Pay to Play: Comparing Capitalization Requirements
Editor's Note: This is a corrected version of the article that was published in the June 8, 2011, edition of Credit Union Times.
Show us the money. That could be the rallying cry of natural person credit union executives as the system’s corporate credit unions continue their reshuffle to meet tougher NCUA financial ratio requirements. But probably what they are really asking is: How much will we be asked to pay?
Consider this a shopper’s guide.
Covered here are the five corporates now actively seeking more capital from new members: Alloya (formerly Members United), United Resources (WesCorp), Catalyst (the result of merging Southwest Corp with Georgia Corporate), Corporate One and Corporate America (after its merger with Louisiana Corporate).
Absent from the round-up is the new corporate, whose name is still to be selected, that will take on many of the payments functions provided by U.S. Central. It is excluded because the new corporate is intended to be a corporate’s corporate, with membership limited to corporate credit unions.
The corporate arising out of the remains of Members United will start with a clean balance sheet, with neither legacy assets nor debts. Target capitalization is $100 million, which Alloya believes will give it the financial standing to operate a $2 billion balance sheet, according to John Fiore, the CEO of Motorola Employees Credit Union who is chairing the Alloya formation committee.
Alloya intends to strip down its focus to what "credit unions have said they need most– correspondent services, single point settlement, overnight lines of credit and technology," according to Alloya documents.
Investment needs of members will be handled by the wholly owned CUSO Balance Sheet Solutions. Use of the CUSO is optional.
A corporate cannot operate without money on its books and, toward that end, Alloya will require members to put up perpetual contributed capital. Alloya stresses that it has sought to keep PCC levels "as small as possible."
Alloya also is pegging PCC to a credit union’s use of the corporate. Heavy users of services will pay in more than light users, or so the theory goes. Alloya will not tier PCC to a member’s fixed assets (meaning very large credit unions may see lower PCC requirements).
The building block Alloya capitalization formula is PCC equals (average daily debit settlement for the most recent calendar quarter) times (three days) times (5%).
One problem is that the PCC formula is hinged on usage, but members have no usage history as such because Alloya does not yet exist. For that reason, Alloya outlines a draft asset-based payment scheme in which a credit union’s size determines the minimum capital and maximum capital.
A credit union larger than $10 million would have a minimum capital of $10,000 and a maximum of $50,000. CUs in the $10 million to $50 million range would have minimum of $40,000 and maximum of $200,000. CUs $50 million to $250 million: minimum $80,000, maximum $650,000. CUs at $250 million to $1 billion: $150,000 minimum, $2 million maximum. And credit unions over $1 billion would have a minimum of $250,000 and a maximum of $5 million.
PCC will be adjusted once sufficient time to measure debit settlement volumes has elapsed.
Alloya, for its part, is adamant that "our plan provides the lowest capital buy-in ... of any corporate."
United Resources is the new corporate that would rise out of the remains of Western Bridge. It, too, will open for business with a clean balance sheet.
"All forms of settlement and item processing, liquidity services and borrowing" will be its business focus, said Matt Davidson, chief financial officer at the Kern Schools FCU and chair of the United Resources formation committee.
Target capitalization is $200 million to $250 million. Asset size is pegged at $4.5 billion, with a membership of 520 credit unions.
"Credit unions interested in investing in United Resources FCU will be asked for a total of 25 basis points of assets to be split 70% (17.5 bps) in permanent capital and 30% (7.5 bps) in five-year capital to a maximum of $2.5 million," said Davidson. "This would be considered an investment and characterized as an earning asset. The proposed dividend rate we will pay on invested capital is one-month Libor plus 100 basis points for PCC and one-month Libor plus 50 basis points for NPC."
Using the United Resources 25 basis points formula, for CUs with $10 million in assets the capital commitment would be $25,000; CUs at $100 million, $250,000; CUs at $250 million, $625,000; CUs at $500 million, $1.3 million; and CUs at $1 billion, $2.5 million.
An important footnote, stressed Davidson, is that "70% of that amount is permanent capital and 30% may be withdrawn."
This will be a new corporate formed out of a merger of Southwest Bridge Corporate with Georgia Corporate. Assuming the merger is successfully completed, it intends to have its headquarters in Plano, Texas, the current home of Southwest Bridge.
The anticipated asset size of the corporate is $2.6 billion.
The merged corporate would offer a "comprehensive menu of services," according to its business plan. Among the services that will be offered are payment services, correspondent services, settlement accounts and off-balance sheet investment services, according to the planning documents.
A goal in forming the new corporate is that the product offerings are designed to meet all the needs a natural person credit union has for a corporate.
Catalyst is creating its own capitalization formula and asking for significantly smaller capital commitments than had been sought by either Southwest Corporate or Georgia Corporate.
The target number according to the business plan is $130 million. The plan also sets as a target 954 members which, it notes, is roughly 13% of the total number of credit unions.
Capital commitments for Catalyst members size up this way: CUs at $10 million have a capital commitment of $5,000; CUs at $100 million, $250,000; CUs at $240 million and $500 million, $600,000; and CUs at $1 billion, $750,000.
The formula is elaborated upon in the official documentation: "For the vast majority of smaller credit unions, the PCC requirement will be equal to or less than 0.25% of assets, representing a reduction in their previous member capital requirement of 75% or more. The membership capital requirement for the consolidated corporate’s largest member credit unions will be capped at $750,000, 25% less than their previous requirement for Southwest Bridge Corporate members (Georgia Corporate did not previously employ a cap)."
Credit unions looking for new corporate relationships of course have choices beyond the three reworked bridges. A prime example of a healthy regional corporate now on the hunt for new members is Corporate One.
"We did not cost our members a dime in lost capital," said CEO Lee Butke. Corporate One anticipates that its solidity will help it grow. Membership now is around 775; Butke expects the number to hit 850 by year-end.
Corporate One anticipates its balance sheet will be around $3 billion. "A corporate needs assets if it extends lines of credit to members as we do," said Butke.
Corporate One offers a broad range of solutions to members, including payments services, liquidity solutions, investments, credit cards and imaging.
The Corporate One formula is 0.9% of assets, with the capital contribution capped at $900,000. CUs at $10 million would require a $90,000 commitment. Contingent on asset size, the commitment ranges up to $900,000 (for credit unions with more than $100 million in assets.)
Dividends will be voted upon, regarding size and issuance, by the board of directors on a quarterly basis. This plan is new and, said Corporate One, it cannot cite past history.
Corporate America members are required to buy only a single $5 share to make use of this corporate’s wide range of services, but approximately 85% of members make additional investments in Corporate America, said CEO Thomas Bonds. Corporate America’s tagline is "Shouldn't the earnings from your members' deposits increase your capital instead of somebody else's? We think so."
A merger with Louisiana Corporate is proceeding, and Bonds expects around 550 members by year-end. Bonds anticipates a balance sheet as big as $3.5 billion.
Corporate America is a full- service corporate and, said Bonds, it offers "everything anybody else offers." Loans, investments, correspondent services and electronic services are all available to members.
Corporate America reports its capitalization this way: "Retained earnings of $24.9 million (April 2011) and member-contributed capital of $95.9 million support a projected balance sheet of $3.35 billion."
In its official member information literature, Corporate One said, "Corporate America membership requires only a $5 dollar share deposit and members are not required to purchase either PCC or nonperpetual capital....Throughout the corporate crisis Corporate America welcomed deposits from new members. The board wanted credit unions throughout the country to take a look at Corporate America, review its products and services, and hopefully join with its capital holders in supporting Corporate America through voluntary capital subscriptions. This has been an exceptionally successful initiative as many new members have shown their support through capital subscriptions."
Are corporates that are not included in this roundup somehow inadequate? Absolutely not. Space permitted including only so many, and that meant priority went to the corporates that are presently engaged in member recruitment.
Comparisons of corporates are not always oranges to oranges, said the experts. A cheaper deal may not be the better deal, and a pricier PCC commitment may not be the better one, either. Read the fine print in any agreement, go slowly, and know in as much detail as possible exactly what you wish from your corporate credit union, the experts advise.