Need For Volume To Drive Consolidation
WARRENVILLE, Ill.-Without the emphasis on investment services within the new corporate system, John Fiore sees corporates eventually consolidating to five or six large organizations.
"I don't have a crystal ball, and I don't know how long that will take, but that is my outlook," said the chair of the advisory council and charter advisory group that are creating the new corporate out of Members United Bridge Corporate.
What will speed consolidation, according to Fiore, also CEO of the $760-million Motorola Employees CU in Schaumberg, Ill., is the need to gain greater volume to pass on discounts for corporate services. "The corporate business is a scale business. It is about aggregation and the key to success is to have volume. There will need to be a critical mass to make those numbers work to keep fees in check. I think some corporates will have some issues about meeting expenses and being able to cover the overhead and may have to raise prices."
Fiore does not see that happening with the new Members United, called Alloya, since it benefits from its wholly owned subsidiary investment CUSO, Balance Sheet Solutions.
"We will help credit unions invest off balance sheet. That is an advantage for Alloya that many other corporates do not have."
Overall, the role of the corporates will not change a great deal besides a lack of investment focus, forecast Fiore, who believes natural-person credit unions will recapitalize the system because attitudes have changed since the corporate collapse in 2008. Fiore contended that much of the anger has not only subsided, but CU leaders understand the need for corporates.
"I would not have said that a year-and-a-half ago. But credit unions have done their due diligence, looked at other options, and many realize they can't get the same services elsewhere at the same rates. They are also asking, 'Who can I trust? 'Will I have a say?' ...They are finding out there are not a whole lot of good options out there. They stay with the corporates, stay with the same people, and don't have to go through a conversion or transfer any business.
"There is not one credit union out there that has not made some bad mortgage loans," continued Fiore. "But it doesn't mean they get out of the mortgage business."
That improved natural-person CU outlook, according to Fiore, is helping Alloya's capital offering. "We will shoot for between $70 to $100 million in capital. The early results are promising. Our memorandum went out the 16th of May and we are close to 200 credit unions now and about $20 million."
Fiore expects the momentum to pick up as July board meetings are held. "Many credit unions did not have the chance to bring our memorandum to their May board meeting, and decisions may take a couple meetings. But as an early gauge, the results make us hopeful. We think we are where we should be at this point."
Like many other corporates, Alloya is shrinking its balance sheet-moving down to $2 billion from $8 billion. It also has a unique capitalization plan that's based on usage and three-day settlements, instead of a percentage of asset size. "We believe that will mean less [of a capital burden] on individual credit unions. Instead of 1% of your asset size, in most cases this formula will calculate out to less than half a percent of assets," Fiore told CU Journal in a May 2 report.
The Feedback From Town Halls
The plan was based on feedback from members given during town hall meetings and surveys, explained Fiore. "It was very evident that our members wanted to put up less capital. So our design is based on the usage of the corporate. If you use Alloya a little you put in less. If you use us more, you put in more."
Merger was on Members United's radar, discussing consolidation with Western Bridge Corporate, before NCUA ended those talks months ago. "Our first objective is to establish Alloya as a healthy, prosperous organization," said Fiore. "Our first intent is not to run out the door and talk to WesCorp. But we will be open to look at merger with anyone that makes sense and brings value back to our members and the members of the other merging credit union."