a

GAO

United States Government Accountability Office

Report to the Ranking Minority Member, 

Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate

September 2004 CORPORATE CREDIT 

UNIONS

Competitive 

Environment May 

Stress Financial 

Condition, Posing 

Challenges for NCUA 

Oversight

GAO-04-977
www.gao.gov/cgi-bin/getrpt?GAO-04-977.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J. 

Hillman at (202) 512-9073 or 

hilmanr@gao.gov. 

Highlights of GAO-04-977, a report to the 

Ranking Minority Member, Committee on 

Banking, Housing, and Urban Affairs, U.S. 

Senate 

September 2004

CORPORATE CREDIT UNIONS 

Competitive Environment May Stress 

Financial Condition, Posing Challenges 

for NCUA Oversight 

Corporates face an increasingly challenging business environment that 

potentially could stress their overall financial condition. In response to the 

competitive environment, corporates are offering new and more 

sophisticated products and services, expanding their use of technology, and 

seeking opportunities to merge or collaborate with other corporates. The 

corporates’ financial condition as measured by profitability and capital ratios

remained close to a range that has prevailed since the mid-1990s. However, 

since 2000, a large influx of deposits, coupled with low returns on traditional 

corporate investments, has constrained earnings and caused a downward 

trend in corporates’ overall profitability. To generate earnings, corporates 

increasingly have targeted more sophisticated and potentially riskier 

investments, but appear to be managing risk by shifting toward more 

variable-rate and shorter-term investments, providing a potentially better 

match for the relatively short-term nature of their members’ deposits. 

However, the corporates’ changing business environment and utilization of 

more sophisticated and riskier investments increases the importance of 

NCUA regularly assessing its oversight processes to ensure that corporates 

are properly managing these risks. 

NCUA has strengthened its oversight of corporates by creating a centralized 

office for oversight, revising regulations, implementing risk-focused 

supervision, and hiring specialists. However, NCUA faces challenges in 

identifying networkwide problems on a consistent basis, using specialists 

effectively, providing relevant guidance on mergers, and assuring the quality 

of corporates’ internal controls. Although NCUA identified deficiencies 

during its examinations, it has not systematically tracked their resolution or 

evaluated trends in examination data, which could help anticipate emerging 

issues facing corporates. NCUA also did not fully consider all risks when 

allocating resources or assigning specialists to examinations, leading to 

NCUA overlooking some information system deficiencies. Although 

corporates continue to consider mergers to remain competitive, NCUA had 

not developed adequate guidance for submitting and reviewing merger 

proposals. Finally, NCUA has not ensured that corporates’ internal controls 

have remained consistent with those of similarly sized financial institutions. 

Three-Tiered Credit Union System as of December 31, 2003

U.S. Central Credit Union

Investments

Investments

Liquidity loans

Liquidity loans

Payment and other

financial services

Payment and other

financial services

9,488 credit unions

30 corporate credit unions

Sources: Call report data and U.S. Central.

Thousands of credit unions have 

placed about $55 billion of their 

excess funds in corporate credit 

unions (corporates). In a threetiered system, corporates provide 

lending, investment, and 

processing services for their 

member credit unions. Problems 

with investments in the past 

prompted regulatory changes that 

required higher capitalization and 

stricter risk management, but 

allowed for expanded investment 

authorities. GAO assessed (1) the 

changes in financial condition of 

the corporate network and (2) the 

oversight of corporates by the 

National Credit Union 

Administration (NCUA), the federal 

regulator of credit unions. 

To improve oversight of 

corporates, GAO recommends that 

the Chairman of NCUA (1) 

establish a process and structure to 

systematically involve specialists in 

identifying and addressing 

problems, (2) track and analyze 

examination deficiencies to 

address complex and emerging 

issues, (3) pay increased attention 

to oversight of corporates’ risk 

management functions, (4) provide 

improved guidance to corporates 

and examiners for preparing and 

reviewing merger packages, and 

(5) require internal control 

reporting consistent with other 

financial institutions. NCUA 

agreed to implement all of these 

recommendations, except for 

providing improved guidance to 

examiners reviewing mergers. 
Page i GAO-04-977 Corporate Credit Unions

Contents

Letter 1

Background 3

Results in Brief 8

Corporate Network Faces an Increasingly Challenging Business 

Environment, Creating Potential Stress on Its Financial 

Condition 10

NCUA Strengthened Its Oversight of Corporates, but Could Do More 

to Anticipate and Address Emerging Network Issues 25

Conclusions 37

Recommendations for Executive Action 38

Agency Comments and Our Evaluation 39

Appendixes

Appendix I: Objectives, Scope, and Methodology 43

Appendix II: Corporate Credit Unions Active as of December 31, 2003 49

Appendix III: Structured Questionnaire to Corporate Credit Unions on 

Their Current Makeup and Challenges Facing the 

Network 50

Appendix IV: Selected Responses to Structured Questionnaire Distributed 

to Corporate Credit Unions 63

Appendix V: Financial Condition of Corporates, 1992-2003 74

Appendix VI: Financial Condition of U.S. Central Generally Mirrors Other 

Corporates 83

Appendix VII: Expanded Authorities Available to Corporates 91

Appendix VIII: Comments from the National Credit Union Administration 94

Appendix IX: GAO Contacts and Staff Acknowledgments 102

GAO Contacts 102

Staff Acknowledgments 102

Tables Table 1: Corporates’ Investments Shifted toward Potentially Higher 

Yielding and More Volatile Securities 22

Table 2: Number of Institutions and Total Assets in the Corporate 

and Natural Person Credit Union Systems, 1992-2003 74

Table 3: Composition of Selected Investments of Corporates, 

1997-2003 77
Contents

Page ii GAO-04-977 Corporate Credit Unions

Table 4: Composition of Total Investments of U.S. Central, 

1997-2003 86

Table 5: Composition of Selected Investments of U.S. Central, 

1997-2003 87

Table 6: Expanded Authorities and Number of Corporates 

Authorized to Engage in Investments under These 

Authorities, as of December 31, 2003 92

Figures Figure 1: Location of Corporate Credit Unions, as of December 

2003 5

Figure 2: Services Provided to Natural Person Credit Unions by 

Corporate Credit Unions and U.S. Central Credit Union, 

as of December 31, 2003 6

Figure 3: Net Income Has Generally Risen, but Profitability Has 

Declined Recently 14

Figure 4: Capital Levels Have Risen, but Corporates Have 

Increasingly Relied on Less Permanent Forms of 

Capital 16

Figure 5: Capital Ratios Have Declined Recently (1998-2003) 18

Figure 6: Corporates’ Investments Have Grown and Consistently 

Represent Most of Corporates’ Assets 20

Figure 7: Largest Corporates Have Invested Relatively Less in U.S. 

Central Obligations Than Smaller Corporates 21

Figure 8: Size Distribution of Corporates, by Number, 1992-2003 75

Figure 9: Asset Concentration Levels of Corporates, 1992-2003 76

Figure 10: Income and Expense Ratios of Corporates, 1993-2003 79

Figure 11: Interest Income and Expense Ratios, 1993-2003 81

Figure 12: Balance Sheet of U.S. Central, 1992-2003 84

Figure 13: U.S. Central’s Investments Relative to Total Assets, 

1992-2003 85

Figure 14: Total Capital of U.S. Central, 1998-2003 88

Figure 15: Capital Ratios of U.S Central, 1998-2003 89

Figure 16: Net Income and Profitability of U.S. Central, 1992-2003 90
Contents

Page iii GAO-04-977 Corporate Credit Unions

Abbreviations

ACCU Association of Corporate Credit Unions

ACH automated clearing house

ALM asset/liability management

CLF Central Liquidity Facility

CMO collaterized mortgage obligation

corporates corporate credit unions

CRIS Corporate Risk Information System

CUGR U.S. Central Grantor Trusts

CUSO Credit Union Service Organization

DANA daily average net assets

DCI data collection instrument

FDIC Federal Deposit Insurance Corporation

FDICIA Federal Deposit Insurance Corporation Improvement Act of 

1991

FFIEC Federal Financial Institutions Examination Council

FRAP floating rate asset program

NCUA National Credit Union Administration

NCUSIF National Credit Union Share Insurance Fund

NEV net economic value

OCC Office of the Comptroller of the Currency

OCCU Office of Corporate Credit Unions

OSPSP Office of Strategic Program Support and Planning

OTS Office of Thrift Supervision

REMIC real estate mortgage investment conduit

RUDE reserves and undivided earnings

U.S. Central U.S. Central Credit Union

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Page 1 GAO-04-977 Corporate Credit Unions

United States Government Accountability Office

Washington, D.C. 20548

A

September 10, 2004 Letr

The Honorable Paul S. Sarbanes 

Ranking Minority Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

Dear Senator Sarbanes:

Thousands of credit unions have placed about $55 billion of their excess 

funds in corporate credit unions for investment purposes. Under a 

three-tiered system, corporate credit unions (corporates) are 

member-owned financial cooperatives whose members are credit unions, 

not individuals. As the “credit union for credit unions,” corporates provide 

deposit, liquidity, investment, and processing services for their members. In 

turn, the member credit unions have about 82 million members, to whom 

they provide deposit, loan, and some investment services. U.S. Central 

Credit Union (U.S. Central), a nonprofit cooperative, is owned by 

corporates (serves as the “corporate for the corporates”) and it serves its 

members much like corporates serve their credit union members—which 

the federal regulator for credit unions, National Credit Union 

Administration (NCUA), and the corporate network refer to as natural 

person credit unions.1

We last conducted a comprehensive review of corporates and their 

oversight by NCUA in 1991.2 In addition, we conducted more targeted 

reviews of corporates in 1994 and 1995 in response to the failure of a large 

corporate in the mid-1990s.3

 Since that time, assets placed in corporates 

have grown, corporate credit union business strategies have changed, and 

1

NCUA’s authority over corporate credit unions exists in NCUA’s general regulatory powers 

under section 120(a) of the Federal Credit Union Act. See 12 U.S.C. § 1766(a) (2000); see 

also, 12 C.F.R. § 704.1 (2004).

2

GAO, Credit Unions: Reforms for Ensuring Future Soundness, GAO/GGD-91-85

(Washington, D.C.: July 10, 1991). 

3

See GAO, Corporate Credit Unions: Conditions, Issues, and Concerns, GAO/T-GGD-95-15

(Washington, D.C.: Oct. 6, 1994). In addition, see Credit Unions: The Failure of Capital 

Corporate Federal Credit Union, GAO/T-GGD-95-107 (Washington, D.C.: Feb. 28, 1995) and 

Credit Unions: Proposed Reforms for Corporate Credit Union Regulation,

GAO/T-GGD-95-115 (Washington, D.C.: Mar. 8, 1995). These testimonies described the 

reasons for the failure and provided recommendations to Congress and NCUA to improve 

the safety and soundness of corporates. 
Page 2 GAO-04-977 Corporate Credit Unions

NCUA has significantly changed its approach to oversight. In light of the 

evolution of corporate credit union operations and the change in NCUA’s 

supervisory approach, and as part of our overall review of the credit union 

industry, you asked us to review a number of issues involving corporates 

and NCUA.4

 Based on discussions with your staff, we assessed (1) the 

changes in financial condition of corporate credit unions since 1992 and (2) 

NCUA’s supervision and oversight of corporates, particularly with regard to 

how it identifies and addresses safety and soundness issues. 

To assess the changes in the financial condition of corporates, we analyzed 

corporate credit union call report data from December 1992 to December 

2003, and reviewed internal corporate credit union analyses and 

independent studies of the industry from rating agencies.5

 We also 

conducted a legislative and regulatory review to determine the key 

legislative and regulatory changes affecting corporates since 1992. To 

depict the business environment that can affect the financial condition of 

corporates, we administered a questionnaire to all 31 currently operating 

corporates, and interviewed NCUA and credit union trade organization 

officials. To assess how NCUA’s supervision of corporates identified and 

addressed safety and soundness issues, we reviewed NCUA documentation 

on its risk-focused examination program and reviewed examinations and 

NCUA management reports for all corporates from 2001 through 2003. We 

also conducted a detailed review of NCUA workpapers for 10 corporates 

and interviewed the examiners who were responsible for supervising these 

corporates. In addition, we conducted site visits to seven corporates, 

selected based on their size, geographic location, and whether they were 

state or federally chartered, or were granted expanded investment 

authorities.6

 Appendix I provides additional details on our scope and 

4

See GAO, Credit Unions: Financial Condition Has Improved, but Opportunities Exist to 

Enhance Oversight and Share Insurance Management, GAO-04-91 (Washington, D.C.: Oct. 

27, 2003).

5

A call report is a periodic (for example, monthly or quarterly) statement detailing income 

and certain financial condition information, which is filed by an institution with its 

regulator. Corporate credit unions currently file the Form 5310 monthly with NCUA. See 

appendix I for more information.

6

As part of NCUA’s revision of Part 704 of its rules and regulations, corporate credit unions 

that meet applicable requirements of this rule and fulfill additional management and 

infrastructure requirements are allowed to invest in a broader array of products, such as 

lower-rated investments and certain foreign investments, and engage in derivative 

transactions. See 12 C.F.R. Part 704, App. B (2004); see also, 67 Fed. Reg. 65640, 65658 (Oct. 

25, 2002).
Page 3 GAO-04-977 Corporate Credit Unions

methodology. Appendix II provides a list of all 31 corporates that were 

active as of December 31, 2003, and appendix III contains a copy of the 

structured questionnaire. We conducted our work in Alexandria, Virginia, 

Washington, D.C., and other U.S. cities from December 2003 to September 

2004 in accordance with generally accepted government auditing 

standards.

Background Corporate credit unions occupy a unique niche among financial 

institutions.7

 They are nonprofit financial cooperatives that are owned by 

natural person credit unions (that is, credit unions whose members are 

individuals), and provide lending, investment, and other financial services 

to these credit unions. For example, corporates offer loans to member 

credit unions, which in turn use these loans to meet the loan demands of 

their individual members. However, corporates are not the only financial 

institutions that provide products and services to credit unions. For 

example, some credit unions may also obtain loans from Federal Reserve 

Banks or Federal Home Loan Banks.8

 Additionally, corporates offer credit 

unions investment products and investment advice, but credit unions can 

also obtain these services from broker-dealers or investment firms. Finally, 

corporates also offer automated settlement, securities safekeeping, data 

processing, accounting, and electronic payment services, which are similar 

to the correspondent services that large commercial banks have 

traditionally provided to smaller banks. With an emphasis on safety and 

liquidity, corporates seek to provide their members with higher returns on 

their deposits and lower costs on products and services than can be 

obtained individually elsewhere. However, corporates’ limited ability to 

generate profits—as nonprofit institutions, owned and controlled by their 

primary customers—constrains their ability to build a financial cushion 

against adverse financial conditions or unexpected losses.

7

In this report, we refer to the retail corporate credit unions as “corporates,” emphasizing 

the distinction between these institutions and U.S. Central, which is a wholesale corporate 

credit union. We refer to corporates and U.S. Central as the “corporate network.” 

8

In addition, the Central Liquidity Facility (CLF) is a source of funds for credit unions. 

Congress created CLF, which is managed by NCUA, in 1978 to improve the financial stability 

of credit unions by serving as a lender to credit unions experiencing unusual or unexpected 

shortfalls in funds. Most credit unions join CLF through their corporate, which acts as an 

agent for its members.
Page 4 GAO-04-977 Corporate Credit Unions

Since 2000, corporates have experienced deposit inflows from natural 

person credit unions that increased corporates’ assets and shares. 

Corporates act as a “liquidity sponge” for the underlying natural person 

credit union system, and the cyclical rise and fall of corporates’ assets and 

shares (deposits) are rooted in the deposit flows of the natural person 

credit unions. Thus, these inflows and outflows of deposits, which are 

beyond corporates’ control, affect their measures of financial 

strength—such as profitability and capital ratios. As we discuss later in the 

report, this has exacerbated the stress on their financial condition.

Since 1992, the number of corporates in the corporate network has 

decreased, with assets more concentrated in larger institutions. (See fig. 1 

for an illustration of the network’s geographic distribution.) Mainly as a 

result of mergers, corporates have decreased in number from 44, at the end 

of 1992, to 30 as of December 31, 2003, excluding U.S. Central. On average, 

corporates also have become larger, with the median asset size (excluding 

U.S. Central) increasing from $450.6 million in 1992 to $1.2 billion at the 

end of 2003. However, the corporate network still encompasses small and 

large institutions, ranging in size from $7.3 million in assets to $25 billion, 

as of December 31, 2003. In addition, asset concentration in the network 

has become more pronounced since 1992. Excluding U.S. Central, at the 

end of 1992 the three largest corporates accounted for approximately 42 

percent of the corporates’ total assets. By the end of 2003, these corporates 

accounted for roughly half of corporates’ total assets and the largest 

corporate accounted for about one-third. 
Page 5 GAO-04-977 Corporate Credit Unions

Figure 1: Location of Corporate Credit Unions, as of December 2003

As shown in figure 2, the credit union industry is organized into three 

closely connected groupings. At the “top” or retail level, as of December 31, 

2003, there were the 9,488 credit unions that served roughly 82 million 

individual customers. In the middle are the 30 corporates, which serve 

credit unions by investing the cash they have not lent out and by providing 

loans and other financial services to the credit unions. Finally, on the 

“bottom” or wholesale level is U.S. Central, which provides corporates a 

range of products and services, similar to those that corporates provide to 

credit unions.

Corporate credit union

U.S. Central Credit Union

Source: NCUA 2003 Annual Report.

Parkersburg

WV

Irondale

AL

Southfield

MI

Auburn

Wallingford

CT

Hales

Corner

WI

Columbus

OH

MA Woburn Albany

NY

Greensboro

NC

Phoenix

AZ

Duluth

GA

Des Moines

IA

Wichita

KS

Louisville

KY

Endicott

Metairie

LA

Middletown

Warrenville PA

IL

Bismarck

ND

St. Louis

MO

Portland

OR

Tallahassee

FL

Dallas

TX

Arvada

CO

Helena

MT

Westbrook

ME

Lenexa

Lynchburg

VA

Nashville

TN San Dimas

CA
Page 6 GAO-04-977 Corporate Credit Unions

Figure 2: Services Provided to Natural Person Credit Unions by Corporate Credit 

Unions and U.S. Central Credit Union, as of December 31, 2003

a

Includes cash management products and services, risk management, settlement, and funds transfer.

b

Twenty-nine corporates are members of U.S. Central Credit Union. LICU Corporate Federal Credit 

Union is not a member of U.S. Central. LICU Corporate was originally established as a corporate credit 

union to facilitate payment and payroll processing for a league of IBM credit unions. While LICU 

Corporate and U.S. Central have discussed the possibility of LICU Corporate joining U.S. Central, 

LICU has not applied for membership.

Since their inception, corporates’ primary functions have been to accept 

deposits and make loans to their members. In addition, today, they also 

provide investments and other financial services to credit unions, and 

corporates over time have broadened the types of products and services 

they offer. Most corporates offer

• investment services;

• electronic services, such as the Automated Clearing House (ACH) and 

wire transfers; 

• correspondent services, such as settlements with the Federal Reserve 

and other financial institutions;

• check services, including collection and settlement of money orders and 

traveler’s checks;

U.S. Central Credit Union

Investments

Investments

Liquidity loans

Liquidity loans

Payment and

other servicesa

Payment and

other servicesa

9,488 credit unions

30 corporate credit unionsb

Sources: Call report data and U.S. Central.
Page 7 GAO-04-977 Corporate Credit Unions

• credit card settlement; and 

• education and training.

However, corporates now offer or plan to introduce new products and 

services such as online training, electronic bill payment, Internet banking, 

asset/liability management (ALM), and brokerage services.9

 For more 

detailed information on the products and services corporates offered or 

planned to offer, see appendix IV.

While the first credit union in the United States started in 1909, the first 

corporate did not start operations until 1968.10 Many corporates grew out of 

the various state credit union leagues and initially served only single states 

or regions. Over time, corporates were granted national fields of 

membership that allowed them to expand the number of credit unions they 

served. While corporate credit union membership can be national, 

corporates can have either a state or federal charter. As of December 31, 

2003, 18 of the 31 corporates, including U.S. Central, were state-chartered. 

In terms of oversight, NCUA has authority for supervision and examination 

of federally chartered corporates. Under the dual-chartering system, the 

supervisory authorities for those states that have state-chartered 

corporates are primarily responsible for supervision of these institutions. 

However, since all corporates provide deposit, liquidity, and correspondent 

services to federally insured credit unions, NCUA also has regulatory 

authority over state-chartered corporates and assesses the risks federally 

insured, state-chartered corporates and noninsured, state-chartered 

corporates present to the National Credit Union Share Insurance Fund 

(NCUSIF).11 This assessment, which is essentially an examination of the 

9

Asset/liability management is the process of evaluating interest-rate and liquidity risk and 

making decisions about the mix of assets and liabilities to hold, which enable a credit union 

to remain financially viable as economic conditions change. Interest-rate risk is the 

potential for lower earnings and capital resulting from interest-rate changes. Liquidity risk is 

the risk that a sudden withdrawal of deposits by natural person credit unions will force the 

corporate to sell assets quickly to cover the withdrawals.

10U.S. Central started operations in 1974.

11NCUSIF provides primary deposit insurance up to $100,000 per member per qualifying 

account. In the case of corporates, the members are natural person credit unions. Since the 

insurance coverage is very small compared with the deposits natural person credit unions 

have in corporates, most of these deposits are not federally insured. One state-chartered 

corporate does not have insurance coverage by NCUSIF. NCUA administers NCUSIF, which 

is funded by credit unions that deposit 1 percent of their insured shares into NCUSIF.
Page 8 GAO-04-977 Corporate Credit Unions

corporates’ operations, is performed jointly with state supervisory 

authorities during their examinations of state-chartered corporates.

Part 704 of NCUA’s regulations, together with the relevant provisions of the 

Federal Credit Union Act of 1934, constitutes the primary federal 

regulatory framework for both state- and federally chartered corporates.12

NCUA first issued Part 704 in 1982. Since our previous report on corporates 

in 1991, NCUA made significant revisions to Part 704 in 1998 and 2002 

relating to risks, capital, investments, and other areas covered by this 

report.

Results in Brief Corporates face an increasingly challenging business environment that has 

created potential stresses on their financial condition. Like other financial 

institutions, corporates operate in an environment characterized by 

increasing competition, changing product and service offerings, and the 

continuous introduction of new technology—thus increasing the 

complexity of their operations, which in turn can impact their financial 

condition. The corporates’ financial condition, as measured by profitability 

(the ratio of net income to average assets) and capital ratios, remained 

close to a range that has prevailed since the mid-1990s. However, since 

2000, a large influx of deposits coupled with low returns on traditional 

corporate investments has caused a downward trend in corporates’ overall 

profitability because deposits/assets have grown more quickly than 

income. More recently, the relatively slower growth in retained earnings (a 

component of income) has also put pressure on capital ratios, which raises 

some concern since capital ratios are an important indicator of financial 

strength. To generate earnings, corporates increasingly have targeted more 

sophisticated and potentially riskier investments. However, corporates 

appear to be managing risk by shifting toward more variable-rate and 

shorter-term investments, providing a potentially better match for the 

relatively short-term nature of their members’ deposits and managing its 

other risks. Further, NCUA recently permitted the three largest corporates 

to invest in lower-rated securities, potentially increasing their credit risk 

(that is, there is a higher risk of nonpayment on assets held by the 

corporate), but their use of this expanded authority has been negligible to 

date. The corporates’ changing business environment and their use of more 

sophisticated and potentially riskier investments increases the importance 

1212 C.F.R. Part 704 (2004). 
Page 9 GAO-04-977 Corporate Credit Unions

of NCUA regularly assessing its oversight processes to ensure that 

corporates are properly managing these risks.

NCUA has strengthened its oversight of corporates, which has allowed it to 

better address safety and soundness issues; however, NCUA faces 

challenges in identifying networkwide problems on a consistent basis, 

using specialists effectively, providing relevant guidance on mergers, and 

assuring the quality of corporates’ internal controls. Since 1991, NCUA has 

created an office dedicated to the oversight of corporates—the Office of 

Corporate Credit Unions (OCCU)—significantly revised regulations 

specific to corporates, implemented risk-focused supervision and 

examinations, and hired specialists in areas such as capital markets and 

information systems. Based on our review of NCUA examinations for 2001 

through 2003, NCUA examiners generally have identified safety and 

soundness issues and mandated corrective actions to address them. 

However, NCUA has not tracked or systematically evaluated trends in 

examination findings and their resolution to help its examiners anticipate 

emerging issues within the corporate network. Further, NCUA has not 

systematically considered certain operational risks, such as weak 

information system controls, when assigning specialists to examinations. 

This may have led to NCUA overlooking certain problems or not ensuring 

that problems were corrected in a timely manner. In addition, although it 

has responsibilities to approve proposed mergers, we found that NCUA had 

not developed specific guidance for corporates submitting merger 

proposals or ensured that the guidance examiners used to assess these 

proposals was comprehensive and clearly applicable to corporates. For 

example, NCUA has referred corporates to guidance issued for natural 

person credit unions that provides step-by-step instructions for completing 

the merger process, but the capital ratios were not relevant for evaluating 

corporates’ proposals. During our review of five recent mergers, we found 

that NCUA did not conduct their reviews in a consistent manner; 

additionally, we could not always determine why NCUA reached certain 

decisions concerning these mergers. In an increasingly competitive 

environment in which corporates are considering mergers to remain 

competitive, nonspecific guidance and inconsistent reviews of merger 

proposals might lead to mergers that would not be in the best interest of 

members and would present undue risks to the network’s safety and 

soundness. Finally, as corporates introduce new technologies and offer 

their members more sophisticated products and services, NCUA’s oversight 

of corporates’ internal controls has become more important. However, 

corporates are not subject to the internal control reporting requirements 

imposed on other financial institutions of similar size that help to ensure 
Page 10 GAO-04-977 Corporate Credit Unions

safety and soundness, as defined under the Federal Deposit Insurance 

Corporation Improvement Act of 1991 (FDICIA). This raises a question 

about whether NCUA has the necessary information to assess corporates’ 

internal controls.

This report contains recommendations to NCUA that, if implemented, 

would provide a more systematic and consistent approach to NCUA’s 

oversight of corporates to help achieve its goal of promoting a network of 

financially healthy, well-managed federally insured corporates.

We requested comments on a draft of this report from the Chairman of the 

National Credit Union Administration. We received written comments from 

NCUA that are reprinted in appendix VIII. NCUA concurred with most of 

our assessments and conclusions and agreed to take action to implement 

all but part of one of our report’s recommendations. NCUA’s comments and 

our response are discussed at the end of this report.

Corporate Network 

Faces an Increasingly 

Challenging Business 

Environment, Creating 

Potential Stress on Its 

Financial Condition 

Like other financial institutions, corporates face a challenging business 

environment that affects their financial condition and is characterized by 

increasing competition, changing product and service offerings, and rapid 

technological advances.13 Moreover, recent pressure from a 

low-interest-rate environment and rapid growth in assets has put additional 

stress on the corporate network’s profitability and capital ratios.14 While 

net income levels have grown since 2000, corporates’ profitability was 

lower in 2003 than in 1993. As rapid asset growth negatively impacts 

profitability, it affects corporates’ ability to generate sufficient retained

13We assessed the financial condition of the corporate network by the overall profitability, 

capital ratios, and assets of the corporates and U.S. Central. Assets include cash, 

investments, and loans, among other things. Profitability is the ratio of net income to 

average assets. Capital, which represents the long-term funding of a financial institution, 

enables a corporate to continue to fund operations, generate earnings, and grow, and it also 

provides a cushion to absorb unexpected losses. A capital ratio is the ratio of capital to 

average assets, which takes into account the size of an institution.

14Our quantitative analysis is based on publicly available balance sheet and income 

statement information from call reports and annual reports, unless otherwise noted. We 

generally separated U.S. Central from the corporates to control for the interrelationship that 

exists between the corporates and U.S. Central, in which a substantial portion of corporates’ 

assets is held by U.S. Central and contributes to its capital. U.S. Central’s overall financial 

holdings and investments tend to parallel those made by other large corporates. For more 

information on the financial condition of U.S. Central, see appendix VI.
Page 11 GAO-04-977 Corporate Credit Unions

earnings—the primary component of their capital.15 As overall capital 

levels have been rising, corporates have been relying more on less 

permanent (relatively weaker) forms of capital. Additionally, rapid asset 

growth and the relatively slower growth in retained earnings has put 

pressure on corporates’ capital ratios, which could be a cause for concern 

since capital ratios are an important indicator of financial strength. Growth 

and changes in corporate investments, such as recent shifts of more of the 

corporates’ investment portfolios into potentially higher yielding and more 

volatile securities, may increase interest-rate risk if the investments are not 

managed properly. In particular, the percentage of corporate investments in 

obligations of U.S. Central has declined while the percentages of 

corporates’ investments in privately issued mortgage-related and 

asset-backed securities have increased.

16 Corporates appear to be 

managing risk by shifting toward more variable-rate and shorter-term 

securities, providing a potentially better match for the relatively short-term 

nature of their members’ deposits. However, a regulatory change effective 

in 2003 allowed certain corporates to purchase securities with lower credit 

quality (more credit risk), raising implications for NCUA oversight since 

this activity may lead to increased risk if it is not managed properly.

The Challenging Business 

Environment in Which 

Corporates Operate May 

Impact Their Financial 

Condition

Corporate credit unions are operating in a challenging business 

environment characterized by increased competition, pressure to increase 

returns on their investments in a low-interest-rate environment, and the 

need to invest in technology and personnel to meet the demands of their 

credit union members for new and more sophisticated products and 

services. To obtain the corporates’ views on their business environment, 

we distributed a questionnaire to the entire network and achieved a 100 

percent response rate. The corporates reported that they faced competition 

from outside the corporate network from entities such as banks, 

broker-dealers, the Federal Reserve System, and Federal Home Loan 

Banks. About 87 percent of the corporates reported that they also faced 

competition from other corporates despite the cooperative nature of the 

network. In addition, in recent years (since 2000), corporates have received 

a large inflow of deposits from their natural person credit union members, 

15A corporate’s retained earnings are the key component of its capital, as they represent the 

corporate’s net income not distributed to members and, as they are generated internally, are 

the most permanent form of capital.

16These include investments usually secured by mortgages, automobile loans, or credit 

cards.
Page 12 GAO-04-977 Corporate Credit Unions

which had increasing amounts of unloaned funds because of the “flight to 

safety” that occurred in the wake of the stock market downturn.17 These 

inflows increased corporates’ assets, pressuring them to ensure that they 

received sufficient returns when investing these funds to maintain 

adequate capital levels and fund operations. However, over the last several 

years, low interest rates have reduced the returns that corporates could 

obtain on their investments, which has put stress on their overall 

profitability. Finally, the corporates stated that they faced a rapidly 

changing marketplace, particularly related to the increased demands from 

credit unions for more sophisticated products and services such as 

electronic banking.

The strategies corporates have employed to respond to their challenging 

business environment can have positive or negative impacts on their 

overall financial condition. For example, over time, corporates have 

increasingly invested in securities such as privately issued 

mortgage-related and asset-backed securities and less so in obligations of 

U.S.Central, suggesting that they are seeking to enhance the yields on their 

investments. As corporates shift their investments into potentially 

higher-yielding securities, the network could face increased risks if 

individual corporates do not have adequate infrastructure in place to 

manage risks associated with their investments.18

Increasing competitive pressures may have encouraged consolidation, 

through mergers within the network, as corporates sought to achieve 

economies of scale. Consolidation is likely to continue as 7 of the 30 

corporates responding to our questionnaire stated that they were likely or 

would consider merging in the next 2 years. Industry observers have noted 

that mergers are an effective strategy to attain economies of scale 

necessary to afford investments in technology and skilled personnel; 

however, if poorly implemented, mergers have the potential to impact 

operating performance. The recent and expected consolidation activities 

17As investors sought high-quality (that is, safe) investments due to weak performance by 

the stock and other investment markets in the early 2000s, credit unions experienced 

significant growth in member share deposits. See GAO, Credit Unions: Available 

Information Indicated No Compelling Need for Secondary Capital, GAO-04-849

(Washington, D.C.: Aug. 6, 2004).

18Risks include interest-rate, liquidity, and credit risks. Credit risk is the risk that the 

promised cash flows due from an investment will not be fully paid, exposing investors to 

potential decreases in its capital. 
Page 13 GAO-04-977 Corporate Credit Unions

within the network could impact the financial condition of the acquiring 

corporate, as well as the corporate network.

Finally, based on the responses to our questionnaire, corporates reported 

that they have been forming strategic alliances with other corporates to 

provide member credit unions with sophisticated products and services 

such as online banking and business lending services. Industry observers 

have viewed these alliances as an effective approach to meet the demands 

of members while distributing the costs among several corporates. 

However, as corporates move into new areas to meet the demands of their 

members, corporates need to maintain sufficient retained earnings and 

capital levels.

Despite General Growth in 

Net Income, Corporate 

Profitability Has Trended 

Lower Recently

Despite generally rising net income levels since 1995, the profitability of 

corporates has declined recently due to the low-interest-rate environment 

and large inflows of deposits from natural person credit unions.19 More 

specifically, as shown in figure 3, while net income of corporates generally 

fluctuated since 1992, it grew overall since 1995. While profitability 

generally remained within ranges prevalent in the industry since the 

mid-1990s, it was lower at the end of 2003 than at the end of 1993. 20

19Profitability in a given year is measured by the ratio of that year’s net income to the 

average of that year’s total assets and the prior year’s total assets. We used this measure of 

average assets to create consistency in 1993-2003 data.

20U.S. Central did not experience the same rapid increase in its assets and, thus, has not 

suffered recent declines in its profitability. In fact, U.S. Central’s profitability has generally 

been increasing. See appendix VI for more information.
Page 14 GAO-04-977 Corporate Credit Unions

Figure 3: Net Income Has Generally Risen, but Profitability Has Declined Recently

Note: In this figure, profitability in a given year is measured by the ratio of that year’s net income to the 

average of that year’s total assets and the prior year’s total assets. This figure excludes data on U.S. 

Central.

Also, as shown in figure 3, profitability—the net income corporates realize 

on their assets—was relatively stable in the mid-1990s, but has been 

trending downward since 2001. Effectively, the recent lower-interest-rate 

environment has narrowed the difference between what corporates were 

earning on their investments and what they were paying to their members. 

(Appendix V provides more details on corporates’ income and operating 

expenses.) Profitability is an important indicator of financial condition, as 

it is a key determinant of the sufficiency of a corporate’s retained earnings. 

Retained earnings are the primary component of a corporate’s capital, 

representing that corporate’s financial strength and its ability to withstand 

adverse financial events. The recent trend downward in corporates’ 

profitability has slowed growth in their retained earnings and capital 

compared with their assets.

0

50

100

150

200

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Dollars in millions

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

.0

.2

.4

.6

.8

1.0

Percentage (net income to average assets)

Net income Profitability

Source: Call report data.
Page 15 GAO-04-977 Corporate Credit Unions

Despite Increases in Overall 

Capital Levels, Corporates’ 

Capital Ratios Have Trended 

Lower Recently

The overall level of capital at corporates has steadily increased since 1998, 

in part due to regulatory changes that allowed corporates to use other, less 

permanent (or relatively weaker) forms of capital in addition to retained 

earnings.21 Corporates have been increasingly relying on these relatively 

weaker forms of capital. However, since 2000 capital ratios have declined 

as growth in assets outpaced growth in capital.22 The increasing reliance on 

less permanent forms of capital and corporates’ generally constrained 

ability to build capital in periods of stress raises a potential concern about 

the financial strength of the corporate network.

Capital Levels Have Generally 

Risen, but Corporates 

Increasingly Have Relied on Less 

Permanent Forms of Capital

As shown in figure 4, the overall level of capital at corporates has steadily 

increased since 1998. This is due in part to regulatory changes that allowed 

corporates to use other, less permanent (or relatively weaker) forms of 

capital in addition to retained earnings.

21Because changes in the regulatory definition of capital preclude meaningful comparisons 

between the pre- and post-1998 periods, we focused our discussion on 1998-2003.

22In general, an institution’s capital ratio reflects the extent to which it has a cushion against 

losses—the higher the ratio, the more severe an adverse financial shock it can endure. The 

relative cushion offered by a particular type of capital also depends on the relative 

permanence of the capital. To calculate the capital ratio, we divided capital by the moving 

daily average of net assets (DANA), which is the average of a corporate’s daily average net 

assets for the month being measured and the previous 11 months. Effective 1998, Part 704 

prescribed moving DANA as the denominator for capital ratios.
Page 16 GAO-04-977 Corporate Credit Unions

Figure 4: Capital Levels Have Risen, but Corporates Have Increasingly Relied on 

Less Permanent Forms of Capital

Note: Retained earnings represent the most permanent form of capital, while membership capital 

represents the least permanent. This figure excludes data on U.S. Central. 

Beginning in 1998, Part 704 of NCUA regulations expanded the definition of 

regulatory capital by defining capital as the sum of reserves and undivided 

earnings (that is, retained earnings) and permitted corporates to include 

two other, less permanent forms—paid-in capital and membership capital. 

More specifically, reserves and undivided earnings include all forms of 

retained earnings, including regular or statutory reserves and any other 

appropriations designated by management or regulatory authorities. NCUA 

currently defines “core capital” for corporates in Part 704 as retained 

earnings plus paid-in capital. Retained earnings, which are internally 

generated, are the most permanent form and the primary component of 

corporates’ capital. Both paid-in capital and membership capital, which are 

from external sources, are less permanent forms of capital, suggesting they 

provide a relatively weaker cushion against adverse financial events. Prior 

to July 1, 2003, paid-in capital was defined as a member deposit account 

0

1

2

3

4

5

Membership capital

Paid-in-capital

Retained earnings

1998 1999 2000 2001 2002 2003

Dollars in billions

Source: Call report data.
Page 17 GAO-04-977 Corporate Credit Unions

with an initial maturity of at least 20 years. However, NCUA now requires 

paid-in capital to be a more permanent form of capital (a perpetual 

dividend account), available to cover losses that exceed reserves and 

undivided earnings. NCUA had noted that, due to its high cost, paid-in 

capital would be used by corporates as a bridge during short periods of 

stress, such as rapid growth, and should not be used for long periods. While 

NCUA’s redefinition of paid-in capital has increased the relative 

permanence of this form of capital, membership capital represents funds 

contributed by members that have either an adjustable balance with a 

required notice of withdrawal of at least 3 years or are term certificates 

with a minimum term of 3 years.23 As such, membership capital is probably 

best thought of as a form of subordinated debt, which can protect the 

insurance fund in the event of a corporate failure. 

As shown in figure 4, corporate capital rose from $2.9 billion in 1998 to $5 

billion at the end of 2003. Retained earnings accounted for 41 percent of 

total capital in 1998 but declined to around 36 percent of total capital at the 

end of 2003. Paid-in capital increased from around 6 percent of total capital 

in 1998 to around 10 percent in 2003. Membership capital shares have 

consistently represented the largest percentage of capital, typically around 

50 percent, and have been steadily accounting for a greater percentage of 

capital since 2000. Thus, while the capital of corporates continues to rise, 

corporates have increasingly relied on less permanent (that is, relatively 

weaker) forms of capital. While this is a method corporates can use to 

increase capital during periods of rapid growth in assets, it does lead to 

concerns about the ability of the network to withstand financial shocks, 

especially in light of the increasingly challenging business environment 

they face.

Capital Ratios Have Declined 

Recently but Remain above 

Current Regulatory 

Requirements

While the total capital of corporates has steadily increased since the 

late-1990s, since 2000 capital ratios have declined as growth in assets 

outpaced growth in capital. NCUA currently specifies three capital ratios: 

the capital ratio, which includes all forms of capital relative to moving daily 

average net assets (DANA); the core capital ratio, which includes core 

capital (retained earnings plus paid-in capital) relative to moving DANA; 

and the retained earnings ratio, which includes reserves plus undivided

23Neither paid-in nor membership capital is insured by NCUSIF or other share or deposit 

insurers and cannot be pledged against borrowings.
Page 18 GAO-04-977 Corporate Credit Unions

earnings relative to moving DANA.24 As depicted in figure 5, these capital 

ratios were lower in 2003 than in 1998 despite generally rising capital 

levels. 

Figure 5: Capital Ratios Have Declined Recently (1998-2003)

Note: In this figure, capital ratios are calculated by dividing capital by the moving daily average of net 

assets (DANA), which is a measure of average assets as set forth in Part 704 in 1998. This figure 

excludes data on U.S. Central.

As assets have increased, corporates have been unable to generate 

sufficient capital to maintain capital ratios. In particular, after peaking in 

2000, capital ratios declined, as the corporates’ asset base—which 

inversely affects the capital ratio—increased by over 80 percent over the 

same period. Despite recent declines, at the end of 2003 the capital and 

24Prior to 2003, NCUA defined the ratio of retained earnings and paid-in capital to moving 

DANA as the reserve ratio, and it defined the ratio of retained earnings to moving DANA as 

the reserves and undivided earnings, or RUDE, ratio.

Percent

Capital ratio

Core capital ratio

Retained earnings ratio

Source: Call report data.

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003

7.74

3.57

3.20

7.93

3.90

3.17

9.76

5.07

3.97

7.33

3.73

2.99

7.09

3.35

2.70

6.79

3.18

2.48
Page 19 GAO-04-977 Corporate Credit Unions

retained earnings ratios remained in excess of their current respective 

regulatory requirements of 4 percent and 2 percent.25 Due to corporates’ 

role in serving their members, their generally low earnings continue to 

present a challenge and a potential weakness—as corporates generally rely 

on building permanent capital from retained earnings—and could put a 

strain on the profitability of the corporate network in the future. As a 

result, corporates’ capital ratios, although above current regulatory 

requirements for safety and soundness purposes, are vulnerable to erosion 

from factors such as rapid inflows of deposits that corporates may not be 

able to control.

Growth and Changes in 

Corporates’ Investments 

May Increase Risks If Not 

Monitored or Managed 

Properly

Although assets have grown through the recent influx of deposits, 

corporates have continued to allocate them almost exclusively to 

investments (rather than other assets that include cash, loans, or fixed 

assets). With this growth, the percentage of corporates’ investments in 

obligations of U.S. Central has declined somewhat, particularly for the 

largest corporates. In response to the low-interest-rate environment, 

corporates have moved relatively more of their investments into potentially 

higher yielding—and more volatile—securities. The largest corporates also 

appear to be managing interest-rate risk by shifting toward more 

variable-rate and shorter-term securities, providing a potentially better 

match for the relatively short-term nature of their members’ deposits. 

However, a regulatory change effective in 2003 allowed certain corporates 

to purchase securities with lower credit quality, but few have used this 

investment authority. It is not clear, however, to what extent corporates 

might use this investment flexibility in the future, raising implications for 

NCUA oversight since this activity may lead to increased credit risk if it is 

not managed properly. 

While Corporate Investment 

Portfolios Have Grown, Larger 

Corporates Invested Less in U.S. 

Central

Corporates’ investments have grown with the recent inflows of deposits 

from natural person credit unions. Investments, which include 

asset-backed securities, commercial debt obligations, mortgage-related 

issues, and U.S. government obligations, represent the vast majority of 

corporates’ assets—usually 90 percent or more (see fig. 6). At the end of 

25The regulatory requirements (Part 704) for capital and retained earnings ratios represent 

the basic level of capital regulation for credit unions. In general, regulatory capital 

requirements for corporates can vary, depending on such factors as corporate type (that is, 

retail or wholesale), the corporate’s eligibility for expanded investment authorities, and 

limits on monthly changes in risk.
Page 20 GAO-04-977 Corporate Credit Unions

1992, total investments of corporates stood at $41.1 billion; at the end of 

2003, they were reported at $65.3 billion. Since 2000, total investments of 

corporates have grown by 84 percent.

Figure 6: Corporates’ Investments Have Grown and Consistently Represent Most of Corporates’ Assets

Note: Other assets include cash, loans, and fixed assets. This figure excludes data on U.S. Central.

Since 1992, corporates’ investments in U.S. Central obligations have 

typically accounted for approximately one-half of their total investments, 

the largest single investment category. The generally high proportion of 

investments in U.S. Central obligations reflects the “pass-through” nature 

of many corporates. Historically, U.S. Central has functioned as a conduit 

between corporates and the capital markets. Despite growth in the overall 

amount of corporates’ investments in U.S. Central obligations, they 

declined as a percentage of corporates’ total investments from 1997 to 

2003. For example, they went from $15.6 billion (53 percent) at the end of 

1997 to $29.2 billion (45 percent) at the end of 2003. This decline indicates 

that the largest corporates are investing their funds directly, rather than 

through U.S. Central. As shown in figure 7, in general, the largest 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Total investments

Total other assets

Source: Call report data.

0

10

20

30

40

50

60

70

80

Dollars in billions
Page 21 GAO-04-977 Corporate Credit Unions

corporates have held smaller percentages of their investments in U.S. 

Central obligations than smaller corporates. 

Figure 7: Largest Corporates Have Invested Relatively Less in U.S. Central 

Obligations Than Smaller Corporates

Notes: In this figure, which separates corporates into three categories according to their year-end 

assets, corporates’ investments in U.S. Central obligations are shown relative to corporates’ total 

investments. Prior to 1997, NCUA call reports did not disaggregate investments in U.S. Central 

obligations from investments in corporate credit unions, and thus a proxy measure—investments in 

corporates relative to corporates’ total investments—is depicted for 1992-1996. To the extent that 

corporates invested in other corporates during 1992-1996, the call report data reflect an upper bound 

on investments in U.S. Central obligations. This figure does not follow the same institutions each year; 

rather, it reflects the investments of those corporates in a given size category in a given year. This 

figure excludes data on U.S. Central.

As investment management has increased in complexity, smaller 

corporates may not have had the resources necessary to develop and 

maintain investment capabilities internally, and U.S. Central thus was able 

to provide smaller corporates with these services by leveraging the 

efficiencies gained through its economies of scale. Despite the recent 

decline in the percentage of corporates’ investments in U.S. Central 

0

20

40

60

80

100

Corporates with assets of more than $5 billion

Corporates with assets between $1 billion and $5 billion

Corporates with assets of less than $1 billion

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Percentage

Source: Call report data.
Page 22 GAO-04-977 Corporate Credit Unions

obligations, U.S. Central still provides substantial investment 

services—suggesting that the health of U.S. Central remains critically 

important for its members and their associated natural person credit 

unions.

Investments Have Shifted 

Toward Potentially Higher 

Yielding and More Volatile 

Securities, but Largest 

Corporates Appear to Be 

Managing Interest-Rate Risk

In response to the low-interest-rate environment, corporates have moved 

relatively more of their investments into potentially higher yielding—and 

more volatile—securities. In particular, corporates have increased their 

relative holdings of privately issued mortgage-related and asset-backed 

securities, which may offer higher yields for corporates relative to other 

investments such as government-guaranteed obligations. As illustrated in 

table 1, the percentage of investments in privately issued mortgage-related 

securities increased from 0.9 percent of total investments in 1997 to 14.1 

percent in 2003. Asset-backed securities also increased relative to total 

investments (from 19.5 percent in 1997 to 24.7 percent in 2003).26 With the 

potentially higher yields, the corporates are also potentially increasing 

risk—notably interest-rate risk. This shift highlights the importance of risk 

monitoring and management by the corporates and NCUA.

Table 1: Corporates’ Investments Shifted toward Potentially Higher Yielding and More Volatile Securities

Source: Call report data.

Notes: Totals may not add due to rounding. “Other” includes U.S. government obligations, U.S. 

government-guaranteed obligations, obligations of U.S. government-sponsored enterprises, and 

commercial debt obligations. This table excludes data on U.S. Central. 

However, corporates also have shifted the composition of their investment 

portfolios toward more variable-rate and shorter-term securities, a strategy 

that tends to reduce adverse exposure to changing interest rates and thus 

26Asset-backed securities include securities backed by fixed- and variable-rate credit card, 

auto, and home equity loans.

Investments relative to total investments (percent) 1997 1998 1999 2000 2001 2002 2003

U.S. Central obligations held by corporates 53% 56% 57% 53% 45% 42% 45%

Asset-backed securities 19 18 24 23 23 23 25

Privately issued mortgage-related securities 1 2 3 4 6 9 14

Government and agency mortgage-related securities 13 9 9 8 8 7 6

Other 14 14 7 11 18 18 11

Total investments (in millions) $29,727 $41,645 $35,642 $35,553 $55,449 $63,859 $65,280
Page 23 GAO-04-977 Corporate Credit Unions

reduces interest-rate risk. While 41.7 percent of corporates’ asset-backed 

securities were classified as fixed-rate at the end of 1997, 18 percent were 

so classified at the end of 2003. Since corporates’ call reports do not 

include weighted-average life data—the expected time that the principal 

portion of a security will remain outstanding—we reviewed materials from 

the three largest corporate credit unions that showed these institutions 

tended to hold securities with relatively short weighted-average lives, with 

most being less than 3 years.27 As a result, while corporates have moved to 

securities that may entail additional investment risk, the largest corporates 

in the network appear to be managing interest-rate risk by shifting toward 

more variable-rate and shorter-term securities, providing a potentially 

better match for the relatively short-term nature of their members’ 

deposits.28

Expanded Authority to Invest in 

BBB Rated Securities May Lead 

to Increased Credit Risk If Not 

Managed Properly

Due to the revision of Part 704, some corporates have been allowed to 

invest in lower-rated securities (down to BBB rated), which might lead to 

increased credit risk if these investments were not managed properly.29

Investments with lower credit quality tend to provide higher yields but can 

also expose investors to the increased likelihood that promised cash flows 

will not be paid. While “moving down the credit curve” (that is, investing in 

lower credit quality securities) potentially exposes a corporate to increased 

credit risk, such a strategy might not increase the overall risk for a 

corporate making such investments provided the additional risk was 

managed appropriately. According to NCUA, this regulatory change gave 

corporates added flexibility with which to diversify their portfolios and

27We chose the largest corporates because they had been granted the broadest investment 

authorities.

28Because members’ deposits tend to be short-term in nature, a corporate’s asset mix tends 

to be short-term, too. In general, corporates need to maintain a high level of liquidity given 

their role as a liquidity provider to credit unions.

29Investment ratings are a measure of credit risk, ranging from AAA to D (a total of 10 

ratings). Investment grade (that is, highest quality to medium grade) investments carry the 

top four ratings—AAA, AA, A, or BBB. A BBB rated investment is considered to be of 

medium investment grade.
Page 24 GAO-04-977 Corporate Credit Unions

reduce investment concentration.30 In particular, these securities could be 

used in an attempt to limit credit risk by lowering concentrations in certain 

industries or geographical areas and creating a more diversified portfolio. 

Also, lower-rated securities could be purchased because they carried a 

particularly attractive return for their credit rating or provided a good mix 

of credit risk and interest-rate risk given the other holdings of a corporate.31

According to NCUA and corporate officials, the ability to hold such 

lower-rated securities in their portfolios (as opposed to having to sell a 

security immediately if it were downgraded) might provide these 

institutions more flexibility in disposing of an investment that suffered a 

rating downgrade. Corporates would be able to hold the investment in an 

effort to limit realized losses rather than being forced to promptly liquidate 

it. Based on our review of information provided by the three corporates 

that have the authority to invest in these securities, as well as discussions 

with their officials and risk management staff, corporates either have made 

few such investments or none. Further, officials at the three institutions 

indicated that they did not plan to use their authority to purchase BBB 

rated securities.

However, it is not clear to what extent corporates will take advantage of 

this investment flexibility in the future, which has implications for NCUA 

oversight that we discuss later in this report. If corporates were to hold or 

invest in BBB rated securities to a greater extent, these investments might 

create additional risks to the corporate network if not managed properly. In 

general, like other financial institutions, a corporate’s vulnerability to risk 

depends on its overall portfolio and the amount of capital that is backing it. 

Some have suggested that corporates tend to be relatively thinly capitalized 

compared with other financial institutions, which may raise concerns over 

30The 1998 revisions to Part 704 also allowed corporates, with prior NCUA approval, to seek 

expanded investment authorities and greater flexibility to manage their risks and earnings. 

For example, under this additional authority, a corporate that fulfilled additional capital, 

management, infrastructure, and asset and liability requirements, and received NCUA’s 

written approval, was allowed greater flexibility in managing its net economic value, given 

more relaxed concentration limits on investments, and given the ability to invest in 

lower-rated securities. NCUA subsequently revised Part 704 in 2002 and allowed corporates 

with certain types of expanded authorities to invest in BBB rated securities. Prior to the 

2002 revisions, some corporates had been allowed to invest in securities rated as low as A-.

31Interactions among the risks to which a corporate is exposed, such as interest-rate and 

credit risk, can be complex and need to be considered in the context of the institution’s 

overall portfolio of assets and liabilities. The addition of a particular investment to a 

corporate’s investment portfolio can impact risks in differing ways, potentially increasing 

some risks while lessening others.
Page 25 GAO-04-977 Corporate Credit Unions

potential additional exposure to risk. For example, the Department of the 

Treasury has raised concerns that allowing corporates to invest in BBB 

rated securities could weaken the safety and soundness of the corporate 

network because the amount of capital held in the corporatesmight not be 

commensurate with the risks associated with these lower credit quality 

investments.32

NCUA Strengthened Its 

Oversight of 

Corporates, but Could 

Do More to Anticipate 

and Address Emerging 

Network Issues 

NCUA has made numerous changes over the last several years to 

strengthen its oversight of corporates but faces challenges in such areas as 

networkwide assessments, obtaining and utilizing technical staff resources, 

developing merger guidance for corporates, and assuring the quality of 

corporates’ internal control structures. Specifically, NCUA established a 

separate office dedicated to the oversight of corporates, and revised its 

corporate regulation (Part 704) to improve corporates’ management of 

credit, interest-rate, and liquidity risks. NCUA also adopted a risk-focused 

supervision and examination approach, and trained or hired a limited 

number of specialists to help oversee increasingly complex operations at 

corporates. However, NCUA has not put in place a system to track the 

resolution of deficiencies or evaluate trends in examination data and 

therefore may not be able to anticipate emerging issues within the network. 

Further, NCUA has not systematically considered certain operational risks, 

such as weak information system controls, when assigning specialists to 

examinations, which may have led to NCUA overlooking certain problems 

or not ensuring that problems were corrected in a timely manner. While 

continued consolidation of the corporate network appears likely, NCUA 

has not developed merger guidance specific to corporates, and its 

examiner guidance has not ensured that merger proposals were assessed 

consistently. Thus, NCUA’s inadequate guidance has increased the risk that 

resulting decisions may not be in the best interests of corporates or their 

members, or may negatively affect the safety and soundness of corporates. 

Also, as corporates have invested in more complex technologies and added 

more sophisticated products and services, the importance of NCUA’s 

oversight of corporates’ internal controls has increased. However, 

corporates are not subject to the internal control reporting requirements 

imposed on other financial institutions of similar size that help to ensure 

safety and soundness, as defined under the Federal Deposit Insurance 

32Department of the Treasury comment letter concerning NCUA’s proposed rule on 

corporate credit unions, amending Part 704, dated October 15, 2002. Treasury has not 

modified its position since then.
Page 26 GAO-04-977 Corporate Credit Unions

Corporation Improvement Act of 1991 (FDICIA). This raises a question 

about whether NCUA has the necessary information to assess corporates’ 

internal controls.

NCUA Made Several Major 

Improvements in Oversight 

Since 1991

Since 1991, NCUA has strengthened its oversight of corporates by 

reorganizing staff, revising regulations, and changing examination and 

supervisory focus. NCUA established the Office of Corporate Credit Unions 

(OCCU) in 1994, partly in response to problems with selected investments 

at U.S. Central.33 Within this new office, NCUA centralized its supervision 

of corporates and increased the number of examiners dedicated to 

supervision and examination of corporates. According to NCUA officials, 

prior to this change, NCUA examiners lacked adequate training and 

expertise to examine activities undertaken by corporates, since they spent 

most of their time examining natural person credit unions, whose 

operations generally are less complex than those of corporates. Further, in 

1992, NCUA had 12 examiners dedicated to the oversight of 44 corporates 

and U.S. Central. As of June 2004, NCUA had 22 examiners plus three 

information systems specialists and one payments system specialist hired 

to help oversee the 30 corporates and U.S. Central.

NCUA also revised its corporate regulation (Part 704) in 1998 to increase 

measurement and monitoring of interest-rate, liquidity, and credit risk 

within the corporate network.34 The revisions to Part 704 were in response 

to the failure of Capital Corporate Federal Credit Union in January 1995 

and GAO and other recommendations for NCUA to improve its oversight of 

corporates.35 The 1998 revisions required corporates to measure and report 

on the impact of interest-rate and liquidity changes on their net economic 

33In mid-1993, U.S. Central made a series of investments in Banco Español de Credito 

(Banesto). On December 28, 1993, the Spanish Central Bank took over Banesto because of 

problems in its commercial loan portfolio, which placed some of U.S. Central’s remaining 

investments in potential jeopardy (at that time $255 million). Although U.S. Central did not 

incur any loss as a result of the Banesto investment, NCUA and Congress raised questions 

about these investments.

3462 Fed. Reg. 12929 (Mar. 19, 1997, effective Jan. 1, 1998).

35See GAO/T-GGD-95-107 (Feb. 28, 1995) and GAO/T-GGD-95-115 (Mar. 8, 1995). These two 

testimonies provided recommendations for NCUA to improve oversight of corporate credit 

unions in the wake of the failure of Capital Corporate Federal Credit Union. See 

NCUA-commissioned study by Harold Black, Albert DePrince, William Ford, James 

Kudlinski, and Robert Schweitzer, Corporate Credit Union Network Investments: Risks 

and Risk Management (Alexandria, Virginia, 1994).
Page 27 GAO-04-977 Corporate Credit Unions

value.36 Corporates also were required to change the methods used to 

calculate their investment concentration limits—moving from a calculation 

that used an asset base to one that consisted of core capital (reserves and 

undivided earnings and paid-in-capital). Corporates could use this method 

to improve their management of credit risk by matching the risks 

associated with investment concentrations with capital, which protects 

corporates if investment risks lead to losses. 

NCUA also implemented a risk-focused supervision and examination 

approach in 1999 to concentrate its resources on the high-risk areas within 

corporate operations. Similar to the examination approach taken by other 

financial institution regulators, the risk-focused approach is intended, in 

part, to better employ examiner resources and improve examination 

results by emphasizing the areas of greatest risk. Under this approach, 

examiners have greater discretion to identify areas that require their 

attention and allocate their time accordingly. Further, examiners can 

determine when and where to employ the assistance of specialists with 

skills tailored to the activities of the institution, as its operations become 

more complex. According to NCUA officials, OCCU also began to promote 

examiners who had experience in investments and asset/liability 

management to the position of capital market specialist. As of August 2004, 

OCCU had five capital market specialists. Additionally, NCUA’s Office of 

Strategic Program Support and Planning (OSPSP) had three investment 

specialists with private-sector financial market experience that could assist 

OCCU’s capital markets specialists.37 For example, OSPSP investment 

specialists participate in selected examinations of corporates that have 

expanded investment authorities.

36Net economic value is defined as the fair or economic value of assets minus the fair value 

of liabilities. Specifically, corporates must limit their risk exposure to levels that did not 

result in a decline in the net economic value of more than 18 percent. 

37OSPSP develops agency policies and procedures related to credit union investments and 

asset/liability management, and the office assists examiners in evaluating investment issues 

in credit unions.
Page 28 GAO-04-977 Corporate Credit Unions

NCUA Identified 

Deficiencies but Did Not 

Systematically Track Their 

Resolution or Evaluate 

Trends in Examination Data

NCUA’s risk-focused approach has helped it identify weaknesses in 

corporates’ operations and require corrective actions at corporates; 

however, we found that NCUA did not methodically aggregate and track 

the resolution of deficiencies or systematically conduct trend analyses to 

identify recurrent or networkwide issues. We have reported that sound 

risk-focused examination practices rely on the regulator’s ability to 

maintain an awareness of industrywide risk.38 Other depository institution 

regulators, such as the Office of the Comptroller of the Currency, the Board 

of Governors of the Federal Reserve System, and the Office of Thrift 

Supervision reported that they have mechanisms in place to conduct some 

degree of industrywide assessments of their depository institutions. 

Further, the Federal Deposit Insurance Corporation (FDIC) tracks and 

analyzes trends in examination findings and their resolution in several 

ways. For example, after each examination, FDIC reviews, analyzes, and 

enters findings and their resolution into various databases. In addition, 

FDIC gathers information on its institutions’ internal controls to report on 

local, regional, and national trends in bank performance and identify 

activities, products, and risks that affect banks and the banking industry.

Based on our review of about 100 risk-focused examinations for all 

corporates and U.S. Central from January 2001 through December 2003, 

NCUA examiners had identified deficiencies—most frequently in the areas 

of asset/liability management, investments, management, funds transfer, 

and information systems—but we could not always determine if corporates 

had resolved these deficiencies. NCUA also had established time frames for 

correcting deficiencies and procedures for corporates to take actions to 

address the deficiencies. According to NCUA, corporates must prepare 

plans that specify the action needed and identify the corporate official 

responsible for implementing the plan. Further, NCUA reported that 

examiners typically verify the resolution of deficiencies during an 

examination or on-site supervision, actions that examiners were expected 

to document in the examination workpapers. Examiners assigned to 

subsequent examinations also were to review the deficiencies from the last 

examination report to see what corrective action had been implemented. 

NCUA reported that based on the severity of the deficiency, as a matter of 

practice, resolutions might be noted in the examination report or in the 

workpapers.

38GAO, Risk-Focused Bank Examinations: Regulators of Large Banking Organizations 

Face Challenges, GAO/GGD-00-48 (Washington, D.C.: Jan. 24, 2000). 
Page 29 GAO-04-977 Corporate Credit Unions

However, after reviewing these examination reports and other NCUA 

oversight documents, we were unable to consistently determine whether 

the deficiencies NCUA had identified for individual corporates had been 

resolved. The executive summaries included in some examination reports 

noted that deficiencies from the previous year had been addressed, but this 

practice was not standard for all of the exam reports we reviewed. For 

example, 14 of 38 examination reports we reviewed had discussed the 

status of deficiencies and whether they were resolved. Moreover, the 

corporate examiners’ guide did not stipulate that examiners should 

document the resolution of prior deficiencies when preparing the final 

examination report. NCUA officials told us that the examiner-in-charge 

tracked the status of deficiencies at individual institutions and reported 

this information in monthly examiner reports. While these reports 

documented the status of deficiencies, information on the status was not 

included or consolidated in monthly reports prepared for the OCCU 

Director or in quarterly reports to NCUA’s Board. As a result, NCUA 

management may have been unaware of issues related to the resolution of 

examination deficiencies, as can be seen in the following examples:

• In the review of one corporate’s examinations, we noted that its 

information system disaster recovery site did not meet NCUA 

requirements (for site location and a separate power system) for at least 

3 years. The examination documentation we reviewed did not issue a 

deficiency finding detailing the weaknesses of the recovery site. After 

further review, we found that the disaster recovery site was located at 

the chief executive officer’s home for at least 6 years before the 

examination report detailed the need to replace the disaster recovery 

site. 

• At another corporate, NCUA acknowledged in the examination that the 

institution had not addressed information systems deficiencies related 

to information security for 3 years. However, in the prior year’s 

examination, NCUA had no mention of recurring problems with 

information systems at this corporate. 

• NCUA issued a deficiency finding in the area of accounting and financial 

reporting for a corporate after it had submitted 13 months of data 

inaccuracies in its 5310 call reports, exposing the corporate to financial 

and reputation risk. 

NCUA management believed that its existing examination processes and 

available information (such as call reports, examiner reports on 
Page 30 GAO-04-977 Corporate Credit Unions

corporates, internal monthly management and quarterly reports, and staff’s 

institutional knowledge) provided it with sufficient information to assess 

the adequacy and timeliness of corporates’ corrective actions. For 

example, NCUA officials stated that OCCU management reviews all 

examination reports prior to issuance, including any noted deficiencies. In 

the regulator’s view, this practice provides an additional layer of oversight 

and evaluation. Additionally, OCCU emphasized that its monthly 

management reports serve as a key supervision tool to assess issues, 

trends, and corrective action at individual corporates. Despite OCCU’s 

practices for coordinating and overseeing individual examinations, these 

practices were informal (that is, we did not identify guidance or formal 

operating procedures) and appeared to operate independently of one 

another. Additionally, these processes and practices did not constitute a 

system that would aggregate the number and type of deficiencies occurring 

at all corporates. 

According to NCUA officials, their current practices kept them abreast of 

potential overall issues affecting the network without the need for a 

separate system to catalogue the deficiencies. For example, OCCU has 

trained three corporate program specialists to support field examiners, 

who track issues and trends in their assigned corporates and meet 

periodically with OCCU management to discuss issues and trends across 

the corporate system. They also noted that the examination review process 

had identified a number of issues or trends such as the need to address 

Bank Secrecy Act-related issues. However, NCUA officials also said that at 

the request of their corporate program specialists, they were developing a 

database to track deficiencies identified in examinations to better track 

their resolution. They did not specify the planned completion date for this 

database. 

NCUA’s current system has relied on interaction between the different 

offices, examiners, and specialists involved in oversight of corporates. A 

tracking system may have helped NCUA to identify, anticipate, or 

otherwise address some of the information system weaknesses we noted 

above. More specifically, without such a system for tracking examination 

findings and their resolution, NCUA’s ability to identify the extent and 

duration of a problem at an individual corporate is limited, which may 

prevent the timely resolution of deficiencies. Similarly, the lack of a 

tracking system that aggregates deficiencies diminishes NCUA’s ability to 

identify networkwide problems readily, assist examiners-in-charge in 

developing examination plans, and devise strategies to address issues 

before they become a significant safety and soundness concern. 
Page 31 GAO-04-977 Corporate Credit Unions

NCUA Did Not 

Systematically Consider 

Certain Risks When 

Allocating Resources or 

Scheduling Specialists for 

Examinations 

NCUA has not systematically considered corporates’ risk management 

(both quality and capacity) when allocating resources and scheduling 

specialists for examinations.39 Federal depository institution regulators, 

under the auspices of the Federal Financial Institution Examination 

Council (FFIEC)—of which NCUA is a member—had issued guidance on 

how to systematically determine when to assign specialists to an 

examination.40 In addition, FDIC and Office of the Comptroller of the 

Currency (OCC) have issued specific guidance on the frequency with which 

specialty examinations should be conducted. For example, OCC’s guidance 

requires that information systems examinations be consistently conducted 

at least every 12 to 18 months for community banks with assets of less than 

$1 billion, with a minimum objective of assessing the quantity of 

transaction risk and the quality of risk management, including staff 

capacity and skills. By contrast, NCUA has not established a minimum level 

of involvement of specialists in examinations. 

Since we noted that NCUA had identified a number of problems in 

information systems at the corporates and were concerned that they had 

relatively few specialists in this area, we reviewed FFIEC’s Information 

Systems Examination Handbook, which also provides a process by which 

regulators can determine when and where to employ information systems 

specialists. We used this handbook to assess how NCUA deployed 

examiners, relative to best practices and guidance as exemplified in the 

handbook. According to this handbook, information systems examiners 

must judge risk posed by the quantity of transactions and quality of the

39Risk management includes the identification of risk to recognize and understand existing 

risks or risks that may arise from new business initiatives. It also includes the accurate and 

timely measurement of risks, policies, and procedures to control risk, and monitoring of risk 

to ensure timely review of risk positions of the institution. The staff responsible for risk 

management should be independent from the institutions risk-taking activities and the 

board of directors should be informed of the institution’s risk management program. 

Capable management and appropriate staffing are critical to effective risk management.

40NCUA is a member of FFIEC, which is an interagency body empowered to prescribe 

uniform principles, standards, and report forms for the federal examination of financial 

institutions, and make recommendations to promote uniformity in the supervision of 

financial institutions. Other members include the Board of Governors of the Federal 

Reserve System, FDIC, OCC, and the Office of Thrift Supervision. 
Page 32 GAO-04-977 Corporate Credit Unions

institution’s risk management.41 Assessing aggregate risk allows examiners 

to weigh the relative importance of both the quantity of transactions and 

the quality of risk management for a given institution and direct the 

activities and resources for the regulators’ supervisory strategies. Under 

this approach, a smaller corporate with a low volume of transactions and 

weak risk management could pose a risk to the network equal to that of a 

large corporate with a high volume of transactions and a strong risk 

management program. 

We reviewed examination-planning documents for all 31 corporates to 

determine how NCUA evaluated these risks when determining the 

frequency at which specialists would be assigned to examinations. We 

found that NCUA documented its assessment of operations risk in these 

planning documents, but did not explicitly discuss the quality of risk 

management for various functions and operations when determining if 

specialists should be assigned to examinations.42 For example, in some 

cases, we found that the examination-planning documents only provided a 

single line stating that an information systems specialist was not needed on 

the next examination and did not document the reason for this assessment. 

While the planning documents were not clear about NCUA’s decision 

process for assigning specialists to examinations, it also was not clear to us 

whether NCUA routinely or consistently considered various operational 

weaknesses at these corporates when assigning specialists.

An external review of OCCU in 2002 concluded that NCUA’s complement of 

two information systems specialists and one payment system specialist did 

not appear to be sufficient to adequately oversee the corporate network 

and that OCCU should consider hiring additional specialists in these areas. 

NCUA believes it has sufficient specialists to examine the 31 corporates; 

however, it has made this determination without fully assessing the 

41We focused on FFIEC guidance that was in place until March 2003, which covered the 

major portion of the exam periods we reviewed. FFIEC has updated this guidance in the 

form of various information technology examination handbooks that address various 

aspects of financial institutions’ computerized operations. The updated guidance also 

suggests that information technology examinations should focus on institutions’ 

management of technology.

42Operations risk is the risk that existing technology or support systems may malfunction or 

break down. For example, breakdowns in the information systems could limit the ability of 

a corporate to process payments and transfers or it could lead to mistakes in the estimation 

of risk, and thereby let the corporate undertake unwarranted risks and sustain potential 

losses. 
Page 33 GAO-04-977 Corporate Credit Unions

corporates’ business environment and networkwide challenges. NCUA 

tended to assign specialists on the examinations of larger corporates or 

those implementing newer systems and less so on examinations of smaller 

corporates or examinations of established systems at large corporates. 

According to NCUA, specialists had limited or no involvement in 

examinations at the 12 smallest corporates (with assets of less than $1 

billion) from 2001 to 2003. During the same period, specialists were 

annually involved in the examination of the eight corporates with assets 

above $2.6 billion. While this approach appears reasonable, the limited 

involvement of specialists under such circumstances may have contributed 

to important information system weaknesses at corporates that were either 

not identified by NCUA or not promptly corrected. For example, U.S. 

Central’s automated clearing house (ACH) software had deficiencies that 

led to a system failure that delayed payments to customers of 2,200 natural 

person credit unions for nearly 2 days. According to NCUA, information 

systems specialists had reviewed the system’s performance in prior 

examinations. However, because the Automated Clearing House (ACH) 

software was mature and U.S. Central staff was monitoring its 

performance, NCUA did not consider it a high-risk component of U.S. 

Central’s operations and had not reviewed it recently. As a result, 

weaknesses in their backup procedures and routine maintenance, 

insufficient capacity (noted in prior examinations but not satisfactorily 

resolved), and other deficiencies that resulted in the outage were not 

corrected. NCUA has stated that it is reviewing its procedures to determine 

if such systems should receive a minimum level of review. NCUA has also 

acknowledged that the ACH delay resulted in financial loss and increased 

reputation risk to the corporate network. 

NCUA also faces other obstacles to conducting more systematic 

evaluations of risk—both in assuring that corporates have the capacity for 

managing risks and ensuring that, as a regulator, it has the staff to assess 

the quality and operations in corporates’ risk management functions. As 

noted previously, corporates have been operating in a challenging 

investment environment, with additional authorities to make lower-rated 

investments. Consequently, the quality of risk management at corporates 

has grown in importance. While the results of our review of the risk 

management function at the three largest corporates suggested that these 

corporates were taking appropriate steps to assess and mitigate their risks, 

these corporates had a relatively small number of staff in their risk 

management functions. More specifically, the largest corporates and U.S. 

Central were using sophisticated financial models to assess and manage
Page 34 GAO-04-977 Corporate Credit Unions

interest-rate, credit, and liquidity risks.43 But a rating agency and external 

auditor have expressed concerns about small staff sizes and how they 

affect these corporates’ continued ability to evaluate and manage risks and 

undertake succession planning should key staff leave. The loss of any such 

staff at a corporate could hamper its ability to undertake the sophisticated 

analyses needed to evaluate risks. The thinness of corporates’ risk 

management staffs indicates that NCUA should routinely assess 

corporates’ investment risk. However, as we noted earlier, NCUA also has a 

limited number of specialists to conduct comprehensive evaluations of risk 

management at corporates. Given that the risk-focused approach allows 

judgment in assigning resources to areas of greatest concern, the thinness 

of corporates’ risk management staff, in combination with the limited 

number of specialists at NCUA, suggests that continued attention to 

corporates’ investment strategies may help to ensure that corporates are 

adequately undertaking their risk management functions. Therefore, this 

may require NCUA to reassess its staffing levels and consider the costs and 

benefits of adding additional examiners or specialists to adequately 

monitor and oversee the growing complexity of corporates’ operations. 

As Corporate Network 

Consolidates, Merger 

Approval Process Could Be 

Improved with Better 

Guidance 

As part of its regulatory authority to ensure the safety and soundness of 

corporates, NCUA reviews and approves corporate merger applications. 

Some corporates, NCUA, and trade-organization officials indicated that 

consolidation in the network—as a result of mergers—would likely 

continue over the next several years. However, with more mergers likely, 

NCUA has not developed specific guidance for corporates preparing 

merger proposal packages. In contrast, NCUA has issued guidance for 

natural person credit unions that provides step-by-step instructions for 

completing the merger process, and NCUA refers corporates to this 

guidance. However, NCUA has recognized that this guidance may be 

insufficient for corporates. In its guidance to examiners, who are 

responsible for evaluating merger proposal packages, NCUA has suggested 

that capital ratios unique to corporates, defined in Part 704 of NCUA’s Rules 

and Regulations, were more appropriate than the probable asset share ratio

43We focused on the largest corporates and U.S. Central, since we judged them to have the 

most significant potential exposure to risk. We reviewed internal and corporate examiner 

documents, and independent third-party reviews, and discussed risk management with 

corporate officials and examiners. As a result, we have some confidence that the corporates 

appropriately staffed risk management functions and regularly evaluated and updated risk 

management models and the economic assumptions underlying them. Our analysis also was 

consistent with findings of a rating agency and independent analyses of larger corporates.
Page 35 GAO-04-977 Corporate Credit Unions

applicable to natural person credit unions.44 However, in the guidance on 

mergers available to corporates on its Web site, NCUA has not indicated 

that corporates needed to include this information. In our review of five 

merger packages recently approved by NCUA, we found that three merger 

packages were initially submitted without the corporate capital ratios 

defined in Part 704. These merger packages required revision or additional 

analysis by the corporate and NCUA before the package could be 

approved, encumbering the approval process.

Other regulators such as OCC have provided detailed guidance to banks 

applying for mergers that listed specific data needed for evaluation and 

described the regulators’ merger review process. OCC has stated that their 

approach is intended to avoid misunderstandings and unnecessary delays 

in the approval. NCUA officials told us they considered several factors 

when approving corporate mergers such as consolidated budgets and 

conversion and consolidation plans for information systems that it has not 

discussed in the natural person credit union guidance. However, only one 

of the five merger proposals we analyzed was submitted with this 

additional information. Other corporate’s proposals required revisions or 

were approved without additional information being provided. One 

corporate stated they believed the merger process could be improved and 

made less cumbersome if NCUA provided clearer or more specific 

guidance for corporates. Finally, NCUA’s guidance did not explicitly discuss 

how the effects of competition should be considered when approving 

corporate mergers, which may become more of an issue as the network 

continues to consolidate and corporates increasingly compete with each 

other or with other financial institutions. 

Corporates Not Subject to 

Internal Control Reporting 

Requirements of FDICIA 

As corporates react to a competitive environment by investing in 

technology and offering more products and services, NCUA’s oversight of 

internal controls at corporates becomes even more critical. However, 

corporates with assets over $500 million were not required to report on the 

effectiveness of their internal controls for financial reporting.45 Under the 

44NCUA’s Credit Union Merger Manual requires natural person credit unions to compute a 

“probable asset share” ratio for both the merging and continuing credit unions. The 

probable asset share ratio is computed by dividing the net value of a natural person credit 

union’s assets by its total shares and reflects the relative worth of each dollar invested in 

shares.

45See GAO-04-91.
Page 36 GAO-04-977 Corporate Credit Unions

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) 

and its implementing regulations, banks and thrifts with assets over $500 

million are required to prepare an annual management report that contains:

• a statement of management’s responsibility for preparing the 

institution’s annual financial statements, for establishing and 

maintaining an adequate internal control structure and procedures for 

financial reporting, and for complying with designated laws and 

regulations relating to safety and soundness; and

• management’s assessment of the effectiveness of the institution’s 

internal control structure and procedures for financial reporting as of 

the end of the fiscal year and the institution’s compliance with the 

designated safety and soundness laws and regulations during the fiscal 

year.46

Additionally, the institution’s independent accountants are required to 

attest to management’s assertions concerning the effectiveness of the 

institution’s internal control structure and procedures for financial 

reporting. The institution’s management report and the accountant’s 

attestation report must be filed with the institution’s primary federal 

regulator and any appropriate state depository institution supervisor, and 

must be available for public inspection. These reports allow depository 

institution regulators to gain increased assurance about the reliability of 

financial reporting.

The reporting requirement for banks and thrifts under FDICIA is similar to 

the reporting requirement included in the Sarbanes-Oxley Act of 2002.47

Under Sarbanes-Oxley, public companies are required to establish and 

maintain adequate internal control structures and procedures for financial 

reporting. In addition, a company’s auditor is required to attest to, and 

report on, the assessment made by company management on the 

effectiveness of internal controls. As a result of FDICIA and 

Sarbanes-Oxley, reports on management’s assessment of the effectiveness 

of internal controls over financial reporting and the independent auditor’s 

attestation on management’s assessment have become a normal business 

practice for financial institutions and many companies.

46See 12 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003).

47See e.g., 15 U.S.C. §§ 7241, 7262.
Page 37 GAO-04-977 Corporate Credit Unions

While NCUA has issued a letter to corporates indicating that selected 

provisions of the Sarbanes-Oxley Act of 2002, including the provision on 

internal control reporting standards, may be appropriate to consider, 

NCUA has not mandated that corporates adopt this standard.48 Given that 

other depository institutions of similar size are required by FDICIA to 

adhere to the internal control reporting requirements to ensure safety and 

soundness, NCUA’s lack of such a requirement for corporates raises the 

question of whether NCUA has the necessary information to adequately 

assess corporates’ internal controls. This assessment has become more 

important as corporates’ operations have grown in complexity due to their 

changing investment strategies, investments in technology, and 

introduction of new products and services.

Conclusions Increased competition both inside and outside of the credit union system 

has challenged corporates to explore new technologies and introduce more 

products and services to retain their members. Increased competition, 

large fluctuations in inflows and outflows of deposits, in combination with 

low interest rates, have created potential stress on the financial condition 

of corporates and U.S. Central. While corporates’ assets have increased 

rapidly, their ability to increase earnings remained constrained. As a result, 

corporates have increased their investments in privately issued, 

mortgage-related and asset-backed securities, which can increase returns 

but require more sophisticated analysis and monitoring. The change in 

corporates’ investment profile is another indication of the growing 

complexity in their operations. Since some corporates have been allowed 

to invest in lower-rated securities (although few have), this could introduce 

increased risks in the system if not managed properly. With the changing 

operating and investment environments, this increases corporates’ 

potential vulnerability to different financial stresses—and requires that 

corporates and their regulator, NCUA, place continued attention on their 

risk-assessment and monitoring strategies.

NCUA has made strides in strengthening its oversight of corporates, 

particularly with the adoption of a risk-focused approach, certain 

regulatory changes, and the hiring or training of specialists in information 

48In October 2003, NCUA issued a Letter to Federal Credit Unions, 03-FCU-07, that discusses 

guidance on selected provisions of the Sarbanes-Oxley Act of 2002 for federally chartered 

credit unions, including federally chartered corporates. NCUA encouraged all corporates, 

regardless of their charter type to review this letter.
Page 38 GAO-04-977 Corporate Credit Unions

and payment systems and capital markets. We believe these actions have 

helped NCUA to more effectively oversee corporates. However, based on 

issues we identified, we believe NCUA should do more to anticipate and 

address emerging network issues. In particular, a tracking system used in 

conjunction with other measures, such as information from its 

management and call reports, could provide timely and significant 

information to NCUA that would help ensure that its risk-focused approach 

addressed individual as well as networkwide risks. The relatively small 

number of specialists during a time of increased competition and growing 

complexity in corporate operations raises additional concerns since NCUA 

had not systematically incorporated specialists in planning risk-focused 

examinations, or tracked recurring or pervasive issues throughout the 

network. We believe this makes it difficult for NCUA to determine the 

number and type of specialists that are needed or to anticipate problems to 

adequately monitor or oversee the corporate network. Further, with the 

continued consolidation in the network, NCUA’s guidance was inadequate 

to ensure that examiners consistently evaluate proposed corporate 

mergers. Without sufficient guidance for corporates and examiners, NCUA 

lacks assurances that decisions on corporate mergers are consistently 

being made using appropriate criteria and information or that these 

decisions are consistently being made in the best interests of their 

members and NCUSIF. We believe that corporates and NCUA examiners 

would benefit from better guidance since consolidation, through mergers, 

is likely to continue. The growing complexity in operations and the 

products that corporates have introduced also raise important concerns 

about whether NCUA can ensure that corporates’ internal controls, which 

are central to monitoring operations and risk management, are properly 

assessed and monitored. However, NCUA has not required corporates to 

follow the same internal control reporting requirements (defined under 

FDICIA) as other financial institutions that face similar risks. Finally, the 

changing profile of the industry introduces both greater opportunities and 

greater challenges for NCUA, as the regulator of these institutions, to 

achieve a balance that ensures the network’s ability to introduce beneficial 

changes and properly manage its risks. 

Recommendations for 

Executive Action

To promote a more systematic and consistent approach in NCUA’s 

oversight of corporates to ensure they are safely providing financial 

services to natural person credit unions, we recommend that the Chairman 

of the National Credit Union Administration take the following five actions:
Page 39 GAO-04-977 Corporate Credit Unions

• Establish a process and structure to ensure more systematic 

involvement of specialists in identifying and addressing problems and 

developing and consistently applying policies, and reassess whether 

there are sufficient specialists to oversee corporates;

• Track and analyze examination deficiencies on a networkwide basis to 

identify and track recurring and pervasive issues throughout the 

network and to ensure that corporates take required corrective actions;

• Pay increased attention to oversight of corporates’ risk management 

functions to ensure corporates have sufficient capacity and skills to 

monitor and manage their risks;

• Provide specific guidance to corporates for merger proposal packages 

to ensure they are providing sufficient and relevant information, and 

improve guidance to examiners to ensure that merger proposals are 

reviewed consistently and meet the goals of serving members while not 

placing NCUSIF at undue risk; and 

• Require corporates with assets of $500 million or more to be subject to 

the internal control reporting requirements of the Federal Deposit 

Insurance Corporate Improvement Act of 1991 to ensure that corporates 

are held to the same standards as other financial institutions that face 

similar risks.

Agency Comments and 

Our Evaluation

We requested comments on a draft of this report from the Chairman of the 

National Credit Union Administration. We received written comments from 

NCUA that are summarized below and reprinted in appendix VIII. In 

addition, we received technical comments from NCUA that we 

incorporated into the report, as appropriate.

NCUA stated that it concurred with most of our assessments and 

conclusions contained in the report and plans to take actions to implement 

all but part of one of our recommendations. 

Specifically, NCUA concurred with the report’s assessment that corporates 

are operating in an increasingly challenging and competitive environment. 

In its comments on a draft of this report, NCUA stated that its changes to 

the corporate rule, made in response to the dynamic financial marketplace, 

functioned as intended, thus permitting the corporates’ balance sheets to 

expand and contract, sometimes rapidly, depending on liquidity levels in 
Page 40 GAO-04-977 Corporate Credit Unions

credit unions, while not compromising safety and soundness. NCUA agreed 

that the influx of deposits, combined with decreasing interest rates had 

strained profitability and resulted in lower capital ratios. However, NCUA 

did not agree with the report’s assessment that paid-in capital and 

membership capital are “weaker forms of capital.” NCUA restated its 

requirements for these two forms of capital and, as stated in the report, 

believed that both paid-in capital and membership shares are available to 

cover losses that exceed retained earnings, and are not insured by either 

NCUSIF and cannot be pledged against borrowings. While we agree with 

NCUA’s statements, as further discussed in the report, we remain 

concerned that both forms of capital are from external sources and are less 

permanent than retained earnings, therefore, providing a relatively weaker 

cushion against adverse financial events. 

In commenting on corporates’ investments, NCUA believed that the slight 

potential increase in credit risk exposure due to the 2002 rule change 

permitting corporates to purchase securities with lower credit quality is 

more than offset by the rule’s decrease in exposure to credit concentration 

risk. Additionally, NCUA is of the opinion that the rule’s “modest 

expansion” of permissible investment graded securities, combined with its 

reduction in credit concentration limits, results in a stronger corporate 

network—that corporate management is better positioned to compete, 

within prudent safety and soundness thresholds, than under the previous 

rule. NCUA also pointed out in its comments that as of June 30, 2004, 97 

percent of the network’s rated long-term securities are rated AAA. Based 

on the high quality and diversification of the network’s investments, NCUA 

believes credit risk is minimal. NCUA stated that it has addressed 

controlling interest-rate risk in the corporate rule and its assessment of the 

network’s investment portfolio interest-rate risk is minimal. We 

acknowledged in our report that corporates either have made few or no 

investments in BBB rated securities, and they indicated that they did not 

plan to use their authority to purchase such investments. However, it is not 

clear to what extent corporates will take advantage of this investment 

flexibility in the future, which has implications for NCUA’s oversight, 

especially given the thinness of risk-management staff at corporates. 

Further, we share Treasury’s concerns that allowing corporates to invest in 

BBB rated securities could weaken the safety and soundness of the 

corporate network because the amount of capital held in the corporates 

might not be commensurate with the risks associated with these lower 

credit quality investments.
Page 41 GAO-04-977 Corporate Credit Unions

While NCUA concurred with the report’s recommendation for the need to 

provide corporates with specific merger guidance to facilitate the 

regulatory review process, NCUA did not concur with the report’s 

conclusion that improved guidance to examiners is needed to ensure 

mergers meet the goals of serving members while not placing NCUSIF at 

undue risk. NCUA stated in its comments that it has adequate procedures 

in place, and that every corporate merger package prepared by OCCU is 

reviewed by NCUA’s Office of General Counsel prior to being presented to 

the NCUA Board for action. As stated in the report, NCUA officials told us 

that they considered several factors when approving corporate mergers 

such as consolidated budgets and conversion plans for information 

systems that NCUA has not discussed in the natural person credit union 

guidance. However, we found that only one of the five merger proposals we 

analyzed was submitted with this additional information and, therefore, we 

do not believe that NCUA’s guidance to examiners was sufficient to ensure 

that examiners consistently evaluate corporate mergers. As stated in the 

report’s conclusions, without sufficient guidance, NCUA lacks assurances 

that decisions on corporate mergers are consistently made using 

appropriate criteria and information or that these decisions are made in the 

best interests of their members and NCUSIF. While clear criteria and 

consistency in review are important, improving examiner guidance for 

mergers is also necessary to help protect against forbearance on the part of 

NCUA. 

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from its 

issuance. At that time, we will send copies of the report to the Chairman of 

the Senate Committee on Banking, Housing, and Urban Affairs; the 

Chairman and Ranking Minority Member of the House Committee on 

Financial Services; and interested congressional committees. We also will 

send copies to the National Credit Union Administration and make copies 

available to others upon request. In addition, this report will be available at 

no charge on the GAO Web site at http://www.gao.gov.
Page 42 GAO-04-977 Corporate Credit Unions

If you or your staff have any questions regarding this report, please 

contact me at (202) 512-8678 or hillmanr@gao.gov or Debra R. Johnson at 

(202) 512-9603 or johnsond@gao.gov. Key contributors are acknowledged 

in appendix IX.

Sincerely yours,

Richard J. Hillman

Director, Financial Markets

 and Community Investment
Page 43 GAO-04-977 Corporate Credit Unions

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Our report objectives were to (1) assess the changes in financial condition 

of corporate credit unions (corporates) since 1992 and (2) assess the 

National Credit Union Administration’s (NCUA) supervision and oversight 

of corporates, particularly with regard to how it identifies and addresses 

safety and soundness issues in the industry.

Financial Condition of 

Corporate Credit Unions 

Since 1992 

To assess the changes in the financial condition of corporates since 1992, 

we analyzed corporate credit union call report data, which include balance 

sheet and income statement data for corporates. Our analysis, based on 

Forms 5300 and 5310 data supplied by NCUA, included calculating 

descriptive statistics and key financial ratios and describing trends in 

financial performance and the structure of the industry.1

 The information 

included Form 5300 data from the end of 1992 through the end of 1996 and 

monthly Form 5310 data from January 1997 through December 2003. Our 

analysis relied upon selected balance sheet and income statement data 

such as assets, shares, investments, capital, net economic value (NEV), and 

various income measures and ratios that are commonly used to assess the 

financial condition of financial institutions. The transition in 1997 from 

Form 5300 (still used by natural person credit unions) to Form 5310, which 

is specifically designed for corporates, entailed numerous changes in 

reporting. Furthermore, significant regulatory changes, effective in 1998, 

also resulted in numerous changes to the information reported on Form 

5310 for 1998. Overall, these changes resulted in the deletion of some items 

from the financial reports and the addition of others. Subsequently, in some 

cases the data were not comparable across time. For example, NEV, which 

is a measure of interest-rate risk, was added to Form 5310 in 1998; thus, we 

were only able to conduct analysis on this measure from 1998 to 2003. In 

our prior report on natural person credit unions, we reviewed NCUA’s 

procedures for verifying the accuracy of the Form 5300 database and found 

that the data were verified on an annual basis, either during the corporate 

credit union’s examination, or through off-site supervision. We determined 

that the data were sufficiently reliable for the purposes of this report. We 

also performed a data reliability assessment on data from January 1997 

through December 2003 for Form 5310, which involved electronic testing of 

the data and obtaining information from NCUA on its data verification 

procedures. We found that the data were verified for accuracy on a monthly 

1

NCUA provided most of the information in electronic form. Additional data were obtained 

from the regulator’s Web site—www.ncua.gov. 
Appendix I

Objectives, Scope, and Methodology

Page 44 GAO-04-977 Corporate Credit Unions

basis and determined that the data were sufficiently reliable for the 

purposes of this report.

To augment our analysis and obtain a more comprehensive assessment of 

corporates’ financial condition and risks, we reviewed internal corporate 

credit union financial analysis reports from selected corporates, 

independent evaluations of corporate risk controls and models, and 

external studies of the industry from major rating agencies, such as Fitch, 

Moody’s, and Standard and Poor’s. We also met with selected NCUA 

examiners and risk management staff at corporates to better assess how 

corporates were managing their risks. In addition, we reviewed internal 

documents and analyses dealing with risk monitoring and control from 

several corporates in order to assess how well these corporates could 

assess and manage risk.

NCUA’s Supervision of 

Corporates

To assess how NCUA’s supervision of corporates identifies and addresses 

safety and soundness issues, we conducted a review of key legislative and 

regulatory changes affecting corporates since 1992. We reviewed NCUA 

documentation on its risk-focused program, including NCUA examination 

reports, their corresponding three-year plans, and the Office of Corporate 

Credit Union (OCCU) management reports for all 31 corporates for 2001-

2003.2

 We conducted interviews with OCCU management and with OCCU 

examiners-in-charge for 10 corporates.3 In addition, we visited seven 

corporates. We developed a structured questionnaire for all 31 corporates 

to solicit their views on what challenges individual institutions and the 

collective corporate network faced. We reviewed past GAO and U.S. 

Department of the Treasury reports on corporates and NCUA, internal 

reviews of OCCU, and an external review of OCCU performed by an 

outside auditing firm. We also contacted officials from the Federal Deposit 

Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), the 

Office of the Comptroller of Currency (OCC), and the Board of Governors 

of the Federal Reserve System. Lastly, we interviewed trade association 

officials.

2

Appendix II lists the 31 active corporates, including U.S. Central, as of December 31, 2003.

3

Consistent with our policy on auditing financial institutions, we did not identify the 

locations of these 10 corporates, with the exception of U.S. Central (because of its unique 

role), because it would identify the operations of ongoing institutions. 
Appendix I

Objectives, Scope, and Methodology

Page 45 GAO-04-977 Corporate Credit Unions

As part of our legislative review, we reviewed the Federal Credit Union Act 

to determine the legislative authority for corporates and NCUA’s Part 704, 

which is the primary regulation governing corporates. Specifically, we 

reviewed the Federal Register for all changes made to Part 704 since 1992 

to understand the rationale behind these changes. We also obtained 

summaries from NCUA, which provided their rationale for the changes and 

brief descriptions of the changes to specific sections of Part 704.

To assess NCUA’s documentation for its risk-focused program, we reviewed 

NCUA’s Corporate Examiner’s Guide, which describes the policies and 

procedures under which examiners are to implement the risk-focused 

program. The guide describes procedures for off-site monitoring, on-site 

examinations, information required in an examination report, and 

coordination with state supervisory authorities for corporates that have a 

state charter.

Also, as part of our assessment of NCUA’s risk-focused examination 

program, we reviewed about 100 examinations for the 31 currently 

operating corporates, corresponding 3-year plans, and OCCU monthly 

management and quarterly reports for the period January 2001 through 

December 2003. For the review of examinations, we developed a data 

collection instrument (DCI) to collect 3 years’ worth of information for 

each of the 31 corporates. The DCI enabled us to aggregate examination 

areas appearing in a large number of corporates over the time period 

reviewed that could be potential networkwide issues due to their 

prevalence or persistence. Examples of findings identified by NCUA in the 

various examination areas included errors or problems associated with 

5310 reporting, accounting procedures, asset/liability management, Bank 

Secrecy Act compliance, contingency planning, corporate governance, 

credit analysis, funds transfer, information systems, interest-rate risk, 

investment, lending, and management. 

The 3-year plans included information on the last examination and financial 

profiles—for example, daily average net assets (DANA), capital ratios, and 

net economic value (NEV). These plans also contained the supervision type 

of the corporate, supervision plans, Corporate Risk Information System 

(CRIS) ratings, and in some cases, requests for information system,
Appendix I

Objectives, Scope, and Methodology

Page 46 GAO-04-977 Corporate Credit Unions

payment system, or capital market specialists for the next examination or 

supervision contact.4

The OCCU monthly management reports covered areas such as OCCU’s 

administration news, trends in corporates, significant problem case 

corporates, other significant program issues, miscellaneous corporate 

information, information on internal or external affairs, board action items, 

and the next month’s calendar. The quarterly reports provided a brief 

update of events since the previous report, a summary of corporate 

network trends, the current status of e-commerce in corporates, specific 

discussions on 20 percent to 50 percent of individual corporates, and the 

future outlook for corporates and OCCU during the next quarter and 

beyond. 

We met with OCCU management to follow up on questions generated from 

our review of the examinations, 3-year plans, and OCCU monthly 

management and quarterly reports. We also selected a judgmental sample 

of 10 corporates from which to gather additional information about NCUA 

oversight. These corporates were selected based on asset size, geographic 

location, charter type, level of expanded investment authority, and 

significant findings in the examinations. We obtained NCUA’s most recent 

examiner workpapers for these 10 corporates to review how NCUA 

supported its findings. We also met with the examiner-in-charge and, when 

possible, capital market specialists for the 10 corporates to better 

comprehend their approach to examining the corporate credit union and to 

understand the support and rationale for some examination findings. In 

addition, we visited 7 of the 10 corporates to observe and discuss their 

operations, risk management practices, and interactions with NCUA. We 

selected these 7 based on their asset size, geographic location, type of 

charter (state or federal), and whether they had expanded investment 

authorities. We interviewed senior management and some board and 

supervisory committee members. We asked structured questions of 

officials from various departments within the corporates. The departments 

included investments, risk management, accounting, internal audit, 

external audit, information systems, and product support. We obtained 

policies and procedures for various areas within the corporates, including 

4

The supervision type is a code assigned to a corporate to determine the specific targeted 

examination and supervision program applied to the institution. It is not a rigid function of 

asset size, expanded authority level, or rating from an examination. Rather, it represents a 

combination of factors that may include these elements in addition to perceived risk levels, 

quality of changes in management, and financial condition.
Appendix I

Objectives, Scope, and Methodology

Page 47 GAO-04-977 Corporate Credit Unions

investments, lending, and risk management. We also obtained 

documentation packages, which were submitted to the asset/liability 

committees of corporates for some of the institutions we visited, to review 

investments and their impact on the risk within the corporates. We also 

observed corporates’ physical environment to determine the types of 

safeguards that were in place, particularly for information technology. 

We developed a structured questionnaire to collect information from the 

corporate network that focused on their perspectives about various 

components of the industry. We pretested the questionnaire with one of the 

largest corporates and received numerous meaningful observations about 

our original version and made refinements. We administered the structured 

questionnaire to the entire population of active corporates (as of December 

31, 2003) as shown in appendix II. 

Appendix III includes a copy of our structured questionnaire, and appendix 

IV includes responses to the majority of questions in the questionnaire. The 

Association of Corporate Credit Unions (ACCU) oversaw the distribution 

of our structured questionnaire to its 30 corporate members. We 

administered the questionnaire to the one non-ACCU corporate member. 

The questionnaires were sent by e-mail at the end of March 2004. We 

received all responses to our questionnaire by mid-May 2004 and achieved 

a 100 percent response rate. We conducted follow-up telephone interviews 

with numerous corporates to obtain clarification on some of their 

responses. Our questionnaire covered the following areas:

• products and services that corporates offer to their natural person 

credit unions,

• Credit Union Service Organizations (CUSO), 

• competition,

• investment authorities,

• corporate investments with U.S. Central,

• regulatory changes and impacts on corporates’ operations,

• the effects of the risk-focused approach on corporates,

• corporates’ fields of membership,
Appendix I

Objectives, Scope, and Methodology

Page 48 GAO-04-977 Corporate Credit Unions

• challenges corporates face and their responses to these challenges, and

• corporates’ immediate and future merger plans.

We analyzed the results by summarizing responses or providing simple 

statistics (for example, range, median, and average) to most of the 

quantitative questions. Specifically, we conducted quantitative analysis on 

questions 1, 3, 4, 5, 7, 7a, 11, 12, 13, 14, 17, and 21. We performed content 

analysis on most of the responses to the qualitative questions. Specifically, 

we conducted content analysis on questions 8, 9, 10, 16, 19, 20, 21a, and 22. 

The results of our analysis for most of the questions are presented in 

appendix IV.

To gain a better understanding on the challenges and problems NCUA has 

faced in overseeing corporates, we reviewed past GAO and U.S. 

Department of the Treasury reports on corporates and NCUA. These 

reports also provided recommendations for NCUA to improve its oversight. 

Additionally, we reviewed internal NCUA reviews on OCCU. These reviews 

are conducted about every 3 years by OCCU’s Director and staff from 

outside OCCU, who review OCCU’s operations and suggest improvements. 

Similarly, NCUA has contracted for an outside party to review OCCU’s 

operations, and this party also has provided recommendations on 

improvements in OCCU management and oversight. OCCU’s last external 

review was completed in 2002. We interviewed officials from the 

Department of the Treasury and academia who had studied corporates.

To obtain information on the experiences of other depository institution 

regulators with the risk-focused examination and supervision approach, we 

obtained written responses from officials at FDIC, OTS, OCC, and the 

Board of Governors of the Federal Reserve System.

Finally, to obtain perspectives on the business environment confronting the 

corporate network and their responses to a changing environment, we 

interviewed trade association officials from ACCU, the National 

Association of Federal Credit Unions, including its board of directors, and 

the National Association of State Credit Union Supervisors. 

We conducted our work from December 2003 to September 2004 in 

Alexandria, Virginia, Washington, D.C., and other U.S. cities in accordance 

with generally accepted government auditing standards.
Page 49 GAO-04-977 Corporate Credit Unions

Appendix II

Corporate Credit Unions Active as of 

December 31, 2003 ApendxiI

Source: NCUA.

Corporate credit union Federally or state-chartered

Central Corporate Credit Union State

Central Credit Union Fund State

Constitution State Corporate Credit Union State

Corporate America Credit Union State

Corporate Central Credit Union State

Corporate One Federal Credit Union Federal

Eastern Corporate Federal Credit Union Federal

Empire Corporate Federal Credit Union Federal

First Carolina Corporate Credit Union State

First Corporate Credit Union State

Georgia Central Corporate Credit Union State

Iowa League Corporate Central Credit Union State

Kansas Corporate Credit Union State

Kentucky Corporate Federal Credit Union Federal

LICU Corporate Federal Credit Union Federal

Louisiana Corporate Credit Union State

Mid-Atlantic Corporate Federal Credit Union Federal

Mid-States Corporate Federal Credit Union Federal

Midwest Corporate Federal Credit Union Federal

Missouri Corporate Credit Union State

Northwest Corporate Credit Union State

Southeast Corporate Federal Credit Union Federal

Southwest Corporate Federal Credit Union Federal

Sun Corporate Credit Union State

Treasure State Corporate Credit Union State

Tricorp Corporate Federal Credit Union Federal

U.S. Central Credit Union State

Virginia League Corporate Federal Credit Union Federal

Volunteer Corporate Credit Union State

West Virginia Corporate Credit Union State

Western Corporate Federal Credit Union Federal
Page 50 GAO-04-977 Corporate Credit Unions

Appendix III

Structured Questionnaire to Corporate Credit 

Unions on Their Current Makeup and 

Challenges Facing the Network ApendxiI

We distributed the following questionnaire to the entire network of 

corporates in the United States, including both federally and statechartered institutions, and achieved a 100 percent response rate. 

(Appendix II lists the 31 corporates active as of December 31, 2003, and 

whether they are federally or state-chartered.) The questionnaire has three 

sections: products and services, regulatory changes, and challenges facing 

corporates. The first section addresses the types of products and services 

offered by corporates to their members, the issues they faced regarding 

competition, the type of investment authorities corporates had or sought, 

and the extent of their investments with U.S. Central Corporate Credit 

Union. The second section addresses various regulatory issues such as 

what regulatory changes affected their institution, a description of the 

corporate’s field of membership (for example, whether they had a national 

field of membership), and their perception of NCUA’s risk-focused 

supervisory approach. Finally, the questionnaire solicits the opinions of 

corporate managers on what future issues the corporate credit union 

industry faces. Appendix IV contains selected responses to the 

questionnaire.
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 51 GAO-04-977 Corporate Credit Unions

United States General Accounting Office 

Survey of Corporate Credit Unions on Current 

Makeup and Challenges Facing the Network 

Introduction

The U.S. General Accounting Office (GAO), 

an independent agency of the U.S. Congress, 

has been asked to review the National 

Credit Union Administration’s (NCUA) 

oversight of corporate credit unions on 

behalf of the Senate Banking committee. As 

part of this review, we are collecting 

information from the corporate credit union 

network. We are sending this questionnaire, 

via the Association of Corporate Credit 

Unions, to each of the 31 corporate credit 

unions, in order to reflect corporate credit 

unions’ perspective in our study. 

Instructions

The questionnaire should be answered by 

the official (or officials) most familiar with 

the corporate credit union’s operations. 

Specifically, our review is focused on 

examining the following three questions:

(1) How has the financial condition and 

function of corporate credit unions changed 

over time and what have been the effects of 

that change; (2) To what extent does 

NCUA’s supervision of corporate credit 

unions identify and address safety and 

soundness issues in the industry; and (3) 

What challenges do corporate credit unions 

face and what actions are they taking to 

address these challenges. 

If you are using the Microsoft Word format, 

please save it to your computer first and 

then enter your answers directly into the 

marked areas. Many of the questions in this 

survey can be answered by checking a box 

or filling in a blank; some request a short 

narrative answer. The survey covers 

substantive questions and is largely factbased for the purpose of allowing the GAO 

to accurately describe the current makeup 

of the corporate credit union network. 

In addition, the survey asks for the opinion 

of the management of your corporate credit 

union on the future issues that face the 

industry. Those questions are included to 

ensure that the issues covered in our report 

reflect the perspective of the corporate 

network. 

Your responses and all company 

information you provide will be treated to 

protect your privacy and that of the 

corporate credit union. Responses will be 

reported in aggregate, and therefore will not 

be used in any way that would identify you 

or your corporate credit union. 

Please return your completed questionnaire 

to GAO by April 15, 2004. The response 

should be submitted electronically as a 

Microsoft Word file attachment sent to May 

Lee at Leem@gao.gov , or if you like, we 

could make other arrangements for your 

submission. Please call May Lee at (415) 

904-2182 to make such arrangements. 

If you have any questions about this survey 

or the GAO study, please contact José R. 

Peña, Analyst-in-Charge, at (415)-904-2268. 

or email him at penajr@gao.gov.

Thank you for your participation. 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 52 GAO-04-977 Corporate Credit Unions

2

I. Products, Services and Investments 

1) Please complete the following table describing the products and services that your corporate credit union 

offers: 

Product or Service

Is currently 

offered? 

(Yes or No) 

If offered, was 

product/service 

introduced in 

the last 

five years? 

If not offered,

are there 

plans to do so 

in the next 

two years? 

A. Card/ATM Services 

 1. ATM Cards (Issuing) Yes No Yes Yes 

 2. ATM Settlements/Terminal Driving Yes No Yes Yes 

 3. Credit Card Settlement Yes No Yes Yes 

 4. Debit Cards (Issuing) Yes No Yes Yes 

B. Check Services

 1. Check Collection Yes No Yes Yes 

 2. Check Loss Reduction Yes No Yes Yes 

 3. Money Order Settlement Yes No Yes Yes 

 4. Share Draft Processing Yes No Yes Yes 

 5. Statement Prep and Mailing Yes No Yes Yes 

 6. Tellers Check Yes No Yes Yes 

 7. Travelers Check Settlement Yes No Yes Yes 

C. Correspondence Services

 1. Coin and Currency Yes No Yes Yes 

 2. Federal Reserve Settlement Yes No Yes Yes 

 3. Financial Settlements Yes No Yes Yes 

 4. Foreign Check Collection Yes No Yes Yes 

 5. Foreign Currency Conversion Yes No Yes Yes 

D. Education and Training

 1. Marketing Yes No Yes Yes 

 2. Online Training Yes No Yes Yes 

 3. Rates/Events Updates/News Yes No Yes Yes 

E. E-Services

 1. ACH Services Yes No Yes Yes 

 2. Cash Concentration Yes No Yes Yes 

 3. Check Imaging Yes No Yes Yes 

 4. Electronic Bill Payment Yes No Yes Yes 

 5. Funds/Wire Transfers (In & Out) Yes No Yes Yes 

 6. Internet Banking Yes No Yes Yes 

 7. Website Design and Management Yes No Yes Yes 

(continue on next page.)
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 53 GAO-04-977 Corporate Credit Unions

3

(continuation of Q1.) 

Product or Service

Is currently 

offered? 

(Yes or No) 

If offered, was 

product/service 

introduced in 

the last 

five years? 

If not offered,

are there 

plans to do so 

in the next 

two years? 

F. Funds Management/Financial 

Services

 1. Account Management & Statements Yes No Yes Yes 

 2. Amortizing Certificates (ACP) Yes No Yes Yes 

 3. Asset/Liability Management Yes No Yes Yes 

 4. Brokerage Services Yes No Yes Yes 

 5. CDs Yes No Yes Yes 

 6. Corporate Checking Accounts Yes No Yes Yes 

 7. Derivatives Hedging Yes No Yes Yes 

 8. Dividend Earning Accounts Yes No Yes Yes 

 9. Investment Advisory Yes No Yes Yes 

10. Loans/Lending Yes No Yes Yes 

11. Members’ Business Accounts Yes No Yes Yes 

12. Members’ Capital Accounts Yes No Yes Yes 

13. Money Market Accounts Yes No Yes Yes 

14. Open-End and Term Credits Yes No Yes Yes 

15. Overnight/Cash Management Accounts Yes No Yes Yes 

16. Savings Bonds Yes No Yes Yes 

17. Share Certificates (all kinds) Yes No Yes Yes 

G. Miscellaneous

 1. Cash Letter Credit Yes No Yes Yes 

 2. CU Service Settlement Yes No Yes Yes 

 3. CUNA Service Group Settlement Yes No Yes Yes 

 4. CUNA Mutual Services Yes No Yes Yes 

 5. Reverse Purchase Program Yes No Yes Yes 

 6. Securities Safekeeping Yes No Yes Yes 

H. Other (Specify.)

 1. [type here] Yes No Yes Yes 

 2. [type here] Yes No Yes Yes 

 3. [type here] Yes No Yes Yes 

 4. [type here] Yes No Yes Yes 

 5. [type here] Yes No Yes Yes 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 54 GAO-04-977 Corporate Credit Unions

4

2) How are your member capital accounts structured? 

[type here] 

3) By size of assets, how many of your members are NPCUs, CCUs, or Others? 

(Enter the number of your Corporate members in each cell. If none, enter “0”.)

Size of Member Type 

Member CU Number of NPCUs

in your membership 

Number of CCUs in 

your membership 

Number of Others

in your membership 

< $10 Million 

[type # or 0] [type # or 0] [type # or 0] 

>$10M but <$100M 

[type # or 0] [type # or 0] [type # or 0] 

>$100M but <$1 Billion 

[type # or 0] [type # or 0] [type # or 0] 

> $1 Billion 

[type # or 0] [type # or 0] [type # or 0] 

TOTAL [type # or 0] [type # or 0] [type # or 0] 

4) What percentage of your various lines of business are from the following Natural Person (or Corporate) Credit 

Union member size categories? 

(Enter percent by size for each line of business. Percentages should total to 100%) 

Size of Line of Business 

Member 

Credit 

Union

Payments Settlements Loans or 

Liquidity 

Provision 

Investments Brokerage ALM Other 

< $10 

Million 

[Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] 

>$10M but 

<$100M 

[Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] 

>$100M but 

<$1 Billion 

[Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] 

> $1 Billion [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] [Enter %] 

TOTAL 100% 100% 100% 100% 100% 100% 100% 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 55 GAO-04-977 Corporate Credit Unions

5

5) Has your Natural Person (or Corporate) Credit Union members’ use of services increased (I), 

stayed the same (S), or decreased (D) since CY1992 , as broken out by member size? (Select 

a letter for each cell in the table using the following indicators; then enter it in the cell. 

I = INCREASED use of the service 

S = SAME use of the service as before 1992 

D= DECREASED use of the service 

NA = Not applicable) 

Size of Line of Business 

Member 

Credit 

Union

Payments Settlements Loans or 

Liquidity 

Provision 

Investments Brokerage ALM Other 

< $10 

Million 

enter letter enter letter enter letter enter letter enter letter enter letter enter letter 

>$10M but 

<$100M 

enter letter enter letter enter letter enter letter enter letter enter letter enter letter 

>$100M but 

<$1 Billion 

enter letter enter letter enter letter enter letter enter letter enter letter enter letter 

>$1

Billion 

enter letter enter letter enter letter enter letter enter letter enter letter enter letter 

6) What do you think are the reasons for any changes in your members’ use of your services? 

[type here] 

7) How many CUSOs does your corporate credit union have a stake in? (Check one.)
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 56 GAO-04-977 Corporate Credit Unions

6

1. 0 (Skip to Question #8.) 

2. 1 

3. 2 

4. 3 or more 

7a) If 1 or more, please complete the following table and continue to question 7b. 

Name of CUSO Percentage 

of

ownership 

stake

Primary function 

[enter name] [Enter %] [enter function] 

[enter name] [Enter %] [enter function] 

[enter name] [Enter %] [enter function] 

7b) How do the services that these CUSOs provide differ from the services the corporate 

credit union provides? 

 [type here] 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 57 GAO-04-977 Corporate Credit Unions

7

8) In what ways does your corporate credit union face competition from outside the corporate 

credit union network? (If no external competition, skip question 8a.) 

[type here] 

8a) What are the sources of that competition, and which products services are most 

affected?

Source of 

competition

Products and Services Affected 

[type here] [type here] 

[type here] [type here] 

[type here] [type here] 

[type here] [type here] 

8b) To what extent do you expect competition to continue to increase in the next several 

years?

 [type here] 

9) In what ways have you felt competition from other corporate credit unions increase in the 

last five years?

[type here] 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 58 GAO-04-977 Corporate Credit Unions

8

10) To what extent do you expect competition from other corporate credit unions to continue to 

increase in the next several years? 

[type here] 

11) What investment authorities do you currently have? (Check all that apply.)

1. Base

2. Base Plus 

3. Part I 

4. Part II

5. Part III 

6. Part IV 

7. Part V 

 8. Other (Specify.) [type here] 

12) Do you plan on asking for more authorities in the next two years? If yes, then which ones? 

(Check all that apply.)

1. Base

2. Base Plus 

3. Part I 

4. Part II

5. Part III 

6. Part IV 

7. Part V 

 8. Other (Specify.) [type here] 

13) What percent of your investments are made through U.S. Central? 

[enter %] = Percent of investments with U.S. Central. 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 59 GAO-04-977 Corporate Credit Unions

9

14) Which of the following categories best describes your planned use of U.S. Central for 

investment purposes in the next two years?

1. To do Less with U.S. Central 

2. To do the Same with U.S. Central 

3. To do More with U.S. Central 

4. Do not currently invest in U.S. Central AND do not plan to do so in next two years 

II. Regulatory Changes 

15) Which regulatory changes – including changes to Part 704 – have had the most impact on 

your corporate credit union? 

[type here] 

15a) Please describe how those changes have impacted your corporate credit union’s 

operations? 

[type here] 

16) Please describe the effect of NCUA’s more risk-based approach of corporate credit union 

examination on your corporate credit union? 

[type here] 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 60 GAO-04-977 Corporate Credit Unions

10 

17) Do you have a national field of membership? Check one.)

1. Yes 

2. No 

18) How many NPCU members are within your Corporate field of membership in each of the 

following states? (If other than “0”, enter actual number of member NPCUs in each state.)

Alabama [0] Alaska [0] Arizona [0] Arkansas [0] California [0] 

Colorado [0] Connecticut [0] Delaware [0] Florida [0] Georgia [0] 

Hawaii [0] Idaho [0] Illinois [0] Indiana [0] Iowa [0] 

Kansas [0] Kentucky [0] Louisiana [0] Maine [0] Maryland [0] 

Massachusetts [0] Michigan [0] Minnesota [0] Mississippi [0] Missouri [0] 

Montana [0] Nebraska [0] Nevada [0] New Hampshire [0] New Jersey [0] 

New Mexico [0] New York [0] North Carolina [0] North Dakota [0] Ohio [0] 

Oklahoma [0] Oregon [0] Pennsylvania [0] Rhode Island [0] South Carolina [0] 

South Dakota [0] Tennessee [0] Texas [0] Utah [0] Vermont [0] 

Virginia [0] Washington [0] West Virginia [0] Wisconsin [0] Wyoming [0] 

III. Challenges Facing Corporate Credit Unions

19) What are the primary challenges facing your corporate credit union as it attempts to maintain 

and/or grow its membership in the next two years? 

[type here] 

20) What is your corporate credit union doing to address these challenges? 

[type here] 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 61 GAO-04-977 Corporate Credit Unions

11 

21) What is your corporate credit union’s current merger plans? 

1. In discussions to merge with another corporate credit union 

2. Likely to merge with another corporate credit union in the next two years 

3. Will consider a merger with another corporate credit union in the next two years 

______________________

4. Will not consider a merger in the next two years 

5. Uncertain 

21a) If you checked either box 1, 2, or 3 in the previous question (#21), please describe the 

factors that contribute to your corporate credit union’s decision to consider a merger? 

[type here] 

22) What are the three major challenges currently facing the corporate credit union industry as 

a whole? 

1. [type here] 

2. [type here] 

3. [type here] 

23) Please indicate the name, title, and phone number of the person(s) who was mainly 

responsible for filling out this questionnaire.

Name [enter name], Title [enter title], 

Phone number: [enter area code & number] 
Appendix III

Structured Questionnaire to Corporate 

Credit Unions on Their Current Makeup and 

Challenges Facing the Network 

Page 62 GAO-04-977 Corporate Credit Unions

12 

24) Please indicate the name, title, and phone number of the person GAO staff should contact if

GAO has follow up questions.

Name [enter name], Title [enter title] 

Phone number: [enter area code & number] 

25) Would you like to discuss any of the above questions in further depth, or anything else 

related to our review of the corporate credit union industry, with GAO? 

1. No 

2. Yes 

If YES, please provide name, title, and phone number of the person to contact to 

schedule a follow-up conversation. 

Name [enter name], Title [enter title] 

Phone number: [enter area code & number] 

Thank you for completing the Survey 

(Save your completed survey as an MS Word document and 

send it as an attachment to May Lee at Leem@gao.gov)
Page 63 GAO-04-977 Corporate Credit Unions

Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate Credit 

Unions ApendxiIV

As noted in appendix III, we distributed a questionnaire to the entire 

network of corporates. This appendix provides responses to the majority of 

questions posed in the questionnaire (see questions 1, 3-5, 7-14, 16-17, and 

19-22). This information was analyzed in the aggregate to prevent specific 

responses from being associated with an individual institution. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 64 GAO-04-977 Corporate Credit Unions

Selected Questionnaire Results 

The information included in this appendix is based on the responses of 31 corporates, unless 

otherwise indicated. 

Question 1: Products and Services Corporate Credit Unions Offer 

Product or service 

Is currently 

offered?

Yes

If offered, was 

product/service 

introduced in the 

last 

five years? 

If not offered,

are there plans 

to do so in the 

next 

two years? 

A. Card/ATM Services 

 1. ATM Cards (Issuing) 4 0 2 

 2. ATM Settlements/Terminal Driving 14 1 1 

 3. Credit Card Settlement 26 0 0 

 4. Debit Cards (Issuing) 4 0 2 

B. Check Services 

 1. Check Collection 26 2 1 

 2. Check Loss Reduction 6 3 4 

 3. Money Order Settlement 25 0 0 

 4. Share Draft Processing 18 3 1 

 5. Statement Prep and Mailing 4 0 2 

 6. Tellers Check 21 0 0 

 7. Travelers Check Settlement 25 0 0 

C. Correspondence Services 

 1. Coin and Currency 26 0 0 

 2. Federal Reserve Settlement 30 0 0 

 3. Financial Settlements 29 0 0 

 4. Foreign Check Collection 30 2 0 

 5. Foreign Currency Conversion 20 3 0 

D. Education and Training 

 1. Marketing 19 1 1 

 2. Online Training 23 13 2 

 3. Rates/Events Updates/News 31 4 0 

E. E-Services 

 1. ACH Services 30 2 0 

 2. Cash Concentration 29 1 0 

 3. Check Imaging 20 7 3 

 4. Electronic Bill Payment 22 15 2 

 5. Funds/Wire Transfers (In & Out) 31 0 0 

 6. Internet Banking 19 11 0 

 7. Website Design and Management 6 5 1 

F. Funds Management/Financial Services

 1. Account Management & Statements 25 1 0 

 2. Amortizing Certificates (ACP) 28 3 1 

 3. Asset/Liability Management 21 8 2 

 4. Brokerage Services 22 14 4 

 5. CDs 30 2 0 

 6. Corporate Checking Accounts 28 1 0 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 65 GAO-04-977 Corporate Credit Unions

Product or service 

Is currently 

offered?

Yes

If offered, was 

product/service 

introduced in the 

last 

five years? 

If not offered,

are there plans 

to do so in the 

next 

two years? 

 7. Derivatives Hedging 3 2 3 

 8. Dividend Earning Accounts 31 0 0 

 9. Investment Advisory 13 3 3 

10. Loans/Lending 31 0 0 

11. Members’ Business Accounts 11 3 6 

12. Members’ Capital Accounts 30 0 0 

13. Money Market Accounts 20 0 0 

14. Open-End and Term Credits 26 1 0 

15. Overnight/Cash Management Accounts 30 0 0 

16. Savings Bonds 14 0 0 

17. Share Certificates (all kinds) 28 0 0 

G. Miscellaneous 

 1. Cash Letter Credit 26 0 0 

 2. CU Service Settlement 26 0 0 

 3. CUNA Service Group Settlement 28 0 0 

 4. CUNA Mutual Services 15 0 0 

 5. Reverse Purchase Program 26 0 0 

 6. Securities Safekeeping 29 0 0 

H. Other (Specify.)a

 1. ALM 1 1 0 

 2. ATM/Pay Card Services 2 1 0 

 3. CDs 6 4 0 

 4. Consulting Services 3 2 0 

 5. CUSO Products/Services 1 0 0 

 6. Education/Training 1 0 0 

 7. Financial/Liquidity Products 1 0 0 

 8. Fraud Protection Products 2 2 0 

 9. International Services 1 1 0 

10. Loans 3 2 1 

11. Lock box 1 0 0 

12. Member Services 3 2 0 

13. Money Transfers 1 0 0 

14. Non-Member Deposits 1 0 0 

15. Payment and Technology Products 1 0 0 

16. Settlements 5 0 0 

17. Share Draft Electronic Image Exchange 0 0 1 

18. Transit Return Processing 1 0 0 

19. WAVE/Web-Based Solution 2 1 0 

Source: GAO Structured Questionnaire to Corporates. 

a

Responses displayed are as reported by corporates. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 66 GAO-04-977 Corporate Credit Unions

Question 3: Corporate Credit Union Membership by Asset Size 

Size of natural person 

credit union 

Number of natural person 

credit unions in your 

membership 

< $10 Million Range => 0-553 

Median => 102 

>$10M but <$100M Range => 3-579 

Median => 109 

>$100M but <$1 Billion Range => 3-232 

Median => 25 

> $1 Billion Range => 0-65 

Median => 2 

Source: GAO Structured Questionnaire to Corporates.

Question 4: Member Credit Union Usage of Corporate Credit Union Services and Products 

Based on Member Asset Size 

Line of business

Size of 

member credit 

union 

Payments Settlements Loans or 

liquidity 

provision 

Investments Brokerage ALM Other 

< $10 Million Range 0-60% 

Ave 23.89% 

Range 0-66% 

Ave 25.05% 

Range 0-60% 

Ave 23.88% 

Range 0-63% 

Ave 24.11% 

Range 0-38% 

Ave 5.45% 

Range 0-66% 

Ave 8.17% 

Range 0-60% 

Ave 10.38% 

>$10M but <$100M Range 0-85% 

Ave 42.83%

Range 0-70% 

Ave 41.28% 

Range 0-95% 

Ave 41.92% 

Range 0-62% 

Ave 36.63% 

Range 0-100% 

Ave 35.57% 

Range 0-100% 

Ave 47.15% 

Range 0-60% 

Ave 13.91% 

>$100M but <$1 Bil Range 0-62% 

Ave 22.02% 

Range 0-63% 

Ave 22.27% 

Range 0-77% 

Ave 24.62% 

Range 0-60% 

Ave 25.72% 

Range 0-70% 

Ave 19.44% 

Range 0-100% 

Ave 15.43% 

Range 0-70% 

Ave 8.42% 

> $1 Billion Range 0-50% 

Ave 3.65% 

Range 0-81% 

Ave 6.59% 

Range 0-88% 

Ave 6.02% 

Range 0-88.7% 

Ave 10.15% 

Range 0-82% 

Ave 5.80% 

Range 0-46% 

Ave 2.42% 

Range 0-26% 

Ave 1.21% 

Source: GAO Structured Questionnaire to Corporates.

Question 5: Level of Member Credit Unions’ Use of Services Since Calendar Year 1992 

Line of business

Size of 

member 

credit union 

Payments Settlements Loans or 

liquidity 

provision 

Investments Brokerage ALM Other 

< $10 Million I = 23 (74.19%) 

S = 4 (12.90%) 

D = 0 (0%) 

NA = 4 (12.90%) 

I = 23 (74.19%) 

S = 5 (16.13%) 

D = 1 (3.23%) 

NA = 2 (6.45%) 

I = 17 (54.84%) 

S = 7 (22.58%) 

D = 5 (16.13%) 

NA = 2 (6.45%) 

I = 23 (74.19%) 

S = 5 (16.13%) 

D = 0 (0%) 

NA = 2 (6.45%) 

I = 14 (45.16%) 

S = 3 (9.68%) 

D = 0 (0%) 

NA = 13 (41.94%) 

I = 12 (38.71%) 

S = 5 (16.13%) 

D = 1 (3.23%) 

NA = 13 (41.94%) 

I = 10 (32.26%) 

S = 2 (6.45%) 

D = 0 (0%) 

NA = 8 (25.81%) 

>$10M but <$100M I = 25 (80.65%) 

S = 2 (6.45%) 

D = 1 (3.23%) 

NA = 3 (9.68%) 

I = 24 (77.42%) 

S = 4 (12.90%) 

D = 3 (9.68%) 

NA = 0 (0%) 

I = 24 (77.42%) 

S = 4 (12.90%) 

D = 3 (9.68%) 

NA = 0 (0%) 

I = 20 (64.52%) 

S = 5 (16.13%) 

D = 6 (19.35%) 

NA = 0 (0%) 

I = 25 (80.65%) 

S = 3 (9.68%) 

D = 2 (6.45%) 

NA = 1 (3.23%) 

I = 18 (58.06%) 

S = 0 (0%) 

D = 1 (3.23%) 

NA = 12 (38.71%) 

I = 18 (58.06%) 

S = 0 (0%) 

D = 1 (3.23%) 

NA = 12 (38.71%) 

>$100M but <$1 Bil I = 24 (77.42%) 

S = 3 (9.68%) 

D = 1 (3.23%) 

NA = 3 (9.68%) 

I = 23 (74.19%) 

S = 5 (16..13%) 

D = 3 (9.68%) 

NA = 0 (0%) 

I = 19 (61.29%) 

S = 6 (19.35%) 

D = 6 (19.35%) 

NA = 0 (0%) 

I = 23 (74.19%) 

S = 5 (16.13%) 

D = 2 (6.45%) 

NA = 1 (3.23%) 

I = 16 (51.61%) 

S = 1 (3.23%) 

D = 1 (3.23%) 

NA = 11 (35.48%) 

I = 17 (54.84%) 

S = 2 (6.45%) 

D = 1 (3.23%) 

NA = 11 (35.48%) 

I = 11 (35.48%) 

S = 3 (9.68%) 

D = 0 (0%) 

NA = 6 (19.35%) 

> $1 Billion I = 17 (54.84%) 

S = 4 (12.90%) 

D = 0 (0%) 

NA = 10 (32.26%) 

I = 19 (61.29%) 

S = 4 (12.90%) 

D = 1 (3.23%) 

NA = 7 (22.58%) 

I = 15 (48.39%) 

S = 5 (16.13%) 

D = 4 (12.90%) 

NA = 7 (22.58%) 

I = 19 (61.29%) 

S = 3 (9.68%) 

D = 1 (3.23%) 

NA = 8 (25.81%) 

I = 11 (35.48%) 

S = 4 (12.90%) 

D = 0 (0%) 

NA = 15 (48.39%) 

I = 8 (25.81%) 

S = 7 (22.58%) 

D = 0 (0%) 

NA = 16 (51.61%) 

I = 5 (16.13%) 

S = 5 (16.13%) 

D = 0 (0%) 

NA = 10 (32.26%) 

Source: GAO Structured Questionnaire to Corporates. 

Note: I = increased, S = stayed the same, or D = decrease since calendar year 1992. N/A = not applicable. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 67 GAO-04-977 Corporate Credit Unions

Question 7: Number of Credit Union Service Organizations Corporate Credit 

Unions Have Stakes In 

Response category Number of 

corporates 

Percent of 

corporates 

None 1 3.23%

1 5 16.13%

2 11 35.48%

3 or more 14 45.16%

Source: GAO Structured Questionnaire to Corporates.

Question 7a: Credit Union Service Organization (CUSO) Names, Function, and Percentage 

Holdings 

CUSO name CUSO function Number of 

corporates a

Percent

holdings b

Primary Financial, Co LLC CD brokerage services 24 67.25% c

CNBS, Inc. LLC Broker/Dealer, ALM, advisory, and education 7 66.28% 

CU Business Group, LLC Business lending, deposit, and consulting 4 100% 

Corporate Access Loan participation, shared financial services 3 60% 

Corporate Exchange Brokered CDs 2 12% 

CU eArchive Solutions (CUeas) Image archive for share drafts 2 100% 

CU National Item Capture (CUNIC) Item processing for share drafts/check 

processing 

2 100% 

1909 Financial Advisors CU Financial Services 1 100% 

ALM First Financial Advisors Balance sheet/investment risk management 1 85% 

Callahan CU Financial Services 

(CUFSLP) 

Investment services 1 2% 

Carolina CU Services, Inc. Shared branching network for credit unions 1 3% 

CenCorp Business Solutions, LLC Out-sourced business loan underwriting and 

other business services for CUs 

1 100% 

Centennial Lending LLC Lending CUSO for member credit unions 1 25% 

Charlie Mac, LLC Purchase mortgage and auto loans; provide 

credit unions with a secondary market 

1 100% 

Constitution Investment Investment advisory and risk reporting 1 100% 

Corporate Network eCom, LLC Low-cost electronic bill payment and related 

solutions 

1 87% 

Corporate Synergies, LLC Operates new core processing system 1 75% 

Credit Union Brokerage Services Brokerage services 1 100% 

Credit Union Direct Lending (CUDL) Point of sale auto lending 1 .6% 

CSC II, Inc. Shared branching services to credit unions in 

New York 

1 3.3% 

CSI Item processing for credit unions 1 6% 

CU Business Partners (CUBP) Member business lending 1 1% 

CU Investment Solutions, Inc. Offered fee-based, investment supervisory 

services to credit unions 

1 100% 

CU Service Co. of VA Branching for retail credit unions 1 1% 

CU West Mortgage (CUWM) Mortgage origination 1 3% 

CUC Mortgage Corp Mortgage processing services for credit unions 1 10% 

CUCKY Shared service center for credit unions 1 0% 

CUSOURCE, LLC Investments 1 100% 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 68 GAO-04-977 Corporate Credit Unions

CUSO name CUSO function Number of 

corporates a

Percent

holdings b

First Carolina RE Services, LLC Assist homebuyers in finding mortgage and 

real estate agents 

1 50% 

Georgia Credit Union Affiliates Management services 1 33% 

ICUL Service Corp Various credit union services 1 6% 

Member Business Solutions, LLC Merchant services and entry into loans, 

deposits, payroll, commercial credit analysis 

1 100% 

Member Trade Advisory Services, LLC ALM educational, analytical, and advisory 

products and services 

1 100% 

Member Trade Financial Services, LLC Broker/dealer products and services 1 100% 

Mid-States Investment Solutions, Inc. Broker/dealer 1 100% 

MY CU Services, LLC Wholesale payment services 1 100% 

Network Financial Services, LLC Provides advice for government securities 

program 

1 100% 

Open Financial Solutions, Inc. Provides e-bill payment services 1 11.1% 

PA Shared Service Center Shared branch facilities 1 4% 

SimpliCD CD brokerage 1 5% 

SmartSource Solutions Web development and hosting 1 100% 

Synergent League service corporation 1 1% 

The Members Group Outsourcing operations work for many 

corporate products and services 

1 50% 

VSOI Sale of software to other corporate credit 

unions 

1 100% 

WesCorp Investment Services Wholesale broker dealer 1 100% 

Wisconsin CD Shared Service Center Shared branches 1 

XCU Corporation Retail broker dealer 1 6.7% 

Source: GAO Structured Questionnaire to Corporates. 

a

This column indicates the total of corporate credit unions that indicated having ownership stakes in the Credit 

Union Service Organizations. 

b

This column represents the percentage stake owned by the corporate(s). 

c

Three corporates did not provide their percentage holdings in Primary Financial but indicated that each own 1 

share. Therefore, the total percentage holdings for Primary Financial is 67.25 percent and 3 shares. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 69 GAO-04-977 Corporate Credit Unions

Question 8: Source, Number and Percent of Corporate Credit Unions Experiencing Competition From 

Outside The Corporate Credit Union Network

Response category Number of 

corporates 

Percent of 

corporates 

Banks and savings and loans 23 74.19% 

Broker/dealers and other investment entities 23 74.19% 

Federal Home Loan Banks 19 61.29% 

Federal Reserve Banks 19 61.29% 

Third-party processors 13 41.94% 

Competitors on a product-by-product basis 4 12.90% 

Financial institutions in general 4 12.90% 

Niche providersa 3 9.68% 

Mutual funds 2 6.45% 

Federal agencies 1 3.23% 

Government Sponsored Enterprises 1 3.23% 

Source: GAO Structured Questionnaire to Corporates.

a

Electronic bill payment or business services are examples of products provided by niche providers. 

Question 9: Corporate Credit Unions’ Experience with Competition Inside the Corporate Credit Union 

Network during the last five years 

Response category Number of 

corporates 

Percent of 

corporates 

Experienced competition within corporate 

credit union network 

27 87.10%

Did not experience competition within 

credit union network 

2 6.45%

Do not compete 2 6.45%

Source: GAO Structured Questionnaire to Corporates.

Question 10: Future Outlook on Competition within the Corporate Credit Union Network 

Response category Number of 

corporates 

Percent of 

corporates 

Competition will increase 21 67.74%

Competition will continue 7 22.58%

Competition will remain about the same 1 3.23%

Increased partnerships because of 

competition 

1 3.23%

Do not compete 2 6.45%

Source: GAO Structured Questionnaire to Corporates.

Note: Total percent exceeds 100 percent because 2 corporates provided multiple answers. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 70 GAO-04-977 Corporate Credit Unions

Question 11: Current Investment Authorities Held By Corporate Credit Unions 

Response category a Number of 

corporates 

Base 20

Base Plus 13

Part I 4

Part II 3

Part III 3

Part IV 3

Part V 1

Other b 2 Source: GAO Structured Questionnaire to Corporates. 

a

The investment authorities are described in more detail in appendix VII. 

b

These two corporates offered loan participations through a waiver from NCUA. In addition, one of these 

two respondents has “derivatives vendor status,” as approved by NCUA. 

Question 12: Corporate Credit Unions’ Plans to Seek Additional Expanded Authorities in the Next Two 

Years 

Response category Number of 

corporates 

Base 0

Base Plus 3

Part I 7

Part II 1

Part III 1

Part IV 5

Part V 9

Othera 1 Source: GAO Structured Questionnaire to Corporates. 

a

This corporate credit union may ask for more investment authorities in the next two years.

Question 13: Percentage Of Corporate Credit Unions’ Investments Made Through U.S. Central 

Response category Number of 

corporates 

Percent of 

corporates 

0-25% 2 6.67% 

26-50% 6 20.00% 

51-75% 8 26.67% 

76-100% 13 43.33% 

Did not respond 1 3.33% 

 Total a 30 100% Source: GAO Structured Questionnaire to Corporates. 

a

Percent calculations did not include U.S. Central, therefore the base is 30 versus 31 corporate credit 

unions. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 71 GAO-04-977 Corporate Credit Unions

Question 14: Corporate Credit Unions’ Planned Use of U.S. Central for Investment Activities Over the 

Next Two Years 

Response category Number of 

corporates 

Percent of 

corporatesa

Continue present level of investment with U.S. Central 22 73.33%

Less investment with U.S. Central 5 16.67%

Increase investments with U.S. Central b 2 6.67%

Do not currently invest with U.S. Central and do not plan to do so in next 

two years 

1 3.33%

Did not respond 1 3.33%

Source: GAO Structured Questionnaire to Corporates. 

a

Percent calculations did not include U.S. Central, therefore the base is 30 versus 31 corporate credit unions. Total 

percent exceeds 100 percent because one corporate credit union responded to two response categories and was 

included in both categories. 

Question 16: Corporate Credit Unions’ Views On NCUA’s Risk-Based Approach Of Corporate Credit 

Union Examination 

Response category Number of 

corporates 

Percent of 

corporatesa

Positive response to risk-based approach 

(for example, targeted exams) 

26 83.87%

No discernable impact from risk-based 

approach 

4 12.90%

Expressed concerns about targeted exam 

approachb

2 6.45%

Did not respond 1 3.23%

Source: GAO Structured Questionnaire to Corporates. 

a

Total of this column is greater than 100 percent because two respondents expressed concerns in addition 

to their comments (see table footnote b below). 

b

Two respondents expressed concerns in addition to their comments on their reaction to the risk-based 

approach. Specifically, one respondent had a positive reaction and the other experienced no discernable 

impact. 

Question 17: Corporate Credit Unions’ National Field of Membership Classification 

Response category Number of 

corporates 

Percent of 

corporates 

Currently have national field of 

membership 

29 93.55%

Do not currently have national field of 

membership 

2a 6.45%

Source: GAO Structured Questionnaire to Corporates.

a

One of these corporates, Kentucky Corporate Federal Credit Union, has a regional field of membership; and the 

other, LICU Corporate Federal Credit Union, facilitates payment and payroll processing for a league of IBM credit 

unions. 
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 72 GAO-04-977 Corporate Credit Unions

Question 19: Primary Challenges Faced By Corporate Credit Unions 

Response category Number of 

corporates 

Percent of 

corporates 

Marketplace changes/challenges 19 61.29%

Competition 16 51.61%

Consolidation/mergers 12 38.71%

Issues associated with natural 

person credit unions 

9 29.03%

Regulatory/legal Issues 6 19.35%

Other challenges 6 19.35%

No challenges 2 6.45%

Source: GAO Structured Questionnaire to Corporates.

Question 20: Strategies Used by Corporate Credit Unions to Address Challenges Reported in

Question 19 

Response category Number of 

corporates 

Percent of 

corporates 

Process improvementsa 20 64.52%

Increased products and services 16 51.61%

Market expansion activities 18 58.06%

Other strategies 9 29.03%

Source: GAO Structured Questionnaire to Corporates.

a

Examples of process improvements include investments in human resources and technology; public 

relations, brand recognition activities; regular evaluation of account structures; and survey and visit. 

Question 21: Corporate Credit Unions’ Current Merger Plans 

Response category Number of 

corporates 

Percent of 

corporates 

Will not consider a merger within the next two 

years 

14 45.16%

Uncertain 9 29.03%

Will consider a merger with another corporate 

credit union within the next two years 

6 19.35%

Likely to merge with another corporate credit 

union within the next two years 

1 3.23%

Not applicable 1 3.23%

Source: GAO Structured Questionnaire to Corporates.
Appendix IV

Selected Responses to Structured 

Questionnaire Distributed to Corporate 

Credit Unions 

Page 73 GAO-04-977 Corporate Credit Unions

Question 21a: Contributing Factors to Consider Mergers

Factors Number of 

corporates 

Percent of 

corporates 

Benefits to corporate and members 5 71.43%

Management 3 42.86%

Increases in membership 3 42.86%

Asset quality and increasesa 2 28.57%

Otherb 4 57.14% Source: GAO Structured Questionnaire to Corporates.

Note: Only includes the seven corporates that indicated they are likely to merge or will consider to merge within the 

next two years. 

a

Asset quality and increases include financial strength and capital resources and structure. 

b

Other includes geographic proximity and due diligence study. 

Question 22: Major Challenges Currently Facing the Corporate Credit Union Network 

Response category Number of 

corporates 

Percent of 

corporates 

Evolving/changing marketplace 22 70.97%

Regulatory requirements/issues 21 67.74%

Competitive forces 17 54.84%

Consolidation 12 38.71%

Source: GAO Structured Questionnaire to Corporates.
Page 74 GAO-04-977 Corporate Credit Unions

Appendix V

Financial Condition of Corporates, 1992-2003 ApendxiV

The corporate credit union network has consolidated since 1992, with asset 

concentration rising moderately. As corporates’ investments have grown, 

their composition has changed, with relatively more emphasis on privately 

issued mortgage-related and asset-backed securities and a shift toward 

more variable-rate investments. Concurrent with net income ratios, 

interest-related income and expense ratios have declined recently. In 

recent years, natural person credit unions have invested less in corporates.

Corporate Credit Union 

Network Has Consolidated 

and Asset Concentration 

Has Risen Moderately

Since 1992, the corporate system has consolidated, a change primarily 

driven by mergers. This consolidation trend has resulted in a moderate 

increase in asset concentration. For more detailed, year-by-year 

information, see the table and figures below. 

Table 2: Number of Institutions and Total Assets in the Corporate and Natural Person Credit Union Systems, 1992-2003

Source: NCUA call reports.

Note: This table includes only federally insured natural person credit unions. 

Year

Number of 

corporates, 

excluding

U.S. Central

Total assets of 

corporates, excluding

U.S. Central (in millions 

of dollars)

Total shares of 

corporates, excluding

U.S. Central (in millions 

of dollars) 

Number of 

natural person 

credit unions

Total assets of 

natural person credit 

unions (in millions

of dollars)

1992 44 $43,447 $37,186 12,595 $258,365

1993 44 40,982 33,922 12,317 277,130

1994 44 35,993 29,217 11,991 289,453

1995 41 33,807 29,199 11,687 306,642

1996 40 30,154 24,196 11,392 326,887

1997 38 33,097 27,222 11,238 351,165

1998 37 43,555 38,743 10,995 388,700

1999 36 39,206 32,768 10,630 411,418

2000 35 39,627 32,248 10,316 438,219

2001 34 59,154 51,997 9,984 501,540

2002 32 68,968 60,421 9,688 557,075

2003 30 73,835 58,808 9,369 610,156
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 75 GAO-04-977 Corporate Credit Unions

Figure 8: Size Distribution of Corporates, by Number, 1992-2003

Note: This figure excludes data on U.S. Central.

Frequency (number)

Corporates with assets of more than $5 billion

Corporates with assets between $1 billion and $5 billion

Corporates with assets of less than $1 billion

Source: Call report data.

0

10

20

30

40

50

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 76 GAO-04-977 Corporate Credit Unions

Figure 9: Asset Concentration Levels of Corporates, 1992-2003

Note: While one corporate was the largest in each year from 1992 through 2003, this figure depicts the 

asset concentration in a given year for the largest corporates in that year, and the largest four 

corporates were not necessarily the same in all years. This figure excludes data on U.S. Central.

Investments of Corporates 

Have Grown since 1992, and 

Composition Has Changed

As noted earlier, investments, which are the vast majority of corporates’ 

assets, have grown since 1992, but recently the percentage of corporates’ 

investments in U.S. Central has declined somewhat and corporates have 

moved relatively more of their investments into privately issued mortgagerelated and asset-backed securities. We made this determination using call 

reports and other data (for more information on our methodology see app. 

I). Since there were significant changes to NCUA’s call reports in 1997, in 

the transition from Form 5300 to Form 5310, some account codes were not 

available previously and thus could not be disaggregated. 

0

10

20

30

40

50

60

Largest

Two largest

Three largest

Four largest

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Percentage of assets

Source: NCUA call reports.
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 77 GAO-04-977 Corporate Credit Unions

In general, corporates’ investments in mortgage-backed securities 

(including mortgage pass-throughs, collateralized mortgage obligations, 

and real estate mortgage investment conduits) as a percentage of total 

investments declined from the mid-1990s through 1998 in the wake of the 

Cap Corp failure, which was largely driven by ineffective interest-rate risk 

management for collateralized mortgage obligations. However, since 1998, 

corporates steadily have been increasing their investments in mortgagebacked securities. In addition, corporates have been shifting more of their 

investments in mortgage-related and asset-backed securities to variablerate securities, a move that tends to lessen interest-rate risk. In particular, 

while 41.7 percent of corporates’ asset-backed securities were classified as 

fixed-rate at the end of 1997, by the end of 2003 this proportion stood at 

18.0 percent. The trend in collateralized mortgage obligations and real 

estate mortgage investment conduits (REMIC) has been similar, with a 

relatively greater proportion now classified as variable rate.1

 Table 3 offers 

additional details of corporates’ investments in U.S. Central, privately 

issued mortgage-related securities, and asset-backed securities, from 1997 

through 2003. 

Table 3: Composition of Selected Investments of Corporates, 1997-2003 

1

A REMIC is a mortgage securities vehicle authorized by the Tax Reform Act of 1986 that 

holds commercial and residential mortgages in trust, and issues securities representing an 

undivided interest in the mortgage.

U.S. Central obligations held by corporates

U.S. Central obligations relative to total 

investments 1997 1998 1999 2000 2001 2002 2003

Daily shares 20.16% 24.17% 25.44% 21.03% 13.77% 9.37% 8.68%

Time certificates 18.38 20.11 18.53 17.41 15.44 18.08 17.42

Investments resulting from repurchase transactions 0.00 0.00 0.14 0.15 0.19 0.20 0.11

Amortizing certificates 1.42 0.40 0.18 0.30 0.11 0.52 0.88

Smart floaters 0.00 0.00 0.12 0.00 0.00 0.00 0.00

Step up certificates 1.57 0.86 1.88 2.14 1.23 1.64 2.36

FRAPs 5.43 6.84 4.45 6.58 10.64 8.68 9.21

Membership capital shares 2.25 1.93 2.61 2.10 1.47 1.58 1.74

Central Liquidity Facility share deposit 2.29 1.59 2.32 2.37 1.63 1.57 1.77

Paid-in capital 0.00 0.00 0.00 0.00 0.00 0.00 0.46
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 78 GAO-04-977 Corporate Credit Unions

Source: NCUA call reports.

Notes: CUGR stands for U.S. Central Grantor Trusts, FRAP stands for Floating Rate Asset Program, 

CMO stands for collateralized mortgage obligation, and REMIC stands for real estate mortgage 

investment conduit. Totals may not add due to rounding. This table excludes data on U.S. Central.

a

In the 1997 data in this table, the “Other” category of U.S Central obligations held by corporates 

includes CUGRs—which accounted for 0.81 percent of total investments—as NCUA specified CUGRs 

with U.S. Central obligations in Form 5310. Beginning in 1998, CUGRs were specified with assetbacked securities in Form 5310.

U.S. Central obligations relative to total 

investments 1997 1998 1999 2000 2001 2002 2003

Other 1.09a 0.48 0.87 1.04 0.54 0.70 2.12

Total U.S. Central obligations relative to total 

investments 52.59% 56.38% 56.56% 53.12% 45.03% 42.35% 44.76%

Total U.S. Central obligations (in millions) $15,634 $23,480 $20,159 $18,887 $24,966 $27,041 $29,220

Privately Issued Mortgage-Related Issues, 1997-2003

Privately issued mortgage-related issues relative to total investments

Fixed-rate CMOs/REMICs 0.33% 1.68% 2.17% 3.04% 2.13% 2.44% 3.11%

Variable-rate CMOs/REMICs 0.32 0.54 0.83 1.20 1.08 3.19 5.69

Mortgage-backed pass-throughs 0.25 0.09 0.08 0.09 0.10 0.22 0.21

Other 0.00 0.00 0.00 0.00 2.69 3.00 5.08

Total privately issued mortgage-related issues 

relative to total investments 0.90% 2.31% 3.08% 4.33% 6.01% 8.85% 14.09%

Total privately issued mortgage-related issues 

(in millions) $267 $961 $1,098 $1,540 $3,333 $5,652 $9,199

Asset-backed securities, 1997-2003

Asset-backed securities relative to total investments 

CUGRs 0.00%a 0.47% 0.64% 0.00% 0.00% 0.00% 0.00%

Fixed-rate credit cards 2.44 1.24 1.58 1.75 1.96 1.42 0.68

Variable-rate credit cards 4.37 4.67 5.77 5.95 5.46 4.38 4.16

Fixed-rate autos 4.14 2.94 4.08 3.48 3.47 3.30 2.23

Variable-rate autos 1.67 1.12 0.99 1.06 2.29 2.34 2.03

Fixed-rate home equity 1.35 1.91 1.87 1.53 1.39 1.73 1.33

Variable-rate home equity 3.89 4.18 5.64 5.86 5.80 8.20 12.09

Fixed-rate other 0.21 0.31 0.67 0.67 0.33 0.33 0.20

Variable-rate other 1.43 1.38 2.80 3.07 1.92 1.54 1.94

Total asset-backed securities relative to total 

investments 19.48% 18.23% 24.03% 23.37% 22.62% 23.24% 24.66%

Total asset-backed securities (in millions) $5,792 $7,590 $8,563 $8,309 $12,541 $14,841 $16,100

(Continued From Previous Page)
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 79 GAO-04-977 Corporate Credit Unions

Concurrent with Net 

Income Ratios, InterestRelated Income and 

Expense Ratios Have 

Declined Recently

Concurrent with the recent low-interest rate environment, corporates’ 

interest-related income and expenses, relative to average assets, have 

declined, as illustrated in figure 10. Net interest income, total noninterest 

income, and operating expense ratios cycled from 1993 through 2003, 

generally expanding from 1995 through 2000 and then contracting through 

2003. Recently, net interest income and operating expense ratios were 

lower and total noninterest income ratios were higher, suggesting that fee 

income has become more important for corporates. 

Figure 10: Income and Expense Ratios of Corporates, 1993-2003

Note: In this figure, net income components in a given year are measured relative to the average of 

that year’s total assets and the prior year’s total assets. The operating expense ratio is shown as a 

negative number for illustrative purposes. This figure excludes data on U.S. Central.

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

-0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0

Operating expenses to average assets

Net interest income to average assets

Total noninterest income to average assets

Source: NCUA call reports.

Percentage net income/expense components to average assets

Year

Expenses Income
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 80 GAO-04-977 Corporate Credit Unions

Net interest income as a percentage of average assets is often referred to as 

net interest margin.2

 A corporate can maximize its net interest margin by 

effectively allocating resources among earning and nonearning assets, 

maintaining low levels of nonperforming assets, providing adequate 

funding through the lowest cost mix of funds, and maintaining a strong 

capital position. In a volatile interest-rate environment, large changes in a 

corporate’s net interest margin are associated with high-interest-rate risk 

exposures and weak risk management.

Net interest income, which is interest income minus interest expense, is 

normally the primary source of income for a corporate and a key indicator 

of earnings performance and stability. Interest income consists of interest 

earned on loans and investments. The major contributor to interest income 

within a corporate is normally the investment portfolio. Interest expense 

consists of the corporate’s cost of funding operations, or simply its “cost of 

funds.” Interest expense in a corporate is realized through dividends on 

shares, share certificates, member capital accounts, and interest on 

borrowings (for example, loans and commercial paper). As illustrated in 

figure 11, interest income and expense have narrowed significantly since 

2000.

2

NCUA defines net interest margin in terms of moving DANA. As moving DANA was not 

calculated prior to 1998, we used the average of assets measured at year-end for the two 

most recent years in order to create consistency for 1998-2003.
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 81 GAO-04-977 Corporate Credit Unions

Figure 11: Interest Income and Expense Ratios, 1993-2003

Note: In this figure, interest income (yields on investments and loans) and expense (cost of funds) 

ratios in a given year are measured relative to the average of that year’s total assets and the prior 

year’s total assets. The cost of funds is shown as a negative number for illustrative purposes. This 

figure excludes U.S. Central.

In Recent Years, Natural 

Person Credit Unions Have 

Invested Less in Corporates

Natural person credit unions’ investments in corporates, which include 

membership capital, paid-in capital, and other investments, actually were 

lower at the end of 2003 than at the end of 1998—both in amount ($37.8 

billion versus $29.1 billion) and as a percentage of investments (30.4 

percent versus 18.1 percent). The smallest natural person credit unions 

(those with assets of less than $100 million) consistently invested more in 

corporates, as a percentage of their total investments, from 1998 through 

2003. It is important to note that this measure does not include cash on 

deposit in corporates, since these data were not disaggregated from 

deposits in other financial institutions in the Form 5310 report until 2003. 

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

Cost of funds

Yield on investments

Yield on loans

Source: NCUA call reports.

Percentage net income/expense components to average assets

Year

Expenses Income

-0.06 -0.05 -0.04 -0.03 -0.02 -0.01 0.00 0.00 0.01 0.02 0.03 0.04 0.05 0.06
Appendix V

Financial Condition of Corporates, 1992-

2003

Page 82 GAO-04-977 Corporate Credit Unions

At the end of 2003, natural person credit unions reported $26.2 billion in 

cash on deposit at corporates, which represented over three-quarters of 

natural person credit unions’ total cash on deposit. Corporates held $55.3 

billion, or 26.9 percent, of the total amount of natural person credit unions’ 

cash on hand, cash on deposit, and investments at the end of 2003, with the 

smallest natural person credit unions (those with assets of less than $100 

million) holding around 34 percent and the largest (those with assets in 

excess of $1 billion) holding around 23 percent of their total in corporates. 

While it cannot be confirmed given the available data, the growth in natural 

person credit unions’ loans, coupled with the possibility that natural person 

credit unions have become more willing to invest their funds directly rather 

than through corporates, may have resulted in relatively less funds flowing 

from natural person credit unions into corporates.
Page 83 GAO-04-977 Corporate Credit Unions

Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates ApendxiVI

U.S. Central Credit Union (U.S. Central) is a nonprofit cooperative that is 

owned by corporates, and it serves these member-owners much like 

corporates serve their natural person credit union members. Trends in U.S. 

Central’s balance sheet and income statement suggest that its financial 

condition has been similar to other corporates, with greater profitability 

and slightly higher capital ratios. 

The balance sheet of U.S. Central grew overall from 1992 through 2003. 

However, as with the corporates, the dynamics of its asset and share 

growth have varied as the use of U.S. Central by its member-owners has 

varied. Investments, the vast majority of U.S. Central’s assets, have 

mirrored the general growth pattern of its assets, declining through the 

early to mid-1990s and rising thereafter. Recently, U.S. Central has moved 

relatively more of its investments into privately issued mortgage-related 

securities. 

Overall, total assets and shares of U.S. Central have grown since 1992; after 

generally declining in the early to mid-1990s, by the end of 2003 they were 

reported at $35 billion and $30.7 billion, respectively (see fig. 12). 
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 84 GAO-04-977 Corporate Credit Unions

Figure 12: Balance Sheet of U.S. Central, 1992-2003

U.S. Central’s balance sheet is primarily influenced by the balance sheet 

dynamics of its underlying corporate member-owners, which have varied 

since 1992. As noted earlier, corporates saw their assets and shares decline 

in the early to mid-1990s but then rebound; corporates’ assets and shares 

both grew by over 80 percent from 2000 through 2003. While displaying a 

similar cyclical trend from 1992 through 2003, U.S. Central did not 

experience the same degree of growth from 2000, as assets grew by around 

54 percent and shares grew by around 57 percent. As with corporates, in 

general investments represent over 90 percent of U.S. Central’s assets, as 

illustrated in figure 13. 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Dollars in billions

Total assets

Total shares

Source: Call report data.

0

5

10

15

20

25

30

35

40
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 85 GAO-04-977 Corporate Credit Unions

Figure 13: U.S. Central’s Investments Relative to Total Assets, 1992-2003

Note: Other assets include cash, loans, and fixed assets.

Investments in accounts at U.S. Central, including overnight accounts, term 

certificates, structured products, and membership shares, are important to 

many corporates, especially the smaller ones. As of the end of 2003, 17, or 

57 percent of all corporates, had at least 70 percent of their total 

investments in accounts at U.S. Central and 4 had over 60 percent. With the 

recent investment environment characterized by historic low interest rates, 

U.S. Central’s members may have increased their utilization of U.S. 

Central’s economies of scale to help increase the spreads between the rates 

they offered their customers and the rates they earned on their 

investments. In general, it seems sensible for corporates—especially the 

smaller ones—to be able to rely on the services of U.S. Central given its 

economies of scale. This reliance, however, adds more weight to the need 

for U.S. Central to be a safe and sound investment.

As U.S. Central’s total investments have grown, the composition of these 

investments has changed, particularly with increases in investments in 

mortgage-related securities since 1997 (see table 4). U.S. Central’s 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Total investments

Total other assets

Source: NCUA call reports.

Dollars in billions

0

5

10

15

20

25

30

35

40
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 86 GAO-04-977 Corporate Credit Unions

investments in privately issued mortgage-related securities increased from 

3.4 percent of its total investments in 1997 to 24.7 percent of its total 

investments in 2003. Overall, U.S. Central’s mortgage-related investments, 

including government and agency mortgage-related issues, rose from 10.5 

percent of its total investments to 32.7 percent of its total investments over 

this period. As with corporates, asset-backed securities have consistently 

been an important investment type for U.S. Central. 

Table 4: Composition of Total Investments of U.S. Central, 1997-2003

Source: NCUA call reports.

Note: Totals may not add due to rounding.

Holding variable-rate investments and securities with shorter weighted 

average lives tends to result in relatively lower interest-rate risk. U.S. 

Central, like the corporates, tends to have significant holdings of mortgagerelated issues and asset-backed securities—80 percent of its portfolio was 

in such investments at the end of 2003—but holds most of these in the form 

of variable-rate and shorter weighted average life issues. Holdings of 

variable-rate asset-backed and privately issued mortgage-related securities 

accounted for 67 percent of all investments at the end of 2003. According to 

its 2003 annual report, at the end of the year, mortgage-related and assetbacked securities in U.S. Central’s portfolio had weighted average lives of 

Dollars in millions

Investments relative to total investments 1997 1998 1999 2000 2001 2002 2003

U.S. government and government-guaranteed 

obligations 5.17% 2.34% 1.23% 0.41% 0.55% 1.36% 1.35%

Obligations of U.S. government-sponsored enterprises 0.10 1.19 0.43 0.30 0.10 0.50 0.00

Central Liquidity Facility stock (direct) 4.06 2.96 3.39 4.16 2.96 3.36 3.58

U.S. banks 12.27 23.34 26.77 10.50 4.27 2.40 6.34

Foreign banks 0.00 2.02 0.00 15.41 6.80 0.83 1.84

Repurchase activity 14.73 9.89 17.65 4.51 10.41 5.38 0.94

Government and agency mortgage-related issues 7.10 3.80 2.61 3.01 2.74 4.55 8.05

Privately issued mortgage-related issues 3.35 0.69 1.04 2.94 13.17 19.24 24.66

Asset-backed securities 52.12 50.23 44.20 52.68 44.10 49.00 48.24

Mutual funds 0.00 0.00 0.00 0.00 7.12 1.49 0.00

Commercial debt obligations 1.10 3.55 2.68 6.09 7.77 11.90 4.99

Other 0.00 0.00 0.00 0.00 0.24 0.34 0.18

Total investments $17,364 $24,773 $24,668 $20,444 $30,952 $30,342 $32,656
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 87 GAO-04-977 Corporate Credit Unions

approximately 2.8 years and 3 years, respectively, and approximately 83 

percent of interest-earning assets were set to reprice or mature within 1 

year. Table 5 details selected investments of U.S. Central from 1997 through 

2003.

Table 5: Composition of Selected Investments of U.S. Central, 1997-2003

Source: NCUA call reports.

Note: CMO stands for collateralized mortgage obligation, and REMIC stands for real estate mortgage 

investment conduit. Totals may not add due to rounding.

Privately issued mortgage-related issues, 1997-2003

Privately issued mortgage-related issues relative 

to total investments 1997 1998 1999 2000 2001 2002 2003

Fixed-rate CMOs/REMICs 1.15% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Variable-rate CMOs/REMICs 2.20 0.00 0.07 1.13 12.57 18.76 23.70

Mortgage-backed pass throughs 0.00 0.69 0.97 1.81 0.60 0.48 0.97

Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total privately issued mortgage-related issues 

relative to total investments 3.35% 0.69% 1.04% 2.94% 13.17% 19.24% 24.66%

Total privately issued mortgage-related issues 

(in millions) $582 $170 $256 $600 $4,066 $5,817 $8,040

Asset-backed securities, 1997-2003

Asset-backed securities relative to total investments 1997 1998 1999 2000 2001 2002 2003

Fixed-rate credit cards 0.60% 1.07% 1.02% 0.98% 1.53% 1.69% 2.67%

Variable-rate credit cards 20.57 17.45 22.12 18.84 17.14 20.76 20.87

Fixed-rate autos 0.14 0.61 1.40 1.59 1.12 0.80 0.59

Variable-rate autos 0.34 2.82 6.24 5.21 7.85 4.76 5.17

Fixed-rate home equity 0.00 0.08 0.31 0.13 0.33 0.78 1.28

Variable-rate home equity 6.08 5.38 6.50 19.10 12.90 16.26 16.05

Fixed-rate other 0.27 1.40 0.09 0.04 0.06 0.06 0.35

Variable-rate other 24.13 21.41 6.52 6.78 3.16 3.89 1.26

Total asset-backed securities relative to total 

investments 52.12% 50.23% 44.20% 52.68% 44.10% 49.00% 48.24%

Total asset-backed securities (in millions) $9,051 $12,442 $10,904 $10,770 $13,617 $14,818 $15,727
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 88 GAO-04-977 Corporate Credit Unions

U.S. Central’s Capital Levels 

Generally Increased Since 

1998 and, Despite Recent 

Asset Growth, Capital 

Ratios Were Higher in 2003 

Than in 1998

Since 1998, U.S. Central’s capital has generally been rising. Total capital, as 

defined in Part 704, rose from $1.2 billion in 1998 to $2 billion at the end of 

2003. Figure 14 illustrates the growth in U.S. Central’s total capital. 

Retained earnings and membership capital have grown overall, but paid-in 

capital has remained constant since 1999. 

Figure 14: Total Capital of U.S. Central, 1998-2003

Since 1998, undivided earnings (a component of retained earnings) have 

provided the fastest growth, increasing 61 percent, while membership 

capital, the largest component, has grown 37 percent. At the end of 2003, 

membership capital accounted for 58 percent, or $1.1 billion, of U.S. 

Central’s total capital.

Despite recent asset growth, U.S. Central’s capital ratios have remained 

relatively stable, as shown in figure 15. After peaking in 2000, capital ratios 

Membership capital

Paid-in-capital

Retained earnings

1998 1999 2000 2001 2002 2003

Dollars in billions

Source: NCUA call reports.

0

.5

1.0

1.5

2.0
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 89 GAO-04-977 Corporate Credit Unions

declined in 2001 but have since leveled off. They remain above the current 

regulatory requirements.

Figure 15: Capital Ratios of U.S Central, 1998-2003

Note: In this figure, capital ratios are calculated by dividing capital by the moving daily average of net 

assets (DANA), which is a measure of average assets as set forth in Part 704 in 1998. NCUA currently 

specifies three capital ratios: the capital ratio, which includes all forms of capital relative to moving 

DANA; the core capital ratio, which includes core capital (that is, retained earnings plus paid-in capital) 

relative to moving DANA; and the retained earnings ratio, which includes reserves plus undivided 

earnings relative to moving DANA.

U.S. Central’s Net Income 

and Profitability Have 

Grown Since 1992

U.S. Central’s net income has grown since 1992 and was at its highest level 

at the end of 2003. As depicted in figure 16, after declining to $10.7 million 

at the end of 1994, U.S. Central’s net income rebounded, generally rising 

through 1998. After peaking in 1998 at $38.4 million, net income declined to 

$22.8 million at the end of 2000. However, by the end of 2003, net income 

had tripled to $67.9 million. U.S. Central’s profitability—that is, net income 

Percent

Capital ratio

Core capital ratio

Retained earnings ratio

Source: Call report data.

1998 1999 2000 2001 2002 2003

5.38

1.55 1.55

6.28

2.85

1.57

6.67

3.46

1.96

5.35

2.71

1.58

5.75

2.59

1.59

5.77

2.43

1.56

0

1

2

3

4

5

6

7

8
Appendix VI

Financial Condition of U.S. Central Generally 

Mirrors Other Corporates

Page 90 GAO-04-977 Corporate Credit Unions

divided by average assets—followed the general pattern exhibited by net 

income since 1992, and it was at its highest at the end of 2003. 

Figure 16: Net Income and Profitability of U.S. Central, 1992-2003

Note: In this figure, profitability in a given year is measured by the ratio of that year’s net income to the 

average of that year’s total assets and the prior year’s total assets. 

As with the corporates, U.S. Central witnessed a narrowing of its yields on 

investments recently. However, while profitability suffered at the 

corporates since 2001, U.S. Central managed to increase its profitability, in 

part through increased noninterest income.

Source: NCUA call reports.

Dollars in millions

Net income

0

20

40

60

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Percentage (net income to average assets)

Profitability

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

0.15

0.30

0.45

0.60
Page 91 GAO-04-977 Corporate Credit Unions

Appendix VII

Expanded Authorities Available to CorporatesApendxiVI

In 1998 NCUA revised Part 704. Among other things, the new regulations 

provided qualified corporates with expanded authorities that allowed 

corporates having a strong financial position, management, and 

infrastructure to exercise greater flexibility in managing their risks subject 

to NCUA approval.1

 For example, corporates with certain levels of 

expanded authorities were allowed to invest in foreign securities or Arated securities, compared with the higher-rated AAA securities in which 

other corporates were allowed to invest. In 2002, NCUA again revised Part 

704 to allow for further flexibilities in expanded investment authorities.2

For example, qualified corporates were allowed to invest in BBB rated 

securities, subject to NCUA approval.3

 Table 6 provides more detail on the 

types of investments allowed under the various levels of expanded 

authorities, and the number of corporates that currently have these 

authorities.

1

See 62 Fed. Reg. 12929, 12937 (Mar. 19, 1997).

2

See 67 Fed. Reg. 65640 (Oct. 25, 2002).

3

12 C.F.R. Part 704, App. B (2004); see 67 Fed, Reg. 65649-50.
Appendix VII

Expanded Authorities Available to 

Corporates

Page 92 GAO-04-977 Corporate Credit Unions

Table 6: Expanded Authorities and Number of Corporates Authorized to Engage in Investments under These Authorities, as of 

December 31, 2003

Source: Part 704 of NCUA Rules and Regulations.

Notes: Corporates can be granted more than one expanded authority level. 

a

The investments under Part I authority are subject to certain conditions, including the requirement that 

aggregated investments in repurchase and securities lending agreements with any one counterparty 

are limited to 300 percent of capital.

b

The investments under Part II authority are subject to certain conditions, including the requirement 

that aggregated investments in repurchase and securities lending agreements with any one 

counterparty are limited to 400 percent of capital.

c

To engage in Part III expanded authorities, the corporate must have met the requirements of Part I or 

Part II, and additional requirements for Part III. Foreign investments are subject to the following 

requirements: The investments must be rated no lower than the minimum permissible domestic rating 

under the corporate’s Part I or Part II authority. The sovereign issuer, or the country in which an obligor 

is organized, must have a long-term foreign currency (nonlocal currency) debt rating no lower than AA- 

(or equivalent). For each approved foreign bank line, the corporate credit union must identify the 

specific banking centers and branches to which it will lend funds. Obligations of any single foreign 

obligor may not exceed 50 percent of capital. Finally, obligations in any single foreign country may not 

exceed 250 percent of capital.

Expanded 

authority level

Number of 

corporates Investments allowed under expanded authorities

Part Ia 2 • Purchase investments with long-term ratings no lower than A- (or equivalent)

• Purchase investments with short-term ratings no lower than A-2 (or equivalent), provided that 

the issuer has a long-term rating no lower than A- (or equivalent) or the investment is a 

domestically issued asset-backed security

• Engage in short sales of permissible investments to reduce interest-rate risk

• Purchase principal-only stripped mortgage-backed securities to reduce interest rate risk

• Enter into a “dollar roll” transaction

Part IIb 3 • Purchase investments with long-term ratings no lower than BBB (flat) (or equivalent); the 

aggregate of all investments rated BBB+ (or equivalent) or lower in any single obligor is not to 

exceed 25 percent of capital

• Purchase investments with short-term ratings no lower than A-2 (or equivalent), provided that 

the issuer has a long-term rating no lower that BBB (flat) (or equivalent) or the investment is a 

domestically issued asset-backed security

• Engage in short sales of permissible investments to reduce interest-rate risk

• Purchase principal-only stripped mortgage-backed securities to reduce interest-rate risk

• Enter into a “dollar roll” transaction

Part IIIc 3 • Invest in debt obligations of a foreign country

• Invest in deposits and debt obligations of foreign banks or obligations guaranteed by these 

banks

• Invest in marketable debt obligations of foreign corporations; this authority does not apply to 

debt obligations that are convertible into stock of the corporation

• Invest in foreign-issued, asset-backed securities

Part IVd 3 • Enter into derivative transactions specifically approved by NCUA to create structured products, 

manage its own balance sheet, and hedge the balance sheets of its members

Part Ve 1 • Participate in loans with member natural person credit unions as approved by the Office of 

Corporate Credit Union Director
Appendix VII

Expanded Authorities Available to 

Corporates

Page 93 GAO-04-977 Corporate Credit Unions

d

The derivative transactions under Part IV are subject to the following requirements: If the counterparty 

is domestic, the counterparty rating must be no lower than the minimum permissible rating for 

comparable term permissible investments. If the counterparty is foreign, the corporate must have Part 

III expanded authority and the counterparty rating must be no lower than the minimum permissible 

rating for a comparable term investment under Part III authority.

e

The ability to engage in Part V authorities is subject to the maximum aggregate amount of 

participation loans with any one member credit union, which must not exceed 25 percent of capital. In 

addition, the maximum aggregate amount of participation loans with all member credit unions must be 

determined on a case-by-case basis by the Office of Corporate Credit Union Director.
Page 94 GAO-04-977 Corporate Credit Unions

Appendix VIII

Comments from the National Credit Union 

Administration ApendxiVI
Appendix VIII

Comments from the National Credit Union 

Administration

Page 95 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 96 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 97 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 98 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 99 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 100 GAO-04-977 Corporate Credit Unions
Appendix VIII

Comments from the National Credit Union 

Administration

Page 101 GAO-04-977 Corporate Credit Unions
Page 102 GAO-04-977 Corporate Credit Unions

Appendix IX

GAO Contacts and Staff Acknowledgments ApendxiIX

GAO Contacts Richard J. Hillman, (202) 512-8678

Debra R. Johnson, (202) 512-9603

Staff 

Acknowledgments

In addition to those named in the body of this report, the following 

individuals made key contributions: William Chatlos, May Lee, John Lord, 

Alexandra Martin-Arseneau, Kimberley Mcgatlin, José R. Peña, Julie 

Phillips, Mitch Rachlis, Barbara Roesmann, Paul Thompson, and Richard 

Vagnoni.

(250165)
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