Beer Summit Part 3

Back in December, Keith Leggett posted an article on his blog, Credit Union Watch, about non-member business lending. To summarize the post:

The reporter was shocked that credit unions were funding business loans to nonmembers, as this seems to contradict the raison d’etre for credit unions as membership organizations.

He then stated a few statistics from the call report picking the top 10 CU’s with non-member business loans, otherwise known as participations. In my response, I stated:

By selecting large CU’s, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I’d bet you a beer that their %’s are inline with the industry.

Keith then did some more follow up work about my comment, posted at Beer Summit Part 2. As is common with statistics, they can be sliced and diced so many ways that nearly every point can be made with the same data, as Mark Twain also believes. That being said, Keith is correct. The top ten credit unions in terms of total business participations do have a higher concentration of participations against assets. However, the numbers simply come down to how you want to look at them.

Simplistically, this is simply a sign of a more advanced business lending credit union. These top ten credit unions use participation loans differently then the rest of the industry according to their investment needs. In an effort to compare credit unions based on the similarity of their philosophy on business lending and investments, I took the list of 700 or so credit unions with business participations and further split it out based on those credit unions who have the majority of the business lending in participations. This cut the list in half, to 366 CU’s, and I believe this is a more accurate representation of credit unions using advanced business lending techniques. Advanced, however, does not necessarily mean that the credit union is taking undue risk. On the contrary, CU’s who participate more than they actually lend to their own membership recognize that they don’t have the internal expertise and controls in place to appropriately lend funds to their own members, even when lending internally may give them a higher rate of return.

These are the top ten credit unions of those who do more participations than their own business lending. Of the 366 credit unions I mentioned earlier, 84% of their business lending portfolio comes from participations. Of these top ten below, only four (Patelco, Western, Langley, and Keypoint) are higher than the industry average.

PATELCO
PREMIER AMERICA
WESTERN
SCHOOLSFIRST
LANGLEY
KEYPOINT
TRAVIS
SAFE
BETHPAGE
CITIZENSFIRST

By simply looking at two factors, one can never come to an appropriate assertation on a given situation. Just because a credit union has a lower average age than the rests of the industry doesn’t mean that they are the best at social media or have the coolest technology.  Nor does having more CUSO’s than the average credit union make you riskier just like having few branches doesn’t make you less popular in your market.

Getting back to the point at hand, I believe credit unions should be able to utilize business lending participations with other credit unions as an alternative form of investment.  The creditor is still a credit union member thus overcoming any objections in my book. Additionally, these participations are included in all Risk Based Net Worth calculations so these activities are not putting an undue or hidden stress on the financial strength of the credit union. I would agree with you however, that lending to a real non-member would be beyond the scope of of the Federal Credit Union Act and ancillary regulatory measures and guidance. I understand the stance the ABA and the banks they represent take on this situation as it is coming straight at a major portion of their income. I’m not sure if you lean towards Keynsism or Marxian economics, but I believe the more competition in a given industry, the better the options for the consumers.

So Keith, I owe you a beer. I’ll be in DC for CUNA’s GAC conference the week of February 21st.  If you’re in DC, I’d love to meet you for dinner or drinks one night that week and I’m sure some other folks would love a lively debate.

Is the weakening dollar going to affect your CU?

Unless you are an ostrich and have had your head in the sand, the US economy isn’t doing great.  Arguably we are already in a recession with the dreaded word "Depression" occasionally getting thrown around if we have any type of bank runs or if more large investment or retail banks go under like Bear Stearns.  Many of our members will also be experiencing this in the near future if not right now.

So in these times of devaluation of the USD, wouldn’t it be nice to have some money in euros or pounds?  Lots of our members travel abroad and need euros anyway.  Other are interested in euros specifically to hedge their bets in the US economy.  Short of having member surveys in hand, it seems their will be a growing need for foreign currency in the future.  Many CU’s along the borders already handle currency exchange without much effort.  Even CU’s with a large membership base the travels abroad can do currency exchange.  But having euros in hand isn’t exactly the best way to transact business. 

I’ve been chatting with some people around here about the concept of any online savings account that can hold multiple currencies.  The member can simply log in to online banking and view each savings account denominated with different currencies.  If the member started doubting the US dollar, they could simply transfer the money from the USD account to their EUR account and the FI would handle the actual currency exchange behind the scenes.

The only company I’ve been able to find that does anything remotely similar is HSBC of Singapore, but that’s not to say others aren’t doing it.  CU’s can hold foreign currency.  So what’s stopping the creation of this kind of account for the US consumer?  Is it a technology hurdle with online banking?  Core processor support?  Have other CU’s even had members express a need for such an account or is this more a private banking thing that CU’s can’t really touch?

Prosper takes a huge move forward with a secondary market

Prosper

Prosper announced this morning that they will be creating a $500M secondary marketplace for the person-to-person loans they manage.  This will enable lenders to resell loans they have on their books to other investors to free up capital.

Currently, when you lend money on Prosper, it is lent directly to a person, unlike Zopa which uses “risk buckets”.  That lent money is then locked up for the entire term of every three year loan Prosper does.  This move will enable lenders to act even more like a bank by enabling them to free up capital by selling off old loans.

Currently, many banks (and CU’s) originate mortgages, generate the mortgage fee and sell the loan off to another investor.  Banks and CU’s also can sell participations to one another in which on FI would own 40% of a loan and the other 60%.  But the two FI’s involved in the participation could sell chunks of their investment to each other or other investors if additional capital was needed.

This is a huge step for p2p lending and should attract many more participants into the arena.

Yahoo Finance Press Release

SEC Filing

TechCrunch Coverage

What’s an IDA?

I asked the same question the first time I saw IDA.  Did someone misspell IRA???

 An IDA is an Individual Development Account and it is an initiative the state of Oregon kick off a few years ago through The Neighborhood Partnership Fund.  The fund lists three main goals:

      1. Oregon’s communities will thrive while meeting the housing needs of all residents.
      2. Low income Oregonians will have increased opportunities to succeed in school and life. Success will be maximized by an infrastructure of interwoven housing and services provided by a vibrant network of community development organizations.
      3. Low-income Oregonians will increase their household financial resources and stability. NPF will work with partners to build individual, family, and community social and financial assets. 

The primary goal behind the IDA is to help low income individuals and families start a business, education or skills training, or to purchase their first home.  The savings in the IDA are matched at a rate of 2:1 or 3:1!  How is this possible you say? 

The state of Oregon has initiated a tax credit for donations to the NPF at the rate of 75%!  Plunk down a thousand dollar donation to the NPF, and you’ll get to write off $750 from your Oregon state taxes!  (Footnote: I’m not a tax professional, don’t listen to me.  I’m just reading their site.)  These donations then fund the savings matching. 

How does this apply to credit unions you say?  Well besides helping low income families, and besides helping our membership save, and besides helping our more affluent members get a tax break,

"Once eligible low-income participants have met program criteria, they open their IDA at a local bank or credit union. They work with program staff from a qualified social service organization to set up a savings schedule and ultimate savings goal."

Sounds like a perfect fit for credit unions.   

About the IDA (the NPF site)

User generated content @ FI’s

So we’re talking about making a product manual for our staff to have quick reference to all of our product info. Everyone is talking about “manual owners” and who will be responsible for updating it, making it work in conjunction with the other manuals, etc, when I blurt out “what if we did a wiki?” And everyone but about two people said, “What?”

After a brief explanation of what a wiki is, most people got a little defensive saying things like: “We can’t let everyone make changes” or “We’re in a highly-regulated industry. We don’t want people to have the wrong information.”

So how do you combat comments like that? Is it possible to have wiki-based manuals in an FI due to the strict regulations we face? Obviously some things are fixed verbiage dictated to us by regulations, but internal policies, product descriptions, etc aren’t so they seem fair game for a wiki.

We do all programing in dot net with SQL backends, so what wiki would work best in our situation? Can FI’s even do wiki’s internally?

custom cards (again)

A while back I posted about Garanti Bank offering some pretty sweet customized credit cards.

A co-worker recently emailed me back talking about this particular product again and I got a chance to re-read the original Springwise article. One of the visitors noted that First National Bank of Omaha is also offering such a card. Called "One of a Card Visa", it lets you pick your picture, reward types, etc from a pre-defined list.

If credit unions are listening for ways to turn control back over to your members, find a way to do this!

Epiphanies and IRA’s

A few months back while we were planning out our deposit strategy for 2007 and 2008, I just rattled an idea out of my head. No clue where it came from, but I just blurted it out.

Why does our IRA rate suck? (That wasn’t my idea, just my observation.)

The average life of one of our IRA’s is almost in the double digits! So why do we pay low rates on that money? If the average life of an IRA is almost 10 years, what rate would be put on a 10 year CD??

So we’ve developed my IRA idea into our Premier IRA: The Last IRA You’ll Need.

Internally, it will always be priced around our 5 year CD. We launched the product last month, but we haven’t start the promo machine until this month. Our current rate is 4.5% APY with no account minimums.

We’re running with the “Last IRA You’ll Need” because we’re targeting the large number of people who have small IRA’s spread out across a few institutions and want to help our members consolidate their IRA’s and not have to ladder CD’s and manage maturity dates. This way, they have one big account that is easier to manage and their funds are fully liquid! Plus, the NCUA insures it up to $250K now! And at 4.5% we’re way ahead of of our regional IRA savings market and we’re in market for 5 year CD’s.

We’re looking for ways to grow shares rather than promo CD’s and checking, checking, checking. We’ll see how it pans out.