A Capital Initiative At Fairfax County Credit Union

In the first quarter of 2015, 78 natural person credit unions with low-income designations reported a balance of $217.4 million in supplemental capital. Credit unions raise this capital from external sources instead of through retained earnings, and its benefits include enhancing the safety and soundness of the institution and expanding capacity for deposit growth. Supplemental capital  also offers regulatory flexibility.

Supplemental capital is not a short-term measure of life support; it is a resource upon which credit unions can grow. The six-dozen-plus credit unions that use supplemental capital, a group that includes Fairfax County Federal Credit Union ($297.0, Fairfax, VA), can use the funds in numerous ways to accomplish myriad functions.

A Necessary Boost

During the throes of the Great Recession, lenders were putting stringent stipulations on borrowers as foreclosures climbed at an alarming rate. Areas such as Fairfax County, VA, a suburb of Washington DC, were feeling the shock waves.

According to a 2008 Washington Post article, the DC metropolitan area had six times as many foreclosures between February 2007 and February 2008 as it did during the same period the year before. Fairfax County had 1,700 of them.

“Foreclosures were going like gangbusters and banks were not lending,” says Joe Thomas, president and chief executive officer of Fairfax County Federal Credit Union. “Some didn’t have enough money to lend, others didn’t want to lend for fear that properties were going to deteriorate more in value.”

From year-end 2008 to year-end 2010, an uptick in deposit activity coupled with negative loan growth resulted in a drop of more than 30% in the credit union’s loan-to-share ratio, according to data from Callahan & Associates.

LOANS TO SHARES

FOR ALL U.S. CREDIT UNIONS | DATA AS OF 03.31.15

Source: Callahan & Associates.

Like the economy, Fairfax County Federal Credit Union needed a boost.

A Capital Initiative

In September 2009, the credit union received certification as a Community Development Financial Institution from the U.S. Department of the Treasury. In 2010, the credit union discovered Treasury’s Community Development Capital Initiative, a program that used capital investment to assist CDFIs during the financial crisis. And Fairfax County Federal Credit Union’s low-income designation from NCUA enabled it to use the amount borrowed as supplementary capital.

The credit union borrowed 3% of its asset base at the time — slightly more than $8.0 million — to improve its net worth ratio, which had fallen to 7.19% by fourth quarter 2009. This allowed it to make real estate loans to “members who weren’t able to qualify for a loan,” Thomas says.

The term of the investment, which it received in September 2010, is eight years. However, the credit union is unable to keep the entire amount on its balance sheet as capital for the entire term. Each year after the first three, the credit union must treat $1.6 million, or 20%, of the total investment as liability on its balance sheet rather than capital. During the term, Treasury charges Fairfax County FCU 2.0% interest on the total balance and requires the credit union to pay back the complete capital injection by 2018. As of fourth quarter 2014, the credit union held $4.8 million of the initial $8 million investment as capital.

Money For Today; Planning For Tomorrow

Fairfax County FCU received its CDFI certification, in part, because of its focus on serving the county's Hispanic population. According to U.S. Census data, Hispanics comprised 15.6% of the county’s population in 2010. According to Thomas, they comprise 20% of the credit union’s membership.

You have to use supplemental capital for the benefit of both the balance sheet and the membership, not just to get over a hump.

Thomas saw firsthand the issues this population faced. At the time, the futures of mortgage enterprises Fannie Mae and Freddie Mac were uncertain. If they did continue to exist, it was unclear what considerations they would require on a mortgage loan for a secondary sale.

On the other end of the spectrum, both well-meaning and unscrupulous lenders were devising convoluted loan programs to accommodate borrowers who didn’t otherwise qualified for a mortgage, Thomas says.

With the additional capital, the credit union has served its members — specifically its Hispanic members or those with blemished credit — through affordable fixed-rate and adjustable-rate mortgages as well as other programs.

“We made the programs we had work,” Thomas says. “We were already a low-income credit union, and this was a way to help people through a horrible financial environment.”

Since the first quarter of 2010, before Fairfax County Federal Credit Union received capital from Treasury, the credit union has increased its total real estate portfolio by 73.2%. During this five-year period, first mortgages increased 63.0%, expanding from $34.1 million in 2010 to $55.7 million today.

Just as important, the credit union’s loan-to-share ratio has increased from 64.2% as of first quarter 2010 to 75.3% as of first quarter 2015. Additionally, it’s net worth ratio has topped 10% since the credit union received capital assistance in September 2010.

For Fairfax County FCU, success means not only helping members during the recession but also continuing that help. Using supplemental capital wisely, Thomas says, involves a long-term approach.

“This is money to invest in the membership and not in a short-term program,” he says. “You have to use it for the benefit of both the balance sheet and the membership, not just to get over a hump.”

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