At Northpark Community CU we have run into a wall when it comes to growth. As noted in the first part of this series, no, the wall is not the opportunity to grow, it's permission to grow-permission from our regulator.
For Northpark Community, our double digit growth helped push our capital down to 10% from the 15% level it had been at. It's time to do something about the negative implications of how capital is viewed and the CU ability to grow it.
In 2005, a NASCUS white paper included many of the solutions related to capital instruments that could be issued by natural person credit unions. The NASCUS white paper is a great starting point. However, my personal opinion is that (though there are other alternative sources) my investor source of choice would be corporate credit unions. They can invest in the equity instruments (referred to as Member PIC) issued by their credit union partners. Referring back to the NASCUS report, an earlier GAO report states each of their three alternative capital instruments and arrangements would:
- Preserve the not-for-profit, mutual, member-owned, cooperative structure of CUs;
- Maintain that ownership interests remains with the members; and
- Preserve the federal income tax exemption.
Further, equity debt models discussed:
- Qualify as equity balances under GAAP;
- Provide a degree of permanence, protecting CUs from sudden outflows of capital from occurring;
In other words, CU characteristics and personalities remain unchanged. We will not be forced to behave as banks. The NASCUS hybrid instruments described in their white paper include these features:
- No voting rights;
- No put rights on the part of the holder;
- Redemption only at the discretion of the issuer, and then only at the face amount;
- Indefinite final maturity;
- Interest or dividends payable at a fixed rate rather than based on performance; and
- Subordination to claims of creditors and depositors.
It is comforting to know that an association representing state regulators supports the effort behind alternative capital. The NCUA regulators would probably support the NASCUS models. After action by Congress and state legislatures clarify and eliminate regulatory obstacles, corporate credit unions would be cleared to become "members" of natural person credit unions. Natural person credit unions can offer members capital equity instruments, referred to as Member Paid-In-Capital (PIC). Currently, Member PIC issued by corporate credit unions is recognized by the NCUA as regulatory capital. Changes in state and federal regulations would provide the same ability to natural person credit unions.
Credit unions can show they are good investments by delivering solid performance and sound business plans. They would get the equity injections they need to serve Main Streets and consumers all over the U.S. Corporate credit unions with investments in performing credit unions can continue to provide quality advice and support, yet at a higher level of interest and responsibility. In this new regulatory environment, healthy competition between corporates desiring to be known as active investors in natural person CUs would be good for the movement.
While we are it, let's expand or eliminate the member business lending caps by including necessary language in the proposal. It is simply impossible for a mid-size credit union to cost-justify employing talented lenders and support staff when portfolio-caps limitations are what they are today. We are a movement based on cooperation and collaboration. We can come to an agreement on a sound plan to offer a Congress willing to try anything. The new Congress may appreciate this plan will not require federal bail-out funds. True to our history and self-help philosophy, we can help ourselves.
Good Reason for a Retreat
Collective, powerful intellect in support of an important mission can achieve great things. History has proven that many times. Leaders of the movement can organize a think-tank of the best and the brightest from the NCUA, CUNA, NAFCU, NASCUS, corporates, state leagues, as well as others. They can hunker down for a long week end at an uncomfortable, out-of-the-way retreat free of sunny golf-outings and other distractions. Out of this would come a detailed proposal to Congress to permit corporates to invest in natural person CU Member PIC's. Once completed, all of us can gleefully "Hike the Hill" to take the message directly to Congress.
It is true that this is a problem to which our CU needs a solution, but we are not alone. No credit union should let the world go by, shackled by dysfunctional limitations that threaten the safety and soundness of the CU structure.
Now is the time to ask President Obama, his new Economic Team and Congress to permit alternative capital from inside sources and to expand business lending powers. The president may trust our good intentions and be exhausted thinking about the greed and poor management of the banking industry. Now may be the best time to ask Obama, Pelosi, Reid and Frank to give corporate and natural person CUs these new capabilities. Politicians can live up to their promise of hope and change.
There are a lot of similarities being discussed between 1934 and what is happening today. Why not add credit unions making another bold move to reposition the movement for the future?