Ask corporate credit union senior executives what keeps them up at night and for many, it’s whether they can grow their business.
New NCUA ratios designed to manage risk may impose tight controls on what corporates do with cash on hand and, in many cases it might just be easier to meet the regulator’s requirements when assets are minimized some have said. That may sound paradoxical to some but the numbers prove how profoundly corporates have shriveled.
A quick look at the assets of several corporates in December 2007, according to the Government Accounting Offices, offers proof: U.S. Central Bridge at $44.7 billion, WesCorp Credit Union at $32.5 billion, Members United Corporate Credit Union at $14.5 billion and Southwest Bridge Corporate Federal Credit Union had $12.7 billion.
Fast forward to October 2011 and the numbers tallied by Callahan & Associates show a different ranking of the top five corporates: Corporate One Federal Credit Union at $3.33 billion, Corporate America Credit Union at $3.26 billion, Mid-Atlantic Corporate Federal Credit Union at $2.98 billion, Catalyst Corporate Federal Credit Union at $2.01 billion and Alloya Corporate Federal Credit Union at $1.81 billion.
“Things are not exactly as they seem,” said David Savoie, CEO of Louisiana Corporate Federal Credit Union in Metairie. “In order to deal with the capital ratio requirements of the new regulation, many corporates have entered into agreements with their members to sweep balances over a certain amount to the Federal Reserve each evening. Their funds come back in in the morning and are swept back out in the afternoon.”
Crunching the numbers, today’s corporates collectively seem smaller than they had been a half dozen years ago. So the questions are will they stay that way and is growth a nonstarter for corporate credit unions? Opinions are hedged among corporate credit union executives with some seeing buoyant times ahead while others are more tempered in their outlook.
At least some anticipate further consolidation among corporates as the institutions try to remain relevant while forging new business models.
Thomas Bonds, president/CEO of Corporate America in Irondale, Ala., is sober in his forecast.
“The purpose for which natural person credit unions formed corporate credit unions has been fundamentally changed by the new regulation,” Bonds said. “It will take time for the few surviving corporates to adjust to the new business model.”
Still, while Bonds sees corporates growing by offering new lines of business such as audit services, brokerage services and website development, he believes that the present regulatory regimen may bring challenges for many corporates.
Jay Murray, CEO of Mid-Atlantic Corporate in Middletown, Pa., said he knows the regulatory limitations by heart yet he is more optimistic.
“There is room for a corporate to grow. It is more challenging to live under the new regulations, that is true, but we are reinventing ourselves to better serve our members,” Murray said. “We have to manage our balance sheet differently and we are looking for new ways to serve our members.”
One of Murray’s prime growth strategies is winning more wallet share of every member, which means getting more of their business on a continuing basis. That may be a bit easier nowadays, mainly because few natural person credit unions maintain multiple corporate relationships as many did a half dozen years ago, he added.
“Our growth will be organic but you don’t know what might come along,” said Murray, who stressed that Mid-Atlantic is not currently seeking merger partners.
At Corporate One in Columbus, Ohio, President/CEO Lee Butke said, “We will grow by helping our members. We have to prove our value to our members every day.”
Butke said Corporate One has plenty of capital to support its balance sheet but he also indicated that a path to growth at his corporate will occur off balance sheet. Part of that growth will come through an increase in its CUSOs including those picked up in the recent merger with Southeast Corporate. Because capital is not required for Corporate One to use its CUSOs, a natural person credit union can choose to use Member Business Solutions for instance, without a capital call.
Butke also rang a warning bell about the future of all corporates.
“Check volumes are dropping. It’s a strategic mistake to spend money, time and effort worrying about clearing checks,” he said, adding growth for any corporate will happen in newer lines of business not by looking for more share of dying lines.
At Volunteer Corporate Credit Union in Nashville, Tenn., which recently completed a merger with West Virginia Corporate, growth is not necessarily the end all there, said Sandy Swofford, chief operating officer.
“We concentrate on member service. We hold their hands and we help them,” Swofford pointed out.
A key to VolCorp’s growth is its quarterly product council meetings where many VolCorp members participate, Swofford said. The idea is for members to come with needs they want satisfied and also with new ideas they may have heard from peers. In the end, VolCorp takes its pick of what new offerings to make available.
“Listening to our members, really, is how we grow,” Swofford said.
At Alloya in Warrenville, Ill., there are numerous paths to growth, said Vic Vrigian, a spokesman.
“For instance, we can provide access to affordable technology. I don’t know that it’s possible for every credit union to keep up with the new technology,” he offered. “Corporates can aggregate volume, which will reduce costs.”
Alloya can also offer access to experts in many areas including back office capabilities that can give credit unions a competitive advantage, Vrigian said.
“Credit unions don’t have to build out systems. Why would they,” he asked. “Leverage the resources of a corporate.”
Vrigian said Alloya believes it will grow by signing new members particularly in the western United States and the corporate is open to any mergers that might come along.
At Catalyst Corporate in Plano, Texas, now retired President/CEO Dianne Addington, said, during what turned out to be her penultimate week in that post, she is a witness to how a corporate can grow.
“A corporate needs to have a long-term business model and it needs to be transparent with its member owners,” Addington said. “Member owners are taking more ownership than they ever had. [They] did not pay that much attention to corporates before. That has changed.”
Addington also spelled out her formula for creating a thriving corporate.
“Corporates have to have the self discipline to constantly seek cost reduction. We need to give our members real competitive pricing.”
That means a corporate giving its members access to a full range of services and creating tremendous possibilities to help natural person credit unions, she added.
Optimism aside, one reality for corporates is that some of them compete with each other over unaffiliated natural person credit unions, experts have observed.
“Corporates have a shrinking marketplace, except to pilfer from each other,” said Stacy Glidden, chief operating officer at FirstCorp Credit Union in Phoenix.
Still, there will always be growth opportunities for corporates.
“Perhaps the biggest [concern] is to realize we cannot be all things to all natural person credit unions and to specialize in just doing a couple things very well,” Glidden explained, adding “then form strategic partnerships with other corporates to offer full service to members.”
Those guidelines tie directly into the cooperative history of corporates, can lessen the competition for members, and it just might light a path to prosperity, she said.
“There is such great opportunity for the corporates that adapt to the new marketplace,” Glidden said.
While that optimism is contagious, the 900-pound gorilla in the room can cast a huge shadow over any potential growth scenario. Keith Leggett, economist and vice president with the American Bankers Association, wrote in his February “Credit Union Watch” blog about the flight of capital out of the corporate system during the last five years, mainly because larger credit unions were not capitalizing corporates.
Leggett defined a universe of large credit unions with more than $100 million in assets. By his count, from 2007 to 2011, 31% of those institutions left the corporate system.
According to Leggett, because not only are fewer big credit unions ponying up capital, they are putting in fewer dollars. He wrote that 1,099 credit unions reported reducing the amount of capital they held in corporate credit unions between December 2007 and September 2011.
In an interview with Credit Union Times, Leggett said large credit unions are not dependent on the corporate system.
“They can get their needs met elsewhere. [Many] have decided to maximize value to themselves, not to the movement,” he said. “There is a lot of question within the industry as to whether the corporates can be viable under the new regulations.”
That leaves the question for 2012, which is can corporate credit unions grow if the big natural person credit unions sit on their wallets? The jury is still out on that issue.
“We believe some credit unions will come back to corporates. We had one yesterday that said, we are back in,” said Butke at Corporate One.
The lure is that Corporate One, like many corporates, is ready to offer liquidity through short term loan, for instance, to members on an as needed basis, Butke said.
“The time will return when liquidity needs are again crucial and there just aren’t many places for a credit union to go. We believe the right corporate will be a good choice.”
Butke may be right about that but the other side of the coin is that at least some experts expect further shrinkage in the ranks of corporates.
“There will be 16 corporates left by year end, predicted Addington at Catalyst. “But there will be a further shakeout. There will be a few good corporates left. In three years, I don’t know if it will be three or seven. But it won’t be 16.”