Effects of the Economy on Credit Unions

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An operating environment resulting from slow growth in the economy, low interest rates, and nagging unemployment has from a macro-perspective produced an outcome of rapid savings growth, slow loan growth, and a steep yield curve.

We have seen:

  • Declining yield on assets due to lower interest rates plus the asset distribution shifting to lower-rate investments and maturing loans being replaced with low rate loans;
  • Declining cost of funds due to lower dividend rates plus the distribution of savings shifting to low-cost savings products;
  • Indeterminate net interest margin due to cost of funds falling faster than yield on assets if dividend rates are aggressively lowered.  However, if loan growth is very weak and savings growth very strong, yield on assets may fall faster than cost of funds;
  • Rising provisions for loan loss due to higher bankruptcies and charge-offs reflecting employment trends;
  • Lower operating expense to average asset ratio due to rapid savings growth increasing assets faster than the growth in operating expenses;
  • Higher fee income due to non-sufficient funds and late payments.
  • Return on assets will be flat to marginally lower; and
  • Capital-to-assets will be flat to marginally higher.

Things to consider in maintaining net income when interest rates are very low are listed below:

  • Avoid extending investment maturities significantly;
  • Limit additions to the fixed rate mortgage portfolio;
  • Don’t overreact by slashing operating expenses; and
  • Adjust rate paid on member savings downward.

Some factors to consider with respect to falling net worth ratios are as follows:

  • Members are seeking a safe place to store their financial assets (asset growth has been strong);
  • If rates paid on savings are not hyper-competitive, this savings growth can be healthy.

This blog entry you have just read was written by Edward Lis who is a former senior executive of three different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com or by calling 518-420-2108.

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SAFE Act registration

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The NCUA expects the initial period for federal registration of residential mortgage loan originators under the SAFE Act to begin around Jan. 31 and end around July 29.

The SAFE Act, or Secure and Fair Enforcement for Mortgage Licensing Act of 2008
– requires all mortgage loan originators to register on the Nationwide Mortgage Licensing System and Registry. The registry website is up now and provides information about the registration process, including what credit unions can do prior to the registration period to facilitate the process.

Finalized-FDIC Overdraft Guidance

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The FDIC guidance “reaffirms” a best practices document that was issued in 2005, and it creates specific risk-mitigation techniques that it expects regulated banks to implement.   The FDIC guidance does not apply to credit unions, however, with that said this guidance opens the door for others.
Herein are some specific risk-mitigation techniques:

  • Your board must be involved with its ODP program.  Expected; is regular oversight including an annual board review of an ODP program’s key features.
  • Reviewing ODP advertising to minimize confusion and to promote responsible use.
  • Monitor programs for excessive or chronic customeruse.  What is abuse? When a customer overdraws the account on more than six occasions where a fee is charged in a rolling twelve-month period.  If and when that occurs, the bank must undertake “meaningful and effective” follow-up action, which may include, for example:
    • Contacting the customer to discuss less costly alternatives; and
    • Giving the customer a reasonable opportunity to decide whether to continue fee-based ODP coverage or choose another available alternative.
  • Instituting appropriate daily limits on customer costs by, as an example, limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day.
  • Considering the elimination of overdraft fees for transactions that overdraw an account by a small amount.
  • Considering the use of cost effective, existing technology, as appropriate (e.g., text message, e-mail, telephone or cell phone) to alert customers when their account balance is at risk of generating a fee for non-sufficient funds.
  • Reviewing check-clearing procedures and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order.

The FDIC expects affected institutions to have their new risk-mitigation techniques in place by July 1, 2011.

The guidance will create downward pressure on bank ODP revenue streams.

If your credit union earns income from an ODP program, that income is now at risk.  How much is at risk is yet to be determined, but one may want to consider the following.

  • How much ODP income do you receive from smaller transactions. If the small dollar amount transaction cutoff for fees take effect, ODP fees from those transactions could go away.   What is the impact?
  • How much ODP income do you earn from consumers who are charged more than 6 ODP fees in any 12-month rolling period? If this applied to you, you’d have to reach out to them and show them alternatives. Let’s say only 10% of those consumers opted out of your ODP program. How much money would that be?
  • Do you clear items from largest to smallest in terms of dollar amount?  If you had to clear items based on the order received or by check number, how might that affect your income?
  • Imagine you implemented a daily limit of $25 or $50 for ODP programs.  How would that have affected your income in 2011?

Credit unions are member-centric organizations.  It is recommended those credit unions with an ODP program begin to  develop and deploy several of the risk-mitigation techniques above if they already have not.  That said, it is widely anticipated many executives will be revisiting this area once again.

Merger Partner Registry

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Letters to Credit Union 10-CU-22 issued this month is for those credit unions interested in expanding their field of membership (FOM) by merging with another credit union.  Interested credit unions can now let the NCUA know by signing up for the new Merger Partner Registry.

According to 10-CU-22, the registry does not change the process for voluntary mergers between healthy credit unions.  Voluntary mergers may continue to take place without regulatory intervention.

The Registry does apply to two types of transactions in which healthy credit unions can acquire another credit union’s field of membership:

1)    Assisted merger of a troubled credit union, or;

2)    Purchase and assumption (P&A) of a liquidated credit union.

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