BIRMINGHAM, Ala. — With the returns being paid by corporate credit unions lagging some other alternatives, the question of whether to invest in corporates varies among natural-person CUs, according to CEOs and CFOs interviewed by Credit Union Journal.
For corporates, the pressure is on to build earnings and reserves, while balancing that demand against the needs of their member CUs to bolster their own balance sheets.
At press time a check of rates paid by a sampling of corporate credit unions — Mid-Atlantic, WesCorp, Corporate One, SunCorp, and Midwest — showed six-month rates ranging between .53% to .70%, one-year returns from .57% to .77%, and two year terms from 1.24% to 1.39%. San Dimas, Calif.-based WesCorp, which is currently operating under federal conservatorship, paid on average the highest returns.
Lowering Rates to Increase Earnings
Thomas Bonds, CEO of Corporate America CU here, acknowledged the low rates are an effort by corporates to increase retained earnings. "You either get your capital from your member credit unions by asking them to buy paid-in capital, or you get your capital from your members by simply not giving it to them in the first place," Bonds said. "We threw our books wide open to all of our member credit unions, said this is what we've got and we are asking you to invest in Corporate America through paid-in capital. That will go a long way toward keeping us from having to reduce dividends."
At press time Corporate America paid .78% on six-month deposits, 1.36% for one year, and 2.16% for two years. "U.S. Central came out at some point last year with a CD product in an effort to increase liquidity," Bonds continued. "The certificate paid the corporates less than the corporates were asking their natural-person CU members to pay. In other words, U.S. Central was asking corporates to 'take one for the team.' Whether this same message is being communicated by other corporate credit unions to their members today, it's hard for me to say."
In Glendale, Calif., outspoken Glendale Area Schools FCU President Stuart Perlitsh had little problem making a call on the situation. Citing low rates for corporate investment instruments, Perlitsh said his $250-million CU is looking to bolster its bottom line with "any investment that is not related to a corporate credit union. We are also doing things direct with the Federal Reserve and our price is less expensive than at the corporates. That tells you all along the corporate credit unions have never been here to support the natural-person credit unions."
Will corporates see more natural-person CUs pull back on their investments, especially if the price tag for the bailout moves higher? "I can't speak for other credit union CEOs," Perlitsh said. "But my fiduciary duty is to maximize my rate of return for my members. It appears that other credit unions don't subscribe to that thinking and are willing to get a lower return on investments. All of this take one for the team, kumbya baloney...My responsibility is to my membership and not to shore up these failing corporates."
But Doug Fecher, CEO of the $1.6-billion Wright-Patt CU, Fairborn, Ohio, said his CU will continue to invest in the corporate system - and it's not a matter of taking one for the team. "Especially in this volatile economy," Fecher said. "Corporate investment rates are lower. But rate is not as important as it might be in a more normal economic environment. We are pleased with NCUA's guarantee of corporate deposits. Frankly, right now everything we have available is going into the corporates."
Fecher acknowledged his CU's healthy ROA and capital at 11% has allowed Wright-Patt to be less concerned about return and more with safety. "There is not any other investment that would appeal to us right now due to risk."
Corporate investment rates remain above Treasury notes. At press time the six-month T-bill stood at .254%, one year paid .435%, and two years returned .904%.
In Columbus, Ohio, Corporate One CEO Lee Butke cautioned against comparing corporate CU investment products against offers from banks and brokerages, due to safety concerns, pricing variables, and deposit limitations. "A lot of banks are in trouble and they are willing to pay astronomical rates. And the other side is what are we doing with the investment money? There's nothing we see today that is not risky that we can invest in to match up against the higher rates."
Jeanne Gregor, director of finance at the $2.9-billion ENT FCU in Colorado Springs, Colo., currently invests with SunCorp, and said the corporate's rates on CDs and callable certificates "look fairly competitive to me compared to bullet agencies and callable agencies." At press time, SunCorp paid .65% for six months, .72% for one year, and 1.34% for two years.
Choosing to Invest Elsewhere
David Tuyo, AVP and CFO of the $965-million Pen Air FCU in Pensacola Fla., said his CU has no certificates with corporate credit unions, choosing instead to invest in agency callables, CMOs, and mortgage-backed securities. Tuyo believes that many of the corporate credit unions are keeping rates down to limit deposits and improve capital-to-asset ratios. "Look at their balance sheets - WesCorp has reduced its by half. Southwest Corporate's has shrunk, as has Southeast's. They are shrinking their balance sheets by not paying attractive rates and offering alternative off-balance-sheet investments like their brokered CD program."
