Credit union executives said the NCUA's new proposal on fixedassets would help them compete in the marketplace, while othersexplained it would have no impact on their operations.

The NCUA board unanimously approved the new proposed rule attheir monthly board meeting on March 19, which would remove anylimits associated with the level of fixed assets.

The agency received 36 comments on the original fixed-assetsproposal, which was approved at the NCUA board meeting in July2014.

“While most supported additional flexibility, many also saidthat neither the 5% aggregate threshold nor the fixed-assetmanagement process were needed,” NCUA Board Vice Chairman RickMetsger said in response to the feedback. “Today the board istaking those comments to heart by issuing a new rule incorporatingboth of those suggestions.”

Intended to provide regulatory relief for credit unions, the newproposal eliminates a provision in the current fixed-assets rulethat establishes a 5% aggregate limit on investments in fixedassets for federal credit unions with $1 million or more inassets.

The new proposal also removes the provisions in the current rulerelated to waivers from the aggregate limit. In addition, theproposal simplifies the fixed-assets rule's partial occupancyrequirements for a federal credit union's premises acquired forfuture expansion, establishes a single six-year time period forpartial occupancy of the premises and removes the 30-monthrequirement for partial occupancy waiver requests.

“It's important to remember that over-concentration of fixedassets can still be dangerous, and, as we know, with greaterfreedom comes greater responsibility,” NCUA Board Chairman DebbieMatz said to back up the proposal. “We do know that high levels offixed assets have been a primary or contributing factor in 16% offederal credit union failures since 2009. Therefore, each creditunion's board of directors would have to set limits that areappropriate and reasonable for their operations after the rule isfinalized.”

Dan McGowan, president/CEO of the $192 million Pioneer WestVirginia Federal Credit Union in Charleston, W.Va., applauded theNCUA's removal of the fixed-asset limitation.

“I don't view it as a direct help in the competitive sense, butit does free us up to make our own decisions, utilizing the capitalstructures of our credit unions to our best advantage,” he said.“The removal of a regulatory one-size-fits-all mandate allows theleadership of each institution to decide what's in their bestinterest without being micromanaged by the NCUA.”

McGowan said it is certainly not a good idea to tie up too muchof an institution's assets in fixed assets.

“I'm sure that was the rationale for the original regulation,”he said. “But 'too much' can be in the eye of the beholder andhighly dependent on specific circumstances and opportunities. Theremay be a temporary need to be a little heavy on fixed assets if itmakes sense in the longer term.”

As an example, McGowan cited a credit union merger where one ofthe parties is flush with fixed assets that would later beliquidated.

Since 2009, Pioneer West Virginia's fixed-asset ratio has risenfrom about 3.8% to its current ratio of about 4.3%, after dippingas low as 2.4%.

“Fortunately, the asset number, serving as the denominator inthe ratio, has helped keep the ratio down as we've grown in size,”McGowan said. “The big uptick in the ratio in September of 2013 wasdue to a merger with a failing institution, which was in distressbecause they had invested too heavily in fixed assets.”

McGowan said the credit union was healthy enough to take the hitbut is still in the process of liquidating two properties owned bythe other credit union.

James Norris, president/CEO of the $105 million MontgomeryCounty Employees Federal Credit Union in Germantown, Md., said hewas very pleased to hear the news about the NCUA's proposal, whichwould help his credit union compete with banks.

“For the past five years, our credit union has been workingwithin the restriction due to being over the 5% limit,” he said.“We've had to request waivers just to purchase IT equipment neededto replace old technology as well as any other purchases. I amhappy to say that we have reduced our fixed-asset ratiosignificantly over the past five years, and I look forward to theexpedient passage of this proposal in order to safely add fixedassets to address the satisfaction, security and profitability ofour members, and continue to enable us to compete against thebanks.”

Bogdan Chmielewski, president/CEO of the $1.6 billion Polish& Slavic Federal Credit Union in Brooklyn, N.Y., saideliminating the fixed assets cap would not currently impact hiscredit union.

“However, we believe the board's initiative to provide greaterflexibility and regulatory relief is a step in the rightdirection,” he said. “I am looking forward to reviewing the updatedsupervisory guidance to examiners that will be released once thefixed-asset proposal is finalized. The proposal may help us in thefuture as our credit union grows and we look to expand into newmarkets.”

If the NCUA board finalizes the 2015 proposal, the agency plansto issue an updated supervisory guidance to examiners that would beshared with credit unions. This guidance would outline expectationsfor credit unions in the demonstration of appropriate duediligence.

NCUA Director of Examination and Insurance Larry Fazio said theagency currently has a very early draft of the guidance.

“The guidance will ensure examiners effectively identify anyrisks to safety and soundness due to a federal credit union'sexcessive investment in fixed assets,” the proposal said.

Suzanne Weinstein, chief financial officer of the $192 millionOrlando Federal Credit Union in Orlando, Fla., said removing the 5%fixed-asset cap would benefit small to mid-size credit unionsattempting to increase their footprints in local communities orupdate their technology to better protect their members' data.

“Frequently, credit unions bump up against the 5% barrier with awell-developed strategy and strong financials,” she said. “As theCentral Florida population grows, our member-owners are moving tosuburban communities outside Orlando.”

Weinstein said Orlando Federal Credit Union needs a presence inthese communities to continue supporting their existing members anddevelop new relationships.

“By removing the 5% fixed-asset requirement, the credit unionwill be able to add additional offices without exceeding thethreshold or being required to request a waiver,” she said.

Jane Dobbs, president/CEO of the $137 million Canyon StateCredit Union in Phoenix, Ariz., said she hopes the ArizonaDepartment of Financial Institutions, which currently uses the 5%cap, seeks parity with the NCUA's latest proposal on fixedassets.

“Having spent time in federally chartered credit unions, I ampleased to see this proposal approved as it shows the regulators'willingness to support ongoing regulatory relief,” she said. “Thiswould have a positive impact on our credit union in relation tohaving the flexibility to thoughtfully improve our competitiveposition with banks.”

Dobbs said eliminating the cap would give her credit union theability to invest in areas the board and senior team agree areimportant to the credit union's membership and the ongoing healthof the institution.

“Having the flexibility to responsibly manage this ourselveswithin a strategic business plan will ensure that we can competewith banks,” she said.

Metsger said the NCUA had to propose a new rule because therevisions go beyond the scope of the July 2014 proposal.

“The main reason we don't need to micromanage in this area isthat credit unions and their management have a built-in incentivenot to invest in assets on which they can't earn a return,” hesaid. “This issue is largely self-regulating because credit unionswant to earn a return for their members on every dollar theypossibly can, and fixed assets don't earn the return that a goodloan provides.”

NCUA Board Member J. Mark McWatters said he thought the originalproposal meant an increase in regulation, but called the revisedversion a move in the right direction.

The revised proposed rule has been put out for a 30-day commentperiod.