Reg Relief Focus of Fixed-Asset Rule
The NCUA's plan to eliminate the 5% cap on fixed assets would provide regulatory relief for federal credit unions, Board Member Rick Metsger said.
Under the proposed rule approved at the agency's July 31 board meeting, credit unions would be required to put together a fixed-asset management plan instead of going through the existing waiver process.
“We thought rather than you (credit unions) coming to us and us going back and forth spending a lot of time approving something, perhaps it's better to allow credit unions to develop their own fixed-asset policy and manage their own assets as they see best,” Metsger said.
According to the text of the proposed rule, “an FCU's [fixed assets management] program is subject to supervisory scrutiny and must provide for close, ongoing oversight of fixed-assets levels and their effect on financial performance.”
Metsger said there are not going to be any changes for credit unions that are under the 5% threshold.
The board approved a technical correction to the fixed-assets rule at Metsger's first board meeting.
Following that September 2013 meeting, Metsger asked NCUA staff to review any issues with fixed assets in terms of the effect on delinquency, return on assets and the risk to the credit unions that received waivers versus those that did not.
“We found out that over the five-year window that we looked at (through December 2013), the changes in net worth ratio, ROAA and delinquency ratio were comparable between federal credit unions with high and low fixed asset ratios. In other words, there was not really any difference,” Metsger said.
Metsger's staff also discovered that last year, 78% of the waivers related to the 5% ratio limit were approved and 10% were sent back for more information.
NCUA Chairman Debbie Matz said the proposed rule would streamline the process for federal credit unions to occupy land or buildings.
“When you want to update your facilities, upgrade technology, or make other purchases that have no impact on safety and soundness, NCUA should not micro-manage your individual business decisions,” Matz said at NAFCU's recent Las Vegas conference when announcing the proposal.
“It makes life easier for them [federal credit unions] and it makes life a lot easier for us,” Matz said at the July 31 board meeting.
Dan McGowan, EVP/CFO at the $180 million Pioneer West Virginia FCU, said eliminating the fixed assets ratio cap is an excellent plan.
“We at Pioneer WV FCU are pleased with the NCUA's decision to drop the fixed-assets rule. In fact, we wish they had done so just a couple of months ago, when we, and our lead examiner, were in the process of writing up a request to exceed the 5% limit in order to purchase property for the construction of a new corporate headquarters building,” he said.
“The request was granted, but a lot of unnecessary work went into justifying it. And, we haven't even yet exceeded the old cap. Philosophically, we appreciate the fact that the NCUA can occasionally acknowledge that credit union boards and management can make good decisions about such things without micro-managing. Perhaps the same mindset should be applied to risk-based capital,” he added.
McGowan also told CU Times that eliminating bad management that overindulges in fixed assets without adequate ROI is a good move for credit unions.
“It's obvious that some credit unions have overly optimistic leadership when it comes to capital expenditures,” McGowan said.
He said Pioneer merged a troubled credit union into its operations last year, which had a fixed-assets ratio of 11.3%,
“We're now in the process of liquidating a vacant lot it had purchased for future expansion. That credit union's problems were largely the result of the ‘if we build it, they will come’ idea, except that no one came,” McGowan said.
Dave Osborn, CEO of the $1.4 billion Anheuser-Busch Employees Credit Union in St. Louis, said eliminating the cap would not affect his credit union.
“We have 28 branches but our fixed asset ratio is only 2.5%. Most of our out-of-state branches are on sponsor property at low or no rent which help us support branches at small employee locations. However, I have been in the credit union industry for 38 years and I have seen some small credit unions build huge offices that they could not afford and in some cases destroyed the credit union,” he said.
“So, it may be a good idea to let each credit union decide what is right for them, but the NCUA should require each credit union to establish a policy that states their fixed asset limit. Then NCUA should monitor their position in the annual exam,” Osburn added.