Corporates Ponder New Capital
The difference in approaches comes down to confidence in what the future will bring.
The $1.9 billion Corporate America had raised $35 million worth of new PIC capital as of June 30. The Irondale, Ala.-based corporate will continue to issue the capital in stages, and may continue issuances until a total of $250 million is raised. Previous PIC issuances include $9 million in 1998 and $7.2 million in 2001.
Why the drastic ramp-up? CEO Thomas Bonds said when NCUA Chairman Michael Fryzel testified before Congress that he would likely recommend increasing corporate core capital minimums to 5%, Bonds considered it "as close to written in stone as you can get."
"I think for a corporate credit union to survive, it has to raise PIC. You can't get to 5% Tier 1 capital without doing so," he said. Bonds added he didn't want to reach the ratio by shrinking assets or building retained earnings at the expense of members.
Though Corporate America does have nonagency mortgage-backed securities in its portfolio, Bonds said respected third-party due diligence firms have reviewed the corporate's portfolio and determined that there is no risk to member capital.
"We could write off 10% of OTTI in our pessimistic scenario and 100% of U.S. Central capital and still have positive retained earnings," he said.
Lee Butke, president/CEO of the $4.2 billion Corporate One, said the question of raising capital has been debated in his Columbus, Ohio, boardroom, and members have also asked about it. It's a serious question that deserves serious debate, Butke said. However, his cooperative has decided against seeking new PIC. Instead, Corporate One is focusing on building retained earnings.
"Unlike in past PIC issuances, we'd be unable to express clarity about the risk involved," Butke said. "Obviously, there's the potential for additional U.S. Central write-downs, which thankfully is fairly modest for us, but there's also the risk of loss on any bonds or investments one holds."
Butke also said he's not willing to generate capital until the NCUA issues new corporate regulations. "There's an assumption things won't change. I ask, when anticipating a 5% capital requirement, 5% of what? If corporates are limited to a term book of business, for example, then the asset base won't be where it is today," he said.
Additionally, when raising capital, corporates must make forward statements regarding how they will generate future earnings. New NCUA regulations could potentially limit those assumptions, he said.
Why not wait until new regulations are in writing? Bonds said corporates that can't meet new regulatory requirements could be subject to regulatory action.
"My view is the NCUA won't close or consolidate corporate credit unions," Bonds said. "Instead, they will set new capital requirement, and it will be up to credit unions to determine whether or not they are worthy of that minimum."
Butke said he envisions a day when he'll be raising additional capital for Corporate One, but said he won't do it until he can provide "a crystal clear vision of the future." --firstname.lastname@example.org