Looking for Meaning by Crunching the Numbers
As the countdown to the October deadline for hitting key minimum financial ratios draws nearer, more spreadsheets are floating around the credit union industry and always there are the same questions: How many corporates will fold up shop before the deadline because they cannot hit the targets? Are the ratios in fact fair measures of corporate credit union performance? And, lastly, perhaps most worrisome is this question: Are the ratios compelling corporates to abandon much of the work good corporates once did?
Big questions all, and all questions that strike at the center of what the NCUA is doing in its attempt to better manage risk throughout the corporate credit union system. "The new standards will bring our regulation more in line with how banks are regulated," said Jay Murray, CEO of Mid-Atlantic Corporate FCU.
David Savoie, CEO of Louisiana Corporate Credit Union, added: "Wherever there is risk-based capital, you need ratios. But," he pointedly added, "NCUA is still trying to wrap its arms around all of this."
Savoie offered the hypothetical of asking three NCUA examiners for input on assessing the risks involved in a particular activity, and, he suggested, "You would get three very different assessments. NCUA is still working on standardizing this."
And that raises an enormous problem: "Risk assessments of different credit unions will not always be apples to apples," said Savoie. "Often it will be apples to oranges." One examination may be optimistic, another pessimistic, and dramatically different ratios will result–with all that means for the futures of affected corporates.
Is that fair? Savoie shrugged because, ultimately, this is what it is in the early days of the NCUA trying to safeguard the credit union system against a repeat of the enormous risks–and devastating losses–that almost undid it. There are dead ends and unexpected U-turns but smoother transit cannot be expected just yet. "We need more agreement within NCUA about weighting risks but we do not have that now," said Savoie.
And then the stakes turn even more serious: "Some corporates are not going to make the numbers," predicted Evan Clark, CEO of the Department of Commerce FCU.
Corporates face two make-or-break ratios this October: total capital and net economic value. Both are believed to be barometers of corporate credit union health, but not all the time and not by all people.
A glance at year-end numbers for corporates in fact shows 15 falling short of the NCUA mandated 4% minimum to take effect in October. Some of those (VACORP, for instance) already have announced an intention to merge. Others are close enough to the 4% target that a big push ought to get them there. The bridges, too, may be reconfigured and for that reason their very low current numbers have no meaning for the future. But there nonetheless are a half-dozen or so corporate credit unions with clouded futures, suggested Clark. "Many will have real troubles with the total capital ratio."
Tactics are being deployed to get their other key ratio, NEV, in line, but is this what best serves the credit union system? "The investment portfolios are plain vanilla," said Clark. "They are investing very short term, so there is very little risk, and this helps their NEV," which equals the fair value of assets minus the fair value of liabilities. At year-end, 11 corporates fell short of the 2% minimum NEV mandated by NCUA for October, but many of those appeared to be within reach of the mandate.
But that may not be the good news it seems. "I have a problem with NCUA putting so much emphasis on NEV," said Clark. "NCUA has put the clamps on what corporates invest in so their NEV will be good." Set out to minimize risk, suggested Clark, and NEV necessarily tilts high. But almost by definition, a sound investment strategy incorporates risk. So Clark suggested that some, perhaps many, corporates are abdicating the investment part of their mission.
Not everybody agrees. Chris Felton, senior vice president for member relations at Corporate Central (which boasts extremely high numbers for both total capital and NEV), said: "NEV is a critical number. It takes into account the risk of the portfolio." At Corporate Central, in fact, the current NEV is 11.25% and, elaborated Felton, nearly half the portfolio is in cash. "Our NEV is a reflection of our conservative nature," said Felton.
That is exactly what the NCUA seems to want from corporates. But are the corporates that are likely to be left standing in fact what the credit union movement needs? Henry Wirz, CEO of SAFE Credit Union, is blunt. "We are blowing it. We are showing up for a game of bowling and NCUA is handing out rule sheets for bowling. We are going down the wrong path and it starts with the NCUA rules."
"The credit unions that come out of the rebirth of the corporate system will be less sophisticated pass-through corporates. The more sophisticated corporates are the most badly wounded. The system will be rebuilt on the corporates with the least experience," said Wirz.
Mid-Atlantic’s Murray, for his part, admitted this: "We will not see a new Tier 1 corporate soon. Balance sheets going forward will be smaller. In 10 years, perhaps we will see a return of Tier 1s but not likely sooner."
One upshot: "The changes are pushing natural person credit unions to invest outside the corporate system," said Murray. "Will there be proper oversight? That is not yet clear."