When it comes to monitoring a credit union's business lending portfolio, ensuring that there is synergy between the CEO and the board of directors can go a long way in identifying risk exposure.
Teresa Halleck, president/CEO of the $5 billion San Diego County Credit Union, is such a strong advocate of that connection, putting together a management analysis of the cooperative's member business lending portfolio was among the first action items since taking the helm five months ago.
"For any type of lending, a CEO needs to make sure the board gets good information," Halleck said. "Board members have a fiduciary responsibility, and it's important for them to keep up to speed on various risks, too."
Halleck was a guest panelist during a Jan. 25 webinar hosted by Credit Union Times' Credit Union Leadership Forum. She, along with Paul Peterson, NCUA associate general counsel, and Stuart Levine, chairman and CEO of Stuart Levine & Associates LLC, shared insights on a NCUA rule that requires board directors to have financial proficiency training.
A periodic evaluation of the credit union's MBL portfolio looks at various risks, Halleck explained. She said in a shaky lending environment, factors such as determining if the collateral is holding value, how the portfolio is structured and divided, if the borrowers are making timely payments and if the debt is being properly serviced are examined.
The analysis also requires looking deep beneath the service, Halleck said. Hypothetically, if someone is making timely payments, there still might be some risks if the loan is underwater. If the borrower decided to default, there's exposure on the collateral side.
"What you're doing is re-underwriting the loan. You're looking at a borrower's credit worthiness, the market value of property, concentration risks and where the property is located."
Looking at vacancy rates, for instance, if there is an abundance of vacant office spaces, a tenant can go back to the lender and say he or she will move across the street if the rent is not reduced, Halleck said. Other exposures triggered by life events such as a death, job loss or divorce that often impacts FICO scores are prevalent on the consumer lending side. The commercial lending side contains real estate analysis that dives into market values, borrower performance and credit scores.
Once the analysis is completed, a report is prepared for the board of directors. Halleck said it doesn't contain the borrower's personal information but offers a snapshot, including trends year over year. The information can help pinpoint if the loan portfolio is growing, what the pay-downs are and other elements that aid in maintaining a proactive approach.
"It puts the board in a great position to monitor and carry out fiduciary responsibilities," Halleck said.
Halleck said ideally, the reports are presented to the board annually or twice a year, particularly in an unstable lending environment. SDCCU also hires an independent third party firm to do a stress test of its lending portfolio.
According to NCUA December 2010 Call Report data, SDCCU had nearly $480 million in member business loans. Halleck said its portfolio is geared more toward high quality loans and not on chasing volume.
Prior to coming to SDCCU, Halleck served as president/CEO the $7.3 billion The Golden 1 Credit Union, which did not offer business loans. Still, with any type of lending, keeping the board consistently in the loop can only help, not hurt.
Halleck acknowledged while the reports may be expensive for some credit unions, if they are important to the CEO, then they should be just as important as sharing them with the board.