I doubt that I am the only CEO who reviews the FPRs of my neighboring credit unions. So I'll admit I've been watching one credit union in particular, it is of heightened interest as its parking lot is adjoining to our parking lot. I noticed they had been in a slow decline for some period and was only somewhat surprised to learn in January that they 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 they were forced to record a large adjustment to ALL. This drove their capital ratio to 3.65%, and we all know what happens to small CUs with a capital ratio below 4.0%. I was very surprised when I then saw their Q1 2011 final financial report. Lo' and behold they posted an ROA of 4.09% (before NCUSIF assessment), and capital was back to 4.50%-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 are 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 ($400K to $603K for the 1st and 4th quarters of 2010 respectively). But then in the 1st quarter of 2011 they declined to only $300K. 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 ALL 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 over 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 CU, Santa Rosa, Calif.