I sure do feel for Mark Holbrook and the folks at Evangelical Christian Credit Union. As he told Credit Union Times, the NCUA's proposed risk-based capital rule jeopardizes his business model.
In case you’re not familiar with this $1.1 billion Southern California shop, Evangelical Christian isn't your average natural person credit union. The 11,600-member credit union does have individual members, but the bulk of its assets come from churches, schools, missionaries and other ministries, and are classified as business members.
The credit union's December 2013 5300 report illustrates why the proposed capital rule would drop it from well capitalized to undercapitalized PCA status: $770,224,786 in outstanding member business loans, nearly 72% of total assets. The bulk of that amount is secured by owner-occupied, non-residential property and is structured as balloon/hybrids, and pretty evenly split between terms longer and shorter than five years.
Currently, it reports 8.80% net worth, and an 8.97% risk-based net worth ratio under current requirements. Under the proposed rule, Evangelical Christian would only have a 6.80% risk-based capital ratio and would be considered undercapitalized, along with credit union that have net worth ratios of 4% to 5.99%.
Chartered in 1964 and insured in 1977, Evangelical Christian has been serving this market for quite some time, and as a result, isn't required to abide by the business lending cap.
But if the risk-based rule is finalized as written, seems like it will have a similar effect. At the peak of the real estate boom, the credit union reported 145.78% loan-to-shares as of Dec. 31, 2006. That ratio has since dropped to 96.82% as of Dec. 31, 2013.
Of course, the credit union took some hits in its loan portfolio, as real estate values fell along with church attendance and offering plate counts. Even today, delinquencies are higher than average: 5.03% of total loans as of 2013 year-end, after being above 6% for the first three quarters of the year.
Still, Holbrook's shop is such a niche player with such an atypical credit union business plan, it's going to take quite a bit of capital to comply with the rule. Evangelical Christian ended the 2013 with a $5 million net profit; not bad, but still half the ROA of average peers. That's enough to maintain net worth above 8% and still cover loan losses, but not enough to comply with this new rule without some major balance sheet maneuvers.
I can see the NCUA's side of this argument: concentration is risky. Delinquencies higher than 5% are risky. Niche credit unions are risky; some of the largest credit union failures since the real estate crash had unique business plans like Evangelical Christian.
But those niche business plans are important in the argument that credit unions are different from banks. It would be a real shame if this proposed rule watered them down as an unintended consequence.
Another unintended consequence might be that the rule will prevent some credit unions to grow above $50 million in assets to avoid the rule, as another a small credit union CEO suggested this week.
I also wonder if the NCUA will have to adjust the rule when loan demand returns and loan-to-share ratios rise.
Sure, putting assets into government guaranteed loans and deposits poses less risk to the share insurance fund than investing in a new church building, community coffee shop, or even a residential real estate loan. But it doesn't sure doesn't serve members or communities very well.
The NCUA has done a fine job of soliciting feedback from the industry when writing final rules. However, that online risk-based net worth calculator on the NCUA's website makes me wonder how open minded it will be when reviewing comments this time around.
Since the calculator launched last month, people have been scratching their heads at the decision to make public the results of a proposed rule. Why make public numbers that not only confuse the public now, but may later have to be changed or even scrapped altogether?
Maybe the NCUA's uncharacteristic move is a signal it will move forward with this proposed rule, come hell or high water.
I can appreciate the NCUA is expected to prevent future losses like those suffered since 2007. I just hope those efforts don't compromise the missions of credit unions like Evangelical Christian and others like it.