A large Landover-based credit union that serves other credit unions has restricted withdrawals by its nearly 500 customers because of problems with its portfolio of derivatives.
The Capital Corporate Federal Credit Union, which had nearly two-thirds of its $1.5 billion in assets in the risky securities, took the action last week after it was unable to sell the derivatives quickly enough to raise money to meet demand for loans.
Capital, many of whose customers are Maryland-based credit unions, said it is negotiating a merger with a larger California credit union to ease the problems that led to last week's declaration of a 60-day withdrawal freeze.
The company also announced 10 days ago that its chief executive officer, J. Clayton Brooke, had resigned at the start of the month for personal reasons.
Capital is one of 44 "corporate" credit unions which serve the country's 12,500 so-called "natural person" credit unions, such as the State Employees Credit Union and the Municipal Employees Credit Union. The corporate credit unions make HTC investments for their members and process credit card and check transactions.
Capital emphasized that the recent problems do not represent a threat to its existence, and federal regulators insisted the institution is not in any danger of being closed. "We don't see any immediate need" for a takeover, said Robert Loftus, a spokesman for the National Credit Union Administration (NCUA).
Capital's customers, or members, include about 490 credit unions in the mid-Atlantic area and across the country. They may apply for emergency relief to Capital or the NCUA if they need to make withdrawals before the freeze is lifted, according to Patrick Keefe, a spokesman for Capital.
Mr. Keefe said the negotiations with Western Corporate Federal Credit Union in San Dimas, Calif., are promising and should result in a merger within a month. At that point the withdrawal freeze would be lifted.
Officials said the situation most likely will not be noticed by people who have money in Capital's member credit unions. But it could not be determined to what extent the freeze would disrupt the operations of those institutions.
Several Maryland credit union officials said the problems at Capital would not hurt them. "It doesn't affect us at all, because we just use them to clear our checks through," said Gene S. Leber, president of Central Credit Union of Maryland Inc., a Towson company with about $11 million in assets.
Likewise, the Municipal Employees Credit Union of Baltimore, the area's third-largest credit union, with assets of $350 million, uses Capital only for credit card transactions. "This doesn't affect us in any way," said Raymond G. Rolle Sr., MECU's chief executive officer.
The freeze was prompted by problems with Capital's large portfolio of collateralized mortgage obligations, or CMOs, a type of security whose value is derived from a pool of mortgages. Many corporate credit unions invest in CMOs to one degree or another, but Capital had $1 billion, or two-thirds of its assets, in the derivatives. As interest rates have risen in the past 10 months, the value of those CMOs has plummeted.
Capital was one of two corporate credit unions forced by the NCUA to sell some of its CMOs recently. Early this month the NCUA said that more such divestitures could come soon, and at a meeting in November officials told an audience of corporate credit union officials that about six institutions were having similar difficulties, the American Banker newspaper reported.
On Dec. 1, soon after the forced sale of two CMO securities cost Capital about $1.4 million in losses, Mr. Brooke resigned as chief executive officer.
Less than a week later, on Dec. 7, Capital became temporarily unable to meet the borrowing demands of some of its member credit unions. The institution faced so much demand for money from its members that it exceeded its daily limit on borrowing from other institutions. Because its CMO portfolio had lost so much value on paper, Capital also couldn't afford to sell the securities and briefly had to stop lending to its customers, according to Mr. Keefe.
At that point the NCUA stepped in and told Capital's board of directors to find a solution to this "liquidity crunch." Capital's solution was to seek a merger partner.