Know The Market Value Of Your Balance Sheet

Insight provided by fair valuation opens up new possibilities for balance sheet management, product pricing, and investment diversification.


The following disclosure at the bottom of a colleague’s December HSA statement caught my attention:

“Fair market value of account as of December 31, 2011: $18,596.34. This fair market value is being furnished to the Internal Revenue Service Under Trustee ID as required by law.”

Why is it important that a consumer, let alone the IRS, know this information?

A Long-Standing Challenge

Fair market value questions hover around every aspect of a credit union’s balance sheet. A change in merger accounting requirements three years ago calls for the fair valuation of an acquired credit union when combining assets and liabilities onto a single balance sheet. 

For decades, credit unions selling to Fannie Mae or Freddie Mac have had the option to hold first mortgage loans on their books as securities to facilitate a possible future sale at a readily determined market value based on the GSE guarantee.

When credit unions purchase or sell deposits, loans, or fixed assets to another firm, the market value versus the book (i.e., historical) cost is frequently an issue in completing the transaction.

Fair market value was once considered such an essential real-time management tool and disclosure for investment that the Financial Accounting Standards Board evaluated whether it was feasible to implement a standard that required financial institutions to report all loans and deposits at fair market value in all financial statements. Although FASB never implemented this standard, the approach has influenced the use and reporting of multiple transactions today, including derivative accounting and OTTI estimates for investments.

Fair Value And Risk Management

Today, knowing the true market value enhances enterprise risk management and allows an institution to evaluate: What liquidity would be available from the sale of investments or loans? How much would it cost to replace shares that might leave in an emergency? What will the balance sheet’s net economic value (the market value of equity) be if external interest rates change? In other words, is the institution’s pricing of assets and savings sufficiently balanced and flexible to preserve earning capabilities and net worth in future scenarios?

Examiners have focused their comments on current valuation when referencing potential asset bubbles in reviewing loans secured by real estate and other collateral. Bubble conjecturing is meant to caution credit unions that the valuation of a loan, its underlying collateral, and future performance could be affected by external factors overriding the borrower’s current capacity or willingness to pay.

The question of how extensively to implement asset valuation practices is a balance of cost and benefit. Few credit unions can afford, or even need, to know the market value of their shares in today’s context.  This is because the Federal Reserve has foreshadowed low interest rates until 2014. Liquidity is abundant and shares are virtually free. And periodic valuation is not useful when institutions hold fixed assets for their full economic lives.

How Real-Time Valuation Works

Despite today’s environment, it is beneficial to understand both the value and expertise that real-time, market-based valuations bring to financial management decisions. In fact, as a regulatory requirement, publically traded mutual funds registered with the SEC must report real time, market-based valuations. Every day, as soon as the markets close at 4 p.m. Eastern, all mutual funds, from simple money market with $1 stable values, to government bond funds, to the most exotic stock fund, must calculate and post the net asset value at which the funds’ shares were sold or bought on that day.

Mutual funds limited to investments authorized for federal credit unions illustrate the benefits of this rigorous valuation requirement. The information provides the user an ability to easily compare performance and return with other investment options.  It also provides insight into the impact of market events on all securities in a portfolio, especially those classified as “held to maturity.”

Two Decades Of Market Values

An example of this investment option is the Trust for Credit Unions. Formed in 1987, this three-fund family with more than $1.1 billon of credit union investments must report the market price for purchase or sales every business day.

As shown in the NAV history graph below, TCU has published this daily market valuation for more than two decades. In up or down markets and during times of economic panic, war, or international crisis, there has never been a day when markets were open that the TCU funds were not available for trading.  

TCU Daily Market Valuation
Click on graph to view larger size.

Every asset on a credit union’s balance sheet changes in value. Credit unions book most assets, such as loans and many investments, with the intent to hold them for their full useful lives. That does not mean the economic value, as determined by what price they could be sold, remains stable.  

A credit union might not need to incorporate daily or monthly valuation for every balance sheet category; however, mutual funds as a part of a credit union’s investment strategy can provide a valuable window into market events that illuminate fluctuations in other asset categories and highlight hidden value improvements or declines in other asset classes. 

This insight opens up new possibilities for management of the current balance sheet, for pricing future products, and for diversifying investment portfolios.    

To learn more about the TCU Fund family and its history of serving credit unions, visit the Trust for Credit Unions website.

The Trust for Credit Unions (TCU) is a family of institutional mutual funds offered exclusively to credit unions. Callahan Financial Services is a wholly owned subsidiary of Callahan & Associates and is the distributor of the TCU mutual funds. Goldman Sachs Asset Management is the advisor of the TCU mutual funds. To obtain a prospectus that contains detailed fund information including investment policies, risk considerations, charges, and expenses, call Callahan Financial Services, Inc. at 800-CFS-5678. Please read the prospectus carefully before investing or sending money. Units of the Trust portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. Government, the NCUSIF, the NCUA, or any other governmental agency. An investment in the portfolios involves risk including possible loss of principal.



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