Fixed Asset Ruling

"The fixed asset ceiling does not allow our credit union to grow to our potential." This statement has been expressed by some credit unions as they work to balance technology and branch and operations facility costs with growth opportunities.

The National Credit Union Administration's recent change to the fixed asset ceiling rule for federal credit unions, which becomes effective Oct. 2, aims to mitigate this problem. The new final rule:

• removes the 5 percent aggregate limit on federal credit union investment in "fixed assets," understood as property and equipment that cannot be easily converted to cash; in place of the limit, NCUA will use the supervisory process to monitor a federal credit union's level of fixed assets; and
• simplifies the current fixed assets rule's partial occupancy requirements for premises acquired for future expansion by establishing a single six-year time period for establishing partial occupancy, regardless of whether the property is improved or unimproved. The previous requirement to apply for a partial occupancy waiver within 30 months has been eliminated. Additionally, there is no regulatory deadline for full occupancy, just a requirement that the FCU plans to fully occupy the property within a reasonable time. Notably, FCUs may still apply to the NCUA Regional Director for a waiver from the six-year partial occupancy requirement.

NCUA Board Chair Debbi Matz has called the final rule a significant milestone in a year of regulatory relief. She expects that when the rule takes effect on Oct. 2, federal credit union boards of directors will have more freedom to make their own decisions about the appropriate level of fixed assets to hold-in other words, about whether to upgrade facilities and technology or purchase other fixed assets.

What is the Impact of This Change?

As a result of this change, CUs should be able grow their branch networks faster. They will be better able to "land bank" property-that is, to choose to buy property in markets sooner when costs are lower, and then develop the property in the future. The change also provides credit unions a longer investment cycle so they have more time to ride a market and not be forced to sell property in a downturn.

The change also enhances a credit union's ability to develop a property to its full potential. For example, a credit union competes against Walgreens, Starbucks, McDonalds and others and wins a prime one-acre corner lot with high traffic and visibility, easy ingress and egress and adjacency to a high volume and quality retail center. The evolution in branch business modeling and design suggests that a 2,800-square-foot branch will support market potential for the next five to 10 years. A small branch on a million dollar piece of property may be underutilizing the site. The regulatory change makes it easier to develop the site to its full real-estate potential by doing something like constructing a two-story building that can be leased at retail rates now and allow for future expansion of credit union high value services providers like mortgage, wealth management, small business, and insurance in the future.

In the past, the regulation also sometimes left credit unions facing the need to choose between adding branches and building a new headquarters; the new rule should eliminate this dilemma.

Which Credit Unions are Most Affected?

The evolution of this regulation has more impact on small credit unions than large. In a recent article, Glenn Christensen, CEO of CEO Advisory Group wrote that "$1 billion-plus credit unions tend to have a smaller portion of assets tied up in land and buildings, with the majority having a land and building asset ratio below 2 percent."

Since 2009 credit unions have grown their branch network by 1,659, or about 9 percent. Sixty percent of the growth was by credit unions with over $1 billion in assets. Conversely, credit unions with less than $50 million in assets lost 440 branches. The table below illustrates the impact of size on the ability to branch.

Whether you are a small or large federal credit union, the regulatory change is good news, as it provides more freedom to reach your goals within your own guidelines.

Paul Seibert, CMC, is principal/financial and retail design, for CUES Supplier member EHS, a NELSON Company, Seattle.