Pressure from regulators to increase earnings has lead the board of Missouri Corporate CU to lower its overnight dividend rate to 0%, effective May 1.
President/CEO Dennis DeGroot said because his $900 million corporate's operating expenses are already among the lowest in the system, there was no room to cut there. The cooperative wasn't interested in leveraging risk or raising fees to increase earnings, either.
"So, we had to look at dividends," he said.
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The St. Louis-based corporate alerted members to the impending change one week before it became effective and recommended members transfer excess funds into laddered certificates. DeGroot said members had transferred $40 million into laddered CDs as of May 3. Total overnight accounts average around $250 million at Missouri Corp, depending upon liquidity patterns.
Susie Venable, Missouri Corp vice chairman and president/CEO of the $18 million St. Luke's Credit Union, said the decision to drop the rate wasn't easy, but in today's low rate environment, it won't have much of an impact on member credit unions. Missouri Corp was previously paying 0.08% on the account.
However, Venable said over time the decision "could have a great impact on our efforts to rebuild capital at Missouri Corporate."
DeGroot said Missouri Corporate differs from other wholesale credit unions in that it only pays a single overnight rate, rather than separating what's required for settlement from excess. Most corporates pay a small or no dividend on settlement balances, he said, reserving dividends for excess balances, often in a tiered structure.
As of May 3, Southwest Corporate FCU offered 0.10% on cash management accounts and 0.05% on daily shares. Overnight tiered accounts paid up to 0.25% for balances greater than $10 million.
Members United Corporate FCU paid between 0.06% and 0.26% on overnight accounts as of May 4, with top tier dividends reserved for balances greater than $10 million. Volunteer Corporate Credit Union's overnight rates varied on May 4 from 0.06% for transaction account balances to 0.25% for managed fund balances of $10 million and greater.
Missouri Corporate anticipates paying the dividend again when the Federal Reserve raises short-term rates, DeGroot said. All U.S. Central capital was charged off in 2009, and the St. Louis-based institution is in "recovery mode," he said, building retained earnings as quickly as possible. The 0% dividend is "just a rough patch" it can survive, he said.
While there is a risk members will move their settlement business to replace the lost revenue, DeGroot said credit unions are used to keeping their settlement account, overnight account and a line of credit tied to settlement together under one roof.
"The beauty of the corporate system is at one single point, a credit union can settle their dollars. It's a great system and it has worked well," he said. "I think we're going to run into difficulties as a network if we begin to pull those pieces apart. Credit unions can get all the components from other places, but I don't know how easy it will be for any size credit union to manage."
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