COLUMBUS, Ohio — Despite different products and services, and operating on much thinner margins, the noninterest income of corporates varies as much as their natural person counterparts.
Credit Union Times discussed noninterest income and the role it plays in their budgets with four corporates, and noninterest income strategies had little to do with asset size or investment market conditions. The corporates included the $1.8 billion Virginia Corporate, the $1.5 billion Volunteer Corporate, the $4 billion Corporate One and the $13 billion Southwest Corporate.
Corporate One led the pack in noninterest income, raking in $19 million last year, accounting for nearly half of its net income. Melissa Ashley, vice president/chief financial officer, credited that success to the refusal to simply remarket other products.
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That strategy comes as no surprise to other corporates and those natural person credit unions that purchase SimpliCD products; Corporate One pioneered the product and created the highly successful corporate CUSO Primary Financial, which now counts all 26 corporates as members.
"We try to be proactive, and when we find something credit unions are struggling with, we see if there's a way we can help by aggregating the volumes and gaining better bargaining power," Ashley said.
Primary Financial fit the bill, she said, not only replacing the need for credit union financial managers to constantly rate shop 20 to 30 certificates from various institutions, but also providing natural person credit unions with the bargaining power that corporates were created to provide.
"We saw that this could be something big, so we went out and bought a company that was doing certificates, wrote the back end solution and did our own processing," she said.
That "if you want it done right, do it yourself" strategy has also driven Corporate One's large correspondent book of business. The corporate dove head first into developing remote capture technology and convincing member credit unions to make the switch, even going so far as to throwing in the scanners and other equipment for free.
"We took on all the risk to develop that product, and made it turnkey and with no upfront cost for them," Ashley said. And, she said, that up-front cost is beginning to cycle out of her budget, boosting net profit.
All four corporates agreed that Check 21 has had a positive effect on their item processing bottom line, even though Americans continue to trade in their checkbooks for debit cards and ACH payments. Imaging has blown the doors wide open on the competition for correspondent services, because corporates can now compete with local banks that had a geographical advantage when it came to delivering paper checks.
Nashville-based Volunteer Corporate has always been a big player in the item processing business, especially in Tennessee, having jumped on the product early in its inception and establishing considerable market share. Now that the corporate isn't restricted by physical distance, it's picked up new clients in neighboring states.
And, the continued strength of its processing suite of services has been a major contributor to the $5 million VolCorp earns in noninterest income each year, which President/CEO Rick Veach said covers three-quarters of his operating expenses.
"Certainly, noninterest income is important to us, and someday I'd like noninterest and interest income to reach parity. We'd also like to see noninterest income cover 100% of our expenses, though it's going to be difficult getting there," Veach said.
Non-NII Drivers
All four corporates agreed noninterest income boosts budgets; however, corporates don't consider fee income a strategy to offset interest income short-comings.
Corporates don't earn the relatively fat margins that natural person credit unions do, said Bruce Fox, executive vice president/chief investment officer at Plano, Texas-based Southwest Corporate. Because of that, most corporates traditionally depend more upon income from investments. Fox said Southwest's budget strategy is pretty typical of the average corporate, and even the average natural person credit union, earning only about one-third of its revenue from noninterest income.
"It's not relative," Fox said. "No matter what we're doing on the investment side, we're constantly trying to identify products and services that meet our member credit unions' needs. What's going on in the market won't impact our goals and initiatives on that side of the business–we won't allow it to alter how we serve our members."
Savings to members trumps income, according to Virginia Corporate President/CEO Bill Hansen. He said Virginia Corporate's noninterest income accounts for less than 1.0% of its total net income by design. He doesn't look at his products and services as revenue generators, choosing instead to follow a break-even philosophy.
"We have a relatively small shop, and our only key to success is through efficiency," Hansen said. "We do an analysis once a year on what it costs to provide our services, and although we make sure we don't lose money, we don't look at it as income, either."
Rather than develop new technology and keep everything in-house, VACORP instead utilizes partnerships and strategic alliances to keep costs low.
"We have a little over 200 member credit unions, and 75% are under $50 million in assets, relatively small credit unions, and they're struggling and having some financial difficulty in the current environment. The last thing we want to do is charge larger fees to smaller credit unions," he said.
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