WALLINGFORD, Conn. – Constitution Corporate isn't one of the top-tier corporates in terms of assets, given its Connecticut location, but the $1.6 billion corporate is a network leader and innovator in many areas. Credit Union Times recently spent a day on-site at Constitution's Wallingford, Connecticut headquarters and saw first hand its approach to serving its membership. For starters, it is a lean and mean operation. It has a full-time staff of 55 with 16 part-timers. Constitution CEO Bob Nealon is like a proud parent when describing his staffers. "The more you get to know us you'll see we have a very knowledgeable staff that has considerable experience. They're just great. They make us who we are," said Nealon. More than a quarter of the staff has over a decade of experience with Constitution. The corporate points to its three-person member service representative team as one of its greatest assets. Nealon has led Constitution for about a year and a half. He hails from the $480 million Sikorsky FCU where he served as EVP/CFO. "I was very lucky when I came here. I found a lot of things were teed up. We've accomplished a lot in my time that I can't take the credit for," said Nealon. The corporate is located in a 23,000 square-foot building, which it owns, in Southern Connecticut centrally located near the state's main highways, giving it good access to its membership base. The corporate's leaders also tout the fact that its headquarters are just 90 miles from Wall Street, making it the closest corporate to that financial mecca. It's not uncommon for Constitution's investment professionals to take day trips to Wall Street to meet with investment firms. Constitution Vice President and Chief Investment Officer Jeff Navin said getting face time with these firms can be important. "If they have a special bond offering, they'll think of us and give us a call," said Navin. Navin said the corporate tries to offer at least one special certificate offering each month. Constitution is unique in that it has been able to bring in a higher percentage of term investments than most corporates. As of August, 71.80% of its portfolio is in term certificates, the highest percentage in the corporate network. According to the corporate, this percentage typically stays between 65 and 75%. This helps the corporate in that its asset base won't fluctuate as much as an average corporate's. Some corporates are still struggling to drive home the importance of laddering to its members, something Constitution's members are routinely doing. A Year of Change 2005 has been an eventful year at Constitution. Its members showed their commitment by purchasing $30 million in a member capital share offering. It didn't need the capital for regulatory issues, but hadn't offered capital shares since 1994 and it helped boost its capital level near 7%. Also this year Constitution became one of just six corporates to receive Part I expanded investment authority from NCUA, which most significantly allows it to invest in single A securities. Corporates first need to acquire Part I authority before they can achieve Part IV authority which allows them to utilize derivatives. Navin said Part IV is something the corporate will consider in the future. In 2005, Constitution converted its charter from state to federal. Nealon said it will result in about a $100,000 savings to the corporate, much of the savings coming from sales and use tax. The federal charter also gets rid of some quirky regulatory impediments. Constitution ran across a problem recently where a Massachusetts state-chartered CU had to pull out its money because Massachusetts state law doesn't allow state institutions to invest in out-of-state state charters. Speaking of out-of-state members, 33 of the corporate's 184 members are outside of Connecticut. Bringing on new members from other states is one of Director of Business Development Dan Poulin's mandates. Historically, like most corporates, Constitution has tried to attract CUs from other states using investment offers; it still does that, but it's now focusing more on branch capture as an out-of-state sales tool. "Branch capture takes down traditional boundaries we had with out-of-state credit unions. It allows us to bring deposits in from the checks credit unions would process from another corporate," said Poulin. Constitution currently has the capability to work with any credit union on branch capture for deposited items and Poulin expects it will soon be able to do share draft processing with any CU in the country. Right now it can only do share draft processing for CUs in District 1 of the Fed, but that is poised to change. "We're in the queue with the Fed to become one of first to start receiving share draft images from the Fed," he said. Earlier this year Constitution became of one of first institutions in the country and the first corporate in the Northeast to have its branch item capture image files certified by the Fed. Charter Oak FCU in Connecticut was the first CU to begin transmitting images to Constitution. During the visit, Poulin demonstrated its image capture system which relies on Vsoft's Check 21 product suite and Canon scanners. It takes only a few seconds to queue up checks to be imaged, and it zips through the scanner almost instantly. Poulin believes bringing on CUs as item capture clients can open the door to more business from those CUs – it's sort of an anchor prouduct. "When they're having their checks deposited with us, they're on our system in our account area looking to see how many dollars came in, and what was available to invest. They're coming to us more frequently to see the whole picture, where typically our out-of-state members are using us for one or two types of investments and communication isn't as frequent." He noted that in the last six months four CUs have come on board from Massachusetts for share draft processing and corporate checking. SmartSource Success There's a whole other side of Constitution that many credit unions likely don't know about. It offers a variety of online products via its SmartSource Solutions CUSO. SmartSource is based out of Kansas City. The Kansas City roots come from Mike Pennell, executive director for SmartSource, who is a former employee of Kansas-based U.S. Central. SmartSource has a four-person staff. It offers all aspects of Web site development and hosting. So far it has redesigned 15 Web sites, and it recently completed its fourth Spanish translation Web site, a growing trend in the industry as more CUs target the Hispanic market. While Web design is an established business, Pennell said many credit unions and credit union groups are in their second, third, or even fourth redesign of their sites, so business will always be there. He said an average site has a shelf life of about three years. SmartSource is also getting a lot of traction with its CUboardroom product. CUboardroom essentially eliminates the need for paper packets being delivered to directors. All of a board's correspondence is centralized online where they can pull down the board meeting agenda, minutes from last meeting, proposals, etc. Credit unions can post information using Adobe Acrobat and common Microsoft production software like Word, Excel and PowerPoint. It also allows directors to communicate back and forth in a secure environment and has a voting component. Currently 60 credit unions are on CUboardroom -SmartSource has 120 clients total. Similar to other successful corporate CU CUSOs, SmartSource has relied on its fellow corporates to expand its business. It has reseller agreements with seven corporates to market SmartSource products to their members. Constitution takes security seriously. It has had an internal audit department (two staffers) for about 10 years, a rarity for a corporate of its size. Robin Faircloth, VP of Internal Audit, has been with the corporate for all of those 10 years. She reports directly to the supervisory committee. Faircloth clearly has a passion about what she does. She said internal auditing has evolved from evaluating what an organization did wrong in the past, to what it can do now on the audit side to help the organization succeed in the future. "Internal auditing used to be very much reactive, now it's more proactive, looking strategically at what we're doing to help in moving forward." On the proactive side Constitution has adopted what it believes are the best practices of Sarbanes-Oxley and it has developed a governance committee that oversees the board and assures directors are carrying through on their duties. It also has a compliance committee to review regulatory issues. An annual compliance statement is produced by the CEO and presented to the board that states the corporate is in compliance. Faircloth believes compliance permeates just about every department of a corporate today. In a first for the corporate network, Constitution has implemented an anonymous reporting hotline where someone could call up anonymously and report on some staff impropriety or like issue. Thankfully, said Faircloth, it hasn't been used yet, but she's glad it's there. You can't get a feel for Constitution without talking to EVP Bill White, the corporate's longest tenured employee at 18 years of service. "When I got there, they were really just a plain vanilla corporate with very few services. They were not full service, and that was a challenge I was told that we were going to have to overcome," said White. "There were a lot more credit unions then, they were all using the corporate for liquidity needs and maybe wires, but that was it. They kept telling us they had to use other financial institutions, so we worked on adding corporate checking, share draft processing, check collection, coin and currency, sale of money orders, ATM products, and ACH. All those things we had to start developing one by one in order to become a full-service corporate. We did it within a few years of taking that initiative on," said White. He said now it's rewarding to see Constitution leading the pack on things like branch capture and IT initiatives. He noted that the corporate is currently doing a rewrite of a critical in-house system. Its Corporate Enterprise System contains three components: its billing system, member information files, and its corporate checking system. White said it is being designed by SmartSource Solutions with the intent to sell it to other corporates. "Our first priority is naturally to replace the system we're using, but we're building it with the intent that other corporates may be interested in either one, two or three of those modules," said White. He noted that one corporate is already interested in the billing system, so in a cooperative move Constitution is sharing the specs with them to see if they have input on other things the system should have. White said one of the biggest differences in the Connecticut market since he started is that the number of natural person CUs has declined from over 400 to 155 today, and of course today's corporates all compete with each other. White also guided the tour of Constitution's item processing operations. White said the item processing operations of today will look much different just a few years from now as image exchange takes place. Not as many sorters will be needed or microfiche machines. There will also be fewer people for proofing and other duties. Constitution processes approximately 150,000 items a day. "It's all changing. COLD storage replaced microfilm. We've been imaging since 2000, so we've had seven years to get ready," said White. For Nealon, the adjustment from a natural person CU to the corporate has gone smoothly, partly because he was a former Constitution board member so he knew the corporate well. "I had a pretty good sense of what was going on. I was happy to stay in the industry. We have so much potential it's scary. We're on the cusp of leveraging all that we do now to bring in more business, but we fully appreciate our Connecticut credit union base." [email protected]

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