Will NCUA capital plan encourage more bank-credit union deals?

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Banking industry groups are objecting to a new capital proposal by the National Credit Union Administration that, they say, could fuel more credit union acquisitions of commercial banks.

The plan, which the NCUA board approved unanimously at a meeting Thursday, would give large credit unions the ability to issue subordinated debt and apply it to their risk-based capital requirement. It also would expand the pool of potential investors by permitting accredited investors to purchase credit union subordinated debt, in addition to traditional institutional investors.

Questions have been raised about whether the plan could provide more financing for credit union-bank deals. Tom Fay, capital markets manager for the NCUA’s Office of Examination and Insurance, said at the meeting in Alexandria, Va., that no specific provision in the proposed rule would prevent credit unions from leveraging subordinated debt to acquire a bank.

“We don’t mandate the strategic intent of what a credit union does with that capital,” Fay said.

The fact that did not escape notice of American Bankers Association President and CEO Rob Nichols, who is among the banking industry leaders to complain that for-profit community banks are unfairly susceptible to takeovers by tax-exempt credit unions.

“Given that we have already seen a wave of these acquisitions over the last few years, now is not the time for the NCUA to create additional tools to encourage more,” Nichols said in a statement.

“Allowing large credit unions to issue debt to outside, for-profit investors could misalign the incentives of credit union executives with their member owners, and potentially crowd out low-income credit unions’ ability to raise secondary capital,” Nichols added.

Independent Community Bankers of America President and CEO Rebeca Romero Rainey was even more pointed in her comments.

“We urge the agency to withdraw its plan,” Romero Rainey said Thursday in a statement. “This proposal is yet another example of the NCUA pushing the envelope and expanding credit union powers well beyond limits justifying the industry’s tax exemption.”

The plan will now go out for a 120-day comment period, twice the usual length.

A watershed proposal

Aside from its M&A impact, the proposal unquestionably would be the most significant change to credit unions’ capital regulations in more than a decade and maybe the most important since 1998, when low-income-designated credit unions were permitted to include secondary capital as part of their net worth calculations.

As things stand now, only a relative handful of the more than 2,600 low-income-designated credit unions have taken advantage of their subordinated-debt authority. At June 30, just 68 had debt on their books totaling just under $300 million, according to the NCUA.

The proposal would extend subordinated-debt authority to 285 additional credit unions, most of them large institutions that hold the lion’s share — $730 billion — of the industry’s total assets.

As recently as 2009 the total amount of credit union subordinated debt was less than $100 million, though in recent years applications have grown larger and more complex, Fay said.

The NCUA expects it would receive 20 to 40 applications per year under the proposed rule, with the majority coming from complex credit unions. To keep pace with an increased debt-related workload, the agency would need to increase its annual legal budget $1 million, Fay added.

No new regs for bank purchases

According to the NCUA, credit unions have acquired 18 banks since the start of 2018 with another nine deals pending. There were only 14 such deals from 2013 to 2017, according to Keefe, Bruyette & Woods. While the numbers are small in absolute terms, the upward trend of late has prompted the agency to embark on a revision of its rules governing combinations with non-credit unions.

It unveiled a proposed regulation Thursday aimed at making the existing framework simpler and more transparent, rather than imposing new regulatory requirements.

“It provides some much needed clarity without imposing an undue regulatory burden,” NCUA Chairman Rodney Hood said.

Hood linked the uptick in bank acquisitions by credit unions to “evolution in the marketplace,” saying such deals can benefit consumers in underserved and rural areas. Indeed, banker frustration notwithstanding, the board appears content with taking a largely hands-off approach to the issue.

“If, on occasion, market forces and arm's-length negotiations indicates that [a] merger … between a credit union and a community bank makes economic sense, the proposed rules will assist both parties in negotiating, documenting and closing their transaction in a fully accountable and transparent manner,” said Mark McWatters, a member of the NCUA board.

The board on Thursday also completed a number of housekeeping matters, including extending the current 18% interest rate cap on loans for federal credit unions to September 2021 and confirmed required inflationary adjustments for civil monetary penalties.

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Capital M&A Growth strategies Credit unions NCUA American Bankers Association ICBA