSIF assessment may be much higher in 2010

CU 2010 assessment may be 0.15%-0.4%
ALEXANDRIA, Va. (11/20/09)—The credit union assessment to fund the National Credit Union Share Insurance Fund (NCUSIF) and the corporate credit union stabilization fund could range from 0.15% and 0.4% of insured shares in 2010, National Credit Union Administration (NCUA) estimated Thursday.
At the agency's open board meeting, Melinda Love, director of examination and insurance, predicted that NCUSIF losses for the coming year could range from $450 million to $1.68 billion—a substantially wide range. Those losses, she said, could require a 0.1% to 0.25% premium, And the assessment to fund the NCUA's Corporate Stabilization Fund could be between 0/05% and 0.15% of insure shares.

From CUNA News Now

You'd Better Contact Your Corporate. More Losses at US Central.

On October 30th, U.S. Central (USC) released their financial statements for the third quarter. Their cumulative losses over the last three years is now up to $2.6 billion. If your Corporate Credit Union has considerable investments (capital) with USC, then it's a good bet that your Corporate's capital account with USC is impaired more than expected. So who pays the tab? Natural Persons credit unions, of course.

Examples from Cindrich Mahalak & Co, CPAs . . . Corporate CenCorp in Michigan has an unexpected 24% impairment, or $240,000 for each million in you capital account. On the other hand, Corporate One in Ohio has no impairment expected. According to CM&Co, "don't expect any recoveries here like you saw with the NCUSF deposit, as this cannot be written up under current accounting rules."

It is suggested that you contact your Corporate to find out where they stand. I would imagine that your Board of Directors does not like surprises, unless they are good ones.

The economy seems to be improving somewhat - this is the good news. However, with new credit union legislation, potential NSF/Courtesy Pay limitations, record high unemployment, and NCUSIF related expenses, credit unions will be navagating some pretty rocky roads ahead.

Employment Data Due on Friday

The market is expecting unemployment to rise ever so slightly from 9.4% to 9.5%. A lower than expected unemployment rate may be one more signal that the recession has hit bottom and the economy is turning around. A higher than expected rate could mean we are in for six more weeks of winter. No, wait, that's Puxatony Phil.

The employment report is considered the most timely and broad indicator of economic activity released each month. The average workweek is an important part of the employment report because it can be a determinant of personal income and a useful indicator of labor market conditions: a rising workweek may be the first indication that employers are preparing to boost their payrolls.

Why is this so important to credit union managers? Higher employment is likely to lead to what we will call a "normalization" of interest rates over the next year. If you are getting close to budget time, determining the direction of rates will go a long way towards providing you with a meaningful financial "road map" and help you plan for the coming year. Because interest expense is such a large line item, a wrong "guess" on interest rates can make a real difference in the accuracy and usefulness 0f your budget as a Board and management tool.

There is more information related to employment than you could ever want at http://stats.bls.gov/news.release/empsit.toc.htm.

Shocker! FASB Proposal - Mark to Market Soon to Apply to All Loans?

The FASB met on 8/13/09 to consider expanding mark-to-market accounting rules to good old-fashioned traditional loans. I am NOT making this up!

Mark-to-market requires financial institutions to determine market values on their traded securities, but is currently not required for loans carried on the balance sheets of banks and credit unions. The FASB is expected to release a formal proposal on the changes in the first half of 2010.

This would be a MAJOR change in accounting rules and could force credit unions to take losses, and hinder their ability to meet capital requirements. Imagine this scenario: Interest rates move up quickly, which would in turn mean your loans have less value; who would purchase loans with a lower yield than market interest rates? You would have to sell them at a discount, yes? With mark-to-market applied, you will have to reflect the lower "value" on your books. How is market value determined? There are plenty of questions.

Sometimes, FASB proposals die on the vine, and this one may wither away too, especially with the banking industry gearing up for a dogfight. Hopefully, the credit union industry will nip at FASB's heels as well. But this one just may go through, as there has been a concerted effort to make accounting rules more international in nature - the International Accounting Standards Board has made moves towards mark-to-market for loans. Click here for a related CNBC Article.
I've been trying to come up with an alternative for the FASB acronym. So far I have (der) Fuhrer Accounting Sadistic . . . I need something for the "B" any ideas what the "B" could be?

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.

"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.

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.

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.

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

Corporate Stabilization TMZ.

The NCUA held a webinar today to clarify the effects of the May 20th, 2009 amendments to the Federal Credit Union Act. Just a few points of interest:

The impairment to the NCUSIF will not cost natural credit unions any less - we're just putting it on our VISAtm card. The amount will be borrowed from the Treasury by the Stabilization Fund and must be repaid over seven years.

If you assessed the full .99% NCUSIF impairment and premium in the first quarter, congratulations! You did the right thing. In the second quarter, you will book "non-operating income" for the recapitalizaton of the NCUSIF. While the net effect is zero, this is not a reversal of your first quarter entries.

BOTTOM LINE: The NCUA estimates that NCUSIF related expenses for 2009 will be .15% instead of .99% of your insured deposits.

You say you'd rather just take the full "hit" this year rather than deal with it for seven years? You don't have that option, Macho (Wo)Man.

And yes indeedy, expenses related to Stabilization can change. Any bets on whether it will cost us more or less?

You need more information. NCUA Letter No: 09-CU-14 can be found at http://www.ncua.gov/news/express/xfiles/LTCUs09-CU-14CorpStabilizationFundImplementation.pdf