The Custodial Agent Role

As your custodian, Alaska USA Trust Company, a legal fiduciary, holds your securities in trust for you. A detailed accounting of each security you own is kept by us on our trust accounting system. Alaska USA Trust Company is a limited-purpose financial institution, chartered and regulated by the state of Alaska, Division of Banking. Chartered in 1997, Alaska USA Trust Company as primarily organized to provide credit union industry with custody, safekeeping, and securities lending services.

Alaska USA Trust Company

As your custodian, we are able to take those lendable securities that are held by us for credit unions and lend them out in large groups. In many cases, several of our credit union clients will own pieces of the same security. The Trust Company is able to consolidate these securities, thus facilitating the securities lending process. Alaska USA Trust Company has its own trust accounting system-Trust Rite-which accounts for each credit union's individual securities in separate accounts.

We have developed operational interfaces and related communications capacities with our sub-agents, who arrange the transactions described above. These agents work on behalf of Alaska USA Trust Company and our member clients to look for the best possible transactions and will market the securities of beneficial owners for the best deal on both sides of the transaction. They are paid on a performance basis, yet are governed by a strict contract, so that they will always endeavor to find the best rates for our clients while remaining within NCUA guidelines. These sub-agents are firms that specialize in securities lending transactions. While they are our partners, and we communicate constantly regarding revenue opportunities, compliance and other issues, it is important to understand that they work for Alaska USA Trust Company, who has the final say over the securities lending program.

Transaction Oversight

In order for credit unions to participate in this program, the loan proceeds received from the borrower are reinvested in either collateralized repurchase agreements or in high quality, Regulation 703 permissible securities. Both of these transactions will have the same maturity as the term of the loan. This matching of maturities, which is required by regulation, locks in the spread at the time the deal is done. Counterparties used in the securities lending program are restricted to a small group of large, well-known and well-capitalized broker-dealers who meet specific due diligence criteria. Alaska USA Trust Company periodically performs financial and operational reviews of these firms and monitors the business news services for information that could signal changes in a firm's financial position.

The Trust Company receives the collateral detail and performs a due diligence review daily. This review consists of first identifying each security by CUSIP and comparing the description provided by the counterparty's custodian to that provided by a recognized third-party information provider (i.e., Bloomberg). This is done to confirm that the collateral is what it is purported to be, and verify that it is a legal and permissible investment for credit unions.

Next, the pricing and margin are reviewed to determine that they are current and accurate, and that the counterparties always maintain the excess collateralization required under the agreement. The industry standard is 102% over-collateralization. A higher percentage is required on certain types of transactions. If the collateral does not meet requirements, immediate same-day substitution is arranged to bring the program into legal and contractual compliance. Each automated review is also manually reviewed and approved. To remain in full compliance with NCUA regulations, the Trust Company will at all times ensure that our clients maintain a first priority security interest in the collateral, and that there are written loan security agreements in place with each borrower.

Income Distribution and Reporting

Securities lending income is received monthly from the various counterparties. This income is allocated by the Trust Company on a daily basis to the credit unions participating in the program based on their pro-rata share of the securities lent. Those amounts are remitted monthly to each participating credit union. In addition, participating credit unions are provided with reports, including due diligence files, on the counterparties for their review and retention for subsequent review by NCUA examiners. Furthermore, the Trust Company will provide daily collateral listings for each credit union's compliance testing.

Program Convenience

The NCUA, as a conservative regulator, is strict in their rules governing securities lending. We have been able to structure our program in a fashion that is acceptable to the NCUA. Alaska USA Trust Company currently has approximately $700 million in our lending program. Our clients are able to transact their normal business without disruption while participating in the program. While $200 million is generally considered a minimum in this market, due to our operational capabilities and our ability to consolidate, we can add portfolios of lendable securities to our program with customers earning incremental income for portfolios of much smaller sizes.

Summary

Alaska USA Trust Company acts as the lenders' custodian, apportioning collateral, moving securities, collecting fees, and performing due diligence on counterparties-all in a transparent program designed to benefit customers and to operate in a user-friendly environment. In short, we do all the detailed custodial accounting for each individual credit union, monitor collateral and ensure contractual compliance, as well as provide each credit union with all of the necessary reporting and due diligence required by the NCUA.