The Corporate Credit Union Crisis and Aftermath:

Transcription

1 The Corporate Credit Union Crisis and Aftermath: Evolution of an Industry September 27, 2012

2 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

3 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

4 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

5 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)

6 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

7 Secondary Mortgage Market FNMA FHLMC Countrywide GMAC : Perfect Storm Low mortgage rates Poor underwriting Home prices rising

8 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

9 Secondary Mortgage Market Rating agencies underestimated potential losses on AAArated 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

10 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

11 Capital Distribution Retained Earnings CU Contributions NPCUs: 11% n/a Corporates: 2-3% +$3.5 billion US Central: 1-2% +$2.0 billion

12 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 6 th (ANPR) March Wescorp & US Central conserved Constitution, Southwest, & Members United followed

13 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)

14 Corporate System Total of 25 retail corporates + 1 wholesale corporate (US Central) when financial crisis hit 5 corporates conserved Troubled MBS 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

15 Corporate System 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

16 Corporate System 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

17 Corporate System 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

18 Corporate System When NCUA liquidates US Central the end of October 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

19 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

20 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

21 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?

22 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

23 Questions