ARLINGTON, Va.-NAFCU is concerned about the process NCUA follows when facilitating mergers, and is asking the regulator to provide greater transparency in its approach and with how it determines merger partners.
In a letter to NCUA Chairman Deborah Matz, NAFCU president Fred Becker stated that there is "still considerable confusion and frustration with the process that NCUA employs to find suitable merger partners," and called for NCUA to "clarify its selection criteria to match troubled credit unions with potential merger partners," urging the regulator to "cast a wide net for suitable partners."
The concern is not new, but one that NAFCU has been hearing more about from its members lately, noted Carrie Hunt, NAFCU's senior counsel and director of regulatory affairs. "We have been learning from our members that there is a lot of frustration."
Some frustrations, Hunt noted, are rising from credit unions that have been passed over without explanation, and from those involved in merger talks that perform due diligence, only to find later that they were not selected and are not given a clear explanation from NCUA why they were not chosen. "I have heard that there has been a lack of communication (from NCUA) or some timing issues," Hunt said. "I would not call them technical issues, more process issues."
Other concerns center around field of membership, where a credit union that was passed over due to FOM concerns could have "tweaked" its field of membership and become a viable partner, Hunt explained. Even taking into consideration the fact that NCUA often needs to move swiftly, Hunt contended that improvements can be made. "We recognize NCUA needs to act in emergency situations, but overall we can work together and come up with a better process."
Putting NCUA's assisted merger process on paper would be a significant change, insisted Hunt, and it is something NAFCU is asking NCUA to consider. "There is not a clear set-on-paper process," she said. "I am sure NCUA has some sort of internal process that they follow to some extent. But I think that probably differs from region to region."
According to John McKechnie, NCUA director of public and congressional affairs, the regulator's current approach to mergers balances the need for transparency with an awareness that an "overly bureaucratic process" could unnecessarily slow mergers and ultimately make them more costly to the NCUSI and CUs.
McKechine pointed out that there are also misassumptions within the industry, at times, regarding NCUA's involvement with mergers. "NCUA works proactively with troubled credit unions. This often translates into early decisions to seek a merger, and also prior to a need for NCUSIF assistance."
In those cases, McKechnie said, NCUA leaves the selection of the merger partner to the credit union officials as long as it results in a "safe and sound" continuing institution. "There have been recent instances when the industry has assumed that NCUA put together the merger when, in fact, we did not."
But when there is a potential cost to the NCUSIF through some form of cash assistance, NCUA develops a pool of merger candidates based on the ability of the continuing credit union to absorb assets and potential losses without significantly altering their capital levels. "As the average asset size of problem cases have grown, the need to seek national pools of candidates has become a more normal process," McKechnie related. "However, we still have to limit the number of candidates for logistical reasons."
NCUA often hears that only large institutions are sought. "The difficulty we have is trying to make sure that the continuing institution is still safe and sound," he said. "Our lowest cost comes from bidding out a full credit union due to the intrinsic franchise value. Once we start to break the credit union into smaller pieces, the cost to the NCUSIF goes up because credit unions understandably only want to bid on the positive parts of the balance sheet and avoid involvement with bad assets."
Opening the process so that other credit unions can look at bid packages could potentially let out proprietary information, stated McKechnie, sharing concerns over raising NCUSIF costs and inviting non-credit union bidders.
At press time McKechnie said NCUA is reviewing NAFCU's recommendations and plans to get back to the trade association. Hunt reminded that not today, nor in the past, has this issue been "adversarial" between NAFCU and NCUA. "They have said in the past that this is something they are working on, but we haven't seen anything yet. We know NCUA does not want to tie their hands, and we don't want processes to tie their hands. But we want there to be a more clear understanding of what NCUA is looking for-just what the rules of the road are."
