NEW YORK — For Montauk Credit Union to continue to meet the borrowing needs of its members, it may have to switch to a mutual savings bank charter, says the credit union's CEO.
Louis Jimenez considered the option as soon as he understood the risk-based capital rule proposed by NCUA.
"I read the rule, ran our calculation on NCUA's risk-based capital calculator, and my jaw hit the floor," said Jimenez, watching his 11.94% net worth CU drop to 6.79% on the risk-based calculation, well below the proposed 10.5% well-capitalized floor. "All options are on the table right now, at least as the rule currently stands. Regrettably, we may have to consider a charter change to serve our members."
Montauk is among a limited number of CUs without a member business lending cap, high MBL concentrations, and potential problems under the proposed risk-based capital rule. Most CUs that offer taxi medallion loans, as well as some faith-based credit unions or cooperatives that serve agricultural communities, have no MBL cap as they were grandfathered in when the MBL cap was established in the late 1990s.
The proposed new capital rule applies heavy risk weighting to member business loans — 100% below 15% of the loan portfolio, 150% from 15% to 25% and 200% for any higher concentration. MBL makes up 95% of the $147 million Montauk's loan portfolio. The CU has been successful making taxi medallion loans, whose balances average about $200,000 each.
What distresses Jimenez is that the credit union may have to make big changes to how it serves the membership — limiting growth and cutting back on medallion loans.
"If the proposal is not changed, the rule will dramatically change how we function," he said. "Our members may have to go to private lenders or a bank and they won't get the same kind of treatment they get from us."
Jimenez sees the proposed rule pulling his cooperative away from its mission of serving the underserved.
"I can't tell you the countless number of people we have helped build their businesses and make good lives — the countless number of checks I have signed as result of refinancing a medallion loan that members used to start a new business, open a restaurant or buy a hotel. And I've signed checks to pay for tuition for our borrowers' children to go to Harvard, Duke and other fine schools. I have seen lives change. These are hard-working people, just like my father, and it gives me joy to help them. I can't really see the things we do every day changing."
Evangelical Christian Concerned Too
In Brea, Calif., Mark Holbrook, CEO of Evangelical Christian CU has the same concerns for his membership. The $1.1 billion shop makes loans to churches and ministries across the U.S., and of its $740 million loan portfolio, about 98% is MBL.
The new risk-based rule takes the 8.8% net worth Evangelical Christian to 6.8% risk based and undercapitalized.
"For 50 years we have built our business model around serving churches and ministries," said Holbrook. "We received the MBL exemption under HR 1151 for a reason. Congress recognized the service we provide and the tremendous good we do, and we do it in a responsible way," said Holbrook, who acknowledged that CU capital reform is needed.
But the new rule creates a dilemma: ECCU needs to diversify but it does not want to expand outside its current charter. "Our credit union is exactly what credit unions are organized to do, serve individuals and groups that have a common bond," said Holbrook.
The CEO said Evangelical Christian will do what it needs to do to make changes to become well capitalized under the new rule. "But we are concerned about the lack of time given to meet the rule. It will require some radical steps on our part that will hurt our ability to serve our members."
Holbrook pointed out that it will take "a number of years" for Evangelical Christian to be considered well capitalized under the risk-based formula.
"There is no phase-in period," said Holbrook. "I know we might have two years, perhaps, before the rule becomes final, but we don't know now what the final rule will be. Banks were given upwards of four years to raise their capital level to meet their new requirements and they have the ability to raise additional capital — we do not. NCUA has shown a pattern of listening to credit unions, so we hope they listen to the needs of credit unions like ours."
At Progressive CU in New York City, which has 85% of its loan portfolio in MBL, most taxi medallion, the situation is not as tough as those facing ECCU or Montauk. Thanks to a huge capital cushion, 38.29%% net worth, its risk-based ratio is 22.27%.
"We are fortunate," said CEO Robert Familant, who emphasized that the reason capital is so strong is due to medallion lending. "The medallion taxi lending business is an excellent asset. We have excellent collateral and the bowers all pay. So we make money and our capital grows."
Nonetheless, the new rule will impede growth at the $684 million Progressive, said the CEO, and impact the number of taxi medallion loans made.
In Shreveport, La., Shreveport FCU does not make taxi medallion loans, but it does serve the underserved with a highly successful micro business lending program (Credit Union Journal, Oct. 28, 2013). CEO Helen Godfrey-Smith, while acknowledging CU capital reform is needed, said the new system should not prevent a credit union from meeting its mission.
"Congress has taken a stand that the service credit unions provide to our economy and country is so valuable that they are willing to sacrifice the tax on the income we make," said Smith.
But the $101 million CU, despite its 15.6% net worth and 19.92% risk-based capital, sees that changes need to be made for the long term if the proposed rule is not altered.
'Handwriting On The Wall'
"We see the handwriting on the wall and have already begun to slow some of our higher-risk lending," said Godfrey-Smith. "We have to in order to survive. As much as we would love to continue at our same levels, we have to moderate some of our lending and restructure our concentrations."
All the CEOs agreed that the MBL weighting under the proposed rule seems "unfair" when compared with banks' capital structure, and that the rule fails to take into consideration an individual credit union's proven ability to manage risk well.
"Here is the question NCUA needs to answer: Have there been greater losses from credit unions that do member business lending than losses at CUs that do not? I don't know the answer, but that question has to be answered to justify the heightened requirement for MBL," said Progressive's Familant, who noted CU MBL risk weighting at the high end is twice what is required of banks.
Progressive's charge-offs and delinquencies are less than peer, said Familant. "It has been that way for 25 years, and is the reason why our capital is so high. When you make good loans to hard-working people who pay you back, that is how your capital grows."
At Montauk, delinquency is 0.3%, said Jimenez. "And in the 23 years we have been doing medallion financing, we have never written off a penny of principal."
Godfrey-Smith emphasized that her CU is effectively managing the risk on its micro business lending. "When we started the program we reserved 100%, dollar-for-dollar, so we could show examiners the program is not risky. And it has not been."
Cathie Mahon, president of the National Federation of Community Development CUs in New York emphasized that credit unions serving the underserved are good risk managers. "These credit unions really get to know their members and their communities. They understand the local market and ecosystem in which the small businesses operate and can build a lending program the CU can be successful with."
Managing Higher Lending Concentrations
Mahon agreed that sometimes that can lead to higher lending concentrations, but added those are manageable since the credit union develops expertise in a lending area. "Lower income does not translate into higher charge-offs," said Mahon, who expressed that the Federation supports NCUA restructuring the CU capital system.
With CU MBL risk weighting tighter than banks, sources questioned what NCUA is basing its business lending risk rules on.
"In the banking industry, as long as you have good capital to support your lending and you are properly GAAP'd through your ALM analysis, you should not be penalized," said Richard Garabedian, partner with the Washington firm of Luse Gorman Pomerenk & Schick, which works with banks on mergers. "The proposed credit union rule is tighter. The way NCUA is handling loan concentrations requires more risk-based capital."
But credit union consultant John Tippets expects the final risk-based rule will carry the needed changes.
"Assuming NCUA goes through the deliberative process and takes into account the comments from credit unions, I suspect they will come up with a much better final rule than this first draft and hopefully one that will be good for the movement," said the former CEO of San Diego-based North Island CU who led that organization's turnaround a few years ago. Tippets CU career also includes leading American Airlines FCU.
Progressive's Familant fears what could happen if NCUA does not get the next rule iteration right.
"I wonder how many credit unions will fail or will be forced to merge? And how will the credit union movement look when we are down to 5,000 CUs with 90% of the assets in just 10% of the institutions? We will look like banks, and not appear deserving of our tax exemption."
