Case Study: Exploring FedChoice Federal Credit Union s Effective MBL Program

Transcription

1 Veronese 2401 Friday, July 25, :00 11:00 a.m.; 11:15 a.m. 12:15 p.m. Case Study: Exploring FedChoice Federal Credit Union s Effective MBL Program Bill Keilholtz, Director Lending Services, FedChoice Federal Credit Union Case Study: Exploring FedChoice Federal Credit Union s Effective MBL Program Presented by Bill Keilholtz Director Lending Services FedChoice Federal Credit Union 1

2 What is an MBL? Member Business Loan Defined in NCUA Regulation Part 723 Member Business Loans An MBL is a Member Business Loan (loan, line of credit or letter of credit, including any unfunded commitments) where the borrower uses the proceeds for the following purposes: Commercial Corporate Other business investment property or venture (Non-Owner occupied Residential Rental Properties over $50,000 are an MBL) Agriculture $46,500,000 FedChoice FCU MBL Loans Outstanding $41,500,000 $41,505,509 $36,500,000 $31,500,000 $32,449,084 $26,500,000 $21,500,000 $22,693,453 $16,500,000 $11,500,000 $6,500,000 $9,146,298 $8,305,253 $8,306,440 $7,946,049 $6,963,

3 $1,400,000 FedChoice FCU MBL Interest Income $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ % FedChoice FCU MBL Percent of Total Loan Interest Income 14% 12% 10% 8% 6% 4% 2% 0%

4 FedChoice Historical Chargeoffs / Losses cumulative since 2004 for our MBL Program: 0.00% FedChoice Historical Delinquency since 2004 for our MBL Program: 0.00% 4

5 Why consider doing Member Business Loans? Effectively utilize excess funds that you cannot invest in loans to your own members. As an alternative to Investments. Increased income and yield. Traditional MBL s are currently offering 3.5% - 5% yield for loans with 5-year adjustments/ balloons. Why consider doing Member Business Loans? Portfolio diversity. Borrower, industry, geographic / market and originator diversity to spread risk. Create Member Value FedChoice Borrower Rewards Program. 5

6 Investment Yield vs. MBL Yield Investment Yield MBL Yield Difference % 2.83% (0.10%) % 2.92% 0.27% % 3.34% 0.61% April % 3.39% 1.48% 5-Year Constant Maturity Treasury Yield vs. MBL Yield 5-Year CMT Yield MBL Yield Difference % 2.83% 1.94% % 2.92% 2.22% % 3.34% 1.76% April % 3.39% 1.69% 6

7 Portfolio Diversity Concentration by Property Type 4/30/2014 6% 4% 16% 46% New York City Taxi Medallion Chicago Taxi Medallion Retail / Shopping Centers Office Buildings Commercial Warehouse 23% 5% Multi-Family Residential / Student Housing Portfolio Diversity 6% 5% 7% Concentration By State 4/30/14 3% 3% 2% 2% 1% 4% 67% New York North Carolina New Jersey Illinois Texas Ohio Michigan Maryland Virginia Oregon 7

8 Portfolio Diversity Concentration By Originating Credit Union 4/30/14 3% 2% 6% 12% 5% 5% 20% 26% 21% A B C D E F G H I How do our Members receive value from our MBL Program? The program provided $1.2 million in interest income in 2013 with minimal expense. FedChoice made $2.1 in Net Income in Without the MBL s, would we have made $1.0 million? 8

9 How do our Members receive value from our MBL Program? Helped meet our Strategic and Financial Goals. ROA Budget 0.40% ROA Actual 0.64% (After Borrower Rewards) Helped make FedChoice a stronger Credit Union! How do our Members receive value from our MBL Program? We gave back to our Members! We launched our Borrowers Reward Program in The MBL program significantly contributed toward returning almost $300,000 back to our Members. 9

10 What makes a sound Member Business Lending program? Per a recent NCUA Letter to CU s: Capital Adequacy and Planning Policies and Procedures Staffing 2 years of experience (?) Systems What are the basic NCUA considerations to do MBL Lending? NCUA requires a minimum of two-years experience specific to the industry. Can be internal or external expertise. Typical Loan Policies required o Participation (if buying Participations) o Member Business Loan o Concentration o Appraisal o Industry specific (Taxi Medallion Policy or Retail Center Policy as examples). 10

11 What are the basic NCUA considerations to do MBL Lending? Business purpose or Residential Investment properties greater than $50,000. MBL portfolio lesser of 12.25% of Assets or 1.75 times Net Worth. The Cap Conundrum What are the basic NCUA considerations to do MBL Lending? Secured Loans to one borrower or related borrowers less than 15% of Net Worth. Need to set Concentration limits per industry / loan type and market area. Loan Classification methodology to do risk rating. 11

12 Strategies / Ways to grow MBL loans. What FedChoice did NOT do? Organic Growth credit union originates We are not Community our Field of Membership is not conducive to MBL growth Organic growth requires Trained staff Commercial / Business Loan documentation Loan system that can accommodate MBL structure Infrastructure Expense Patience! Strategies / Ways to grow MBL loans. What FedChoice did NOT do? Join an MBL CUSO (Credit Union Service Organization) Group of Credit Unions We wanted to control our own destiny Costs to join a CUSO Only as good as the originating capabilities of the member credit unions 12

13 Strategies / Ways to grow MBL loans. What FedChoice did NOT do? Create an MBL CUSO to originate, broker and service loans Separation between credit union and CUSO duplicate infrastructure Ability to source and sell loans Requirements similar to organic growth needed Potential long lead time to break even or make income! Strategies / Ways to grow MBL loans. What FedChoice DID do? Bought loan Participations / MBL s Easiest way to grow portfolio and put excess funds to work! Originally bought Auto and Mortgage loan pools Visited the originating credit union to do the due diligence mixed results 13

14 Strategies / Ways to grow MBL loans. What FedChoice DID do? Bought MBL s - Continued: In 2004, we bought participations in Taxi Medallion loans MBL s. In 2011, we began acquiring participation interests in traditional MBL loans. Between 2011 and 2013, we grew the portfolio $35 million. We are at our Cap otherwise we would continue to grow. The Cap Conundrum! Strategies / Ways to grow MBL loans. How did FedChoice do it? Requirements to buy MBL loans / Getting ready to buy: You need a plan! What are your strategic and financial objectives? Volume, Yield, Maturity, Risk, Diversity Board approved policies Participation, MBL and Concentration policies at a minimum 14

15 Strategies / Ways to grow MBL loans. How did FedChoice do it? Requirements to buy MBL loans (con t): Experienced and competent Personnel either internal or external expertise - MOST CRITICAL Business lending is an art that takes acquired experience. Determine your approval structure who will / can approve them in your credit union? Strategies / Ways to grow MBL loans. How did FedChoice do it? Requirements to buy MBL loans (con t): Involve your Accounting Department early on monthly remittances will have to be booked by them Get legal advice make sure that you have an attorney who can help you review the Master Participation Agreements that you will be asked to sign 15

16 Strategies / Ways to grow MBL loans. How did FedChoice do it? Requirements to buy MBL loans (con t): Try to know what you will not do Some types of Special Purpose Properties i.e. Church loans Industries that I will typically not finance i.e. Marinas or Hotels Loan Types i.e. Lines of Credit, Unsecured Loans and Letters of Credit Loans that take extensive monitoring - Credit Unions have no business doing these! If I don t understand it, I don t do it! Strategies / Ways to grow MBL loans. How did FedChoice do it? Buying MBL loans Look for MBL participation opportunities many sources As you find potential opportunities, read them carefully!!!! Do they meet your financial objectives Size, Yield, Maturity, Risk, Diversity 16

17 Strategies / Ways to grow MBL loans. How did FedChoice do it? Buying MBL loans (con t) Due Diligence Review the originating credit union (or broker) Get to know them. Review their NCUA 5300 and Financial Performance Report. Get references. Review the credit memo Remember, the credit memo is trying to sell the loan to you. Review the Appraisal - The narrative and pictures are invaluable. Get your own review appraisal. Strategies / Ways to grow MBL loans. How did FedChoice do it? Buying MBL loans (con t) Due Diligence: Are there any environmental issues? Review the Title Search and Commitment for Title Insurance. Google the subject property, guarantor, market area / neighborhood. If you decide to buy a participation interest, get the Participation Agreement and possibly the Loan Documents reviewed. 17

18 Strategies / Ways to grow MBL loans. What FedChoice DID do? What is required to monitor an MBL portfolio on-going after you buy? Monitor portfolio concentration relative to NCUA and Board approved guidelines Member Business Loans Loan Portfolio Concentration Limits - March 31st, 2014 Description Limit Actual Aggregate Total Lesser of 1.75 times Net Worth or 12.25% of Total Assets. Total Assets X 12.25% 11.46% Market or Type 80% of Aggregate Limit 9.8% of Total Assets 8.49% Total Unsecured Maximum of 10% of Net Worth 10% of Net Worth 0.00% Per Borrower / Group 15% of Net Worth Secured 15.00% 10.52% $100,000 unsecured $100,000 0% Participation Loan Market or Product Not to exceed 20% of "Unimpaired Capital and Surplus" 20.00% 9.60% Central Liquidity Definition Per Borrower / Group 15% of Net Worth Secured 15.00% 10.52% With One Originator 100% of Net Worth % 33.29% 18

19 Strategies / Ways to grow MBL loans. What FedChoice DID do? What is required to monitor an MBL portfolio on-going after you buy? Annual review o updated financial statements, tax returns and credit reports o narrative on the financial results and any other pertinent information o updated Risk Rating / Loan Classification Guarantor 15.0% Experience Liquidity (borrower and guarantor) Loan Purpose Weighting Score Weighted Score 5.0% >5 Years 3-5 Years 1-3 Years 1 Year or less Cash Reserves >12 months Debt Service 10.0% Refinance, No Cash Out Cash Reserves 6-12 months Debt Service Refi W/Cash out, Purchase Cash Reserves 4-6 months Debt Service Purchase w/seller Subordinate Financing Cash Reserves 2-4 months Debt Service Develop. Or Construction w/perm Loan commit. Start Up business Cash Reserves <2 months Develop. Or Construction w/ no Perm loan commit LTV 10.0% < 55% 55% - 65% 65% - 75% 75% - 80% > 80% % Office Bldg, Shop Center, Multi-Family Housing, NYC Taxi Land Unsecured Type of Collateral Medallion 15.0% 2.0X Debt Service Coverage Ratio History of % Cash flow Warehouse, Chicago Taxi Medallion Special Purpose Building 1.50X-1.99X 1.25X-1.49X 1.0X-1.24X 3+ Years 2+ Years 1+ Years <1yr Financials <1.0X No Financials Guarantor s 5.0% > < FICO(s) Character/ Relationship with CU Industry Market Conditions and Factors 10.0% Excellent Very Good Good New Business but known to CU 10.0% Excellent Very Good Good Potential Market Concerns New/ Unknown Significant Market Concerns

20 1a Excellent ( ) 1b Very Good ( ) 1c Good ( ) 1d Pass ( ) 2 Watch ( ) 3 Substandard ( ) 4 Doubtful( ) 5 Loss (Less than 1.50) Strategies / Ways to grow MBL loans. What FedChoice DID do? Why do an annual review? o Need to be aware of any warning signs of potential or real problems. o Plus NCUA requires it! 20

21 So, is it worth it to buy MBL participation loans? $46,500,000 FedChoice FCU MBL Loans Outstanding $41,500,000 $41,505,509 $36,500,000 $31,500,000 $32,449,084 $26,500,000 $21,500,000 $22,693,453 $16,500,000 $11,500,000 $6,500,000 $9,146,298 $8,305,253 $8,306,440 $7,946,049 $6,963,

22 $1,400,000 FedChoice FCU MBL Interest Income $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ % FedChoice FCU MBL Percent of Total Loan Interest Income 14% 12% 10% 8% 6% 4% 2% 0%

23 Conclusions / Summary / Take-Aways MBL s can effectively utilize excess deposit funds that you can t loan to your own members or invest. You can achieve yields / returns in excess of Investment returns or Government Securities. Need to adhere to NCUA and Board approved regulations, guidance, policies and procedures. Conclusions / Summary / Take-Aways Establish your strategic and financial plans and goals. What do you want your MBL program to achieve? MBL s take expertise, but that can be either internal or external. If you don t understand it, don t do it! MBL s can provide an opportunity to create value and return money to your Members! 23

24 Any Questions? Contact Information: Bill Keilholtz Office: Cell: