The Corner Office: Eliminate the MBL Cap
June 16, 2011
June 16, 2011
This article is part of Anthem’s member credit union leaders’ opinion series, which strives to stimulate discussion among the Northwest credit union system. The views expressed below are those of the author’s and do not represent the views of the Association or its staff.
By Wayne Langei
WECU is a strong credit union. We currently have $734 million in assets, a net worth of approximately 17.5 percent, and a net return on average assets (ROA) for the first four months of 2011 of 1.78 percent, despite accruing for NCUSIF/TCCUSF expenses.
At the present time, our profitability comes from a long-term fixed rate mortgage portfolio, which at $350 million is large for us. We also have $180 million in our servicing portfolio.
WECU’s strategic plan is unique to our institution. I believe that a successful business model must accommodate the specifics of a credit union’s membership, community and business philosophies. When building a business model, we need to consider whether it is going to allow the credit union to thrive for the next 100 years. I have been in credit unions for 39 years so another 100 years does not actually look that far off.
In thinking about the future, it is clear that striving for a federal cap on members business loans of 27.5 percent does not work for WECU.
We currently have a business lending cap of 20 percent and 13.5 percent of our assets are in member business loans (MBLs). Washington State law for credit unions allows us to carry up to three times our net worth in MBLs. This is much more liberal than the proposed federal MBL legislation, and yet, it is still too conservative. State law will allow us to lend up to 52.5 percent of our assets in business loans.
Certainly there are limits to what is prudent and there is a role for regulators. I do not believe credit unions with 7 percent or 8 percent capital should be in MBL lending above the current 12.25 percent because they do not have the net worth to handle potential losses. Credit unions must manage their growth and their business in a sustainable manner to increase their capital and ROA to a high sustainable level. Also, when WECU decided to strive for regulatory approval to increase our MBL limit, we also decided to follow the recommendations of our regulators on how we managed, approved, and monitored our MBLs.
If you want MBLs, you need to think about how they fit into your strategy. We use MBL interest income to subsidize the low-balance unprofitable consumer accounts we have—and we have a lot of them. Ideally I would like to have 40 – 50 percent of our loans in our MBL portfolio.
Other types of lending cannot support these consumer accounts. It is difficult to make enough consumer loans to use up our deposits. Due to interest rate risk, it is uncomfortable keeping a large portfolio of real estate loans to use up our deposits. Ideally I would like to have an extremely large servicing portfolio; unfortunately a large servicing portfolio does not give us an interest rate return on the loan.
This is where MBLs come in. MBLs re-price more often than real estate loans, they give interest rate protection, have higher interest rates, and generate higher revenue. MBL portfolios also generate deposits. WECU needs a large-balance MBL portfolio to be profitable.
I do not want to have any investment other than overnight liquidity. When you invest money and send it outside your community, you are depriving your community of the lending dollars the community needs to grow. Money in an investment portfolio is an asset that is not being properly used to properly benefit the community. I truly believe that a credit union is the size of its loan portfolio, not the size of its deposit portfolio. Deposits are easy to get but loans are really where the action is.
Over the long term, I believe Washington State will increase or maybe even eliminate the MBL cap. Credit unions will need to put the majority of their deposits into MBLs to survive in the future. Increasing the MBL level from 12.25 percent to 27.5 percent is the same kind of faulty strategic thinking that credit unions used when we gave up our ability to make MBLs in trade for the AT&T field of membership and the requirement to follow GAAP instead of RAP accounting. The banks really beat us in that negotiation, and have shown themselves to be better long-term strategic thinkers.
Even if we do gain the ability to grow our MBL portfolio to 27.5 percent, it will be 30 years before legislators will do anything for us again. If MBL is important to us, and I believe it is, we need to have the cap eliminated and give the regulators the ability to dole it out to those they deem worthy. We need the regulators to support our activity if we want to be successful.
We need to eliminate the MBL cap and should not settle for anything less!
Wayne Langei is the President & CEO of Whatcom Educational Credit Union (WECU) in Bellingham, Wash.
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