Liquidity Problems Are Easy; Accounting Is The Hard Part

Register now

As the president of the 11th largest credit union in the country, I have followed, with considerable interest, the financial performance of U.S. Central, the corporates and the recent actions of NCUA.

The corporate problems seem to involve their liquidity and the ability to place a fair value on the securities they hold via their required accounting treatment.

Liquidity has been adequately addressed via CU SIP and the share guarantee program which provides funds so that the corporates can pay down borrowings and won't be forced to sell current investments in a depressed market. We don't want to turn unrealized losses into actual losses. NCUA has acted responsibly and come up with a good solution.

The accounting issues are less clear. When a corporate investment will not repay in full they recognize an other than temporary impairment, or OTTI. GAAP required that U. S. Central immediately take a $1.2-billion write down. In my discussions with U.S. Central, they believe that the actual cash loss will be less than half that amount if they are allowed to hold those investments to maturity.

Since U.S. Central's portfolio currently has 80% in AA and above rated bonds I believe members of corporates will be best served by remaining patient and allowing these bonds to repay over time. It should be noted that at the time of purchase 95% of the portfolio were rated AAA which reflects that U.S. Central was not in the market purchasing high risk, high yield bonds. If there are future OTTI problems they should be openly and honestly addressed, as they occur, by reducing the current year earnings and move on.

It appears that NCUA's overriding issue is maximizing the value of the NCUSIF. We should be concerned that PIMCO could take an excessively conservative approach to valuing the corporates securities which increases the premiums credit unions will pay. The simulation that NCUA used in valuing the corporates current investments is very, very conservative, which has resulted in a higher-than-necessary impairment of the insurance fund. Perhaps NCUA has seen a future need for additional resources to liquidate or to purchase and assume natural person credit unions under PCA.

Let's hope that common sense will prevail as the NCUA mandates future restructuring of the corporate system.

During my 35 years in the movement, I have never seen a time like this but I can still say with confidence this isn't the time to panic nor is it the time to change leadership in the corporate system. Let us not be guilty of over reacting at such a critical time. I have confidence in the corporate system and realize that America's and the credit union movement's best days are still ahead of us.

Rick Craig, CEO

America First CU, Ogden, Utah

For reprint and licensing requests for this article, click here.