Corporate Credit Unions and the 8-Track

This was originally written and posted for the CU Times. Here is the article in its entirety:

Corporate credit unions are quite the unpopular kid at prom these days. With fresh allegations of fraud from senior executives at some corporates, dismal investment portfolios, and lackluster capital positions, corporates are riding a wave of negative publicity. With massive changes to their business model on the horizon and the threat of further regulation, corporates face the same dilemma that the 8-track cassette tape faced:  obsolescence.

Unlike 8-track, the popular audio cassette technology from the 1960s and 1970s, the corporate credit union system has not been short lived. However, forces are changing the marketplace, arguably making corporate credit unions much less relevant. In its January 2009 ANPR, the NCUA suggests making changes to nearly every key component of a corporate credit union’s business model including payment systems, liquidity management, field of membership, investment authority, and capital structure.

Progressive corporates have seen the writing on the wall and have launched new internal programs in preparation for the NCUA’s upcoming systemic alterations.  CU Business Group represents a great example of this concept. A CUSO owned by eight corporate credit unions, CUBG provides mainly business services related items such as loan origination, servicing, and SBA lending. The CUSO model has been quite appealing to corporates lately as a way to branch out and diversify some of their services and revenue.  Many corporates are beginning to get into the CUSO game such as Southeast and Georgia Central with Member Business Solutions and Missouri Corporate and the Missouri Credit Union Association with their CUSO, Heartland Business Services.

The CUSO structure provides a solution not only for corporates, but also for natural person credit unions looking to overcome some of the current issues with corporates. Nearly all services offered by a corporate credit union to its member credit unions are being offered through CUSOs. For example, Palmetto Cooperative Services of South Carolina offers item processing, statement processing, and printing and mailing services. Originally started as a League Service Corporation, Palmetto now boasts more than 400 clients across twenty states.

Investments have been a source of much anguish from the corporates, but many alternatives are provided through CUSOs as well. CUSOs such as MaPS Advisory Services offer complete replacements for portfolio management.  When asked why a credit union would choose a CUSO over a corporate for investment options, Kevin Cole, CFO of MaPS Credit Union and Manager of Client Relations for MaPS Advisory Services, had this to say: “MAS can provide credit unions with an alternative to investing funds in corporate certificates that does not require uninsured membership capital.  Rather than credit unions investing in corporate certificates and corporates investing in mortgage backed securities and other bonds, credit unions can directly own the securities with MAS managing the portfolio to a written investment policy statement developed specifically for the credit union.”

Card and ACH processing is another mainstay of corporate credit unions, but again, many options are available to credit unions of all sizes. PSCU, The Members group, and CO-OP are just a few of the CUSO card processors out there today.  PSCU has over 600 credit union owners and CO-OP has one of the largest ATM networks in the nation.

As practically every operating aspect of a corporate credit union is available from other providers, natural person credit unions will begin to look elsewhere for products and solutions. In today’s economy, credit unions are avoiding risk at all costs, and that includes any potential issues that may arise from utilizing a corporate credit union. Such risks might include changes related from mergers and acquisitions, key employee turn-over, or further capital calls.

While the more modern cassette tape replaced the 8-track in the 1980s, the outdated standard still had a leg up on the competition in sound quality. That advantage was very short lived and within a few years of being introduced, the cassette tape killed 8-track. Corporate credit unions are currently at the same turning point as the 8-track.  CUSO’s and other providers can deliver the exact same services and products to natural person credit unions that a corporate credit union can deliver. While corporates do maintain some slim advantages, they will be quick to deteriorate as the NCUA hands down new regulations in the future.

CUSOs represent a unique opportunity for the credit union industry. Corporate credit unions can capitalize on that opportunity by creating new CUSOs to deliver their existing products in a different format or by adding new business lines. These new business lines could contribute significantly to the bottom line of the corporate, helping to diversify revenue and decrease reliance on products with embedded risk.  Natural person credit unions can also leverage CUSOs to collaborate on new joint ventures to better serve themselves and other credit unions.

Time and time again, new technologies over take old. New businesses enter a market and crush existing competitors. The companies, and business models, that survive have a major skill at their disposal: their ability to confront change. The corporate credit union model is being challenged and if corporates are going to survive, they need to confront that fact and embrace all the tools available to them to ensure that they do not become the credit union equivalent of the 8-track.

Introducing Numbers

Numbers

Welcome to Numbers, CU Innovators call report data solution.

While the NCUA has been providing call report data for many years, it has always been structured in such a way that makes it problematic to use unless you were a database administrator. There are a few others solutions available to the enterprising user, but none give the flexibility required for a custom reporting solution or web application. Wading through the details every quarter to update Excel spreadsheets is monotonous and takes up valuable time. With Numbers, all that is a thing of the past.

Built on a high-availability database architecture, Numbers is readily available online to be integrated into almost any tool you can dream up.

Internal credit union reporting
Peer comparisons
Merger analysis
CUSO market research
Credit union industry trends
Custom web applications

Numbers has been integrated into websites to demonstrate the effectiveness of a product to potential credit union clients. It has been used for peer comparisons and analysis to determine high performing credit unions. It is currently being built upon to create an impact analysis for potential clients of a CUSO. The list goes on and on.

What, do you say, could I use this for? The NCUA call report contains a large amount of data, including the asset size of every federally insured credit union. It has the url of their website, which online banking provider they use, how many employees they have, who the CEO is, and how much fee income they produced in a given quarter. There is so much information, in fact, that we’ve created a searchable data dictionary (PDF) to help you wade through it all.

Numbers has a large variety of uses and is only limited by your imagination. If you have any idea of how you’d like to use Numbers, drop us a line. We’d love to help you out! For more info, visit the Numbers product page.

Mica and Leggett to form new consulting company

Dan Mica and Keith LeggettDan Mica and Keith Leggett have announced today that they will be forming a new consulting company to assist credit unions and banks with strategic planning and political efforts.

Dan Mica announced his retirement plans in late 2009, but has been tight lipped about his destination until now. As a former Congressmen, Mica has very unique insight into how the political process works and how best to accomplish the goals of an industry. Keith Leggett, a senior economist with American Bankers Association, has been critical of credit unions and the NCUA in the past, especially in regards to business lending, corporate credit union issues, NCUA governance, and field of membership restrictions. In reference to the recent creation of a new low-income designated credit union, Leggett had this to say, “…I guess being a rogue agency is part of NCUA’s culture.”

While some may be initially shocked that such an avid credit union supporter would be joining forces with what many describe as an enemy of the credit union industry, the combination of their unique skill sets could be advantageous for credit unions and banks.

It will be interesting to see how this plays out in the industry. With Mica partnering with Leggett, could it be viewed as him jumping ship and getting in bed with the ABA? On the other hand, Leggett may be viewed has suddenly having a soft heart for credit unions. Either way, the pair will have a tough boat to row, potentially polarizing any potential clients. The industry will watch with anticipation once the company is launched in January 2011.

Here’s the full press release.

Beer Summit Part 3

Back in December, Keith Leggett posted an article on his blog, Credit Union Watch, about non-member business lending. To summarize the post:

The reporter was shocked that credit unions were funding business loans to nonmembers, as this seems to contradict the raison d’etre for credit unions as membership organizations.

He then stated a few statistics from the call report picking the top 10 CU’s with non-member business loans, otherwise known as participations. In my response, I stated:

By selecting large CU’s, their participation numbers will obviously be large, but it effectively gets your alarmist point across. I’d bet you a beer that their %’s are inline with the industry.

Keith then did some more follow up work about my comment, posted at Beer Summit Part 2. As is common with statistics, they can be sliced and diced so many ways that nearly every point can be made with the same data, as Mark Twain also believes. That being said, Keith is correct. The top ten credit unions in terms of total business participations do have a higher concentration of participations against assets. However, the numbers simply come down to how you want to look at them.

Simplistically, this is simply a sign of a more advanced business lending credit union. These top ten credit unions use participation loans differently then the rest of the industry according to their investment needs. In an effort to compare credit unions based on the similarity of their philosophy on business lending and investments, I took the list of 700 or so credit unions with business participations and further split it out based on those credit unions who have the majority of the business lending in participations. This cut the list in half, to 366 CU’s, and I believe this is a more accurate representation of credit unions using advanced business lending techniques. Advanced, however, does not necessarily mean that the credit union is taking undue risk. On the contrary, CU’s who participate more than they actually lend to their own membership recognize that they don’t have the internal expertise and controls in place to appropriately lend funds to their own members, even when lending internally may give them a higher rate of return.

These are the top ten credit unions of those who do more participations than their own business lending. Of the 366 credit unions I mentioned earlier, 84% of their business lending portfolio comes from participations. Of these top ten below, only four (Patelco, Western, Langley, and Keypoint) are higher than the industry average.

PATELCO
PREMIER AMERICA
WESTERN
SCHOOLSFIRST
LANGLEY
KEYPOINT
TRAVIS
SAFE
BETHPAGE
CITIZENSFIRST

By simply looking at two factors, one can never come to an appropriate assertation on a given situation. Just because a credit union has a lower average age than the rests of the industry doesn’t mean that they are the best at social media or have the coolest technology.  Nor does having more CUSO’s than the average credit union make you riskier just like having few branches doesn’t make you less popular in your market.

Getting back to the point at hand, I believe credit unions should be able to utilize business lending participations with other credit unions as an alternative form of investment.  The creditor is still a credit union member thus overcoming any objections in my book. Additionally, these participations are included in all Risk Based Net Worth calculations so these activities are not putting an undue or hidden stress on the financial strength of the credit union. I would agree with you however, that lending to a real non-member would be beyond the scope of of the Federal Credit Union Act and ancillary regulatory measures and guidance. I understand the stance the ABA and the banks they represent take on this situation as it is coming straight at a major portion of their income. I’m not sure if you lean towards Keynsism or Marxian economics, but I believe the more competition in a given industry, the better the options for the consumers.

So Keith, I owe you a beer. I’ll be in DC for CUNA’s GAC conference the week of February 21st.  If you’re in DC, I’d love to meet you for dinner or drinks one night that week and I’m sure some other folks would love a lively debate.

Members in Nevada and California hit hard by economy

topten-dq

As I was neck deep in NCUA reports this week, I noticed a few interesting things about the state of delinquency in CU’s.

Not too surprising, but the state with the credit unions that have been the hardest hit by this recession has been Nevada.  Nevada credit unions, on average, have a reportable DQ (accounts over 60 days late) of greater than 5%.  For those not great at math, that means if you have a $100M CU, you have $5M in accounts that are currently 2 months or more late.  Utah is on Nevada’s heels.  And surprisingly, at least to me, Delaware is in the top ten states by DQ%.

topten-dqbalCutting the same numbers a different way, California is having a hell of a time with delinquency as well.  Nearly $2B in overdue accounts.  The 20 states in these two top tens are having real estate problems.  Rather their credit union members are.  So what are credit unions to do facing these types of numbers?  California and Nevada both share the same league, the California and Nevada Credit Union Leagues.  Is there an opportunity for the league to help out?

Oh, and don’t get down on CU’s.  Banks have an average DQ rate of 7.03% for the 3rd quarter.

All information was computed using the 3rd quarter 2009 call report.  The raw data can be found here.

Credit unions need their head in the clouds

Cloud computing is the wave of the future for all things data related.  Amazon started it with EC2 and S3.  Microsoft is in it.  Salesforce is doing it too.  Credit unions are just starting to realize the benefits of virtualization and as more CU’s struggle with income generation, expense control, and capital expenditures, virtualization is going to take off.  But why use your members’ capital to acquire VMWare or Citrix servers, additional bandwidth, etc when you can “outsource” the hardware and infrastructure to providers that are much more efficient at it than the CU could ever be and do it cheaper?

Credit unions love to have control of their infrastructure and data, many IT departments love new projects and new technologies.  And they are pretty much required to.  Just look at the NCUA’s guide for doing third-party due diligence.  They don’t make it very easy to use new technology or unproven (read: new and innovative) vendors or products. Cloud computing is where we’re moving but how can credit unions make that jump while satisfying the NCUA’s security and vendor requirements?