Two funding experts suggest four steps for expanding into this new market.
Credit unions have been at the heart of local communities for more than 100 years. Originally, they grew due to their focus on serving specific member groups or communities through a common bond. More recently, they have seen growth from serving the needs of member businesses.
An area for additional member business growth is in serving political subdivisions, such as counties, cities, towns and villages, and such special districts as school districts, water districts and park districts. Credit unions have traditionally focused on serving employees of political subdivisions, but with their increasing size and footprint coupled with advances in technology, they are able to compete for the opportunity to serve the member business needs of political subdivisions as well.
Even with increased size and systems, credit unions often face state statute hurdles when competing with banks for the business of political subdivisions. These restrictions are written into state investment statutes and policies, which banks and bank trade groups have historically played a significant role in crafting.
Some states legislate consistently for credit unions and banks (give them the same requirements), whereas other states restrict by footprint (branch presence) or type of insurance or institution (Federal Deposit Insurance Corp. vs. National Credit Union Share Insurance Fund), from which other restrictions stem (such as collateral requirements).
For a political subdivision to safely deposit funds in a credit union in excess of federal insurance, collateral has to be provided by the credit union to the political subdivision for the amount of the deposit over the insurance limit, so if the CU failed, the corporate or FHLB would provide the political subdivision with the uninsured portion of its deposit.
One way a credit union can participate is by using a letter of credit in which it pledges a portion of its loan portfolio to a corporate credit union or the Federal Home Loan Bank, which in return issues a letter of credit to the political subdivision. In the case where the credit union is using securities for collateral, it pledges a portion of its investment portfolio to a third party, such as a corporate or the FHLB, as security for the deposit.
Banks generally have had greater access to a broader variety of collateral options, such as reciprocal programs, giving them an advantage when it comes to competing for and managing relationships with political subdivisions. Reciprocal programs defined by state statutes allow banks to fully use and still insure a deposit in excess of the usual cap on federal deposit insurance by allowing them to offset that deposit on the balance sheets of other banks.
In addition, nongovernmental insurance providers are beginning to enter the market again, providing excess FDIC insurance coverage to depositors for amounts deposited at a bank over the FDIC limits. Such a program could provide anywhere from $10 million to $500 million in collateral that a credit union would be unable to obtain.
The public units of a community must make choices and abide by standards when deciding where to open their financial institution account relationships. First and foremost, public units must consider the financial institution’s credit strength. Other deciding factors include the ease of using the institution’s technology and online services, pricing, and relationship with the community.
At the same time, credit unions need to consider whether taking in the large deposits often associated with serving a political subdivision is a good idea in the context of its own balance sheet and the larger marketplace. Large deposits can be expensive and more rate sensitive and thus must be deployed in a methodical fashion.
If serving political subdivisions seems like a good opportunity for your credit union, here are three steps to take:
- Communicate your CU’s community support efforts to the leadership of the political subdivision. This often includes credit union leadership establishing a strong business relationship with the political subdivision’s finance manager/CEO through work on community involvement projects.
- Seek opportunities to submit requests for proposals for political subdivisions. The political subdivision should seek out local financial institutions to help define potential services it requires. Once parameters have been established, a request for proposals can be created. Political subdivisions typically request RFPs only from banks. Through the RFP due diligence and vetting process, both parties—the local entity and the financial institution—will have a thorough understanding of the respective roles that are desired in creating a productive, meaningful relationship. Final selection will have support from the governing board or commission in addition to the finance manager/CEO of the entity.
- Once the credit union has won the business, develop a professional working relationship with staff from the political subdivision who will have daily interaction with employees of the credit union. A “meet and greet” at the credit union should be scheduled and repeated every so often to define and update needs of the customer along with introducing new products and services being offered by the credit union. Above all, you want to over-communicate your commitment to the relationship and reassure the leadership of the political subdivisions that the credit union will do everything within its power to maintain a relationship that is beneficial to both parties.
- Continue to communicate with the leadership of the political subdivision about regulatory requirements (such as collateral) and changes that impact the relationship. A quarterly meeting at the financial institution or local governmental offices is not only a productive method of sharing information but also serves to develop a business relationship that will last through periods of financial turbulence and downturns.
Building a lasting relationship with political subdivision managers is no different than other positive relationships you have likely developed in the past. Listen to your client and, when problems arise, don’t take a passive approach; solve the problem. Earn their trust and always act in their best interests, as this benefits both the client and the credit union in the long run.
D. James (Jim) Lutter is SVP/trading and operations at PMA Financial Network and PMA Securities Inc., where he oversees PMA Funding, a service of both companies that provides over 1,000 financial institutions with a broad array of cost-effective funding alternatives.
Todd A. Terrazas is business development and product manager at PMA Financial Network Inc. where he is responsible for developing financial institution partner relationships and managing funding product solutions and association affiliations.
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