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!

Yogi Berra has met his match... Debbie Matz!

Here is the newest "Matz-isms" I found: 

"Although it may seem counter intuitive at first, allowing credit union to make more member business loans would allow credit unions - and NCUA - to manage risks more prudently."


WOW! "Counter Intuitive" "NCUA to manage risks more prudently"

How about their track record of abysmal and total FAILURE?  How about the oxymoron of NCUA and Managing Risks being used in the same sentence?  How about their whining to the judge regarding WesCorp that they are a small agency and strapped for resources?  How can a do-nothing organization like NCUA "MANAGE" anything?

This was followed up with - "At NCUA we take great care to ensure that our rules keep pace with market changes.... " 

Really?  On what planet did that happen?  In what galaxy far far away, in some dark and distant past? 

I see her lips moving, but I only hear Yogi coming out!


 

The Prom - a guest post

An admirer of this sight wanted to see if I would post "anonymously " for him/her.  Well, I do that myself as a matter of course, so I thought - "why not?"  While I don't agree 100% with all the statements made... the point is well taken.   ENJOY!

The Prom”

Credit Unions are based on a simple, cooperative principle:  the whole is bigger than the sum of its parts.  Hence, the movement was formed to provide the undeserved an alternative to the predatory practices and cold shoulders of banks.  The movement provided an opportunity to share the risks and benefits of financial services among the “owners” of the credit union. 

So what’s that got to do with “The Prom”?

In today’s credit union merger environment, one has to ask the question “At what size does a credit union get so big as to lose sight of its roots?”  Granted the regulatory environment, we currently find ourselves buried in forced mergers to gain the economies of scale to survive. 

This culture of Big Brother poking at the inner workings of the cooperatives isn’t about to change soon.  The NCUA mantra of “We know better!”, “Manage your Risk (the way we tell you to)!”, and “We’ll Examine you Until There’s Nothing Left to Examine and Then We’ll Decide How and When You’ll Merge” isn’t about to change anytime soon.

Anyone who understands risk knows you can’t reduce it to zero.  But that is just what the regulators are trying to force credit unions to do.  As a result, many Credit Union loans today are based purely on computer generated credit scores.  Whatever happened to a credit union knowing its members and working to provide for their needs as individuals? Whatever happened to lending based on character, a name, and a handshake?—People Helping People! 

Imagine for a minute a group of fishermen, oyster men, shrimpers, charter captains, ecology tour guides, and associated tourist and seafood industry people in Apalachicola, Florida, a small fishing town in the Florida Panhandle.  The three community banks that existed last year all failed or were bought out by other banks that subsequently failed.  What remains are two branches of large nationwide bank headquartered in Arkansas, which will soon consolidate.  This out of state bank that purports to be a community bank services the people we want to study.  Service has declined significantly. 

Suppose our handful of individuals in these industry groups got together and decided to form a credit union.  What would be the result?  My prediction:  Nothing.  No credit union could ever form.  The rules directing capital ratios, the rules delineating risk management, and the rules of governance will all conspire to prevent a credit union ever developing a viable charter.  After all, how many have been chartered in the last 10 years?  But that doesn’t mean there isn’t a need, and in other areas besides Apalachicola.

Yes the need for People Helping People has never been greater, especially in many smaller communities in these troubled economic times.

I’m afraid, however, that the NCUA has gotten so political it has lost touch with its owners—the credit unions.  You know, the ones who pay their bills.

As the old saying goes, “Remember who brung ya to the Prom!”

“People Helping People.”

Y.E. Fun Facts for the large CUs and more reasons it sucks to be small!!!

If we look at the divergence in cu asset sizes ($2 -20, $20 - 50, $50 -100, $100 - 500, $500 - 1B, and 1B+) over the last 15 years, you will notice some interesting trends :

- $1B+ ROA for 2010 average = .720%  The smaller cu's ($2 -20) haven't seen those kind of ROA numbers since 2001.  In 1995 the difference in ROA between those two categories was 5 BP... It's now the largest ever at YE 2010 at 88BP.

- For Non-Interest Income as a % of total Income the spread between the largest and smallest was 268 BP in 1995.  It now stands at 611 BP.  More than double.  Rarely has a smaller asset bracket exceeded the average income of the next larger bracket over the 15 years.  Bigger is Better.

- It pays to be a member of a larger CU.  The difference in Dividends as a % of Income in 1995 was 800 BP, and now it's down to 474 BP.  In 2005 and 2007 this spread increased to over 1475 BP.  However, after the larger shops stopped their growth streak, it fell dramatically.

- The efficiency ratio is another indicator (the cost to produce $1 of income) of the advantage larger cu's enjoy.  In 1995 the large shops were $0.07 more efficient at just over $0.64.  Fast forward to 2010 and that becomes a  whopping $0.21 advantage to the largest cu.  There is some channel noise with the write-downs and subsequent reduction of ALLL, but this has been an ever-widening trend since 1995.

- Yield on Assets - Advantage smaller cu.  But, what do you expect.  If you only make signature and auto loans, you have higher yields than with Real Estate loans.  The 71 BP advantage in 1995 is now down to 5 BP.  So, small cu, enjoy it while you can.  In reviewing the entire trend, 1995 looks to be a spike.  The advantage for small shops held almost constant at 30 BP until 2008 and then it's dropped off significantly.

- Same with Net Interest Spread.  Advantage small shops, but smaller now:  124 BP to 59BP.

- THIS IS KEY - OPERATING EXPENSES AS A % OF ASSETS:  In 1995 the largest had a 96 BP advantage.  They now have 136 BP advantage.  The large shops are saving $13,600,000 per year per Billion in their office efficiency.  If a $20 M shop had this same ratio, they would be saving $272,000 in expenses each year.  Do you think they would be profitable then?  Heck Yes!!!!  This is the TRUMP RATIO that makes bigger better.  This is also the one area you have the most control over. This is where small shops need to concentrate and COLLABORATE ALREADY!!!!  DO IT FOR YOUR MEMBERS.  Your cu's very existence depends on it. 

- One more fun facet to look at.  This tells us as an industry how vulnerable we are to Non-Interest Income.
Take non-interest income away from the ROA and what do you have?  In 2000 the $100-500 category cu's bottom line went negative first.  In 2001 all the others did as well, except the $1B+ cu's.  They didn't have a negative bottom line until 2004.  That year every cu category went negative, and they all stayed there.  EXCEPT - the $1B+ became positive in 2009 and they are the only category that has remained positive since that time.  EVERY OTHER CATEGORY HAS BEEN NEGATIVE SINCE 2004, WITH THE SMALLER SHOPS SUFFERING THE MOST.  So, only the $B+ shops are making it on the spread.  They don't require NON-Interest income to turn a positive bottom line.  The rest of the shops now need 40 BP, or more, of Non-interest income - JUST TO BREAK EVEN!  Think of it this way... The large shops are standing in neck-deep water.  The rest of us are in over our heads.

So, when we hear that cu's are getting better and pulling out, let's ask which size cu's they are talking about --- The 1B+ shops or, everyone else? 


 

What comes after QE1 and QE2.... Inflation or QE3?

There is a great article in Financial Times : http://www.ft.com/intl/cms/s/0/96ec2b02-8146-11e0-9360-00144feabdc0.html?ftcamp=crm/email/2011518/nbe/ExclusiveComment/product#axzz1MjL4EYXz

It discusses the next step from here.  QE2 is about to end.  Conventional Wisdom suggests inflation.  Check out what Galbraith refers to Conventional Wisdom as (since he brought the phrase to popularity).

If you doubt where the author is going... consider that Japan went through QE8 and was still a wreck before the tsunami hit!

"What's that mean to me as a cu?"  Glad you asked!  If you've been staying short and waiting for the rates to rise - Don't. Ladder out longer now.  Just be sure to use step-ups or variable investments.  Never fixed.

Some have seen a resurgence in borrowing.  That's great, but don't give the store away on very long term loans a very low fixed rates.  That's akin to putting all your eggs in one basket.

I happen to agree that we are in for a long slow slog back... There is no rainbow and no pot of gold waiting for us in the near future. We've been on a 25-year buying binge... the consumer is learning a new lesson in a new economy right now.  I don't see massive running up of personal debt any time soon. Remember, it was the consumer who drove 70% of our economy for a long time. We don't have the economic engine to pull us through, this time around.