How many pitfalls lurk in the 5300 call report? So many that a breakout session at the recent CUNA CFO Council conference spotlighting the “Terrible Ten” most common errors listed 15.
The session was led by Kevin Durrance, president and CEO of $1.6 billion Texans CU, Richardson, Texas, a credit union veteran of nearly three decades who has been leading call report trainings since 2001. Durrance began with advice folks may recall hearing from their 7th grade teacher: When in doubt, read the instructions.
“Yes, it is clear as mud sometimes, but you would be surprised how many people have not read the instructions,” he said.
Another overlooked strategy: take time to read NCUA’s definitions. Durrance said miscategorizing certain types of loans or income can lead to negative consequences that are otherwise easily avoided. He also urged those filling out a call report to proof their work before submitting.
“If you turn in your 5300 and the examiner finds mistakes, the examiner can downgrade your CAMEL rating by one level for the credit union not having proper controls,” he warned.
Durrance’s Terrible Ten (and more):
One: Cash/cash equivalents…or a security?
Line 3 is for cash equivalents, which are short-term, highly liquid investments including certificates of deposit. However, if the asset is a security, as defined by GAAP, Durrance said it must be reported on lines 4, 5 or 6, regardless of whether it has the characteristics of a cash equivalent.
Two: Courtesy pay is great for members, but it actually can cause headaches come reporting time. If the CU overdraws an account as an extension of credit – via an organized courtesy pay program or an informal gesture of goodwill, it has created a negative share account, he explained. However, because adding negative shares will miscalculate the CU’s total shares, and therefore its share insurance numbers, those figures must be moved to “other unsecured loans” in the loans section.
Three: Income and expense statement must always be year to date figures – from Jan. 1 to the current quarter-end date. “This is the most common error in filling out a call report,” he declared. “Credit unions put in the wrong number – perhaps only for that quarter or that month, rather than the entire quarter.” To avoid this mistake, check all ratios over the past several quarters, including ROA, which Durrance said will catch off numbers by an unusual variance.
Four: Interest on loans listed under the interest income category has some pitfalls. “CFOs and controllers know the rules about regulatory reporting, but lending folks do not usually know,” he said. “They are trying to make loans. CFOs have to teach lending and collection folks how to account for income earned from interest on loans and recognition of deferred loan fees and costs. Interest should not be accrued on loans 90 days or more delinquent.”
Five: In the same section, beware of income from investments. Common mistakes to avoid: Include income earned on cash on deposit and cash equivalents, but do not include any realized or unrealized gains/losses from trading securities. Also, do not include gains or losses resulting from the sale of investments, and do not include unconsolidated CUSO income in income from investments.
Six: Other operating income and fee income. Durrance said some CFOs put more into fee income rather than other operating income as a way of reducing the CU’s net operating expense ratio. “Examiners have gotten wise to this, so [line] 12, fee income, is only income derived directly from the member, while [line] 13, other operating income, is income indirectly derived from the member, or from activity. This includes interchange income.”
Seven: The call report has changed with regard to how to report commercial loans. Durrance said all loans backed by real estate must be backed by real estate – not a houseboat, not an RV – even though the Internal Revenue Service allows people to declare that as their primary residence.
Eight: Commercial loans have a new definition separate from business loans. “Since implementation of new risk-based capital rule may be delayed a few years, and almost certainly will not be implemented on January 1, , NCUA is trying to do away with difference,” he said. “But until that happens, not all commercial loans are business loans, and not all business loans are commercial loans.” Loans to CUSOs are excluded from the definition of commercial loans, Durrance continued, advising a close look at lines 12, 13 and 14 under commercial loans/lines of credit real estate secured. He said line 12 is only for commercial loans secured by real estate, line 13 is for commercial loans not secured by real estate. Page 72 of the instructions has a chart some CUs may find helpful. “Look at the FAQ every quarter so you will notice any changes,” he said. “There was a change in the FAQ in last 60 days, but NCUA does not send out a notice that there was a change, you have to read it every quarter so you see something is different.”
Nine: Loans granted year to date. To fill out this line correctly, Durrance advises thinking in terms of funding. “Even if you sell a mortgage on the secondary market, it counts as a loan granted year to date,” he pointed out. Similarly, a participation that is funded counts as a loan granted YTD. “The problem is with how to count a revolving line of credit – it is only one loan, even if the member takes several draws on the line of credit, paying it back each time. Even examiners get confused on this because it is difficult to audit.”
Ten: Troubled Debt Restructured. According to Durrance, a TDR is a loan whose terms have been modified by the credit union for economic or legal reasons. However, a loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a TDR. The CU cannot keep modifying the loan to re-age it and count it as current. “You must have a policy in place to handle TDRs,” he said.
Eleven: In 2013, the rule regarding delinquencies was changed to using days, not months. Therefore, 60 days past due is considered a reportable delinquency, not two months. Because July and August both have 31 days, it can result in a variance. “Therefore, periodically you need to check that your core system is giving the proper numbers,” he said. “NCUA is considering changing the TDR reporting rules, but right now it is once a TDR, it is always a TDR.”
Twelve: On Page 9 of the form, in the section covering loan charge-offs and recoveries, Durrance said be very careful with lines 27, 28 and 29. “This is the second-most common error on the call report, because lines 28 and 29 are linked together. If a member only has a credit card with the credit union, not a loan, and credit union received court notice leading to a charge-off of the credit card balance, the member drops off reporting in Line 28. If the credit union charges off the card, it is no longer outstanding. On line 28, put the number of members filing bankruptcy year to date, but only if they still have an outstanding loan.”
Thirteen: Still on page 9, line 30 is for reporting real estate loans foreclosed YTD. Durrance said to report the number and the balance of the loan at the time of foreclosure.
Fourteen: The Unfunded Commitments page. Line 1 is for all the commitments added together, while line 2 is the information on what was reported in line 1.
Fifteen: NCUA made a change to Schedule A, in the part regarding regulatory reporting of Member Business Loans. “NCUA did not send an e-mail saying it had made a change, it simply added it to the FAQ,” he said.
“I know I said this was going to be the Terrible Ten, but there were some extras,” Durrance said with a laugh.