Reg's Push for Volume Drives Corporate Consolidation
And then there were 16. That is the current count of corporate credit unions, after a year where all the institutions faced an Oct. 20 NCUA deadline to qualify as “adequately capitalized” per the regulator’s calculus.
This represents more than a 50% decrease in the number of corporates that had been operational in mid-2010, by the count of Dianne Addington, CEO of Catalyst, a new corporate that arose in 2011 from a merger of Georgia Corporate with Southwest Bridge.
Ask John Fiore, however, and the CEO of Motorola Employees Credit Union and a leader in the drive that capitalized Members United Bridge as Alloya said, in effect, we ain’t seen nothing yet. That is because Fiore sees a time in the near future where the number of surviving corporates will dip into the single digits. “This has become a volume business,” said Fiore, and he does not believe that there will be ample volume to support more than a handful of corporates.
For Lee Butke, CEO of Corporate One, volume may be important, but he said, “What we believe will matter most is efficiency.” That is, the corporates that survive will be the ones that have created processes that cut waste to a minimum. And not every corporate will have the skills to hit the needed efficiency levels, suggested Butke.
“I believe we now are seeing the next reinvention of the corporate,” Butke added.
For now, the stark reality is that corporates have been busily merging. In 2011, VACORP merged into Mid Atlantic; Louisiana into Corporate America; West Virginia into Volunteer Corporate; Treasure State into Kansas; Southeast into Corporate One; Georgia into Southwest Bridge, creating Catalyst. Most of those mergers are still in progress, as an overburdened federal regulator struggled to handle the number of deals that landed on its desk.
“Their resources are stretched,” Jay Murray, CEO of Mid Atlantic, told Credit Union Times by way of explaining why his institution’s merger came to fruition many months later than he had predicted.
Also this year, two corporates voluntarily folded, Iowa Corporate and Midwest Corporate, and Western Bridge fell short in its drive to capitalize as United Resources, which raised barely one-third of a projected $200 million capital goal. Also, United Resources failed resoundingly in its pitch to larger natural person credit unions, the kinds of institutions that bring dollars and transaction volume to the table. In the last numbers seen by Credit Union Times, United Resources claimed capital commitments from just nine of some 107 $1 billion-plus natural person credit unions that had been on the books of Western Bridge.
The other issue arising out of the failure of United Resources is the question of what happens to the nearly 900 credit unions that had been using Western Bridge. A clear NCUA priority has been holding that group together for a new buyer, but many in the industry express skepticism this will play out as the NCUA wishes. The sore point is that only 207 credit unions are known to have made a capital commitment to United Resources, meaning nearly 700 did not.
Yet Catalyst, winner of the NCUA's bidding proecess to take over Western Bridge, has indicated it plans to seek to collect capital commitments from Western Bridge members who wish to join Catalyst.
How many will agree to pony up? Nobody knows, but optimism is not abundant. Many of those credit unions may simply have decided to move outside the corporate system. Going with the Federal Reserve emerged in 2011 as a popular option even for smaller natural person credit unions. At the $40 million Valley Credit Union in San Bernardino, Calif., for instance, CEO Gregg Stockdale insisted his move to the Fed was seamless and that on a continuing basis the institution’s charges with the Fed would be less than it had been paying Western Bridge.
US Central, meanwhile, failed to attract bidders from within the credit union world, so the regulator was forced to open bidding to other types of financial institutions as it sought to dispose of the carcass of this once huge corporate. Fiserv and Lending Tools are said to be in that mix, although the NCUA declined to confirm this.
But more shoes are likely to fall, especially as new NCUA regulations regarding still higher capitalization levels and risk-management expertise kick in. “I see a new wave of mergers,” said Butke, “because new regulations bring new challenges.”
A first pressure point, triggered by NCUA 704.15 regulations, effectively pushes Sarbanes-Oxley style financial oversight and responsibility onto corporate credit unions, said Thomas Bonds, CEO of Corporate America. “Many corporates already have the needed oversight in place,” he said.
But not all do. At FirstCorp, Chief Operation Officer Stacy Glidden said, “Those regs alone will add several hundreds of thousands of costs,” an amount she suggested might tip some smaller corporates into deciding to merge.
Butke said that another looming challenge for many corporates, one some will probably fail, is their ability to fund their line of credit commitments to members.
Prepayment Plan Fails
A program that may have saved credit unions some of the costs for rescuing corporate CUs never got off the ground due to a lack of interest.
The NCUA announced in August that it only received $369.9 million in pledges from 799 credit unions for the prepayment program. It needed $500 million to get going.
The agency said that if the program had gone forward, this year’s assessment would have been 18.6 basis points instead of 25 basis points. It projected that next year’s assessment will be between eight and 11 basis points.
The NCUA also said that the remaining costs of the corporate credit union rescue will be between $1.8 billion and $6.1 billion between next year and 2021.
The agency explained that it had structured the program, which would have involved credit unions making interest-free loans to the agency, in response to industry comments. It said the $500 million figure was picked to satisfy the requests made in the comment letters that all funds be used for dollar-for-dollar reductions this year.
NAFCU President/CEO Fred Becker said he wasn’t surprised by the lack of interest in the pre-payment program given the financial difficulties facing many credit unions.
“Especially after the corporate credit unions’ problems, the cooperative spirit among credit unions isn’t the same as it was 12 years ago. Credit union CEOs are focusing more on their fiduciary responsibilities to their institution and aren’t thinking as much about the industry as a whole,” he said.
CUNA Senior Vice President and Chief Economist Bill Hampel said based on his conversations with credit union leaders he wasn’t sure whether there was enough support to launch the program. He said one of the reasons for the insufficient interest is that the savings to credit unions wouldn’t have been that great.
“An 18.4 basis point assessment is a lot closer to 25 than to 10, which the assessment would have been if they had gone for a $1 billion program, which is what we recommended."