NORTH HIGHLANDS, Calif. — NCUA's recent guidance on corporate restructuring has many CEOs contending the regulator has "pulled the rug out" from under them, reversing its original "hands-off" policy regarding reconstitution of the corporate network.
The result, judging from extensive interviews by Credit Union Journal, is that CEOs in all parts of the country say they are dissatisfied with the agency's management of the corporate recovery and are questioning the future of the corporate system.
Earlier this month NCUA rejected proposed plans to combine two or more of the four failed corporate credit unions--surviving now as so-called bridge corporates--to create a single entity with a nationwide reach. NCUA Chairman Debbie Matz said in a policy statement in mid-February that the agency was worried consolidation of two or more bridge corporates could create a new entity that would pose new systemic risk concerns for NCUA,
Prior to the release of that policy statement, NCUA had distributed a Letter to Credit Unions referring to plans for a major consolidation among corporate credit unions or a nationwide payments CUSO that would concentrate resources. Such a concentration of services or the aggregation of service volumes in one entity, said NCUA, would introduce systemic risk that may create an unacceptable "too big to fail" scenario.
Confusion After Call
According to sources present at a recent conference call between NCUA and the advisory councils of the bridge corporates, many participants came away from the meeting confused and angry over NCUA's direction, and—due to uncertainty over NCUA's plans—are concerned over advisory boards' ability to meet the March 31 deadline for detailed business plans.
But the larger issue, sources told Credit Union Journal, is the future of the corporate system itself, which some CEOs believe NCUA's new position jeopardizes. Large CUs say they have options, such as working directly with the Fed, that they acknowledge smaller CUs do not.
According to Henry Wirz, CEO of the $1.7-billion SAFE CU, which has a representative on the Western Bridge Corporate advisory board, NCUA's latest position is a "tragedy." Wirz said that the final corporate rule appeared to state that natural-person and corporate credit unions would be allowed to shape the future of the corporate network. "Now they have gone back on that original concept, imposing additional restrictions that I think will result in the unfortunate outcome of not being too big to fail but rather too small to succeed."
Fear of Failure
Wirz usggested NCUA's apparent "fear of failure is so pervasive that it creates an environment in which you really won't move forward. I think the risk NCUA faces going forward without a viable corporate system is that credit unions will rush for the exits. There will be panic about the right kind of vendors to replace the services they currently receive from the corporates. And there has been a long history here in California of banks offering these services to credit unions, and then due to a merger and in a very unorganized and helter-skelter way, pull out of the business and leave CUs high and dry."
What NCUA is doing, observed Brandon Michaels, CFO for the $420-million Mazuma CU in Kansas City, Mo, is regulating the industry by "looking in the rearview mirror. It's as if they go inside Congress, submit their plan for regulation and then go to meetings with the FDIC, OTC, and OTS, pick up on certain things, and say, 'We didn't think about that. Let's send out a letter to credit unions and say watch out for systemic risk.' That's the rub. I am not sure they are the most forward-thinking organization."
The agency's course change, said Michaels, who is a member of the Southwest Bridge Corporate advisory council, is frustrating, and makes it difficult for Southwest to know exactly how to proceed. The advisory board is currently moving forward with plans to merge Southwest with Georgia Corporate FCU.
"So now you are left to wonder if the capital plan and business model we have devised, which are already at NCUA, will even meet what the agency is looking for. Well, it would have been nice to have this latest guidance a little earlier. Kerry Parker and Diane Addington, who are intricately involved in the development of our plan, have contacted NCUA, voiced concerns, and asked if they can submit an addendum or attachment to the filing of our plan."
Parker, CEO of A+ FCU in Austin, Texas, and Southwest Bridge Corporate executive committee chair, told Credit Union Journal Southwest is not changing its plans to merge with Georgia Central. "I think everyone in the industry has a question about this. But we have received votes from our membership, we're out doing town halls from Oregon to Texas, and we have not changed our agenda."
Helen Godfrey-Smith, CEO of $90-million Shreveport FCU in Louisiana, said she is concerned for small CUs if the corporate system is weakened. "When I am doing risk-management for different areas of our credit union now, there is an area of risk that has never been there before--and that is the platform from which these (payment and correspondent) services are offered."
Small credit unions simply do not have the capacity, and it is costly, to switch service platforms. "It would be difficult for us, and we are not a tiny credit union," said Godfrey-Smith, a member of the Southwest advisory council. "So I cannot imagine what it must be like now in the board rooms of the smaller credit unions wondering if they have to set up service platforms all over again."
Seeking Proposals
One small CU leader, requesting anonymity said he is already seeking proposals from outside parties, even though "we may get ripped apart by NCUA, saying we have not done our due-diligence."
In San Bernardino, Calif., Gregg Stockdale, CEO of the $35-million 1st Valley CU and a member of the Western Bridge advisory council, agreed with others, saying NCUA hs not provided "clear direction."
Commenting on NCUA's risk aversion, Stockdale said the "only way to make money is to take some risk. Initially the corporates took stupid risk. But you can't really do anything without taking some risk. NCUA really neutered the corporates with the initial rule; now how much more risk can they possibly take off the corporates' shoulders? Pretty soon the biggest risk on the planet will be NCUA themselves."
