Although NCUA’s final rule on corporate credit unions eliminates some onerous provisions from previous versions, it limits retail credit unions’ choices and increases the need for financial scrutiny. And with fewer corporates left, some credit unions are looking outside the credit union movement for services.
Forming new relationships
Roger Ball, president/CEO of $350 million asset Call Federal Credit Union, Richmond, Va., is on the board of Virginia Corporate Federal Credit Union at least until it merges with Mid-Atlantic Corporate Federal Credit Union.
“Virginia Corporate is structured strictly as a pass-through entity for credit unions,” he explains. “It budgeted with a very narrow margin because we knew it didn’t have to make a profit; it just provided services credit unions needed.”
The corporate’s business plan didn’t call for large reserves or build in high net income. “So with the new requirements, we had to look for a merger partner,” says Ball. “If the system had been designed with risk-based capital requirements, many corporates would remain safe and viable.”
Virginia Corporate, says Ball, “never held toxic or unguaranteed assets.” He’s also comfortable with Mid-Atlantic Corporate. “I’ve dealt with it in the past and I have a lot of respect for the organization,” he says.
NCUA’ s rule on corporates will affect every credit union, he says. “Most have a long history of affiliation with their corporates, some with more than one. They’ve come to rely on them for at least the minimum pass-through services.”
NCUA formerly encouraged credit unions to do business exclusively with corporate credit unions. “We wanted to differentiate our industry by relying on corporates instead of banks,” says Ball. “But now corporates probably won’t be able to provide everything we need. We’ll be forced to go back and form new relationships within the banking industry.”
As corporates merge with other entities and credit unions lose their familiar local ones, they’ll change their habits, he predicts, “Especially small credit unions.
“They never had to worry about due diligence with their corporates,” he adds. “Now, knowing their deposits aren’t fully insured, credit unions will have to perform due diligence on other financial institutions.
“They’ll have to rely on the strength of the financial institutions they deal with, and many credit unions don’t have experience in that area. It might be intimidating, and for smaller credit unions, this whole issue might be the instigator to look for mergers themselves.”
On the plus side, the new requirements will ensure corporate credit unions implement operating efficiencies and keep their profit structures in order. “But they’ll have to change their pricing to meet the capital and retained earnings requirements,” Ball speculates.
“The few corporates left won’t be able to sustain their line-of-credit systems,” he adds. “Many credit unions will have to look for lines in other places. It will be the first time many credit unions will have to worry about the old adage, ‘Don’t put all your eggs in one basket.’”
On an emotional level, says Ball, it’s sad to see something that has worked so well diminished by a few poor business decisions and calculations. Some corporates, he says, got in over their heads in toxic investments and chased returns for competitive reasons.
The industry will rebound, he says. “We’ll come back; we’ll just look different. Maybe it’s time for the whole credit union industry to redefine itself. Positive things will come out of this.”
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