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WEST PALM BEACH, Fla. – Whether it’s an uncommon term, a special call feature or a unique floating rate option, today’s corporate credit unions can now churn out customized investments in as little as a half an hour. Corporates are seeing more demand from credit unions for reverse-inquiry investments. Reverse-inquiry is essentially when a credit union requests a tailor made investment to fit their needs, usually to fill a hole in their laddered investment strategy. It’s become so popular at many corporates, custom certificates make up nearly half of their investment portfolio. Southwest Corporate, the nation’s second largest corporate with $8.5 billion in assets, helped create 50 reverse-inquiry structures for credit unions in ’04 valued at more than $372 million. Already this year it has created 13 reverse-inquiries for $148 million. “It’s getting more and more popular because the expertise in the credit union world is getting more sophisticated. They understand their portfolio needs, they shop around,” said Southwest Corporate Manager of Portfolio Management Cynthia Shi. Each week Southwest creates its own structured certificates that can beat agencies by 10-15 basis points, but sometimes they don’t fit a credit union’s needs, said Shi. That’s where reverse-inquiry comes into play. The advantage Southwest and other corporates have over agencies, according to Shi, is they can tailor an investment for as little as $5 million, where agencies typically require $25 million. Shi said if Southwest gets a request from a credit union that might only have $2 million to invest, it’s not necessarily a deal breaker because the corporate can go out and solicit the remaining necessary $3 million from other members. “The good thing is we have over a thousand credit unions to look to for a group offering.” Ron Koza, chief investment officer for the $4.7 billion Mid-States Corporate, said reverse-inquiries help the corporate keep ties with members open. Sometimes that leads to very customized certificates for just a few credit unions, other times it helps Mid-States create a certificate with widespread appeal, but it wouldn’t necessarily have created on its own. “It helps us find out what they’re looking for. A lot of times what it does is highlight a particular sector of the marketplace where there is a need. When we receive a lot of inquiries from members, we will always try to develop a special offering,” said Koza. Koza believes credit union needs haven’t changed, but they are getting more sophisticated and they have more options than ever for investments. He said he wished all credit unions knew just how far corporate certificates have come. “We have seen a lot of this (reverse-inquiry) with large credit unions. Mid-tier credit unions however somehow have gotten the false impression corporate certificates aren’t as sophisticated an investment,” said Koza. Of Mid-States’ $1.6 billion in outstanding certificates on the books right now, about $420 million, or almost 30% of its portfolio, is in these custom certificates. Taking a Bite Out of Agencies Marc Schieffer, chief investment officer for SunCorp, said customization is where corporates can set themselves apart from agencies, which are still wildly popular with credit unions. Schieffer said agencies like Fannie Mae and Freddie Mac have had a lot of issuances over the last five years to help fund mortgage growth, and credit unions were buying them up. Now with Fannie and Freddie in the news in a negative light, the supply line hasn’t been as full. “Our members still have a need to place investments. I think corporates have evolved and this is a real value-added area for us. We’re committed to serving these members the best way we can, as opposed to agency issues. Forty percent of what we do is reverse-inquiry,” said Schieffer. He said a lot of SunCorp’s custom certificates are done a one-on-one basis. Of SunCorp’s billion-dollar plus term portfolio, $350 to $400 million of that is in custom certificates. Like other corporates, SunCorp will go out and solicit participation from other CUs if one CU doesn’t have the requisite $5 million. “But if someone wants to come in for $500,000 for a 10-month or 22-month type cert, that we can do all day long,” said Schieffer. It’s not only on the investment side where today’s custom corporates can shine. Schieffer noted a custom three-year floating rate loan with a cap it did for a credit union about six months ago as another example of the tailor-made products corporates can provide. This particular CU was looking to hedge against rising interest rates. “They were working with a third-party ALM vendor. They were looking for something to help them reduce their risk by x amount. We structured the product to do only that,” said Schieffer. Moving further West to the $26 billion WesCorp finds the nation’s largest corporate with about half of its $6 billion certificate portfolio in custom certificates.. “I think it (reverse-inquiry) is absolutely a big selling point. Agencies have a higher threshold, they won’t cater to what a credit union wants,” said Dietmar Huesch, VP of treasury and funding for WesCorp. Huesch noted agencies are also typically longer investments and CUs are usually looking shorter, in the one to five year range. Huesch said WesCorp can turn around custom certificates in about a half hour. WesCorp built, on its own, a brand new booking system a year and a half ago that has sped up customization. It is menu driven and the user can scroll through various screens adding different bells and whistles until the reverse-inquiry is met. “It’s really allowed us to turn our efficiencies around,” said Huesch. He also noted the importance of derivatives power in customization. Currently WesCorp and Southwest are the two only corporates with derivatives powers from NCUA, while Mid-States is currently working with NCUA to get it. Huesch said it’s a good risk mitigator. “We’ll create the structure and hedge it out and pretty much eliminate WesCorp’s risk that may have been created,” said Huesch. Shi said Southwest’s derivative powers gives it added flexibility. “With derivatives you can lock in a structure without having to find exactly the same structure. If you don’t have derivatives, you can only buy the same structure from existing structures in the bond market,” Shi said. Schieffer, who used to work with Shi at Southwest said derivative powers are on the drawing board for SunCorp, but said it’s not hurting Southwest’s customizing ability. “From my background working with Southwest with derivative authority, I know it’s a tremendous resource for additional flexibility. But U.S. Central has become much more flexible and competitive in rates they are paying. With the cost in infrastructure and execution, right now it doesn’t behoove us to do it (derivatives),” said Schieffer, though he stressed it is on the horizon. Other corporates interviewed for this story also noted U.S. Central’s willingness to customize on their end to help corporates meet a member’s demand. Many pointed to this is the quintessential example of the corporate network working together as one. “If we can’t create it within our own market features, we would go to U.S. Central, unless it was something extremely exotic,” said Kevin Brauer, COO of Empire Corporate. Brauer said reverse-inquiries often help CUs needing odd durations. “We will customize for maturity needs. If they need a 95-day CD we can do that. It takes a little bit more work, but it’s making a credit union’s life easier,” said Brauer who noted more corporates are competing on customization as well as ALM products these days. Schieffer said he hopes this article will wake credit unions up to just how member-oriented and sophisticated corporates have become on the investment side. WesCorp’s Huesch said he’s struggled for years with why credit unions do so much agency business away from corporates. “Brokers can wine and dine credit unions, corporates can’t. We continue to grow relationships, we’ve caught the eyes of the big credit unions,” said Huesch, who noted that 18 of the top 20 largest CUs are members of WesCorp. [email protected]

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