7 Ways To Make A New SEG Partnership A Success

How a new corporate sponsor helps a struggling Florida credit union rebrand and regain financial health.

 
 

The success of Darden Employees Federal Credit Union ($28.8M, Orlando, FL) has hinged on some “unique circumstances,” as CEO Jim Kasch describes it. But the stroke of luck the credit union had in connecting with a Fortune 500 company is also inspiration for any credit union looking to shore up new growth from an old strategy: serving a SEG.

Just a few years ago, the credit union was grappling with an underperforming legacy loan portfolio. Today, it is among the industry’s leaders in terms of loan growth, share growth, and member growth. Its monthly income, primarily driven by consumer loans, has surged to $260,000 from $40,000 in 2010. Its assets have nearly tripled while loan balances have increased fourfold.

NET INCOME AND LOAN GROWTH
DATA AS OF SEPTEMBER 30, 2012

net-income-and-loan-growth

A New SEG Brought Younger Members And An Influx Of Loans To Darden Employees FCU.
Generated by Callahan & Associates' Peer-to-Peer Software.

Although there are multiple factors at play, it’s clear much of this success depended upon a single factor — the credit union’s partnership with Darden Restaurants.

“There’s no real secret,” Kasch says of the credit union’s turnaround. “It’s the fact we now have an engaged sponsor and the ability to serve a huge field of membership that was not available to us before.”

Darden Employees previously existed as Multi-Media Federal Credit Union and served the struggling media industry in central Florida. But in 2009, it began an ambitious rebranding and service expansion in partnership with Darden Restaurants.

Darden Restaurants has an approximate nationwide employee base of 200,000 servers, cooks, restaurant managers, and more. In the late 2000s, it was looking for a credit union to serve those employees financial needs through a virtual banking platform.

In return, Darden Restaurants was willing to make a substantial investment in the infrastructure of the credit union to help quickly launch new services.

Step 1: Indentify Opportunity

Darden Restaurants is the only Fortune 500 company headquartered in Orlando. Despite being outside the financial industry, several executives there had been involved with credit unions through previous employers and were familiar with all the credit union movement had to offer.

Curious about how a potential partnership with a credit union might fit into the company’s interest as well as the interests of its employees, Darden Restaurants scoured the restaurant industry to see if its peers offered a similar arrangement. It found that no other major restaurant chain had set such precedent, and realized  adopting a credit union would be the perfect way to gain a competitive advantage in both attracting and retaining top talent.

Approaching this financial services partnership like it would any other capital project, Darden Restaurants assessed how much a business investment like this would cost, what it would need to do to launch it, and where it would need to go to find a qualified partner.

After reaching out to a dozen cooperatives across Florida, including institutions in Miami, Jacksonville, Tampa, and Orlando, the company realized it might have more success by focusing on credit unions that catered to industries that were struggling in the digital age — in particular, newspapers.

This new focus lead to a cold call with executives at Multi-Media FCU. Despite being a  $10 million credit union, Multi-Media offered a robust suite of products and services —including checking accounts, credit cards, debit cards, and online banking — Darden Restaurants was looking for.

For its part, Multi-Media was the definition of an institution in trouble. At the time, it predominantly served Orlando Sentinel employees as Sentinel Star Employees Federal Credit Union, and the institution spent the past decade mirroring the economic struggles of the industry it served. Poor performance eventually forced the credit union out of its headquarters in the newsroom building.

Seeing the opportunity in a rebrand, the credit union retained its multi-common bond structure and changed its name to Multi-Media FCU. It then opened its membership base to the broader media industry.

Although Multi-Media expanded its charter to include a small Catholic diocese newsletter in the Orlando area, the arrival of the recession in the late 2000s put a quick halt to any forward momentum. With just $5 million in loans, the credit union was drowning in burdensom legacy relationships, including one $200,000 delinquent mortgage described by Kasch as “a killer.”


DELINQUENCY AND NET CHARGE-OFFS
DATA AS OF SEPTEMBER 30, 2012

delinquency-and-net-charge-offs

Together With Its Sponsor Group, Darden Employees Has Greatly Reduced Delinquency And Charge-Offs In Its Portfolio
Generated by Callahan & Associates' Peer-to-Peer Software.

When Darden Restaurants offered to absorb legacy loan losses, boost reserves to more than 6%, and pay off the credit union’s bills, the cooperative recognized an unprecedented opportunity.

Although skeptical of the arrangement between the sponsor and the credit union, NCUA approved the change. With regulator approval, the new institution took its first steps toward becoming the credit union both businesses knew it could be.

Because credit unions can only build net worth through income, the money Darden Restaurants gave the credit union was considered a gift. As such, there were no expectations of repayment.

However, Darden Employees also submitted a plan for low-income designation to the NCUA that was approved in December 2012. This designation allows Darden Employees to raise secondary capital and will let its SEG group loan the credit union capital instead.

Step 2: Secure Ambitious Governance

With its new sponsor, the credit union hired more staff, updated every major platform, implemented an online origination system, and launched an online membership application system.

In April 2010, the credit union lured Jim Kasch from Partners Federal Credit Union ($1.1B, Burbank, CA), which serves employees and cast members of the Walt Disney Company. In addition to retaining all four of Multi-Media’s staff, Kasch also hired 16 new employees, including key additions to senior management.

The credit union combined its existing board with representatives from various parts of Darden Restaurants’ operation including HR, legal, and finance to round out the experience and skill set needed for successful governance.

Once solidified, the board and executive team began drafting a blueprint for how exactly they would rebrand the institution.

Step 3: Make A Great First Impression

Darden Restaurants was adamant that each employee —from Orlando to Seattle —be privy to the same benefits at the same time. This meant the credit union could not gradually roll out its services from state to state; it had to launch its entire suite of offerings all at once. Since its December 2010 launch date, the credit union has been able to open accounts across the country, field phone calls 24 hours a day in English and Spanish, and take, decision, fund, and close loan applications electronically.

CAPITAL RATIO
DATA AS OF SEPTEMBER 30, 2012

capital-ration

Reaching an advantageous capital ratio will continue to be a priority for Darden Employees FCU in the years ahead.
Generated by Callahan & Associates' Peer-to-Peer Software.

“We only have one branch, but to our members we look like Bank of America,” says Tonya Voltolina, chief financial officer, about the credit union’s virtual footprint. “And because we participate in shared branching, we actually have more branches available to members than Bank of America.”

Step 4: Get To Work

Darden Employees needed to generate revenue to support its large new membership base. Executives believed consumer loans were the best way to do that.  As the credit union accepted deposits, assets surged from $10 million to $28 million in 18 months, driving up assets. To keep up reserves, the credit union had to turn to its sponsor for cash to support the growth.


LOANS TO SHARES
DATA AS OF SEPTEMBER 30, 2012

loans-to-shares

Darden Employees Has Been More Effective At Loaning Out Its Deposits Than Peers In Its Asset Size  
Generated by Callahan & Associates' Peer-to-Peer Software.

“Anything we bring in with deposits we loan out,” Kasch says. “The reason that works for us is because there are so many Darden Restaurant employees.”

To grow its average of $900,000 in net new balances every month, Darden Employees originates between $1.5 million to $2 million per month. To push the loans out the door, the credit union runs roughly one-third of Darden Restaurants’ 200,000 employees through a prescreening process and then reaches out through direct mail to preapproved workers.

The credit union screens approximately 800 loan applications per month, and potential borrowers can respond either online or over the phone.


QUARTERLY LOAN ORIGINATIONS
DATA AS OF SEPTEMBER 30, 2012

quarterly-loan-originations

Caption: Darden Employees Loan Growth Spiked In 2011 And Has Remained Strong Since
Generated by Callahan & Associates' Peer-to-Peer Software.

The prescreening process entails sending the employee data from Darden Restaurants shares to Experian, which scrubs the list with the credit union’s base level criteria. This eliminates anyone with a bankruptcy, D or E paper borrowers, and those who have a vehicle loan in delinquency or have had a repossession. The credit union sends approximately 65,000 names every three months; Experian returns around 18,000 prequalified candidates.

Because Darden’s new member base consists of primarily lower-income, younger workers, the credit quality of potential borrowers is not premium. However, it’s not all subprime either. Still the credit union is making loans in smaller-than-average amounts.

“We don’t have $25,000 to $30,000 car loans – we’re doing it at $11,000 each,” Kasch says. “We have to do two loans for every one loan a typical credit union would do.”

Through Raddon Financial Group’s lifecycle segmentation methodology, Darden Employees knows 85% of its members fall into the “fee-driven” segment of consumers. Such borrowers are typically focused on used vehicle loans, personal loans, and credit cards, so the credit union leads with those products, Kasch says.

QUARTERLY CHANGE IN MEMBERS
DATA AS OF SEPTEMBER 30, 2012

quarterly-change-in-members

Darden Employees Has Continued To Successfully Grow Membership From Both Legacy SEG Groups And Darden Restaurants
Generated by Callahan & Associates' Peer-to-Peer Software.

Despite lower dollar amounts, total auto loans at Darden Employees have increased 104% as of the third quarter, including 34.4% growth in new auto loans and 118.5% growth in used auto loans.

Since the launch, the credit union’s loan balances have ballooned from $5.5 million to more than $27 million. Total monthly income also grew to $260,000 from just $40,000 prior to the SEG addition.


AVERAGE AUTO LOAN BALANCE
DATA AS OF SEPTEMBER 30, 2012

average-auto-loan-balance

New And Used Auto Is A Prime Focus For Darden Employees
Generated by Callahan & Associates' Peer-to-Peer Software.

The approval rate on auto loans, even with the prescreening process, is approximately 40%. And although the credit union doesn’t yet have the employee power needed to have one-on-one conversations with each of the 400 to 500 applicants who are denied every month, it guides these individuals toward resources that can help them improve their budgeting skills and credit scores. 


When the economy improves and these restaurant employees see a boost to their credit and income, Kasch believes the credit union could approve roughly 60% of its loans and add an average of 600 new members per month.

About 200 to 300 new members join Darden Employees each month, and the majority of those join because of a loan.

“If you’re looking at membership growth, deposit growth, and loan growth, there’s really no surprise,” Kasch says. “It’s simply a matter of opening up to another SEG willing to funnel its employees to the credit union.”

Although Darden Employees has a different set of concerns than many credit unions, including potential issues stemming from its substantial loan demand, it has learned how to navigate those challenges well. Loan balances have to remain at a certain level so the credit union can build its income. But to have loan balances, the credit union needs deposits. And with those deposits, assets increase, which hurts the credit union’s net worth.

“We're focused on building and preserving our capital,” Voltolina says. “We want to make sure we have positive loan growth, and we're very fortunate we have achieved that. But loan growth is not our singular focus.”

Step 5: Build New Ties With Your Target Audience

When Darden Employees officially opened for business, its marketing team faced the challenge of appealing to a mass audience that had never heard of the credit union.

“We were new, so we were asking ‘How do we reach them? How do we get the message to them in a strategic way?’” says Brooke Rodriguez, the credit union’s marketing manager.

Much of the department’s original focus was on building a marketing plan from the ground up and determining the best communication channels to reach its targeted audience. For the initial launch, the credit union conducted a six-month phased campaign across Darden Restaurants’ internal communication touch points. It distributed marketing materials at the restaurants during the general managers’ kickoff meetings with floor staff. For its part, the restaurant incorporated an explanatory video into quarterly all-staff shift meetings as well as new hire orientations. It also embeds information on the credit union in new hire packets and annual open enrollment packets.  

Step 6: Make Membership Easy And Rewarding

The marketing team is currently focusing on developing its annual member loyalty survey. It is also conducting a new member survey two weeks into the onboarding process to identify and remove any potential points of pain.

When a new member joins Darden Employees, the credit union uses MeridianLink’s Opening Act System and DocuSign for eSignatures. The process is simple and self-explanatory. Once a member applies to open an account, the credit union verifies their information and opens the account with a deposit, whether ACH or credit card, then issues all the membership documents via DocuSign.

MEMBERS, CHECKING ACCOUNTS, AND AUTO LOANS
DATA AS OF SEPTEMBER 30, 2012

members-checking-accounts-and-auto-loans

Darden Employees FCU has not only grown membership and checking accounts but key areas of the loan portfolio, like autos.
Generated by Callahan & Associates' Peer-to-Peer Software.

Kasch says the credit union’s current onboarding process works, but there is also room for improvement.

“We don’t do a great job at that —we do a decent job,” Kasch says. To improve the member experience going forward, Darden Employees is consolidating its loan processing teams and member service teams and has created a position called the Member Advocate.

Member Advocates are based exclusively in the call center, where the credit union conducts 99% of its business.

FAST FACT

The board initially consisted of 15 members, but the credit union is downsizing to just nine individuals.  It will preserve the same ratio of representatives from both parties.

These representatives operate from a member service perspective — for example, helping members find out if a check cleared, what their balance is, whether can they open an account, and if they can transfer money. But they also have a loan queue in which they accept applications from members that call in, from Internet channels, or from the underwriting desk.

“We want each of our member advocates to have a book of business and own that membership,” Kasch says. Eventually, the Member Advocates will send out materials out with their name and face to create a personalized connection to their membership.

Step 7: Share What Works With Others

If tying the institution to a sponsor at a time when other credit unions are moving toward broader membership seems countercyclical, it was designed that way. For Darden Employees, this “new old school” strategy represents the credit union’s greatest competitive advantage.

“I see so many credit unions that have become completely dislocated and disconnected from their original sponsors,” Kasch says. “They go community because they think that’s going to be the answer and it hardly ever is. As soon as you disassociate yourself from that employer base, you’re just like Wells Fargo, except way smaller.”

2-2-2 TO WELCOME YOU

2 Days — Two days after the member joins, the credit union sends an email that includes information for members such as how to access online accounts, where to find account numbers, when to expect their ATM or debit card, and how to contact the credit union. 

2 Weeks —Two weeks later, the credit unions sends a follow-up email that lets members know they should have received their debit card and encourages them to call with questions. The credit union also sends a mini survey about the process, asking if it was better or worse than the member expected. Darden then uses a Net Promoter Score survey to gauge whether a member would recommend the credit union to a co-worker or family member.
 
2 Months —Darden sends a third email two months after the member has made a loan payment to determine if there’s anything else the credit union can do for them.

“You need to articulate what your credit union can do for their employees,” Kasch says.Credit unions that want to grow SEG relationships can start by connecting with human resources departments to demonstrate the benefits of credit union membership. Be able to explain in detail how this no-cost option differentiates the company from its peers, improves employee morale, and decreases the turnover rate.

“Companies don’t care about the credit union but they do care about employee retention and employee engagement. If you don’t talk to these employers about credit union advantages, they won’t know.”