A Positive Moving Forward, But...
BIRMINGHAM, Ala. — Corporate credit union earnings in 2009 will look much better than the previous year thanks to FASB's mark to market ruling, according to a former NCUA chairman.Dennis Dollar, principal at Dollar Associates, said the accounting changes will boost the bottom line at corporates and natural person credit unions with impaired investments going forward, but those institutions will still be forced to write down the actual credit losses on the mortgages that back those securities.
"The good news in the mark to market rule change is that there will be greater flexibility going forward on how certain assets are classified in terms of their losses. Many of the hits to balance sheets come from the mark to market provision that says a security must be marked to an estimated value today even though the institution may intend and have the ability to hold it to maturity," he explained. "The downside is that FASB did not allow that to be applied retroactively to 2008 and the impact is considerable for credit unions."
Corporates will now not be allowed to re-state their earnings, Dollar noted, meaning they will still take huge write-downs on last year's books. The big losses has put a serious drain on corporate reserves and some of those institutions may have to tap paid-in-capital and member shares, impacting natural person CUs. Dollar called the decision unfortunate and confusing, arguing that if ending mark to market accounting "is good policy in 2009 it was good policy to apply to 2008. The 2008 books have not been closed in the overwhelming majority of financial institutions; many of them waiting for this very ruling."
The former NCUA chief was quick to point out, however, that the accounting changes would not have saved US Central or WesCorp. Those corporates were conserved, he noted, because of PIMCO's report on past and projected actual credit losses at those institutions, forcing the federal regulator to put them into conservatorship.
'Smoke & Mirrors'
GLENDALE, Calif. — The fact that the FASB rejected the request to apply the accounting changes to 2008 financials does not upset Stuart Perlitsh, CEO of the $250-million Glendale Area Schools FCU, Glendale, Calif."I don't think credit unions should be restating financials that have already been published. The accounting rules ostensibly were set up to create honest financial statements. Now everyone is running around saying we need to change the accounting rules because it's making our financial statements look like hell. Well isn't that what the accounting rules are supposed to do? Reflect some sense of truth? It's just more smoke and mirrors."
A 'Reality Check'
HARRISBURG, Penn. — Scott Rhoads, VP of finance for the $4-billion Pennsylvania State Employees CU in Harrisburg, Penn., said the move was less an epiphany and more a reality check. "Our reaction is neutral. We always felt that this was just a clarification of our understanding, not a revelation. It probably will help the balance sheets of credit unions that have a whole different set of securities on their books than we do. Our securities have been pretty vanilla and safe. We never saw that this would be a big change for us."
End of Overly Gloomy Picture
WINSTON-SALEM, N.C. — Jack Braswell Jr., CEO of Members CU said he is "pleased that FASB has taken this. Mark-to-market rules have in cases where a willing buyer and a willing seller do not exist have forced excessive, premature devaluation of troubled, yet still valuable, assets, painting a much gloomier picture of an organization's financial condition than is warranted. It has been our opinion that market value information already included in footnotes should satisfy potential investors' needs to understand the market value of companies."
Too Little, Too Late
MANCHESTER, N.H. — The nation's first credit union called FASB's changes "too little, too late." "While I commend FASB for their recent action, which resulted in easing the mark-to-market rules, I think the change is too little too late," said Daryl Cady, EVP/CFO for St. Mary's Bank. "Many companies have already recorded significant impairments through year-end and the cascading affect of doing so has already been felt across the industry. While amending the rule now may provide some relief on a going-forward basis, it doesn't reverse what has already happened. In fact, a mid-course correction now may distort the picture even more. And the real issue remains, 'What are the assets worth?' and 'How should they be valued?'"
Good For CUs, Not For The U.S.
LAKE BLUFF, Ill. — While the hold-to-maturity feature within the FASB rule changes will certainly benefit credit unions, they still do not solve all the problems, suggested Mike Moebs, CEO of Moebs $ervices in Lake Bluff, Ill. "Because we still have toxic assets."The truly negative aspect of the changes come from the view the rest of the world will have on the U.S. stance on mark-to-market accounting, says Moebs. "The rule changes do not conform to what the rest of the world is doing," he observed. "Frankly, we are saying we don't care about that. And if I were a credit union, that's the way I have to think. Terrible stresses are being placed on credit unions by the Treasury not including credit unions in TARP. So what do they expect credit unions to do? From a pure credit union movement perspective, this is a good move."
Taking FASB To Task
TAMPA, Fla. — Count GTE FCU CEO Bucky Sebastian as among the critics of the FASB ruling."I am just incensed that we as a society bestow the kind of authority on a profession like the accounting profession that can bring down the economic condition of the free world," said Sebastian. "We all live by their rules but we don't know who they are and how they got there. I think someone ought to shake them, to get a hold of them and put a very large dose of real life into the accounting profession."
Though GTE is in one of the now-notorious "sand states" that has taken one of the biggest economic hits, Sebastian said the accounting changes will have no affect on his credit union's bottom line. The longtime CU chief took FASB to task for making big changes in the accounting rules twice in the last two years; first by implementing mark to market in 2007, and now allowing financial institutions to hold off on most investment write-downs if they plan on keeping securities for a longer period of time. Sebastian said the original change in 2007 didn't make much sense to him.
"If in my business the value of real estate is up we cannot take advantage of that unless we sell it," he said, pointing to the huge gains many institutions racked up while not selling their investments. "I'm speechless when I deal with people who are more interested in the philosophical points of the discussion than the real world consequences."
Sebastian accused the accounting board of only making changes after it helped to "destroyed people's lives or institutions" with mark to market accounting. He argued that full disclosure of investments would make the most sense when determining the liquidity and solvency of an institution as the market would be allowed to decide what assets are worth and how much they could benefit or hurt an institution based on said institution's liquidity position and how long they plan to hold their investments.
