KBRA Affirms Ratings for Global Federal Credit Union

KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for Anchorage, Alaska-based Global Federal Credit Union (dba Global Credit Union)(“Global” or “the credit union”). The Outlook for all long-term ratings is Negative.

Key Credit Considerations

The credit union’s earnings profile has been constrained in contemporary periods due to lower levels of noninterest income, combined with an elevated expense base representing 3.5% of average assets and an increase in provision expense compared to historical levels driven by an increase in credit costs. The credit union has historically had a diversified revenue stream complemented by solid fee revenue with noninterest income representing 40% of total revenue; however, the impact of the Durbin Amendment, combined with management's strategic decision to modify the credit union's fee architecture (eliminating NSF and significantly restructuring overdraft fees), and lower mortgage originations, has caused noninterest income to decline to 23% of total revenue, weighing on overall earnings. The proposed acquisition with First Financial Northwest Bank (NASDAQ: FFNW) ($1.5 billion in assets) is expected to partially offset the headwinds from the Durbin Amendment, which should improve the credit union’s earnings profile. Nonetheless, should a more challenging credit environment arise, the credit union’s weakened earnings profile provides limited ability to absorb rising credit costs, NCOs and NPAs have been impacted by the consumer focused model, notably, by auto and unsecured loans. In recent periods, NPAs have increased to 1.02% of loans, though loss content remains well below GFC levels at 43 bps. We also note that the loan portfolio is highly granular with an average loan size of just ~$21,500, reducing the possibility for outsized loan losses. Additionally, the loan loss reserves remain adequate at 1.12% of total loans, covering NPAs by 141%. Positively, the credit union’s asset sensitive balance sheet, given that 51% of the loan portfolio is in shorter-duration auto loans, allows the earning asset base to reprice relatively quicker, and combined with a solid granular, low cost core deposit base, has contributed to 15 bps of NIM expansion through 9M24. Global maintains a net worth ratio (NWR) of 10.6% supported by the inclusion of $110 million in subordinated debt, though we expect proforma capital to edge down to the mid 9% range following the close of the FFNW acquisition. Nevertheless, the combined entity should remain comfortably above well capitalized. Global’s strong consumer banking profile is a key driver in its funding base which is ~90% core funded by member shares. The credit union maintains a healthy balance of NIB deposits at 25% of total deposits with ample sources of liquidity.

Rating Sensitivities

A return to Stable Outlook could occur from a stabilized credit environment in combination with improved earnings performance over time. Additionally, the successful integration of the FFNW merger would be viewed favorably. Given the Negative Outlook, a rating downgrade is possible, which could result from material deterioration in credit that further weakens the profitability of the credit union, negatively impacting Global’s ability to maintain solid capital levels.

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Methodologies