3.12.10 Timeline of Events

Sent on behalf of Don Chapman, President/CEO of VACORP…

 

 

March 11, 2010

 

Dear Member Credit Union:

 

Below is a summary of the events which have occurred over the last several years leading up to and including the conservatorship of U. S. Central Federal Credit Union (USC) by the National Credit Union Administration (NCUA) and the subsequent write down of all USC retained earnings and paid-in capital.  We have prepared this document to assist you in informing your members and volunteer officials why your Membership Capital Account with VACORP has been reduced in value by approximately 66%.  Every effort was made to provide the facts as we know them without inserting our opinion into the discussion.

 

VACORP always has been and continues to be a conservatively run corporate credit union.  We believe you, our members, have wanted us to provide you with low-cost cash management and settlement services, competitively priced liquidity products, and high quality, low risk investment products.  Thus, our business model evolved over the years as a low-cost provider of high quality products and services by cooperatively using strategic partners, such as USC and select corporate credit unions, to help us offer best of breed products and services to our members.  We believed, as did our strategic partners, that the risk in these products and services was relatively low and manageable.  As we have all discovered during the last few years, there was considerably more risk in USC’s investment portfolio than was apparent.

 

When USC was required to write down its retained earnings and capital as the value of its investment portfolio declined, VACORP was required to write down its own capital investment in USC, as well as reduce the value of its members’ capital investment in VACORP.  The past year has been a devastating experience for all of us and our members have suffered unprecedented losses.  Moving forward, VACORP will continue to be fully committed to serving  our members with a new viable business model, enabling you to do what you do best - successfully meeting the needs of your members every day.

 

Don Chapman

 

President/CEO

VACORP Federal Credit Union

 

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A SUMMARY OF U. S. CENTRAL FCU FINANCIAL ISSUES AND THE IMPACT ON VACORP AND ITS MEMBERS

 

Pre 2009 Background 
 
During the period 2003 to 2007, many financial institutions, including U.S. Central (USC), increased its investment in mortgage-backed securities (MBS). This change in investment strategy enabled USC to pay higher, more competitive dividend yields on savings products to its corporate credit union members.  Those corporates, including VACORP, which invested in USC savings products were able to share those increased dividend yields with its natural person credit union members by offering higher rates on its savings products. Presumably, USC purchased these MBS investments without significantly increasing risk since all the securities at the time of purchase were rated investment grade with 98 percent rated AA or higher.  This strategy proved profitable during the housing boom when home prices continued to rise and mortgage delinquency rates were stable.   
 
Beginning mid-year 2007, real estate values declined across many markets in the U.S. and greater numbers of mortgages became delinquent leading to higher foreclosures.  The higher number of foreclosures further eroded housing prices, resulting in lower recovery of principal and even higher losses when the foreclosed properties were liquidated. The housing bubble burst as a result of:  the inability of some homeowners to make their mortgage payments due to adjustable-rate mortgages resetting to higher rates; many borrowers were over-extended making it difficult to meet their mortgage payments; predatory and fraudulent lending practices of mortgage lenders; the offering of risky mortgage products to uneducated consumers; and speculation and overbuilding during the boom period.  The end result was the beginning of a sharp price decline for MBS as the markets realized that credit losses on the mortgages collateralizing the MBS investments would be far in excess of earlier estimates.  As MBS prices and marketability declined significantly, even bonds that held AA ratings or higher were unable to be sold at prices close to par.  In hindsight, it became very apparent that the ratings agencies (Moody's, Standard and Poors, and Fitch) had grossly underestimated the credit risk of many of these MBS investments prior to their sale.  Accounting rules required USC to recognize the decline in the value of its investments, causing a dramatic increase in unrealized losses on available-for-sale securities.

USC was not the only financial intermediary to be negatively impacted by the decline in value of MBS.  In the latter part of 2008,  the much publicized problems with Fannie Mae, Freddie Mac, Bear Stearns, Countrywide and other financial intermediaries created an environment in which credit was extremely difficult, if not impossible, to obtain for financing business activities.  This generated questions and concerns not only about USC viability, but the entire financial services industry.  In fact by the end of 2008, while USC continued to see the value of its investment portfolio plunge, Fannie Mae and Freddie Mac were both taken over by the government. Lehman Brothers had declared bankruptcy. J.P. Morgan agreed to purchase the assets of Washington Mutual in what was the biggest bank failure in history.  Bank of America purchased Merrill Lynch and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.

 

2009 Timeline

 

January               

  7-  Moody’s lowers USC ratings.

14-   Fitch says “USC portfolio has majority of AAA rated securities, but credit quality      

has deteriorated.”

28- USC tells members it expects to take a $1 billion write-off charge for 2008.

28- NCUA extends the Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP), insuring all credit union shares and deposits, except membership capital, through the National Credit Union Share Insurance Fund (NCUSIF).

30- S & P downgrades USC to AA-/A1+ with an outlook of “ Negative”

February            

  3-  Fitch lowers USC’s individual rating to “ F”
10-  S & P places USC’s credit rating at “AA-“/Watch Negative/”A1+”
27-  USC posts $1.1 billion loss in 2008, wiping out over $700 million in retained

earnings.

March                                  

20-  USC makes public February financials, showing a $1.1 million loss and an unrealized loss of $6.6 billion compared with $5.9 billion for January.

20-   NCUA places USC into conservatorship.

April             

14-  NCUA informs corporates that USC capital is “extinguished” – permanently impaired and unrecoverable.

May                     

22-  NCUA Letter 09-CU-10 to federally insured credit unions explains regulatory mandate requiring paid-in-capital (PIC) and membership capital shares (MCS) be used to cover losses that exceed retained earnings.

August                     

31-  Per NCUA mandate, VACORP writes down all PIC  I & II  and approximately 63.2% of its MCS at USC.

September    

               24-  NCUA announces the first NCUSIF premium assessment in the multi-year process of recapitalizing the insurance fund.           

30-  In accordance with NCUA Letter 09-CU-10, VACORP  depletes approximately 27.6 % of our members’ capital to cover losses at USC.

October               

31-  VACORP  is required to write down an additional 25.5% of MCS at USC (cumulative total of approximately 89%).

November

30-  In accordance with NCUA Letter 09-CU-10, VACORP  depletes an additional  26.1% of our members’ capital ( cumulative total of approximately 54%) to cover losses at USC.

December        

30-  VACORP writes down all remaining capital at USC and, as mandated by NCUA regulation,  makes the final write down of members’ capital in relation to USC losses, bringing the cumulative depletion to approximately 66% of members original Membership Capital Account (MCA) balance. With this action, the MCA of VACORP members will no longer be exposed to any future losses at USC.