WEST PALM BEACH, Fla. – Looking ahead and behind corporates are still mulling over Part 704, looking for a way to bring value to CUs wanting to serve businesses, and recognizing the importance electronic transactions will play in the future. Corporate leaders say they can help CUs get over the hump of offering business services. "Entering an entirely new business arena always creates challenges, among them, the ability to allocate, or acquire, adequate resources – and the ability to withstand a lengthy waiting period before any return is realized. Many credit unions simply would not be able to make the investment and absorb the short-term losses," said Greg Moore, president/CEO of Georgia Central CU. Moore said corporates can help CUs get into this market without absorbing all the cost. "We operate with the same cooperative principle as credit unions, and due to our access to resources, we can help capitalize the venture." Corporates not only have to work with each other but also with their leagues, said Moore. Later this month the Georgia League is offering a two-day seminar on serving businesses that the corporate plans to be in tune with. Other corporates say many of the products needed to help CUs are in place. "We already offer many of those services, including cash management accounts, merchant debit card processing, ACH origination, and share draft imaging," said Lee Butke, president/CEO of Corporate One FCU. Corporate One is also linking in with its state league. "We also teamed with the Ohio Credit Union League's Member Business Services Task Force to create account-document templates so credit unions can open accounts properly for their business members," said Butke. Joe Herbst, president/CEO of Empire Corporate FCU, said corporates can really bring value in many ways, but the major one is helping CUs that are deep into business lending get some of the money off their books so they stay under the 12.25% cap. "When they (CUs) consider regulatory restrictions, they will likely have to seek loan participations. Empire is one of the few corporates in the country that has been granted a waiver by NCUA to do loan participation. In fact we are very close to booking our first one. It could play a major role in the lending side of our business," said Herbst. Herbst said corporates also can't forget about leveraging their item processing capabilities for vital business services such as lock box. David Brehmer, president/CEO of First Carolina Corporate CU, said corporates should play that central underwriter role, similar to what Northwest Corporate is doing with its new CUSO. "A centralized underwriter/processor makes a lot of sense because then credit unions can participate as they like without having to build the infrastructure. Corporates can do what they do best, develop the needed back-office support service that spreads costs among many credit unions to make accessing business services an option for all credit unions," said Brehmer. EasCorp President/CEO Jane Melchionda said corporates are the right players to get involved with helping CUs serve businesses, but EasCorp hasn't had much demand from its members on the lending side, which is getting most of the headlines so far. Demand has instead come for electronic services that can help expand a CU's business product menu. "A good example is ACH origination. We've offered it for years, but we're seeing interest grow as a way credit unions can position themselves to serve business accounts. Their members who are business owners can use ACH deposit applications to originate payrolls, expense checks, pre-tax spending accounts and similar programs. Why should credit unions give up that valuable business to banks?" said Melchionda. As corporates move forward next year with the new Part 704, most are pleased, but some have some nagging questions about NCUA's thinking in some aspects. "We now have three capital ratios to monitor, retained earnings, core capital, and total capital. Although the new capital and reserving requirements will not materially change, I am certainly hopeful that we will not see any further regulatory revisions to our capital structure in the foreseeable future. It is extremely difficult to plan a course of action when the guidelines for capital adequacy have the potential to change every few years," said Brehmer. Brehmer also questions the interpretation that a gain is not consistent with a penalty (which is required by the regulation) for early withdrawal of a share certificate. "I can not understand the reasoning for disallowing a corporate to share gains on certificates redeemed early when the market conditions allow it," said Brehmer He laid out the example of a credit union wanting to redeem a certificate with a one-year remaining maturity that is paying an interest rate of 4%. Today's market for 1-year certificates is about 2%. "Obviously, there is a rather substantial unrealized gain in this transaction, selling a 4% investment in a 2% rate environment. The new regulation appears to require we charge a penalty on this transaction regardless of the gain that the corporate would receive if they elected to sell the corresponding asset," said Brehmer. Moore said NCUA was right to give corporates the freedom to in essence take more risk, though corporates will still first keep an eye on safety and soundness. "From an asset/liability management perspective, the net effect of the new regulation is to allow corporate credit unions to take more risk on their balance sheet. Interest rate risk as well as credit risk limitations under the old regulation were prohibitive, so the modifications are welcome," said Moore. "But it's important to remember that the restrictiveness actually benefited the credit union network by enhancing the industry-wide image of financial soundness. Credit unions have long enjoyed a reputation as a safe venue for savings-related products and service," he said. Herbst wanted NCUA to give in on the ACH settlement date provision, but despite the efforts of the Association of Corporate CUs on this point, it didn't happen. "We would have liked to see future dated ACH booked according to settlement date. We are now required to book them upon notification. This inflates the balance sheet and gives the perception that capital is not as strong as it really is," said Herbst. "Since a large amount of transactions hit at the beginning of the month, and the advices are sent at the end of the prior month, the assets are distorted. Given the large volume, this can have material impact," he said. As for next year's goals, Georgia Central sure has a clear game plan. It recently obtained Board approval and has executed agreements to participate in a new broker-dealer service offered to credit unions by Investment Solutions, Inc. This service will enable Georgia Central's Investment Department to be a one-stop shop for its members, said Moore. Interestingly, Georgia Central, which was in the process of merging with Southwest Corporate, but the deal fell through, has a clear idea about where it's going in the merger happy network. "Some corporate credit unions are seeking to merge or to market outside their traditional territories in order to increase economies of scale and improve overall product offering and return. Georgia Central is operating under a different philosophy, which is that partnerships within the network have great potential to create positive outcome for individual corporates and their members. I think a return to cooperation will be the hallmark of successful corporate ventures over the next decade," said Moore. Herbst said adding business services is one goal for 2003, but also finding ways to help CUs with their shrinking margins. "Empire Corporate has consciously reduced our return on assets in order to provide our members with the best possible return. Next year will be just as challenging from a margin perspective. We will be looking for ways to add additional value in this very challenging market," said Herbst. For EasCorp, the trend of paper-to-electronic will continue next year. "We've been in the process of transitioning many products and services from paper-based to electronic-based, and in 2003 we'll accelerate that process," said Melchionda. Also look for EasCorp to grow its investment advisory CUSO, ALM First Financial Advisors. "When we set it up, we believed the demand for fee-based advisory services would grow and that's proved to be true. Now, ALM First has more than $5 billion under management, and I think we'll see tremendous growth in the next couple of years. Credit unions – particularly the larger ones – will always want a certain amount of their portfolios to be in securities," she said. With a new reg, a consolidating network, an eye toward business services, and more movement to electronic transactions, 2003 should be a big year for corporates. [email protected]

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