OVERLAND PARK, Kansas – Broker/dealer CUSO CNBS has had a rebirth of sorts and CNBS President/CEO Brian Hague couldn't be happier. A few months ago CNBS announced that it would be holding a private placement offering to attract investment from natural person credit unions. This marks the first time CNBS opened up ownership to natural person credit unions. Traditionally, it has been corporate credit union owned, thus the former name Corporate Network Brokerage Services. The company is now known just as CNBS. Probably more significant than opening up ownership to natural person CUs through the private placement is CNBS simultaneously offered its 18 corporate credit union owners the opportunity to tender their shares and sell their ownership in CNBS. The reasoning behind this said Hague is with more corporates either opening their own broker/dealers or partnering with U.S. Central's brokerage subsidiary, ISI, many CNBS corporate owners were in essence competing head-to-head with CNBS. "Our primary objective was to provide a means for those corporates that owned CNBS stock but we're competing with CNBS to get out of the ownership base, particularly in light of there having been some talk of some kind of hostile take over," said Hague. The plan worked. Prior to the tender offering, CNBS was owned solely by 18 corporate credit unions (see sidebar). But now there are just eight corporate owners as 10 of them took the offer and sold their ownership interest. All but two of the corporates that sold either had their own broker/dealer or were partnering with ISI. According to U.S. Central, so far seven corporates have partnered with ISI for broker/dealer services. CNBS raised $1.7 million in the private placement. Four of the eight corporates that remain with CNBS actually increased their investment, quite substantially, and CNBS attracted investment from five natural person credit unions (see sidebar). Hague said diversifying its ownership was important, particularly in light of ongoing corporate CU mergers which would have seen CNBS owned by fewer corporates. Now with natural person CUs in the mix, Hague believes the ownership is much more balanced and it reduces political problems. "Natural person credit unions aren't likely to get into the institutional brokerage business. That's been the source of political pressure on CNBS with corporates increasingly wanting to get in to the brokerage business. There's less risk that we'll face that pressure in the future," said Hague. Over the years Hague said CNBS has faced considerable political pressure from corporates that wanted CNBS to license securities reps to be housed in corporates. Hague has consistently shot down this proposition, saying it would be costly and time consuming from a regulatory standpoint. He also said CNBS surveys show credit unions wouldn't do any more business with CNBS if there's a rep on hand at the corporate. Securities is a remote business, even for big Street firms, so local reps in a corporate's office wouldn't help CNBS, said Hague. CNBS mostly sells bonds to credit unions, but that's not why corporates wanted CNBS reps in Hague's mind. "It wasn't to sell more bonds through us, they wanted to be the contact. When the calls come into their rep and the credit union is looking for say a three-year callable, they could show them one of the corporate's certificates instead," said Hague. There's of course nothing wrong with that said Hague, but it highlights the contradiction corporates have, that is having their own proprietary balance sheet products they want to sell. Hague said he was mildly concerned about rumors of a hostile takeover prior to this offering. If the 18 corporates had remained as the sole shareholders, once the Mid-States/Minnesota Corporate merger was completed 54% of the voting shares would have been direct competitors of CNBS, allowing them to make major changes at CNBS. The early termination of a 10-year non-compete between CNBS and U.S. Central paved the way for all of this to happen. During the non-compete, CNBS could not provide brokerage and advisory services to corporates, while U.S. Central's broker/dealer subsidiary couldn't provide brokerage and advisory services to credit unions. When the deal ended last year, U.S. Central's ISI started partnering with corporates to have ISI reps at the corporate offering credit unions broker/dealer services, exactly what CNBS owners had wanted CNBS to do. Good Times For CNBS CNBS has been on quite a high in recent years. With modest loan demand, hordes of liquidity, and shrinking margins, credit unions have been looking to investments to bridge the income gap. CNBS has reported two consecutive years of record revenues, and has set records in fee income and transaction volume. Interestingly, when credit unions may not be doing that well, is when CNBS is. Hague said investors in CNBS can use this cyclical nature as a sort of income hedging. "We're likely to pay a very large dividend in years credit unions are facing margin squeezes. When liquidity is very tight, we may be unable to pay a dividend," said Hague. Ron Westad, president/CEO of Arizona FCU, one of the five new natural person CU owners, said he's excited about how well CNBS is positioned even when liquidity isn't strong. "They've been able to diversify over the years to the position that they will do well in any environment," said Westad, noting CNBS' strong fee income tied to ALM, advisory and other services that CUs need in any economic climate. Hague echoed that saying fee-income is even more important than transaction income because it is steady income. Westad said Arizona FCU has used CNBS for over 10 years and that was the best way to evaluate them as an investment option. "I think it's just a great investment. They continue to offer value. Their customer surveys exceed expectations." FirstCorp was one of the corporates to increase its investment in CNBS. FirstCorp President/CEO Pete Pritts, who is the current chairman of CNBS, said he'd rather provide broker/dealer services to his credit union members via participation in the CNBS CUSO, than go through the costly process of starting one in-house. "We still consider ourselves full-service by participating in CNBS. Now that the non-compete is eliminated and U.S. Central can do their thing and CNBS can do their thing, we see opportunities for CNBS," said Pritts. These opportunities will likely lead to healthy dividends, he said. Louisiana Corporate also kept its stake in CNBS. One of the nation's smallest corporates, president/CEO David Savoie said CNBS provides leverage. "Our board originally made the decision to become a co-owner of CNBS because they believed in the concept of leveraging resources with other corporates to provide brokerage, ALM and advisory services to credit unions in the most effective manner possible. Our board assesses that CNBS continues to perform that function in an outstanding manner," said Savoie. Corporates that have left CNBS consistently said it makes no sense to compete against an organization they had ownership in. Mid-States is a good example of a former CNBS owner that would have become a competitor. The corporate just announced its new broker/dealer CUSO, Mid-States Investment Solutions. Mid-States leaders said it wanted to be able to offer investment products that were a strategic fit with its members' portfolio goals. [email protected]