Will large credit unions, which can shop around for alternatives to corporate credit union services, invest capital as a condition to access corporates?
According to some, particularly those on the West coast, the answer is a resounding “no.” Credit Union Times spoke with eight of the top 20 natural person credit unions by asset size, and only two said their credit unions would participate in mandatory corporate recapitalization. Furthermore, the “yes” responses were cast begrudgingly, both including the comment “if it's mandatory, do we have a choice?”
All respondents said they are currently shopping the competition to limit corporate exposure or have already taken their business elsewhere.
Olympia, Wash.-based consultant Marvin Umholtz said of the credit union CEOs who manage shops larger than $500 million, none he's spoken to support corporate recapitalization. Credit unions of that size are large enough to shop around, he said.
If the $500 million and up club doesn't support a new corporate system, it could limit services provided to remaining credit unions that can't shop as easily outside the network. As of June 30, 348 federally insured credit unions had $500 million or more in assets, and together represent $524 billion in assets, roughly 60% according to NCUA 5300 reports. Large credit unions also hold about half of the industry's cash and equivalents and a little less than half of total investments.
As recommended in the Sept. 2 CUNA/NAFCU Corporate Credit Union Restructure Policy Task Force report, removing long-term investments from corporate balance sheets will significantly reduce their asset size, and in turn, their capital requirements.
Mike Lussier, president/CEO of the $475 million Webster First Federal Credit Union, is co-chairman of the task force. He said he had received positive response to the report, particularly the recommendation to significantly shrink balance sheets by removing long-term investments.
“For us, the major issue was to find a way to ensure the burden that has fallen upon natural person credit unions won't happen again,” Lussier said.
Lussier said the task force's recommendation to keep short-term investments available to corporates will allow them to fund payment systems programs.
This makes the prospect of corporate recapitalization more palatable to Rick Heldebrant, president/CEO of the $4.8 billion Star One Credit Union, a Western Corporate Federal Credit Union member headquartered in Sunnyvale, Calif.
However, Heldebrant said the corporate brand is so damaged, even a much smaller capital investment in WesCorp isn't an automatic “yes” for Star One.
“For me, part of it is that nobody has said what went wrong with the corporates,” Heldebrant said. “The corporates say the NCUA overreacted. The NCUA isn't saying anybody at the corporates screwed up or that they missed anything as regulator. So how can anyone say they will avoid this situation in the future?”
The Golden 1 Credit Union President/CEO Terry Halleck said the decision to replenish member capital accounts at WesCorp will be a tough one for its members.
“While many credit unions currently depend upon the valuable services provided by WesCorp, and are highly supportive of collaboration in the industry, the ultimate fiduciary responsibility of a CEO and his or her board of directors is to their individual credit union and its membership,” Halleck said. “Accordingly, I would anticipate each CEO would perform a cost-benefit analysis as to the value their individual credit union receives from WesCorp versus alternative options in the market and determine if those benefits truly outweigh the financial considerations of placing additional equity funds in at risk member capital accounts.”
Halleck said given a corporate's need to maintain a stable deposit base, mandatory capital calls would “seem imprudent” any time in the near future.
If First Entertainment Credit Union's Charles Bruen could write his own screenplay that determined how the corporate stabilization drama played out, the corporate credit union network and the NCUA's Central Liquidity Facility would explode in a giant, money-shot fireball.
To be fair, Bruen recommended a “phased shut down” of the emergency liquidity enterprise, but he didn't mince words in voicing his opposition to recapitalizing corporates and the CLF in an Aug. 31 position statement.
Bruen said First Entertainment's board supports his published position and feels exposure to corporate credit union and other share insurance fund losses, inaccessibility to alternative capital sources and outdated capital regulations, when combined with a prolonged recession, pose a threat to FECU's survival.
He said his $820 million institution has “zero intention” of recapitalizing corporates, and is developing plans to replace services currently provided by WesCorp should recapitalization become mandatory.
He said he's sympathetic to small credit unions that rely upon corporates but questioned the ability of “the severely wounded corporate network” to provide much help to any credit union, large or small.
Bruen suggested some larger natural person credit unions might step forward to provide correspondent relationships for their colleagues with fewer assets; however, he said First Entertainment has no interest in pursuing that business.
Not only was the CLF never intended to be used to provide liquidity to corporates, but the U.S. Treasury has been critical of the CLF structure since 1997, the Hollywood-based Bruen said. The NCUA's July 31 CLF accounting changes are valid, but he charges the agency was compelled to act by the Treasury.
“Think of the U.S. Treasury's Federal Financing Bank as serving in the role as the NCUA's banker,” Bruen wrote. “It has a borrower-the CLF-that has a faulty business plan, mountains of debt (that is certain to grow) and no real capital. Having a borrower in those circumstances would motivate most lenders to get very hands on. It is not surprising that the U.S. Treasury has done so under the circumstances.”
Bruen said he's concerned about the NCUA method of counting industry capital, which he called “double counting.” He cited the Treasury's 1997 credit union study, which covered the issue. Although the Treasury concluded the NCUA is following proper accounting standards in treating the deposit as an asset rather than expensing it, the agency was critical of the practice.
“The Share Insurance Fund counts the 1% deposit in its reserves. At the same time, credit unions count the 1% deposit as an asset on their own books, which makes their reported net worth higher than it would be than if they had expensed the deposit. This treatment of the same dollars as reserves of the fund and as an asset of credit unions results in double counting if one views the fund and credit unions' net worth as the total buffer available to absorb credit union losses,” states the 1997 Treasury report.
Umholtz said double counting is an understatement. If natural person credit unions, retail corporates, U.S. Central and the NCUSIF are all counted as buffer levels, the correct term is quadruple counting.
“We've seen how this practice can produce a domino effect,” Umholtz said. “These days, the only real capital is sitting at natural person credit unions. Theoretically, corporates have had some retained earnings, but if you look at the whole corporate system, how much capital is really left? For all intents and purposes, corporates are undercapitalized.”
The structure creates a no-win situation for credit unions large enough to shop around to limit their corporate capital exposure because any federally insured credit union that participates in the share insurance fund is exposed to corporate risk.
At $40 billion, Navy Federal Credit Union is larger than any corporate and doesn't use corporate services. However, the recipient of the industry's largest share insurance fund bill is still exposed to corporate losses.
“We will be paying for [corporate losses] for the next seven years, and we don't want to be put in that position again in the future,” said Dennis Godfrey, Navy Fed's chief innovation officer.
Godfrey said he agreed with the joint task force's recommendation that corporate deposit insurance be limited to that of natural person credit unions.
Umholtz said he thinks the corporate brand and business model is beyond repair.
“Yes, there were outside forces involved, but corporates got caught up in them, and I think they've cost the credit union industry more than it's ever lost in its history, up to this time,” he said.
However, Lussier disagreed, saying he thinks even if large credit unions ditch the corporate system, there will still be
enough assets left to sustain the corp-
orate network.
“Larger credit unions really need to look at our plan as all-inclusive in order to work properly,” he said. “If it's applied that way, the amount of risk taken for those who choose to participate going forward will be minimal.”
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