Corporate Capital Pledge Fears Weigh on the Industry
The ability to raise capital continues to define the new corporate marketplace.
The Tallahassee, Fla.-based Southeast Corporate Federal Credit Union faced a May 31 deadline to raise $75 million in perpetual contributed capital in advance of the $1.6 billion corporate’s planned merger with the $3.7 billion Corporate One Federal Credit Union. And the $2.4 billion Corporate Central Credit Union will now offer credit unions the option to establish membership at an associate member, providing services while requiring less capital than required for full membership, or no capital commitment at all.
Corporate One President/CEO Lee Butke said May 30 he was “nothing but pleased” with Southeast Corporate’s progress toward the $75 million goal. Southeast Corporate members must convert their existing $63 million in member capital shares to PCC, and if required to meet the membership requirement of 0.9% of assets, purchase additional PCC.
According to Southeast Corporate’s April financial reports, posted on its website, the corporate reported $29.5 million in membership capital shares, down from $31.7 million in March and $34 million in February. As of April 2011, the corporate reported more than $53 million in MCS. PCC was not included in the financial reports, and the corporate did not respond to requests for an interview.
Butke declined to provide any numbers on Southeast because he said the process of a credit union committing to a capital investment is a timely one, requiring volunteer approval, usually at a monthly board meeting, and the transferring of funds into an escrow account.
“I’m very enthusiastic,” Butke said of Southeast Corporate’s ability to make the goal. “They have some fence sitters, but we had our own during our own capital raise.”
Peer pressure among credit unions is helping advance the goal, he said.
In a March 28 merger update posted on the Southeast Corporate website, the institutions called the merger “the best and only remaining option to protect your collective $63 million in capital.”
“From the beginning, this merger has been about doing what is right for members and the greater credit union community, as well as protect the system from further losses,” Butke said.
Should Southeast Corporate not achieve its $75 million PCC goal, it doesn’t necessarily kill the merger. Butke stressed that Corporate One’s most important goal is to be well-capitalized and meet NCUA capital requirements before the merger and be on track to meet that goal after the merger is complete. The $75 million is means to that end. Should Southeast fall short, Butke said, the merger could still proceed at the discretion of Corporate One’s board.
“To merely be adequately capitalized is a very short-sighted goal,” he said. “The agency is going to want us at the well-capitalized level, and our members want us to be well-capitalized, too.”
Corporate One reported nearly $145 million in PCC as of April 30, as well as $39 million worth of reserves and undivided earnings. Unrealized losses on investments have decreased from nearly $170 million at the beginning of 2012 to $159 million as of April 30. Butke said Southeast Corporate’s unrealized losses have also decreased, increasing total equity.
Corporate Central Executive Vice President Chris Felton said his Muskego, Wis.-based institution’s decision to offer services to credit unions with little or no capital investment came after “hearing the angst that credit unions have expressed across the country” regarding replacing corporate services and a reluctance to invest capital in a corporate at industry events and conferences.
“We said, let’s get creative and find a way to help bring some stability to their lives,” he said. “You can hear the pain they went through, and that’s what this is all about, trying to provide a home to those who need it.”
With the exception of Corporate Central members and some others, most credit unions lost corporate capital, and Felton said he understands most have “pretty significant apprehension” investing capital with a new corporate.
Felton, President/CEO Bob Fouch and others at Corporate Central tinkered with their membership structure so the corporate could offer services that don’t inflate the balance sheet, and as a result, don’t require capital.
The new partner level of associate membership allows access to correspondent services, settlement services and a line of credit that is proportional to a credit union’s PCC commitment. Credit unions can buy into partner level membership for as little as $10,000.
The correspondent level of associate membership allows access to correspondent services with no capital commitment. Term investments, other investments and borrowing are services reserved for full members.
“It really does offer something for everyone,” Felton said. “A credit union can become a full member and participate in the governance of the organization, or they could gain the convenience of settlement and a credit line by contributing capital proportionate to the line of credit, or they could just want some services and invest no capital.”
Doug Wolf, former president/CEO of the shuttered Midwest Corporate Federal Credit Union, said fewer credit unions have left the corporate system than he anticipated. Wolf is now vice president for ProDraft Services, a Bismarck, N.D.-based CUSO that was begat out of Midwest Corporate to provide item processing, deposit processing and correspondent services for about 50 credit unions.
“We talked to many who said they weren’t going to recapitalize, but some ended up still going back with a corporate,” Wolf said.
Once credit unions got over the sticker shock of paying for corporate stabilization and experienced a return to profitability after corporate assessments, it softened their anti-capital position, he said. Many credit unions settled for a combination of services from corporates and other providers.
“For years, people were pretty much doing everything at a corporate because that’s just what you did, you didn’t even think about other options,” Wolf said. “Now people realize they don’t need corporate to operate. But, the big question mark now is if corporates can truly make the new capital requirements.”
Over time, Felton said Corporate Central believes many associate level members will graduate up to full membership after developing a comfort level with the corporate.
“If you enable a credit union to experience the level of service we provide, and time passes from the ugly event in which they lost capital at their previous corporate, and, taking into consideration that credit unions inherently want to be involved in the governance of an organization, over time we think they will develop same level of commitment as our members who have been here 30 years,” he said. “We think they’ll become more engaged.”
Corporate Central expects to gain between 100 and 200 members as a result of the new membership structure. The corporate has picked up about 200 new members in the past few years, resulting in roughly 300 members currently. However, there is also a negative membership trend. In the last year, the corporate lost 30 members to mergers alone.
“We add 60, and lose 30, and end up netting 30,” he said. “That’s just the way it’s going.”
Credit unions have been bombarded with talk of new business models, and part of their apprehension in investing capital is that those new business models haven’t been tested through various market conditions, like tight liquidity, he said.
“When liquidity is plentiful, it’s easier to not worry about or be concerned about liquidity sources,” he said. “It’s in times of tight liquidity that it becomes a huge issue when credit unions that don’t have access to the lines of credit they need.”
Because Wisconsin credit unions have historically maintained high loan-to-share ratios, Corporate Central has been the biggest lender among corporates, he said.
“Our 60% loan-to-share ratio doesn’t sound like a lot for natural person credit unions, but compare that to other corporates who are in the single digits,” he said. “That’s our No. 1 role, to be a source of liquidity. It’s our bread and butter.”
Not only are seasonal liquidity flows high, but cyclical liquidity has been flush for the past few years.
“Once we get past the elections and develop more certainty in the marketplace, you’ll see borrowings begin to pick up,” he said.
According to unaudited April financial reports posted on Corporate Central’s website, the credit union has gained $2.4 million net income year-to-date before paying out PCC dividends. Corporate Central already exceeds the NCUA’s retained earnings Tier 1 core capital and risk-based capital requirements that must be met by October of 2013.