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InsideRISK Awards: Recognizing Credit Union Best Practices

At WesCorp’s Credit Union Outlook conference in Las Vegas, more than 400 credit union professionals gathered together on the final day to honor the InsideRISK Award recipients. With so many excellent applicants, this year’s selection process was extremely difficult. The InsideRISK Awards are sponsored by the editorial board of the InsideRISK magazine. This year awards were presented to two credit unions that developed innovative processes that represent best practices within the industry.

Submissions for this year’s program were much broader in range than previous years. As the economy presents difficult challenges, credit union professionals are looking for new and better ways to leverage technology, improve communications, develop new tools in managing risk, and improving forecasting and managing of all aspects of the balance sheet. Professionals are focused on understanding and reporting on sound ALM practices, monitoring and managing liquidity and credit, improving the consistency of reporting, and giving back more to members.

One of the most unique aspects of the credit union industry, as compared to other sectors of financial services, is the collaborative means by which professionals openly share strategic success factors. The third year of the InsideRISK Awards is no exception.

Now on to the winners…

Envision Credit Union (a two time winner!)
Submitted by Dan McGowan, SVP/CFO
Our first recipient is a return InsideRISK Awards winner, Envision Credit Union from Tallahassee, Fl. ($212 million in assets). Envision Credit Union submitted several process improvement projects for consideration. Among them was a new methodology for estimating allowance for loan losses. Envision implemented a revamped methodology to address its need for an objective process that has made effective use of available technology. Dan McGowan, CFO, writes that this new approach “provides early warning and recognition of dollars at risk attributable to the velocity of delinquency changes, while establishing a dynamic floor for setting the allowance level by period.”

In recent years accounting firms have placed more emphasis on eliminating the “rainy day” fund within allowance for loan losses. In some cases, they took extreme stances on not allowing for any provision if historical losses for new segments have not occurred. For example, a credit union that had just recently entered member business lending and had no history of taking losses may not be allowed to incorporate losses in its provision. Auditors have been increasingly looking for sound provisioning methodologies that look at other factors other than historical results and modified look back periods.

Envision’s process incorporates forward-looking indicators that will be used in directing underwriting decisions at origination. This hot topic is drawing credit unions to develop and implement in-house or third-party solutions. Allowance for loan loss provisioning is expected to be a key area for external auditors and regulators to review. If your methods have not been reviewed or revised in the last twelve months, this may be a key area that requires additional focus.

Mountain America Credit Union
Submitted by Chad Curtis, SVP/ Controller
Our second winner was Mountain America Credit Union, located in West Jordan, Utah. Mountain America Credit Union ($2.8 billion in assets) was selected for its design of an Excel workbook to facilitate the preparation of NCUA 5300 Call Report at the end of each quarter. Mountain America management asserts that the use of such a workbook “provides excellent internal controls over financial reporting and helps with both internal and external audits.”

Before 2004, like most other credit unions, Mountain America Credit Union prepared its quarterly NCUA 5300 Call Report by entering information directly into the provided NCUA 5300 Call Report software. This methodology had certain weaknesses:

Limited Logic Checks: The NCUA software has its own Errors and Warnings; however, it’s helpful to know if certain figures make sense as the data is being compiled.

Disaster Recovery and/or Backup: If the employee who normally prepares the Call Report gets hit by a bus on the way back from lunch (or is just on vacation that week), would anybody else know which figures go into which cells?

When Chad Curtis began preparing the Call Report in 2004, his initial goal was to use technology to automate preparation of the Call Report as much as possible. What he found is that this process has truly become an invaluable financial analysis and internal control tool, both for MACU management as well as for the regulators.

The NCUA seems to enjoy MACU’s call report methodology. The first day of an examination, the examiners receive their packet of hard-copy backup, as well as an electronic file containing the Call Report workbook and other supporting electronic files and reports. The workbook’s cell comments tell the examiners exactly where all supporting numbers came from, thus resulting in fewer follow-up questions asked of management.

Although there were many submissions that had a lot more “sizzle” appeal than Mountain America’s Excel workbook for preparing its 5300, MACU was selected because of its applicability to all federally insured credit unions. Big or small credit unions should not underestimate the value of creating and reporting consistently accurate financial reports for auditors and regulators. The workbook contains every data field as found in the original report with links to two input worksheets that house GL trial balances. Eliminating errors, including validity checks, and providing ease of review by auditors and regulators made this practical submission one of the two winners for the 2008 awards.

Honorable Mentions:
Eastman Credit Union (Kingsport, Tenn.)
Submitted by Tonja Fish, Risk Manager
Eastman Credit Union submitted its ALM process for consideration. This process includes:

  • Adequate policies and limits
  • Active balance sheet management
  • Risk monitoring systems
  • Board of Directors oversight

Eastman’s comprehensive approach to monitoring and measuring interest rate risk has enabled the credit union to careful evaluate risk/reward opportunities. The process also includes external model validations to provide independent third-party evaluations. This practice provides Eastman with a greater sense of confidence by incorporating validation within its business practices.

Eagle Credit Union (Lake Forest, Calif.)
Submitted by Moritz Wohanka, SVP/CFO
Eagle Credit Union submitted two entries for consideration. The first was a set of financial performance reports that are distributed monthly to all staff. Eagle Credit Union contends that this has led to “a more effective communication and understanding of the issues throughout the entire organization.” This tool has been used to communicate with staff and provide an opportunity for education and knowledge transfers across the organization.

The second entry was a teller transaction activity analysis that identifies transaction trends by location within various time periods. This offers the Eagle’s “management with the opportunity to analyze staff utilization at each branch.” Management reports such as this assist in staffing, time work load balancing, and in measuring efficiencies.

ALPS Federal Credit Union (Sitka, Alaska)
Submitted by James Wileman, CEO
Faced with depletion of deposits, ALPS embarked on a bold strategy of targeting 0 percent ROA as far back as 2006. The new CEO has used this opportunity to offer members competitive deposit rates to reverse deposit outflows. This board-approved initiative was openly debated among board members, which recognized it would raise questions from regulators on the credit union’s ability to essentially make money. The strategy has included improved competitive rates and special year-end dividends the last two years. This strategy is not for the faint of heart or for credit unions with lower capital ratios. ALPS had approximately 18 percent capital when it began implementing this strategy. The plan has resulted in significant deposit growth over the last two years with deeper member relationships.

F&A Federal Credit Union (Monterey Park, Calif.)
Submitted by Michael Harden, EVP/COO
F&A Credit Union submitted an overview of its cash flow laddering strategy using mortgage-back securities instead of more traditional bullet products. “A key to successful implementation of this complex strategy is to be able to switch direction of investment purchase management very quickly,” writes Michael Harden, EVP / COO. With more than 63 percent of its assets allocated to investments, F&A Credit Union has enjoyed returns well in excess of its benchmark (2Yr T-Note) since June 2007 even as the yields skidded downward. The procedure also balances liquidity against investment returns with a one-, two- and three-year limit on liquidity within its liquidity and investment framework.

Tyndall Federal Credit Union (Panama City, Fl.)
Submitted by Steven Ravin, SVP/CFO
Tyndall Federal Credit Union submitted its credit union’s capital analysis for consideration. Measuring the optimum level of capital has been advanced based on “the concept of ‘capital maintenance’ rather than the building of capital.” Tyndall analysis depicts the optimum gross and net capital levels. Within its analysis, Tyndall performed a risk analysis that evaluated the following risks along an competitive analysis:

  • Credit Risk
  • Interest Rate Risk
  • Taxation Risk
  • Regulatory Risk
  • Legislative Risk
  • Share Insurance Fund Risk
  • Market Risk
  • Mistake Risk
  • Sponsor Risk

In the end, management feels the need to have sufficient capital to protect against risks, balancing against providing high returns to members. They also feel the need to update this analysis every two years going forward.

Sound Credit Union (Tacoma, Wash.)
Submitted by Russ Gowrylow, SVP/CFO
Sound Credit Union submitted a cash management technique for tracking cash flows from various sources. Using a spreadsheet, overnight balances are tracked and forecasted for a six-month period. The benefit of using this tool, writes Russ Gowrylow, SVP/CFO, is that “it maximizes investment opportunities.”

Conclusion
We would like to thank all participants for their submissions. We hope to encourage the sharing of new and innovative solutions to financial and operational management by all our members. The next InsideRISK Awards will be presented during the Credit Union Outlook Conference to be held next September 21-24, 2009, at Bellagio Hotel and Casino in Las Vegas. We look forward to your submissions in 2009.