Friday, May 20, 2011

Y.E. Fun Facts for the large CUs and more reasons it sucks to be small!!!

If we look at the divergence in cu asset sizes ($2 -20, $20 - 50, $50 -100, $100 - 500, $500 - 1B, and 1B+) over the last 15 years, you will notice some interesting trends :

- $1B+ ROA for 2010 average = .720%  The smaller cu's ($2 -20) haven't seen those kind of ROA numbers since 2001.  In 1995 the difference in ROA between those two categories was 5 BP... It's now the largest ever at YE 2010 at 88BP.

- For Non-Interest Income as a % of total Income the spread between the largest and smallest was 268 BP in 1995.  It now stands at 611 BP.  More than double.  Rarely has a smaller asset bracket exceeded the average income of the next larger bracket over the 15 years.  Bigger is Better.

- It pays to be a member of a larger CU.  The difference in Dividends as a % of Income in 1995 was 800 BP, and now it's down to 474 BP.  In 2005 and 2007 this spread increased to over 1475 BP.  However, after the larger shops stopped their growth streak, it fell dramatically.

- The efficiency ratio is another indicator (the cost to produce $1 of income) of the advantage larger cu's enjoy.  In 1995 the large shops were $0.07 more efficient at just over $0.64.  Fast forward to 2010 and that becomes a  whopping $0.21 advantage to the largest cu.  There is some channel noise with the write-downs and subsequent reduction of ALLL, but this has been an ever-widening trend since 1995.

- Yield on Assets - Advantage smaller cu.  But, what do you expect.  If you only make signature and auto loans, you have higher yields than with Real Estate loans.  The 71 BP advantage in 1995 is now down to 5 BP.  So, small cu, enjoy it while you can.  In reviewing the entire trend, 1995 looks to be a spike.  The advantage for small shops held almost constant at 30 BP until 2008 and then it's dropped off significantly.

- Same with Net Interest Spread.  Advantage small shops, but smaller now:  124 BP to 59BP.

- THIS IS KEY - OPERATING EXPENSES AS A % OF ASSETS:  In 1995 the largest had a 96 BP advantage.  They now have 136 BP advantage.  The large shops are saving $13,600,000 per year per Billion in their office efficiency.  If a $20 M shop had this same ratio, they would be saving $272,000 in expenses each year.  Do you think they would be profitable then?  Heck Yes!!!!  This is the TRUMP RATIO that makes bigger better.  This is also the one area you have the most control over. This is where small shops need to concentrate and COLLABORATE ALREADY!!!!  DO IT FOR YOUR MEMBERS.  Your cu's very existence depends on it. 

- One more fun facet to look at.  This tells us as an industry how vulnerable we are to Non-Interest Income.
Take non-interest income away from the ROA and what do you have?  In 2000 the $100-500 category cu's bottom line went negative first.  In 2001 all the others did as well, except the $1B+ cu's.  They didn't have a negative bottom line until 2004.  That year every cu category went negative, and they all stayed there.  EXCEPT - the $1B+ became positive in 2009 and they are the only category that has remained positive since that time.  EVERY OTHER CATEGORY HAS BEEN NEGATIVE SINCE 2004, WITH THE SMALLER SHOPS SUFFERING THE MOST.  So, only the $B+ shops are making it on the spread.  They don't require NON-Interest income to turn a positive bottom line.  The rest of the shops now need 40 BP, or more, of Non-interest income - JUST TO BREAK EVEN!  Think of it this way... The large shops are standing in neck-deep water.  The rest of us are in over our heads.

So, when we hear that cu's are getting better and pulling out, let's ask which size cu's they are talking about --- The 1B+ shops or, everyone else? 


 

Wednesday, May 18, 2011

What comes after QE1 and QE2.... Inflation or QE3?

There is a great article in Financial Times : http://www.ft.com/intl/cms/s/0/96ec2b02-8146-11e0-9360-00144feabdc0.html?ftcamp=crm/email/2011518/nbe/ExclusiveComment/product#axzz1MjL4EYXz

It discusses the next step from here.  QE2 is about to end.  Conventional Wisdom suggests inflation.  Check out what Galbraith refers to Conventional Wisdom as (since he brought the phrase to popularity).

If you doubt where the author is going... consider that Japan went through QE8 and was still a wreck before the tsunami hit!

"What's that mean to me as a cu?"  Glad you asked!  If you've been staying short and waiting for the rates to rise - Don't. Ladder out longer now.  Just be sure to use step-ups or variable investments.  Never fixed.

Some have seen a resurgence in borrowing.  That's great, but don't give the store away on very long term loans a very low fixed rates.  That's akin to putting all your eggs in one basket.

I happen to agree that we are in for a long slow slog back... There is no rainbow and no pot of gold waiting for us in the near future. We've been on a 25-year buying binge... the consumer is learning a new lesson in a new economy right now.  I don't see massive running up of personal debt any time soon. Remember, it was the consumer who drove 70% of our economy for a long time. We don't have the economic engine to pull us through, this time around.

Tuesday, May 10, 2011

NCUA is Helping Durbin... Not CU's! CUNA's got it right!

According to the NorthWest CU Association: 


CUNA is concerned that a recent letter sent by the National Credit Union Administration (NCUA) to the Federal Reserve Board regarding debit interchange fees does not accurately reflect the costs associated with card programs.
At the urging of Senator Durbin, NCUA surveyed “direct costs and income” related to credit union debit card transactions. However, a chart attached to the letter appears to demonstrate that credit unions in the range of $500 million to $1 billion make $0.35 per debit card transaction, with credit unions over $1 billion making $0.36 per transaction. For those who take the time to read the letter, it clearly states that not included in those costs were factors such as “labor, facilities, equipment, and other overhead costs related to operating a debit card program.”
Further analysis would find, as credit unions know, that the costs of running a debit card program are not simply per-transaction fees but require significant back-of-house work, time, technology, and many other components.


Instead of just acknowledging that the analysis “likely underestimates costs for debit card transactions” in their letter, CUNA is pushing NCUA to revise this chart to include all costs related to offering debit cards.
Unfortunately, a document like this, as grossly misleading as it is, was provided to the Federal Reserve by NCUA as an accurate representation of debit card fees. It provides fodder for those opposing delay of the Durbin interchange amendment, which, without Congressional intervention becomes effective July 21, 2011.


So....... Who do we write to now.... Durbin or NCUA?  Or, Both.  


Gee thanks NCUA for the shot in the foot!!!!


Anyone besides me think NCUA is out to end CU's as we know them?  Run them into the ground, merge them down to just a few, and then turn the remains over to FDIC.

Monday, May 9, 2011

The dam is about ready to burst - $425 Billion in troubled loans to be "handled" at B of A!

According to the Financial Times:  B of A, aka Big and Apathetic, is about ready to dump $425 Billion in troubled home loans.  This in order to "resole problems" related to its purchase of Countrywide Financial.  B of A plans on doing this over three years.  Guess who's holding those loans for close to 30 years?  You and I are.  Remember WesCorp?  Remember how much they invested in Countrywide?  Remember how NCUA sold off the future cash flow of those loans?  Remember how we are holding the principle balance?  Remember how they said the eventual losses will be between $11 Billion and $16 Billion?  We are about ready to find out how much of that "stuff" WesCorp purchased.  Let's see how the "tranche warfare" worked out for the financial wonder boys.  I'm curious if the shoe will drop on cu's in this go-around of shedding loans, or will it come when B of A addresses the remaining $425 Billion in bad loans? 

Amazingly,  B of A is only addressing 1/2 their troubled loans here.  It seems that they are worried about the banks overall performance and that waiting may "tarnish" the reputation of Brian Moyniham, it CEO. Tarnish his reputation?  Really?  What positive reputation could he possibly have at this point? The key word there was PERFORMANCE.  You see, the real reason was the impact these loans have on bonuses.  I wonder how many B of A big wigs are paid multi-million bonuses and are still upside down on their home loans?  How ironic would that be?

We actually need this action by B of A and a few others.  We won't start a true recovery until the housing market is addressed.  It's kind of like watching the doctor bring out a big needle.  You know you'll be better for taking the medicine,  but you just don't want more pain!

Our first dose of medicine is coming up soon.  Let's just hope it cures us, not kills us.