Constitution Corporate Aims for Cost Containment, Capital

After recording $85 million in permanent impairments in April and May, Constitution Corporate Federal Credit Union updated members on its cost containment and capital recovery plans. The corporate’s board approved updated versions of the plans for third quarter June 30. The $1.5 billion corporate’s April 5310 call report reflects a $33.8 million write-down that represents 100% of its U.S. Central paid-in capital and member capital shares. Constitution also recorded a $51.5 million other-than-temporary impairment against its own investment portfolio as of March 31, deciding to early-adopt FASB rules after accumulating almost $400 million in unrealized losses. The combination of losses exhausted Constitution Corporate’s $51 million in retained earnings and left the line item with a negative balance, which will eventually impact member capital shares as much as 50%. Although the NCUA suspended capital ratios as of November 30, 2008, the regulator, management and volunteers must still address the institution’s resulting negative 2.09% core capital ratio and 2.19% capital ratio as of April 30. “The capital plan acknowledges the corporate is currently undercapitalized from a regulatory perspective for the amount of risk on its balance sheet,” President/CEO Robert Nealon wrote to members July 1. He said the plan quantifies interest rate, credit, liquidity and operational risk in detail. He said, “even if moderate investment losses continue through 2009,” Constitution Corporate does not expect to completely exhaust member capital, and in a number of scenarios, projected positive earnings and adequate liquidity. Cost containment plans aim to cut $900,000 from expenses this year thanks to initiatives that have been implemented since February. A board-appointed Cost Containment Committee comprises three board members, as well as Nealon and Chief Financial Officer Michael Kinne. The team will review the corporate’s business model and current and future operating parameters, in an attempt to increase net earnings and replenish capital, and make “difficult but necessary decisions.” –[email protected]

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