KBRA Affirms Ratings for Truliant 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 Winston-Salem, North Carolina-based Truliant Federal Credit Union (“Truliant”, "TFCU", or “the credit union”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Truliant's seasoned management team with a mix of credit union and banking experience, tax advantaged business model, and the granular/consumer-focused banking model, lending to a durable deposit base with core deposits representing 86% of total funding. That said, we recognize the higher rate environment has pressured funding costs with the cost of deposits increasing 211 bps since 2022 to 2.54% for 1H24, however Truliant’s asset sensitive balance sheet, given a shorter duration loan portfolio with 34% of loans in auto and a weighted average life of ~22 months, has benefited from the higher rate environment with average earning asset yields increasing 246 bps over the same period. As such, NIM has remained relatively stable at 4.02% through 1H24. However, earnings have been negatively impacted in contemporary periods due to an increase in provision for loan loss expense related to elevated NCOs that are currently near levels TFCU experienced during the GFC. Due to the consumer-oriented loan mix, inflation and the higher interest rate environment has impacted low-to-medium income borrowers, resulting in NCOs increasing to 1.58% in 2Q24. The majority of charge-offs are comprised of auto loans (51%) followed by unsecured consumer loans (47%). That said, the loan portfolio is highly granular, with an average loan size of ~$20,000 which is less susceptible to large loss given defaults like that of a commercial bank with less than 1% of commercial loans in nonaccrual status. Additionally, TFCU maintains adequate loan loss reserves representing 1.07% of total loans, covering NPAs by 141%. While capital ratios have declined from historical levels due to robust loan growth in recent years reflected by the net worth ratio and total risk-based capital ratio falling to 8.8% and 11.5%, respectively, the credit union maintains an adequate buffer above the minimum for well capitalized thresholds (180 bps for net worth and 150 bps for total risk-based capital) to support management’s target of mid-single digit growth.

Rating Sensitivities

Improved scale and geographic diversification, as well as maintaining solid profitability metrics, above peer capital metrics, and improved credit quality metrics consistent with the higher rating category, could result in positive rating momentum over time. Conversely, negative rating action may occur should credit quality metrics continue to worsen negatively impacting profitability metrics beyond peer levels, capital metrics deteriorate, notably net worth dipping below 8%, with a material change in the funding profile.

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Methodologies