DES MOINES, Iowa – The $5.5 billion Mid-States Corporate FCU and the $400 million Iowa Corporate Central CU could have decided to just tie the knot in yet another ho-hum corporate merger, but instead the two are engaging in a groundbreaking and potentially precedent-setting partnership. The agreement will effectively have Mid-States become the provider of investments and loans for Iowa credit unions. Of course for many corporates, such as Mid-States, investments and loans are their bread and butter offerings, for Iowa Corporate Central they are not. "This is a different way of serving the members in Iowa. We looked at our future in Iowa and wanted to capitalize on what we do well and take advantage of economies of scale to serve our members," said Iowa Corporate Central CU CEO Tom Kuehl, who announced the new partnership at the corporate's recent annual meeting in Des Moines. Kuehl said Iowa Corporate is renowned for its member service, but members want better rates. "For years we've done member surveys and every year we get 99% satisfaction from our members. They say `you are great to do business with, but you could do a lot better on the rates.' As a small corporate it's hard to get those economies of scale," said Kuehl. Economies of scale is just what Iowa will get with Mid-States, the third largest corporate in the nation (excluding U.S. Central). Mid-States also recently received Part IV investment authority from NCUA to engage in derivatives transactions, which Mid-States CEO Dave Preter believes will help the corporate offer from 5 to 15 basis points more on investments. "I think it's a win-win. We've been building Mid-States up to be competitive with other tier one corporates. Our core business is investment services and our philosophy at Mid-States is to cooperate and work with other corporates as much as we can," said Preter. Mid-States will compete fiercely with other corporates, but only if they first enter Mid-States' territory. Some of this is going on right now in Wisconsin and Minnesota between Mid-States and Corporate Central CU. Preter said Mid-States has invested $3 million to $4 million a year over the last three and a half years in infrastructure that makes it capable of handling the added volume that will come from Iowa. Mid-States has been involved in a lot of big deals. In one of the largest mergers ever it combined with INDICORP in the `90s and just a few years ago merged with Minnesota Corporate. In both cases, Preter said Mid-States learned how important it is to have local control in the corporate environment, which will be key in this situation. Iowa Corporate Central will keep its headquarters, staff, board and other components. Kuehl said Iowa Corporate Central attorneys determined regulatory approval was not needed for this partnership, though they informed NCUA and state regulators of the move. All future deposits from Iowa Corporate Central CU members will be transferring to Mid-States on a regular basis as they begin to purchase Mid-States CDs and other investments. Credit unions will maintain a minimum settlement account at Iowa Corporate, but any excess deposits will be transferred to Mid-States. Thus, Iowa Corporate Central's asset base will diminish dramatically. Iowa Corporate Central's SVP of Investment Services will become licensed under Mid-States to broker securities. Some might think this type of arrangement could cause a branding dilemma, but the two corporates do not. "We will co-identify or co-brand those investments purchased through Mid-States. We will create an agent relationship with members in Iowa. When a member calls we will identify they are buying a Mid-States investment. Iowa Corporate will be their agent; we will conduct the transaction," said Kuehl. In other words, Iowa CUs will not directly contact Mid-States. If a member has a problem or a question, they will continue to deal with their Iowa reps who will work directly with Mid-States reps. Kuehl said this maintains what Iowa Corporate Central CU does best – member service. Kuehl said Iowa considered a merger possibility, not just with Mid-States but in general, and ultimately decided against it, one reason being its strong capital and earnings. "Over the years we've accumulated a lot of RUDE (Reserves, Undivided Earnings). With our capital structure we can do some things other corporates can't. Our capital and earnings from our subsidiary are strong enough to run the corporate, we don't have to have a strong asset base," said Kuehl. Therefore losing the assets from investments to Mid-States won't affect its other services. The subsidiary Kuehl is referring to is The Members Group, owned 50/50 by the corporate and the Iowa CU League. The Members Group has added to its product line in recent years and now offers ACH, ALM, card processing, item processing, mortgage loan and printing services. Preter said down the line some of these products could potentially become available to Mid-States CUs. Iowa Corporate will continue to provide its members with correspondent services such as ACH and item processing services, said Kuehl While innovative, what these two corporates are doing is being done albeit in different varieties around the network. There are now eight corporates involved in CU Business Group, a CUSO that assists CUs with providing business services. All corporates are now owners in Primary Financial, which offers the popular SimpliCD program, and once owned exclusively by Corporate One. Mid-States itself has a number of relationships with other corporates for various services, including in Kentucky and West Virginia for item processing. Many other corporates have smaller partnerships that may be transparent to members. Southeast Corporate and Georgia Central CU for example partner on data processing services. There is one strong theme coming from corporate CEOs these days and that is with margins what they are corporates need to be ultra efficient. Part of that is streamlining the back office. Empire Corporate President/CEO Joe Herbst said Mid-States and Iowa Corporate Central should be commended for this partnership in that it really assists Iowa Corporate on the back-end, but does not change their relationship with members. "There are a lot of trends now in the financial industry for outsourcing back-office functions. The reasons credit unions have been successful is successful cooperation and working together. Credit unions expect cooperative rates, and we all need to be as efficient as we can to deliver," said Herbst. Both Preter and Kuehl emphasized that the corporates both practiced the Midwest culture and that too will make the transition easier. The corporates will hold a series of town hall meetings in Iowa to explain the new partnership. [email protected]