WASHINGTON – Navigating through the murky waters of a recession, credit unions have managed to steer their loan-to-share proportions to record levels and keep a softly-cushioned capital-to-assets ratio near 11%. The question of how much capital is enough, too much or at a level to keep regulators at bay has more to do with what benefits can be given to members and still buffer that generosity. But the short answer to how much capital is enough? It really depends, most industry economists agree. "Are you trying to satisfy the minimum to keep the regulator happy or do you plan to withhold benefits to members to withstand problems in the future," said Dr. Tun Wai, NAFCU Director of Research and Chief Economist. "If you want to grow aggressively and expand your membership, you need more capital. What it boils down to is how best do you want to serve your membership." Most credit unions have more capital than they need to appease the regulator and a lot more than they need to meet their operational costs said Bill Hampel, CUNA & Affiliates Senior Vice President, Research and Advisory. "From my 25 years of working with credit unions, on average, I would say 5% is plenty of capital." Hampel said the 1,500 credit unions that operate with net worth ratios between 7% and 9% are "well managed, well capitalized and most of them choose to be there." Indeed, in the late 1980s and early 1990s, 6% capital may have been considered well capitalized, Wai said. Prompt Corrective Action has since deemed that level a red flag zone. "What PCA has done is increased the level of what it takes to be safe from the law but not from losses," Hampel explained. The board of directors at Whatcom Educational Credit Union in Bellingham, Wash. encourages a capital level range between 19 to 20% said Wayne Langei, president/CEO. The credit union, which has 34,200 members and $322 million in assets has a relatively plain vanilla product line. It offers no investment services and no real estate loans. Whatcom was chartered to serve the county's school district and medical employees but expanded to a community charter because it had reached its "saturation point." Langei said 32% of households here have a relationship with the credit union. "Our growth has been quite substantial but we're very aggressive with our capital," Langei said. "There have been times in the past when we've gone over 21% and that's when we look for ways to give back to members." For its size, some may consider Whatcom "overstaffed" with 161 employees, Langei admitted, but "the high levels of member service, low or no fees – that's what brings people to us." While Whatcom is flush with capital, at 9% Santa Ana Federal Credit Union President/CEO Steven Potts said PCA is dictating what the CU does. The Santa Ana, Calif.-based credit union recently expanded its charter to serve an underserved community but Potts is frustrated that he has to hold back on offering the "much-needed" financial services residents here need. Any new offerings now could drop Santa Ana's capital-to-assets ratio dangerously close to PCA. The credit union serves 9,500 members and has $72 million in assets. "This is an area with a potential membership of 300,000 with 28 check-cashing stores and pawn shops so someone isn't being fairly served," Potts said. "There are a lot of things I could do. As much as I hate to admit it, we manage the credit union to PCA." With a loan-to-share ratio at 92%, Potts said he could choose to grow deposits but any returns to members would, again, put Santa Ana close to or even below PCA. While the credit union has grown $12 million this year alone and could "easily" grow another $4 million by the end of 2003, Potts said that would be another red flag. "None of us want to become PCA credit unions," he explained. "But my hands are tied because I don't want to rock the boat." While PCA puts credit unions "at the knife's edge," Wai said those hovering there generally have plans to "withstand sufficient shocks or manage their shocks so they don't have to worry about slipping further." This usually applies to the larger credit unions that feel comfortable with PCA plus 2%. Some CUs say they can manage the razor thin edge separating them from PCA. Despite being relatively close to the first level of PCA, the threat of PCA has not had any impact on operations at Lacamas Community Credit Union in Camas, Wash. said Kathleen Romane, vice-president/COO. According to data compiled by Callahan and Associates, Lacamas had a capital-to-asset ratio of 7.96%. The credit union serves 17,137 members and has $143 million in assets. "Everything we do is based on risk and performance and we're pretty comfortable," Romane said. "We're able to offer a comprehensive package of services to our members." Some credit unions say their cushy capital is a reflection of their lean and mean approach. First Community Federal Credit Union typically keeps its capital-to-assets ratio at nearly 22%, said JohnVerSteeg, president/CEO of the $248 million credit union. While its loan-to-share ratio has been low lately and equity is down to 20%, VerSteeg said a "lean and mean" operation reaps benefits for the Parchmant, Mich.-based credit union's 47,000 members. "We've never been elaborate with our branches, in fact we just completed a corporate headquarters that had been in the works for seven years," VerSteeg said. "We watch our pennies closely especially for equipment purchases." As a result, members get 4.99% new car loan rates and savings and CD rates that beat the local competitors, VerSteeg said, adding "when you have a buffer, you can be a little more lenient on other things." Should the dreaded "t" word ever come to be in credit union land, those with high capital feel confident in their financial position. "We have enough capital that God forbid, if credit unions were taxed, we would be okay. We don't want to build capital at the expense to members," said Jeff Moats, CEO of Edinburg Teachers Credit Union in Texas. The CU now has nearly 18% capital now, but it wasn't always that way. Three years before Jeff Moats arrived, the CU's financial picture looked grim due to negative capital and low earnings. Moats has tried to get his staff "to work smarter" – and he rewards them for it. The $59 million CU's 18 full-time employees earn 25% above the marketplace's average salary for financial institutions here. Moats prides himself on having the knack to "negotiate aggressively" with vendors. Without blinking an eye, he will follow up on his threats to move Edinburg's business elsewhere if a vendor "doesn't cut us a deal that's good for the membership" especially in the pricey area of data processing. As a result, Moats said Edinburg gets a better deal than other credit unions in the area. Since 1995, members have not had a single fee increase, he pointed out. Other than a taxation buffer, Moats said Edinburg's high capital level puts it in a solid position should it ever want to expand to a community charter or merge with a credit union with serious capital problems. Some CUs just know when it's time to put some of their capital back into the membership and back into the credit union. With a capital level approaching 20%, Illiana Financial Credit Union President/CEO Walter Kopacz remembers the concern he and the board had, and knew it was time to give back."Coming in, we weren't sure of our direction but we ultimately agreed to give back to our members," Kopacz recalled. The $157 million CU offered a high-rate checking account that brought in $37 million. The credit union also used the capital to place more cash dispensers at select employee group work sites, expanded their ATM network and are considering possible branch relocations. "At some point, we had to ask are we serving our regulator or members," Kopacz said. "Quite frankly, we're serving both. I'm sure NCUA loves us since were protecting the insurance fund." In A Capital Class All Their Own Given the recent economic downturn, the vast majority of credit unions are adequately capitalized, unlike in other industries, said Dave Colby, CUNA Mutual Group Corporate Economist. Members reaped the benefits through mortgage refinancings and lower new and used auto loan rates. "It should be a tremendous source of pride that credit unions were able to grow capital during a slow economic cycle," Colby pointed out. Banks have such advantages as issuing stock to quickly raise capital while credit unions rely on retained earnings. It appears to be the growing impetus for the number of recent thrift charter conversions, some industry watchers say. Wai said regulators have allowed banks to decide what their capital levels will be. Indeed, NCUA Chairman Dennis Dollar has led the cause to modify PCA to a model similar to what banks use. Dollar has used the international Basel Accord, which sets worldwide capital standards for banks, as a basic template for incorporating a risk-based model into credit union net worth calculations under PCA. A minimum capital ratio would still be needed as well as an interest rate risk component and one based largely on credit risk such as Basel, Dollar has said. "It's a step in the right direction," Wai said. "What's good for the regulator may not be good for the credit union. Whether they know it or not, credit unions have an idea of what is optimal capital for them." Even credit unions with more than a billion in assets have capital-to-asset ratios all over the place, Colby said. The ratios can go as low as 7% and as high as 15.6%. Potential members drive that wide margin because if they're shaky and seek a safe haven at a credit union, "your assets explode and your capital goes down," Colby said. "There's not much room to move and that's the rub between the regulators and credit unions," Colby said. [email protected]