Corporate CU Q&A

The Northwest Credit Union Association (NWCUA) surveyed a group of corporate credit union insiders to find out what the corporate system looks like these days, and what role it will play going forward. Respondents asked to remain anonymous because of the sensitivity of the subject.

Q. Generally, what does the corporate credit union system look like now and how does it differ from the system before the NCUA stepped in?

A. The majority of the corporate system’s assets and operations is conserved and run by the NCUA. One corporate was liquidated, Constitution Corporate in Connecticut, and another, U.S. Central Corporate, will likely only reconstitute as an item processing company.

Corporate sources predict that assets in the corporate system will shrink from about $71 billion in April, 2010, to around $12 billion at some point in the near future. The corporate feel that the on-balance sheet functions are being disaggregated in part by regulators through Rule 704. Corporates will have smaller balance sheets, and will not offer the rates and on-balance sheet options present before.

Q. How can credit unions be assured that similar problems will not happen again?

A. NCUA has hard coded concentration risk limits within corporate credit union’s investment portfolios through its revisions to Regulation 704. Concentration risk was one of the primary factors in the losses that occurred during the recent recession. Private label mortgage-backed securities, the source of most of the losses, are expressly prohibited investments for corporates. Finally, the NCUA now has the Prompt Corrective Action (PCA) available to right future ailing corporates; previously the main tool was the nuclear option of conservatorship.

Q. What is a corporate credit union’s role in the future credit union system?

A. The future role of the corporate credit union system will be dictated by the natural person member credit unions who have invested capital in their corporate credit union.

Western Bridge Corporate (WesCorp), for example, has actively solicited member input from over 160 credit union leaders as it developed it future business plan. As a result, the new corporate will provide low cost payment processing, a dependable source for liquidity, and a safe alternative for investing excess funds. However, the successor to WesCorp, United Resources FCU, will carry on operations substantially as before, but on much smaller scale (investments) and serve a smaller member base.

Q. Why is rebuilding the corporate credit union system taking so long?

A. This process is not a race. Corporate leaders are committed to soliciting member input and carefully design a business model that surpasses the regulatory benchmarks, while meeting the near- and long-term needs of member credit unions. As they say: “We have one shot to get this right, and right—not first—is the proper focus.”

Q. How is the recapitalization process going for Western Bridge Corporate and Southwest Bridge Corporate, which Northwest credit unions use the most?

A. United Resources FCU, the new corporate credit union replacing Western Bridge Corporate, has set a rate of 25 basis points of credit union assets with a cap of $2.5 million for investment in the new corporate. Capital investment in United Resources FCU will be split 70 percent (17.5 bp) in permanent capital, and 30 percent (7.5 bp) in 5-year capital. The capital raise goal is $200 million. The campaign will launch by the end of May and close by August 31, 2011. Fees are designed to remain unchanged. Although the NCUA charter application requires only 7 natural person credit unions to officially apply for a new charter, over three times that many have agreed to sign United Resources’ charter application.

Southwest Corporate was conserved by NCUA on September 24, 2010. The Southwest Bridge Corporate Member Advisory Council consisting of 141 member credit unions, and its 13-member Executive Committee reviewed six business model options in late 2010 and recommended a consolidation with Georgia Corporate to the entire membership.

Economies of scale are gained through consolidation. The model is scalable, efficient, and can be executed in a relatively short timeframe by mid-2011. A strong 91.3 percent of the 540 members who voted in a January 2011 poll supported the recommended business model to consolidate with Georgia Corporate.

The merger will create Catalyst Corporate FCU, which has a smaller combined balance sheet ($2.6 billion) in order to minimize the amount of perpetual contributed capital (PCC) required to be invested by credit unions. The overnight investment account, Performance Tiered Account (PTA – the equivalent of Georgia Corporate’s MarketFlex account), will be capped at around $6 million and provide a sweep to other overnight investment options. No term certificates will be offered. All of the correspondent, payment and off-balance sheet products and services will continue to be provided, with changes only to balance sheet investment products.

Q. What will the new funds go towards?

A. The proceeds of this capital offering will be used to support the balance sheet of United Resources. The offering is designed to maintain sufficient core capital to sustain a leverage ratio and risk-based capital ratios that exceed the minimum regulatory capital requirements for an adequately or well capitalized corporate credit union. NCUA defines a well capitalized corporate credit union as one that has attained a leverage ratio of 5.00 percent or greater, a total risk-based capital ratio of 10.00 percent or greater, and a Tier 1 risk-based capital ratio of 6.00 percent or greater.

Q. Would any future profits be redirected towards the NCUSIF to mitigate future assessments by the NCUA? Or could former creditors get their capital back?

A. Actions taken under NCUA’s Corporate System Resolution Plan segregated corporate services and operations from their troubled legacy assets. United Resources will be a new corporate taking on substantially all of the former corporate’s services and operations. The business plan for United Resources reflects an immediate and consistent growth of retained earnings to protect member credit union capital investment in this new corporate. The legacy assets that produced the loss of member capital are now held within an Asset Management Estate managed by NCUA. The regulators have been quite clear and forceful on the issue of capital recovery once written down and lost. They will have to address specific cases.

Q. Do corporates still have significant concerns about the NCUA’s Regulation 704 and its implications?

A. Final revisions to Regulation 704 have been published and the regulation requires important changes to corporate credit union investment strategy and capital ratios. The business plan supporting United Resources FCU is in full compliance with the revisions to the regulation while providing adequate flexibility to continue to offer a full suite of products and services for member credit unions. For now, given the recent adoption of a few revisions to 704, I see the rulemaking process around corporates substantially finished.


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Posted in NCUA.