The Federal Reserve reported on December 7 that outstanding consumer credit grew at credit unions by almost $5.3 billion during October to $378.8 billion, as both revolving and non-revolving credit increased.
Revolving credit increased by almost $200 million to $51.1 billion.
Non-revolving credit rose by approximately $4.9 billion to $327.6 billion.
Read the G.19 Report.
Wednesday, December 7, 2016
Will Examiners Second Guess Unguaranteed Business Loans?
Will the National Credit Union Administration (NCUA) examiners second guess credit union business loans that don't have personal guarantees?
In May 2016, NCUA replaced the explicit requirement of personal guarantees on business loans with an implicit expectation that credit unions should obtain a personal guarantee.
According to its updated Examiner's Guide, "[a] credit union should only waive a requirement for a personal guarantee when the credit union has a rigorous credit risk management program in place and the ability to properly mitigate the additional risk. The reliance on a personal guarantee should not be relinquished solely to meet competitive pressure."
NCUA expects that only financially strong borrowers would be eligible to receive a personal guarantee waiver.
NCUA lists multiple factors that should be used to determine if a borrower is financially strong, including superior debt service coverage, positive income and profit trends, a strong balance sheet with a conservative debt-to-worth ratio, readily salable collateral supporting the loan, and a low loan-to-value ratio for the loan.
In addition, credit unions must set concentration limits in their policies on the maximum amount of business or commercial loans that do not have personal guarantees.
Moreover, NCUA expects a credit union to "monitor a borrower's financial condition by requiring frequent financial reporting and compliance with specific well-defined financial covenants. The borrower’s operation should be monitored by frequent contacts by the credit union with the borrower to evaluate if there have been material changes to the operations."
In closing, the Examiner's Guide states that "[e]xaminers should determine whether a credit union adheres to its policy in granting unguaranteed commercial loans. Examiners should give particular attention to the credit union’s ability to monitor the performance of these loans. Loans without the benefit of a personal guarantee should be reported to the board in the aggregate and clearly monitored for adverse changes in their repayment performance or overall risk."
Unfortunately, too much of the guidance is based upon subjective language, which will give credit union examiners a lot of leeway to second guess business loans without personal guarantees.
Read the section on personal guarantees.
In May 2016, NCUA replaced the explicit requirement of personal guarantees on business loans with an implicit expectation that credit unions should obtain a personal guarantee.
According to its updated Examiner's Guide, "[a] credit union should only waive a requirement for a personal guarantee when the credit union has a rigorous credit risk management program in place and the ability to properly mitigate the additional risk. The reliance on a personal guarantee should not be relinquished solely to meet competitive pressure."
NCUA expects that only financially strong borrowers would be eligible to receive a personal guarantee waiver.
NCUA lists multiple factors that should be used to determine if a borrower is financially strong, including superior debt service coverage, positive income and profit trends, a strong balance sheet with a conservative debt-to-worth ratio, readily salable collateral supporting the loan, and a low loan-to-value ratio for the loan.
In addition, credit unions must set concentration limits in their policies on the maximum amount of business or commercial loans that do not have personal guarantees.
Moreover, NCUA expects a credit union to "monitor a borrower's financial condition by requiring frequent financial reporting and compliance with specific well-defined financial covenants. The borrower’s operation should be monitored by frequent contacts by the credit union with the borrower to evaluate if there have been material changes to the operations."
In closing, the Examiner's Guide states that "[e]xaminers should determine whether a credit union adheres to its policy in granting unguaranteed commercial loans. Examiners should give particular attention to the credit union’s ability to monitor the performance of these loans. Loans without the benefit of a personal guarantee should be reported to the board in the aggregate and clearly monitored for adverse changes in their repayment performance or overall risk."
Unfortunately, too much of the guidance is based upon subjective language, which will give credit union examiners a lot of leeway to second guess business loans without personal guarantees.
Read the section on personal guarantees.
Tuesday, December 6, 2016
Alliance FCU Changes to State Charter and Private Share Insurance
Alliance Federal Credit Union (Lubbock, TX) switched from a federal charter to a state charter and changed from federal share insurance to private share insurance provided by American Share Insurance.
According to Scott Rose, President and CEO of the $245 million Alliance FCU, one of the main reasons he and his board of directors chose to convert to American Share was the simple fact that the role of the regulator and insurer needs to be differentiated.
Another key factor in the credit union's decision to move to a state charter, and to partner with American Share Insurance, was that they wanted to be regulated by local government officials that better understand the needs of Texas residents.
This is the third Texas-based credit union to join American Share Insurance in the last 18 months.
Read the press release.
According to Scott Rose, President and CEO of the $245 million Alliance FCU, one of the main reasons he and his board of directors chose to convert to American Share was the simple fact that the role of the regulator and insurer needs to be differentiated.
Another key factor in the credit union's decision to move to a state charter, and to partner with American Share Insurance, was that they wanted to be regulated by local government officials that better understand the needs of Texas residents.
This is the third Texas-based credit union to join American Share Insurance in the last 18 months.
Read the press release.
Monday, December 5, 2016
CUs Report Double Digit Year-over-Year Loan Growth
The National Credit Union Administration (NCUA) reported strong loan and deposit growth for federally-insured credit unions at the end of the third quarter of 2016.
Total loans outstanding at federally insured credit unions reached $847.1 billion at the end of the third quarter of 2016, an increase of 10.1 percent from one year earlier.
Every major loan category posted year-over-year growth. New auto loans grew the fastest at a rate of 15.8 percent to $112.2 billion. Outstanding net member business loans grew at the second fastest pace by 14 percent to $63.9 billion.
Insured shares and deposits in federally insured credit unions grew, for the first time, to more than $1 trillion.
As a result of loans growing at a faster pace than deposits (shares), this caused the industry's loan-to-share ratio to increase. The loans-to-shares ratio was 78.6 percent, up from 77.8 percent at the end of the second quarter of 2016 and 77.5 percent a year earlier.
Net Income Up 5.7 Percent
Net income at federally-insured credit unions increased by 5.7 percent from one year ago to an annualized net income of $9.7 billion through the first three quarters of 2016.
Gross income at credit unions rose by $4.7 billion to $59.3 billion as of September 2016. Offsetting the increase in gross income was an increase in non-interest expense by $2.55 billion and interest expense by .52 billion. In addition, provisions for loan and lease losses jumped by $1.1 billion to $4.7 billion. Operating expenses as of September 2016 were 65.43 percent of gross income.
The annualized return on average assets ratio for federally insured credit unions stood at 78 basis points on September 30, 2016, down from 80 basis points a year earlier. The median return on average assets was 37 basis points at an annual rate during the first three quarters of 2016, up slightly from 36 basis points a year earlier.
Almost 98 Percent of CUs Are Well-Capitalized
The industry's aggregate net worth ratio was 10.85 percent as of the end of September, the same as the previous quarter. One year earlier, the system’s aggregate net worth ratio was 10.99 percent.
NCUA reported that 97.9 percent of federally insured credit unions were well-capitalized. At the end of the third quarter of 2016, less than 1.0 percent of federally insured credit unions were undercapitalized.
Delinquency Rate Flat, Net Charge-Off Rate Up
Credit union reported holding approximately $6.5 billion in delinquent loans. This was up from almost $6 billion one year earlier. The overall delinquency rate was largely unchanged -- down 1 basis point from one year ago at 77 basis points. Over the last year, the delinquency rates on member business loans and credit card loans jumped by 41 basis points to 1.52 percent and by 7 basis points to 1.04 percent, respectively.
Net charge-offs are up $930 million from a year earlier to $4.4 billion. The net charge-off rate was up 7 basis points from a year ago to 53 basis points.
NCUA also noted that credit unions with at least $500 million in assets continued to outperform smaller credit unions.
Read the press release.
Review Financial Trends Report.
Total loans outstanding at federally insured credit unions reached $847.1 billion at the end of the third quarter of 2016, an increase of 10.1 percent from one year earlier.
Every major loan category posted year-over-year growth. New auto loans grew the fastest at a rate of 15.8 percent to $112.2 billion. Outstanding net member business loans grew at the second fastest pace by 14 percent to $63.9 billion.
Insured shares and deposits in federally insured credit unions grew, for the first time, to more than $1 trillion.
As a result of loans growing at a faster pace than deposits (shares), this caused the industry's loan-to-share ratio to increase. The loans-to-shares ratio was 78.6 percent, up from 77.8 percent at the end of the second quarter of 2016 and 77.5 percent a year earlier.
Net Income Up 5.7 Percent
Net income at federally-insured credit unions increased by 5.7 percent from one year ago to an annualized net income of $9.7 billion through the first three quarters of 2016.
Gross income at credit unions rose by $4.7 billion to $59.3 billion as of September 2016. Offsetting the increase in gross income was an increase in non-interest expense by $2.55 billion and interest expense by .52 billion. In addition, provisions for loan and lease losses jumped by $1.1 billion to $4.7 billion. Operating expenses as of September 2016 were 65.43 percent of gross income.
The annualized return on average assets ratio for federally insured credit unions stood at 78 basis points on September 30, 2016, down from 80 basis points a year earlier. The median return on average assets was 37 basis points at an annual rate during the first three quarters of 2016, up slightly from 36 basis points a year earlier.
Almost 98 Percent of CUs Are Well-Capitalized
The industry's aggregate net worth ratio was 10.85 percent as of the end of September, the same as the previous quarter. One year earlier, the system’s aggregate net worth ratio was 10.99 percent.
NCUA reported that 97.9 percent of federally insured credit unions were well-capitalized. At the end of the third quarter of 2016, less than 1.0 percent of federally insured credit unions were undercapitalized.
Delinquency Rate Flat, Net Charge-Off Rate Up
Credit union reported holding approximately $6.5 billion in delinquent loans. This was up from almost $6 billion one year earlier. The overall delinquency rate was largely unchanged -- down 1 basis point from one year ago at 77 basis points. Over the last year, the delinquency rates on member business loans and credit card loans jumped by 41 basis points to 1.52 percent and by 7 basis points to 1.04 percent, respectively.
Net charge-offs are up $930 million from a year earlier to $4.4 billion. The net charge-off rate was up 7 basis points from a year ago to 53 basis points.
NCUA also noted that credit unions with at least $500 million in assets continued to outperform smaller credit unions.
Read the press release.
Review Financial Trends Report.
Saturday, December 3, 2016
University Federal Credit Union Sponsors University's Rooftop Playfield
University Federal Credit Union (UFCU), Salt Lake City, Utah, has sponsored a playfield at the University of Utah.
The University Federal Credit Union Playfield was made possible through a lead gift from the UFCU.
The playfield is located on the top of a four-level parking structure in the middle of campus.
In addition, the credit union made a generous contribution to the George S. Eccles Student Life Center, which created the UFCU The Core workout center.
The dollar amount of the contributions were not disclosed.
Read the press release.
The University Federal Credit Union Playfield was made possible through a lead gift from the UFCU.
The playfield is located on the top of a four-level parking structure in the middle of campus.
In addition, the credit union made a generous contribution to the George S. Eccles Student Life Center, which created the UFCU The Core workout center.
The dollar amount of the contributions were not disclosed.
Read the press release.
Friday, December 2, 2016
Is the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area A Well-Defined Local Community?
The National Credit Union Administration (NCUA) Board is proposing to quadruple the population threshold of a presumptive community charter consisting of a statistical area or a portion thereof served by a federal credit union (FCU) to 10 million.
The Board defines a statistical area as being comprised by a Combined Statistical Area or a Core-Based Statistical Area (CBSA). A CBSA is either a Metropolitan or Micropolitan Statistical Area.
For example, if the proposed population threshold of 10 million is approved, this would allow an FCU to serve a statistical area as a well-defined local community (WDLC) with a population that is greater than the population of 41 states and the District of Columbia.
In addition, the proposal would qualify 20 additional Combined Statistical Areas as presumptive WDLCs. This means that all but two Combined Statistical Areas would qualify as presumptive WDLCs.
Under the proposal, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area would qualify as a presumptive WDLC.
The Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area has an estimated population of approximately 9.6 million people. This is below the proposed 10 million population threshold.
The region encompasses one county in southern Pennsylvania, portions of the eastern panhandle of West Virginia, central and southern Maryland including part of the eastern shore, the District of Columbia, and northern Virginia.
It includes six Metropolitan Statistical Areas and two Micropolitan Statistical Areas.
This region has numerous trade areas, multiple taxing authorities, and multiple political jurisdictions.
In my opinion, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area is hardly a local community; but rather a region.
The Board defines a statistical area as being comprised by a Combined Statistical Area or a Core-Based Statistical Area (CBSA). A CBSA is either a Metropolitan or Micropolitan Statistical Area.
For example, if the proposed population threshold of 10 million is approved, this would allow an FCU to serve a statistical area as a well-defined local community (WDLC) with a population that is greater than the population of 41 states and the District of Columbia.
In addition, the proposal would qualify 20 additional Combined Statistical Areas as presumptive WDLCs. This means that all but two Combined Statistical Areas would qualify as presumptive WDLCs.
Under the proposal, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area would qualify as a presumptive WDLC.
The Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area has an estimated population of approximately 9.6 million people. This is below the proposed 10 million population threshold.
The region encompasses one county in southern Pennsylvania, portions of the eastern panhandle of West Virginia, central and southern Maryland including part of the eastern shore, the District of Columbia, and northern Virginia.
It includes six Metropolitan Statistical Areas and two Micropolitan Statistical Areas.
This region has numerous trade areas, multiple taxing authorities, and multiple political jurisdictions.
In my opinion, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area is hardly a local community; but rather a region.
Thursday, December 1, 2016
NCUA Should Not Rubber Stamp Narrative Model for Community Charter
The National Credit Union Administration (NCUA) Board is proposing to resurrect the narrative model to demonstrate that a community that a federal credit union (FCU) wishes to serve is a well-defined, local community (WDLC).
Until 2010, NCUA required that an FCU applying a community charter submit a narrative for NCUA approval demonstrating that the residents of the proposed community had common interests and interaction. The Board abandoned the narrative requirement in favor of an objective model that gave credit unions the choice between two presumptive WDLC models -- a single political jurisdiction or a statistical area.
The Board is now proposing to allow an FCU to submit a narrative to demonstrate that the community it proposes to serve qualifies as a WDLC based upon common interests and interaction among the area’s residents.
NCUA noted that its pre-2010 experience with community charter applications has identified 13 criteria that were most useful and compelling to demonstrate common interests and interaction.
The thirteen criteria are:
However, NCUA has an obligation to examine not only those factors that support the presence of common interests and interaction in the proposed community; but also, those factors that do not support the presence of common interests and interaction. To exclude factors that would rule against the presence of common interests and interaction would bias the agency’s analysis. As a federal judge opined: “NCUA must critically analyze the facts provided in the application to ensure that incomplete and erroneous information does not lead to an improper conclusion.”
In conclusion, NCUA should not “rubber stamp” information provided by an FCU showing interaction and common interests of residents. To augment its analysis, the NCUA Board should seek comment from the public on whether the proposed community is a WDLC.
Read the proposed rule.
Until 2010, NCUA required that an FCU applying a community charter submit a narrative for NCUA approval demonstrating that the residents of the proposed community had common interests and interaction. The Board abandoned the narrative requirement in favor of an objective model that gave credit unions the choice between two presumptive WDLC models -- a single political jurisdiction or a statistical area.
The Board is now proposing to allow an FCU to submit a narrative to demonstrate that the community it proposes to serve qualifies as a WDLC based upon common interests and interaction among the area’s residents.
NCUA noted that its pre-2010 experience with community charter applications has identified 13 criteria that were most useful and compelling to demonstrate common interests and interaction.
The thirteen criteria are:
- Presence of a Central Economic Hub;
- Community-wide Quasi-Government Agency Services;
- Governmental Designations with Community;
- Shared Public Services and Facilities;
- Hospitals and Major Medical Facility Services;
- College and University Enrollment;
- Multi-Jurisdictional Mutual Aid Agreements;
- Organizations’ and Clubs’ Membership and Services;
- Newspaper Subscriptions;
- Attendance at Entertainment and Sporting Events;
- Local Television and Radio Audiences;
- Community-wide Shopping Patterns; and
- Geographic Isolation.
However, NCUA has an obligation to examine not only those factors that support the presence of common interests and interaction in the proposed community; but also, those factors that do not support the presence of common interests and interaction. To exclude factors that would rule against the presence of common interests and interaction would bias the agency’s analysis. As a federal judge opined: “NCUA must critically analyze the facts provided in the application to ensure that incomplete and erroneous information does not lead to an improper conclusion.”
In conclusion, NCUA should not “rubber stamp” information provided by an FCU showing interaction and common interests of residents. To augment its analysis, the NCUA Board should seek comment from the public on whether the proposed community is a WDLC.
Read the proposed rule.
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