According to Reich, the Federal Reserve is erroneously focusing their primary concern on inflation whereas he said consumers "are just going to reach the end of their pocket books" and substantially slowdown in spending. If the Fed does not begin cutting rates at that point, it could lead to a recession.

It will also lead to even fiercer competition in the financial services market. "It means the banks are going to be trying to get more and more of your members," he summed up. He added that banks will try even harder to fight back credit union efforts to expand their powers because of increasing competition.

Reich outlined three vectors impacting the economy--globalization, technological changes and demographics--all of which affect how much money is flowing into federal credit unions. Globalization is not leading to a loss of jobs, but a declining quality in the jobs available. In the United States, the problem is not so much where wages are set, but the skills that are available. "We have a world of opportunity if we have the right education," Reich said.

"The big demographic story...is the way the baby boom is working its way through the economy," he added. As the Baby Boomers enter the retirement age, many will not have saved enough to live in the lifestyle they want to and they will strain Social Security because there are fewer workers available to support them, but Medicare and what Reich called an inefficient health care system will be the biggest taxes on the American economy into the future. "It's a crazy system and it has to change," he stated.

"One of the great things you have going for you in terms of competition is relational capital," Reich told the credit union attendees. That personal knowledge of credit union members will become more and more important for credit unions.

"It creates a long-term competitive advantage," he said. "Many of our large banks do not have it at all."

Reich concluded, "The big trends of globalization, technological change, and demographic change are or could be working toward your competitive advantage." Credit unions' personal attention to service is not something that can be outsourced and that technology cannot replace the one-to-one attention. "You are going to do fine. You are going to be doing better and better."

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Pentagon FCU Memberships Retained Through E-Deposits

HONOLULU -- Serving Pentagon and military personnel, Pentagon Federal Credit Union has a highly mobile field of membership and noticed it had been losing members as they went onto other assignments or just out of the Washington, D.C.-area.

The credit union learned about the electronic deposit program at Pennsylvania State Employees Credit Union, Pentagon FCU Executive Vice President of Operations James R. Schenck explained, and after consulting with PSECU CEO Greg Smith decided the concept was right for Pentagon FCU as well.

"We saw a reduction in folks leaving us...Our benefit so far has been on retention," he said. However, there are also cost savings to be had, both by the credit union--just one person runs the program used by approximately 10,000 members--and by the member.

"They don't have to worry about when the branch is open," Schenck explained. "They are at their home or office 24 hours a day." With the rising cost of fuel prices, members save a trip to the branch as well.

"That's virtual convenience," he said. "I can't compete on physical convenience." Schenck added that it is estimated that 4,000 financials will offer this service by the end of the year.

However, he also pointed out that banks are beginning to charge for this service. "That gives us a competitive advantage by not charging fees."

The Pentagon FCU executive also emphasized that the credit union has not experienced any fraud though some accounts have had to be turned off when the member repeatedly did not get their deposit mailed in within the eight business-day allotment. Schenck said that a member had to be in good standing for six months and then would be permitted to deposit up to $750 electronically, which can be increased to $1,500 after a certain amount of time.

The credit union has looked at scanning for faster check delivery to the institution, but Schenck is hoping to leap frog that for mobile technology.

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Credit Unions Are Partners in Fight Against Predatory Lending, DoD Says

HONOLULU -- The Department of Defense views credit unions as partners against payday and other fringe lenders preying on military personnel, according to Deputy Undersecretary for Military Community & Family Policy Leslye Arsht.

"The department was faced with a unique opportunity to regulate the financial services industry, not really our core competency," she admitted. However, through consultation with the financial services regulators the department feels a balance has been struck though a final rule will not be published until Sept. 1. NAFCU Associate Director of Regulatory Affairs Pamela Yu commended the department for its efforts to listen to the concerns of the financial services industry.

Credit unions and banks were not exempted, which some had lobbied for. To achieve balance in the regulation, Arsht explained, "We chose to define the creditor broadly and the covered consumers narrowly."

However, Arsht added, "We will consider changes to the regulation when it is warranted and practical." The department continues to monitor the practices of predatory lenders to see if they change their practices to evade the new law and regulation.

She highlighted that in the DoD report to Congress that spawned the legislation, 19 of the 24 "best practices" provided came from credit unions. "We regard you all as partners in helping protect out service members and families," Arsht told participants in NAFCU's Annual Conference.

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Increased Competition Hindering Cooperative Spirit, Becker Notes

By SARAH SNELL COOKE
CU Times Senior Washington Reporter

HONOLULU -- The rapidly changing and evermore competitive financial services landscape has led to changes in the way credit unions work together--or do not work together, NAFCU President/CEO Fred Becker said.

With the current merger frenzy some smaller credit unions are skeptical of accepting a helping hand from larger credit unions and the industry also experienced its first hostile takeover attempt. "When this happened, some speculated that cooperation among credit unions would soon be a thing of the past," Becker stated.

Credit unions' hold on marketshare has remained relatively constant, just under 2%, and, despite their record profits, banks and thrifts are actually losing ground. The segment of the financial services industry that has grown the most since 1980 has been the mutual fund industry, Becker said. They have jumped from 3% of the market in 1980 to 17% of the market last year. Others that have been successful have included private pension companies, mortgage companies, and investment companies.

"I don't have to tell you that the marketplace has become a lot more competitive," Becker said to attendees of NAFCU's 40th Annual Conference. "This has impacted credit unions in a number of ways. It's become more difficult for credit unions to boost their bottom lines. Mergers are on the rise. Sadly, we've started to see rifts develop between some credit unions.

"Some credit unions seem less inclined to share and exchange ideas with one another. I have to admit that I'm troubled by this particular trend. It goes against the spirit of cooperation that has long defined the credit union community."

Cooperation and collaboration must continue their role in the credit union community in order to face the challenges of the future. "This should be the case for all credit unions. When it comes to problem-solving, we stand a better chance of coming up with real solutions if we discuss and share ideas with one another." He pointed out that NAFCU looks to all its members for ideas and expertise on various issues.

The way these other industries have been so successful in growing their marketshare is through innovation. "They are no longer plain vanilla models of their former selves. They've stepped outside their traditional product boundaries to become something more expansive...I believe that credit unions can be as creative and as innovative as any financial institution."

Becker continued, "Now is the time to renew the spirit of cooperation that defines us. Let us never forget that when credit unions cooperate, it leads to great accomplishments."

He pointed to CUSOs that help credit unions provide services they could not afford to on their own or looking to some credit unions' successful work in gaining new, young members or saving immigrants from predatory lenders.

"As you can see," Becker said, "there are many ways we can learn from each other. I'm not just referring to specific product or marketing strategies. I'm talking about an outlook, a philosophy and a value system. These innovative credit unions aren't just thinking about their bottom lines---they're thinking about their members."

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Legislative Victories Grounded in Grassroots

HONOLULU -- NAFCU's top lobbyists told participants in NAFCU's Annual Conference to establish relationships with their members of Congress and help them out in order to garner their help for the future.

Right now, NAFCU is asking its members for help in the push for the Credit Union Regulatory Improvements Act (H.R. 1537), but credit unions should be networking with their legislators all the time, including when they are not asking for something. "There's only so much a lobbyist can do," NAFCU Senior Vice President of Government Affairs Dan Berger said, but voters trump all.

And NAFCU Director of Political Affairs Dillon Shea encouraged attendees to meet with their representatives on a regular basis to establish an ongoing relationship. He added, "When push comes to shove, if legislation passes or doesn't pass that helps or hurts you, it's going to affect you a lot more than it affects me personally."

The bankers claim they have sent out 130,000 letters in opposition to CURIA, NAFCU Director of Legislative Affairs Brad Thaler noted. That would be about 15 letters per credit union, which he challenged participants to meet.

Aside from CURIA, there have also been "some grumblings" on Capitol Hill that House Financial Services Committee Chairman Barney Frank (D-Mass.) would be interested in Community Reinvestment Act legislation for various industries, including credit unions. Berger dropped a stack of three, three-inch binders--a print out of the CRA requirements and related documents for banks. "Can you afford that regulatory burden? I don't think so." Point out to your members of Congress that according to the Home Mortgage Disclosure Act data, credit unions still do a better job of serving the low-income and minority segments of the population than banks without CRA requirements.

The lobbyists suggested making contact with their Senators and representatives at least every 60 days--give them a call, invite them to a branch opening, send them a birthday card. Get pictures of them touring the credit union and meeting the staff for your newsletter. "They love that. They love free publicity," Berger said. NAFCU staff offered to help with logistics as well.

They also told attendees not to be put off by meeting with a staffer instead of the member of Congress. Thaler let his audience in on a secret of Washington: "Some of the most powerful people in Congress are staff."

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NCUA Board Members Discuss Hot Button Issues of the Day

By SARAH SNELL COOKE
CU Times Senior Washington Reporter

HONOLULU -- NCUA Vice Chairman Rodney Hood and Board Member Gigi Hyland reaffirmed their opposition to CRA for credit unions, addressed hostile mergers, and community charter issues during a talk show-style session at NAFCU's Annual Conference.

NAFCU Chairman John Milazzo, president/CEO of Campus Federal Credit Union who moderated the event, noted that House Financial Services Committee Chairman Barney Frank (D-Mass.) is a proponent of expanding CRA. Hyland responded, "I've said many times that I don't believe CRA is appropriate for credit unions." She pointed out that CRA began because banks were caught redlining.

Vice Chairman Hood, a former bank CRA officer, commented, "To Ms. Hyland's point, credit unions are doing the right things already...I will work with you on keeping CRA out of credit unions."

However, NCUA last year completed its Member Service Assessment Pilot, which is currently being reviewed by the NCUA Outreach Task Force chaired by Hyland. The group is studying whether the agency should continue to collect member service data into the future. No decisions have been reached at this point and two more town hall meetings to gather information are scheduled for Denver and Washington, D.C. Hyland noted that if rules are promulgated, they will go through the regular notice and comment process.

Aside from CRA, another issue that Hood said does not belong in credit unions are hostile takeovers like the one attempted by Wings Federal Credit Union against Continental Federal Credit Union. He noted that part of why he enjoys working in the credit union movement now is because of the air of "collegiality." Hostile takeover attempts just create "perceptions of feat and mistrust" that do not serve the historically cooperative and collaborative credit union philosophy.

"We should do all we can to ensure it doesn't rear its head again," Hood stated.

NCUA is also working to work out kinks in the community charter application process, which is "not working as smoothly as we want it to work," Hyland said. The agency is striving to ensure that the rules are applied equally across all the regions and that all related matters are clearly defined in the rule, including the definition of a rural community.

Hyland added that the community chartering rule is also being made even stronger by establishing more definitions of presumptive communities keeping in mind the statutory language "local."

One of the new provisions in the proposed community charter rule would be to establish a notice and comment procedure for those communities applied for that do not automatically meet the requirements of the presumptive communities. If approved in final form as proposed, the rule could cause those in opposition to the community charter--Hyland referred to the past banker litigation--to "tip their hand" and allow NCUA to better defend its decision. Or, she added, it could require the

applying credit union to "pony up" with a stronger package that would provide greater legal

justification.

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NAFCU Applauds Board Members' Public Pronouncements Against CRA for Credit Unions

HONOLULU -- NAFCU commended NCUA Vice Chairman Rodney Hood and Board Member Gigi Hyland for their firm and public rejection of the idea of Community Reinvestment Act requirements for credit unions during the group's Annual Conference.

NAFCU President Fred Becker said he appreciated Hood and Hyland's frank statements on the issue. "CRA has no place in the credit union system," he agreed.

CUEG Members Discuss Impact of Yield Curve Remaining Flat and Alternative Funding Sources

HONOLULU -- Under the current abnormal inverted yield curve, credit unions need to think on their feet to keep earnings up.

"The Federal Reserve is not expected to make any changes to its target federal funds rate for the remainder of this year, and prospects for an inverted or flat yield curve to continue remain high," NAFCU Chief Economist Tun Wai said. "This implies that low returns on credit union long-term loans and investments will continue to put pressure on earnings. Under this environment, the challenge is to find alternative earning sources."

Though the situation is "unusual," credit unions can position themselves against the curve, Wescorp FCU Executive Vice President and Chief Investment Officer Bob Burrell said. "While the flat curve eliminates the opportunities to 'ride the curve,' credit union balance sheets are well positioned to capitalize on other opportunities to boost earnings," he said during the panel discussion. He added that interest rate risk and credit exposures are modest at most credit unions, while some have too much liquidity.

Southwest Corporate Executive Vice President and Chief Investment Officer Bruce Fox noted that core funding is declining as a percent of aggregate funding for many reasons, including the fact that members are just better informed about their choices and are looking toward nontraditional avenues, like Internet banks. He added that other problems affecting future funding sources include credit unions' restricted access to capital markets as well as a limited robust loan participation market.

Eli Vasquez, senior vice president and chief financial officer at American Airlines FCU, offered some solutions to these problems. "High loan to share ratios and intense competition for core deposits present increasing funding and liquidity challenges for credit unions," he said. "These challenges can be overcome through various channels, such as loan participation networks and borrowing funds.

"Deposits can also be attracted by returning more value to members, using excess capital to fund creative features and superior pricing of deposit products. Pooling of credit union resources and maintaining lean and efficient operations also create more value for our members." Costs to credit unions can be cut by automation and cooperation, like shared branching, he said.

Vasquez said credit unions can minimize their operating costs through automation; by increasing their cooperation with other credit unions through pooled resources and purchasing, shared branch and ATM networks and CUSOs, and by taking a focused approach to developing sound and efficient expansion strategies.

The tight competition in the financial services market has led credit unions to "a critical crossroad for relevance," CUNA Mutual Chief Economist Dave Colby commented. "It's more than ever to understand your credit union's demographics so that you're able to influence them."

This is precisely why credit unions need to get creative, Sunmark FCU President/CEO Bruce Beaudette said. Credit unions need to "constantly test new strategies, because consumers are a moving target. The numbers may look good now, but the combination of a highly dynamic financial services market for consumers and a major demographic shift has the ability to overwhelm credit unions that are comfortable with their current results."

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