SOUTHFIELD, Mich. – The Michigan Credit Union League is renowned for being one of the most financially stable and best run leagues in the nation, but the state’s corporate shouldn’t be overlooked either. Looking at the statistics, Michigan credit unions can be sure their corporate credit union, CenCorp, isn’t holding anything back to get them the best deal. The corporate’s net interest income as a percentage of daily net average assets (DANA) is a frugal 21 basis points, the lowest in the corporate network where the average is 41 basis points. Moving on to CenCorp’s Net Operating Expenses and you find it has the lowest ratio over the last two years, at a razor thin 0.11%. In the first quarter it was second to EasCorp, but that is an anomaly attributable to EasCorp’s proceeds from the sale of its CUSO, ALM First. So why the lean and mean approach? Simple, says CEO Bill Walby, it ensures the corporate is giving back all it can to its members. “We’re retaining 21 basis points. If we were operating at the average for corporates, we would be retaining over $1.5 million in net interest income. What we’re doing is returning that to members on an ongoing basis,” said Walby. He said the corporate’s net operating expenses are so narrow because the $3 billion CenCorp can just about cover operating expenses through its fee income. “We concentrate very heavily on automating as much as we can, and expanding revenue faster than expanding operating expenses. There’s not one thing I can point to, we do a lot of little things on an ongoing basis,” said Walby. CenCorp also believes in giving back the most to those credit unions that have committed to the corporate. Credit unions that are fully invested in member capital share deposit accounts receive one of the highest rates of the entire network for those accounts. Over the last four years, the rate has averaged 3.6%. In 2002 the corporate made some unique changes to overnight funds management. It consolidated its short-term accounts into one high yield account that is priced five basis points above the Fed Funds target so right now it is paying 3.05%. The advantage of this system, which is rare, is it eliminates member CUs from moving money daily to get the best rates. “When there are multiple accounts what you require the member to do is a computation every afternoon where the member goes through and looks at how much money it needs for settlement and how much it can invest for the day. What we’ve said is we will automatically put the funds where they earn the most. You don’t have to call us,” said Walby. The other thing it brings is stability, said Walby, because the rate, being tied to Fed Funds, is predictable. He said by eliminating the balancing step, it lessens the risk that credit unions will leave extra money in a lower yielding account Why don’t more financials do this? “It’s just kind of tradition. That’s the way it’s always been set up. We haven’t had any credit unions ask us to go back to the old system,” said Walby. CenCorp, which has seen fee income exceed net interest income since 2002, relies on fee-based products to keep its lean and mean approach going. It has added a number of fee-based products in recent years, including ALM modeling in 2001, SimpliCD in 2002, business services in 2003 and marketable security sales in 2005. SimpliCD is the brokered CD product offered by Primary Financial, a CUSO owned by all corporates. CenCorp is the second largest corporate issuer of SimpliCD with $320 million outstanding. It offers business services through its first ever CUSO, CenCorp Business Solutions LLC. “There are only about 400 credit unions in the state and I’m hoping to sign up our 40th user shortly. It’s a little bit more than we expected. We thought we’d get a lot of play from credit unions with community charters, and have gotten that, but we didn’t expect to get so much from credit unions with more closed field of memberships,” said Walby. CenCorp has had to invest considerable money to get this CUSO going. It has three staffers that do the processing and underwriting in-house. Walby said because of the fast start the CUSO is almost at break-even and he expects to hit profitability in the second half of 2005. He said the CUSO’s strategy was to price it attractively to encourage more participation and build the business on volume, not high prices. Its newest fee-based service, marketable securities, is done through a partnership with U.S. Central’s ISI subsidiary. Walby said CenCorp’s approach to securities sales, of any kind, is to give members one convenient snapshot of rates being paid by agencies, bonds, corporate CDs and any other option a CU has. That’s why visitors to www.cencorpcu.com will immediately notice a line chart on the top left of the page that clearly displays this comparison. “What we wanted to do was consolidate on one site a snapshot of what rates are available from different sectors at a point in time. Here are your options, you decide,” said Walby. Walby is concerned about what the flat yield curve is doing to credit unions, so they need to know the best places to invest. “We’ve seen a substantial number of credit unions where their bottomline is either negative or barely positive. The compliance related costs of BSA and Gramm Leach Bliley and the whole compliance umbrella are also hurting credit unions, especially smaller ones. I think how credit unions are going to get that profitability back is the big question today,” he said. Though it relies heavily on fee income, because of its operational efficiencies it’s actually been able to reduce fees. For example last year it came down with a 13% average reduction in fees for item processing. CenCorp processes about 13 million items a month. Walby sees more efficiencies coming with Check 21. “So far Check 21 from a practical standpoint has made very little difference. The biggest change has been internal. Right now when you have a return draft we go back and find the physical item and return it. Instead of doing that, we are going to be returning an image of that item. That wasn’t touted with Check 21, but it’s a more efficient process,” he said. Walby is also proud that 99% of Michigan CUs are CenCorp members, though he’d like to bring on board the remaining four small CUs (the largest is $1.9 million). “It would be great to be able to say 100% some day,” he said. -email@example.com
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