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Description: Cyber Technology Issue. Credit Union BUSINESS Magazine July 2014 10th Anniversary Edition.

THE CYBER TECHNOLOGY ISSUE JULY 2014 VOLUME 9 ISSUE 7 9.95 EMPOWERING CARDHOLDERS TO HELP PREVENT CARD FRAUD Game-Changing Fraud Strategies Every Financial Institution Needs to Know By Nicole Reyes CYBER RISK MANAGEMENT By Paul Caiazzo Building a Second Vendor Program LOOKING TO REDUCE TECHNOLOGY HASSLES By Jana Fowler One CU Takes a Leap Into the Cloud Buried Under A Mountain of Paperwork and Regulatory Red Tape With SWBC Mortgage s outsourced lending program you can increase the number of mortgage loans in your portfolio while mitigating some of the administrative hassle of paperwork or compliance-related risk. Our turnkey outsourced lending program provides you with a loan officer as well as processing underwriting and closing services for your members. Best of all we take on the full scope of the compliance and regulatory burden that accompanies mortgage lending. Let SWBC Mortgage help you with the administrative and regulatory hassle of your institution s mortgage lending efforts. Call 800-460-6990 for more information CONVENTIONAL VA FHA 2014 SWBC. All rights reserved. Loans are subject to credit and property approval. Certain restrictions and conditions may apply. Programs and guidelines are subject to change. Rates change daily. SWBC Mortgage Corporation NMLS 9741 Corporate Office located at 9311 San Pedro Suite 100 San Antonio TX 78216. CONTENTS Credit Union BUSINESS JULY 2014 V O L U M E 9 I S S U E 7 4 6 8 PUBLISHER S POV Tim O Hara CU COMMENT James Collins UNDER THE HOOD Happy Anniversary GSE Reform On a Road to Nowhere Empowering Cardholders To Help Prevent Card Fraud Game-Changing Fraud Strategies Every Financial Institution Needs to Know Nicole Reyes 22 CFO CURRENCY Net Interest Income Simulation and Net Economic Value Emily Mor Hollis The Two Main Asset Liability Management Tests 25 CU CYBER RISK MANAGEMENT Building a Sound Vendor Management Program Paul Caiazzo COMPLIANCE UPDATE Jason Skemp Due Diligence Now or Significant Liability Later 11 13 20 28 30 33 37 LENDING SOLUTIONS Bob Schroeder CU SYSTEMS A BSA Process That Means Business Credit Unions Becoming More App Savvy to Focus on Member Engagement Roy W. Urrico CU BRANCH BUSINESS TECHNICALLY SPEAKING Bankruptcy Friend or Foe Looking to Reduce Technology Hassles One CU Takes Leap into the Cloud Jana Fowler CU CONTENT A Winning Formula Kelly Outwater CU TRAINING Paul Nunn The Case of Greylock FederalCredit Union Laura Enock Saving Time and Making Money with DNACreator Tips for Opening a New Branch Attack of the E-Learning Course www.cubusiness.com July 2014 Credit Union BUSINESS 1 ABOUT US Publishing Team Tim O Hara Publisher tim cubusiness.com Steve Magnuson Managing Editor steve creditunionbusiness.com Iliana Nord Operations Manager iliana cubizmag.com Patti Manzone Designer Ashok Kumar Circulation Director EMPOWERING CARDHOLDERS TO HELP PREVENT CARD FRAUD Game-Changing Fraud Strategies Every Financial Institution Needs to Know By Nicole Reyes THE CYBER TECHNOLOGY ISSUE JULY 2014 VOLUME 9 ISSUE 7 9.95 CYBER RISK MANAGEMENT By Paul Caiazzo Building a Second Vendor Program Staff Writers James Collins CU Comment Laura Enock CU Content Emily Mor Hollis CFO Currency Paul Nunn CU Training Roy W. Urricho Technically Speaking LOOKING TO REDUCE TECHNOLOGY HASSLES By Jana Fowler One CU Takes a Leap Into the Cloud Subscriptions Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year membership costs 99. An online membership form is available at www.cubusiness.com register. Contributors Paul Caiazzo Jana Fowler Kelly Outwater Nicole Reyes Bob Schroeder Jason Skemp Sales and Advertising Bernie Fitzgerald Advertising Executive Bernie cubusiness.com or 561-282-6015 1 Contact Information Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim cubusiness.com 2 Credit Union BUSINESS July 2014 www.cubusiness.com With 80% of U.S. households saving coins coin processing is in demand especially at nancial institutions where most prefer to redeem their change. Give customers the means to do it themselves and you can increase their satisfaction by as much as 20%. That s the power of self-service coin counters. Now Cummins Allison gives you more ways to add coin machines to your branch. Choose from fast quiet and reliable coin counters that you can buy rent lease or place free of charge. We ll even pick up and process your coins. Coin counters are a proven way to increase traf c and member satisfaction -- let us show you how. Get a custom report comparing your self-service coin options. cumminsallison.com traf c Copyright 2014 Cummins Allison Inc. All rights reserved. FROM TIM Publisher s POV Happy Anniversary It is often said that time flies when you re having fun and that has certainly been the case with me. This month marks the 10th Anniversary of Credit Union BUSINESS and I m having the time of my life I attribute much of my joy to the fact that I embrace the credit union philosophy of people helping people and because I have the greatest respect and admiration for the credit union professionals who take pride in actually helping their members. I often hear from CUB readers telling me how they ve learned something new from the magazine or one of its many e-Newsletters. Whether it s something about a best practice or a new way to serve members they take the time to call or write and tell me how helpful information has been to them. And I hear from credit union CEOs asking for permission to reprint articles to share with the Board or marketing or lending managers hoping to share information with their CEO. It s all music to my ears CUB was designed for the entire credit union executive suite but it seems to be particularly embraced by the CEO level. They are the folks who have worked their way up the ranks to lead their CUs and they did it the old-fashioned way--through hard work and patience. Plus they were always careful to learn as much about the business as they could. In other words they are our ultimate target audience. Lately I ve noticed a trend among other CU trade publications trying to target future generations of CU leaders with up-and-comer under 40 and even not for the CEO promotions. Well you will never find that kind of sentiment around here because today s CEO--the person in charge right here and right now--has the greatest responsibility of all keeping the CU ship afloat and growing under what may be the most challenging of circumstances since their founding. Once again this issue July 2014 marks the 10th anniversary of Credit Union BUSINESS and we re marking the occasion by announcing the formation of an exciting new digital 4 Credit Union BUSINESS destination filled with great BUSINESS information for CEOs only The CUB President s Club. The President s Club is a new membership-only area that will feature an exclusive electronic portal stocked with valuable credit union CEO information a huge on-demand print & share feature and an array of helpful items for its CEO members. During the coming months we ll contact every CU CEO in the USA with a special invitation. In the meantime all up-incomers will need to wait until they achieve true Chief Executive Officer status. Thanks for reading Get it for the entire executive team www.cubusiness.com register July 2014 www.cubusiness.com If hard work has its rewards then retirement should too. Both work and retirement should be rewarding. After years of service a solid retirement plan is the best way for an employee to enjoy what s next. Our outcome-focused approach helps her realize the retirement she deserves with these resources RetireOnTarget online planning tool guides her to better decisions Impactful employee education and communication Low-cost carefully designed investment lineups 79% of employees with a defined contribution retirement plan report increased loyalty. Discover retirement plans that work as hard as your employees do. Visit CUNA Mutual Retirement Solutions at www.cunamutual.com think401k or call 800.356.2644. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company a mutual insurance holding company its subsidiaries and affiliates. Life accident health and annuity insurance products are issued by CMFG Life Insurance Company. Each insurer is solely responsible for the financial obligations under the policies and contracts it issues. Corporate headquarters are located in Madison Wisconsin. BlackRock s 2013 Retirement Survey. 401k-9045241.1-0414-0516 CUNA Mutual Group 2014 All Rights Reserved. CU COMMENT On a Road to Nowhere GSE Reform By James Collins I was on my way to pick up my daughter from college driving along an empty highway in Eastern Washington when I passed a road sign that read Welcome to Nowhere . A few or maybe 100 miles later I passed another sign. It read You re in the middle of it . Aha I thought to myself This is basically where GSE reform is too A place on the map where nobody wants to go. First A History Lesson In 1938 after the great depression Congress created the Federal National Mortgage Association (FNMA) to provide local banks with money so more families would be able to purchase homes. In 1954 the FNMA was reformed as a private public corporation. It became a publically held company in 1968 and was finally made into an NBC miniseries in 2004. As 2008 rolled around these entities--now known as Fannie Mae and her brother Freddie Mac--carried more than 5 trillion on their combined balance sheets sported accounting irregularities galore and held a virtual monopoly on the US housing market. In short as messed up as they were they were also Washington DC normal and almost as untouchable. But that suddenly ended. Just as 2008 was about to enter its fourth quarter a few savvy investors took a careful look at their portfolios gasped and shouted Holy Crap We are underwriting Walmart greeters with 540 FICO scores and zero down payment The housing market abruptly collapsed. Fast forward to 2014. The mood in congress called for a BBQ legislators were hollering to be served equal portions of Fannie and Freddie grilled to perfection. No less than three bills were introduced in an attempt to dismantle the giants but as I am writing all three bills appear to be dead. Why One simple reason Fear. Political fear. 6 Credit Union BUSINESS Three Proposals for Reform The Path (Protecting American Taxpayers and Homeowners) Act This piece of legislation proposed by various Republicans is basically the equivalent of waging nuclear war on the status quo. It eliminates most current Government Sponsored Enterprise functions and replaces them with private capital programs. Given the utter lack of federal guarantees under this proposal banks would be free to offer widely divergent products. Think of this as the Wild West version. The biggest problem with this The magnitude. Taking government out of the market entirely would leave a very large gap. Who would step in At what rates Rising home rates typically force home loan values to drop dramatically. Corker-Warner Introduced by one Republican and one Democratic in a rare love-fest not seen since the premier of Brokeback Mountain this proposal was also designed to dismantle current GSEs and replace them with a new GSE--the FMIC--to regulate and insure mortgages and essentially handle what s left of Fannie and Freddie. July 2014 www.cubusiness.com CU COMMENT 3. It must have governmental support 4. It must avoid any governmental support 5. It must include protections for less credit worthy individuals 6. It must not include special protections for any individuals The result Given that Fannie and Freddie are making money and returning income to the Treasury GSE reform is on a road to nowhere. And I know exactly where that is. James Collins is CEO of O Bee Credit Union based in Tumwater Washington and can be reached at jcollins obee.com. The problem The FMIC is basically a clone of Fannie Freddie but with more capital. The problem The FMIC is basically a clone of Fannie Freddie but with more capital. Republican Congressman Jeb Hensarling (who wrote the Path bill) describes his concern If at the end of the day taxpayers are still on the hook then I fear all you ve done is put Fannie and Freddie in the Federal Witness Protection Program given them cosmetic surgery a new identity and released them back into the general public. Johnson-Crapo This bill is another bipartisan attempt from a Republican Senator Mike Crapo (who arguably had the worst name in elementary school ever) and Democratic Senator Tim Johnson. Similar to the Corker Warner legislation the FMIC would replace Fannie and Freddie after five years. And like the other bill the FMIC would setup a 90% insurance pool for losses. It differs from Corker Warner in that it keeps some of the current GSE s affordable home framework and it expands support for rental housing. In other words Johnson Crapo did a better job of cloning Fannie Freddie than Corker Warner. The problem It walks like a duck it quacks like a duck and it can go bankrupt like the duck called Freddie. BECOME A CREDIT UNION BUSINESS MEMBER AND WE LL 3-YEAR SEND YOU A FREE KINDLE Sign up for a 3 year DIGITAL subscription and CUB will give you a Kindle Reader to enjoy every issue 69 The LendIng ISSUe november 2013 voLUme 8 ISSUe 11 9.95 x 3 207 The Basics of Managing Interest Rate Risk and the Concept of Duration A Mid-Sized Credit Union Spreads Its Wings Where Reform is Today As I write about this subject in mid May all three bills appear deader than Macaulay Culkin s acting career. That s because everyone is looking for a fix that fits exactly into this mold 1. It cannot be like Fannie or Freddie 2. It must be just like Fannie and Freddie Also available in print 89 x 3 267 cubusiness.com SIGN UP AT how Congressional Federal migrated From Using a mortgage Less than 6 ounces CUSo to offering Fits Full-service Lending in your pocket Holds over 1 000 books Downloads books in 60 seconds with built-in Wi-Fi New darker hand-tuned fonts for easier reading www.cubusiness.com July 2014 Credit Union BUSINESS 7 UNDER THE HOOD Empowering Cardholders To Help Prevent Card Fraud Game-Changing Fraud Strategies Every Financial Institution Needs to Know hen several popular retailers recently announced their payment systems had been hacked media outlets throughout the country were hooked on the story. Reporters producers and bloggers quickly learned they could localize the news by talking with area financial institutions (FIs) and residents who had shopped at the popular chain stores during the holiday season. It seemed like fresh stories were published every hour for weeks and the coverage continued for several months. W By Nicole Reyes with every new version of fraud-prevention software consumers are still best at predicting their own purchasing behavior. They know what transactions qualify as unusual for their accounts better than any system or software can. Empowering Cardholders to Help Prevent Card Fraud As a result cardholders from all over the U.S. contacted their card issuers to find out what they should do to protect their accounts. News of a major data breach it seemed had finally hit home for millions of American consumers. For those on the front lines of fraud detection and prevention this consumer wake-up call was long overdue. We understand the extraordinary difference diligent aware cardholders can make in the fight against the ever-growing sophisticated contingent of counterfeiters targeting the U.S. card payments system. Even the most high-tech software and careful human analysis can be significantly improved when cardholders actively engage in monitoring and detecting red flags on their accounts. Much of this is due to the fact that today s consumer fraud tools rely on triggers set by the cardholders themselves. Although fraud detection strategies are becoming increasingly granular 8 Credit Union BUSINESS Although fraud detection strategies are becoming increasingly granular with every new version of fraud-prevention software consumers are still best at predicting their own purchasing behavior. So how do you begin helping these new savvy consumers better play their part in preventing fraud There are essentially two ways Educate consumers on fraud trends and offer them tips on protecting themselves Put actual fraud prevention tools in the hands of consumers Educating Consumers Helping cardholders spot trouble before it affects them is incredibly valuable not only for individuals but also for CUs. www.cubusiness.com July 2014 UNDER THE HOOD upon phishing emails or tampered terminals on their accounts. Local law enforcement wants to know when these crimes are being perpetrated on the community so they can better investigate the scope of the situation and more quickly capture the bad guys. Federal authorities also need to know about consumer-generated intelligence to help them pinpoint the source of malicious software and counterfeiting crime rings. Here are a few organizations you might want to encourage consumers to contact when they suspect fraudulent activity StopFraud.gov stopfraud.gov report.html ic3.gov ic3.gov United States Computer Emergency Readiness Team us-cert.gov report-phishing The abundance of communication channels available to CUs today makes sharing a large amount of information quickly and broadly easier. When researching content for blogs social channels newsletters emails statement stuffers and more consider including more fraud-focused tips and advice. Encouraging consumers to get involved in education can be a great community-building activity. Crowdsource your educational content by asking cardholders to send in screenshots of phishing emails. Host regular educational sessions moderated by an expert from your CU at a branch local coffee house or even online as a webinar or tweetup and have consumers share stories and offer their own warnings. If you re looking for more content consider monitoring the following sites where you can get great information that you can repurpose with attribution BankInfoSecurity s The Fraud Blog bankinfosecurity. com blogs fraud-blog-b-18 Visa Security Sense visasecuritysense.com en_US fraud-news.jsp APWG.org antiphishing.org FBI E-Scams & Warnings fbi.gov scams-safety escams LooksTooGoodtobeTrue.com lookstoogoodtobetrue. com OnGuardOnline.gov onguardonline.gov FTC Bureau of Consumer Protection consumer.ftc. gov MyCreditUnion.gov mycreditunion.gov In addition to educating consumers on what to look for teach them how to respond if they come across red flags or stumble www.cubusiness.com Providing Tools Consumer fraud prevention tools are having a positive impact and are helping minimize losses. Stolen consumer information was misused an average of 95 days in 2010 and was cut to 48 days by 2012 a statistic that may be partially attributed to faster response times triggered by heavier consumer involvement. According to Javelin Strategy & Research more than 50 percent of fraud victims in 2012 actively detected fraud using financial With fraud time is of the essence and we want to be able to reach our cardholders as soon as possible in the way they want to be reached. - Ren e Sanders Purdue Federal Credit Union alerts credit monitoring or identity protection services and by monitoring their accounts. Ren e Sanders who manages nearly 100 000 credit and debit cards for Purdue Federal Credit Union in Indiana said fraud text alerts have gained popularity since the 786 million credit union first introduced them. The jump in enrollment has spiked even higher since news of the Target Neiman Marcus and Michael s data breaches Sanders said. Credit Union BUSINESS 9 July 2014 UNDER THE HOOD Fraud text alerts are among the tools consumers and CUs use to identify fraud and reduce the unnecessary inconvenience often generated by false positives. Triggered by a CUs own unique fraud prevention strategies fraud text alerts are customized to an individual credit union s existing program. Any time a particular transaction is flagged as risky human fraud analysts review the transaction in the context of the account as well as the CU s existing strategies. If warranted fraud analysts will then verify the transaction by texting the cardholder. Thanks to the alerts two-way communication feature a compromised account can be shut down immediately upon verification of the fraud from the cardholder. Other consumerfacing fraud prevention tools require the cardholder to call in to speak with a representative who then must investigate before taking action. This can take up to several hours leaving the account open to more fraud. Don t be shy about encouraging cardholders to sign up for your entire suite of consumer-fraud tools when you discuss what your CU has to offer. That s what Sanders and her team does with their Layer Your Alerts marketing strategy They break down each of the credit union s three available tools and explain how each works. Members have access to Purdue Federal E-Alerts. These email and or text alerts push notifications to members based on their preferences and range from balance alerts to loan-due alerts. V.me by Visa. Also delivered via email or text these alerts are ideal for monitoring transactions as they happen. Purdue Federal Fraud Text Alerts. Real-time debit and credit fraud alerts are delivered to the member via text message. Because some debit transactions are not processed through the Visa payment network the fraud text alerts are a good supplement to V.me by Visa. We recognized that offering several different options could be confusing but we wanted to be proactive in providing choice because every member has a different preference for communicating said Sanders. Some like phone some like email others like text. With fraud time is of the essence and we want to be able to reach our cardholders as soon as possible in the way they want to be reached. Sanders also advocates aggressively promoting fraud prevention tools because she has seen how marketing can dramatically impact enrollment. In October 2013 her team pushed out its Layer Your Alerts campaign and enrollment in fraud text alerts more than tripled as compared to the previous two months. The credit union promoted the tools again immediately following news of the Target breach and members enrolled at a rate nearly 30 times higher than an average month. An Ongoing Effort Attrition rates average 21 percent among cardholders who ve experienced card fraud so it s important that you manage how members perceive your ability to protect cardholders and that you emphasize how cardholder involvement is an additional layer of protection to those your CU already has in place. Communicate with members immediately following any breach and discuss your zero-liability and provisional credit policies. But remember CUs should not wait for a major incident to make national news before encouraging members to get involved in fraud prevention. Counterfeiters often wait months to pull the trigger on the fraudulent transactions they set up so ongoing education about diligent transactions monitoring is always a good idea. Nicole Reyes is a Senior Fraud Prevention Analyst for The Members Group (TMG). In this role Nicole researches and analyzes current fraud trends and actively manages the fraud-prevention strategies for TMG s financial institution clients. She is also an important part of TMG s fraud detection and prevention product implementation team and is a frequent contributor to financial industry news coverage of fraud trends. Nicole s passion is to help credit unions and community banks mitigate their fraud losses by utilizing proactive and innovative methods. Nicole has been with TMG since 2007 and has more than 13 years of card industry experience. She can be reached at nicoler themembersgroup.com. More Than 12 Million Identity Fraud Victims in 2012 According to Latest Javelin Strategy & Research Report Javelin Strategy & Research Feb. 20 2013 2. Annual ACI Worldwide Global Fraud Report Finds One-in-Four Consumers Victims of Card Fraud ACI October 16 2012 1 10 Credit Union BUSINESS July 2014 www.cubusiness.com LENDING SOLUTIONS Bankruptcy Friend or Foe I By Bob Schroeder All I knew about bankruptcy back then was that it meant we transferred a file to someone else in the office to take care of. But here I was confronting a policeman having to make a decision. So I answered by saying that we were already in possession of the vehicle and would have to sort through the bankruptcy issue later. He asked if I would follow him home so that he could remove his personal property after which he would surrender the car. I told him I couldn t do that but if he gave me his keys I would drive him home. He agreed and we set off on a long 15-minute ride. We did not have a lot to talk about. Two days later my company verified the bankruptcy and gave him back his car. My boss told me the decision to take the car was a smart one but it was a really just a lucky guess on my part. That was my first experience with bankruptcy. Little did I know that 30 years later I would be writing an article on bankruptcy for a leading trade journal. I didn t think bankruptcy was fair when I started out in this business. I thought bankruptcy meant the vast majority of people had to pay higher interest rates so that a small minority could walk away from their debts. The more I learned about bankruptcy and its history however the more I began to realize why it works. Before the establishment of legal bankruptcy any man who owed money that he could not repay was forced along with his wife children or servants into bonded labor a status they kept until their creditor recouped his losses via their physical labor. Now that I am older and possibly wiser I believe bankruptcy is a necessity in any civilized society. Sometimes life is not fair and the sooner we realize it the better off we are. Besides it does not matter what I think bankruptcy is here to stay. Let s look at bankruptcy through the eyes of the debtor. What is the bankruptcy experience like How much does it cost What benefits will the debtor receive What paperwork is required Seventy percent of all bankruptcies are chapter VII. Chapter VII roughly costs between 2 000 and 2 500. The debtor must fill our numerous forms that ask for a list of creditors Credit Union BUSINESS 11 remember one beautiful March day in Chicago--yes Chicago does have beautiful March days they occur once every other year--when I worked as a field representative for an auto finance company. I had been sent to find the car of 60-day account and located it in a Chicago police department parking lot. I immediately blocked it with my car so that it could not be moved. This was long before cell or car phones and I recall walking down the block to find the nearest pay phone to call the office. I was told to go back and wait in my car that a tow truck would arrive shortly to impound the vehicle. And I sat in my car lulled into a half slumber by the heat of bright sunlight for about a half hour when a sudden knock on the window startled me into consciousness. Outside stood a middle aged uniformed police officer asking me to move so he could get to his vehicle. I got out of my car and just 22 years old and looking like I was 17 told the officer that I was a representative from the finance company the car was in our possession and I could not give it back to him. He answered by saying he had filed for bankruptcy. www.cubusiness.com July 2014 LENDING SOLUTIONS the nature of their claims statement of intent schedule of income and anticipated income list of assets a detailed list of living expenses and a schedule of contracts and leases. They must also provide copies of tax returns and a certificate of credit counseling usually obtained via the Internet. Once the paperwork is submitted a Bankruptcy petition is filed and the debtor receives a case number and is protected from creditors by an Automatic Stay . Between 20 and 40 days after filing the petition the US Trustee will hold a meeting of creditors during which all debtors are nervous until they discover no one bothers to show up. Assets if any may be sold and any proceeds will go to the creditors. Approximately 90 to 120 days after the filing the debtor receives a Discharge . A Discharge means debtors no longer legally owe certain debts such as unsecured loans deficiency balances on cars they ve surrendered and upside down amounts on real estate secured loans. Unfortunately for the debtor they still owe taxes alimony child support and some student loans. While this debt may be undesirable it is not subject to the Discharge order. Let s do a cost benefit analysis. The cost of filing for bankruptcy is approximately 2 000 plus twenty to thirty hours of paperwork gathering and meeting time versus the benefit of getting out of paying your unsecured debt and upside down amounts on vehicles and homes. Keep in mind the benefit is tax-free. We recommend you look at the benefit in relation to annual gross income (AGI). How much is your unsecured loan amount and upside down amount on secured loans in relation to your AGI How much is manageable and what percentage makes you a good candidate for bankruptcy What would motivate you to consider going through the bankruptcy process Suppose you are looking at a member s credit report with 20 000 in unsecured debt a 21 000 car loan and 100 000 mortgage. They opened up three new credit cards in the last 24 months and have used up eighty percent of their credit limits. They also have a ten-year credit history without one missed payment. Are they a bankruptcy threat If you are a credit reporting agency selling a bankruptcy predictor model you have to make a decision using only this 12 Credit Union BUSINESS July 2014 www.cubusiness.com LENDING SOLUTIONS limited information. Just as in my repo story they often have to make decisions without having all the information they need. Credit unions are spending a lot of money with credit reporting agencies on bankruptcy scoring models in an attempt to identify bankruptcy candidates. While I applaud their efforts they cannot possibly be accurate given the limited information available to them. All they can do is identify the amount of the unsecured debt. They do not know the negative equity positions on secured loans or the debtor s income. Lending Solutions Consulting Inc. (LSCI) has developed a model that predicts bankruptcy with greater accuracy then most other bankruptcy models. Our model which we call HYLS or high yield lending strategy has much more information including equity positions of secured loans and income. Using HYLS in conjunction with proper training will eliminate surprise bankruptcies. In fact it is so effective that some of our client s say it should be named how you lend smart . The HYLS model looks at how debtor s can benefit from bankruptcy. In our earlier example we know the unsecured debt is 20 000. What is the equity position on the 21 000 car loan If the car were worth 18 000 we would calculate the total unsecured loan amount as 23 000 ( 20 000 in unsecured loans plus 3 000 in negative equity). If the member s AGI is 50 000 or less you have a strong bankruptcy candidate. AGI of 85 000 or more and bankruptcy is not a threat as the member has the earnings to support 23 000 in debt. AGI between 50 000 - 85 000 is marginal. Let s assume the member is applying for a new car loan and earns 45 000 annually. You identified him as a prime bankruptcy candidate so you need to turn him down correct Not so fast. LSCI s lending philosophy is the only reason a loan should be turned down is when you believe the credit union will not be paid . Can you make a loan to this member that survives bankruptcy You know the member will have trouble paying everyone but will he pay you If you give him a car loan with an equity position on direct deposit you will get paid even when others may not. Remember our philosophy which would rule out a trade-in since the member has negative equity in the car. Negative equity on a secured loan to a bankruptcy candidate is called a mistake . If you pay off that mistake you own the mistake and you don t want to own the mistake. You can finance a new car with a down payment because the member can use the balance of his existing credit lines to make the down payment. Bankruptcy attorneys coach their clients to take advances on unsecured debt to pay down secured debt prior to bankruptcy. Using available credit lines for a down payment is a logical extension of that concept. What does he do with the car he wanted to trade in You can t tell him what to do however you can advise him that many people would surrender the vehicle to the lender and that the lender may sue for a deficiency balance. Again you are not telling him what to do but others have filed bankruptcy discharging the deficiency balance debt. Give him a car loan at a reasonable rate that will survive bankruptcy before he files and assist him with a credit card after bankruptcy to help him rebuild his credit. Tell the member you want a relationship for life and are willing to help him through the good times and the bad. Most members biggest fear of bankruptcy is that no one will give them credit again. Put him at ease and let him know you are there for him. If this member surrenders the car in bankruptcy he will still have to finance a new car after bankruptcy. Many lenders will be glad to help banks will offer him a 24 percent loan and credit unions an 18 percent loan. Knowing the debtor s interest rates after bankruptcy gives you a strong bargaining position on potential reaffirmations. A reaffirmation is a contractual agreement making your loan non-dischargeable. You may convince the debtor to keep your car because of the value of your rate. If they surrender your car and their 2.9 percent APR and buy a new car at 18 percent are they really saving money Imagine a new member walking into your credit union and speaking with a loan officer. He mentions that he has considered filing for bankruptcy. At the this point 95 percent of America s credit union loan officers will instantly begin looking for the denial reasons and try getting out of the conversation as quickly as possible. However well-trained Loan officers will be looking for ways to nurture a lifelong relationship. How do your loan officers react We coach our clients to develop relationships with bankruptcy attorneys. In fact we know of at least one credit union that went so far as to lease out office space to an attorney Let attorneys know that you will be happy to finance cars to bankruptcy candidates before they file so they can get a reasonable interest rate and that after they file you will help www.cubusiness.com July 2014 Credit Union BUSINESS 13 LENDING SOLUTIONS 1. Implement the lending philosophy the only reason we will deny a loan request is because we feel the credit union will not be repaid . 2. Provide training to your loan officers. Make them experts in bankruptcy making bankruptcy proof loans FICO scoring model credit score enhancement services. LSCI can help you with this. 3. Use the LSCI HYLS model to predict bankruptcies. You can cancel the bankruptcy models from the credit reporting agencies. They do not have the critical information. 4. Develop partnerships with bankruptcy attorneys. I have time available this fall and would love the opportunity to come in and work with your staff. I can help them think outside of the box and contribute a favorable outcome on your net income. We offer a money back guarantee if you are not completely satisfied. Have a great lending month Bob Schroeder CLE is Vice President Consultant of Lending Solutions Consulting Inc. or LSCI. Bob began his thirty plus year credit union career in collections before moving on to lending. He has eleven years experience with two of the largest credit unions in the country rising to the level of Vice President of Credit. He moved on to serve as CEO of a community credit union. During his twenty-one years as CEO the credit union experienced a period of rapid growth and strong earnings. Bob received his Bachelor of Science degree in Finance from Northern Illinois University and in 2005 was the recipient of a Lifetime Achievement Award from NIU for his work in financial services. Bob resides with his wife in Sycamore IL and is the proud father of three grown children. Bob now dedicates his time to improving the financial performance of LSCI client credit unions through his teaching of the University of Lending and other on site consulting services. Bob can be reached at bschroeder rexcuadvice.com. With the proper philosophy training tools and relationships bankruptcy can be a big asset to your credit union. It is an important way to help you prosper in a low interest rate environment. them rebuild their credit scores. With proper coaching people can achieve a 700 plus FICO score in as little as three years after the bankruptcy is discharged. We learned something lenders were doing that really irritated an attorney during one of our meetings. Even though the old school part of me was delighted that we had irritated him the new school me began looking for opportunities. He was upset that mortgage lenders were not reporting paid as agreed to the credit reporting agencies after bankruptcy. We immediately told the attorney that we would be happy to refinance those loans to help their clients rebuild their credit scores and added this to the list we present to other attorneys. Let attorneys know that you will give their business cards to our members who are bankruptcy candidates. Remember the old days before indirect lending when auto dealers were no friends of credit unions They gave out misleading or even false information about credit unions in an effort to finance the car purchase themselves. Because they controlled the point of purchase they won most of the time. Today auto dealers are valued business partners without which many credit unions could not survive. I see bankruptcy attorneys taking a similar trajectory. With the proper philosophy training tools and relationships bankruptcy can be a big asset to your credit union. It is an important way to help you prosper in a low interest rate environment. Follow these steps 14 Credit Union BUSINESS July 2014 www.cubusiness.com CU SYSTEMS Looking to Reduce Technology Hassles One CU Takes a Leap into the Cloud By Jana Fowler A Desert Pacific FCU located in Long Beach CA is the first credit union to adopt Catalyst Corporate s new hosted cloud services. Known as C3 the Catalyst Cloud Computing service provides safe sound and secure options for upsourcing information technology systems and processes capable of freeing credit unions from ongoing technological challenges and hassles. That solution is just what Christine Wood Chief Operating Officer at the 58 million VA Desert Pacific FCU was looking for. According to Wood the technology situation at the credit union has been difficult. We have 14 employees and no IT department. We have a part-time consultant but he is not always available to us she explained. We simply don t have any technical expertise on staff said Wood who has been with the credit union for nine years. I know more about IT than I ever wanted to know because of my position here she said. But as COO she also has to focus on lending operations and compliance. Since everything at the credit union seems IT-related these days when new technology is added Wood said the staff is always worrying and wondering Will it work with our existing technology Will it connect to our two branches And then there is the problem facing William Joya. Joya is the credit union s business development officer who visits nearby VA hospitals--often on a daily basis--to help www.cubusiness.com V Mounting frustration over high-tech headaches has caused VA Desert Pacific Federal Credit Union to take the ultimate leap by launching into the technology systems cloud. Christine Wood Chief Operating Officer at VA Desert Pacific FCU members take care of business at their workplace. Among the credit union s 4 600 members are doctors nurses and hospital staff who don t have the time to break away from surgeries to tend to credit union business. So we bring the service to them sort of like a credit union on wheels Wood said. But our credit union representative--Joya--has to do all his work Credit Union BUSINESS 15 July 2014 CU SYSTEMS William Joya talking with members of the VA Desert Pacific Federal Credit Union Historically whenever technology has been problematic we ve simply put a patch on it. IT has never been a strategic priority. But we came to a point where we had to decide the next step invest more in hardware or move to the cloud. Catalyst Corporate s C3 cloud service-- powered by D H a leading technology provider--is a fully compliant and redundant cloud grid that can be leveraged for all missioncritical applications including Microsoft Office and hundreds of financial services applications. According to Karen Coble Catalyst Corporate s Vice President of Sales the C3 cloud service was built from the ground up for financial services organizations to ensure that credit unions security and regulatory needs are met. Segmentation of these services for financial institutions is important for credit unions to understand. This is not the same as the public cloud said Wood who noted that VA Desert Pacific FCU is already accustomed to outsourcing in a cloud environment by virtue of using an online service bureau for its core processing. offline while he s at the hospital and duplicate all his work once he returns to the office. Those challenges aside the technology tipping point came earlier this year when the credit union was trying to convert its telephone system and several glitches cropped up. The folks putting in the new system thought we might be experiencing trouble with our old router but it was going to cost 30 000 to simply diagnose the problem and that didn t include the cost of fixing the problem she said. Our efforts to move the credit union forward were being hindered by outdated IT infrastructure she noted. About that time Wood began seeing emails from Catalyst Corporate promoting webinars designed to explain the benefits of moving to cloud services. I decided to attend a webinar and I knew right away that cloud services offered a solution that would help us quite a bit she said. This was not another piecemeal solution--like adding more bandwidth reconfiguring our system or getting a new router--but rather an approach that would result in big benefits for the credit union over the long term. 16 Credit Union BUSINESS Key Factors When Considering the Cloud Credit union consultant and technology expert Tim Lerew of Tim Lerew & Associates in Evergreen Colo. also acknowledged that Even before the advent of Internet- and cloud-based applications and data servers many small-to-medium-sized credit unions took advantage of a service bureau approach to outsourcing their IT and computing infrastructure. The requisite private data lines connectivity and terminals got the basics of the job done. Now said Lerew cloud or Internet-connected applications and storage to secure data centers have significantly enhanced what used to be limited proprietary host processing options. For example Microsoft Office is now engineered www.cubusiness.com July 2014 CU SYSTEMS to run and run well via cloud services. In addition host processing applications for the teller line back office call center telephones accounting even FedLine services can now be delivered quickly and securely by using Internet standardsbased connectivity and protocols. Benefits of a strong cloud-based IT enterprise environment are many as long as the partner providing the services has a depth of resources management expertise and commitment to future applications and capabilities according to Lerew. These criteria are necessary to ensure that a credit union s technology can meet member expectations not only today but as they evolve tomorrow. Lerew said credit unions considering a move to a cloudbased enterprise solution should look at these key factors the math the security surrounding the solution and strength of the potential business partner. Will a move to the cloud offset current IT expenditures on hardware software training compliance and--often most significantly--technology staff According to Lerew in many cases the answer will be an emphatic yes. For many credit unions the potential savings is analogous to the earlier move from paper- and postage-driven statements to online and PDF statements. Those savings went straight to the bottom line he said. Regarding security of cloud services Lerew said tunneling protocols make it possible to safely and securely send and further encrypt private data over the Internet. Think about the Internet as the San Francisco Bay and a modern tunneling protocol as the BART tube (an underwater rail tunnel between San Francisco and Oakland) safely carrying passengers under the bay for more than 40 years. Are leaks or other disasters possible in this age of hackers Certainly but that s where a layered encryption strategy enhances overall data integrity and security Lerew said. Consider credit union disaster recovery plans most of which now make extensive use of remote data centers as well as Internet connectivity. If after due diligence you can trust these systems and protocols for your disaster recovery you can probably trust them for your www.cubusiness.com day-to-day credit union operations as well. What Does This Mean to Me According to Catalyst Corporate s Karen Coble C3 cloud services provide a number of benefits including Reduced or eliminated system and software upgrades and ongoing maintenance 24 7 management and support Built in security business continuity and compliance Data assurance Wood reports that VA Desert Pacific FCU expects to reduce its technology expenditures by moving to Catalyst Corporate s cloud services. Even if we didn t save money I would make the move because of the other benefits she said. The biggest benefit of outsourcing our technology has nothing to do with money said Wood. Our VP of Lending VP of Operations and other members of staff have been struggling with technology and it s taking up too much of their time. Because we are a single-sponsor credit union serving VA hospitals we ve been in business expansion mode over the past few years despite the economic downturn she said. We have tried to grow the loan portfolio and have been very successful but technology has been the weakest link. Time is money Wood continued. Are you really saving money by keeping IT in-house If your employees are spending all their time fixing technology they are not utilizing their full potential. The cloud service allows us to get out of the IT business and focus on our members. IT responsibilities are shifted to IT experts instead of falling on credit union management to figure it out. Wood explained that the credit union has been setting its strategic direction using Lean Thinking the process for maximizing customer value and minimizing organizational waste that is identified in Jim Womack and Dan Jones book of the same name. We have an enthusiastic capable staff that wants to grow the credit union she said. We want to capitalize on our employees skills and give them the tools to create a leaner meaner operation. Credit Union BUSINESS 17 July 2014 CU SYSTEMS Wood also is pleased that the credit union will gain true disaster recovery capability. Back-up of all data can occur in real-time. And she notes Our data is protected better as the equipment resides in secured data centers. William Joya talking with members of the VA Desert Pacific Federal Credit Union Another benefit of cloud services according to Wood is that data is accessible to authorized employees anywhere anytime from any computer. So with cloud services William Joya no longer will have to duplicate his work. Wood also is pleased that the credit union will gain true disaster recovery capability. Back up of all data can occur in real-time. And she notes Our data is protected better as the equipment resides in secured data centers. Wood acknowledged that a couple of surprises have arisen as a result of the credit union placing confidence in a part-time IT consultant one issue was revealed by an outside auditor and another by the credit union s insurance company. It turns out that I was investing resources and getting nothing in return Wood said. After reviewing Catalyst Corporate D H sample reports Wood feels she will gain a better understanding of what IT systems and processes are being monitored such as the number of applications members access and the time it takes for them to receive information and where the credit union can get the most value from budgeting additional resources. And rather than ineffective finger pointing with a patchwork of vendors when inevitable troubles arise one vendor now will be responsible for our network infrastructure applications and uptime Wood said. Ongoing annual licensing and maintenance were draining our resources and now we will have predictable annual IT costs she added. 18 Credit Union BUSINESS Wood was quick to say that she will be able to pinpoint the capabilities and benefits of the move to the cloud better once implementation scheduled for October is complete. In the meantime she said We have had many meetings with Catalyst Corporate and D H to discuss the service options available to us. They have been very helpful in answering my ongoing question What does this mean to me For additional information about the C3 suite of hosted services managed services or on-premise technology solutions please visit www.catalystcorp.org c3 send a message to contactus catalystcorp.org or call 800.442.5763 option 5. Jana Fowler is an experienced journalist and has written extensively aboutchallenges facing credit unions and the credit union industry. She is now a publication writer editor for Catalyst Corporate. Jana lives in Allen Texas where there are clouds-sometimes. CEO SUBSCRIPTION WITH BENEFITS Benefit your CFO COO CMO CCO CLO CIO HRD With FREE Monthly E-Newsletters Subscribe NOW www.cubusiness.com register www.cubusiness.com July 2014 CU CONTENT Saving Time and Making Money with DNACreator The Case of Greylock Federal Credit Union G By Laura Enock DNACreator to build a criticized assetreporting app to automate the process for Greylock. Zimmer s new app runs the reports at the end of every month so Greylock s loan officers always have the information they need at their fingertips. What s more the labor hours Greylock spends on criticized asset reporting has dropped to less than 100 hours per year. The extra 900 hours a year freed up by Zimmer s innovative technological solution means loan officers now spend more time meeting with new lending clients and bringing in new business. While the labor savings alone would have been worth Greylock s investment in time labor and training the new business potential has made Zimmer s solution even more compelling and the remarkable capabilities built into DNACreator means the returns will keep accruing. The DNACreator software makes it easy to sell applications via their app store to other Fiserv clients who use the DNA core system. To date Greylock has sold their Criticized Asset Report to 10 other institutions allowing Greylock to recover a significant portion of their development costs. Plus the opportunity to engage in software development helps Greylock attract top-flight programming talent and use the revenue generated by the sale of their app solutions to compensate staff. They ve followed their initial success by producing 10 other DNACreator apps ranging from loan tracking to Experian report data management and they re far from finished. Zimmer wants to make automation a part of every CU product. We re looking at form creation for new customer acquisition. We need OFAC verification and ID check whenever a new member joins our CU. While there are outside firms that www.cubusiness.com reylock Federal Credit Union had a labor problem As a lending-focused credit union they had to comply with a complex set of burdensome regulations that required Greylock s loan officers to compile a large volume of information and that meant spending hours pouring through spreadsheets searching for the requisite data. This laborious task not only took up a great deal of time--approximately 1 000 labor hours annually--it also introduced a greater potential for data entry error. But regulations required the reports. That s where Kevin Zimmer Chief Information Officer and head of the new Greylock Technology Group comes in. As an experienced programmer and developer he saw opportunity in the data gathering process where most people had seen only significant loss of time and productivity. Zimmer met with Greylock s head of commercial lending to find out what data was needed and which parts of the data gathering process could be automated. He then compiled a set of specifications and sent the list to his development team who used Fiserv s Kevin Zimmer Chief Information Officer and President Greylock Technology Group 20 Credit Union BUSINESS July 2014 CU CONTENT provide that service it s time consuming. So our Lexis-Nexis interface sends and receives information automatically incorporating it into DNACreator. Our service representatives just click a button. Innovative ideas like this have lead Greylock to launch a new credit union service organization--Greylock Technology Group--with Zimmer as President. He says GTG is a way to share that knowledge with the community banking industry and generate revenue for Greylock Federal Credit Union. Greylock President Marilyn Sperling adds We are excited about the efficiencies GTG can bring to the daily operations of community banking institutions. We also look forward to the contributions GTG will make to the financial industry s information technology. Other credit unions looking to follow Greylock s example have their work cut out for them. As Zimmer points out Greylock has been a leader in technology for more than 40 years. In 1979 we were one of the first financial institutions to have in-house data processing. We ve always been a leader in the field. That technology leadership is evident in Greylock s investment in its development staff. Greylock currently has ten full time developers on the payroll all of whom have significant programming experience along with a thorough knowledge of core banking procedures. Greylock paid for two of them to attend Fiserv s DNACreator training which is recommended and helpful for using their software. The two individuals were able to lead the rest of Greylock s team in adapting DNACreator for use in other applications. The training is also required for building apps that are eligible for listing on Fiserv s app store. At 2 500 per enrollment for the one-week course the training is a bargain given what it s enabled Greylock to do both in terms of creating efficiencies for the credit union and for generating ongoing revenue by selling their apps to other institutions. Despite this training there was still a learning curve as Zimmer and the development team figured out what DNACreator could do and how to do it. It gets easier every time you use it until you try something else that s completely new Zimmer joked. To overcome this learning curve Zimmer highly recommends the Fiserv portal. This portal is a connection to other Fiserv developers who share technology solutions and offers community support. The portal is also regularly frequented by Fiserv s head of app development who often helps clients navigate Fiserv s toolkit to adapt its program to meet the needs of their organization. The DNACreator environment also offers a fantastic array of applications for users not interested in app development. The apps created by other user institutions have been field-tested to meet credit union standards and are rigorously vetted by Fiserv which certifies each app before allowing it to go on sale. The advantage of DNACreator apps is that they can be swapped out on the fly. There s no need to wait for a massive system update said Zimmer. Apps on the app store range in price from free to roughly 20 000 depending upon its functionality and the level of service. The store currently boasts more than 50 applications all of which include optional bundled support. Greylock s Criticized Asset Report app for example offers a 60-day free trial. License activation costs 7 500 and the purchase comes bundled with a first year maintenance plan for 1 500. Whether you have the personnel to develop apps for sale to other users or just need technological solutions to help boost your own credit union s accuracy and efficiency DNACreator can help. The strength of the DNACreator platform is tied to the common strength all credit unions share community. In much the same way as individual credit unions are made stronger by their members coming together to solve financial problems DNACreator allows credit unions to come together to solve their own problems. Greylock Federal shows how the power of that collaboration can bring a profit to institutions and better service to its members. Laura Enock is Founder and Publisher of CUcontent.com a credit union-specific content service. Join hundreds of credit unions getting FREE monthly content Email her at laura cucontent.com or visit CUcontent.com. www.cubusiness.com July 2014 Credit Union BUSINESS 21 CFO CURRENCY The Two Main Asset Liability Management Tests Net Interest Income Simulation and Net Economic Value N By Emily Mor Hollis borrowing cost for the liabilities however no value is given to future development such as growth of membership branch openings or new products since the purpose of the analysis is to isolate interest rate risk. This base economic value is compared to the up-and-down 300 basis point (bp) scenarios as a measure of risk. If the balance sheet contains longer-term assets a substantial amount of economic value risk likely exists. Generally a variance greater than 50 percent in a shock-up 300 bp environment borders an unacceptable level. NEV is more robust than NII in the fact that it captures the risks inherent in longer cash flows outside the NII simulation horizon. Performing an NII simulation over a traditionally limited forecast horizon (i.e. five years) demonstrates no difference in interest rate risk between five-year-term and longer-term assets. On the other hand an economic value perspective (NEV) would demonstrate that the projected fair value of the longer-term assets would decrease by much greater amounts if rates moved higher. In my opinion both analyses are important. The NII should not be used as a budget but merely for short-term income volatility measures. The NEV should not be replaced with healthy day-to-day management but more for assessment of outlier risk and risk to capital. NII is easy to understand and credit unions are accustomed to using such tests for measuring the familiar return on assets which is conducted every year with budgets. However using NII as a sole test is shortsighted for several reasons not the least of which is that institutions have failed with acceptable shortterm NII result tests. As an example assume a credit union s assets are 100% comprised of thirty year zero-couponed bonds yielding 6 percent and funded by share drafts yielding 0 percent. The www.cubusiness.com et Interest Income (NII) simulation measures the volatility of net interest income as a consequence of different interest rate conditions. The credit union s balance sheet (generally for a one- to five-year period) is entered into a system to execute a base-case model where there is no change in the market interest rate environment and to record the resulting net interest income. NII is defined as interest income less interest expense (neither operating expenses nor fee income are included). The balance sheet is then subjected to extreme interest rate scenarios and the NII generated is compared to the base case. A higher variance in these results equates to higher interest-rate risk within the balance sheet. Net Economic Value (NEV) is the difference between the net present value of the credit union s assets (including the value of the asset s embedded options) and the net present value of the credit union s shares and liabilities (including the value of the liabilities embedded options). Cash flows are generally valued using a market rate for the assets and an alternative 22 Credit Union BUSINESS July 2014 institutions failed. Assumptions for the NII and NEV CFO CURRENCY Simply put there are many more assumptions built into the NII then snapshot in time while the NII projects a balance sheet over reinvestments of cash flows. Because NEV relies upon a standard d it eliminates the These rate assumptions should altogether. credit union is making a substantial spread and a rate increaseforecast horizon problembe utilized in the NEV analysis of 300 basis points would most likely continue to generate and discounted using spot-market rates to produce a discount Both tests points premium to the base economic (NMD) assumptions. Theo profits. On the other hand a rate increase of 300 basisrely onornon-maturing depositvalue. The NEV also uses NMD would cause a market value loss of assumptions should be consistent between both analyses. Exhibit 1 the bonds in excess of 61 percent 9.0% of their book value. If the credit 8.0% union is in need of liquidity and 7.0% forced to sell bonds it wouldn t 6.0% take much for a quick depletion of 5.0% capital immediately threatening Share Draf ts 4.0% Money Market financial viability. 3.0% Asset Yield The experience of many 2.0% savings and loans during the 1.0% late 1980s and 1990s (and 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 credit unions in the mid 1990s) Months showed exactly this market-based measures of risk deteriorated long As an example in an upward-rate environment for purposes of the NII before earnings turned negative. In some projected for five years. five the rate paid ais sensitive to market ra be cases intervention cash flows past If years and assumes decay rate . However by management and regulators was needed just months after generally the will experience a the rate paid. Net interest If not ( one) then the credit union overriding assumption is negative spread. positive earnings were reported. And many times theinterest income for the NII is dependent generated. then net institutions income continues to be upon these assumptions just as experienced cash withdrawals precisely when liquidity tightened much as a premium or discount for the NEV. while higher interest rates prevailed and the institutions were Reinvestment rates for purposes in the should analysis and These rate assumptions should be utilized of the NII NEV be the maxed-out in borrowing. Obviously assets needed to be sold.produce a discount or premium to the base econom market rates to credit union s offering rates. The base-case scenario of the However longer-term and more complex assets had suffered flows past five years and assumes amaturing rate1. uses NMD cash NII simulation assumes a static balance sheet where decay real depreciation in their value. Additional withdrawals caused cash flows are rate paid. Net into the respective assetfor the NII overriding assumption is the assumed to go back interest income or assumptions just as much as a premium or discount for the NEV. even greater losses and many institutions failed. liability. The NEV should capture the exit price of assets and liabilities--what they are worth in the markets upon Assumptions for the NII and1NEV January 2014 CU Business article for more details on modeling non-ma See Simply put there are many more assumptions built into the NII liquidation--and should therefore use market rates. The sale of 2911 Turtle the asset class is contingent upon rates required from www.almfirst. then the NEV. The NEV is a snapshot in time while the NII projects Creek Blvd. Suite 500 Dallas TX 75219 a willing a balance sheet over time and has assumed reinvestments of cash buyer not the rates that are being offered internally. flows. Because NEV relies upon a standard discounting of cash flows it eliminates the forecast horizon problem altogether. Which Test is Preferred Both tests rely on non-maturing deposit (NMD) The test used depends on what the analysis is used for. The NII assumptions. Theoretically speaking NMD assumptions should is preferred to assess the risk of earnings volatility which is the be consistent between both analyses. focus of most financial institutions. Earnings are important and As an example in an upward-rate environment for purposes a trend of negative earnings can be problematic. But when it of the NII NMD assumptions must be projected for five years. comes to assessing the true risk as a going concern or outlier If the rate paid is sensitive to market rates (as shown in exhibit risk and the risk of capital the NEV is the better analysis one) then the credit union will experience a negative spread. hands down. In the event that rates become extremely volatile If not (as shown in exhibit two) then net interest income and withdrawals are severe due to decreased earnings a flight continues to be generated. to quality or other demands on liquidity the NII falls short. www.cubusiness.com July 2014 Credit Union BUSINESS 23 CFO CURRENCY Exhibit 4 The outputs cFO cUrrENcy cUrrENcy cFO are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be inputs allow the user to model cash flows with an end maturity assumptions used should be changed in progressive intervals Exhibit 2 Financial institutions would not be reviewed and authorized and and the output should be recalculated to determine the impact and decay rates that are similar to amortizations. able to earn their way out of these this can take weeks. 7.0% Dividend and discount death allow for the present value of a different assumption. rates events. Slowly bleeding to if you are uncertain as to 6.0% calculationshappen in aninefficient wouldn t (premiums) each modeled interest rate scenario. the many requirements of 5.0% effective duration calculations can then mathematically be Conclusion market for negative earnings applying and using derivatives 4.0% compared to that of the institution s assets. in this case effective non-maturing deposits can be viewed as a franchise value scare depositors. consider engaging an external Share Draf ts duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when 3.0% service providerMarket you Money to help formula. Forof NEV tests is market present value is 100 in the deposits are retained when dividend ratesAssetlow in a higher are Yield The basis example if the liability 2.0% through the steps. base 101 in the up 100analyzepoint scenario and 99 in the down market environment. And vice versa A financial derivatives value driven. They basis the Properly used institution 1.0% 100 basisofpoint scenario the effective duration is one percent that offers a non-maturity dividend rate higher than market effect forced divestiture of can offset interest rate risk 0.0% assets which is why (i.e. (101-99) 200). the analysis to9attract 12 13 money will18 19 20 the economic withinofthe hot 14 15 16 17 decrease is inherent value its 1 2 3 4 5 6 7 8 10 11 that is imperative if hedges are Months is imperative liabilities. itindustry today.to model these accounts for a more credit union This is vital because as competition competencies to meet the final requirements. The second implemented. NEV and price accurate depiction of allow rate unions sensitivity Analysis submitted when all requirements part for purposes can interestcreditrisk. to competecredit unio Reinvestment the and final are the basisisof fixed-income analytics and rates grows derivatives of the NII should be the more are volatility application The regulator strongly suggests sensitivity analyses as aremeans Emily Hollis CFA is a partner with ALM First Financial a effectively. base-case scenarioAdvisors LLC. simulation assumes a static balance she completed including dealer contracts. balance sheet and its of the NII to underpinnings of truly understanding aassumptions. sensitivity toEmily Mor Hollis the respective assetFirst liability. quantify the effects of changing flows are go back into CFA is a partner with ALM or Financial setting up at a dealer is similar assumed inherent risks. a linebecause the core share to becoming a Advisors LLC. analyses are essential evaluation may member of the FHLB--it can be laborious and takes a good deal Emily Hollis CFA is a partner with ALM First Financial The NEV should capture the exit price of assets and liabilities wh Advisors LLC. markets upon liquidation and should therefore use market rates. Th is contingent upon rates required from a willing buyer not the rates internally. Which Test is Preferred The test used depends on what the analysis is used for. The NII is pre of earnings volatility which is the focus of most financial institutions. and a trend of negative earnings can be problematic. But when it com risk as a going concern or outlier risk and the risk of capital the NE hands down. In the event that rates become extremely volatile and due to decreased earnings a flight to quality or other demands on liq Financial institutions would not be able to earn their way out of these to death wouldn t happen in an efficient market for negative earnings s The basis of NEV tests is market value driven. They analyze the effec assets which is why the analysis is imperative if hedges are implem volatility are the basis of fixed-income analytics and are the understanding a balance sheet and its inherent risks. 24 Credit Union BUSINESS www.cubusiness.com www.cubusiness.com July 2014 March 2014 January 2014 www.cubusiness.com 17 credit Union BUSINESS 13 credit Union BUSINESS CU CYBER RISK MANAGEMENT Building a Sound Vendor Management Program Due Diligence Now or Significant Liability Later By Paul Caiazzo Know thy neighbor may never have been more sage advice than it is today. s you may know managing risk within a credit union is a monumental challenge. If you aren t careful you might overlook one pitfall into which many skilled CIOs and CISOs sometimes fall. Here s the ugly truth Cyber Risk Management Programs at Fortune 100 firms are falling short due to inadequate attention paid to risk introduced through third party vendors suppliers and partners. Most organizations seeking to reduce cost and ease administrative burden may examine options in outsourced service providers but organizations should be warned liability cannot be outsourced. Savvy IT Executives know that having tunnel vision when managing technical risks within the boundaries of the CU environment can be dangerous. So how does your organization s Vendor Management Program stack up What are some of the things you can do to reduce your third party risk and most importantly why should you care Third party vendors enjoy a de facto privileged status on many networks often with elevated privileges or access to sensitive data. Certain CU employees may have similar levels of access but since they are within the scope of the CU s authority its policies and controls the associated risk is quantifiable and manageable. A CU that doesn t mandate assess monitor and enforce those same sets of policies procedures and controls with third parties that are accessing their environments or critical systems can quickly find this to be one of the greatest risks to the organization. www.cubusiness.com A This fact is borne out by statistics. In 2012 TrustWave reported that 76% of data breaches were the result of an exploited vulnerability found on a third-party network. More recently the Target breach was perpetrated via malware-laced phishing emails sent to employees of Target s third-party HVAC vendor. Interestingly the malware used against Target is a variant of the password-stealing ZeuS Trojan which is specifically tailored to target the banking and credit union industries and is successfully being used against Credit Unions and banks today. It cannot be overstated Relationships with and interconnections between you and your service providers must be continuously scrutinized for cyber security risks. Major regulatory bodies such as the NCUA FDIC OCC CFPD and FFIEC recognize these risks and have issued new Credit Union BUSINESS 25 July 2014 CU CYBER RISK MANAGEMENT guidance to reflect this elevated focus on third parties and sound Vendor Management Programs. CFPB issued explicit guidance mandating that Credit Unions and other financial institutions are responsible for ensuring vendors and service providers are in compliance with Federal financial laws including those impacting cyber security. Given most service providers are small businesses with limited resources most are unfamiliar with these regulations and required controls. They often fall far short of mandated security compliance requirements and may unknowingly expose you to risk. Therefore it is important that Credit Unions go beyond mandate compliance by performing rigorous due diligence when assessing and selecting providers. Doing so will help protect your Credit Union from financial and reputational liability in the event of a large breach. So how should you go about protecting your CU and what steps should you take to ensure that a service provider doesn t introduce unknown risks The CFPB OCC NCUA Federal Reserve Board and FFIEC specify a program-oriented approach focused on the following components Introduce Senior Management Oversight. Since they will ultimately be found accountable in the eyes of the law it makes sense to tie Board involvement to critical risk management functions. The CISO role should be filled by an individual with cyber program management experience and should report to the CEO not the CIO. Require Risk Assessments prior to Onboarding a News Vendor Assess the risk to the CU associated with the activity or service being provided before engaging a service provider. Once a service provider has been selected-- but prior to contract execution--assess the third party s security program control environment and compliance program. Perform proper due diligence on service providers prior to executing contract. Include Third Party Vendor Security Standards as part of the Contract Terms Clearly outline responsibilities of third party. Clearly outline compliance and performance expectations with respect to federal regulations and cyber security specifically. Clearly establish CU s authority to monitor performance and audit the comprehensiveness and efficacy of the service provider s security program. Establish clear authority to impose consequences upon service providers for cyber security failure. Schedule Ongoing Monitoring of Service Providers Implement processes to monitor service provider performance and security compliance. For high-risk service providers perform granular monitoring of vulnerability management patch management configuration management data flows accesses and actions taken upon CU systems by service providers. Conduct a Review of Your Vendor s Comprehensive Business Continuity and Disaster Recover plans Review and assess the service provider s Business Continuity and Disaster Recovery plans especially for high-risk providers. Test failover mechanisms of third party solutions to ensure there is no impact to CU from a third party service disruption. Incorporate potential third party service disruptions into your own BCP and DRP. Conduct Independent Reviews of your Overall Vendor Management Program Require a qualified independent third party to assess the CU s overarching Vendor Management program and provide recommendations for improvement. Require a qualified independent third party to perform audits vulnerability assessments and penetration testing of all of your service providers. 26 Credit Union BUSINESS July 2014 www.cubusiness.com CU CYBER RISK MANAGEMENT C onquering these problems is extremely challenging at even the largest Credit Unions where competing time and resource constraints preclude most organizations from giving it adequate attention. In April Thomas Curry Controller of the Currency advised that financial institutions have to be able to assure themselves that these service providers have adequate controls and solid processes in place to protect them and their customers. This can be particularly problematic for community banks and thrifts that may not have the resources or specialized expertise needed to identify and mitigate these vulnerabilities. In such cases the CU should turn to a qualified independent third party to not only spot-check vendors affiliates and service providers but to construct a sustainable Vendor Management Program incorporating each of the elements outlined above. The message from the regulators is clear the organization s Board of Directors and Senior Management are directly responsible for managing risks associated with third party relationships. The increased regulatory attention should not be a barrier to engaging a third party service provider or entering into a mutually beneficial partnership with an affiliate. After all these relationships are a key part of the operational environment of every Credit Union. CU s must create sound Vendor Management Programs which including regular testing examination and assessment of all vendors--yes even your HVAC vendor. Most importantly this cannot be viewed as a one-time effort but must be a lifecycle-based program of continuous monitoring and improvement over the life of the relationship. Paul Caiazzo CISSP CISA CEH is a Cyber security expert entrepreneur and strategist. As Principal and co-founder of TruShield Security Solutions Inc Paul is responsible for developing corporate strategy and leading the technical product and service development efforts. AsTruShield s service lead he brings many years of experience solving complex cyber security challenges within the Federal space. Paul participates in a number of Federal-level working groups aimed at defining the standards and technologies the US Federal Government will use to protect the security of government networks. Paul is actively engaged with strategic clients in the Federal Government and banking sectors working closely with senior executive staff within the Office of the CIO and CISO at a number of Government agencies and providing cyber security subject matter expertise in the areas of Continuous Monitoring Vulnerability Management Incident Response and Cyber Security Operations Center to support TruShield s growing commercial practice. www.cubusiness.com July 2014 Credit Union BUSINESS 27 COMPLIANCE UPDATE A BSA Process That Means Business orry over a credit union s Bank Secrecy Act (BSA) program can keep management up at night. Regulations that are not so black and white combined with hefty penalties and the need to rely on every employee to ensure compliance makes a difficult task even more daunting. How do you know if you are reporting the transactions that need reporting Are you doing too little or too much We found one area of confusion came up quite often while conducting independent BSA tests How should CUs monitor report and document suspicious activity A good suspicious activity-monitoring program starts with a solid SAR (suspicious activity report) escalation process and the process varies considerably depending on the size and complexity of the credit union. Evaluating your credit union s complexity and BSA risk is a good place to begin the process. An adequate and successful SAR escalation process has four main components detection research decision-making and reporting. Additionally credit unions must take care to assign responsibility for the process to someone within the organization. At PolicyWorks we have found that the most successful SAR programs involve credit union staff from different departments. This is because BSA has a long reach and covers every part of a credit union s operations. W By Jason Skemp Detection Identification Because the goal of SAR is to identify any suspicious and illegal activity conducted through the credit union having detailed transaction-monitoring procedures and a sound employee-training program is key. This is the most far-reaching and challenging part of the process since it is crucial that you engage every department and all credit union employees. Research A credit union s ability to research detected suspicious activity is important as it allows credit unions to gather important details for reporting eliminate needless reporting and can uncover any additional activity that might be of interest. A senior level employee who is detail oriented and has a thorough knowledge of the credit union s detection systems should be assigned this responsibility. Decision-making This step is typically tasked to a group of individuals representing multiple departments within the credit union. They are responsible for reviewing the research and determining whether or not to take the next step by reporting the activity. In some instances credit unions may decide if additional actions are necessary at this time to protect the credit union and its members. Reporting This occurs when you have decided to file a suspicious activity report (SAR). The credit union s BSA officer should be responsible for gathering all of the appropriate information and writing up a detailed SAR. If you decide not to file a SAR the BSA officer will document your decision and add it to your files. Remember SARs and the existence of SARs are highly confidential. www.cubusiness.com 28 Credit Union BUSINESS July 2014 COMPLIANCE UPDATE Detailed documentation of each step of the process is very important and it is recommended that credit union s develop internal reports of suspicious activity. These reports can be passed along throughout the process and will document each step of an investigation. One of the benefits of maintaining these reports is they can help eliminate any frontline staff debate on whether or not an activity warrants filing a SAR. Senior level staff should research all activity to determine how to move forward this is not a decision that you want anyone making on a gut feeling . Internal reports of suspicious activity offer a discrete and less intimidating way for staff to report anything they may feel is out of place. There have been occasional instances where reports have helped identify insider abuse. Ensuring that your credit union has an adequate and detailed SAR escalation process is a big step in proving that you mean business when it comes to BSA. A well-designed process will help make sure your credit union is meeting its obligations with respect to BSA protecting the credit union and its members and eliminating needless filing. Being proactive is the best approach to compliance detection and often leads to contracting the services of an external BSA auditor to help identify issues and solidify a strong SAR escalation process. Jason Skemp is director of compliance solutions for PolicyWorks. Jason works extensively with individual credit unions by reviewing policies procedures documents and operations related to loans and deposit accounts and advising them as to changes to achieve compliance with federal regulations. As a national leader in credit union compliance solutions PolicyWorks is known for having the vision and expertise necessary to assist with the most challenging compliance issues. For more information visit www.policyworksllc.com. The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship COMPLIANCE IS OUR POLICY PolicyWorks is a national leader in credit union compliance solutions. Our team of experienced professionals offer a wide array of compliance services. We re your partner to make compliance easy. Visit us online to learn more policyworksllc.com. www.cubusiness.com July 2014 Credit Union BUSINESS 29 TECHNICALLY SPEAKING Credit Unions Becoming More App Savvy to Focus on Member Engagement e are all familiar with the catchphrase there s an app for that. What is catching on at an increasing number of credit unions is the creation and customization of their own apps to attract mobile members and assure that mobile applications fulfill the institution s specific needs. CheckAlt which helps credit unions differentiate and build a strong mobile app or enhance existing infrastructure with built in remote-deposit capture settings (RDC) and eCheck solutions is one of the companies that is making it easier for credit unions to adapt to this new trend. Many credit unions now realize that instead of adapting their institution s systems to off-the-shelf products they can build their own application programming interface (API). There Is an App for That Engaging Members through Tablet and Smartphone Applications a research brief by the Filene Research Institute reports that according to Oracle more than half of the mobile users it surveyed want to bank on their tablets smartphones or both. This is a huge opportunity for the financial services sector and perhaps specifically for credit unions as they seek cost-effective ways to attract and engage members. The brief goes on to say Staying true to their mission--for people not for profit--credit unions can be trusted partners across a host of financial services. Building effective engagement platforms can extend this trusted partnership beyond branch sites and branch hours to meet members needs as they arise 24 hours a day 7 days a week. Unchained from any physical location credit unions can be pocket companions moving through space and time ready with helpful financial advice when members need it most. W By Roy W. Urrico Customized Mobile App What distinguishes CheckAlt is that the company focuses on Check 21 solutions. We feel that Check 21 is the most efficient and cost effective payment rail available says Shai Stern Cochairman and CEO of CheckAlt. By Leveraging Check 21 Stern explains that CheckAlt can handle the needs of a Credit Union s internal operations such as ATM teller and branch capture and item processing or the needs of a Credit Union s business customers such as lockbox RDC mobile payments POS payments and eCommerce payment processing. We bridge both paper and electronic item and payment processing all from a single vendor. CheckAlt offers an API for mobile RDC which allows credit union members to remotely deposit checks via their mobile device. Many financial institutions integrate the mobile RDC solution into its mobile banking app. According to CheckAlt for financial institutions in-person branch deposits are costly especially compared to low cost alternatives like mobile. Based on recent research getting a member to remotely deposit a check even just one time a month the average cost savings realized would be approximately 50.00 to the credit union. Additionally CheckAlt offers an API that integrates with mobile front-end providers such as DoubleBeam and CU Wireless. Our API allows these partners to be able to offer an eCheck payment option within their application says Stern. DoubleBeam is a CheckAlt partner but CheckAlt s investors including Stern are also investors in DoubleBeam and on DoubleBeam s board. Doublebeam which is a mobile commerce provider offering customized mobile app building solutions with integrated commerce. Features include account opening technology for mobile bill pay p2p and recurring 30 Credit Union BUSINESS July 2014 www.cubusiness.com TECHNICALLY SPEAKING Instead of capturing images from multiple sources and delivering them as separate files CheckAlt s batch feature allows CUs to consolidate all of those images and deliver them in one file to the Fed or their corporate processor. CheckAlt delivers x9.37 ICL files to 200 financial institutions daily. payments. Implementation takes place via a simple software development kit (SDK) and directly sends your credit union the captured checks and eChecks to your corporate CU or directly to your FED account. Also DoubleBeam has a mobile POS application for the grocery industry which offers the customer various coupons and incentives as well as the ability to pay via eCheck. For the grocery client this is a great way to communicate with their customers and the payments are dramatically less expensive to process than credit card transactions or even ACH. Our API is available for companies that wish to integrate mobile RDC or eChecks as a payment option within their application adds Stern. CheckAlt wants to remain a flexible and value-added payment partner for custom app developers to let them focus on delivering their application and not having to worry about the payment or deposit piece. This leaves our client free to focus on managing their customer relationships. member using mobile RDC into a single stream and single file for simple management of the entire process. Instead of capturing images from multiple sources and delivering them as separate files CheckAlt s batch feature allows CUs to consolidate all of those images and deliver them in one file to the Fed or their corporate processor. CheckAlt delivers x9.37 ICL files to 200 financial institutions daily. Regarding eChecks we are giving credit unions a way to avoid disintermediation by technology companies retailers and others by providing their business customers with the ability to accept eChecks from their customers explains Stern. He adds this important capability can be a real differentiator for a forward-looking credit union interested in better positioning itself to serve its business members. CheckAlt also allows CUs to run duplicate detection on items captured from multiple sources (branch ATMs mobile merchants etc.). On Premise Instead of SAAS Some of CheckAlt s services can be delivered via the cloud but one of our differentiators in the RDC arena is actually the fact that we have on-premise software (many RDC vendors only offer SAAS versions) points out Stern. For many financial institution customers the on-premise RDC option is preferred for the security and control it offers and the fact that it eliminates connectivity issues at the capture location since an internet connection is not required. CheckAlt has over 500 financial institution customers many of which are credit unions. Energy Capital Credit Union uses CheckAlt for branch capture and inclearing share draft returns and is utilizing its duplicate detection technology. First Service is another Credit Union customer using the branch capture and inclearing share draft returns process as well as Credit Union BUSINESS 31 Enhancing RDC & eCheck Solutions In addition CheckAlt s batch feature helps credit unions capture checks and eChecks from multiple sources (branch ATM mobile merchant) and provides a consolidation solution that includes fraud and duplicate detection. CheckAlt s batch processing feature can combine all checks captured within the Credit Union whether at the teller ATM branch or even from a www.cubusiness.com July 2014 TECHNICALLY SPEAKING using CheckAlts API to receive and process its mobile deposits. Dakotaland Federal Credit Union announced its members will be able to deposit checks using the mobile deposit capture solution from industry partners CheckAlt iParse and CU Wireless. Dakotaland selected the mobile solution because it integrated seamlessly into their existing mobile application to allow members to deposit checks quickly and easily using their mobile device. We are pleased to add Dakotaland through our trusted partners iParse and CU Wireless. By offering these mobile deposit capabilities smaller financial institutions are able to better compete with the larger banks by blunting the advantage of a large branch footprint and we re proud to deliver such a strong competitive offering says Stern. The addition of Dakotaland as a client expands the partnership between CheckAlt iParse and CU Wireless. This client further builds upon the companies growing network of credit unions using their mobile solutions. Says the CheckAlt CEO We have a very attractive offering for credit unions because with CheckAlt CUs can reduce their item processing costs while getting all of their processing services through a single vendor reducing their vendor management requirements. We can even help CUs deliver payment processing to their business customers such as lockbox mobile e-commerce and RDC so these CUs can attract and retain their best corporate clients. to continue to understand the needs of Credit Unions so we can serve those needs and grow with them. Roy Urrico is a freelance ghostwriter and byline writer of books articles newsletters guides case studies and white papers about financial institutions financial technology compliance information security credit and collections foreign exchange and many other financial topics. To find out more about how Roy can help your organization check out Roy s profile on LinkedIn visit his Web site at brightideaswriting.com or email him at roy brightideaswriting.com. CheckAlt RDC Services for Credit Unions Teller Capture -- tellers can process and deposit checks right at the teller window and process payment coupons simultaneously. Branch Capture -- allows for one or multiple locations to process and deposit checks at individual branches and then sync to a master file before uploading them to the Federal Reserve. Merchant RDC -- gives credit union business members the capability to use RDC so they can scan checks and make deposits conveniently from their own office location. Inclearings Returns -- provide credit unions with complete end-to-end image capabilities and streamlines return decisioning. Desktop Lockbox -- allows images deposit slips coupons and other remittance items to be scanned in along with checks and stored together in our desktop lockbox. Mobile Capture -- gives credit union members an alternative and convenient option for making deposits. Join the Revolution The foundation of the credit union tradition is a continuing exploration of superior methods to comprehend and serve credit union members. By offering members value-added products and services that fit their needs and energized digital lifestyles fueled by the increasing mobile market credit unions can improve the member experience. The Filene Research Institute research brief summarizes it very well. Credit unions want (and need) to leverage the mobile app revolution. Externally consumers want a convenient mobile experience. Internally credit unions want to be more responsive to member needs and increase operational efficiency. We are very excited with what we ve accomplished to date but even more so about the innovation and development that we have going on right now says Stern. He added We want 32 Credit Union BUSINESS July 2014 www.cubusiness.com CU BRANCH BUSINESS A Winning Formula Tips for Opening a New Branch By Kelly Outwater O Though some may argue that a robust suite of e-services is a better investment than a new branch many consumers disagree. A new branch can still be the best way to grow market share and cultivate stronger member relationships. Even the coveted Gen Y group views the branch as an important consideration when choosing a financial institution. According to a 2014 survey of Gen Y consumers by Raddon Financial Group 64% of respondents stated that technology could not replace a branch. nce you ve run the numbers and determined that a new branch makes financial sense you ve started down the long road to building more capacity and enhancing personal service for your members. What do you do after you ve determined the perfect location chosen the contractor and begun construction It s time to put all the little things that will make a branch successful--the right staff and appropriate marketing--into place. The more work you do behind the scenes the better prepared you ll be once the doors actually open. And just like most projects in life it takes a village to open a new branch be prepared to collaborate across multiple functions to ensure success. One credit union that s developed a winning formula for opening new branches is Hudson Valley Federal Credit Union (HVFCU). Based in Poughkeepsie New York HVFCU is a 3.9 billion credit union with over 286 00 members. Over the past ten years it has opened eleven new branches remodeled three and learned how to streamline new branch opening procedures in the process. www.cubusiness.com Whenever they open a new branch HVFCU starts by appointing a cross-functional task force that consists of retail operations human resource information technology facilities and marketing staff. This group is responsible for developing a plan that clearly defines deadlines and deliverables for each of the operations areas and allows each new branch to run seamlessly from day one. Once the agreed to plan has been approved the task force meets on a regular basis to monitor progress and resolve any issues that might arise to keep the project on schedule. Credit Union BUSINESS 33 July 2014 CU BRANCH BUSINESS Here are some of the highlights of HVFCU s formula that shouldbe useful to other credit unions considering a branch expansion regardless of size. Once the management team has been hired and training is underway HVFCU works on team building by mixing experienced staff with newer hires to create a mentoring environment. When people feel like they re part of a team that wants everyone to win it shows in the way they treat members said Ludlum. For every new branch we plan a day-long event to reinforce the camaraderie they ll need in our new marketplace. Those events are held several weeks before the branch opens and in addition to the management team include the business partners assigned to the new branch mortgage officers business lenders and business development officers. It s a casual low-key event often at some recreational location in the new community so staff will become more familiar with the area. One branch s team building included a scavenger hunt that led them to key locations throughout their new community. Others events include softball games icebreakers like Two Truths and a Lie and field days with sack races three-legged races and basketball free throw contests. Each day s events are designed to help everyone get to know each other better and to generate excitement about the new endeavor said Ludlum. The team also chooses a local non-profit to adopt and support throughout the year which helps solidify the team s collaborative efforts and reinforce community involvement. Building a Strong Team One of the first and most important responsibilities is to recruit and hire the new branch management team. This team consists of a branch manager assistant branch manager branch supervisor (for platform staff) and a teller supervisor. Ideally all four positions are in place five to eight months prior to opening day and HVFCU hires from within whenever possible to ensure the new management team has a strong HVFCU knowledge base. Tellers and platform staff are hired three to five months before opening. Sandy Ludlum HVFCU s Vice President of Branch Administration and the Contact Center reports that they ve found this to be the ideal time frame. It allows us plenty of time to extensively train the entire branch team. Occasionally the long advanced hire date leads to turnover but we manage and it s worth the occasional disruption because it helps us maintain quality service and protect our brand. Certified job instructors conduct the training sessions which includes classroom instruction and on-the-job training at one of the credit union s other branches. 34 Credit Union BUSINESS July 2014 www.cubusiness.com CU BRANCH BUSINESS located in a market where we had good name recognition but that was also served by several well-known local banks said Chelen Reyes Vice President of Retail Delivery and Marketing for HVFCU. Each year in December this particular town has a huge holiday festival attended by thousands of families from the surrounding area. We participated in the festival two years prior to completing construction on the branch to demonstrate our commitment to becoming an integral part of the community. One of HVFCU s core values includes nurturing member and community respect through caring actions. Consequently volunteering and community service are second nature to HVFCU staff and management. Marketing also supports the new branch through a mix of social media messages traditional advertising and special offers and promotions that are tied to the new branch opening. Whenever a new branch opening will help ease some of the high volume experienced by existing branches be sure to promote the new branch location in those branches. In some instances new branches saw immediate benefits from the built in business that migrated from existing branches that had been operating over their capacity said Mr. Reyes. In general utilizing all existing member communication channels including the surrounding branches website social media email and newsletters to inform members of the new branch location hours and opening date will help generate traffic the moment you open the doors. And who doesn t like free stuff New branch marketing plans should include a special grand opening ceremony. The event can be as simple as a ribbon cutting with the local Chamber of Commerce or as complex as a family day that includes free food giveaways and fun activities--such as face painting--planned for kids. We typically hold a Grand Opening Celebration about three weeks after the branch s first day says Ludlum. This gives the branch team time to resolve any unexpected issues and ensure that operations are flawless before drawing in a big crowd. The credit union invites its Board of Directors senior management team and local dignitaries and community leaders to attend. The event also varies depending on the marketplace as well as the time of year. HVFCU has offered everything from hot dog wagons in summer to hot chocolate in winter. The marketing group conducts research on demographics and marketplace potential early in the expansion process to develop a brand awareness strategy. This strategy will launch well before the branch opens and continues to run well after opening day. Is Anybody There The marketing group conducts research on demographics and marketplace potential early in the expansion process to develop a brand awareness strategy. This strategy will launch well before the branch opens and continues to run well after opening day. Sometimes you re lucky and the branch will be sited in a highly visible location in an area where you already have excellent name recognition. However other times even though there s room for you in the market you must make a name for yourself among competitors with longer standing in the community. In any case you want potential members to know that you re coming soon so efforts to increase awareness should start at least six months prior to opening especially in newer and highly competitive markets. Community involvement--both from a sponsorship support standpoint and simply having your people seen out and about--is a smart strategy. Join and participate in the local chamber of commerce and other business and civic associations and attend community events where you can meet future members. This strategy is helpful for attracting consumer accounts and crucial for adding commercial ones. Identify the high profile signature events in your new market and associate your credit union with them either through monetary sponsorship or by providing volunteers. We had known for more than 12 months that our next branch would be www.cubusiness.com July 2014 Credit Union BUSINESS 35 CU BRANCH BUSINESS An Overnight Sensation While we d all hope to have lines out the door with a new branch that s often not the case. Like any newborn baby a new branch needs lots of care and attention to make sure it develops as expected. It is important that you closely monitor a branch s performance compare it to your original goals and be proactive in addressing any potential issues with transaction counts deposit and loan volume member demographics and market share in order to keep it on track. And don t forget to measure how it s impacting existing branches. Changes in marketing and business development outreach may be necessary to deal with slower than expected growth or to capitalize on strong success. Adding new branches remains one of the most effective ways to grow market share and secure ongoing growth and success. Despite Internet and mobile banking adoption rates many members want and expect the convenience of the branch and the consultative services they can find there. Opening a new branch will always be a major undertaking but creating and adhering to a solid plan can help make the process more efficient and successful which ultimately benefits current and future members. Kelly Outwater is the Product Marketing Manager at Hudson Valley Federal Credit Union. She has over nineteen years of financial services experience and has worked at HVFCU since 1999. She holds a Bachelor s degree in Communications from Saint Francis University and is pursuing her Masters of Science degree in Integrated Marketing Communications from West Virginia University. HVFCU in Brief Established in 1963 for IBM Poughkeepsie employees and their families Ended their first year with 172 in assets Currently a community chartered credit union serving four counties in New York State s Hudson Valley region The Hudson Valley s largest local financial institution One of America s largest credit unions 286 700 members 3.97 billion in assets 20 branch locations Offers personal and commercial deposit and loan products a robust suite of e-Services a full range of financial planning services and property and casualty insurance New Branch Do s and Don ts Do Identify primary goals for each new branch Conduct a thorough market analysis including financial assumptions of profitability Hire and train management team well in advance of branch opening Participate in your new community Build excitement as the branch is being built Celebrate the new location Track results closely post-opening to ensure success Don t Expect the same results when entering a new vs. existing market Forget to integrate team-building activities prior to opening Assume people know you re coming Panic if traffic counts rise slower than expected simply shift marketing plans to increase awareness 36 Credit Union BUSINESS July 2014 www.cubusiness.com CU TRAINING Attack of the E-learning Course By Paul Nunn I recently ran across a cartoon strip about an employee who was taking an e-learning course. After the first few sessions the employee s boss came over to his desk and asked him Well what have you learned The employee replied Click next to continue. Many of us have sat through our share of required compliance or safety training courses and they are almost always the same Lots of text a few boring pictures and if you re lucky a video. You mindlessly scan the riveting content and click on the next arrow until--without warning--the QUIZ screen pops up. HUH Oh man I should have been paying attention. So you stumble through the questions retake the quiz a few times and eventually you pass. Congratulations. Credit unions conduct these training courses in order to fulfill several key objectives Training Objective Management and NCUA will get an excel spreadsheet outlining the procedures covered in the training class along with a list of every employee and their successful completion date as evidence of compliance. This will keep regulators and senior staff at bay. Business Objective Proof that 100% of your employees have been trained on procedure X. Managerial Objective Not to be the sole manager with an employee who hasn t completed the course. www.cubusiness.com Employee Objective Hurry up and get it over with. Please don t misunderstand. I acknowledge that documentation showing that employees have completed mandated courses is necessary and that nearly every industry has regulatory and safety information that all employees must learn and apply in the workplace. I honestly don t have a problem with most of the content or the employees who must learn it. Nor do I have a real problem using rapid e-learning software as a cost-effective and efficient way to teach employees. So what is my problem It s how e-learning programs teach. Watching one is just about as exciting as watching paint dry. Now I don t mean to suggest that every compliance course ought to include an animated dancing clown or juggling bear cheerily reciting rule number 62 while walking a high wire (actually clowns frighten me but that s another story for another day). What I do believe is that required training ought to do exactly what its description suggests train. Teach something. Demonstrate something. Apply something. Here s some advice for every trainer instructional designer and training manager who is still reading If you have purchased off-the-shelf compliance training then great Use it. Just follow up with your employees. Conduct branch or team meetings to discuss the topics covered in the course and add something--anything--to the required training Credit Union BUSINESS 37 July 2014 CU TRAINING program. Human reinforcement works wonders. If you are designing your own required training syllabus make sure you add in some interactivity. Many of the rapid authoring tools out there come with some pretty slick features. I am most familiar with Articulate Studio (www.articulate.com) and I like how it allows me to create a scenario in which the learner has to make a decision when put into a situation. Doing so forces the learner to hunt down information by consulting an attached form or navigating the intranet. Your interactivity scenario doesn t need to be fancy it just needs to help better engage the learner. And beware Steer clear of the two most common pitfalls that can quickly ruin your otherwise really cool interactive training course The Ooh that s cool let s make the screen do that syndrome. In other words over-engineering. Have fun with cool effects later. Much later. Right now get it done and make it clear concise and informative. You just want the examiners to leave you alone. Time It s easy to get seduced by all the functionality attached to e-learning software. Believe me I ve been there done that many times. It is fun. But again play with the software after you ve launched the course. Required training can--and should--be interactive. Follow up discussion quizzes and activities all make learning more engaging and well fun (at least more fun than watching the paint dry). 38 Credit Union BUSINESS Here is a list of some good e-learning software and authoring tools that I ve either used recommend or have heard about Articulate uses PowerPoint to build the e-learning course. Captivate an Adobe product. Great for technical training. Lectora Robust tool. Don t know much more than that. Snagit Camtasia Snagit is a very cool clip art program. Camtasia is a very good screen recording capture tool. Audacity An awesome (and free) audio recording program. Share the software you like with your peers. Because trust me they re probably in the same boat. Until next time keep learning. Paul Nunn is an award-winning trainer from Houston Texas. Since 1992 Paul has worn many hats teller trainer instructional designer and training manager. In 2005 he was the recipient of the Training Professional of the Year award by CUNA and Affiliates. Currently Paul and his wife Iris help train organizations with their company Nunn Training and Development (www.nunntraining.com). Paul lives in Spring Texas with his beautiful wife and their two children Emily and PJ and can be reached at info nunntraining.com. 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