By now you have all been exposed to the press and media coverage of recent financial market events, in particular the turmoil on Wall Street. I am writing to you to place all of this in perspective and to assure you that First Citizens’ is among the most-healthy financial institutions in the country. At First Citizens' we believe that your trust is our most important asset. Indeed, many people have expressed concern about the health of their primary financial institution. Before going any further, all of our customers should know that First Citizens’ deposits are insured by the NCUA up to $250,000 and by the Massachusetts Share Insurance Fund (MSIC) for up to $600,000 on any individual account and for even larger amounts for joint accounts. Perhaps even more importantly, the management team at First Citizens' is very seasoned and prudent, and very carefully balances risk and reward in all that it does.

The Mortgage Market

By way of a bit of background, the current market malaise stems from a prolonged period time wherein some financial institutions forgot the basic principles of lending on residential real estate and extended credit to individuals that could perhaps never have afforded the homes that they purchased. These institutions premised their lending decisions on the continued escalation of housing prices rather than on sound market valuations. Where even this latitude was not sufficient to justify a mortgage loan, these institutions then compounded their error by applying creative underwriting stratagems to even more creative mortgage instruments. You have heard of these mortgages in the press, and in retrospect, it seems almost impossible to believe that these mortgages were even offered. 

These mortgages were marketed under the names of Alt-A, Alt-B, Option-ARM’s and Sub-prime and actually provided credit to people with; no or low levels of documentation and income verification; some had fairly punitive adjustable interest rates, others were offered as interest only for brief periods of time with negative amortization and on and on. The levels to which the ordinary mortgage note was contorted to fit people into an inappropriate credit relationship is just astounding to people who have been in the business for some time. First Citizens’ has never offered these products, and never will, because they are highly speculative and in the final analysis imprudent.

Wall Street and Beyond

When things go wrong in markets it is often difficult to determine who is ultimately responsible. In the current situation there are many sectors to blame. It is entirely possible that by virtue of innovations in financial market instruments and the extraordinary amount of money that can be made by their sale, that a system-wide series of incorrect incentives existed driving the origination and sale of the mortgages described above. These incorrect incentives drove many to believe that financial engineering could mitigate the effects of bad lending. As a result, flawed mortgage loans and Mortgage Backed Securities were packaged into very highly speculative financial instruments and sold globally.

The financial engineers and market makers for these securities were among the largest financial institutions in the world. In general, these institutions were Investment Banks that had no access to federally insured deposits, for that we can be thankful. These instruments were funded by short term financing and buttressed by financial guarantees/constructs that were only understood in the abstract. When the real estate market flattened the underlying collateral on these investments triggered defaults, and investment banks were forced to take extraordinary losses and de-leverage their balance sheets. These institutions while frantically searching for cash have driven the liquidity crisis of recent weeks. Several of these institutions were not successful in controlling their problems and have failed. The list of distressed institutions includes many Banks as well as Investment Banks that have either declared bankruptcy and closed, or been sold at distress prices, or await government intervention. The names of these institutions are well-known Bear-Sterns, Merrill-Lynch, Morgan-Stanley, WAMU, Wachovia, Indy-Mac and several very large financial institutions abroad.

Institutional investors, banks, securities companies and sovereign wealth funds from all over the world invested in these debt obligations linked to mortgages. For this reason global markets have been rising and falling on the basis of almost any information coming out of the U.S. market about plans to address the problem. It has been estimated that some $1.2 Trillion of these loans were originated, securitized and sold to various money market participants. Significant government intervention to control the downward trajectory of the industry has been underway for some time and all are hopeful that the final solution for domestic institutions is being determined as we speak.

So Where Are We?

Extraordinarily unconventional loans folded into creative financial instruments and sold globally have resulted in a breakdown in the traditional relationship between the lender and borrower on one hand, and the underlying property values and securities on the other. Because of this complexity these assets cannot easily be valued in the marketplace. Proposals to permit the government to buy many of these assets are an attempt to give time to the marketplace to sort all of this complexity out and restore order. Institutions with large numbers of either the mortgages or the securities, or both, have suffered vast erosion in their market value. Under these circumstances the Federal Banking and Securities Regulators have no choice but to step in and restore confidence in the safety and soundness of the system. Increasingly, the public has not been willing to give affected institutions the benefit of doubt so time is of the essence as the world waits for Congress to construct a financial system bailout.

Typically, everyone will blame everyone else in situations such as these, however, in the final analysis it is when the ordinary US Citizen begins to be harmed that the situation moves closer to resolution. In this respect you will have noticed that your 401k’s and investments in Mutual Funds have fallen in value. This has taken place because institutions and ordinary investors are fleeing the market and selling their stock investments and driving prices down. Your retirement and mutual funds reflect this battering down in prices; they will most likely come back so do not act rashly. You should however, continue to watch these investments and seek help if you do not understand. The current financial crisis will continue for some time as evidenced by the market uncertainty and turmoil recently exhibited in global stock markets.

What You Should Know Going Forward

Many individuals are now moving their wealth into depository institutions because of the federal deposit guarantee, and First Citizens’ is no exception. We are glad to be there to provide assurance and financial comfort to our customers when the national situation becomes critical; that is our mission and we take that responsibility very seriously. The following facts may be useful to you as you manage you life savings and act to protect your assets

• First Citizens’ does not have investments in any of the stock of the institutions that have failed, or will fail; we are not permitted to do under NCUA statutory provisions.
• We have not underwritten any creative mortgages such as Alt-A, B, Option ARM’s or Sub-Prime. They were not, and never will be, a prudent investment for a credit union.
• Customers, like you, have experienced erosion in the value of their Money Market Funds and some have asked what our Money Market Deposits are invested in.
• Our Money Market Deposit, is simply a deposit account that offers money market rates. It is not an investment fund backed by investments that are now reduced in value.
• We have primary insurance on individual deposits up to $250,000, and excess insurance through MSIC to $600,000. Joint accounts have even higher thresholds for protection. Your funds are very safe at First Citizens'.
• We invest in prudent real estate mortgage loans, consumer loans and small business loans, all of which are performing significantly better than the industry, taken as a whole.
• We are among the highest capitalized financial institutions in the country with an excess of 11 percent capital; this is almost two times the required minimum imposed by regulation.
• The First Citizens' management team anticipated the current crisis some months ago and began building its liquidity position in anticipation of the current liquidity crisis.
  • As a result, we have almost $50 million in cash or near cash instruments, amounting to some 8 percent of assets, to weather almost any conceivable cash crisis that might materialize in the region, or nationally.
• The First Citizens' management team and the board are very conservative. We seek the protection of customer funds in all that we do, and hire the best people to make sure that happens.
• We encourage you to come in and talk to our people. They take their positions and responsibility as custodians of your money very seriously.

It is what we do every day, that has contributed to our safety and soundness, and we are proud to have maintained these standards in a very difficult environment. When many others institutions failed to do so, we treated people and their life savings with respect and professionalism.

When a customer comes to us for a loan or a deposit relationship they are increasingly doing so because they trust our institution and our professional judgment and we will not forget that responsibility.

Please feel free to contact me, or any member of the management team, if we can help you with managing your affairs in this challenging environment.

Sincerely,

Peter Muise

Chief Executive Officer

First Citizens’ Federal Credit Union


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