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Conference 7.286::dcu

Title:	DCU
Notice:	1996 BoD Election results in 1004
Moderator:	CPEEDY::BRADLEY

Created:	Sat Feb 07 1987
Last Modified:	Fri Jun 06 1997
Last Successful Update:	Fri Jun 06 1997
Number of topics:	1041
Total number of notes:	18759

811.0. "Guess it wasn't such a good year for loans after all" by SMAUG::GARROD (DCU Board of Directors Candidate) Sat Apr 09 1994 01:17

    I thought it would be an interesting exercise to compare the "words" in
    the 1993 annual report to what the numbers REALLY say. As I guessed
    they're not the same.
    
    Lets look at the words in 1993 annual report:
    
    "1993 marked record growth in loans (see chart below)"
    "Overall consumer loans grew by 20.9% with the largest increase in new
    vehicles (40.5%), used vehicles (24.2%) and credit cards (20.1%)"
    
    The chart (bar graph) shows the following:
    
    Total Loans Granted:
    
    1991:	~$100M
    1992:	 $181.7M
    1993:	 $216.5M
    
    This marvellous performance is attributed to:
    
    "Service improvements included a reduction in loan turn around time to
    less than 24 hours, a simplified application, and an approval rate over
    84%."
    
    And many other statements that on the surface indicate that DCU is
    doing a growing stellar business in loans.
    
    Now let's look at the figures and do a proper analysis of them.
    
    In the 1991 and 1992 annual reports the activity in loans was broken
    down in the consolidated statements of cash flows as follows:
    
    
    INVESTING ACTIVITIES:
    ...                             	1991		1992
    
    Originations of Loans Sold          <56,745,587>    <140,988,894>
    Proceeds from sale of loans          51,997,070      128,200,200
    Net decrease in loans to members     13,981,785       17,884,616
    
    The top two lines are purely talking about loans that granted and then
    sold. The first line is the amount of cash given to the members taking
    out the loan, the second line is the amount of cash recovered when the
    loan was sold on the secondary market. These are primarily long term
    mortgages that quite sensibly the DCU doesn't want to hold too many of
    due to interest rate risk.
    
    The third line is the interesting one. It tells you what's happening to
    the loans that the credit union is holding. It says that at the end of
    1991 it was holding $13M+ less in loans than it was at the beginning
    of the year. And in 1992 it was holding $17M+ less again. This line is
    basically:
    
    VALUE OF LOANS GRANTED THAT YEAR - PAID OFF PRINCIPAL OF LOANS
    
    Doesn't look too hot for a credit union. The credit unions main purpose
    for existing is to grant loans.
    
    But wait. What of the 1993 statement. One would have thought that it
    would be presented in the same manner as the 1991 and 1992 statements.
    But NO it isn't. Instead it is presented as follows (1992 is restated
    in the new terms as well)
    
    INVESTING ACTIVITIES:
    ...                             	  1993	          1992
    
    Proceeds from sale of loans           138,301,205      128,200,200
    Net originations of loans to members <120,721,245>    <122,409,278>

    
    In other words the lines "Originations of loans sold" and
    "Net decrease in loans to members" has been combined into the new
    line "Net originations of loans to members". So let's give the benefit
    of the doubt and say this isn't covering up information on a big drop
    in loans that are actually being held (although one wonders why
    three lines were combined into two, that's LESS information).
    Assuming this there is still a drop of about $1.7M in the value of
    the loan portfolio. Which of course means less interest being earned.
    
    So it appears that even though loan originations are up from the last
    year (remember the words) that is a meaningless statistic because
    more principal was paid off than loaned out. One would have hoped
    that a banner year in loan originations should lead to a balance sheet
    showing a larger loan portfolio. I guess not. I wonder how much of
    that was due to people refinancing and taking their business elsewhere?
    
    I think the credit union needs to do a better job. That in my mind
    means that more people do business with the credit union. I say the
    only way to achieve that is to improve services and marketing. I
    believe fees are doing the exact opposite.
    
    Dave

T.R	Title	User	Personal Name	Date	Lines
811.1		QBUS::M_PARISE	Southern, but no comfort	`Tue Apr 12 1994 01:45`	11
	I must be missing something.. Why would a credit union want to sell loan contracts to a third party for 9cents on the dollar? That sounds more like a mortgage broker than a lending institution. Also why wouldn't the net decrease for 1993 be in the $13-17M range? What is the actual amount in loan balance? Mike (no monetary wizard)
811.2		AOSG::GILLETT	Running for the DCU Board	`Tue Apr 12 1994 11:17`	16
	re: .1 Yes, it does sound a lot like a mortgage broker. Basically, they are trying to avoid carrying a lot of low interest loans on the books. They can sell them now, make a quick buck, and "risk less" when interest rates rise. The argument is typically that if they have a lot of low interest stuff on the books, when rates go up they'll be less available to loan out. I believe they currently carry the fixed rate stuff on the books - I don't think those are sold. Chris
811.3	It's long term fixed rate that is sold	SMAUG::GARROD	DCU Board of Directors Candidate	`Tue Apr 12 1994 11:28`	31
	Re .-1 >Yes, it does sound a lot like a mortgage broker. Basically, they >are trying to avoid carrying a lot of low interest loans on the books. >They can sell them now, make a quick buck, and "risk less" when >interest rates rise. > >The argument is typically that if they have a lot of low interest >stuff on the books, when rates go up they'll be less available to >loan out. Actually I think tthere is more to it than that. The problem with having a lot of low interest loans on the book is that if prevailing rates go up an institution would not be able to raise its deposit rates to prevailing market rates due to lack of income. This would cause depositors to remove money causing a big cash flow problem for the institution. In addition of course it would mean there would be no more money to loan out. >I believe they currently carry the fixed rate stuff on the books - I >don't think those are sold. Actually it is the other way round. It is long term fixed rate mortgages that tend to be sold on the secondary market immediately. Institutions will hold on to all variable rate mortgages because they know that they can adjust the interest rates on these to prevailing rates as time goes by. Dave
811.4		QBUS::M_PARISE	Southern, but no comfort	`Tue Apr 12 1994 12:45`	15
	Dave You claim in the rebuttal of the "Committee for a Qualified DCU Board" memo that investing in membership loans is a far more lucrative, and by inference desirable, pursuit rather than short term cash vehicles employed to develop a better capital position. How does this statement of principle coincide with the line from .0 which states: "These are primarily long term mortgages that quite sensibly the DCU doesn't want to hold too many of due to the interest rate risk." Should the DCU grant and hold loans, or merely broker them? Mike
811.5		STAR::BUDA	I am the NRA	`Tue Apr 12 1994 13:09`	15
	RE: Note 811.3 by SMAUG::GARROD > Actually it is the other way round. It is long term fixed rate > mortgages that tend to be sold on the secondary market immediately. > Institutions will hold on to all variable rate mortgages because they > know that they can adjust the interest rates on these to prevailing > rates as time goes by. You, a mere engineer know of such financial topics??? I thought only, 'Qualified' people would have such knowledge... :-) Looks like engineers can balance a check book after all! :-) :-) - mark
811.6	Thats the problem...	SSDEVO::RMCLEAN		`Tue Apr 12 1994 13:16`	8
	>>You, a mere engineer know of such financial topics??? I thought only, >>'Qualified' people would have such knowledge... :-) This is EXACTLY the problem! Engineers believe in doing the "right" thing and not keep track of the pennies like the bean counters!!! They forget that as the company gets smaller the ratio of Bean counters to Engineers gets smaller ;-.] ;-.]
811.7	Need to bring members business to DCU not elsewhere	SMAUG::GARROD	DCU Board of Directors Candidate	`Tue Apr 12 1994 13:32`	55
	Re: >You claim in the rebuttal of the "Committee for a Qualified DCU Board" >memo that investing in membership loans is a far more lucrative, and by >inference desirable, pursuit rather than short term cash vehicles >employed to develop a better capital position. How does this statement >of principle coincide with the line from .0 which states: "These are >primarily long term mortgages that quite sensibly the DCU doesn't want >to hold too many of due to the interest rate risk." >Should the DCU grant and hold loans, or merely broker them? I believe my statements are consistent. The DCU has done and should continue to sell long term fixed rate loan obligations to avoid the interest rate risk (for an example of an institution that thought it could predict which way interest rates would go take a look at Abbey Financial, they just went bankrupt because they were speculating on interest rates continue to fall). My concern stated in the joint statement is that in my view a too high percenentage of DCUs assets are in investments rather than in member loans. I believe the reason for this is because members are taking their variable rate loan business elsewhere. DCU SHOULD be able to offer a credit card that soaks up as much of the free cash as possible. But NO it ties the credit card fee to being a "Relationship Member". Maybe those who want a credit card don't: a) Want to keep over $3,500 on deposit or b) Don't ALWAYS want to have more than $3,500 outstanding in loans With numbers much less than this DCU could generate significant income from credit cards. Just the interchange income alone is astronomical. But unfortunately the current policy is a complex set of fees and relationships that are causing people to just take their business elsewhere leaving DCU with about $100M+ (I think that is the figure, I don't have the annual report with me at present) sitting in low interest rate investments. DCU's goal seems to be to reduce that $100M not by loaning it out but by chasing away the depositors through the relationship banking scheme. Shouldn't be too difficult since 2/3 of DCU's members are not "relationship members". Only a 1/3 are not "abusers". What DCU needs to do is make it even easier foer members to do business with them. Members need to know that if DCU sets rates too conservatively that no problem some of the excess profits will be redistributed back to the members at the end of the year. But NO the current policy is to retain ALL of that excess profit (except for the piece earmarked for the employees of course -gainsharing-) just to build up the almighty capital ratio. Nowhere have I ever seen either DCU management or the pro fee candidates explain why we need a capital ratio that grows at such a high rate. The only half explanation I've seen is something around matching industry peers. Dave
811.8		QBUS::M_PARISE	Southern, but no comfort	`Tue Apr 12 1994 15:38`	15
	Dave, don't confuse me with the facts! ;-) I guess I misunderstood your intentions in posting the basenote. I thought you were trying to say that the reason loans were being sold was due to the exodus of monies on deposit and the high loan imbalance that created. Now it appears the loans are sold because it is considered sound financial management. Maybe I wouldn't want a mortgage with a credit union who is only going to sell our contract to a mortgage company I don't know. Also isn't it a bit disingenuous to extol loan services which one is only acting as a middle-man, and fully intends to outsource? Mike
811.9		ROWLET::AINSLEY	Less than 150 kts. is TOO slow!	`Tue Apr 12 1994 16:25`	10
	re: .8 I think DCU is required to tell you when you apply for a mortgage (along with all the other mortgage providers) the percentage of loans they have sold in the past along with an indication of whether they intend to sell yours. I agree it is a bit hypocritical to sell service to a potential customer when you have no intention of providing any. Bob
811.10	servicing what you sell?	CVG::THOMPSON	An AlphaGeneration Noter	`Tue Apr 12 1994 16:34`	8
	My understanding is that DCU is trying to increase the number of loans that it services. There is money to be made in servicing the loans that DCU sells. Servicing in this case means collecting the money and passing it on to who ever the loan has been sold to. This allows DCU to make additional money on the loan while controlling the quality of service to its members. Alfred
811.11	Keep the servicing, sell the loans where it makes sense	SMAUG::GARROD	DCU Board of Directors Candidate	`Tue Apr 12 1994 16:40`	17
	As Alfred said DCU is moving towards only selling the loan but keeping the servicing. I too would think it pretty shoddy if an institution hooks you and then immediately sells the servicing to another institution. To be honest I don't think the customer should really care whether or not the loan itself is sold on the secondary market. It is the servicing that should STAY with the institution that issued the mortgage. I'm glad to say this is what DCU is now doing. Whether a loan/mortgage is sold or not should be something that is determined on sound financial management principles. Whether to continue to service loans you issue is more a customer relations issue. It is customer relations where DCU needs to take bigger steps in the direction it has moved forward on some fronts but unfortunately large steps backwards on the front of "fees" and "Relationship Banking". Dave
811.12		PATE::MACNEAL	ruck `n' roll	`Tue Apr 12 1994 16:59`	3
	Personally I never understood the issues some people had with having their mortgages serviced by someone other than the company the loan originated with.
811.13		CSC32::S_BROOK	There and back to see how far it is	`Tue Apr 12 1994 17:10`	16
	There are a number of problems related to changing the servicing of a mortgage ... a) you're never quite sure where to send your mortgage cheques ... some mortgages change hands a couple times a year. b) the service provided can vary ... lots ... in case of servicing questions c) escrow calculations and policies may be different amongst the different companies d) every transfer runs a risk of messing up the numbers of the amount owning, the amount in escrow etc.
811.14	servicing issues	PACKED::COLLIS::JACKSON	Live freed or live a slave to sin	`Tue Apr 12 1994 18:02`	23
	We just completed our second refinancing in a year. The company that our loan was sold to last summer was - unresponsive (10+ minutes to speak to a human voice when calling every time I called) - slow to post money received - quick to slap on fees - charge outrageous (IMO) fees for faxing - broke promises of providing service promptly - gave incorrect information to the Title company causing lots of headaches The new company our loan was sold to is: - quick to answer the phone - knowledgable - pleasant to deal with IMO, who services the loan is VERY important. But then again, I've seen both sides. Collis
811.15		QBUS::M_PARISE	Southern, but no comfort	`Tue Apr 12 1994 19:03`	9
	I heard of a homeowner who had a mortgage with a company that failed. Not all mortgages held by this company were picked up and his was called in (demand payment). Re-financing was a real hassle and the interest rate was much higher. Would this happen with a DCU mortgage that was sold. What "service" would one expect in this case? Mike
811.16		STRATA::JOERILEY	Legalize Freedom	`Wed Apr 13 1994 03:21`	20
	RE:.12 >Personally I never understood the issues some people had with having >their mortgages serviced by someone other than the company the loan >originated with. When I re-mortgaged the first time I paid a $250 application fee plus points (I don't remember how many now) just because I wanted to be with a local bank. That way when any problems arise yours or theirs it's a simple hop in your car and drive down the street. Within one year it was sold to a firm in Portland Oregon. I was never advised of this until the deal was done. It has sense been sold to a firm in Texas. Both Oregon and Texas are a bit to far to drive to on a regular basis and any kind of communication with either was almost non existent. So when I just re-mortgaged with a local credit union (not DCU) the first question I asked was did they plan on selling the mortgage, when they answered no I went ahead with the deal I close this Thursday. Joe
811.18	DCU should service all its loans	CADSYS::RITCHIE	Gotta love log homes	`Wed Apr 13 1994 09:55`	12
	The savings bank we have our mortgage with told us as soon as we converted our variable rate construction loan to a fixed rate mortgage, they would sell the mortgage. They do service all the loans locally, though. For us, it's no difference in service, loan number, billing procedure. In fact, the escrow people are a little flaky, but we had to figure out how to deal with them while we had the construction loan. When the servicing changes, one has to break in new people. Also, it's a local number to straighten things out. They also pay real estate taxes in person, so there's never any problem with that. The bank wins, because they get the servicing income, and they get the proceeds of the sale of the loan to cover interest rate fluctuations. Elaine