Corporate America's Legacy Asset Solution Is Liquidation
Corporate America Credit Union President/CEO Thomas Bonds expects to sell the last of his private-label mortgage-backed securities by September, around the time NCUA will release its legacy assets plan that will separate such investments from corporate balance sheets.
"Because of the way we have repositioned our portfolio, we're not concerned about NCUA coming in and having us involuntarily surrender investments," he said. Bonds confirmed that after the last private-label MBS is sold, no investments will remain on the $3.2 billion institution's books that aren't allowed under proposed corporate regulations.
Corporate America sold off much of its toxic asset portfolio late last year, reducing it from $140 million to only $21 million as of July 31. Bonds said he started with bonds that had the largest principal balance and pursued an aggressive strategy, accepting a lower bid in favor of future losses.
"We thought this is getting worse, not better, and we don't want to downgrade these investments any further," he said.
To offset the red ink, Corporate America also sold performing bonds at a profit. In particular, Bonds said Federal Family Education Loan Program-backed auction-rate securities, purchased shortly after Lehman Brothers collapsed and took the option market with it, have performed well.
The liquidation has been so successful, year-to-date Corporate America boasts a nearly $6 million net profit selling investments, and Bonds said retained earnings gained as a result will soon be worth more than remaining legacy assets.
Bonds credited his ability to liquidate toxic assets to a 1999 decision that reduced portfolio credit risk. Back then, 85% of Corporate America's investment portfolio would be considered toxic. That was reduced to 10% by the time the financial crisis hit, he said, and Corporate America "didn't buy support pieces."
Corporate America stuck to four guidelines when buying securities: underlying collateral borrowers must have average FICO scores of 700 or greater; the weighted average loan-to-value must be 80% or less; no support pieces; and no mezzanine or low positions.
"I mandated to our brokers that they make someone else take first bullet, so we would not impair capital," he said.
Director Jim Phillips, special assistant to the CEO of the $556 million Alabama One Credit Union, was on the Corporate America board in 1999, and said the group didn't have a crystal ball that foretold a mounting financial crisis. Rather, the risk reduction was part of a philosophy of doing whatever it takes to protect members.
"In this particular case, whatever it takes meant giving up earnings to achieve stability," he said.
Phillips said Bonds recommended the shift to a more conservative investment strategy. Bonds said his previous experience as an examiner shaped his credit risk philosophy.
"You can have concentration issues in liquidity, but when you get into credit risk, it can be absolutely catastrophic," Bonds said. "That's a lesson I learned as an examiner."
Corporate America membership has swelled by 50% in the last year, Bonds said, with the credit union gaining 100 new members from several states.