Pritts’s Business Model
President/CEO Pete Pritts announced some major changes at the $2.2 billion Corporate America Credit Union in a July 18 letter to members obtained by Credit Union Times. Since taking the helm of the Irondale, Ala.-based corporate in November 2012, Pritts has put together an almost entirely new senior and middle management team, revamped the balance sheet, and in October will implement a new fee structure. The changes will net the corporate more than $4.4 million in annual operating expense reductions.
“We were structured for a different economy and different regulatory environment,” Pritts said in an interview. “Today’s income opportunities are very different.”
Despite these changes, the corporate has only lost 30 members, leaving it with 550. Pritts said that’s likely because of one thing that didn’t change: Corporate America still does not require member credit unions to contribute capital in order to access services.
“We haven’t seen much of a drain on deposits,” he said. “Nobody wants [fees], but we’re getting lots of praise for leaving the capital requirement in place, and the credit for that goes to our board.”
Board Chairman Monte J. Hill, president/CEO of the $326 million Family Savings Credit Union of Gadsden, Ala., said Corporate America is positioned well for the NCUA’s new capital requirements effective in October, with $107 million in perpetual contributed capital. Additionally, the board decided to not require member capital as a condition of membership because the volunteers believe capitalization should be a choice.
But despite the fact that Corporate America already exceeds regulatory requirements, the corporate is making the changes to become an even stronger institution.
“Like any credit union we want to be poised for growth, financially stable, in a position to advance technology, and employ the best,” he said.
Member credit unions that have not subscribed to PCC will pay a line-of-credit underwriting fee of five basis points and must maintain a minimum credit line of two-and-a-half times their debit settlement amount. Members with PCC will not be assessed the underwriting fee.
“We’re not pretending it costs that much to underwrite the credit line, but we are changing the business model,” he said. “It provides flexibility for the member credit union and flexibility for us. If they want a larger credit line they can have it. And, if a member wants to use select services that don’t require settlement, they can still remain a member in good standing with voting rights.”
Pritts said he’s been pleasantly surprised with the reaction from members, with comments ranging from those who are pleased with the structure because they’ve already contributed capital, to those whose boards refuse to ever capitalize another corporate and will pay the fees, and others who will test drive the new fee structure and consider converting to a capital-contributing membership in the future.
PCC accounts will continue to pay 1%, which Pritts said is competitive. Additional capital accounts will pay 0.5% or lower rates. Corporate America will also raise dividends on its Super 30 share account to 20 basis points the week of July 29, and Pritts said he plans to simplify the deposit account menu pending board approval.
Ten of the corporate’s 55 employees were dismissed: three senior managers, five middle managers, and two information technology staffers, the corporate said. The IT staff positions were refilled, but instead of hiring new management, Pritts said, he “just leveraged the talents we had internally.” No member-facing employees were laid off, he said.
The reduction in staff will save the corporate $1.55 million annually, but Pritts added that severance packages were offered to those who were let go. In particular, he said the corporate did the right thing for those who had worked at Corporate America for many years by offering a generous package. The reduced count is now 55 employees.
Additionally, the credit union’s employee defined benefit plan was frozen indefinitely.
“Hopefully, we can bring that back, but our top priority is adding value to membership,” he said. “We love our employees, but we will take care of them after our members.”
Pritts also achieved operating expense savings by modifying a Federal Home Loan Bank credit line and redeploying some $750 million in cash that was only earning 25 basis points. The $750 million is now earning 75 basis points.
“At our peak, we had $1.6 billion in cash,” he said. “We have to be prepared for liquidity needs, but we didn’t need $1.6 billion in cash. That was not a good business decision.”
The savings offset lower yields on Corporate America’s CMO portfolio, which has suffered from reduced yields due to the low interest rate environment and prepayments through government programs like HARP. At one point, the CMOs were earning a negative yield, but Pritts said it’s been increased to 40 basis points.
In addition to reducing operating expenses and increasing income, Pritts also plans to upgrade operations to automate check processing systems and will consolidate billing to members.
Pritts said despite turning a slight profit in June, he doesn’t think he can recover the corporate’s $1.8 million year-to-date net loss by year-end. However, he does predict turning a profit in 2014.
“We will return to profitability,” he said.