Remote Financial Services Manager,
Credit Union Resources, Inc
Back in 2012, credit unions could rely on the RegFlex exemption to have the freedom to prudently make their own business decisions when determining the amount of fixed assets to acquire in order to improve services or establish expansion for their credit unions. When the RegFlex exemption was no longer available, it left many credit unions with the burden of applying for annual fixed asset waivers to justify their business decisions made prior to 2012; and even more unpleasant was the need to obtain pre-approval for future purchases and expansion. Many credit unions responded and asked for regulatory relief from this additional burden and requested more liberties when making choices regarding their credit union’s future.
These concerns have been heard and relief is on its way. NCUA has approved the Fixed Asset Rule which goes into effect October 2, 2015 and it will completely reform the fixed asset process for federally chartered credit unions.
What are the major changes?
- Removal of the five percent (5%) aggregate limit on fixed asset investments for all federally chartered credit unions that exceed $1 million in assets.
- Pre-approval fixed-asset waivers will not be required for new purchases.
- Annual fixed asset waivers will not be required on exisiting purchases.
- The current rule requires documented Board resolution that details definitive plans for partial occupancy on new property if partial occupancy did not occur within one year of the acquisition of the new property. It also included a deadline of 30-months for partial occupancy to occur. Under the new rule, only a single six year requirement has been set for partial occupancy from date of acquisition.
- New requirement for a Fixed Asset Management Program and Policy must be in place to monitor fixed assets that exceed the prior established five percent (5%) limitation.
What should the Fixed Asset Management Program (FAM) include?
Be conscious that if a credit union’s fixed asset ratio exceeds 5% of total equity, NCUA will more than likely evaluate that credit union’s FAM program to see if it justifies and properly monitors the fixed asset’s risk versus reward. The FAM program should include a FAM Policy that should be established by the Board and should include limitations that meet the size and complexity of the credit union and should be in line with the credit union’s established strategic plan. The FAM Program should also include an ongoing analysis to evaluate the impact on earnings and net worth levels. The credit union should be able to support that its need to run at a higher level of fixed assets, in order to expand its services, is providing the credit union with additional income and projected growth. This might be very similar to the process included in the annual fixed asset waiver projections required in the past. If a credit union cannot prove that the additional fixed assets are actually a benefit to the credit union’s operations, potential growth, and/or income be aware that NCUA can still consider the fixed asset program to be unsafe and unsound and can determine the credit union to not be in compliance with the new Fixed Asset Rule. It is also important to note that if a credit union is subject to a current fixed asset restoration plan from a Document of Resolution (DOR) or Letter of Understanding (LUA), this rule does not supersede those plans. A credit union should continue to work with their Examiner to ensure their FAM Program is safe and sound.
Are there resources available to help create and monitor the FAM Program?
Level 5, one of Credit Union Resources’ Premier Partners, offers a program called FxAMP that has been developed to provide solutions for analytical services credit unions could utilize to manage and monitor their FAM Program! Here is what FxAMP does for credit unions.
- Provides a prudent management process using “real world” analysis and financial modeling.
- Allows fixed asset investments by proving the credit union is conducting prudent planning and analysis.
- Evaluates fixed assets’ impact on the credit union’s balance sheet, income statement and ratios.
- Forecasts the overall efficiency ratio, ROA, and net worth ratios.
- Quantifies fixed assets’ influence on the credit union’s non-interest expenses.
- Provides a report for internal use by the credit union’s senior management and Board to develop a growth strategy that ensures proper management of any ongoing risk to earnings and capital.
- Informs examiners of the credit union’s fixed asset management strategy to ensure that earnings and capital do not encounter undue risk.
What to learn more about FxAMP?
To learn more about this new tool, follow this link to FxAMP: ecom.level5.com
What about State Chartered Credit Unions?
Although this rule only affects those credit unions that are federally chartered and exceed $1 million in assets, many state statues have also granted some regulatory relief. State chartered credit unions should follow up with their state regulators to get more information regarding possible fixed asset requirement changes.
Texas State Chartered Credit Unions:
Texas has seen some relief as well; however, not as significant as at the Federal level. The regulatory limitation has changed from 70% of net worth or six percent of total assets to the limitation of not exceeding the credit union’s net worth. Although this is great news for Texas state chartered credit unions, the Credit Union Department will still require prior approval for purchases that will exceed this new threshold.