The views of some California CEOs on a host of NCUA policies including mergers, prompt corrective action and risk management is generating some lively dialogue.
The spirited discussion led by Henry Wirz, president/CEO of SAFE CU of North Highlands, follows the summer meeting of the California Summit Roundtable, which is made up of the top brass of the 50 largest CUs. The roundtable members convened in private to discuss current issues affecting the industry, and this year’s session had the overlay of economic turmoil.
Wirz and other participants suggested that NCUA tighten up its examination process to root out problem loans early, loosen its merger policies on troubled CUs by providing assistance to acquirers, and PCA improvements.
“It should not go unnoticed that the FDIC has closed 92 banks, while the NCUA has taken on 12 conservatorships over the last year,” observed Wirz, contending that there are often parallel conditions in both industries and yet the two agencies seem to be managing troubled institutions quite differently.
Wirz also argued that tremendous energy is channeled toward propping up small and weak CUs that by rights should be merged.
“There is nothing inherently good about small credit unions,” nor is it essential that a good credit union be saved, Wirz said. “The credit unions that are merging are not meeting member needs and therefore we should be merging smaller credit unions” because statistics show that smaller CUs can’t match larger ones on most key financial statistics, he said.
Many of the smallest CUs have long been in need of being merged and yet “they’ve been allowed to operate way too long,” he said, resulting in “industry confusion” about protecting the small CU.
“I am concerned that almost every regulator has two standards of compliance and regulation: one is for large credit unions and one is for small credit unions. And I believe there has to be more conformity,” advocated Wirz.
The SAFE executive said he is challenging regulators “to look at the statistics, since I believe the lack of segregation of duties and the lower levels of internal control make smaller credit unions more susceptible to fraud, and that when fraud happens in small credit unions, it is often a very significant part of total assets and capital.”
Teresa Halleck, president/CEO of the $7.1 billion The Golden 1 CU agrees with Wirz on some of his mergers but differs on his small CU stance. “The banking approach toward regulatory assistance, with nonperforming loans guaranteed in whole or part by the regulator, ensures the acquiring institution does not take undue risk to its own safety and soundness,” she said.
“A bid process for acquisition of performing assets, after nonperforming assets are stripped out, ensures the inherent risk of the failed institution is managed within the insurance fund and not spread throughout the industry,” said Halleck, also a participant in the three-day Summit Roundtable session held in Carmel.
She also cited the government’s handling of the savings and loan crisis of the 1980s as providing clues on how CU conservatorships could be handled more expeditiously today. A bid from an acquirer to assume a branch location and corresponding deposits of a failed thrift, she explained, “could literally be purchased from the Resolution Trust Corp. for as little as a $100 premium, although some locations commanded solid premiums, and the RTC was simply happy to have an entity willing to take on the additional overhead of a branch location, including the costs of paying the contractual certificate of deposit rates.”
To ensure the losses stemming from CU failures do not place other healthy CUs at risk of demise, “increased regulatory assistance that includes loan loss guarantees or the stripping out of high-risk loans, coupled with a competitive bid process that offers surviving credit unions the option of acquiring branch locations and deposits individually or as a group would appear to provide the best overall solution for regulatory disposition of failed institutions,” she said.
Another CEO outside of California but with experience in merging a failed CU in that state is Mark Spenny, president/CEO of the $4.1 billion CEFCU of Peoria, Ill. He said he respects Wirz for what he said are his thoughtful views on the NCUA’s merger stance.
Spenny said it is up to each CU acquirer “to communicate directly with NCUA on what it has to offer” in a merger deal “to make it palatable and cost effective.” He said he suspects the NCUA “is not closed to the idea” of more flexibility on how it assists acquirers. Spenny added that it is important that the acquiring CU “not be shy, and we’re not.”
Officials of the California/Nevada Credit Union League which helped arrange the roundtable conference, the conclusions of which are kept confidential, stressed that the NCUA merger policies were not part of the formal proceedings.
However, consensus conclusions did deal with risk management, examinations and the Financial Accounting Standards Board.
“Some credit unions would like to encourage NCUA examiners to focus on managing risk rather than eliminating risk, thus giving credit unions the flexibility required to serve entire fields of membership while ensuring safety and soundness,” a consensus report read.
Regarding FASB, the roundtable report stated that “credit unions also discussed FASB’s proposed expansion of the use of fair-market values on corporate income statements and balance sheets in ways that have never before been contemplated.”
“In the extreme, even loans would have to be carried on the balance sheet at ‘fair value’ and liabilities would, likewise, have to be recorded at fair-market values.”
—jrubenstein@cutimes.com