The definition of long-term assets in the NCUA's FPR User's Guide is “Net Long-Term Assets/Total Assets Ratio: The sum of real estate loans which will not refinance, re-price or mature within five years, member business loans, investments with remaining maturities of more than three years, NCUSIF deposit, land and building, and other fixed assets divided by total assets.”

Surprisingly enough, variable rate investments are considered net long-term assets while variable rate real estate loans are not. Credit unions can buy variable rate investments to mitigate the risks associated with rising interest rates, yet see their net long-term asset ratio worsen.

In essence, a credit union could have longer-term investments whose rates change in 36 to 60 months (think 5/1 ARMS), yet have their net long-term assets ratio imply that an increased interest rate risk exists, when that risk does not.

With loan-to-asset ratios nearing an all-time low, investments are becoming an increasingly larger factor in net interest income and that is what ultimately pays the bills. Historically, boards of directors have properly focused on lending while treating investments as the leftovers.

Currently, with investments making up approximately one-third of credit unions' balance sheets, it is of the utmost importance to ensure that the second biggest asset class does not present an inordinate amount of interest rate risk going forward.

Yet, the net long-term assets ratio does not take variable rate investments into account. Therefore, the ratio is a flawed measurement of interest rate risk and WSJ, if they had conducted more research, would have noted that point.

We could be poised for higher short-term interest rates in the near future and the cost of funds of many credit unions is tied to short-term rates as opposed to long-term rates. The net long-term assets ratio does not adequately measure the interest rate risk in investment portfolios. Instead, credit unions should use their own ALM models to determine exposure to rising rates and to ensure that the variable rate component of their investment portfolio is sufficient to offset the fixed rate component of the loan portfolio.

Thomas Bonds is owner of Bonds Capital Group and a SVP at Investments Professionals Inc. He can be reached at 205-383-8980 or [email protected].