On the heels of Sheila Bair relinquishing her chairmanship of the FDIC, NCUA seems poised to incorrectly continue her legacy.
NCUA's current proposal for corporate credit unions to prepay their assessments for two years is an investment decision for credit unions. Is a prepayment of at least $10,000 worth potentially receiving 10 to 25 basis point reductions in future assessments? Is this a good investment of a credit union's assets?
To answer this question, let's first, understand the accounting. A prepaid is treated like an asset on the balance sheet. As a portion of the prepaid expense becomes due, that portion is allocated to the income statement. Effectively, money that could be used as a potential investment, or future loan, is made into another asset–prepaid expense.
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Individuals or businesses will prepay an expense when there is an incentive to do so. The incentive is typically a discount.
Consolidated data from 2010 5300 reports for all credit unions shows net interest margin was 2.43% and noninterest expense was 3.24%. If it weren't for 1.31% in fee revenue, credit unions overall would have reported a net loss. Remember, net income is a credit union's only source of capital.
Now that the accounting and actual investment criteria are known, it would appear that the return on any investment–or the discount on any prepaid expense–would have to be greater than 3.24%, or greater than 324 basis points, to be a worthwhile investment for credit unions. Why? That type of investment, or prepaid expense, would add to the bottom line of the credit unions and help create capital. Or another option, base the assessment on the expense to asset ratio of the individual credit union, thus encouraging expense reduction while increasing capital thru better net income. Anything less would not be a wise advancement of funds or investment.
The NCUA's incentive of 10 to 25 basis points is quite a bit short of what a wise investment would or should be.
Qualitatively, should the investment be done for a moral, social or political measure? Answers:
If money is moved to an investment other than a loan or investment in the private sector, then money is moved out of the economy. When a depository invests or lends money, there is a multiplier effect. Conservatively, every dollar lent multiplies to about six dollars in the economy. Taking money out of the economy reduces the economy. Taking money out of the market will hurt the market and its members.
The "new but unofficial" capital to assets ratio is 11%. If a credit union needs to shrink its assets to boost its capital to assets ratio, then maintaining assets with an unproductive investment will actually hurt the capital to assets ratio by keeping the ratio from falling.
If the credit union has more than 11% capital to asset ratio, sufficient net income, and wants to make a donation, then prepaying a less than discounted expense may be appropriate.
When Sheila Bair made the banks prepay their FDIC insurance premium in 2009, this caused about $50 billion to be taken out of the economy, reduced revenue at banks, and may still not be sufficient to protect the FDIC fund. Credit unions need to determine if they want to follow the FDIC example. n
G. Michael Moebs
Economist and CPA
Moebs Services Inc. Lake Bluff, Ill.
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