2010 Credit Union Trends

In September 2010, the National Credit Union Administration “NCUA” issued a letter to the board of directors of federally insured credit unions outlining trends they are seeing for the first six months of 2010. Overall, the credit union industry remains sound. However, there are negative trends affecting certain types of products, some of which are not a surprise as economic uncertainties continue:

• delinquencies in real estate and business member loans are increasing,
• loan modifications continue to rise; now totaling $10 billion,
• interest rate risk growing; the industry continues to hold significant amount of long-term fixed rate loans, while shares are primarily in rate sensitive or short-term accounts,
• greater loan losses persist in many parts of the country, and
• credit union members filings for bankruptcy rise.

For the past few years, our clients have been and continue to experience these issues as they have sizable exposure to member business loans with heavy concentrations in commercial real estate. We have seen the delinquencies, modifications and foreclosures spike dramatically within a short period of time. Modifications of interest rates to 2.5% for 12 -24 month periods are not unheard of as our clients cope with the mounting number of problem loans.

As a result of these trends, the industry can expect heightened review by the NCUA and other regulatory bodies, especially in those regions struggling with high unemployment, declining real estate values and failing business. Regulators will examine and further scrutinize credit unions’ exposure to member business loans, especially those heavily concentrated in commercial real estate, and interest rate risk.

Credit unions must continue to be vigilant and prudent in their risk management practices to control these risks. They need to be more proactive than ever before and identify problematic loans 12 -24 months before they become serious issues by increasing the number of asset reviews to more than once a year, as things move quickly in this market. In addition, they need to get a better understanding of their borrower/guarantor’s financial picture. Though the loan might appear fine, there might be issues with the sponsor. Some Issues to vet out are:

• does the borrower/guarantor have significant exposure to real estate,
• how will his liquidity and net worth be impacted if real estate values decline another 10%,
• how much debt does he have and how much matures in the next two years,
• are any of his assets under foreclosure,
• is he still employed,
• is he involved in any litigation, and
• what’s his current FICO score?

Not all the news coming from the NCUA is negative. The aggregate net worth ratio is holding steadily at 9.9% and over 94% of federally insured credit unions still exceed the statutory definition of “well capitalized”. For 2Q2010, credit unions lowered their cost of funds at a faster rate than their decline in loan yields and reduced their provision for loan losses by 31 bps, which contributed to an increase in earnings by 23 bps.

At Lighthouse Advisory Services, we are helping our clients tackle these negative trends. We created the Stoplight Solution to help our clients identify and address these issues for their internal and regulatory review. The Stoplight Solution categorizes the portfolio into “GREEN, YELLOW and RED” buckets. By triaging the portfolio in this manner we can identify and address those problematic loans by either quantifying the impairment value or highlighting those issues that management needs to address quickly. Our clients have used our work to supplement their analysis for regulatory review. Go to Testimonials and see what they are saying about us and our work. Want to learn more? Give us a call at 212-398-8316.

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