RALEIGH, N.C.-A credit union here that essentially operates within another CU continues to post robust numbers.
Local Government FCU has grown from $3 million to more than $1-billion thanks to the support it gets from the $20.7-billion State Employees CU. The smaller CU, and it's a relative term, uses all of the front- and most of the back-office functions of the larger financial, and that has led to 18% average annual growth over the years for LGFCU while keeping solid operating expenses well under control.
"We think the savings in operating expenses is 200 basis points annually," said LGFCU CEO Maurice Smith. "We look at like-sized credit unions, and our operating expense-to-average assets ratio (1.49%) is about 2% lower than theirs."
The unique arrangement began in 1983 when SECU, also based in Raleigh, was ordered by the state's Supreme Court to divest local government employees from its field of membership and LGFCU was chartered.
The strong business processes, policies, and strategies of SECU have pulled along LGFCU, acknowledged Smith, who said the relationship has worked because of strict rules and similar ways of thinking. "For this to work, both credit unions have to be like-minded," Smith explained. "And ultimately there has to be a strong sense of trust between the two organizations."
A key agreement that makes the partnership run smoothly is how LGFCU compensates SECU for its services. "We do not operate like a shared branch network where the host CU is paid based on transactions, deposits, loans, and so forth," Smith explained. "We simply pay 25% of our gross income to SECU. It's easy math, no double-counting, and it rightfully limits my ability to manipulate what we pay. If we did it the other way, I could accelerate expenses or move things on and off the balance sheet to try to minimize what I am paying."
No Branches, No Signage
LGFCU relies on SECU for all front-line transactions-it has no member-facing branches, only a headquarters that houses 50 administrative staff, including the marketing department. LGFCU members don't see any signage on SECU locations, only some collateral materials and limited point of sale. That is one of the biggest challenges, admitted Smith. "Our members have to be very well educated that they will be served by a credit union with a different name. That is a very different concept." LGFCU relies on its website, a monthly magazine, and e-mail to carry much of that communication.
The accounting process, which includes a unique account code for LGFCU members within SECU's core system, make recognizing which CU the member is from seamless for tellers. But the partnership does not make cross-selling realistic, and would place too great a burden on tellers, according to Smith. "We rely on the front-line for transaction processing only. We do not look to them for increasing market penetration or share. To do that we rely on our institutional marketing."
Most of the same products and services are offered by LGFCU and SECU, but Smith admits pricing could be an issue if his CU chose not to keep pricing almost identical to SECU's. "Imagine the angst one of my members might feel if they ask about an auto loan rate, are mistakenly quoted SECU's lower rate, and then feel like a second-class citizen when they learn our rate is higher. We try as much as we can to keep our pricing nearly the same as SECU's. It reduces confusion and improves delivery because front-line staff don't have to remember two sets of prices."
Essentially, LGFCU is outsourcing most of its functions. But Smith reminded that his CU does not outsource financial intelligence, managerial accounting, asset/liability management, and risk-management functions. "I don't want someone else making ALM decisions for me," Smith said. He also added that marketing is in-house because "no one else can tell your story like you can."
Shared DP, Dedicated IT
LGFCU relies on SECU's in-house proprietary data processing system but provides its own IT support for administrative staff.
Smith summed up the relationship as "symbiotic," and advised other credit unions considering a similar arrangement to "make sure the platform and the business model from the host credit union is something that will serve your membership. If you are the serviced credit union, you have to be comfortable with the processes and the capabilities of the host."
A credit union must also check its ego at the door. "Most credit unions have great messages to tell about their organization and are prideful in what they do," shared Smith. "We are no different. But if you are going to outsource your back-office and front-line support to another credit union, recognize there will be some limitations. You will have to spend time synchronizing what you want to do with another organization. It doesn't mean you won't get to where you want to be, but it will require a little more time. But from our perspective, the rewards are well worth it."
