Effective Aug. 3, the CLF yanked $1.75 billion worth of stock out of U.S. Central and invested it in a laddered portfolio of U.S. Treasury securities.
U.S. Central's majority ownership stake in the CLF, the Lenexa, Kan.-based corporate's March 20 conservatorship, the corresponding NCUSIF assistance U.S. Central received and the CLF liquidity advances to NCUSIF on behalf of U.S. Central presented too much complexity for the CLF's financial disclosure requirements.
In consultation with its auditors, the CLF determined the change was necessary because GAAP accounting rules may have required the funds at U.S. Central to be presented on the CLF's financial statement as a contra equity account rather than an asset, as it had always previously been classified. Since the investment in U.S. Central is equal to the sum of the CLF's paid-in capital stock and retained earnings, this contra equity treatment would have effectively resulted in total member equity of zero.
Without equity, the CLF would have no borrowing ability and would be rendered unable to assist the industry.
How did the stock find its way to U.S. Central? Credit unions voluntarily subscribed to the CLF, which in turn, sold the stock to U.S. Central. The wholesale corporate bore the cost of, and kept the proceeds from, these funds.
The NCUA consulted with the Treasury, which never particularly liked the CLF's capital structure, on the decision, according to Owen Cole, NCUA's director of capital markets and planning. Even though the stock is now invested in Treasuries, U.S. Central will remain the primary beneficiary of the proceeds, he said.
Cole emphasized that the decision was strictly based on accounting issues, and that U.S. Central is in a fairly strong liquidity position right now. The move is not a statement of the agency's faith in the safety and soundness of U.S. Central, he stressed.
How will U.S. Central cope with the sudden loss of assets?
NCUA Director of Public and Congressional Affairs John McKechnie said the top-tier corporate has a variety of funding sources available and is "well-positioned to handle funding needs moving forward using those sources." He added that the Temporary Corporate Credit Union Liquidity Guarantee Program has provided "more than adequate funding."
Though the stock no longer resides on its balance sheet, U.S. Central must still reevaluate its role as a CLF stock owner. The reinvestment of CLF stock proceeds back into U.S. Central was a circular transaction in which no funds actually exchanged hands. Rather, it was a self-funded purchase. Now, with the requisite change in how CLF funds are invested, the stock purchase is no longer self-funding, so it no longer makes economic sense for U.S. Central to hold the stock on behalf of credit unions.
The NCUA said it is seeking input from the industry to determine the future CLF stock ownership. McKechnie said the NCUA Board will consider a proposal "in the near future" but said he couldn't provide a time frame for the decision or anticipate what the proposal will include.