I doubt that I am the only CEO who reviews the financial performance of my neighboring credit unions. So I'll admit I've been watching one credit union in particular–they are of heightened interest because their parking lot adjoins our parking lot.
I noticed that the credit union had been in a slow decline for some time and was only somewhat surprised to learn in January that it had decided to merge with the large credit union in town. There was no merger vote, so I assume this was done at the forceful direction of the regulators. Upon reviewing the year-end figures, I see that after the DFI/NCUA examination, it was forced to record a large adjustment to the allowance for loan losses. This drove the capital ratio to 3.65%, and we all know what happens to small credit unions with a capital ratio below 4.0%.
I was very surprised when I then saw the final financial report for the first quarter of 2011. Lo and behold, the credit union posted an ROA of 4.09% (before NCUSIF assessment), and capital was back to 4.50%.
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Nothing less than a financial miracle. Wow! How can that be?
I've been part of a few credit union turnarounds, but I've never seen it happen in three short months. The only possible conclusion is one of those sets of figures is not correct. Based on the poor quality of our own recent DFI/NCUA examination, I'm going to bet it was the first set, with the large provision for loan losses forced by the DFI/NCUA.
I took a look back at the charge-off ratio and trend. Indeed, the charge-off dollars had been climbing throughout the year ($400,000 to $603,000 for the first and fourth quarters of 2010, respectively). But then the first quarter of 2011, it declined to only $300,000.
What was the emergency seen in January during the preparation of the year-end financials?
Either way, no matter where you account for the funds, the credit union had combined reserves in the allowance for loan losses and capital that equated to 11.38% of loans, with a loan-loss ratio of 2.58% at the time of the forced merger. My math may be simple, but it seems they could have lasted more than four years before exhausting all the reserves.
What was the emergency, exactly?
I'd like to see our share insurance assessment reduced just as much as any other CEO. However, if it comes at the cost of the DFI/NCUA removing credit unions from their members by forcing mergers based on phony numbers–count me out.
Todd Sheffield
CEO
Community First Credit Union
Santa Rosa, Calif.
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