New SPAM From NCUA - First Blush: ROA...

Very "economic"!!!

The NCUA proudly announced in a June 5, 2012 press release, the issuance of a whole new series of SPAM!  The SPAM series is the latest "product" from the increasingly famous Office of the Chief Economist.  

According to NCUA the SPAM series provides "timely, easy-to-use analysis about credit union performance". "With this information, credit unions can make better decisions and the public can gain a greater understanding of how credit unions are performing."  The NCUA Chair almost gushes with enthusiasm that the SPAM "highlights the diversity of credit union performance across the nation, reflecting local economic conditions, specific state strengths, and current challenges".

SPAM ???  Yep, SPAM!  If you haven't quite figured this out yet, we're talking about the new series of "economic" MAPS just released by the NCUA.  As with much of the Agency's collection and analysis of data, the MAPS are a bit "backward"- i.e., SPAM! And moreover, without a doubt; much of the content and "analysis" depicted by these MAPS definitely ain't  "filet mignon" grade anyway. For $2 million bucks one would expect higher quality.

The SPAM comes in two separate cans: 1) the Return on Assets (ROA) flavor and 2) the Loan/ Delinquency brand.  Let's spend a little time today on the ROA blend...OK?

  

CUTE AND COLORFUL !!

The first, basic, core question to consider is why would the NCUA pick ROA as the most important concept, key indicator, "number to crunch" as a lead in a SPAM series, intended to help the public "gain a greater understanding of how credit unions are performing"?


Many of you may be stumped by that question.  It is very standard for all of us to judge "business success" based on "profitability".  In the for-profit world after all, the bottom-line is "king"; a for-profit business has as a principal focus creating a return on assets, a return on investment for its owners.  ROA is a for-profit concept; why would a federal regulator of cooperative, not-for-profit credit unions choose ROA as a leading indicator of credit union financial health?  Ignorance and lack of true understanding most likely.....


If you're still scratching your head at the above paragraph; at least feel comforted, that if you don't quite "get it", it could mean you're fully qualified to work at NCUA!


Consider the following questions and we'll talk some more about NCUA SPAM tomorrow:

1. If a credit union is fully reserved, well capitalized, and not growing - what would be the most appropriate ROA for the board and management to target?
2. If a credit union is fully reserved, well-capitalized and declining in asset size - what would be the most appropriate ROA for the board and management to target?
3. If a credit union is fully reserved and has surplus capital, would "paying out" the surplus to the membership be appropriate in "hard times"?
4. Does the state in which a CU is headquartered really have a definitive effect on the ROA of the CU?  If so, why is there such dramatic variance in CU performance within a state?
5. Can there be significant variation in "the quality of ROA" among credit unions?  Is it possible that a "high" ROA from "low life" activities could be a signal of future problems? 
6. Could the average ROA of a state be overly influenced by the performance of one exceptionally large, dominant CU?  Think Alaska for example.
7. What level of ROA is "good"; what level is bad? Who decides good from bad?  Does the public know how to interpret the "meaning"of the data ?
8. Who said that the new NCUA MAPS are SPAM?  Aren't they actually.....  

ROA definitely not a wiener...!