Only seven corporates survived U.S. Central's second-quarter financial reports with positive reserves and undivided earnings intact. Predictably, all had less exposure to U.S. Central compared to their peers.
Some also invested less paid-in capital, which is first in line to absorb losses, relative to member capital shares. All of U.S. Central's PIC I and PIC II has been written off, but MCS is currently 63% impaired.
The $4.2 billion Corporate One Federal Credit Union was able to mop up its share of U.S. Central's second-quarter losses with its reserves. In fact, Corporate One emerged with more than $60 million in RUDE to protect its own member PIC and MCS.
The Columbus, Ohio-based corporate's 1999 decision to limit its U.S. Central PIC I purchase significantly lowered its U.S. Central exposure, President/CEO Lee Butke said. He was CorpOne's new CEO at the time, and Butke recalled the issuance stirred up debate among Corporate One management and board members.
The wholesale corporate was offering Libor plus 100 basis points, a good deal at the time. Corporate mergers provided additional opportunities to get it on the yield, as U.S. Central made some merged corporate PIC available to the corporate network. Butke said plenty of retail corporates took U.S. Central up on the offer, and some came away owning as much as $40 million in PIC I capital.
"We realized it was an equity investment, not a deposit, so there was risk to it," he said. "To me, that was the big defining moment. We had a big debate over it, but we took our time, really considered the risk involved and eventually settled on our minimum, $1.9 million."
The $3.7 billion Central Corporate Credit Union also purchased "less PIC I than the typical corporate," President/CEO Bill Walby said. Additionally, CenCorp's concentration risk policies limited its overall U.S. Central exposure, though Walby asserted the $103 million loss wasn't, relative to size, extraordinarily smaller than those absorbed by the average member.
However, CenCorp did emerge from U.S. Central's June losses with $11 million in RUDE and all $112 million MCS untouched.
Policies unrelated to U.S. Central also helped CenCorp avoid dipping into member capital. CenCorp doesn't leverage its balance sheet by borrowing and reinvesting funds, Walby said. So, when U.S. Central predetermined each member's PIC II share would be determined by asset size, CenCorp was in a better relative position to pony up the amount.
CenCorp has also rolled back operating expenses to 2002 levels after years of already running lean and mean, he added.
"You read announcements from other corporates that say they're reducing expenses, and we're doing that here, too," Walby said. "But, low operating expenses have been a mantra of ours for a number of years, and you can see that in our numbers."
Butke also credited his team's early 2007 decision to limit concentration risk. After returning from that year's CUNA Government Affairs Conference, where the increasing foreclosure rate was a fresh topic of concern, Corporate One placed a moratorium on new private-label mortgage-backed securities purchases and further limited all investments so no one asset class represented more than 25% of the total portfolio. That included U.S. Central, along with mortgage- and asset-backed securities.
Corporate One didn't abruptly yank deposits out of U.S. Central. Rather, as funds flowed in per usual seasonal liquidity patterns, Butke said he purchased new investments to diversify the portfolio rather than invest in U.S. Central. Alternatives to U.S. Central included highly selective and short-term auto-loan-backed investments that "paid down very aggressively." Corporate One also bought insured student loans and took a further hit on yields with some credit card pieces that "were barely Libor plus."
"When we set out to lower our mortgage exposure, where else were we going to put it?" Butke said. "We had to give up some margin."
But by early 2008, when U.S. Central recalculated capital share contributions, Corporate One received the lost yield back in the form of a $30 million MCS payback.
Butke stressed he and his board support U.S. Central and only invested new money outside of the system to diversify his corporate's portfolio.
Walby agreed, saying ultimately, it comes down to "keeping liquidity in the system and minimizing the impact on natural person credit unions."
Corporate America Credit Union's Thomas Bonds, however, said his board still hasn't decided if it will "continue to affiliate" with U.S. Central, particularly if that affiliation will require Corporate America to help recapitalize the failed institution.
Bonds said he was turned off by the way U.S. Central solicited PIC II funds in December, threatening to cut off payment systems support to those who failed to participate.
"Look, we don't want to abandon U.S. Central altogether, but we can't be held hostage by an organization that tells the corporate network, 'We need more capital or else we'll turn off your access to payment systems,'" he said.