CLF Can Help CUs Build Capital
As one of many credit unions struggling to grow with the ball and chain of limited capital shackled to our ankles, seeing the debate over alternative capital for credit unions is an exercise in frustration. There is a lot of talk, but no support from Congress.
Recently, our state examiner attempted to take our management team and board to the wood shed, arguing against our business strategy to regain profitability. He felt we were risking a fall from a well-capitalized status to an adequately capitalized category. The clear message from the Department of Financial Institutions lead examiner was that they would rather see us bleed to death, losing capital each month, as long as the capital ratio stayed above 7.0%.
Of course, that strategy can only last so long. Shrinking our credit union to achieve their goal only positioned us for failure. Our strategy is to protect our long-term capital position by rebuilding our credit union's best income generating assets, loans, to a level that creates the income needed to generate a positive ROA. He agreed that we had above average underwriting, strong loan file integrity and the solid back office operations needed to mitigate the risks associated with lending. Still, he argued against our strategy.
It was obvious that he was solely concerned about his work load due to his fear we would be categorized only as adequately capitalized.
Still, though I turn away good business every day, I recognize it will take several years of retained earnings to get the credit union positioned to serve more members. A workable source of alternative capital would help us stretch to the size we need, but that is not available to us now. What I need is greater levels of retained earnings.
This debate over our strategy made me think about the Central Liquidity Facility. This is a tool that can be used to help credit unions build their retained earnings. However, as we see so many times in the credit union movement, the rules are set against us.
We borrowed $5 million at 75 basis points to provide a liquidity bridge created by growth in loans. Our corporate stated it would rather see us borrow from it at 2.4%. I wonder why. The folks at the CLF were wonderful to work with. We felt they had our interests as their primary concern.
The CLF rules do not allow credit unions to borrow to build their loan or investment portfolios. What if the rules would allow this? What if credit unions could borrow from the CLF at 75 bps and make loans at over 6.00%? The CLF loans would be longer term, such as terms equal to the life of the loans, 30 or so months. CLF loans are secured by credit union assets. That margin would result in retained earnings that would help the individual credit union rebuild capital. Of course, the CLF rules for long-term loans (referred to as "protracted adjustment credits") state they are "available in the event of unusual or emergency circumstances of a longer term nature resulting from national, regional, or local difficulties..."
Can't the times we are in as a country and as a movement be defined as "difficult" and long-term in nature? In 1979 the CLF was created "to improve the general financial stability of the credit union industry..."
Now may be a good time to look at how the CLF can be used to stabilize the industry and individual credit unions. What if the CLF rules were relaxed? What would unleashing all or part of $41 billion approved by Congress do for individual credit unions experiencing shrinking loan portfolios and operating margins? I wonder what the federal discount window is doing to help our brothers and sisters in the banking industry during these difficult circumstances. Could these loans be considered alternative capital? Could this create a bridge from today's alternative capital debate to a time when a permanent solution is in place?
Dan K. Robbins
NorthPark Community Credit Union