February 1, 2019 Agenda IBS Overview Regulatory Environment - PowerPoint PPT Presentation

February 1, 2019

Agenda  IBS Overview  Regulatory Environment  Economic Overview / Outlook  Impact on Lending / Portfolio  Comments & Questions

IBS History  Formed 2008 & started operations in 2009 in Fort Mill, SC  Started by 8 SC credit unions and 1 NC credit union  Through 2013 had underwritten $150 million in MBL  At YE 2013 was servicing $20 million portfolio  Relocated office to Columbia, SC in November 2014  Underwrote 232 loans totaling $77 million in 2016  Underwrote 322 loans totaling $143.2 million in 2017  Underwrote 330 loans totaling $149.5 million in 2018  $199 million in portfolio underwritten by IBS  99.8% rated Satisfactory or better

IBS Ownership Credit Union Board Member Charlotte Metro FCU Nicol Matthews - Chair Greenville FCU Paul Hughes – V. Chair SC Telco FCU Steve Harkins Carolina Foothills FCU Scott Weaver Carolina Collegiate FCU Gwen Rivers SPC Credit Union Linda Weatherford Carolina Trust FCU Tim Vogel Piedmont Advantage FCU Alice Stevens

Services Offered  Consulting  Commercial Lending Start Up  Market Evaluation  Hiring  Loan Policy  Credit Training  Sales Training  Board Training (Regs)  Participation Sales  Commercial Loan Underwriting  Loan Document Generation  Appraisal and Environmental Management  Loan Servicing

Regulatory Environment  Existing Regs  Modifications to 1-1-17 Regs  Proposed NCUA Regs

Principles Based Regulation  Purpose is to give credit unions more flexibility to implement principle-based risk management processes and policies and staff to maintain a comprehensive understanding of the borrower’s financial capacity.  Credit unions must establish risk tolerances at the relationship and overall portfolio levels to ensure that the risks taken are consistent with prudent standards within the managerial and financial capability of the credit union.

It’s all about mitigating risk

Executive Management’s Responsibility  Understand the credit union’s commercial lending activities  Have comprehensive understanding of the role of commercial lending in the credit union’s overall business model  Establish risk management processes and controls necessary to safely conduct commercial lending activities

Board of Director’s Responsibility  Approve the commercial loan policy and review at least annually  Ensure the credit union appropriately staffs its commercial lending program in compliance with 723.3(b)  Understand and remain informed about the nature and level of risk in the commercial loan portfolio, including its potential impact on the credit union’s earnings and net worth

Revising the MBL Policy  Less lawyers and more credit analysts.  “How” and “who” added to “what”.  Expected Hot Points  LTVs (often viewed within context of amortization)  Unsecured lending  Recourse  Construction and development limits, eligible costs and monitoring and disbursement procedures

Revising the MBL Policy Underwriting Standards  Underwriting analysis depth and content.  Due diligence and risk evaluation requirements of principals of business borrowers.  Financial projection analysis when historical results insufficient.  No longer need to use industry ratios for real estate financing.  Financial statement quality and verification expectations.  Collateral perfection and valuation requirements, including LTVs appropriate for specific collateral type.

The New Commercial Loan Policy  Must address:  Types of commercial loans permitted  Trade Area  Portfolio concentration limits  Single borrower limits  Qualifications and experience requirements for lending staff  Loan approval process  Underwriting standards  Risk Management processes

Revising the MBL Policy Risk Management Process  Use of loan covenants  Frequency of financial reporting  Frequency and depth of ongoing loan review and collateral value monitoring  A credit risk rating system, at inception and through life of loan  A process to track and report policy exceptions

Risk Management Reporting  Reports for Management and Board of Directors  Past due  New & renewed loans  Collateral Segmentation – 100 codes  Industry Segmentation-NAICS  Purpose  Total Credit Exposure  Maturity Report  Risk Grade Segmentation/Migration  LOC & unused line

Post 1-1-17 Changes  Message that examinations will be made based on the law and not on philosophical intent  MBLs redefined  Loans secured by 1-4 family residential real estate  Loans secured by vehicles manufactured for household use  MBLs don’t count toward cap  The cap is the lesser of 1.75 times the actual net worth or 1.75 times the minimum net worth per the risked based standards.

Post Reg Change NCUA Findings  Lack of Board oversight & involvement relative to new rules  Inadequate staffing & resources for oversight of 3 rd parties  Lack of ongoing credit administration of the portfolio  ARs, Management reports, Risk Grade migration  Inadequate or delinquent ARs  Lack of rick assessment & staffing relative to commercial lending & how it fits into the credit union’s business or strategic plan  Lack of personal guarantees with lack of evidence of risk mitigation

It’s The Economy, Stupid!! Well, if things are so good, why does it feel so bad?

It’s The Economy, Stupid-v.2018  Current expansion now into 114 months  2 nd longest in history (6 mos. away from longest)  2018 GDP growth expected just under 3%  Potentially best year of the expansion  Tax cuts help raise disposable income  Growth in personal spending  Increase in government spending  Accelerated job growth  US Dollar ended the year 7% higher than at YE 2107  Global GDP 3.7% in 2018  Strongest year of global growth since 2011

It’s The Economy, Stupid-v.2019  2019 GDP projected to be 2.3%-2.5%  Below 2018 est. 2.9%  Driven by consumer spending  Expected job growth of 2 million  Below 2018 est. 2.6 million  Currently 1 million more job openings than unemployed workers  Expected earnings growth of under 3.5%  Above 2018 est.3.2%  Growth in business fixed investment over 4%  Below 2018 est.5.0%  Core PCE Inflation above 2.2%  Level with 2018 est. 2.1%  Less Monetary Accommodation

It’s The Economy, Stupid-v.2019  Housing starts under 1.265 million  Well below 2018 forecasts of 1.35 million  Rising rates and price appreciation began slowing market in 2Q18  Fed Funds Target Range under 2.875%  A .25% increase is expected in 2019.  Second increase possible?  Not much expectation beyond two increases.  US Dollar year end expected to be less than 5% below its 2018 year end value  Global growth to slow  China, Japan and Eurozone (Brexit impact?)

It’s The Economy, Stupid-v.2019 Possible Headwinds  Current expansion closing in on record (2Q19)  Twitter storms  Trade Policy/Trade War  Deterioration of business and/or consumer confidence  See above doc title  Both dipped at end of 2018  Inflation could shoot higher  Overheated job market  Talking ourselves in to a recession

It’s The Economy, Stupid-v.2019 Possible Headwinds  Faster slowdown of housing markets  Irrational Exuberance/Equity markets  Tech, tech, and tech.  Oh yeah, and everything else.  Growing budget deficits/debt  Slower than expected global growth  China in particular (they sneeze….) Sources: Wells Fargo Securities Economic Group, Regions Financial Corp. Economic Group, Wall Street Journal

Regional Trends  Unemployment is low—Job growth is stable  Housing markets have been softening since 2Q18  Sales slowing  Value increases slowing  Some markets showed peaks in 2Q & 3Q 18  Rental vacancies are increasing in some markets  Commercial Real Estate  Still showing positive trends, but for how long?

National Trends  Unemployment is low—Job growth is stable  Housing Market softening since 2Q18  Existing home sales down 6.4%, slowest since 2015.  Will stable rates help?  Stock Market volatility  Retail apocalypse continues in 2019  Gymboree-900 stores  Chico’s-250 stores  Gap/Banana Republic-200 stores  Starbucks-250 stores  Children’s Place-100 store  Sears-DOA  Lowes-51 stores

Recent Headlines  Government Shutdown  Ended for now  Impacts won’t be known for awhile.  Estimates of up to .50% effect on 1Q GDP  Tariffs---Coming & Going  Impacts ongoing  Stocks Fall as Fears increase  Stocks Rise as Fears Subside  Which day is it today?

Recent Headlines  Drug Prices go through the roof  Jobs Cuts announced in November 2018 37% higher than year before  Auto  Financial Services  Healthcare  Global Uncertainty  Slowing Growth tests China & Europe  When China sneezes, the rest of the world catches cold  Brexit—what will it eventually mean?