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WEST PALM BEACH, Fla. – Assets, assets, assets. That’s all some people want to talk about when looking at corporate credit unions, but there are billions of more credit union dollars that corporate credit union investment subsidiaries are trading, managing or advising on that won’t show up on any corporate’s balance sheet. It’s only when you look at those and corporates’ own assets that you begin to understand the impact that corporate credit unions have on the credit union industry, said John Arnold, legendary corporate CU leader and author of, “The Journey, A History of the Corporate Credit Union Network,” which is available through the Association of Corporate Credit Unions. What Arnold is talking about of course are the corporate credit union investment subsidiaries, whether they offer broker/dealer, ALM, or advisory services. There are only a handful of major ones, but they deal with billions of CU assets and growing. Some corporate leaders believe these businesses are where the future of corporates is going – that is corporates moving away from pushing their own balance sheet products to becoming more of a trusted balance sheet advisor to credit unions. Five corporates are leading the charge in this area, some are new to the game while others are very well established. They are Southwest Corporate FCU, EasCorp, Empire Corporate FCU, WesCorp and Corporate One FCU. Credit Union Times talked with leaders from each of these corporates or their investment CUSOs to find out just how far their reach in the industry is. Southwest Corporate Investment Services One of the more complete investment subsidiaries is Southwest Corporate Investment Services, founded in 1998. It offers all three of the core products in this area: ALM, advisory services and broker/dealer. It has offered advisory services and ALM since 1988, but didn’t found the CUSO until 1998 when it added broker/dealer services. Now all three services are handled within the CUSO. It has 12 employees. According to Bruce Fox, SVP/Chief Investment Officer for Southwest Corporate, about 80 CUs are using its advisory services. That amounts to a whopping $6.5 billion in CU assets under management that won’t show up on its own balance sheet, but that the CUSO is managing. Fox said the advisory service is a service larger CUs gravitate towards. It’s a labor intensive product that requires evaluating interest rate risk, staying abreast of all regulations, understanding a CU’s investment policy; and on and on. Fox said it’s also good for CUs that want to get into more complex investments, like CMOs, to see how they would affect their portfolios. Southwest Corporate Investment Services also offers ALM, which about 160 CUs are utilizing (80 of those are doing it as part of the advisory service clients; and 80 are just using ALM). The total assets of the CUs that it provides ALM services to are approximately $31 billion. Fox and others interviewed said NCUA’s increased focus on ALM has probably helped ALM business for all the CUSOs, but that CUs in general have become more complex and outside advice is more necessary these days. “I think ALM within the credit union is a constant thing now. There are two or three different variables in doing it these days,” he said. He said it’s not only about doing analysis and risk assessments of credit union portfolios, but also consulting with the credit union to determine things such as what member reaction would be to pricing changes that it may recommend to management. It’s also more and more about using ALM to help CUs achieve their long-term strategic goals, said Fox. “A lot of credit unions stop too soon once they get the report. They use it as an internal measurement tool of how close they are to their standards, and as a regulatory tool. Our service pushes that one step further, using it to find ways to enhance overall activities.” The CUSO also offers broker/dealer services. In the last 12 months it has conducted 750 transactions worth about $875 million. It has three employees dedicated to broker/dealer. “It’s our newest product line. We started in 1998. We thought credit unions were paying excessive prices for buying bonds and such. We have about 110 credit unions specifically using the broker/dealer,” said Fox. ALM First Financial Advisors ALM First Financial Advisors, LLC is EasCorp’s investment CUSO. It has a unique flagship product that encompasses ALM and advisory services in one. Exactly 58 credit unions use this service, with a total of $5 billion under management. ALM First serves some very large CUs. The average asset size of those 58 CUs is just over $310 million. The total assets of the CUs using this product is about $18 billion. Emily Hollis, president of ALM First, said the majority of its clients are in Massachusetts (where its parent EasCorp is located) and Texas (where the firm is located), however she said its biggest growth area is out West, particularly California, Oregon and Washington. Hollis said the product is well-suited for the larger CUs and many happen to be located out West. “Our growth has been in that sector of $300 million and above. They understand the product better. Because our systems are so advanced and portfolio managers so well-trained, credit unions can build huge efficiencies by outsourcing everything,” said Hollis. “They put us on projects as if we’re an extension of their staff. That’s a bit different than our competition.” ALM First employs 16 people. Hollis said outsourcing ALM and advisory to a third-party like ALM First makes sense for many CUs. “It’s extremely natural. It’s really the next step. If you have a service that just provides you numbers and hand them to your examiner that’s not really using the service to the fullest.” Its Dallas address may confuse some because it is a CUSO of a Massachusetts based corporate. Here’s the story. Dallas is where Hollis and her partner Tom Manley are from. They both worked for Southwest Corporate before going to another investment firm in Dallas. Shortly after that the EasCorp opportunity came available. Originally EasCorp owned the CUSO with INDICORP as well, but INDICORP was out of the picture after about only a year. While ALM First has 58 CUs on its flagship product, it also has another 16 CUs using just ALM and it does ALM for seven corporate credit unions. WesCorp Investment Services The $17 billion WesCorp started WesCorp Investment Services, LLC in 2000. It is a broker/dealer with some unique facets, namely that it is involved with manufacturing securities. It underwrote its first security this past January. WesCorp Investment Services was admitted to the Tier 1 Underwriting Group of the Federal Home Loan Bank, allowing it to go directly do the FHLB and request a security with a structure that’s in demand from clients. Bob Burrell, SVP and chief investment officer for WesCorp, said this allows clients to ask for an issuance that meets their investment needs, and instead of having to wait for a dealer to bring a new issue to market, WesCorp Investment Services can go directly to the FHLB to request a new issue. Currently 85 credit unions have broker/dealer accounts open with WesCorp Investment Services. So far this year it has conducted about $300 million in trades. Another 11 credit unions utilize its investment advisory service, for a total of approximately $800 million under management. WesCorp is different in that its ALM service is not offered out of its subsidiary, but through WesCorp itself. About 79 CUs use WesCorp for ALM. WesCorp Investment Services currently has four people on staff with a fifth coming on shortly. It also has six sales people for a total of 11. Some of those employees are subcontracted from WesCorp and wear two hats, one with WesCorp and one with WesCorp Investment Services. Burrell believes these corporate investment subsidiaries are going to play a bigger role in the future as the role of corporates changes. He said corporates have traditionally been liquidity providers, but as CUs get more complex they’re going to have to provide more advanced functions, such as assisting in loan participations, access to capital markets, derivatives, etc. “Long term I think this is where the business is going. I think balance sheets of natural person credit unions are going to change. I think long-term loans are going to grow faster than shares and the role of the investment portfolio is going to be different,” said Burrell. Primary Financial Company Corporate One plays a little bit of a different role in this investment realm. Its CUSO, Primary Financial Company, LLC was founded in 1996 and is best known for its structured certificate program, known as SimpliCD. What’s unique is that aside from Corporate One offering SimpliCD to its member CUs, 15 other corporates have signed on as co-agents of SimpliCD, giving the product tremendous reach At press time there were about 1,300 investors, primarily CUs, with outstanding SimpliCD balances of about $2.2 billion. SimpliCD is still one of the best examples of a corporate partnering with another corporate to offer their members a best-of-breed product said Corporate One President/CEO Lee Butke, who is also chairman of Primary Financial. Primary Financial also acts as a broker/dealer. It is an Office of Supervisory Jurisdiction (OSJ) of Westminster Financial Securities, Inc. Thirty-eight credit unions are registered to do trades with Primary Financial. In May about $20 million worth of CU trades was done through Primary Financial. Butke said corporates can’t be afraid to point CUs to off-balance sheet investments. “We feel very strong that we need to be indifferent as to which product we sell. Whether it’s a term certificate with Corporate One, or a Treasury or agency, our intention is to provide the best product to them,” said Butke. He said he’s surprised more corporates aren’t offering broker/dealer services and moving towards being a one-stop provider. “Having lived my life on the natural person credit union side, I saw a different need for a one-stop solution from a trusted source,” said Butke. Primary Financial has 10 full-time employees who have no overlap with the corporate. There are a handful of other employees who wear two hats, such as Mark Solomon who serves as both CFO of Primary Financial and Corporate One. Solomon said he doesn’t see Primary Financial getting involved with ALM or advisory services because it doesn’t think it can bring any more value than what’s already in the marketplace. He said Corporate One doesn’t want to get into any areas of business it can’t do exceptionally well. Empire’s MemberTrade CUSOs Empire Corporate has two investment CUSOs: MemberTrade Financial Group, LLC, a broker/dealer, and MemberTrade Advisory Services, LLC, the advisory arm of Empire Corporate. “It’s going very well. We started in 1999 and in 2001 we turned a profit. So far in 2002 we are experiencing record volume,” said LeAnn Palladino, president/CEO of both CUSOs. Palladino is also chief investment officer for Empire Corporate. Palladino said this is a good time across the board for broker/dealers because CUs have so much liquidity to invest. MemberTrade has 122 credit unions registered to do trades. It added 17 new CU clients this year. As of the end of June it executed 177 trades worth $247 million. In 2001, it executed 283 trades worth $360 million. MemberTrade has its best penetration in Rhode Island, New Jersey, New York, Connecticut and Massachusetts. It has four registered investment reps on staff, with at least two working the trading desks during the day. MemberTrade Advisory Services, LLC, was just launched in 2001 and has about a dozen CUs that it does regular ALM work for said Palladino. It does two types of ALM modeling, quarterly modeling, and one-time parallel modeling. It also started offering investment advisory services in the first quarter of 2002 and currently has one client. Both of Empire Corporate’s CUSOs share the Director and CEO and each have two full-time employees. Palladino said the CUSOs are also getting involved in offering educational sessions on investing and ALM. She said because of demand, those sessions will likely be expanded. [email protected]

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