Business diversity, fee income and greater operational efficiency are the three main bottom-line drivers at corporate credit unions these days.
This new trio stands in stark contrast to the previous yield-driven and highly competitive investment-focused business model in place at several corporates — particularly the now-defunct WesCorp FCU — before the corporate system meltdown.
In the old model, the investment side of the house often subsidized operations and even prices charged to credit unions for services, such as payments.
Credit Union Journal recently talked with three corporates — Mid-Atlantic Corporate FCU, Catalyst Corporate FCU, and Corporate One FCU — to see what's backing business results this year.
As many credit unions have hesitated to reinvest capital within the new corporate system, Mid-Atlantic Corporate FCU has diversified its business by adding CUSO services credit unions can access without being a capital-contributing member of the corporate.
"As we all know, not every credit union — anymore — wants to contribute capital to a corporate," said Jay Murray, president and CEO of the Middleton, Pa., firm. "So today, not only is Mid-Atlantic offering liquidity and investment services, we have diversified."
Mid-Atlantic has added ATON Financial Management, a wholly owned subsidiary of Mid-Atlantic whose services include investment advisory, ALM, strategic planning and training and education.
The Sollievo Group CUSO offers risk management products and services, as well as insurance products.
MY CU Services, the longest-standing Mid-Atlantic CUSO, provides electronic payment and technology solutions — including cloud services, ACH, share draft processing and mobile.
The new efforts, as well as existing ones, have Mid-Atlantic rebuilding capital ahead of projections, according to Murray. "Last month [retained earnings] reached 1.19%," he said. "By NCUA's requirements, corporate credit unions had to be at .45% by last October. We will get back to 2%, and our intent is to get there as quickly as possible. These strategies will get us there."
With NCUA's corporate restructuring limiting corporates to about a two-year investment maturity window, Murray said, "We are definitely a liquidity house. We are there for credit unions for lines of credit, and for some investing," said Murray who acknowledged much of credit unions' investments are for overnight money.
Previously, investments at several corporates once subsidized operations and even some of the services provided to credit unions. No longer, said Murray. "That is the big shift for us — making that transformation, where each one of our business parts are self-sustaining."
At Corporate One in Columbus, Ohio, rising consumer loan demand is generating more natural-person CU requests for liquidity.
"It has been very interesting," said Lee Butke, president and CEO. "We are making more loans now and getting even more inquiries from credit unions, which tells me natural-person credit unions are loaning more money."
'A Solid Number'
That is helping drive Corporate One's revenue to about $3 million through the first four months of the year. "Adding that amount to the bottom line at this point in the year is a solid number in corporate land," said Butke. "I am not sure we will have record-breaking revenue this year, but things are looking good."
Corporate One's retained earnings stood at 1.20% through March and perpetual contributed capital was $219 million.
Butke cited several reasons for this year's revenue growth, one being investment performance.
Fee income is playing a key role, as well. "When we did the merger (Tallahassee, Fla.-based Southeast Corporate) we were pleased to pick up MBS (Member Business Solutions), a member business services CUSO. And Accolade is our registered investment advisory and ALM consulting firm. Both are coming off great years and look even stronger this year."
Butke said investment sales are contributing to the bottom line, citing CD sales. "One surprise has been ACH," said Butke. "There is a great need for what the credit union originates for its own accounts and records, but we are seeing a very solid business now helping credit unions originate ACH entry for the businesses they serve."
Butke added that Corporate One's credit card business is "robust and growing."
The final piece of the story, noted Butke, is when Corporate One looks at its balance sheet and sees its private mortgage exposure — at one point well underwater — "is dead even. That is great to get that financial burden off our back."
Fee revenue is a much bigger driver of the bottom line these days at Catalyst, according to President and CEO Kathy Garner. "Net fee revenue is probably twice as big as net interest income in this current rate environment."
Garner talked about Catalyst's efficiency adding to the bottom-line results at the Plano, Texas corporate.
"We are very efficient. Our coverage ratio — how much of our operating expenses are covered by fees — runs in the high 80% range."
The CU's retained earnings stood at 1.19% at the end of March.
Payments processing has been a key contributor to fee income, said Garner. Catalyst Corporate's bid was accepted by NCUA to acquire the remnants of Western Bridge Corporate FCU. Catalyst also picked up about 350 capital-contributing members from the failed WesCorp.
Keeping Volume Consistent
"Certainly, that is the case. And even though the volume of credit union usage of our payments services is going down slowly, we keep adding more credit unions, so our overall volume remains consistent."
Fee income from investments services is the second-largest contributor to fee revenue, said Garner.
"We used to have about a $10 billion balance sheet," said Garner about Southwest Corporate FCU, the corporate Catalyst spun out of following NCUA's conservatorship of Southwest. The new entity included merging in Georgia Corporate and Arizona's FirstCorp CU.
"Now the balance sheet is down to about $2.5 billion. So $7 billion had to go somewhere," she said. "Some of that we are seeing sweeping into the Federal Reserve's Excess Balance Account because it truly is overnight money."
Catalyst has transitioned to sell securities and make fee income off the sale. "So instead of taking that money on balance sheet and making an interest rate spread, we are making a fee on selling securities."
