How to Boost Your CU’s Income with an Insurance
CUSO
The Keys to Being a Top 100 CU in Lending
By Rory Rowland
TruStar Federal Credit Union is a Top 100 CU in two categories: It is a Top 100 CU in total capital and lending. TruStar’s capital ratio is over 22% and its loan to share ratio is over 100% as of September 2004. Dale Johnson, the CEO of TruStar FCU shared some of his strategies for creating a better bottom line and boosting the loan to share ratio.
Three years ago TruStar FCU started a CUSO with an insurance agency.
The agency was an independent agency with over 17 different insurance
carriers to offer to their members.
The mix is 60% consumer and 40% commercial insurance sales.
The insurance CUSO is set up as a limited liability company, so the parent
company (the credit union) pays taxes on the earnings at the parent’s
tax rate. Therefore the credit union pays no taxes on the insurance agency’s
earnings.
TruStar bought the agency for $460 thousand and the net income this year
was $250 thousand from the agency. The agency basically paid for itself
in less than three years. With the success of this agency, Mr. Johnson
is looking to purchase another agency for a branch about 160 miles away
from the main office. The current insurance agency has helped contribute
almost half of the net income of the credit union over the past year.
The selling price will be about $600,000, about a 30% return. The business
plan is to have the new agency paid for in a matter of three years. Mr.
Johnson said they wanted a new agency in the area of the new branch so
they could attract new members that may not know anything about the credit
union. The insurance relationship is a great way to introduce new consumers
to the credit union.
Incentive plans can be a sticky issue in the insurance CUSO. Mr. Johnson
said, “Greed is one of the seven deadly sins.” If greed sneaks
into the equation, you may not have a team. The incentives and goals have
to support each other. Mr. Johnson said, “There was a little bit
of a learning curve on this one. At first they paid more on individual
performance, but now the plan is more focused on team incentives. Those
team incentives have helped increase the team spirit and have helped the
credit union boost the overall sales of the agency.” Mr. Johnson
said, “Team work is the key to long term success in a CUSO insurance
agency. Your people make all the difference.” The manager of the
insurance CUSO is on salary plus incentive with a focus to control expenses.
The incentive plan is set up to pay higher incentives for a healthier
book of insurance business. The better the loss ratios for the insurance
companies, the better incentives paid back to the insurance agency from
the insurance companies. Mr. Johnson says the incentives paid back can
be substantial.
Mr. Johnson said the referral business going back and forth between the agency and the credit union is a natural tie. The agency has grown it book of business about 45% since the credit union acquired it about 3 years ago. The credit union has created an incentive plan for the loan officers and the insurance agents to refer business back and forth between agency and the credit union. The lenders get and give leads on insurance and vise versa. It is never high pressure, but it is an offer to help the member save money on their loan, or on their insurance.
The insurance quotes have gone high tech on their web site. The members can seek out insurance quotes off the web site. It helps the insurance agency use its link with the credit union to its advantage.
One important step is to do your due diligence with an insurance company consultant such as Marsh-Berry (http://www.marshberry.com). Mr. Johnson recommends that before you purchase an insurance agency make sure you know the value of the agency. Marsh-Berry does independent insurance agency evaluations so you can prove the value of the agency. Your CPA auditors and the NCUA will want to know the value of the agency as well and remaining in their good graces is valuable. This information needs to be supported by an outside source so you can place a value on the agency. By having an insurance consultant look at the agency can also put you in a better negotiating position. If you know the value, then you know what price to aim hard at when you are talking to the principles. In this case knowledge and information are power.
Mr. Johnson said the agency has been a very good acquisition for the credit union, helping to significantly boost the bottom line, with very little added risk.
Mr. Johnson has not really seen any real down side to the acquisition of the insurance agency. However, the most important thing is to evaluate the personnel that will come with the purchase. Remember buying an insurance agency is buying blue sky; there is no tangible asset that goes along with the purchase. It is a purchase based on the people who come along. Get them locked in with a non-compete clause so that you can protect your investment.
Owning the insurance agency is a win-win situation. Mr. Johnson said, “We have seen growth from both entities working together. The CU and the insurance agency have both grown. The insurance agency has grown by over 45% since we bought the agency.”
By owning the agency, you can reduce one competitor in your community. Many agents have the potential of offering loans to the customers. By owning the agency, you may be reducing one potential competitor to the credit union. State Farm banks are becoming a larger competitor for loans and their banks looks just like the credit union.
From our research of banks at Top100CU.com we have found that the State Farm banks around the country are very similar to credit unions. The majority of their loans are in car and second mortgages. This makes them a direct competitor of many credit unions. And they get many of their leads from the insurance agents they have a relationship with through State Farm.
TruStar has investment services offered through the insurance agency. Mr. Johnson said, “Not that is brings in a lot of investment business, but with the high end members it gives them a chance too look at what we have to offer.” Mr. Johnson also added this piece of advice from his father, “The more hooks you put in a fish, the less likely they are to swim away.”
TruStar does not shy away from the “B” word. Mr. Johnson says, “Consumers understand the concept of bank. Why try to educate the new consumer before they are a member? Make them a member and then educate them to how a credit union works and how it can save them time and money.” TruStar’s mission statement is “Building valued relationships through banking solutions.” And the credit unions tag line is ‘TruStar FCU, a brighter banking solution.’ “We offer banking solutions, and we have a better solution. Why try to fight people’s perception, and let their perceptions work for you.” Mr. Johnson went on to say, “You can call me a bank, and we can outperform the bank. Educate the member after the fact and not before the fact. A confused consumer may be a hesitant consumer.”
Use the power of your brand. Mr. Johnson described that, “We brand everything, for example we offer ‘TruRewards’ and we offer ‘TruChoice Certificates’ which gives the member more options. Once you create the brand, stay focused on the brand. We brand everything back to the logo, in a positive perspective.”
Lending Top 100
To become a Top 100 CU in lending, Mr. Johnson had these ideas:
Seven keys to lending success
1) Offer them more than what they came in to receive.
2) Asks for referrals, you would be surprised.
3) Use CUNA Mutual’s Loan Liner Plus program.
4) Don’t make the member fill out an application when they call.
5) Make it simple, fast and easy for the member to get a loan.
6) Price right with Risk Based Pricing.
7) Know what your cost are, use cost analysis software. It pays off.
Offer More
Mr. Johnson said, “One thing that we do really well, is that we
are not afraid to offer them a solution. Rather than give the member a
$1,500 vacation loan. We may offer him a $45K home equity loan. Look at
their entire financial position, and see if you can offer them a solution
that makes their life better or more organized. We are looking to providing
banking solutions with our loans.” TruStar’s goal is to look
at their total financial health. Mr. Johnson says, “We have spent
a tremendous amount of time really overusing on training of loan officers
to always look for opportunities. We want the member to leave with more
than what they came in to receive. TruStar is always looking to package
the loans. It is just as easy to do two loans as it is to do one loan.
TruStar wants to be seen as a trusted advisor, rather than just a source
for loans.”
Ask for the referrals
Mr. Johnson said, “We teach our loan officers to ask this question
‘Can you recommend anyone else who can talk to us.’ You will
be surprised at the number of the referrals and you may have changed a
small loan into a number of loans by the referrals the credit union receives.”
CUNA Mutual Loan Liner
Members don’t have to sign a document again and the member has a
life long agreement. “We do a lot of loans by phone and the members
love that relationship. We can finance your car and put the money in their
checking account right away. Once you sign, your word is good enough for
us. It is a great way to build trust,” Mr. Johnson said. We have
the coverage through CUNA Mutual’s Intentional Non-filing of Non-title
Collateral. It is a coverage you can buy through CUNA Mutual. In Minnesota
the filing fee with the state is $45. We save the member that money because
we don’t file. We charge a much smaller $15 handling fee that covers
the cost of the insurance. It is another win-win we aim for with the member.
Risk Based Pricing
TruStar has about 60% of members who are A and A+ paper and this leads
to lower delinquency and a lower charge off ratio. However, the pricing
is very important. We have to look at our pricing side and the asset has
to match the liability. TruStar has a higher gross income than peers and
Mr. Johnson attributes that to his pricing strategy.
Mr. Johnson said, “For the ALM (asset liability management) they
use matching pools, and we can be more aggressive on our pricing of deposits,
we have of lose ratio. Pricing is the key to success in a risk based lending
program.”
Cost Analysis Software
“We did a cost of funds analysis for the organization, we know what
it costs us to do teller transactions. It cost us $44 per year to mail
statements and $21 a year to send e-statements, so we try to shift members
to e-statements. But we also don’t give away relationship-pricing
incentives unless we know what the costs are for the program. With the
cost analysis software we can make better decisions, and be more aggressive
in our pricing. You can’t make good decisions, unless you know your
cost,” Mr. Johnson said.
For example some incentives can cost you more than they are worth. Mr. Johnson says know your cost. “TruStar used to offer a member an incentive to have direct deposit on a $50K home equity loan. The credit union would give the member one quarter of one percentage point. But once we did the analysis of what it cost, we realized that it cost more to give the incentive than it cost to take the payment over the counter.” The added information allowed them to make a better pricing decision. Mr. Johnson said, “We were losing money to give the member the incentive. So we decided to stop shooting ourselves in the foot.” Knowing your cost is a great lesson for making better pricing decisions.
In the final analysis there are two keys to lending success. Focus on the member, and make it easy for them to do business with you.
