Southwest Corporate
Location: Dallas
Assets: $12.9 billion
Strategy: To Become More Transparent
DALLAS-John Cassidy, CEO of Southwest Corporate, Plano, Texas, spoke for many when he said, "If I had to summarize our strategy in one word it would be 'transparency.' We want to be as open as possible about what the market dislocation is doing to our performance."
According to Cassidy, Southwest Corporate has worked to maintain one-on-one communication with its credit union members. "We do that normally, but in these conditions it is even more important than usual. Another channel is our financial information and disclosures. We are providing expanded monthly financial disclosures on our website. In addition, we are doing webinars."
Southwest has been sending special notices to its members when an issue arises that they should be aware of, Cassidy added. "Last week was an example-Fitch reaffirmed our ratings, but put us on a negative ratings watch. We notified our members, and we provided some commentary," (CU Journal, June 23).
Cassidy noted that when the national media began focusing on what then was referred to as the subprime mortgage crisis in early 2007, Southwest Corporate also began fielding questions from members. By last fall, Cassidy said, Southwest decided it was important to expand its monthly financial disclosures to address member CUs' concerns.
"Beginning in October, given the degree of market dislocation, we supplemented our disclosures with a management discussion and analysis, or MD&A. We include disclosures of accumulated losses on our balance sheet," Cassidy said.
In February of this year, media articles focused on market dislocation and its effect on U.S. Central, which Cassidy said prompted Southwest to begin offering quarterly webinars. The webinars focus first on Southwest's financial results, second, on the quality of its investments, and third-the majority of the presentation-an overview of its investment portfolio holdings.
"In all of our various contacts, there are five main points we are making as a message to our members. The first message is there is an impact on Southwest Corporate, and that is our recorded assets' fair values are declining. That means the accumulated unrealized losses on our balance sheet caused by lack of training on the marketplace. Second, despite the decline in the recorded fair value, our investments are comprised of very high quality assets. Third, because our asset quality remains high, the current unrealized losses are not expected to result in appreciable realized losses. Fourth, our asset fair values are expected to recover over time in conjunction of resumption of more typical trading levels. Fifth, in the meantime, our operating results have never been stronger, and Southwest Corporate has ample sources of liquidity that prevent the need to sell securities during the present market dislocation."
"The corporate network is in good shape. The underlying value of our investments remains strong," he continued. "There is a danger when people paint events such as Bear Stearns with a broad brush, and relate them to investments we have. Our investments can absorb a decline in collateral performance because there are other pieces in the structure that absorb the losses. We invest in the senior pieces in the structure. The support pieces absorb the losses before the senior pieces, so we get paid first from the senior pieces."
One of the items Southwest Corporate discloses on its MD&A are the high levels of credit enhancement its securities hold, Cassidy continued. "We do invest in mortgage-related products, but only in those products of the highest quality with the most enhancements. Liquidity is a key component. The securities are not marketable now, because you couldn't get a price close to the value. But we have ample sources of liquidity to ensure that would not be the case."
First Carolina Corporate
Location: Greensboro, N.C.
Assets: $2.4 Billion
Strategy: An Emphasis On Liquidity, Health
GREENSBORO, N.C.-First Carolina Corporate may need to change its name to First Communication.
The corporate has turned to multiple channels to get out its message, including quarterly financial due-diligence reports in which executives discuss First Carolina's current financial situation. "We are very open about discussing what our unrealized losses value is and how it relates to capital, as well as our investment portfolio," said Fred Eisel, SVP and chief investment officer.
First Carolina, which serves both North and South Carolina, sent representatives to league meetings in both states where, "We detailed our performance, our portfolio and our capital position at both meetings," he said.
David Brehmer, First Carolina's CEO, is the chair of U.S. Central's ALCO, or Asset Liability Committee. Eisel said Brehmer relays any information on U.S. Central's situation to its board, and First Carolina then relays that information to its members. "We are in close communication with U.S. Central, as all large corporates are," said Eisel. "We are very familiar with U.S. Central's management of our portfolio. They are giving us marketing reports on the portfolio, their unrealized losses and any downgrades they have."
"Our method is print and in person, and we do mini-conferences throughout the Carolinas on various topics," continued Eisel. "Our message is the credit union movement is very well-positioned and very well capitalized to handle the current situation."
Eisel noted the headline news in recent months was U.S. Central getting downgraded from AAA to AA+. Still, he added, AA+ is one of the highest ratings in the country. "We believe the unrealized losses U.S. Central and other corporates are dealing with are a temporary situation, especially if you look at the underlying collateral, which is paying as expected. The price has dropped considerably, but for the most part, payment continues as expected."
First Carolina remains "very comfortable" with its financial position, Eisel continued. Although its unrealized losses have continued to increase-as have those at other corporates, he pointed out its reserves and undivided earnings, or RUDE, are well above the level of those losses, so it still has positive equity.
"That's what we are relaying to our members-we have plenty of liquidity. The big thing for us and for everyone else in this environment is liquidity, and we are staying very liquid."
First Carolina's losses are coming from only a "very small portion" of its balance sheet, Eisel declared. He said the corporate's unrealized losses were slightly more than $29 million as of May 31. It has RUDE of $56 million and no plans to liquidate any of the investments it will hold to maturity. "And the same thing goes for U.S. Central-their unrealized losses are in bonds that they plan to hold. They are labeled 'Available for Sale,' but given the market and their liquidity position, there is no reason to sell."
Eisel said he expects corporates to pass along their record earnings to natural-person CUs in the form of better certificate rates. And he remains confident as to the safety and soundness of his and other corporates. "Corporates are managing their way through this, and still are a source for investments at very, very competitive rates. First Carolina has only seen a handful of our members calling us with concerns. They understand the current market dislocation and the investment situation, and they are confident we are going to ride through the storm."
WesCorp
Location: San Dimas, Calif.
Assets: $30 billion
Strategy: Adding Two-Way Communication
SAN DIMAS, Calif.-Among the communications steps added by Western Corporate FCU (WesCorp) has been quarterly web seminars to ensure the communication flows both ways.
Kevin Lytle, vice president of marketing and public relations observed, "It is even more important to communicate on a regular basis to our credit union members. Because of the current market dislocation and the headline news people are seeing with things like Bear Stearns, there is concern."
To meet this communication need, Lytle said every month WesCorp publishes its financial statements on its website. "And since January, we've been adding a cover letter explaining everything," he noted.
In addition, WesCorp produces quarterly safety-and-soundness webcasts. The webcasts feature Bob Burrell, its EVP/CIO; Jim Hayes, senior VP-CFO; Laura Cloherty, VP-controller, and Jeff Hamilton, VP-investment management, all of whom review its financial condition and offer analysis of its investment portfolio. "If we have any unrealized losses, we go over those on a quarterly basis," Lytle said. "Our members in attendance can submit questions. Time permitting, we answer those questions live. If there are more questions than time permits, we prepare answers and e-mail the questions and the answers to everyone who was on the webcast."
WesCorp's annual report is scheduled to be released by the end of June. Lytle said not only will print copies be available, "we'll be doing something a little bit unique for us-we will have a CD-ROM copy to make it easier for our members to look at our financial statement. And by the first or second week of August, we will have a mid-year analysis of our financials ready.
Section of Due Diligence
All of the financial data and analysis is available at
"It is about having the wherewithal and the deposit base to meet our needs and to meet our members' needs for loans and investments," he said. "We are not in a position to sell any of the securities that represent unrealized losses. If we don't have to sell those securities, then the unrealized losses don't turn into realized losses. The corporate network has ample liquidity to get through this period of market dislocation."
Walter Laskos, WesCorp's director of public relations, said an important note to keep in mind regarding the corporate's unrealized losses is it holds two CDOs that have been downgraded, but they are performing fully to expectations.
"The CDOs have been examined by two outside agencies, who agreed with WesCorp they will perform to full maturity," he explained. "We showed that to NCUA, who agreed with us and told us to hold them to maturity."
One problem, according to Laskos, is the increasing complexity of corporate CUs' balance sheets. "Some people have no idea how to read a balance sheet, and they might react emotionally if they don't have all the facts," he said.
When asked if credit unions are expressing fears, Lytle said, "I don't know if there is fear as much as there is concern. Credit union members are concerned, and rightfully so, about keeping track of their corporate's financial condition. We are going to continue to provide our members with as much information as is necessary to make our members comfortable with our financial position."
CORPORATE ONE
LOCATION: Columbus, Ohio
ASSETS: $4 Billion
Strategy: Emphasis On Diversification
Proactive discussion of issues, attending meetings with member credit unions and posting financial statements online-just a few of the methods Corporate One FCU is using to soothe nerves during the ongoing tight credit market.
Melissa Ashley, Corporate One's chief financial officer, told Credit Union Journal the corporate always has been "open and transparent" with its members.
Since the credit crunch began making negative headlines last fall, though, it has ratcheted up its efforts.
"One of the things we started last November was getting our financial statements posted on our website by the 15th of each month," she said. "We are very proactive about updating the discussion section of the statements each month, talking about what members should understand about our financials."
Among other concepts Corporate One wants its natural-person CUs to know is the diversification in its portfolio. "We are not invested just in mortgage-backed securities. Liquidity certainly is a key thing. We have a section just on how we manage liquidity, which helps us make sure an unrealized loss doesn't become a realized loss. You don't want to sell an asset in a distressed market."
In addition to the online postings, Corporate One maintains a crew of "knowledgeable folks" designated to take calls from credit unions, Ashley said. Some credit unions call the corporate every month with questions. "And we proactively call some credit unions if we know they will have a concern."
Corporate One representatives visit asset liability committees at several of its member credit unions to allow them to question the corporate directly, Ashley explained. "We offer to go to these ALCO meetings, or we host them at our office. As CFO I write the discussion section of our financial statement each month, so I want to know what the concerns are that credit unions have. When we are able to talk to members and explain our financial position, we get very positive reactions. We've found it a very worthwhile thing to take their calls and answer their questions."
Ashley told Credit Union Journal Corporate One's unrealized losses were $247 million as of May 31-an improvement of $14 million from the end of April. While that figure might seem distressing to some, she emphasized several factors that lead management to believe the unrealized losses will not have a negative impact in the long run.
"We are very confident we have the liquidity to hold these to maturity and not have to take an actual loss," she declared. "We are very confident with our financial wherewithal. We have very strong earnings-the highest in the history of Corporate One. Even though you see unrealized losses on our balance sheet, none of the bonds have defaulted, and the assets are bringing great earnings."
Ashley credited Bill Hampel, CUNA's chief economist, for coining an excellent analogy for the credit crisis. He said: if one bottle of wine in a case potentially will kill you, no one will want to buy any of the remainder of the case.
"The rest of the bottles are high quality, but because one scares you, you don't want to buy any of them," she said. "Some bonds are scary, so no one wants to buy any of the bonds, which is why we have price deterioration."
The concern over the corporate network's safety and soundness is a bit overblown, she assessed, because of NCUA's strict regulations on corporates from the start on permissible investments.
Corporate One has also established a diverse revenue stream, which should help it survive the current economic turbulence, Ashley asserted. The corporate provides correspondent services, such as banking services, share draft processing, ATM services and ACH services. It also sells securities. Ashley added that Corporate One's relationship with the FHLB of Cincinnati also provides liquidity.
