2. Agenda Corporate One FCU - background Corporate One’s future balance sheet Corporate One’s efficiency ratio Corporate One’s plan to meet proposed capital requirements Corporate One’s future business model Requests for CUNA and task force Questions and answers
4. Corporate One - Background National membership of more than 750, touch nearly 1500 credit unions with our products Strong regional presence – 610 credit unions within our region OH, IN, IL, MI, KY, PA and WV. Nationally, almost 150 additional members, plus more than 1000 participants via Alliance One Full-service corporate with more than 100 employees $5.5 B in assets under management Diverse, qualified, experienced Board of Directors, strong Supervisory Committee and a strong Enterprise Risk Management Committee
5. As of March 31, 2010 RUDE $ 25,700 PIC 25,682 MCS 117,849 Total Capital $ 169,231 12 month rolling DANA $3,732,490 Regulatory capital ratio 4.53% Regulatory capital ratio per NCUA April 2009 letter 7.10% Current Financials(dollars in 1,000’s)
6. Not a U.S. Central Pass-Through U.S. Central Services Investments We have relationships with 15 of the county’s top broker/dealers Cash/Liquidity Access to the Federal Reserve Agreements with 5 of the nation’s largest FIs Line of Credit LOC Commitments Several sources including FHLB, Nat’l banks, and Reverse repo agreements Wires (domestic and international) National Settlement
7. Product/Service Provider Partnerships Processing Alliance eDOC Innovations Members Development Company Primary Financial CU*Answers – CU* OSJ of MBS PSCU/STAR US Central Jack Henry Vsoft Diebold Alaska USA Trust
8. Product/Service Offerings Multiple profitable business lines Deposit automation services (Check 21) Using software from Alogent software from Jack Henry Net income of $3.58 million in 2009 Share draft processing 100% electronic processing through Endpoint Exchange Net income of $1.67 million in 2009 ACH processing Using U.S. Central with contingency plans if necessary Net income of $.81 million in 2009 Debit and credit cards Through PSCU- FS / STAR Net income of $7.4 million in 2009
9. Product/Service Offerings Multiple profitable business lines (con’t) Cash and cash management services Through JPM Chase Brokerage Through Multi-Bank Securities, Inc Net income of $4.04 million in 2009 Balance sheet products Investments ????????? Lending ??????????????
17. Coverage Ratio Efficient and effective measurement Ability to cover all expenses with fee income Strong fee income from multiple business lines and low expense structure Historically one of the highest earning corporates Remained innovative and focused on our mission A must for the future No reliance on Investment results!
20. Equity Members Equity based on .9% of assets, maximum initial is $900,000 (E class of shares) Maximum deposit total is $200 M Line of Credit - up to 10% or $200 M UCC-1 only for all A,B,C rated Collateral required for D No annual fee, no set up fee Term and Demand loans best rates No compensating clearing balance required Daylight Overdrafts permitted – up to line Dividend declared and paid quarterly E class based on overall return
23. What does the future hold?How will they look tomorrow? Smaller more liquid balance sheets Payment systems a priority in the business model Fee income sources critical to earnings Net interest income not the primary driver of earnings Equity capital limited and requires an “equity return” Off-balance-sheet activity and brokerage key
24. What does the future hold?How will they look tomorrow? Strong enterprise wide risk management (EWRM) Technology skills to build and create Strong management judged on efficiency and effectiveness and not size Strong governance systems Total transparency
25. What does the future hold?How will they look tomorrow? National Field of Membership Capitalized Owners – Equity Partner Select Service Users – Customer/Vendor Consolidation – membership decides “CUSO Mentality” toward corporates by both equity owners and users – focus on the business model
26. Corporate One Summary comments We can adapt and continue to provide service excellence and competitive products Strong CORE earnings coupled with an efficient operation are the basis for a solid corporate credit union business model. Members own a strong business that can provide an equity return on capital Strong brokerage operation already in place with a large book of business and talented staff Risk Management team is in place and functioning well Already prepared to meet the demands of the “new model”
31. Regulatory Comments Basel capital standards/ risk-based capital Investment concentration sector limits Matching/mismatch limits based on capital Leverage limitations Stress tests and modeling Liquidity pool required Payment systems a priority Brokerage products Profitability and efficiency focus to build RUDE
32. Regulatory Comments Common themes in responses “unable to make a spread” “unreasonable stress tests” WAL too short
35. Spread Shock examples Fixed coupons with approximately 1 year WALs FHLB certificate Credit card Auto ABS Floating coupons with approximately 1 year WALs Credit card Student loan FHLMC debt
37. Observations Since floaters are treated the same as fixed, Corporates would be encouraged to take interest rate risk by purchasing fixed rate bonds. This new test creates incentive to buy non-agency paper since test results are the same and yield is lower on agency. In other words, credit risk taking is encouraged.
38. Observations (cont) Even a very short WAL (<2yr) and overall conservative balance sheet does not pass the proposed test. Moreover, a balance sheet comprised of all agency assets with one year term (fixed or floating) would result in a -50% change in NEV under the new spread shock test. If spreads were to widen, a matched balance sheet would prevent the realization of loss since securities could be held to maturity. Liquidity/balance sheet management is a better way to mitigate spread risk.
41. Spread shock example Fixed coupons with approximately 1 year WALs FHLB certificate Credit card Auto ABS Floating coupons with approximately 1 year WALs Credit card Student loan FHLMC debt
43. Observations Since floaters are treated the same as fixed, Corporates would be encouraged to take interest rate risk by purchasing fixed rate bonds. This new test creates incentive to buy non-agency paper since test results are the same and yield is lower on agency. In other words, credit risk taking is encouraged.
44. Observations (cont) Even a very short WAL (<2yr) and overall conservative balance sheet does not pass the proposed test. Moreover, a balance sheet comprised of all agency assets with one year term (fixed or floating) would result in a -50% change in NEV under the new spread shock test. If spreads were to widen, a matched balance sheet would prevent the realization of loss since securities could be held to maturity. Liquidity/balance sheet management is a better way to mitigate spread risk.
47. Regulatory Comments Investment concentration sector limits See our commment letter page xx CUNA Comment Letter Examples Credit Card Trusts
48. Regulatory Comments Stress Tests See our commment letter page xx CUNA Comment Letter Examples 300 Basis Spread Test WAL
49. Committee Demand the corporate present a Business Plan to their membership and not simply a “needs” based plan – help your members to make informed decisions Continue to work on the regulation for improvement- as it is not perfect Research liquidity options for credit unions and determine availability/collateral/cost – see FFIEC/NCUA letter Test validity of all “Assumptions” and “Options” – Prove it to me – demand of both corporates and vendors! Legacy asset plan is being left to the agency At what cost At what political impact $40-$50 billion! Will the fix be worth it!
50. Access to Credit Lines and Cost The recently finalized Interagency Policy Statement on Funding and Liquidity Risk Management underscores this importance of liquidity planning. This policy statement specifically requires financial institutions have contingency funding plans (CFPs). We recommend you prepare for potential future periods of reduced liquidity now rather than wait for your regulator to request a CFP, or worse yet, to face a period of tight liquidity without a plan.
51. Select Service Members Vendor CUSO model Capital requirement ( SS class of shares) Examples – discussion only Share Draft $1,000 - $5,000 ACH $500-$2500 Check 21 $1,000 - $5000 Required Clearing Account @ 150 % of historic high debit for each product – (C class of shares) Rates on SS and C class are not market rates and may not earn Line of credit - required for clearing/settlement – collateral pledge required, demand loans only no term – annual fee and set up fees – advance fees- rate highest Daylight OD penalty
53. Spread shock example Fixed coupons with approximately 1 year WALs FHLB Certificate Credit Card Auto ABS Floating coupons with approximately 1 year WALs Credit Card Student Loan FHLMC Debt
55. Observations Since floaters are treated the same as fixed, Corporates’ would be encouraged to take interest rate risk by purchasing fixed rate bonds. This new test creates incentive to buy non agency paper since test results are the same and yield is lower on agency. In other words, credit risk taking is encouraged.
56. Observations (cont) Even a very short WAL (<2yr) and overall conservative balance sheet does not pass the proposed test. Moreover, a balance sheet comprised of all agency assets with one year term (fixed or floating) would result in a -50% change in NEV under the new spread shock test. If spreads were to widen, a matched balance sheet would prevent the realization of loss since securities could be held to maturity. Liquidity/balance sheet management is a better way to mitigate spread risk.
61. What does the future hold?Regulation Basel capital standards/ risk-based capital Investment concentration sector limits Matching/mismatch limits based on capital Leverage limitations Stress tests and modeling Liquidity pool required Payment systems a priority Brokerage products Profitability and efficiency focus to build RUDE
63. When You Own Corporate One! Offer a full menu of correspondent and payment systems ATM/Debit and Credit Card solutions- partnered with PSCU Financial Services eDOC Innovations Image and Check 21 Processing Alliance Check 21
64. Corporate One Health Strong capital position OTTI improving CORE earnings Efficiency is strong Cash position Assets under management Positive reserves and undivided earnings (RUDE) Portfolio management Earnings and unrealized gains
65. When You Own Corporate One! Formal Collaboration Partnerships Ohio Credit Union League Member National Credit Union Foundation Ohio Credit Union Foundation Indiana Credit union Foundation Ohio Defense Coalition Ohio Credit Union League Services Corporation ERM World Council of Credit Unions – Bolivia and China
66. When You Own Corporate One! Offer a full menu of correspondent and payment systems Share draft image processing 100% paper free ACH Receipt and Origination Remote Deposit Capture – ACE Developed low cost RDC solution for ATMs RDC Merchant Capture eDOC Innovations CUSO owner 100% paper free from day 1 Vault Cash Services
67. When You Own Corporate One!Brokerage Business $1.5 billion under management - off balance sheet OSJ of MBS Safekeeping - Alaska USA Trust Principals – 2 and Series 7 – 5 Full service – all legal credit union investments Free Safekeeping Free Bond Edge SunGard Bond Accounting software Primary Financial – SimpliCD Ten year old product line Gross revenue of $4.04 M in 2009
68. When You Own Corporate One!Share Draft Business Imaged since 1999! Product line for 20 years Low cost reliable presentment 100% Check 21 images - No IRDs Settle and balance Fed – hold all adjustments Low cost automated returns - $.95 Gross revenue of $1.67 M in 2009
69. When You Own Corporate One!Balance Sheet Products Cash Management Account – single settlement and daily cash management Cash accounts with Fed Funds rates Competitive cash account terms and conditions Daily daylight overdrafts permitted! Window open until 5:00 P.M. ET for same day credit! Term products
70. When You Own Corporate One!CUSO Ownership Primary Financial LLC Sales revenue Royalty revenue Profitable CUSO eDOC Innovations Document Imaging company Check 21 Profitable CUSO
71. When You Own Corporate One!Debit/Credit Cards Business Partnership with Star and PSCU Debit card and Credit card 15 year old product line Small credit union focused Value added experts and technology volume collaboration Alliance One 1000 financial institutions $250 a year – no per transaction ! 5,000 ATMs with NO surcharge! Gross Revenues of $7.4 M in 2009
72. When You Own Corporate One!Check 21 Business Began as turnkey solution Seven year old product line Front office /Teller window/ ATM/Remote capture products Volume presentment “wholesale” eDOC Diebold VSoft Large credit unions Least Cost Routing solution – 9 direct sends with national bank and clearinghouses Gross revenue of $3.58 M in 2009
73. When You Own Corporate One!ACH Business Product line for 20 years Fed Direct, P&H in house, moved to USC and Pep+ solution International ACH IAT compliant Origination for vendors OFAC/BAS compliant tools ACH association ACH experts consultants - 2 AAP ACH annual audit assistance Gross revenue of $.81 M in 2009
74. When You Own Corporate One! National in scope Strong Core earnings derived from many business lines Strong management team Strong risk management team and culture Strong brokerage operation Efficient and effective operation Solid financial performance
75. When You Own Corporate OneRisk Management expertise Skilled team Operational Modeling skills and tools in place QRM Intex Andrew Davidson (Cash Flows)
Editor's Notes
$75M with Key Bank$240 M with FHLB$ 70 M in fed funds lines with 3 banks$500 reverse repo agreements with Greenwich
