MIDDLETOWN, Penn. -
The result has been a significant increase in liquidity among the corporates.
Ed Fox, CEO of Mid-Atlantic Corporate Federal Credit Union, based here, said in recent months he has seen member CUs willing to go take on longer terms.
"I think the reason is they've noticed the yield curve finally straightened out," he assessed. "There no longer is an inversion in the shorter-term rates. Our members reflect what the consumer is doing, and it makes sense to invest in longer-term investments. For the past several years, it has not been as rewarding to invest long term."
Mid-Atlantic is not the only corporate CU that has spotted this trend. Representatives from several corporates told Credit Union Journal money typically flows in during the first quarter each year, then becomes an outflow shortly after personal income tax season ends. In 2007, however, deposits have remained strong well into the second quarter.
Dennis DeGroodt, CEO of St. Louis-based Missouri Corporate Credit Union, described the strong deposit growth as "significant" and a welcome change after 24 months of what he termed "illiquidity." He said Missouri Corporate enjoyed a dramatic increase of $253 million in corporate certificates, or 89.6%, in May of 2007 versus May 2006.
"What surprises me compared to the past, and liquidity always ebbs and flows, is the speed with which liquidity came back into the system," DeGroodt said. "We had been in a very illiquid market for two years. Since December of 2006, it has continued to flow in and it just hasn't stopped. I haven't seen the June numbers yet, but I expect them to come in at the same high level as the first quarter and the rest of the second quarter."
Georgia Central Credit Union's vice president and chief investment officer, Cory Johnston, had a similar observation: "A lot of our business is cyclical. We see a flood of deposits in the first quarter of the year. At some point, that flood of deposits flips from overnight deposits to term deposits," he said.
"At the end of 2006, liquidity was really tight," Johnston continued. "In the first quarter of 2007 the economy slowed down, which brought in a jolt of deposits due to fears and uncertainty. Other investment opportunities dried up, so the first thing people did is leave their money in their regular accounts while they decided what to do. That in turn led to more liquidity in the natural person credit unions."
Unlike Missouri Corporate, Johnston said Duluth, Ga.-based Georgia Central has seen a slowdown of deposits in June.
Fox said Mid-Atlantic Corporate had a "very small decrease" in balances from May to June.
"Usually, we see more runoff. Corporate assets generally peak in April with income tax refunds, followed by a general decline in shares for the end of the year. The decline has been minimal so far this year. Our assets increased by about $1 billion in the first quarter this year compared to the same quarter in 2006. It all goes back to the fact we are paying better rates on investments."
MORE THAN A SEASON
What's Behind The Deposit Surge At Corporates?
The reason for the recent surge in deposits: the simple fact corporate certificates are paying high rates, several experts suggested. Missouri Corporate's DeGroodt listed several factors for growth. He said the seasonal inflows of liquidity by natural-person credit unions typically occur because members are making IRA deposits and getting tax refunds deposited at their credit unions and sponsor companies tend to pay out bonuses in the first quarter. "A lot of this liquidity ends up in the corporate network because the credit unions can't lend it out as fast as it comes in," he said.
"This year, based on conversations I've had, there is flat loan demand and an increase in deposits," DeGroodt reported. "People are spending less and saving more. As that liquidity flowed into the system and they can't lend it out, it is flowing into corporate certificates because those CDs have very attractive rates. Lately, our CDs have been about 15 basis points higher than a comparable marketable security, including government bonds purchased through a broker."
In some cases, corporate credit union rates eclipse those of banks, he added. DeGroodt said Missouri corporate offers 5.32% for 90 days, while a bank CD is 5%. "That's 32 basis points better, which is substantial. As you go out farther in time, there are CDs where banks are better, it just depends on how far out the credit union is looking to invest."
The housing market slowdown might be indirectly affecting the asset inflow, DeGroodt suggested. He said some members who may have been interested in buying a home have been put off by rising mortgage rates-and therefore the cash is parked in their share accounts.
"There are just more dollars available right now," he added.
Donnie Pardee is vice president of corporate investments for $2.5-billion Delta Community Credit Union. The Atlanta-based CU is a member of Georgia Central Credit Union, as well as five other corporates, and holds more than $450 million in corporate certificates. Pardee said there is an old paradigm used by many credit unions when it comes to investments: safety, liquidity and then yield, in that order.
Delta Community CU follows this time-honored standard, he said, and, "the corporate share certificate fits very nicely into that. We belong to six corporate credit unions because we have a desire to make sure we diversify our investments, and we want to make sure we are getting a good representation of yield quotes from the corporates who are submitting levels on our share certificates."
TAKING A HIT
Growth In Corporate Deposits Takes A Bite Out Of Agencies
Much of the growth seen at corporates is coming at the expense of the agencies. Fox said when Mid-Atlantic Corporate's members look at investment options they consider agencies, but corporates have been beating the agencies on yield.
"We are paying very competitively. Therefore, there is more business and the money is staying longer," he said. "Our members are telling us, 'You guys are beating the agency rates so you are getting our business now.' We are told we are beating the agencies by 10 to 20 basis points."
According to Johnston, Georgia Central CU has become such a strong alternative to agencies, not only has its certificate sales increased 52% over the last year, the number of its member credit unions that do not buy from agencies has grown to 78%. As of May 2007, Georgia Central's member CUs had 33% of their surplus funds with agencies and 20% with corporates. In 2000, he said, the breakdown was 39% in agencies and 11% with corporate credit unions.
"Our yield compared to agencies, especially over the past five or six years, is typically 5 to 10 basis points higher. With the better yield that corporates have, and as corporates become more sophisticated, credit unions have become more comfortable with investing in the corporate network. Before, credit unions might have been looking to diversify."
Johnston said corporates are offering more variety than in years past, although he acknowledged with thousands of agencies and just 28 corporates, a gap remains. In an important development, he said corporates have embraced a sales culture.
"In my tenure at Georgia Central, we've grown the sales book by 1,000%. A lot of that is just getting the message out and not waiting for the investors to call us. The number of staff is the same, but we have different people on the staff."
RIDING THE CYCLE
The Evolution of One CU's Investment Strategy
Pardee has been VP of corporate investments for Delta Community CU since May 1997. He said DCCU's investment portfolio has evolved in the last decade.
"When I started, it was made entirely of treasury bonds. Shortly thereafter, I began to invest in U.S. government agency bonds. There was a yield advantage there because rather than having the explicit guarantee of the U.S. government, there was an implied guarantee. In 1999-2000, we began investing in corporate share certificates, which gave us another yield advantage over the agency bonds."
The gradual evolution from treasuries to agencies, to a blend of agencies and corporate share certificates, to now a more heavily weighted portfolio in corporate share certificates, has led to Delta Community CU holding 80% of its investments in share certificates and 20% in agencies. Pardee estimated the split will swing even more in favor of share certificates in the future thanks to their built-in plusses.
"For one thing, they are more easily purchased compared to an agency bond. Obviously, there is the yield advantage, which tends to be 12 to 20 basis points over the life structure. That's a pretty significant yield advantage."
Pardee said corporates have done a good job making investment managers at real person credit unions aware they have an alternative to the agency bonds and treasury bonds. He said corporate CUs are able to invest in investment vehicles that real person credit unions are not able to invest in-corporate bonds-and then in effect remarket those as corporate share certificates.
"One reason I have a comfort level with the corporate credit union network is: corporate credit unions are highly rated organizations by Standard & Poor's and Moody's," Pardee explained. "I like investing in corporate share certificates because, even though there is a competitive element between the corporates I do business with, there is an attitude of, 'We're all in this together. It is the credit union movement, and it's all about the members.'
"The investments staffs at the corporates are very aware and they have my and my members' best interests in mind," he continued. "They know they might win a few trades and lose a few trades, but when all is said and done, it is about helping the members of the natural person credit unions. That is an affirmation to me they have the same goal I have: serve the members as best as possible."
But there are disadvantages to corporate share certificates, Pardee said, noting that because they are an investment that is custom-tailored to the credit unions, there is no secondary market.
"I can't take my $10 million share certificate and, if I need to generate liquidity, sell it. I can redeem it through my corporate, but I can't resell it as I can with an agency bond. Because of this, corporate share certificates are somewhat less liquid than an agency or a treasury bond."
Told of this assessment by an investor at one of his corporate's member CU's, Georgia Central's Johnston responded: "It is the perception, and it is the reality. But it reminds me that corporates and credit unions have developed a special partnership. They own us, so there is a level of trust and there is a comfort in buying share certificates because we are where they redeem them."
Missouri Corporate's DeGroodt said Pardee made a "valid statement." He noted CUs can redeem corporate certificates for a gain or loss and get cash back. He agreed in periods of tight liquidity some credit unions might redeem, but he insisted it is not a common practice for natural person credit unions to look to resell or redeem certificates.
ECONOMY AT WORK
How Long, Will This Deposit Trend Continue?
DeGroodt said he expects heavy investments in corporate certificates to continue "a little longer," noting periods of liquidity and lack of liquidity run in approximately two-year cycles.
The trend would dry up, he countered, if certain parts of the economy were to change-such as housing.
"What is really interesting is the stock market has been doing well during this, which makes me wonder where the money is coming from. All in all, much of it has to do with a lack of borrowing. No one really knows how long it will continue to be this way, though I at least expect it through the end of the year. It is nice to see this liquidity after such a tight period the last two years."
