Victoria Bennett Regional Lending Specialist. NCUA Hot Topics. CUNA Lending Council Conference. November 4, 2014

Transcription

1 Victoria Bennett Regional Lending Specialist NCUA Hot Topics CUNA Lending Council Conference November 4, 2014

2 AGENDA Short update on credit unions Discussion of hot topics Suggestions

3 12000 Decline in Credit Unions Number of Institutions by Asset Size < $50 $ $1B >$1 B Total 3

4 Lending by Loan Type 700 Credit Union Lending by Loan Type Billions of $, Q Other (10.1%) Autos (30.8%) Credit Cards (6.6%) Real Estate (52.5%)

5 Deposit and Loans Credit Union Deposits and Loans Deposits and Loans in Billions of Dollars, Q4 Deposits (Bars) Loans (Line)

6 HOT TOPICS FOR NCUA

7 Topics We ll Cover Interest Rate Risk (for lenders) Liquidity Risk (for lenders) Private Student Loans My choice: Residential Construction

8 INTEREST RATE RISK

9 State of Interest Rate Risk Loans are more concentrated in: Long term - real estate Long amortization periods commercial This in turn causes low rate loans to reprice more slowly

10 Meanwhile, On the Other Side of the Balance Sheet Volatile shares (money markets & CDs) are now a larger portion of member deposits Known as hot money for a reason As rates rise, people will chase yields, withdrawing funds if the rates aren t competitive enough And this is hard on earnings. And liquidity (back to that in a moment)

11 IRR and Lending How are you participating in ALM? Are you or another senior lending staff member on your institution s ALCO? Is your senior staff educated in it? How does it factor into: Your pricing? Concentration risk limits? Portfolio mix?

12 IRR and Mortgages How do you price your real estate loans? At FNMA/Freddie? Or a little above How do you notify your lenders regarding rate changes? How long does it take?

13 IRR and Mortgages What is your pipeline risk? What is your investor fallout risk? Investor fallout = the risk interest rates rise and the loan is no longer within the parameters of the investor s requirements Translation: the credit union has to book a loan whose value is below par

14 IRR and Mortgages Where are your adjustable floors compared to the actual rates? Your margin today: 3.5% Actual = if no floor in place How long will it take for the index & margin to rise sufficiently to break the floor? 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Your margin next year: 2% "Actual" Floor Dividend

15 IRR and Commercial When interest rates rise, investors demand higher rates of return Which means higher cap rates. Higher cap rates lower values. When granting loans, are you considering the effect of rising rates? Consider shocking the values of your CRE using prior appraisals

16 Interest rate movement Rates haven t changed in years But they have in the past.

17 WSJ Prime Rate 0% 5% 10% 15% 20% 25% 6-Nov-74 6-Nov-75 6-Nov-76 6-Nov-77 6-Nov-78 6-Nov-79 6-Nov-80 6-Nov-81 6-Nov-82 6-Nov-83 6-Nov-84 6-Nov-85 6-Nov-86 6-Nov-87 6-Nov-88 6-Nov-89 6-Nov-90 6-Nov-91 6-Nov-92 6-Nov-93 6-Nov-94 6-Nov-95 6-Nov-96 6-Nov-97 6-Nov-98 6-Nov-99 6-Nov-00 6-Nov-01 6-Nov-02 6-Nov-03 6-Nov-04 6-Nov-05 6-Nov-06 6-Nov-07 6-Nov-08 6-Nov-09 6-Nov-10 6-Nov-11 6-Nov-12 6-Nov-13 12/19/ % 12/16/ %

18 Could We Play If For a Moment? Understanding circumstances are very different today What if we had the same changes as occurred starting on today s date in 1977?

19 WSJ Prime Rate 0% 5% 10% 15% 20% 25% 6-Nov-74 6-Nov-75 6-Nov-76 6-Nov-77 6-Nov-78 6-Nov-79 6-Nov-80 6-Nov-81 6-Nov-82 6-Nov-83 6-Nov-84 6-Nov-85 6-Nov-86 6-Nov-87 6-Nov-88 6-Nov-89 6-Nov-90 6-Nov-91 6-Nov-92 6-Nov-93 6-Nov-94 6-Nov-95 6-Nov-96 6-Nov-97 6-Nov-98 6-Nov-99 6-Nov-00 6-Nov-01 6-Nov-02 6-Nov-03 6-Nov-04 6-Nov-05 6-Nov-06 6-Nov-07 6-Nov-08 6-Nov-09 6-Nov-10 6-Nov-11 6-Nov-12 6-Nov-13 12/16/ % 12/19/ % 11/4/1977, 7.75%

20 Playing IF Prime rate would rise to 7.25% within a year. In less than three years, prime would hit 17% Periodic caps would affect earnings on current book Interest rates would not return to the current rate until March 2024

21 Hopefully, the Future is Better But credit unions must be prepared for what will and might happen. We know rates will rise. But when?

22 LIQUIDITY RISK

23 Remember this slide? Volatile shares (money markets & CDs) are now a larger portion of member deposits Known as hot money for a reason As rates rise, people will chase yields, withdrawing funds if the rates aren t competitive enough And this is hard on earnings. And liquidity (back to that in a moment)

24 Liquidity Risk New Regulation as of March 2014 Credit unions less than $50 million: Liquidity policy Identify a contingent source of funding Credit unions with assets $50 - $250 million: Liquidity policy Evaluation of various scenarios & periodic testing Credit unions with assets greater than $250 million: Above, and immediate established access to the NCUA s Central Liquidity Facility or the Fed s Discount Window.

25 Liquidity Risk and Lending Are you familiar with the requirements of the NCUA s Central Liquidity Facility or the Federal Reserve s Discount Window? Your CU s line is secured by some of your loan portfolio Collateral requirements vary depending on the loan type

26 PRIVATE STUDENT LOANS

27 Private Student Loans Letter to Credit Unions released December 2013 Private Student Loans (PSLs) non-federally guaranteed Have very long maturities Cash flow may be delayed years Dependent upon a borrower s future employment

28 Expectations Establish loan policies with sound underwriting and collection requirements Debt ratio limits for co-signers, if applicable Individual loan limits School certification of expenses Implement an ongoing quality control process Ensure meeting underwriting standards

29 Expectations Provide limits Concentrations of loans per school Annual loan growth Total size of PSL portfolio Exit Strategies Ongoing portfolio Analysis

30 Portfolio Analysis The usual suspects delinquency & charge offs Static pool analysis Other metrics: Deferments Forbearances Restructures Performance of specific segments (cohorts)

31 Random Thoughts on RESIDENTIAL CONSTRUCTION

32 Inspections An inspection of the area should occur before you lend And not just via the appraiser.

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34 Interim Inspections Please do not rely on the county inspector Or on someone who doesn t have sufficient experience. Track the completion rate from inspection to inspection. Ensure inspections occur before you release funds.

35 Remediation of errors can be cost-prohibitive

36 I m no expert, but that looks a little tilted to me. Edge of driveway

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38 Track the funds The budget must be a line item and comprehensive. Expenditures must be tracked against the budget. The borrower needs to explain how they will compensate for overages.

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40 SUGGESTIONS FOR YOUR NEXT EXAM

41 Suggestions Please stop in and see us Ask questions particularly if you re concerned Let us know what we can do to make it easier for you

42 Suggestions Please have someone test the computer access codes Not someone who uses the programs regularly (IT, lending staff ) Make sure you have audit mode access to all programs Collections Optical Accounts Indirect systems

43 Suggestions Please provide as much up front as you re able If we don t ask for something, but you think it s helpful, please provide it Don t hide your light under a bushel

44 Victoria Bennett Questions? Thank you! 44