Catalyst Assumes Capital, Liabilities After Western Bridge’s Formal Liquidation
August 9, 2012
August 9, 2012
Northwest credit unions lost millions in anticipated interest income last year when the National Credit Union Administration (NCUA) forced the early redemption of certificates of deposit (CDs) held by Western Corporate Federal Credit Union (WesCorp), which had gone into conservatorship in 2009. Its successor, Western Bridge Corporate Federal Credit Union, was formally liquidated last month, and Catalyst Corporate Federal Credit Union now holds a handful of unredeemed CDs.
Credit unions in Oregon and Washington held more than $60 million in WesCorp term certifications when they were redeemed at par in July 2011. Two years prior, the NCUA had pleaded with credit unions to keep their money invested in the corporate credit union system so there would not be a run on corporates. For the good of the system, most, if not all, complied.
However, as part of its role as conservator, the NCUA forced early redemption of the CDs, forcing a loss on a minority of credit unions that held these investments to lessen the costs to other credit union system participants.
“I believe the vast majority of the outstanding share certificates that credit unions had at Western Bridge were redeemed or called early and prior to their maturity,” said Bruce Fox, Catalyst’s executive vice president and chief investments officer. Fox said the NCUA did not redeem “a handful of certificates” because the agency was unclear as to whether or not it had the authority to redeem them early.
Those remaining certificates were transferred to Southwest Corporate Federal Credit Union, which eventually rechartered as Catalyst, and the shares were transferred into Catalyst’s new charter without a change in terms.
“When we did the purchase and assumption of the assets of Western Bridge, some of the liabilities that we assumed were about $10 or $15 million in remaining share certificates—a relatively small dollar number of share certificates that NCUA did not redeem,” Fox said. “But I believe the vast majority of the certificates that were outstanding at that point in time with Western Bridge were redeemed, and that was NCUA’s decision as conservator for Western Bridge.
“It was some kind of technical reading in the actual agreement that Western Bridge or WesCorp had with the credit union for that particular certificate. I think some wording on the agreement where they weren’t allowed to redeem them, or it was unclear to NCUA if they had the authority to actually redeem those. So, I think NCUA took the approach that they just wouldn’t redeem those.”
The NCUA’s logic, according to Northwest Credit Union Association (NWCUA) CEO John Annaloro, may have been that the payment of future interest due on corporate CDs would fall to the agency itself as the conservator. However, given the legal path taken by Catalyst corporate, he said it appears the NCUA had options other than the actions taken.
“This contributed to a double-up, or triple-up, of loss events for many of our Northwest institutions,” Annaloro said. “Some would write off capital in one or more of the corporates, lose substantial interest on CDs, then pay annual assessments to the NCUA’s Corporate Stabilization Fund. At the same time, they were being asked to capitalize the ‘new’ corporate system.”
“I believe their motivation as conservator was to reduce the expense to the share insurance fund, and those were relatively high cost-of-fund certificates, so by calling those and eliminating that high cost of fund going forward, they were able to reduce the amount of losses to the share insurance fund,” Fox said. “Because Western Bridge was not obligated to continue to pay that premium coupon throughout their holding period.”
Fox estimated that most of the premium coupons were between 2 and 4 percent.
“All the assets that Western Bridge or WesCorp had matched against those were moved out when WesCorp was liquidated and became Western Bridge,” Fox said. “So, effectively, they had these high cost of funds on the liability side but didn’t have the high coupon assets to generate the cash flow to cover those high cost of funds on the funding side.”
Fox said that any certificates retained by Catalyst would be honored according to the original contract.
“We’re going to hold those and honor those through maturity,” Fox said. “They might have a call feature that we have the right to call contractually, but we’re abiding by the contractual obligations in the certificates.”
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