Legacy Asset Plans Are The Big Worry, Says Exec
LAS VEGAS-Moving forward, corporates will need to focus on two things: effectiveness and efficiency.
That's the view of Brad Miller, CEO of Southeast Corporate FCU in Tallahassee, Fla., and the former president of the Association of Corporate CUs for the past four years. "One of the problems in the corporate system, I think is we have operated in the background and we morphed into institutions that provided a lot of products and services," Miller said. "I think where we misjudged the impact is we haven't been able to quantify the value brought to the system."
Miller said he foresees a more collaborative model as competition will wane as there is more focus on "basics." He projects an evolution in the business model for corproates where fee income carries most of the weight. "I think there are a lot of costs we can stream out of the system. We really do have to be at a point where our fee income covers operating expenses; clearly can't rely on the investment side of the balance sheet...But if we can still generate maybe 30 points of spread income, too, that allows us to basically pay 15 BPs more than what you're getting from any corporate today (with 15 BPs going to retained earnings)."
Miller believes the pending NCUA corporate rule will be close to the proposed rule and that the overall landscape will "dramatically shift." He believes U.S. Central will need to compete as a "regional corporate." "The second piece of the regulation, the bigger issue that keeps me up more at night, is the legacy asset plans," he said. "We really don't have any details of what that (NCUA) plan entails. The toxic assets are non-performing, but there are still some performing assets generating income. Getting to that 4% leverage ratio is a concern. The other concern to me is I always thought the cheapest way to fund this assets was with the funds coming in from you. We're still sitting on significant unrealized losses, so selling the assets isn't the solution. NCUA doesn't want credit unions long-term to fund the assets, they want CUs to be making loans."
If NCUA places those "legacy assets," which are also known as "toxic assets" by the agency, it could create another dilemma for CUs, noted Miller. "If NCUA manages these assets, and they are going to come to you for funding, you may be left wondering how do I allocate my capital? Do I invest in that pool? Or do I recapitalize my corporate?"