At corporate credit unions aggregation is the key to success. Through cooperative strategies and efficient use of shared resources, institutions such as Catalyst Corporate Federal Credit Union ($3.08B, Plano, TX) and Mid-Atlantic Corporate Federal Credit Union ($3.53B, Middletown, PA) have been helping credit unions best serve members in a crowded financial services arena.
Catalyst was formed in 2011 out of the merger of Southwest Corporate Federal Credit Union and Georgia Federal Credit Union.
“That is our history,” says Kathy Garner, CEO of Catalyst Corporate Federal Credit Union. “Southwest merged with Oklahoma 12 years ago and Northwest Corporate five-plus years ago; mergers have been one of our consistent growth strategies over time.”
Just like retail credit unions, corporate credit unions are organized for the purpose of providing low-cost financial services as well as competitive investment and lending rates to their member-owners.
“I think we were always, and still are, the liquidity provider to credit unions,” says Jay Murray, CEO of Mid-Atlantic. “I still look at that as our main purpose.”
Mid-Atlantic, which was chartered in 1976, became the first corporate granted a national field of membership by the National Credit Union Administration (NCUA) in 1998. As a pioneer in electronic bill pay and emerging technologies that support financial institutions, Mid-Atlantic has managed to retain their values and steadfast commitment to their members.
The Catalyst Experience
Before the financial crisis, corporates were seen by many as service providers for credit unions, because of the service-heavy, vendor-customer relationship. Now the corporate-credit union relationship is much more of an owner-member model. Prior to the financial crisis, corporates were a solid provider of short-term investment options on a variety of payment schedules, and for many corporates, their core business driver was investment income.
Although investments were always a big piece of the Southwest Corporate strategy, their philosophy was more about operating efficiency.
Our niche today is expediency. On a phone call we can respond to a credit union very quickly and get it money, filling that gap very quickly.
“Our payment business has always been self-sustaining,” Garner says. “Southwest Corporate has never subsidized products with interest income; this has been our model forever. That is why we are so successful today.”
Southwest was not reliant on interest income to support the corporate’s payment business, so when the NCUA issued new regulations that reshaped corporates’ operating parameters, Southwest could restructure the balance sheet without changing payment programs.
After the regulations, the loss of net interest income didn’t impair Southwest like it did other corporates. “We were able to downsize our balance sheet and ask for less capital from our members,” Garner says. “I think we’re one of the lowest — if not the lowest — capital requirement, and we were able to accomplish this without touching any of our services or changing any of our prices.”
Catalyst’s 0.52% capital ratio is in fact the lowest in the corporate system, followed by Mid-Atlantic in second at 0.69%.
Catalyst provides member credit unions with a slate of core financial services designed to foster efficiency. Its services include item processing, remote deposit, electronic payment services, as well as correspondent lending and investment products. Catalyst also offers members access to balance sheet management services.
Catalyst is now creating an agent loan participation program that will connect credit unions that want to sell loans with entities that want to purchase interest in a loan pool. Catalyst will post information about loan pools for sale on its website and, whether buying or selling, participation is not limited to Catalyst members.
The program cooperatively facilitates the participation process, allowing previously unaware buyers and sellers to find each other in the market place.
The Mid-Atlantic Experience
Mid-Atlantic provides investment, lending and payment services, including ACH, share draft, and electronic bill payment processing, to a national field of membership. The corporate serves more than 800 credit unions, CUSOs, Leagues and chapters in 44 states.
Most of Mid-Atlantic’s member credit unions are $200 million in assets or less and about half of the corporate’s 800 credit unions are in the $20 or less million category. Even before the crisis hit, the smallest credit unions were always the most vulnerable. But in the years since, the low interest rate environment combined with increased regulatory requirements has created greater challenges for many smaller cooperatives.
The timing of these difficulties couldn’t be more ironic. Because of the crisis, “we have people who really need credit unions, so there is no greater time to be seen and known,” says Murray, Mid-Atlantic’s CEO.
“But if you’re going to be effective, you’ve got to be efficient enough to compete and not get picked off in loans or have somebody beat your auto or home equity rates,” he says.
With that in mind, Mid-Atlantic launched a campaign to rekindle interest among credit unions in cooperative strategies. The goal is to help credit unions of all sizes reconnect and discover new strength in numbers, something many will have to do if they want to compete for a growing share of the financial services market. Appropriately named “Rekindle,” the marketing campaign uses cartoon videos to broadcast its message. But don’t be mislead by the campaign’s cozy romanticized name, because Murray has convincing numbers that back up the value of credit unions who join forces.
“The cost of compliance and of running a credit union can be overwhelming,” he says. “Credit unions with $100 million or less in assets spend nearly 70 cents to make a dollar, while credit unions that are half a billion or larger spend about 49 cents to make a dollar.”
The tiniest of credit unions spend even more, as much as 90 cents, to produce one dollar of revenue. With those numbers, no wonder some credit unions struggle to keep their promise of minimal fees, higher savings rates, and lower loan rates to the membership. If more little credit unions banded together or joined forces with larger credit unions, the costs could be reduced significantly.
The problem is often persuading credit unions to think of other credit unions as their ally in the quest to secure a larger piece of the financial services market, where banks continue to dominate. In 4Q 2012, banks had $14.45 trillion in assets compared to the credit union movement’s $1.03 trillion. Although, it should be noted that since the financial crisis, the idea of banks-as-king is becoming less of the reality in the financial services market. A June 2012 Gallup survey showed that the percent of Americans with a great deal of confidence in U.S. banks fell 32 percentage points from 53% in 2004 to a record-low 21% in 2012. The survey also showed for the fourth year in a row the percentage of Americans with little to no confidence in U.S. banks is greater than the percentage of people with a great deal of confidence.
“Say the credit union movement is a trillion dollars and JP Morgan alone is doing nearly $2.5 trillion, if we don’t band together and prepare to play in the banking world, we are not going to succeed,” Murray says.
Competing with other credit unions is not just unnecessary; it’s counterproductive. When credit unions compete with each other, they risk losing members to banks, thrifts, or online lenders.
The Role of Corporates in Today’s Market
The role of corporate credit unions as investment providers has evolved since the financial crisis and the enacting of new regulations by the NCUA.
“I think post-crisis, there’s obviously a spreading of liquidity needs, resulting in a situation where a corporate may not be able to handle all of the liquidity needs of a credit union,” Murray says. “In addition there are also the new regulations outlining that credit unions must have more than one provider.”
Because of this corporates now present themselves as one piece of the liquidity solution for a natural person credit union. Larger credit unions — with greater financial demands — go to the Federal Reserve and the Federal Home Loan Bank to secure additional liquidity, and it is important that the bigger credit unions have access to those resources.
“Our niche today is expediency,” Murray said. “On a phone call we can respond to a credit union very quickly and get it money, filling that gap very quickly. On the other hand for longer-term lending, I think the Federal Home Loan Bank and the Fed are the ultimate back up. The Federal Home Loan Bank is there for many as a longer-term funder for certain purposes.”
The need to work cooperatively is just as real today as it has been throughout the credit union movement.
“As a strategy I don’t think there is another way,” Murray said. “I don’t believe you can make it alone. So I think strategically – if you don’t band together to help each other with the compliance burden, or with liquidity needed or loans, it is going to be tough to survive.”