Many credit unions, through the corporate stabilization process, have come to an intersection of roads.
They can continue to follow their current path and stay with their current corporate. This may or may not necessitate a greater capital contribution, or a contribution of a more permanent nature, but it preserves much of the status quo. Or they can choose a new path leading them to another corporate or even a service provider outside the corporate system. In so doing, the path is likely to confront them with new opportunities, new challenges, and possibly no capital contributions.
Time is also of the essence as decisions to capitalize or not capitalize can impact a corporate's ability to remain viable and continue to offer its products and services. Corporates must be in compliance with NCUA's new capitalization standards by Oct. 20, but many have capital subscription periods ending sooner.
In short, many CUs are asking a lot of "what-if" questions. While NCUA cannot answer these questions, as each CU's needs are its own, it can propose a few high-level questions to help decide whether the grass could be greener on the other side.
What happens if my CU purchases capital issued by a corporate credit union?
Most corporates, and potential successor corporates to the four bridge institutions, will be soliciting capital from members. Within the business plans and the capital offering documents, these corporates are presenting a picture of their expected futures. In some cases, nothing may change. In other cases, the future corporate's business plan may look very different.
As many corporates are soliciting perpetual capital, it is imperative each CU study these documents to best understand their potential, lasting relationship with a corporate upon making a commitment, and ask themselves the some important questions.
These questions are offered for consideration purposes only. They certainly are not intended to be exhaustive, but serve to provoke discussion around due diligence:
* How is my CU's capital contribution determined? How can it change over time?
* Can my credit union expect the same lines of credit that currently exist?
* Will my corporate be making wholesale changes to service fees, or will fees be calculated on a different basis?
* Are there any restrictions on placing funds with my corporate?
* If there are restrictions going forward, where will my CU invest excess funds?
* Will any changes in my corporate's future service array directly affect how my credit union serves members?
Further, once committing capital, a credit union should treat the capital in much the same way as an individual may purchase of a share of stock in a public company. Contributed capital should not be considered merely a higher earning deposit. There is risk. The capital is there to absorb losses when they occur, and dividends cannot be guaranteed under NCUA's rules and regulations.
NCUA encourages CUs to stay abreast of their corporate's financial health and the execution of its strategic plans. When questions arise, execs need to identify the appropriate channels at their corporate to obtain answers.
What if my credit union chooses not to capitalize my corporate credit union?
Some CUs that are currently a member of a corporate that is raising capital may decide not to subscribe. These credit unions must ask what will become of their futures. Not all credit unions use their corporate's full service array, and not all corporates offer all services. The following questions are raised as food for thought before determining not to make any minimum required capital contribution:
* Will my CU be charged higher fees by or experience restricted services from my corporate, or will the corporate terminate my membership (realizing proper notice must be given)?
* Will my credit union need to secure historical check images from my corporate?
* Will my credit union need to secure a new routing and transit number, and if so, how does that impact my service to members?
* Will the CU's DP systemand personnel need to learn new systems and processes?
* How long will it take all parties to ensure uninterrupted service to my members?
*How will my investment options change?
* Will we need to establish new relationships with brokers and securities safekeepers?
* Where will I obtain a line of credit for contingency purposes?
* How will my funds management processes change when managing settlements for payments operations?
Capitalizing a corporate is decision dependent upon a CU's individual needs. Regardless of the path they choose to take, NCUA encourages credit unions to conduct proper due diligence. While such due diligence takes time, credit unions need to act quickly.
It is critical that every credit union make decisions promptly and take the necessary actions to ensure service to members can continue without interruption. In other words, the credit unions still contemplating whether the grass is greener urgently need to ask the what-if questions to determine the next steps.
Scott Hunt is NCUA's Director of the Office of Corporate Credit Unions.
