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Corporate System – The Beginning
• Created in mid-late 1970s• NPCUs did not have access to the Fed• Most NPCUs 100+% loan/share ratios• Original vision – mimic the 12 Fed districts• Leagues led movement to create system• Ended up with 41 corporates (2 in Mass)+ USC
-official network tied to State Leagues• US Central created in 1975• Spun-off from central credit unions• CUNA controlled US Central• Majority of corporates shared management with leagues
Corporate System – The Beginning
• Primary purpose – provide cash flow assistance> Reliable Liquidity Provider
• Developed correspondent & payments services• Balance sheet growth mid-late 1980s with fall of S&Ls
> Developed investment expertise • Corporates growth reflected their memberships• All had set FOMs – no overlaps
> Some cases had to be a League member to join• Varying memberships resulted in very different sized
corporates – assets and subsequently infrastructures> Wescorp (California + Nevada)> South Dakota Corporate> Some corporates experienced financial troubles
Corporate System – the 1990s
• Standards & Guidelines (ALM)• Banesto• CapCorp failure (CMOs)
• Liquidity problem / Member capital lost ($60m)• Regulation 704• Separation of league/corporate management• NCUA witch hunt• Merger activity starts• NCUA wants consolidation
• Opens up all FOMs - nationwide• Paid-in Capital introduced (PIC)• MCS – notice goes from 1 to 3 years
2000s - the beginning of the end• Competition begins to trump cooperation• Corporate system – dysfunctional• Competition creates rate inflation
• Corporates create own investment rate curve above agency yields
• Asset growth greatly exceeds retained earnings accumulation capabilities
• Growth fueled by above market rates• Additional risks taken to provide more competitive yields• Capital imbalance masked by member capital• Concentrations in private issue mortgage-backed
securities by largest corporates• Arbitrage transactions• Sandlot (USC)
Background – Corporate Investments
• By regulation – highly rated securities
• Majority AAA-rated when purchased
• Securities can be readily sold for liquidity
• Expanded powers needed for additional credit/NEV risk
• 5 Levels of expanded authorities• Credit (2)/Foreign/Derivatives/Loan Participation
Secondary Mortgage Market
• FNMA – FHLMC
• Countrywide – GMAC
• 2004-2007: Perfect Storm• Low mortgage rates• Poor underwriting• Home prices rising
Secondary Mortgage Market
• Market conditions steady decline since mid 2007 – starting with sub-prime
• Problems moved into all mortgage markets –prime & non-prime
• Market values of private issue mortgage securities in free fall making them completely illiquid
• Monoline insurers masked deeper underwriting problems – start to fail
Secondary Mortgage Market
• Rating agencies underestimated potential losses on AAA-rated mortgage securities
• Did not factor in severe drop in RE values
• US Central FCU & several other large corporates overly concentrated in non-agency mortgage securities (up to 50% of portfolio)
• NCUA examiners on-site full-time at each of the conserved corporates
Corporate Holdings – March 2009
• Corporate Investment Holdings• $64 billion in mortgage securities• $41 billion in non-agency mortgages• $22 billion outside US Central• $18 billion in unrealized losses
• First Carolina• $98 million in non-agencies (0.24%)• $48 million in unrealized losses
Capital Distribution
Retained Earnings CU Contributions• NPCUs: 11% n/a• Corporates: 2-3% +$3.5 billion• US Central: 1-2% +$2.0 billion
NCUA Actions• SIP/HARP Liquidity Programs (4Q-2008)• Capital infusion in USC $1 billion (Jan 2009)• Guarantee of US Central Deposits (excluding capital)• Voluntary guarantee for corporate CUs• PIMCO review- 100% of private mortgages in corporate
system• Expectation of further large write-downs
• Seeking comments to re-write Corporate Regulations - due April 6th (ANPR)
• March – Wescorp & US Central conserved• Constitution, Southwest, & Members United followed
New Regulation 704
• Significant reduction in allowable managed on-balance sheet risks
• More focus on liquidity function – much shorter portfolio WAL (2 year limit for weighted average life of portfolio)
• Eliminates most leveraging capacity• Reduces credit concentrations limits (Sector & Issuer)
• Non-agency mortgage securities prohibited • No more wholesale corporate• Higher capital requirements for Tier 1 or Core Capital
• Retained earnings + Perpetual Contributed Capital (PCC)
Corporate System -- 2011• Total of 25 retail corporates + 1 wholesale corporate (US
Central) when financial crisis hit• 5 corporates conserved• Troubled MBS assets @ NCUA’s asset liquidation unit• Constitution corporate liquidated into Members United
Corporate • 4 Bridge Corporates formed with 2-year charters:
> US Central Bridge> Western Bridge (Wescorp)> Southwest Bridge> Members United Bridge
Corporate System -- 2011
• Western (Wescorp) Bridge failed its recapitalization effort to become United Resources Corporate
> NCUA will maintain until a smooth transition can be made so current members do not have interrupted service
> NCUA trying to sell off Wescorp operation/members to another corporate
> Current Bridge Charter good through September 2012
Corporate System -- 2011
• Southwest Bridge merged into Georgia Corporate although headquarters to remain in Dallas, TX
> Successfully recapitalized* and is now operating as Catalyst Corporate CU
• Members United Bridge successfully recapitalized*> Now operating as Alloya Corporate
*both did have to modify recapitalization plans to lower capital expectations
Corporate System -- 201216 corporates (in 2009 > 25+1)• 5 mergers (VA, WVA, GA, SE, MT)/3 liquidations (IA, Midwest,
Constitution)/1 P&A (Wescorp) • Less First Corp: P & A (by Catalyst) • Less Cencorp: merging with Alloya• Less Louisiana: merging with Corp America (called off 9/17)• 4 others at risk due to weak earnings • US Central to be closed by end of October 2012
• NCUA LUA/Share Guarantee will expire as of December 31, 2012
Corporate System -- 2012
• When NCUA liquidates US Central the end of October -- 6000+ NPCUs lose access to the Central Liquidity Facility (CLF)
• CLF lending capacity drops from $46B to $2.1B
> (only 96 direct members)
• Balance sheet and earnings constraints impact corporates ongoing ability to be a CLF Agent
> Will continue to serve correspondent role to CLF
Corporates -- Future Outlook
• Corporates capitalized to varying degrees:• Some will focus just on settlement balances & payments• Some will be able to provide variety of on-balance sheet deposit
products• Ability to provide liquidity & LOCs will also vary corporate to
corporate depending on how well capitalized they are for the membership they serve
• Term deposits will primarily be handled off-balance sheet (>1 year)
• Fed EBA program has become critical for managing balances & capital levels
> Some corporates more dependent than others
Corporates -- Future Outlook• Value of corporates can vary quite a bit under new
environment. Size may no longer dictate competitiveness of product offerings – capitalization to membership very important to long term stability.
• Retained earnings requirements• Must be able to earn enough spread to build retained earnings• NCUA has set retained earnings thresholds for 3 years, 6 years, &
10 years• Narrow NEV tightrope – particularly with limited capital
• Potential for additional consolidation as corporates operate within the new corporate and regulatory framework
Corporates -- Future Outlook• Sole purpose of corporate system – add value to NPCUs
• Innovate & aggregate/cooperatively owned and controlled
• Essentially high participation CUSOs
• Corporate system has changed but still maintains considerable value in skill levels & ability to adopt and change
• Will credit unions participate?
First Carolina Corporate• $2B in assets• Lost $98.5 million in capital at USC/100% of RUDE• Members lost PIC & 20% of MCSD• Transparent & Open throughout crisis
• 90% recapitalization rate -- $68m/ 5.57% capital ratio• Liquidity resource still important to members so
additional levels of new member capital needed• $1.5 B in assets• Settlement services: <1 year short term deposits• Low cost correspondent services• ALM & Investment advisory & sales• Financial Education
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