FIVE Trends, Concerns, Strategies And Sage Advice For 2005

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Pace of Bank Conversions to S-Corps to Quicken

CHICAGO-Nearly a quarter of banks and thrifts have converted to S Corporation status in the eight years since such conversions were made legal, and the pace will quicken. According to new analysis by Grant Thornton, some 2,137 banks and thrifts are now S Corps.

"Changes made by the American Jobs Creation Act 2004 will generally make it easier for financial institutions to make the S Corporation election," said the analysis. "The number of banks and thrifts making the election is expected to increase in the coming years due to these changes." S Corp status allows profits to pass through to individual shareholders, with income taxed at the personal rate rather than the corporate rate.

"The enactment of these changes late in 2004 undoubtedly did not give some financial institutions enough time to restructure in time to make the election for 2005," said John Ziegelbauer, co-author of the study. "Accordingly, it would not be surprising if a surge in the number of banks and thrifts making the S Corporation election is spread out over two or more years."

Additional findings:

* A total of 2,137-24.4% of the 8,755 eligible Federal Deposit Insurance Corp.-insured banks and thrifts as of March 31, 2004-are currently S Corps. This represents a 128% net increase of S Corporations over 2003.

* The Southwest region has the highest percentage of financial institution S Corporations-37.7% of banks and 22.0% of stock-thrifts.

* Fourteen banks and eight stock-thrifts with more than $1 billion in total assets have become S Corps.

As Minn. Legislature Convenes, No Missing Those Postcards

BLOOMINGTON, Minn.-By the time the 2005 session of the Minnesota legislature convenes here in early January, its members will have received nine brightly colored postcards from Minnesota's credit unions.

Organized by the Minnesota Credit Union Network, the postcards were sent to all 201 members of the Minnesota House and Senate, and ask and answer questions such as "Who benefits from a credit union?" The cards contain facts on general credit union membership, rate comparisons and the tax-exempt status granted by Congress in 1934.

"We thought the postcard series would be a great way to stay in touch with the elected officials that we will be working with in the upcoming session," said Joe Mathews, MnCUN Director of Governmental Affairs. "By sending a weekly postcard, we not only increase our visibility, but we provide information in a form that isn't overwhelming to legislators.

The first postcard in the series congratulated all new legislators, followed by week two, which included Minnesota credit union statistics. The card in week three contained information on how credit unions help local economies by keeping money within their communities.

The postcard from week eight worked to dispel the myth that the growth of credit unions is detrimental to community banks. It reads: "In 1993 the 100 largest banks in the country controlled 41% of the financial services market, while the smaller community banks and credit unions controlled 53% and 6%, respectively. Today the national credit union marketshare remains around 6%, while large banks saw their market share soar to 65% at the expense of smaller banks, whose market share shrunk to 29%."

CFOs Cite 'Growing Revenues' As Biggest Concern

MENLO PARK, Calif.-What will keep chief financial officers (CFOs) at American companies up at night during 2005?

In a new survey of CFOs by Robert Half Management Associates 34% said that "growing revenue" was their biggest concern. In part CFOs said they need to drive additional revenues to offset what a near-majority (45%) anticipate will be their biggest cost increase during 2005: healthcare.

In addition to growing revenue, other leading responses to the question, "What is your company's top business priority or concern for 2005?" were: managing expenses (22%), recruiting/retaining qualified staff (17%), gaining competitive marketshare (11%), strengthening internal controls (6%) and streamling business processes (6%).

When asked what they anticipated would be the biggest cost increase during 2005, CFOs responded healthcare (45%), technology (20%), other employee benefits (6%) and telecommunications (3%).

The survey was based on responses from 1,400 CFOs at companies of more than 20 companies.

Columbia CU members Still Demanding Answers

VANCOUVER, Wash.-Almost a year after the bid to convert Columbia CU to a mutual savings bank was rejected by regulators, dissident members of CCU enter 2005 still fighting to uncover the costs of the failed conversion bid. "The bottom line is, we don't have any information we've been able to extract from them yet," Doug Schaefer, an attorney for Save Columbia CU, told The Credit Union Journal. The group has been thwarted in its efforts even though its members have won four seats on the nine member board and control the credit union's supervisory committee. Estimates for the costs of the year-long effort to convert, combined with costs related to defending the board at the time of an unprecedented recall effort, are more than $1 million. That includes costs to hire Portland's most powerful law firm, an expensive Wall Street proxy firm to sway the members' recall vote, security, mailing, printing and handling of ballots, and a special meeting.

Five Investment Resolutions for Every CU This Year

DALLAS-Southwest Corporate FCU is urging credit unions to make the following investment resolutions for 2005:

1) Resist the temptation to invest long term during or soon after the trough of an interest rate cycle. "The economy has been plodding forward in a slow recovery which should result in higher rates over the next few years as it has in 2004," said Zane Wilson, director of investment services at Southwest Corporate Investment Services. "Chasing yield by investing in 10- to 15-year average-life maturities will hurt the credit unions' spreads down the road. Most credit unions' liabilities have a very short duration and loading up the portfolio with long-term investments will create an interest rate risk mismatch and an ensuing asset liability management nightmare.

The cost of funds for credit unions is expected to rise in 2005 as the FOMC continues to raise overnight rates. This should put pressure on earnings. To minimize that negative impact, credit unions should be proactive in putting their funds to work in the two- to three-year sector, Wilson added.

2) Develop a cash-flow worksheet to plan ahead for changes in loan demand and liquidity.

Economic recoveries can put a drain on a credit union's liquidity position. That happens because loan demand usually strengthens while cash also flows from the credit union's regular share and money market accounts into equity markets. Developing a cash-flow worksheet to track cash flow and plan for the year ahead is a useful tool, Wilson said, "and you just may learn more about your credit union as you gather information about the sources of your liquidity and its uses."

3) Diversify your investment portfolio. "Similar to your personal investment portfolio, it is wise to diversify your credit union's investment portfolio so that you are not gearing that portfolio toward any single interest rate scenario," Wilson said. "Diversifying the portfolio between non-callables, callables, amortizing and floating rate instruments will enable the portfolio to perform better over a wide range of interest rate scenarios. Obviously, also managing and diversifying the credit risk on the balance sheet will reduce the chances of default of principal."

4) Understand the investments that you are purchasing. For some, the array of investment options-such as callables and floaters-may seem confusing. For others, the names may not be the problem, it's the promise.

"Make sure you understand how a bond will perform under various interest rate scenarios and that you are comfortable with a bond under worst case scenarios," said Wilson.

5) Obtain a competitive quote when buying or selling a security.

"It is possible to earn substantially higher yields on investments purchased and sold by obtaining quotes from several brokers before settling on and executing a trade," Wilson said. Not only would a credit union be negligent in its management of its portfolio, but it would also not be complying with NCUA Regulation Part 703 if it is not getting competitive quotes on investment transactions, Wilson pointed out.

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