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RANCHO CUCAMONGA, Calif. – The California Credit Union League is preparing to present to the NCUA Board in September its list of five recommendations for alternative methods for credit unions to raise capital. The recommendations are discussed at length, including the advantages and disadvantages for each model, in a paper prepared by the 10 members of the league’s alternative capital task force committee: Charles Bruen, CEO, First Entertainment CU, Hollywood and chairman of the committee; John Cassidy, CEO, Sierra Central CU, Yuba City; Debra Gannaway, CEO, Norton Community CU, San Bernardino; Richard Johnson, CEO, WesCorp, San Dimas; Jim Jordon, CEO, Schools Financial CU, Sacramento; John Merlo, CEO, Premier America CU, Chatsworth; Bruce Rodella, Washoe CU, Reno, Nev.; Sharon Updike, Eagle Community CU, Lake Forest; and D. Matthew Davidson, executive vice president, CCUL and committee liaison. “We are seeking ways in which credit unions can build capital so that credit unions can continue to grow and serve more consumers, and remain within their PCA-mandated net worth requirements,” said Bruen. “If a credit union is growing rapidly and determines it can’t support its growth through earnings, it has the option of finding an alternative source for capital, which is currently unacceptable, or stopping its growth,” Bruen continued. “Before PCA, credit unions could deal with the peaks and valleys associated with capital, but they can’t afford that anymore. They have to consider the safety margin they have before they butt up against the PCA wall. This has changed the dynamics of credit union growth and caused us to look at alternative sources for capital.” The five alternative capital sources identified by the task force are: * membership capital shares – shares in a credit union a member could purchase in addition to shares in a CU that a member could purchase when they join a credit union. This source would require only a bylaw change, could be effective immediately upon membership approval, and would qualify as primary capital. * member investment shares – members would be able to purchase up to a set amount per member. The shares would have a definite term, would not be insured, and would have a premium rate of return over other, insured deposit products. They would be considered a form of secondary capital. * non-member subordinated debt – would include capital investment by credit union sponsors, other credit unions, and other sources which have yet to be identified. * leased capital – like leasing a car, the lessor (a heavily well-capitalized credit union) would continue to own the capital, and it would stay on its balance sheet. The lessee (a credit union needing capital) would be able to use the capital for a fee for regulatory operating purposes. (Under this option, it could be possible for corporate credit unions to pool excess capital from small credit unions, creating a secondary market for capital.) * member paid-in capital – a hybrid of membership capital shares and member investment shares that would be based on the corporate credit union model. Paid-in capital is currently available to corporate CUs and is considered primary capital by NCUA. Such paid-in capital would be similar to membership capital shares, but it might require extended notification for a member to withdraw it. The task force advised that “legal, accounting (including GAAP-generally accepted accounting principles-requirements), and operational issues will need to be addressed as these concepts are more fully developed,” and recommended that, “Since this capital may be subordinate to other forms of capital and uninsured, it will be necessary to provide appropriate disclosures to participants.” It also emphasized that while any or all of the suggested alternate forms of capital can be of value to credit unions in general, “it is important for each individual credit union to carefully examine its own capital plan to determine which of the particular form of capital are appropriate to its needs and operations.” “If we can get our state regulator to allow alternative sources of capital for privately insured, state-chartered credit unions, then that could serve as a model for regulation on the federal level,” said Bruen. The list of recommendations was actually drawn up by the committee in response to a request by the California Department of Financial Institutions for the league’s input on what the DFI should consider as acceptable forms of alternative capital. Last year, the state legislature enacted A.B. 2503 which gives the commissioner of the DFI authority to allow CUs to consider as equity capital forms of capital beyond accumulation of earnings. “We knew that to have the commissioner recognize alternative sources for capital, we needed to first have a bill passed,” said Monica Cisneros, legislative and regulatory analyst for CCUL. A.B. 2503 did not specify any sources. “When the bill first passed, nobody had an idea what sources could be used. They left it up to us (CCUL).” Cisneros said DFI’s new authority and its specification of sources of capital are part of the department’s ongoing efforts to rewrite the regulations governing state-chartered credit unions in California. Cisneros said Commissioner Beth Dooley informed the league that she does not intend to hold up revising the regulations for CCUL’s recommendations on secondary capital. Bruen said the committee made the compilation of recommendations its first priority and “we’re moving on the fast-track.” He said the league is looking at the end of 2001 for the regulation to be enacted, given the required comment period. Chris Kerecman, vice president of federal governmental affairs for CCUL said the league is not daunted by the position the NCUA Board has taken so far on requests by credit unions regarding alternative capital. Jim Blaine, president/CEO, State Employees Credit Union of North Carolina for example had his request turned down by the agency to count as net worth a $1 million capital equity share investment from Self-Help Credit Union (CU Times Aug. 1), Kerecman said, “We don’t expect NCUA to reject our recommendations. Blaine presented his request as a fait accompli to the NCUA Board, sort of a `here it is, now accept it.’ “It’s not that the NCUA Board doesn’t have the legal authority to allow alternative capital, they’ve chosen not to address it. But if you let NCUA deal with alternative sources for capital in an environment that allows them to think it through, the agency will recognize the need for it. Our goal is to say there will be no surprises. The whole purpose of the paper is to create a foundation to begin the debate on alternative capital. All federally-insured state-chartered credit unions will eventually get alternative capital, it’s just a question of when,” said Kerecman. Bruen said he and other members of the committee had been informed by NCUA in earlier conversations that the agency has no authority under H.R. 1151 to authorize sources for alternative capital. “We disagree with that,” Bruen said. “We think Congress’ intent when it passed H.R. 1151 was that NCUA should make those decisions. NCUA needs to make a bold move and exercise their authority to do what is necessary to insure the safety and soundness of credit unions.” “We need a groundswell of support from all credit unions on alternative capital. NCUA will respond to that,” Bruen added. What if the agency doesn’t? “If NCUA doesn’t recognize secondary capital when they calculate PCA, then our work will have been a wasted exercise, and it will simply be restricted to privately-insured, state-chartered credit unions,” Bruen said. -

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