AUSTIN, Texas–Is your credit union making one of the following terrible” mistakes when it comes to filing your 5300? It’s likely, according to Kevin Durrance, president/CEO of Texans Credit Union.
In remarks to the CUNA CFO Council here, Durrance walked his audience through some common mistakes made by credit unions that can lead to a downgrading in the management “M” of the CAMEL rating, depending on the type of mistake and how many there are.
First, stressed, Durrance, start with the basics.
“When in doubt, read the instructions. You would be surprised at how many folks have not read the instructions,” he said, before asking a large room of attendees how many had read the instructions on NCUA 5300s from front to back in the last year. Two hands were raised.
Durrance reminded that definitions of terms need to be checked, pointing out, for example, that NCUA has changed its definition of commercial loan as opposed to a business loan.
He also urged reading the Historical Warnings Report.
“You should carefully read and check these warnings to identify if you have made an error,” he advised. “If you find any errors, correct them. Keep ‘proof’ that you have checked the Historical Warnings Report.”
Among the common “terrible” errors found in call reports, according to Durrance, include:
The Number-One Mistake
“The number-one mistake on the call report is when you are doing the P&L, the income statement, whatever you call it, the income and the expenses must always be year to date,” he said. “Sometimes, we accidentally pull the wrong number, such as the monthly date, and all of a sudden your ROA drops…and you look like you had a big loss. Once you have transmitted the call report, look at the Financial Performance Report. The second major tab is the ratios page. You should check your ROA, your net worth, your NOE, your DQ, and your net charge-offs. That will catch a lot of mistakes. If you have a variance, it will pick it up, and you can correct it before your examiner does it for you.”
Cash and Cash Equivalents
The mistake here, he said, is not understanding a cash equivalent has an original maturity of three months or less at the time of the purchase; it is readily convertible to known amounts to cash.
Courtesy Pay
Overdrawn or negative share account balances should NOT be reported here, warned Durrance. Why? “Because it misstates your total share accounts. If you overdraw an account as an extension of credit, whether by intent as part of an organized courtesy pay program or an informal courtesy pay program or by accident, you have created a negative share account. Adding negative shares will miscalculate your total shares, meaning you will be sending NCUA less money as part of your NCUSIF capitalization account.”
So, where do those accounts get reported? They must go to other unsecured loans in the loans section, he said.
Interest on Loans
Durance reminded that CUs must be careful around income earned from interest on loans and how they recognize deferred loan fees and costs. Interest should not be accrued on loans 90 days or more delinquent, and added that previously accrued but uncollected interest should be reversed in accordance with GAAP. “Once it is 12 months past due, you reverse that,” he said, before reminding, “Your lending folks must have a policy if you are modifying any loans that rise to the threshold of being a TDR.
Non-Interest Income
Durrance said the simple thing to remember is fee income is derived directly from the member. Other operating income is derived indirectly from the member or the member’s activity.
With other operating income other than the types designated in lines 1 to 4 and line 12, this Includes dividends from the NCUSIF, income or loss derived from selling real estate loans on the secondary market, interchange income and unconsolidated CUSO income. Credit unions must also include interest income earned on purchased participations not qualifying for true sales accounting under GAAP.
Commissions that are paid to a CU by a third party go in number 13 on the call report.
Kevin Durrance speaking to CUNA CFO Council in Austin, Texas.
Gains/Losses on Investments
Section 14 on the all report is for the reporting of the resulting gain/loss from the sale or disposition of all investments except trading accounts (line 4).
All Other Secured Non-Real Estate Loans/Lines of Credit
Durrance said this is for all consumer loans secured by nothing other than real estate and not reported elsewhere in the loan section, such as:
- Fully-share secured loans
- Loans secured by ATVs, RVs, and boats
- Loans financing the disposal
Total Loans/Lines of Credit
Total loans/lines of credit secured are those secured by first lien one-to-four family residential properties, he said.
“When you are looking at loans backed by real estate, they literallyhave to be backed by real estate. Not an RV or a boat, even if a primary residence and even if this IRS allows it,” Durrance told the CFO meeting.
Commercial Loans
Durrance reminded everyone that the new definition of commercial loans is separate from business loans.
“Commercial loan means any loan, line of credit, or letter of credit, and any interest a credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations or other business enterprises for commercial, industrial, agricultural or professional purposes, but notfor personal expenditure purposes,” he said. “Not all commercial loans are business loans and not all business loans are commercial loans, and then there is a category that is both business and commercial. A commercial loan is for business purposes.”
Commercial Loan Exclusions
What’s excluded from commercial loans, said Durrance, is any loan made to a corporate credit union, to another natural-person credit union, to any CUSO (those to be reported in other assets).
“This is a big change. What’s excluded from commercial loans is any property secured by a 1-4 family residential property. It does not have to be the member’s primary residence,” he said. “It is also excluded if fully secured by shares or deposits, when secured by a vehicle manufactured for household use, loans to a member or an associated member that when added together are equal to or less than $50,000.
“On a commercial loan, it’s easier to calculate the $50,000,” he continued. “You add the outstanding balance to the unfunded commitment if it’s a line of credit, and back out any portion of that loan that is secured by shares or deposits at another federally insured institution. If that number is greater than $50,000, it’s a commercial loan.”
Commercial loans are broken out in 12 and 13, he said, adding that on page 72 on the instructions to the call report is a helpful chart on the issue.
Loans Granted YTD
“When you look at this, think about funding,” advised Durrance. “If you’re selling mortgages on the secondary market, but you originated and funded that loan, that counts as a loan granted YTD. If you buy a participation, you funded it, that’s a loan granted YTD because you re-underwrite it, even if it’s a CUSO that did it. Where the problem is is in how you count a revolving line of credit. That gives us headaches. Let’s take a home equity line of credit, for example. The member has a $50,000 limit. You don’t report the credit limit; you report the aggregate total on the draws. Twelve draws on a line of credit at $10,000 each is one loan granted YTD representing $120,000.”
Troubled Debt Restructured
Durrance said the definition of a TDR is a loan whose terms have been modified by the credit union for economic or legal reasons related to the debtor’s financial difficulties and which grants a concession to the member that would not otherwise be considered.
“What you are permitted to do is treat consumer TDRs a little bit differently now,” he said. “But you have to have a loan policy related to TDRs in order to do that. A TDR is now calculated consistent with the new loan contractual terms. Additionally, if you have written a policy on TDRs you can use the 90% rule (for consumer loans only, not business loans). If that consumer-member pays 90% of the payment, you can calculate that as a full payment for the purposes of calculating the delinquency. You can now count that loan for purposes of delinquency according to whatever the new contractual terms are.”
Delinquencies
When calculating delinquencies, said Durrance, it’s critical to use days, not months. Anything 60 or more days overdue is considered a reportable delinquency. Months with 31 days do create a variance, he acknowledged.
“Periodically, you need to check to make sure your core system is giving you loans that are greater than 59 days delinquent, not greater than 60,” said Dorrance.
After that, he added, “It’s once a TDR, always a TDR, until paid off or charged off.”
He noted that NCUA has said it is seeking to develop new rules with some conditions so that once a TDR fulfills those conditions the credit union no longer needs to count it as a TDR. “But NCUA said this in 2010, so don’t hold your breath,” he joked.
Loan Charge Offs and Recovery (page 9 of the 5300)
This is the second most common error on the call report, according to Durrance.
“If I see lines 28 and 29 constantly rising throughout the year, I know they are making a mistake. Line 27 is the total amount of loans charged off due to bankruptcy year to date. So, if you have charged it off in this calendar year, regardless of when you got the bankruptcy notice, the amount charged off goes into line 27. So, 27 should keep going up. However, 28 and 29 are linked together; 28 is where you list the number of members who have filed for Chapter 7, 11, 12, 13 or 14, and then haven’t reaffirmed on the loan and the bankruptcy hasn’t been dismissed by the court. Include reaffirmations, and exclude bankruptcies that have bene dismissed by the court.
“Sometimes you will get a bankruptcy notice where the member doesn’t have any loans outstanding; you don’t count it in 28,” he continued. “You only count it in 28 so long as they filed it this year and they have an outstanding balance on that loan. Once you have charged it off, it drops out of 28. So, if the call report isn’t fluctuating, there is either something wrong with the call report or how you are handling bankruptcies internally.”
For line 29, the amount of outstanding loans subject to bankruptcy, Durrance said the credit union should provide the dollar amount of the total outstandingloan balances of those members who have filed for bankruptcy identified in lines 28. This means that, at the time of reporting, they still had an outstanding balance, were not charged off, etc., he said.
Real Estate Loans Foreclosed YTD
“What you report is not the fair market value of the property at the time you put it on the books, but the balances of the real estate loans at the time of foreclosure,” he said.
One Last Common Error
Another common error, he said, comes from reporting on interest-only and payment-option first mortgage loans in the miscellaneous real estate line of credit information (Schedule A).
“While it’s interest only, it’s reported in 11 and 12. Once P&I are required, it drops out of 11 and 12,” he said.