The "11 ratios every board should know" meets the KISS principle

1 – ROA  Is it positive? Is it becoming more positive or less? Keep an eye on the components that make up the ratio.  ROA is a benchmark… the following are the building blocks.

            1a – Gross Spread – the difference between cost of funds and yield on earning assets (loans and investments).  Again, is it growing or shrinking?  

            1b – Non-interest Income/ Total income -  How dependent are we on this income? 

            1c – Operating expenses / Assets – how expensive are our operations?

            A to C gives a glimpse as to why ROA is either great or just making sucking sounds.

2 – Net Charge offs to total Loans.  It’s not what you make, it’s what you keep that's important.

            2a – As a general rule, loans that are not delinquent are not losses…. Keep this low and all good things will follow.  This is the barometer of what #2 will be. (In general – we have all witnessed the phenomenon of “current to c/o” because of bankruptcy.  I call these “lightning losses” …. They strike hard, without warning, and from the damndest places!)

3 – Net Worth.  You have to have it and you have to keep it to fulfill the #1 rule of CU’s --- BE HERE NEXT YEAR!  #1 and #2 will indicate if this is going to be a good ratio or a problem ratio. Lose sight of this ratio and you are either in PCA hell or Toast... AKA, between a rock and a hard place.

 

            3a – RBNWR – for those of us who push the envelope in investing (because lending sucks), sometimes we need more Net Worth than the minimum 7%. 

Increase income, decrease expenses, shrink assets, make better loans, and investing wisely are methods to assist you in the successful management of these ratios. It’s not complex, but it’s not easy… it takes all our waking hours to be vigilant in keeping these in balance when times get tough.

Get these three right, and life is good…. If they fall out of whack… you’ve got some (or a lot) of work to do.  

If the decisions seem tough…. Refer to the #1 rule of cu’s…

Guest post - Fed Direct... It's easy, it's safe, and better than funding WesCorp!

I sat through umpteen meetings where I was told by the folks at WesCorp... "Don't go to the Fed, gloom and doom are sure to follow".  Scare tactic after scare tactic.  "Watch out for the Fed-man".  Ok.... so a few folks didn't drink the Kool-aid and went to the Fed.... GUESS WHAT?  No SWEAT!

I asked a real live Fed user to tell everyone about the experience.... This is what I received:

We are a federal credit union located in the County of Los Angeles. We went Check-21 direct to the Federal Reserve over 5 years ago. Yes, we moved to the Federal Reserve before WesCorp went Bankrupt (Bankrupt is a technical term for Conservatorship). The Federal Reserve is a branch of the U.S. Federal Government. Unlike the NCUA, the Federal Reserve provides products and services that are of great benefit to financial institutions. Imagine a branch of the Federal Government that is competent. It could happen. We are pleased with the level of service at the L.A. Branch of the Federal Reserve. Contact Manuel Ramirez the Account Executive for Business Development at the Federal Reserve. Manuel can be reached at (213) 683-2885. Ask Manuel for credit union references. We have had no counterfeit checks, no forgery, and no complaints. We get immediate settlement credit. Returns are prompt. We balance daily to the Federal Reserve and it takes all of 15 minutes per day. Going direct with the Federal Reserve is less expensive & more efficient than going through WesCorp FCU. We would do it again. We have no regrets. Don't take my word for it. Give Manuel Ramirez a call at the Federal Reserve and get credit union references.

There it is... from the mouth of a real end-user.  So, now who are you going to believe?  Someone begging for your future monies, or a fellow CU that has nothing to gain?

There are options.... REAL live and functioning options.

You'da thunk the CEO's of Western Bridge, the League, the board of Western Bridge, and the "Nifty Fifty" in Newport would have clued us in....  NOPE... we play politics... we don't cooperate or assist our fellow cu's.... unless we need them to serve our purposes! 

Thank you GUEST POSTER.... one honest voice!

Don't fear the Fed.... Don't drink the Kool-aid....  Take the options available.

It grinds this blogger that all of a sudden Corporates have become sacred cows.... we put them in place back in the 70's to serve a need...  Is it just possible that the need has passed, and others can do the job better?  AND for less?

Just because they will soon be turning out the lights in San Dimas, doesn't mean you will be left in a lurch. 

Step-up bonds are great for yield, but be careful of PCA. Another NCUA incompetent moment.

Ok... so here's the deal... You can't lend in this market so you look to your investments to "bring home the bacon".  After everyone has looked at every type of bond out there, the only one that makes any sense at all is the step-up bond.  They start at 2% to 3% and move all the way up to 7% or 10% over 8, 10, even 15 years.  Wow, you say.  That long?  Yes, and here's why...  NONE OF THESE HAVE EVER GONE TO MATURITY.  Somewhere along the way, the rate will step up above the market and the bond will be called.  With the right broker you can get these at a discount.  Even if the bond is called after the first lock-out period... you earn 4 to.5 TIMES what you would anywhere else.  So it got called?  So what?  Go buy another.  DUH!!!!

So why do I say NCUA is incompetent here?  If you have these, you have to risk rate them to MATURITY  (the % you must keep on hand in equity for a 10+ year bond is 20%).  

Why is that incompetent?  You see, when we fell victim to this scam by NCUA a bunch of years ago, I actually called NCUA and talked to the Alfred Henry who put that in place.  I was told in glowing and fatherly terms that "NCUA is trying to make the call report easy to complete (I remember his exact words) and calculating average life on these would impose too much of a burden".  After ADMITTING that NONE OF THESE EVER go to maturity, he stated that NCUA had to draw a line somewhere and "unfortunately" these fell on the "RISK RATE TO MATURITY" side of the equation... "We're NCUA and it sucks to be you" - paraphrase by me.

So now our UNDERSTANDING NCUA examiner came in to me (and I've heard of others as well) and said WE'VE FOUND YOU IN EXCESS OF YOUR RBNWR ON X-Date.... You are now under PCA.  Ok, how did I get there?  Too many long bonds I had carried at average life that put us over when they were rated to maturity.  So, I sold one bond and WHAMO SMACKO...  I was under the RBNWR.  Cool huh?  

NOT SO... NCUA said  I had to serve our my 2 years under PCA for that transgression, even though it was corrected the same day the error was pointed out. Then another Alfred Henry from NCUA came in and had the nerve to want to talk to me about my earnings and how I was going to get back in their good graces and work myself out of PCA....I verbally threw him out of my office.  

How do you get to PCA even if you have over 10% equity... your RISK BASED EQUITY REQUIREMENT MAY EXCEED YOUR EQUITY.  Look on page 11 of your call report to see if that exceeds 7%.  You can also look at page 12 to see the actual calculation (and do some "what if" scenarios to make sure you don't get sent to PCA Jail!!

Story as current as this week.  Another cu in another state had step-ups and had them term-listed based upon average life on page 1 of the call report.  Their examiner comes in and does a exam effective 3 or 4 months ago and finds that they should have been listing their step-ups at maturity... The examiner makes the changes and finds the cu has insufficient reserves for  its RBNWR and slaps them with PCA.... Here's where it gets good.  All those bonds have been called in the intervening time and they are currently under the RBNWR.  Cool HUH?  No... "I did the exam as of that date and on that date you were undercapitalized  --- Go straight to PCA Hell for two years".  They can expect a visit from another examiner in the near future wanting to "help" them with their earnings issues. 

And you wonder why I rant?  You can't make this stuff up!

Recently someone sent me an anonymous email (that's ok I'm kind of an anonymous kind of person here anyway) and stated I was a blow hard as evidenced by some perceived benchmark they held to.  Well, Sir or Madame, it's not being a blow hard when you are right or you are pointing out a wrong being done.  Perhaps this person was offended by characterization of the board members of WesCorp or of the action of NCUA.  Get over it!  WesCorp was a train wreck caused by management and enabled by incompetent board members.  Just because they escaped going to trial, doesn't mean they were blameless.... it just shows how incompetent NCUA is in putting a case together when they co-enabled the debacle.  If you don't like what I'm saying.... you must not be paying assessments... because everyone that is, HATES what happened to them and whether they say it or not... hold NCUA as accountable as anyone else for their pain and suffering.  

If you have some facts that I gave that are wrong, let me know... I've been wrong before.... After all, this is 1st Thoughts.... not second or after the fact.  But, whoever you are, I don't post snarky comments.... Go get your own blog and flame me there if you like.  Expound upon what ever floats your boat.... it's a free country (for now).

If anyone has questions regard the RBNW and how it "REALLY" works, drop me a line with your cu name  and I'll give you some more direction from your actual call report data.  I could save you from unnecessarily going to PCA Hell!