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T H E S T R AT E G I C P L A N N I N G I S S U E Three Traits of Successful Strategic Planners How North East Texas Credit Union Met the Challenge Laura Enock OCTOBER 2014 VOLUME 9 ISSUE 10 9.95 Shazia Manus CEO The Members Group The Home Depot Breach Shazia Manus CEO The Members Group Does your CPI Program have a bad reputation Maybe you should take a closer look at ours. Collateral Protection Insurance (CPI) has a bad reputation--with your borrowers with regulators even within your own credit union. Our CPI Hybrid program is more than meets the eye. If you take a closer look you ll see that it is the consumer-friendly option you and your borrowers need. With SWBC s CPI Hybrid you can reduce the cost of CPI to 50 90 per month as opposed to the typical 2 000 annual policy. Call 866-316-1162 or visit info.swbc.com hybrid today to learn more about CPI Hybrid. 2014 SWBC. All rights reserved. 5540-1209 CUB 1014 CONTENTS Credit Union BUSINESS OCTOBER 2014 V O L U M E 9 I S S U E 10 4 6 7 9 13 15 18 PUBLISHER S POV Welcome Walt Laskos CUB s Editor-in-Chief Tim O Hara EDITORIAL 26 CU INVESTMENTS Simplified Investment Portfolio Management Strategies for Smaller Credit Unions Amy Rapp CFO CURRENCY As I See It Walt Laskos Editor-in-Chief CU COMMENT James Collins UNDER THE HOOD 30 32 35 39 41 44 48 The Growing Size Of Credit Unions Negative Or Positive Implications For The Industry Emily Mor Hollis CFA TECHNICALLY SPEAKING Roy W. Urrico CU OPERATIONS Business Lending Taking Control of Payments Three Traits of Successful Strategic Planners Shazia Manus CEO The Members Group CU COMPLIANCE Checking Account Growth The Gift of Lift that Keeps on Giving Jessica Duncan CU MARKETING Anna Pena CU SALES AND SERVICE No Time to Read the 572-Page Proposed HMDA Rule Brian D. Godwin ATM BUSINESS Critical to Hispanic Membership Growth Camelot Coping with the Never-Ending Challenge of ATM Compliance Gary Walston CU CONTENT Brad Roteman CU SPOTLITE The Home Depot Breach How North East Texas Credit Union Met the Challenge Laura Enock The Wheels On The Bus At Point Breeze Credit Union Sharon Sweda CROSSWORD 21 CU LENDING Underwriting Loans to Members with Outstanding Student Loans Bob Schroeder October 2014 Credit Union BUSINESS 1 www.cubusiness.com ABOUT US Publishing Team Tim O Hara Publisher tim cubusiness.com Walt Laskos Editor-in-Chief walt cubizmag.com Iliana Nord Operations Manager iliana cubizmag.com Patti Manzone Designer Ashok Kumar Circulation Director T H E S T R AT E G I C P L A N N I N G I S S U E Three Traits of Successful Strategic Planners How North East Texas Credit Union Met the Challenge Laura Enock OCTOBER 2014 VOLUME 9 ISSUE 10 9.95 Shazia Manus CEO The Members Group The Home Depot Breach Staff Writers James Collins CU Comment Laura Enock CU Content Emily Hollis CFO Currency Sharon Sweda CU Spotlite Roy W. Urricho Technically Speaking Shazia Manus CEO The Members Group OCT_2014.indd 1 10 20 14 11 51 AM Subscriptions Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year membership costs 99 yr x 3 for Print ( 297.) or 75 yr x 3 ( 225.) for Digital. An online membership form is available at www.cubusiness. com register. Contributors Jessica Duncan Brian D. Godwin Shazia Manus Anna Pena Amy Rapp Brad Roteman Bob Schroeder Gary Walston Sales and Advertising Tim O Hara Publisher tim cubusiness.com or 561-282-6015 1 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 October 2014 www.cubusiness.com Experience the Power of Plus. Let Advisors Plus give your credit union superpowers... minus the cape. Can t round the globe with super speed can create multi-channel initiatives. Can t become invisible can make your direct mail offerings stand out from the crowd. Can t shoot laser beams from eyes can use predictive analytics to target profit opportunities. Can t fly through the city can give your balance transfer campaign wings. Meet the Advisors Plus Marketing Services group the superheroes behind hundreds of creative and profitable marketing growth campaigns each year. Marketing Strategy New Member Acquisition Programs Data Mining & Segmentation Analysis Predictive Analytics Credit and Debit Card Growth Campaigns Checking Account Acquisition Balance Transfer Campaigns Onboarding & Cross-selling Programs Branch Sales Training Campaign Analysis & Back-end Analytics Make Advisors Plus YOUR secret weapon Call 727.299.2535 or visit us today at AdvisorsPlus.com. FROM TIM Publisher s POV Welcome Walt Laskos CUB s Editor-in-Chief It just goes to show if you work long enough and hard enough at something good things are bound to happen. That s what happened to me recently when I learned that my old friend and fellow credit union veteran Walter Laskos had left his editor post at Credit Union Magazine. I jumped in quickly to persuade Walter to come and help me build Credit Union BUSINESS (CUB). Now I am delighted to report to you that Walter J. Laskos is the Editor-in-Chief of this exciting venture and I m very much looking forward to building an excellent multi-platform information source for our fast growing credit union executive readership Walter and I have known each other for many years beginning when he was in charge of the impressive public relations department at WesCorp and I was just beginning to publish CUB. I always looked forward to my visits with Walter in San Dimas California where Western Corporate Federal Credit Union was headquartered because Walt was one of my first CUB advertising customers but also because I always learned something from our meetings. I vividly recall taking a tour of WesCorp s sophisticated video studios where Walt and others put together some highly touted webinars and podcasts. The day of the tour Walt explained how they created a series around the WesCorp economist Dwight Johnston. The podcast aptly called OnDeck with Dwight Johnston was a weekly commentary and review of the economy and markets featuring the popular economist. While at WesCorp Walter also launched a series of web-based educational videos Beyond the Balance Sheet and CEO Leadership Table. He also produced the quarterly educational magazine InsideRisk a first of its kind in the credit union industry devoted to helping credit unions optimize their balance sheet Walter J. Laskos performance. In addition to helping me edit our magazine digital publication and a growing number of E-Newsletters which we currently produce Walter is now a full partner in a series of audio and video productions beginning with Credit Union BUSINESS Internet Radio a new series of credit union executive interviews which will be immediately available to our CUB President s Club members a fast growing list of who s running America s credit unions. I believe that the future is here--and it looks very bright indeed. Welcome aboard Walter J. Laskos Thanks for reading 4 Credit Union BUSINESS October 2014 www.cubusiness.com Ready for more value from your ATM provider Open your doors to a new ATM provider For decades Cummins Allison has helped you make the most of your branch resources. Now we re excited to offer a complete line of highly reliable secure full-function ATMs to fit any branch configuration from drive-up to walk-up. And best of all our ATMs are backed by the responsive dependable local service you need and have come to expect. So open your doors and give us a try. When you re ready to replace add to or expand your ATM network let s talk. Visit cumminsallison.com letstalk 2014 Cummins Allison Inc. All rights reserved. EDITORIAL As I See It B By Walt Laskos Editor-In-Chief Add to that your responsibilities to other community organizations as a board member or volunteer. I bet your list can go on and on. It s no wonder then that you value your time as you do and that s why it s important to cut to the chase when it comes to the business of running a credit union. The more I understand and appreciate your role as a credit union leader the more I take delight in my new partnership with Tim O Hara serving as editor-in-chief of Credit Union BUSINESS. Our agenda is simple--tell it to you straight connect you with the leading experts on all areas of credit union operations. We re committed to give you the kind of information you need to make the critical decisions you face each day no matter how the trade winds may be blowing. As an independent service provider we have no need to be cautious with every syllable we utter. And we ll do our best to cut to the chase. We ll be straightforward avoid confusing jargon and make the complex easy to understand. As I see it Credit Union BUSINESS is your channel for independent and expert commentary advice and information custom delivered so you and your credit union can be successful. It s that plain and simple. I m Walt Laskos and I endorse this message eware the mid-term elections are approaching. Expect to be inundated with messaging that s designed in a carefully crafted manner to convince you to support a certain candidate or cause. Is it just me or do you also find these messages to be alarmingly unbelievable in the way they bend and construe the facts in order to push an agenda regardless if it is for the right the left or for those espousing an independent or libertarian mindset While these messages will certainly grow in numbers and frequency right up until November 4th all we can do is cut through the bias discern the facts and then act upon what we believe to be the best course of action by casting the vote we choose to make. And isn t that also what we do when it comes to the kinds of messages we receive throughout the credit union world There s no avoiding it. Whether it s to support a political cause or hold hands as we sing a cooperative kumbaya we re always going to find ourselves coming face-to-face with the agendas of others. However when it all comes down to the basics this is what s most important of all and it trumps all agendas you re responsible for running a business--period. This is what matters the most. People s livelihoods are in your hands--both your employees and members alike You hold the trust of thousands who have deposited their hard-earned money to your organization s care and safety. Let s also not forget the regulators breathing heavily down your back. And to top it all off you constantly feel the weight of the world as you strive to generate income in an environment where every penny must count. Plus you may also be among those of us who are married with spousal commitments. You may have children in need of guidance and upbringing. Maybe they re about to enter college. Oh the bills 6 Credit Union BUSINESS October 2014 www.cubusiness.com CU COMMENT I Business Lending By James Collins Historically the first and most common source of small business capital has been family and friends (except of course for my brother in-law George who incidentally my family has regarded as somewhat unstable for years). Technology has expanded and redefined how far family and friends can reach. Where a typical address book once contained only a dozen or so names of people with whom you were on speaking terms today s list of Facebook friends may number several hundred or more all of whom you can badger for funds. The second is Peer-to-Peer lending which has really taken off. In fact Google invested 125 million in Lending Club (using I believe money they found looking under the couch cushions of Google s executive offices). Lending Club s participating firms rely on technology to analyze and approve loans and are so efficient that they often approve loans in a matter of days whereas traditional lender approval can take months. Their loans come in two types investor money that is matched to a specific borrower or investor money that is pooled. The latter is increasingly popular since it spreads investor risk across multiple loans. A third type of alternative business lending has been designed to appeal to rapidly expanding businesses. These lenders are factoring or asset-based financing companies that essentially allow businesses to guarantee loans using their receivables. However rates are high and this financing specifically targets businesses that need short term funding and are not looking for long term capital improvement. Crowdfunding is the fourth and newest trend. With crowdfunding a borrower will get funding only when enough investors come forward. Applicants in need of funds uploads their ideas a business plan financials and other information onto a crowdfunding website where it is scrutinized by a variety of people ranging from experts to neophytes which makes the whole process strikingly similar to an NCUA exam. Unlike most lenders making money is not the goal of many crowdfunding sites they are designed to advance a goal or promote ideas. f the NCUA s proposed new net worth requirements are any indication it would seem that our regulators feel that member business loans are about as desirable as a Florida time-share in hurricane season. Of course the staggering number of credit unions that have failed--a grand total of four--probably overwhelms the number of credit unions that failed as a result of inadequate regulatory supervision--a number exceeding four. That notwithstanding by the end of 2013 credit unions had grown member business lending programs dramatically by 45.9 billion (an increase of 10.1 percent from 2012). Still the demand for business loans continues to outstrip supply as evidenced by these approval rates Percentage of Small Business Loans Approved Large Banks 20.0% Small Banks 51.4% Credit Unions 43.7% Alternate Lenders 63.2% Brother in-law George 00.0% Source Biz2Credit July 8th 2014 (except for George who told me to get a real job and quit begging for a handout. ) So who are these alternate lenders And why does George think my job is unworthy of consideration First some history in 2008 at the height of the great recession every FI was poking around for anything stinky useless and expendable. Two things sprung immediately to mind teenagers and business loans. Given the considerable legal issues involved with jettisoning the first business loans had to go. As traditional lenders left the business lending market non-traditional lenders entered--a pattern of events that has occurred following nearly every recent economic slowdown. But this time there was one added factor that has distinguished this event from all others--technology. Alternate lenders have entered the market on a mega burst of technology. www.cubusiness.com October 2014 Credit Union BUSINESS 7 CU COMMENT One crowdfunding site Kickstarter.com is the world s largest and has spent more than 1 billion funding more than 135 000 projects since its inception. The growth of these non-traditional funding sources has been staggering. The Lending Club for example has doubled its portfolio every year for the past several. But even with rapid growth alternative lenders have been unable to account for much more than headlines for two major reasons 1. Lack of trust. If getting money from someone you don t know who charges high rates makes you think that you might end up swimming in the bay with concrete shoes you re obviously older than the internet generation. That generation refers to it as browsing with Netscape. 2. Rates. Like I said before they are very high and driven by higher defaults and a lack of investor capital. But most credit unions don t have these issues since they have ample capital and operate under an established set of rules and regulations. Even the NCUA s limit on member business loans shouldn t be much of a factor since many of these business loans fall below the 50 000 minimum and would be excluded from regulatory limitations. 8 Credit Union BUSINESS So what is the problem It is we. We are too entrenched in a system where only those who have already proven themselves and don t really need a loan actually get a loan. We look for net worth cash flow and previous success--all inherent indicators of low risk. What we cannot seem to quantify is hope spirit and strategy--all of which predict success. But taking risk and looking for potential success is what the alternate funding crowd is doing well and why we along with other FI traditionalists are sitting on the sidelines watching the next economy develop. In other words we are like my brother in-law George. James Collins is CEO of O Bee Credit Union based in Tumwater Washington and can be reached at jcollins obee. com. October 2014 www.cubusiness.com UNDER THE HOOD Three Traits of Successful Strategic Planners O By Shazia Manus CEO The Members Group rganizations that have mastered strategic planning combine smart strategy and a manageable execution framework to hammer out a blueprint for the future. The best of the best understand that strategic planning has been forced to evolve. Whereas many businesses of the past operated in steady unchanging environments today s leaders are trying to achieve their objectives in a rapidly changing dynamic and highly competitive environment. Much of this rapid-fire adaptation is being driven by consumers in fact we are now living in the age of the consumer. Therefore the consumer has to be frontand-center in our vision objectives strategic imperatives and tactics. This is true regardless of business orientation. Even those organizations that serve other businesses must keep the end consumer in mind. Great strategic planners know this and use the strategic planning process as an opportunity to both define and enhance the end customer experience regardless of whether they are a business or consumer. A simple way to begin is first define those channels products and services your members engage with most often. These are the foundation of your brand and the elements you must get right every single time in a consistent fashion. Now for each of these areas ask your strategic planners to consider four questions 1. Does this give our members something they can t get from the competition www.cubusiness.com 2. Does this make their lives easier or better 3. Does this help our members solve specific problems they are dealing with 4. What more could we be doing on these fronts that we aren t doing today The answers to these questions will define the ideal consumer experience you seek to create through your business model. Remember the goal is not necessarily to build new products rather it is to build experiences and establish powerful timeless chemical memories of your brand for your consumers. Existing lines of business not capable of adding to the consumer experience should be revamped divested or closed and the October 2014 Credit Union BUSINESS 9 UNDER THE HOOD resulting investments diverted to lines that can legitimately compete and win. After the ideal consumer experience has been solidified it s time to get to work on the strategy that will help credit union teams deliver it. So how can leaders achieve successful consumer-centric strategic planning By emulating the following three traits of successful strategic planners loyalties of consumers. Trait 2 Get Oriented to the Future When credit union management is focused on short-term issues or goals the most eminent short-term and financially significant tactical concerns are what get the attention. That bottom-line thinking creates an environment in which tactics overtake objectives. An orientation to the present doesn t move the strategy needle nearly enough. The present of course can t be discounted. After all a firm grasp on reality is a solid prerequisite for any leader. Good strategic plans foster transparency and empower executives and staff with the business truths (market and competitive realities) allowing them to serve the organization and its members more effectively. As well many credit unions are also doing outstanding things for their members today. Their cultures core competencies and structures are successful. The question for strategic planners becomes how do we exploit our strengths while also exploring new capabilities or opportunities How do we achieve this from a position of strength to foster growth and member loyalty in the future (before the competition does) In its simplest form a strategic plan answers four questions 1. Where are we now 2. Where do we want to be 3. How do we get there 4. How do we measure our progress At The Members Group (TMG) future orientation drives our company s planning. In recent months we have reaped the rewards of this intense focus on what s next. When Apple made its scale-tipping announcement of Apple Pay TMG (and by extension our clients) was strategically positioned to respond. Because our teams had been preparing for the day payments would be made using near field communication (NFC) and tokenization we were ready to confidently advise our clients how to maintain walletshare even as the traditional wallet evolves. Encouraging a future orientation generates several things for planners not the least of which is the ability to see past the current competition chaos and noise. A good strategic plan provides both offensive and defensive direction. When executives are too focused in the here-and-now they have a Trait 1 Take Walks Around the Magic Kingdom (with Eyes and Ears Wide Open) Strategic planning typically happens in one of two ways 1) At a fevered pace with executives hammering out objectives at break-neck speed or 2) Over an interrupted period of time in which ad hoc issues dominate thinking. When creativity strikes you absolutely must take advantage of it. That said strategic planning exercises cannot rely solely on bursts of imaginative energy nor be patched together from pockets of inspiration. Credit union leaders must carry out their planning in an intentional disciplined and yet fluid way. Think of strategic planning as a journey rather than an annual event. This may mean setting aside time each week to do what I like to call taking a walk around the magic kingdom with eyes and ears wide open. Devote time to observe research and gather market insights competitive realities and critical data points from the industry landscape. Allocate time to reflect on how you plan to tackle these macro insights. Work to know your staff and members on a deeper level so they become a powerful unfiltered lens that will show you where to focus your business modeling framework. Such perspectives are very helpful and allow every type of executive to be better prepared for consumer-centric strategic planning. A good strategic plan outlines how the credit union will remain relevant delivering real value to its members. Without understanding the aspirations behavioral attributes and financial pains of members it s incredibly difficult to innovate your way into their world. With the increased competition coming from both in and outside our industry innovation is exactly what credit unions will need to win the hearts minds and 10 Credit Union BUSINESS October 2014 www.cubusiness.com THE TMG DIFFERENCE Customized end-to-end payment programs Intuitive reporting technologies Proprietary web-based card servicing tools State-of-the-art fraud prevention Putting you and your members first... Experience life made easier. Contact us today. themembersgroup.com 800.268.1884 UNDER THE HOOD tendency to stay in a defensive frame of mind. Without a good offensive strategy credit unions are liable to lose points with even their most loyal members. The second thing future orientation generates is a different view of risk. When executives think about their long-term goals and work backward they have a tendency to expand their tolerance of risk. To truly drive creative thinking and inspire innovation leaders have to set the stage of risk containment vs. risk elimination. Third a future orientation allows a plan to be both fluid and measurable. When planners are allowed to focus on what the business will look like five years down the road they prepare their own composure proactively as leaders. This allows them to cope with change by crafting strategies that are adaptable to changing business climates. So long as this is balanced (by repeatable predictable measurable tactics) the plan will not only outline the upcoming 12 months it will serve as a guide for future generations of planners. providing a hard link between planning and execution. It is important to remember plan execution happens at the day-by-day task level. Building the proper governance to support monitor and control the outcomes of the strategic plan is critical. As they say in leadership circles inspect what you expect. Leave a Legacy of Strong Strategic Planning Strategic planning can become devalued the longer it fails to deliver results. By emulating the traits of successful strategic planners your credit union can set the stage for a legacy of strong strategic planning. We are lucky to be operating in an industry ripe for innovation. A rapidly changing financial marketplace functioning in the age of the consumer makes this an ideal time to reinvigorate the strategic planning process. Start your journey today by scheduling your walks through the mag ic kingdom committing to a future orientation and getting the right people around the table. Trait 3 Open the Door Wider Strategic planning provides both the direction and the actions Key Takeaways needed to achieve strategic goals. When an organization sets out 1. Strategic planning is a journey not an event. Set aside in a new direction the drivers of that change should not be time each week to takwe a walk around the magic the last to know. Yet strategic planning sessions often neglect kingdom with eyes and ears wide open. to involve the people most affected by an organization s plans. 2. A future orientation allows strategic planners to build Whether it s dictated by tradition or office politics a seemingly both offensive and defensive objectives. unmovable force often stands in the way of getting the right 3. Sessions should include those key employees who will people around the strategic-planning table. Not surprisingly the have a hand in achieving the credit union s goals. outcome often is failure to deliver results. Consider including or at a minimum consulting with those Shazia Manus is CEO of The Members Group a payments key employees who will have a hand in achieving the credit processor providing credit unions with innovative payment union s desired goals. Once those goals are firmly in place solutions that make life easier. be sure the premise for each goal is communicated alongside the expectation for what success looks like. When people understand the context of a new tactic they are more inclined to buy into the strategic vision of the credit union. Change is difficult for many people. Yet when they can see the potential impact of that change and understand their role in it they are more open to making the necessary adjustments. Any potential confusion that may come from a strategic plan s goals can be eliminated with specificity. When you draft the plan be clear. Avoid ambiguity in language outcomes and processes. Plans that provide clarity facilitate accountability 12 Credit Union BUSINESS October 2014 www.cubusiness.com CU COMPLIANCE O No Time to Read the 572-Page Proposed HMDA Rule By Brian D. Godwin n July 24th of this year the Consumer Financial Protection Bureau (CFPB) published a proposed rule related to the Home Mortgage Disclosure Act (HMDA). The rule is intended to improve the information reported about the residential mortgage market. Many of the proposed changes were mandated by the Dodd-Frank Act while some of them arose from liberties taken by the CFPB. It would be difficult to foresee a final rule having an effective date prior to January 1 2016. That s because the rule would need to be effective at the beginning of a year and a 2015 effective date would not allow for a sufficient implementation period. Focusing on tomorrow let alone a year and a half from now can be quite a challenge for credit unions as they find themselves very busy in service to their members. However by spending time today looking at the proposed rule and providing comments to the CFPB credit unions can make life a bit easier in the months and years to come. While the CFPB can anticipate the manner in which proposed rules may affect credit unions it cannot have a full understanding of each credit union s operations nor how a proposed rule might impact that credit union. Providing that kind of input can help shape final rules. Reading a 572-page proposed rule may not be realistic given the daily schedules of most credit union professionals. However allow me to review the high points The reporting threshold would be changed from one covered loan per year to 25. If a credit union which would otherwise be required to submit HMDA data The proposed rule provides some reduced impact on credit unions but by and large it will nonetheless increase the compliance burden. completes less than 25 covered loans per year it would not be required to report HMDA data. Credit unions originating 75 000 or more loans in the preceding year would be required to submit HMDA information on a quarterly basis. Credit unions at their option could provide public HMDA data on its website rather than making it available at a branch location. Unsecured home improvement loans would no longer need to be reported. However all closed-end loans openend lines of credit (e.g. HELOCs) and reverse mortgages secured by a dwelling would need to be reported. Commercial loans if secured by a dwelling would need to be reported. Additional data fields mandated by the Dodd-Frank Act would be required on the Loan Application Register (LAR). The fields mandated by the Dodd-Frank Act are Applicant age Applicant credit score Applicant channel (e.g. retail broker etc.) www.cubusiness.com October 2014 Credit Union BUSINESS 13 CU COMPLIANCE By spending time today looking at the proposed rule and providing comments to the CFPB credit unions can make life a bit easier in the months and years to come. Address and location of property Property value Points and fees charged on the loan Any introductory period Any non-amortizing features Any prepayment penalties A universal loan identifier Identification of reasons for denial Occupancy status Lien priority HOEPA status Loan type Loan amount Additional fields which the CFPB is proposing to add using its discretionary power include Debt-to-income ratio (DTI) Combined loan-to-value (CLTV) Number of units Construction method Manufactured housing information Multi-family housing information Origination charges Discount points Non-discounted interest rate Interest rate Loan term Qualified Mortgage (QM) status First draw amount for HELOCs and reverse mortgages Loan originator s NMLS identification number Rate spread 14 Credit Union BUSINESS The proposed rule provides some reduced impact on credit unions but by and large it will nonetheless increase the compliance burden. Systems may need to be updated staff will need to be trained on the requirements and each loan will involve more work and thus additional time. Members will ultimately be impacted as fees may need to increase to offset the additional burden to the credit union. Changes to the Dodd-Frank Act mandated fields are highly unlikely. However credit unions have an opportunity to impact the fields the CFPB would like to implement by providing comments detailing any operational concerns or doubts regarding the benefit of information provided by the additional information. Comments are due to the CFPB on October 29th and may be submitted via email at FederalRegisterComments cfpb.gov or at http regulations.gov. Comments should identify the Docket No. CFPB-2014-0019 or RIN 3170-AA10. The CFPB welcomes feedback and is obligated to consider comment from credit unions before publishing a final rule. I highly recommend your credit union consider the impact of this rule and submit a comment. This not only is your opportunity to influence the direction of the CFPB s rulemaking going forward it may also have a significant impact on your credit union s operations well into the future. Brian Godwin is director of regulatory compliance for PolicyWorks. He can be reached at briang policyworksllc. com. October 2014 www.cubusiness.com ATM BUSINESS Coping with the Never-Ending Challenge of ATM Compliance By Gary Walston ATM COMPLIANCE is a perennial challenge but doesn t it seem now that it is coming more frequently with more force and with more cost The combination of more complex networked ATMs utilizing PC-based operating systems with networks and regulators trying to protect sensitive customer data has led to the never-ending need to upgrade or replace ATMs. Some might say it all started with Y2K. Since then there have been a litany of compliance requirements at the ATM mandated by either the various networks (MasterCard or Visa aka Cirrus or Plus) or federal and state banking laws. Here is a brief timeline of the most significant 2000 Y2K 2005 Triple Data Encryption (3DES) 2006 IBM OS 2 End of Life 2009 PCI Encrypted PIN Pads 2012 Americans with Disabilities Act (ADA) 2014 Windows XP End of Life 2016 Europay MasterCard Visa (EMV chip card) 2020 Windows 7 End of Life Every two to three years a new mandate or requirement comes along that forces credit unions to make major decisions regarding upgrading and replacing ATM equipment in order to remain compliant. Unfortunately for credit unions no sooner do you spend money to become compliant than you have to start worrying about another compliance requirement coming down the road. That means you have to evaluate your ATM network all over again spending more time and more money. The compliance end goal is to manage and mitigate risks. Most risk associated with ATMs has to do with sensitive customer information being accessible to thieves and criminals. It is the job of everyone in the ATM industry to protect consumers and all compliance requirements (with the exception of ADA) are designed to accomplish that. The calculation for ATM upgrade or replacement revolves around the age of the equipment the upgrade feasibility and the timing for replacement. All involve considerable expense and hassle. Additionally the partners you turn to for advice and expertise are oftentimes the same ones who benefit the most from these never-ending compliance requirements. With that in mind here are a few strategies for credit unions to effectively manage compliance at the ATM and protect their members. Credit Union BUSINESS 15 www.cubusiness.com October 2014 ATM BUSINESS Strategy One Do nothing. Avoiding the issue involves little effort but a fair amount of risk. There is the risk of how regulators will deal with or punish the institution the risk that other third party providers (processors and networks) will shut your ATMs down the risk of serious damage to your reputation and inconvenience for your members in the event of a breach. And of course there is the risk of litigation. Not all compliance requirements are absolutes EMV for example is simply a liability shift. And while migration to Windows 7 is highly recommended by the Federal Financial Institutions Examination Council (FFIEC) it is not an absolute mandate if you can implement compensating controls to remain PCI compliant. It is all about mitigating your risks which the vast majority of financial institutions address with conservative decision-making that rarely results in doing nothing. Every two to three years a new mandate or requirement comes along that forces credit unions to make major decisions regarding upgrading and replacing ATM equipment in order to remain compliant. need to buy a software suite Does the ATM require a new microprocessor or more memory Will these upgrades handle the next compliance requirement For example to upgrade for EMV you must be running Windows 7 and to run Windows 7 you need new software which requires a faster processor and more memory. A good rule of thumb is to upgrade when you have three or more years of useful life left and the expense doesn t exceed 5 000. Strategy Two Upgrade upgrade upgrade. Upgrading an ATM to remain compliant is always an option. In evaluating whether to upgrade an ATM (and each unit should be looked at individually) you must first consider its age. If your ATM is seven years old for example does it really make sense to invest 4 000 to 10 000 in a piece of equipment that is already nearing the end of its useful life You also need to consider what is involved in upgrading. Is it just a need for new software Do you have a software maintenance agreement that provides an update or do you Strategy Three Replace Evaluating the age of your ATM and its current book value and useful life will help determine whether it s time to replace it and get compliant. Buying a new ATM is more expensive but may save money in the long run. With a new ATM maintenance costs will be lower uptime higher and future compliance will be less costly. 16 Credit Union BUSINESS October 2014 www.cubusiness.com ATM BUSINESS Strategy Four Get out of the ATM business. Outsourcing ATM operations is a growing trend among credit unions particularly those that see the ATM as a necessary evil and not their core competency. Turning their fleet over to an expert focused exclusively on ATM management and operation can save time money and headaches. It also takes the burden of compliance off their back and frees the credit union s staff to focus on the organization s primary objectives. There are many aspects to consider in finding the right partner. One is whether you want to get out of ATMs entirely If so make sure your partner can do it all (terminal driving maintenance cash management replenishment telecommunications monitoring dispatch etc.). That includes purchasing your existing ATMs from you or buying new ATMs. Gary Walston is Executive Vice President of Dolphin Debit (www.dolphindebit.com) a full-service ATM management company that owns and operates ATMs for financial institutions. Contact him at gwalston dolphindebit.com. . . . Look into software maintenance that may lessen your cost of updates upgrades or new software versions. Before making that purchase look into software maintenance that may lessen your cost of updates upgrades or new software versions. Also consider downgrading new technology may do wonderful things but if you see the primary purpose of an ATM as letting members get cash fast simple may be better. The vast majority of ATM transactions are cash withdrawals. Image deposits at the ATM may have been the craze for the past few years but could be short-lived considering the speed with which mobile deposits have taken off. 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 October 2014 Credit Union BUSINESS 17 CU CONTENT The Home Depot Breach How North East Texas Credit Union Met the Challenge D By Laura Enock ata breaches make for difficult times for credit unions. There is a need to remind members of the severity of the security breach advise them on steps to take for better protecting themselves and reassure them that their money is still safe with the credit union. All the while you know it s your organization that will have to bear most of the costs connected to any data breach. Credit unions need to keep their financial future secure in order to protect their members. With disasters like Target and more recently Home Depot in the news and the possibility of more security problems in the future how to respond to data breaches needs to be a topic of conversation occurring among the leadership team at every credit union. Having to weigh the competing concerns of member satisfaction and institutional financial security with incomplete information is a very difficult challenge to address. This was the position that North East Texas Credit Union (NETCU) encountered after the Home Depot breach. It knew some of its debit card numbers were at risk. It didn t know how long it would be before Home Depot released the list of compromised numbers. NETCU faced significant risk of fraud and the knowledge that it would be liable for around 80 percent of the losses incurred as a result of that fraud. Inaction in a situation like this was not an option. After the events of the Target data breach NETCU knew it could not withstand another round of fraud losses like it had previously experienced. It knew its membership could not afford the loss and inconvenience of more fraudulent charges. However the credit union was working with incomplete information. It could wait until Home Depot released the list of Tracie Smith Marketing Director NETCU compromised credit card numbers but every second of delay was another second for criminals to use its members debit cards. Taking initiative NETCU management decided on a proactive approach to member financial security. They had the team pull a transaction register to find what cards had been used at Home Depot during the time when Home Depot s systems had been compromised. The credit union then deactivated those cards. It turns out to have been the right call. When the official list of compromised cards came out all of the affected cards NETCU had identified were on the list. Within the space of an hour prior to the deactivation more than 3 000 18 Credit Union BUSINESS October 2014 www.cubusiness.com CU CONTENT North East Texas Credit Union management and staff stand proud in their recent accomplishment managing the impact of the Home Depot breach on their members. of fraud came in. The cost of delay could have been staggering. While it s clear NETCU made the right decision in response to uncertainty what s really noteworthy is the way the credit union s communication engine worked in a crisis. NETCU engaged in three distinct rounds of communication and showed off the three necessary steps in good crisis communication comfort correct and clarify. The first round of communication was to comfort worried members. In this case NETCU sent a letter to the affected members letting them know their cards had been deactivated. As expected this did produce a flurry of concerned letters emails and phone calls but NETCU handled the burst of communication with grace. Some members expressed concerns about being without cash in an emergency so NETCU agreed www.cubusiness.com October 2014 Credit Union BUSINESS 19 CU CONTENT to short-term activation so members could make withdrawals from ATMs. This step involved a lot of extra labor but was right for the members. Representatives had to work extra hours to print and stuff mailers as well as spend more hours on the phone responding to customer fears. Tracie Smith Marketing Director recorded a welcome greeting for seven separate branches stating that if a debit card wasn t working it s because of the Home Depot breach. Still letters were sent to affected members less than 24 hours after the decision had been made. The second round of communication was to correct the problem. NETCU created new cards for all affected members. This was done in-house to keep time to delivery at a minimum. Again a lot of labor was required but new cards were in the mail to affected members within three days of cancellation. The third wave of communication was to clarify the facts. A few members were upset with the inconvenience they experienced during the brief period when they were without a card. One of those members happened to be a journalist for a local paper. And yes they wrote an editorial in the local newspaper painting the actions of NETCU in a somewhat negative light. Although everything in the newspaper column was factual the word breach appeared in a large headline ... along with a photo of the credit union s sign. NETCU turned to an outside agency to handle their press concerns. Because they had fallen behind in public perception they needed to react efficiently. They needed to act quickly to rectify their public image before their previous work was washed away beneath a tidal wave of negative opinion. Contracting with an outside agency gave them the ability to quickly respond to this negative press. NETCU s response to this problem shows a great deal about how to effectively prioritize in a crisis. They knew they needed to act quickly and decisively and that there would likely be fallout from that action. They put the concerns of their members at the forefront and made direct communication with their members the focus of their efforts. They were able to leverage the goodwill their regular communication with members had built and weather the initial storm. Upon realizing there was a potential conflict they sought help to handle what could have been an embarrassing situation with grace and professionalism. With disasters like Target and more recently Home Depot in the news and the possibility of more security problems in the future how to respond to data breaches needs to be a topic of conversation occurring among the leadership team at every credit union. By following the three C s of crisis communication--Comfort Correct and Clarify--they were able to weather a serious disaster with their reputation intact. This event went from a potentially negative outcome that they had left their members without service for three days into a positive one. They had taken proactive steps to protect their members from fraud. They can use the handling of this disaster to manage new member concerns about security and to retain existing members who are concerned about the next wave of security threats. Security leaks aren t going anywhere. They re an inevitable part of doing business in an integrated online society. Credit union marketers can t influence the security policies of big retailers. All they can do is set up policies and procedures to react when things do go wrong. Following the example of NETCU can be a great place to start in preparing a solid security breach response plan at your credit union. Laura Enock is Publisher of CUcontent which provides credit unions with fresh daily content (articles videos infographics etc.) and digital marketing tools. She can be reached at laura cucontent.com. Get a free eBook called The Technology Your Credit Union s Marketing Department is Missing at CUcontent.com. 20 Credit Union BUSINESS October 2014 www.cubusiness.com CU LENDING Underwriting Loans to Members with Outstanding Student Loans B By Bob Schroeder efore Lending Solutions Consulting Inc. (LSCI) provides on-site consulting services with credit unions we conduct a portfolio analysis. We review loan policies pricing and approximately seventy-five loan files including delinquencies and charge offs. This is where we identify opportunities to make a positive impact on a credit union s net income. We like to compare our portfolio analysis to the exam one receives at the doctor s office prior to a diagnosis. When conducting reviews of delinquencies and charge offs I see a much higher percentage of members with student loans than in the general population. This tells me that these members are struggling and credit unions may not be addressing student loans properly in their underwriting. Are student loans a bubble I m hearing this concept discussed in the media. As I travel around the country it is not unusual to see borrowers having 100 000 or more in student loans. According to the Federal Reserve statistics 3.5 percent of the 37.5 million student loan borrowers owe more than 100 000 in student loans. The average student loan debt per borrower is 25 000. Outstanding student loans are now greater than credit card debt and auto loans in America. How do you address student loan obligations in your loan underwriting When you see a member with student loans what guidance do you offer your staff or the member Let s take a look at four key underwriting ratios guidelines used by LSCI and how student loans affect these ratios. The four ratios and LSCI guidelines are 1. Debt to Income 45 percent or less. 2. Unsecured Debt to Annual Gross Income (AGI) 25 percent or less. 3. Secured Loans to AGI 75 percent or less. 4. Mortgage Debt to AGI 2.5 or less. Typically student loans alter only the Debt to Income ratio 1 of the above four ratios. At a recent University of Lending the discussion focused on the amount of monthly payments to use in the debt to income ratio when student loans are in deferment. Some of the more aggressive credit unions did not add a monthly payment on deferred student loans. Rex Johnson founder of LSCI and class instructor suggested .006 of the original student www.cubusiness.com October 2014 Credit Union BUSINESS 21 CU LENDING caution when structuring new loans. Members with excessive student loans may file bankruptcy when dischargeable debt is less than 25 percent of their AGI. The federally backed student loans may not be discharged in bankruptcy however the extra student loan debt pressures the member to get rid of any debt they can. I strongly encourage having conversations with the members about bankruptcy and their attitude about it. Let them know all the reasons you like the loan and that you want to do everything you can to help them out. Tell them you lend out federally insured money and you have examiners that must be satisfied. Ask them for approval to ask personal questions. Once you get their approval ask if they have ever considered filing bankruptcy. There s no right or wrong answer. Let them know that it s OK to file bankruptcy. If they file bankruptcy we want them to file now before our consolidation loan. If they file after we consolidate their bills we will take the loss while the high-interest rate lenders will receive full payment with interest. Once you have an understanding on the member s attitude about bankruptcy it should be easier to come up with a solution. Let me share an actual experience I had at a credit union with which I was working. The following are loan notes. The member names were changed to protect their identities. Connie and Sam were embarrassed about an NSF fee on their account. They spoke with a MSR who suggested that they talk with a loan specialist to see what could be done to assist them. After the specialist did a credit review it seemed the best option was to refer them to a credit counselor for assistance with their credit card debt. Bob from LSCI was visiting and wanted to talk with Connie and Sam to see if there may be a different way to handle it. Bob learned that Connie & Sam have been members of the credit union for 15 years where they also deposit their payrolls. Connie works for the local clinic as a surgical tech. Sam is a general manager at a local restaurant. This is a good job and he is currently making 52 000 a year. Connie reduced her hours down to 20 hours a week in 2010 to return to school. She graduated in August 2013 with her BA of Science & Nursing. Since then she has been studying for her boards which were in April. Once she passes her boards she will increase her pay to 27.50 per hour from 23.45. If she should not pass them she will be able to maintain her current job at her current rate of pay. www.cubusiness.com . . . Members are struggling and credit unions may not be addressing student loans properly in their underwriting. loan balance as a good number to use. The class participants came up with three alternatives methods. When researching the Internet I found seven options for student loan repayment plans. These repayment plans include standard graduated extended income-based pay as you earn income contingent and income sensitive. There is no one absolute correct number however I too recommend the .006 solution. Some may argue student loans are unsecured loans and should be included in Unsecured Debt to AGI ratio 2. LSCI uses this ratio as a bankruptcy indicator and since federally backed student loans are not dischargeable in bankruptcy we recommend you exclude them from this calculation. This ratio identifies the dollar amount as a percentage of AGI one would benefit from in filing bankruptcy. We believe your members will be tempted to file bankruptcy once their dischargeable debt exceeds 25 percent of their AGI. That is 25 percent of a year s earnings tax-free. Some may hold out for 30 percent or 35 however we all have our limit. Outstanding student loans do not change the Secured Debt to AGI ratio 3 or the Mortgage Debt to AGI ratio 4. When a borrower has student loans outstanding is it reasonable to have the same limits on ratios 2 through 4 as those with no student loans outstanding If you have student loans up to 50 percent of your AGI should you also have a car loan to 75 percent and a mortgage of 2.5 times your AGI I see many credit unions take losses on consolidation loans because they fail to realize the impact student loans have on their members. These loans would be great loans if the member did not have the additional burden of student loans. I recommend a new ratio for those with student loans unsecured debt plus student loans to AGI. If this ratio is more than 50 percent of AGI you must use 22 Credit Union BUSINESS October 2014 CU LENDING They currently have two vehicles a 2012 Forrester and a 2011 Legacy. The Legacy is on lease with approximately 5 800 remaining. The Forrester is at 3.97 percent and they owe approximately 15 400.00. Both vehicles are in good shape. They bought their home in 2009. Since buying it they have remodeled their daughter s bathroom re-roofed the back patio and partially finished the basement. Connie has a 401K with approximately 40 000 in it. Sam does not have a 401K. Connie and Sam have used their credit cards to live on since Connie went part time. This has amounted to more than 33 000 in unsecured debt. Bankruptcy is not an option for them. They feel like bankruptcy is a cop out and would make them feel like failures. She has student loans that are coming due. They are struggling financially and need assistance. Pretty good loan notes right How does your credit union compare I remember the calls well. The husband was more adamant about not filing bankruptcy and stated that if he filed bankruptcy he would be a failure in the eyes of his recently deceased father. It was a quite powerful statement. We even discussed the strength of their relationship. Large unsecured debt consolidations loans are only as strong as the marriage. A divorce would certainly result in a bankruptcy and charge-off. This is a list of their student loan obligations Loan Student Loan 1 Student Loan 2 Student Loan 3 Student Loan 4 Student Loan 5 TOTAL Student Loans Balance 41 800.00 10 100.00 10 100.00 11 000.00 24 500.00 97 500.00 Monthly Payment 259.00 177.00 177.00 233.00 200.00 (In Deferment) 1 046.00 The following is a list of Connie and Sam s non-student loan unsecured obligations Creditor Kohl s Marathon Levin Pottery Barn Care Credit Care Credit Milestone Best Buy Best Buy Citi Card Sears Discover Discover Citi Card TOTAL Balance 1 440.65 1 230.07 2 668.08 715.56 1 598.74 3 299.79 681.04 1 644.98 1 985.02 7 490.97 1 236.52 1 388.13 5 018.88 3426.76 33 825.19 Monthly Payment 184.00 62.00 94.00 73.00 87.00 138.00 157.04 54.00 152.00 1 094.60 40.05 47.00 101.00 81.56 2 365.25 One of the loan officers at the credit union has experience working with similar members and consolidating federal student loans. After discussion with Connie we recommended she contact the appropriate authorities and consolidate her student loans. She was able to consolidate five loans into one with a balance of 97 500 and starting monthly payments of 400 reducing the monthly payment by 646 per month. This is not a fixed payment and the monthly payment will increase every 2 years for a total of 12 times making it a 25-year repayment plan. Once we were able to reduce the federal student loan payments by 646 per month the credit union was able to come up with a consolidation loan that made sense. The financial makeover was complete Before 14 Non-Student Unsecured Loans 5 Student Loans 19 total loans After One Signature loan ( 800. CASH OUT) One Student Loan TOTAL Balance 33 825.00 97 500.00 131 325.00 Balance 34 625.00 97 500.00 132 125.00 Payment 2 365.00 1 046.00 3 411.00 Payment 893.00 400.00 1 293.00 www.cubusiness.com October 2014 Credit Union BUSINESS 23 CU LENDING As student loans become more prevalent your credit union will need a student loan expert to assist members in navigating the system. Debt to income PRIOR to consolidation loan & student loan consolidation Debt to income AFTER consolidation loan & student loan consolidation Finance Charges to be collected by the credit union Continuing a life long relationship with these members 116% 44% 18 955 PRICELESS Standard Repayment Plan Payments are fixed with terms up to ten years. Minimum payment is 50 per month. Extended Repayment Plan Payments are fixed or graduated with terms up to twenty-five years. Graduated Repayment Plan If your income is low now but you expect it to increase steadily over time this plan may be right for you. Under this plan your monthly payments start out low and increase every two years. Graduated repayment plans are made for up to 10 years. The payments will never be less than the amount of interest that accrues and won t be more than three times greater than any other payment. Income-Based Repayment Plan Designed to reduce monthly payments to assist with making your student loan debt manageable. If you need to make lower monthly payments this plan may be for you. Payments are 10 to 15 percent of discretionary income (income in excess of 150 percent of the poverty rate). Pay As You Earn Plan Helps keep your monthly student loan payments affordable and usually has the lowest monthly payment amount of the repayment plans that are based on your income. Payments are 10 percent of discretionary income. Income-Contingent Repayment (ICR) Plan If you need to make lower direct loan payments but do not qualify for the IBR or Pay as you earn plans the ICR Plan may be for you. Payments are the lower of 20 percent of discretionary income or fixed payments with a twelve-year term. ( Based on Connie working full time.) Reducing the monthly payment on the student loans allowed Connie and Sam to buy time to get the consolidation loan paid off. Then once the consolidation loan is paid attack the student loans with the additional 893 a month. This plan would pay off the student loans within 10 years after the five-year consolidation loan is paid. This is a fifteen-year plan which puts them at about 65 when they are completely debt free and ready for retirement. The following are links to the web pages that were used by Connie and Sam to obtain their consolidation of student loans. The only caveat is that private student loans will not qualify for this however there are some loans with private financial institutions that are actually federally backed loans and those will be eligible. https studentloans.gov myDirectLoan consolidationPaper.action https studentaid.ed.gov repay-loans consolidation As student loans become more prevalent your credit union will need a student loan expert to assist members in navigating the system. The following are details on the many repayment plan options. 24 Credit Union BUSINESS October 2014 www.cubusiness.com CU LENDING Deferment Forbearance--Under certain circumstances you can receive a deferment or forbearance that allows you to temporarily postpone or reduce your federal student loan payments. Postponing or reducing your payments may help you avoid default. Deferment is more consumer-friendly as the interest does not accrue. e recommend using caution when working with members who have a substantial amount of student loans. Caution does not mean turn the loan down. Ask the tough questions about bankruptcy before granting loans that will not survive bankruptcy. The loan made to Connie and Sam is a good loan only because the credit union knows their attitude about bankruptcy. The 18 955 in finance charges the credit is expecting to collect would not have happened without the lender helping Connie consolidate her student loans. Most credit unions would have declined the loan and or referred Connie to a credit counselor and received less than 1 000 in investment income. I want to extend special thanks to my friends at Community One Credit Union of Ohio including Jason Norris Melissa Harness Gina Jones and Evelyn Canterbury for contributing to this article. Bob Schroeder vice president consultant of Lending Solutions Consulting Inc (LSCI) 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 before moving on to serve as CEO of a community credit union. During his twenty-one year tenure as CEO the credit union experienced a period of rapid growth and strong earnings. Bob can be reached at schroeder rexcuadvice.com. W www.cubusiness.com October 2014 Credit Union BUSINESS 25 CU INVESTMENTS Simplified Investment Portfolio Management Strategies for Smaller Credit Unions s a credit union manager there are many factors to consider when deciding how to manage your excess liquidity. Many credit unions face the challenge of running at a low loan to share ratio. Letting excess liquidity even in a low interest rate environment sit in the overnight account without earning any yield is just not the correct strategy you re not going to meet your income goals. Doing this for an extended period will put downward pressure on your ROA. However in the eight-plus years that I have been in the credit union industry I have seen many smaller credit unions operate in this fashion. Why Because somewhere along the way it was suggested to them that the risk is not worth it they were given incorrect information or have just not been educated to the simplistic strategies that are associated with putting together a basic CD ladder. The strategy to build an investment ladder is simple to implement avoids the need to make any market timing decisions and provides stable cash flow. Although yields have been low a quick snapshot below will disprove the waiting for rates to go up mindset. A By Amy Rapp The higher the incremental interest rate risk you take on the higher the incremental earnings you can expect. Take a look at the historical peaks and troughs in your cash position. You might want to take a look at the largest outflow that you have experienced over any single 30 60 90 or 180-day period. You will need to allow some contingency for unexpected cash requirements. To help you manage your liquidity on an ongoing basis it is important to establish some liquidity benchmarks. If your liquidity balances run out turn to borrowing or liquidating assets. This may not necessarily be a bad thing but will require some pre-planning. Short-term liquidity needs for a day or two can easily be covered with borrowings. Longer term needs will require some restructuring of the balance sheet. Once you have worked out how much you need to hold in your overnight account you can determine what amount of funds will be available for the investment ladder. Review Current Liquidity Position Before considering any new investment strategy you should first take a look at your current cash position including all expected inflows and outflows for the coming year. Understand Current Risk Position The second step in managing your portfolio is to establish 26 Credit Union BUSINESS October 2014 www.cubusiness.com CU INVESTMENTS your risk tolerance. As a general rule of thumb the higher the incremental interest rate risk you take on the higher the incremental earnings you can expect. Start out agreeing on a well-defined set of risk limits with which all stakeholders including the board and management team are comfortable. Several factors should be considered when choosing the appropriate level of risk Education and experience the greater the breadth of experience of the investment manager the broader the range of investment alternatives that can be considered. Capital level A lower capital level mandates that an investor be more risk averse. Credit loss experience A higher credit loss experience will require greater liquidity and less risk from the portfolio. Letting excess liquidity even in a low interest rate environment sit in the overnight account without earning any yield is just not the correct strategy. There is no single set of limits that is suitable for all credit unions. We undertake risk purely to increase earnings so we need to consider the risk reward trade-off that we might be prepared to make. If you have strong core earnings you probably don t want to take on additional risk. If your earnings are under pressure or you want to subsidize member products you might be prepared to take on quite a bit of additional interest rate risk. In the final analysis your limits should feel comfortable and make sense. The composition of your loan portfolio and core funds will clearly define what level of risk you can assume in the investment portfolio. If you already have a lot of long-term fixed-rate loans on your books you probably have to be fairly conservative with your investment portfolio in order to meet overall risk limits. The amount of interest rate risk that you are prepared to undertake will ultimately determine the maturity structure of the ladder. Waiting For Interest Rates To Go Up Many credit unions maintain significant cash or funds positions either as a liquidity hedge OR with the expectation of investing into a higher-rate environment. Analysis shows waiting to invest sometimes results in foregone current and future investment income. Investing effectively now can capture that foregone income as well as provide cash flow to fund loan demand or for re-investment into rising rates. Create Effective Policies The next step is creating a sound ALM and Liquidity Policy one that provides adequate flexibility while giving clear guidance on what is acceptable. Your liquidity and interest rate risk limits will be based on the two analyses described above. www.cubusiness.com Establishing The Investment Ladder Establishing a fixed maturity ladder is a great way to get excess liquidity working for you. You can set the term of the ladder for example two or three years based on the amount of interest Credit Union BUSINESS 27 October 2014 CU INVESTMENTS purchased as part of an overall portfolio allocation strategy. Here are some regulatory considerations and overall benefits of fixed-income ladders. Establishing a fixed maturity ladder is a great way to get excess liquidity working for you. rate risk that you are prepared to undertake. Build the ladder with non-callable investments such as corporate credit union certificates FDIC insured bank CDs or bullet agency fixed-rate securities. I want to emphasize fixed not callable. I have seen credit unions purchase just callables and then as interest rates changed the investments were called. A fixed-income ladder should come first and then callables can be Benefits of Laddering - Regulatory Considerations Liquidity-excess funds available Day-to-day cash flow needs met Reduces likelihood of borrowing Re-investment-liability consideration Reduces inefficient low yielding money stability of yield Monthly income Corporate credit union certificates insured to 100K by NCUA Safety risk of a material loss 100K-FDIC Insurance Bank CDs Yield rates return on an investment Ladder Example A simple example of a two-year ladder would be to have 1 million maturing each month for the next two years or 24 million total. For credit unions that are significantly smaller in asset sizes ladders that have 100K 250K coming due each month are possible with FDIC insured Bank CDs. I have created ladders using corporate credit union certificates with investment amounts as small as 10 000-25 000k per month for the very small credit union. Having money coming due on a regular basis will provide a much better return over time than leaving the money sitting in the low interest bearing overnight account. Once you have started the ladder it is important to keep the process going. The primary purpose of the ladder is to avoid market-timing issues. As maturities come due they should be rolled over automatically to maintain the integrity of the ladder. If you start to make timing decisions you are 28 Credit Union BUSINESS October 2014 www.cubusiness.com CU INVESTMENTS getting away from the original concept Dollar Cost Averaging Dollar Cost Averaging is a technique of buying a fixed-dollar amount of a particular investment on a regular schedule regardless of the price. Dollar cost averaging can lessen the risk of investing a large amount in a single investment at the wrong time helps you ride out the peaks and troughs in interest rates and avoid unwanted concentrations. In a rising rate environment rates could go up as much as .25 basis points in one day. If you invest all of your overnight funds into a ladder in one day your opportunity of creating a better overall average rate will be considerably reduced. Here is the current Fed Funds Rate from Bank Rate.com This week Fed Funds Rate 0.25 Month ago 0.25 Year ago 0.25 Making adjustments If your interest rate or liquidity positions change over time you will need to make adjustments to the ladder. Reducing the term of the ladder will clearly reduce interest rate exposure. Reducing the amount of funds invested in the ladder will both reduce interest rate risk and provide additional liquidity. It is important to rebalance the ladder as quickly as possible to maintain its effectiveness. This may entail liquidating some existing investments and placing new ones at appropriate maturities. Remember--a ladder with rungs missing ceases to be a usable ladder. Here are rates from a well-known CD provider in the credit union industry on 9 12 2014. Investment Term 182 Days 272 Days 1 Year 18 Months 2 Years 30 Months 3 Years 4 Years 5 Years Top Rate 0.50% 0.55% 0.55% 0.75% 1.00% 1.10% 1.40% 1.85% 2.15% Average Rate 0.36% 0.38% 0.55% 0.68% 0.97% 1.03% 1.38% 1.79% 2.11% Bankrate.com Rates as of 9 10 2014 If we were to ladder 5 million dollars and obtain an average duration of 2 years we would obtain approximately .97 basis points in yield. Compare .97 to the current overnight rate of .25 the Fed Funds Rate. This is a .72 basis point pick-up. You do the math Conclusion By applying some simple principals to the investment management process credit unions may be able to dramatically enhance their earnings while at the same time reduce the amount of risk they face. Amy Rapp is the President CEO of VirtualCorps and can be reached at arapp virtualcorps.com www.cubusiness.com October 2014 Credit Union BUSINESS 29 CFO CURRENCY Negative or Positive Implications for the Industry By Emily Mor Hollis CFA The Growing Size of Credit Unions Growth and Cost of Compliance are Taking a Toll Credit unions have traditionally operated on a small scale specializing in relationship lending. Years ago the common bond of a credit union was advantageous because it reduced the cost of assessing the creditworthiness of potential borrowers allowing credit unions to facilitate unsecured lending to members on reasonable terms. Over time the cost advantages have increased. Today larger institutions have more opportunities for diversification into non-traditional product lines and the efficiencies can greatly enhance the bottom line. But credit unions are challenged to compete with rising technology costs like remote deposit capture and mobile banking platforms to provide the best member experience possible. Regulation has also burdened credit unions especially the smaller ones with expenses that didn t previously exist. The challenges are intensified in low-rate and low-margin environments. Rising compliance costs are even greater in the banking industry. New regulations include but aren t limited to Basel III the Bank Secrecy Act Dodd-Frank Wall Street Reform and the Consumer Financial Protection Act (which includes the Consumer Financial Protection Bureau and the Volcker Rule). These rules have put many of the nation s 6 728 FDICinsured commercial banks and savings institutions in a position of either needing to sell or going under. Additionally pressures on net-interest margins due to the low-rate environment and concerns regarding cyber security and high-profile data breaches have left many banking executives looking for the exit sign. The total number of FDIC-insured banks with asset sizes of 100M and less has declined by a staggering 85 percent between 1985 and 2014. The true underlying problems here are higher regulatory compliance costs issues in obtaining capital in a more restrictive lending environment and operating at a time when the demand for loans has slumped. These problems will continue as financial institutions are challenged by nontraditional lending networks such as peer exchanges. Our industry is no different. The number of credit unions has declined sharply from a peak of 23 866 in 1969 to just 6 491 in 2014 a 73-percent decline. Since 2002 the number of credit unions with assets less than 250 million has decreased by 38 percent to 5 705. Those with greater asset sizes have increased by 78 percent to 786. These larger-sized credit unions represent 79 percent of total credit union assets. Given these statistics the regulators are focusing more intently on larger credit unions for their performance could threaten the share insurance fund. NCUA is applying greater resources to find those they believe are outliers in high-risk tolerance and subsequent strategies. To better assess these risks and by following guidance from the banking industry the NCUA has adopted the New Capital Planning and Stress Testing Regulation. 30 Credit Union BUSINESS October 2014 www.cubusiness.com CFO CURRENCY What is a Stress Test A stress test in financial terminology is an analysis or simulation designed to determine the ability of a given financial instrument or financial institution to deal with an economic crisis. Instead of doing financial projection on a best estimate basis a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain cases a form of financial analysis. For example the instrument may be tested under the following stresses If unemployment rate rises to xx percent in a specific year. If equity markets crash by more than x percent this year. If GDP falls by z percent in a given year. If interest rates increase by at least y percent. If property values erode by w percent. This type of analysis is increasingly used for all governing agencies worldwide including the European Banking Authority and the International Monetary Fund. It is the new trend in regulation for very large entities given their size and current exposure. The goal of a stress test analysis is to inform capital planning and illustrate any balance sheet weaknesses so internal business units may engage in effective challenges. Capital planning would include assessing adequate capital allocation levels to cover potential losses incurred during extreme but plausible events. Scenarios are hypothetical and designed to assess the strength of the institution and their resilience to an adverse economic environment. NCUA s New Capital Planning and Stress Testing Regulation In May 2014 NCUA issued a new stress test requirement. In accordance to Part 702 of the NCUA Rules and Regulations a federally insured credit union with assets of 10 billion or more is required to develop and maintain capital plans. The rule also provides for annual stress tests. At this time the testing will affect four credit unions. As defined by the NCUA reverse stress testing is a tool that allows a credit union to assume a known adverse outcome (such as suffering a credit loss that breaches its regulatory capital ratios or suffering severe liquidity constraints that render it unable to meet its obligations) and then infer the types of events that could lead to such an outcome. The banking industry is requiring stress testing for financial institutions with assets greater than 10 billion as well. Banks of this size represent approximately 2 percent of the market. Applying this percentage to the credit union industry would require 128 credit unions with approximate assets greater than 2 billion to conduct these stress tests. Stress testing requires sophisticated systems which can model loans at record level. Credit losses can be determined by using the appropriate valuation methodologies and assumptions which include local market rates prepayment speeds default rates loss severity rates recovery lags and discount rates. Credit losses given a base scenario should be projected and then shocked with assumptions generated from the stressed environment. Stressed scenarios would also include these credit shocks in conjunction with interest rate shocks producing a comprehensive stress of the institution s balance sheet. Robust stress tests represent a new wave of regulation to assess multiple facets of risk to a balance sheet. Although only required for very large financial institutions stress tests are becoming a more common technique for true risk assessments. Emily Hollis CFA is a partner with ALM First Financial Advisors LLC. Credit Union BUSINESS 31 www.cubusiness.com October 2014 TECHNICALLY SPEAKING Taking Control of Payments T By Roy W. Urrico he announcement of the impending Apple Pay offering is just the latest new payment technology from a non-traditional vendor for credit unions to watch. A digital payments revolution shaped by demanding member expectations and disruptive competitors threatens to change the payment model for credit unions and all traditional financial institutions. But it does not have to be that way. Apple Pay s potential impact aside credit unions need to wrest control of payments from the many alternatives vying for their members payment business. The challenge of digital payments for financial institutions is that it is also an opportunity to leap ahead with the right solution and retain your place at the center of payments. That is why the recent news of the partnership of PayverisTM a next generation online and mobile digital payments company and CUProdigy a CUSO provider of comprehensive core processing platforms to supply digital payments makes so much sense. Payveris offers a full range of bill payment money movement and interbank transfer solutions that connect credit unions members and merchants within the digital payments process. CUProdigy encompasses every core processor facet from new member signup to disaster recovery without seat license costs client software installation or hardware requirements. CUProdigy intends to leverage Payveris modular API-driven digital payments platform to further strengthen CUProdigy s browser-based core banking system and provide member credit unions a competitive edge in the marketplace. We are excited about this partnership with CUProdigy. As a CUSO they are fully dedicated to providing their credit unions with the best in technology so that they can better serve their members growing financial services needs said Payveris founder Fran Duggan. Both of our organizations are service oriented and dedicated to helping credit unions to compete in an ever changing and competitive marketplace. We look forward to working together to deliver a cost effective robust and secure digital payments experience to their credit unions and their members. CUProdigy takes great pride in the close relationships that we have fostered with our credit unions said Craig Peterson director of client services for CUProdigy. We continually evaluate what is going on in the industry in terms of technology offerings that can help our credit unions to better compete and be more efficient. In deciding to partner with Payveris we were impressed not only by the payments technology that Payveris brings to the table but by the team at Payveris and their dedication to helping credit unions to succeed. Payments Evolution or Revolution There was a time when regulated financial institutions controlled payments through their own checks and currency. The US payments system evolved quickly since 2003 the year the US Congress passed the Check Clearing for the 21st Century Act (Check 21) which facilitated the expansion of electronic check processing and clearing. According to the 2013 Federal Reserve Payments Study over the past 10 years paper check payments which--prior to Check 21--typically required physical processing and transporting have been replaced by more efficient electronic processes and alternative payment methods. 32 Credit Union BUSINESS October 2014 www.cubusiness.com TECHNICALLY SPEAKING Almost all checks in 2012 received clearance by electronic image exchange or were converted to ACH payments. Despite this trend to date ACH has not developed into the dominant form of electronic payment in part because traditionally only financial institutions -- not individuals -- could initiate ACH payments. While Fed ACH has had some success as a means to effect and convert routine payments it was the credit card that proved most influential in moving payments from paper to electronics at the point of sale. As we all know the credit card actually was the first ubiquitous consumer-based electronic payments instrument to emerge. In the 1990s when the tech boom made information processing and telecommunications more dominant and less expensive this technology made the credit card a viable means of payment for e-commerce as well. Credit cards introduced in the 1950s spread quickly over the next 30 years. The technology enabling the current payment card networks began in 1979 when Visa launched the first electronic data capturing terminal. At that time mainframe computers did almost all of the processing and storage in central locations. Merchants swiped the patron s magnetic stripe cards through electronic terminals to start the authentication process with the cardholder s bank. Most of the processing took place at various hubs particularly the ones belonging to the owner of the card scheme which consisted of multiple large computers. MasterCard and Visa have upgraded their systems over time but the fundamental architecture remains the same. These intricate pipelines with many vendors supplying the point-ofsale equipment negotiate with nearly 1 000 software systems that impose significant constraints on innovation. After the credit card the debit card is the second most popular electronic instrument for making retail payments in the U.S. today. The debit card arrived on the scene relatively recently--during the 1980s. But since its arrival growth in usage has been dramatic. At first the debit card emerged for automated teller machine (ATM) systems but then moved beyond a mechanism to just access currency. Financial institution customers had the option to simply present the card to the merchants and have their bank account debited directly. It was not long before the credit card networks responded to the growing use of these cash access cards with debit card products of their own. Visa and Credit unions need to wrest control of payments from the many alternatives vying for their members payment business. MasterCard already had an infrastructure in place for processing credit card transactions at the point of sale. They leveraged that infrastructure to establish offline debit card networks. Certainly purchase volumes with these so-called signature debit cards are greater than those of the original PIN-based card. Cards continue as alternative to checks and then some. Over the years payments became increasingly card-based. Cards not only replaced check use for certain payments but the increase in the number of card payments according to the 2013 Fed report far exceeded the decline in the number of check payments from 2009 to 2012. By 2012 about two-thirds of consumer and business payment transactions came from cards and the share of card payments continues its growth with prepaid credit cards gaining popularity fast. The shift of payments from checks to cards cost financial institutions a great deal. Originally almost every bank possessed its own credit card portfolio. Today a community financial institution receives a pittance for every credit card issued and that is it. Debit cards gain very little of the interchange and that is also shrinking rapidly as well. Now credit unions face the additional challenge of mobile payments virtual currency and a slew of non-traditional players getting into the mix including Apple PayPal Square LevelUp Google Amazon AT&T and Telefonica as well as traditional payments companies like American Express Visa MasterCard and First Data. Then there are peer-to-peer mobile payment services supported by companies like Vocalink. Taking Back Control of Payments Payveris came about because existing payments technology was not cutting it in the digital world. Payveris created a single cloud-based payments platform to handle a credit unions need www.cubusiness.com October 2014 Credit Union BUSINESS 33 TECHNICALLY SPEAKING to provide bill payment account to account (A2A) and more recently peer to peer (P2P) services to meet growing member needs. Payments start and end with a financial institution involvement but the changing landscape has given rise to providers that have removed credit unions from the center of the process. With this in mind Payveris mission is to keep credit unions at the center of commerce and help them to better compete against the non-traditional players that have moved into the space in an effort to displace the traditional role that credit unions have played. By bringing the innovation of a cloud-based single payments platform combined with a faster good funds model Payveris enables credit unions to offer a convenient feature rich and seamless payment experience while at the same time at a lower cost to serve. It was the credit card that proved most influential in moving payments from paper to electronics at the point of sale. Roy Urrico is a freelance ghostwriter and byline writer of books Web content including blogs articles newsletters guides case studies and white papers about financial institutions financial technology compliance information security credit and collections foreign exchange and many other 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 Payveris Offers A SaaS-cloud based service to financial institutions that brightideaswriting.com. delivers bill pay and money movement service at a cost that is typically well below other options. Bill payment account-to-account transfers between financial institutions and person-toperson payments for individual and member business account holders. A full range of digital payment solutions from a single platform easily integrated into your online mobile banking platform or core system. With the Payveris Payments Platform members or member businesses benefit by knowing that they get faster service and are dealing with a trusted provider (your their credit union) and not some outside player on the payment block. The payments platform is usable anywhere anytime and anyhow. Not only that it is low cost and easy to get started. For credit unions it enables the organization to remain relevant in the ever changing payments landscape. 34 Credit Union BUSINESS October 2014 www.cubusiness.com CU OPERATIONS Checking Account Growth The Gift of Lift that Keeps on Giving I By Jessica Duncan Their stickiness gives those unassuming checking accounts unparalleled power to Attract and convert prospects Create loyal long-term member relationships Provide the foundation for highly effective farreaching on-boarding and cross-selling programs across all distribution channels. f there s a credit union that doesn t view growth as one of its primary objectives then our marketing experts here at Advisors Plus have yet to encounter it. But despite the best intentions of most credit unions growth can be one of those vague mom and apple pie goals that proves easy to say and hard to pin down. Exactly what are they trying to grow and in what priority order membership deposits loyalty profitability When credit unions can t formulate ready answers to those questions their well-meaning growth plans can easily remain pie in the sky. And because marketing budgets often aren t large enough to risk betting on an ineffective campaign analysis paralysis can set in while a credit union waits for the perfect growth initiative to present itself. Ready. Set. GROW Bottom line checking has the potential to create robust broadbased organic and sustainable growth for your credit union-- in membership deposits cross-sales and ongoing marketplace visibility--in a way that is simple but incredibly resonant for members and virtually risk-free but highly cost-effective for credit unions. Basing your credit union s growth strategy on a product as fundamental as checking will ground and reinforce the foundation of your credit union s overall marketing branding and strategic growth initiatives. It will focus your credit union to Checking The Little Growth Engine that Could So it may surprise credit unions to know that not only does the perfect growth engine exist but ironically you ve been taking it for granted all along--the humble basic checking account. Although checking as a growth engine may seem surprising or even counterintuitive no other credit union marketing program can approach the game-changing way in which committing to a checking strategy can pave the way for acrossthe-board credit union growth. That s because research has shown time and again that checking accounts are the glue that binds and enhances long-term financial relationships--more powerfully in fact than any other financial product except the 30-year mortgage. 1. Define your niche and its WOW factor based on checking. Checking products may seem basic but in today s postDurbin world in which banks are competing by emphasizing technology and mobile features it becomes mandatory for credit unions to brand their flagship checking products in smarter more memorable ways. www.cubusiness.com October 2014 Credit Union BUSINESS 35 CU OPERATIONS A credit union that starts by asking Are we offering the best most competitive checking products and features to attract future members and delight existing ones is using the right mindset to define its differential advantage. That competitive advantage may come from offering such features as truly free checking and debit products vast shared ATM networks free foreign ATM use and ATM surcharge refunds. Spoiler alert it won t come simply from offering online bill pay mobile banking or remote deposit capture which have rapidly evolved from gee-whiz to ho-hum in today s instant access omnichannel world. Then when you have defined what truly WOWs your checking niche spread that news as widely enthusiastically and consistently as possible across all platforms. 2. Play up your credit union s human touch but make your website wonderful. Although an ever-decreasing number of today s financial transactions take place in brick and mortar branches those that do are especially important to building and maintaining checking relationships. That s because one of the primary reasons that consumers switch financial institutions is due to changes in life status such as marriage relocation etc. Those new checking accounts tend to get opened in person at branches and the opportunity to on-board and build a new member relationship using a sticky product like checking is one of the best uses of your branch sales force imaginable. But your website plays an increasingly vital role in communicating your credit union s welcoming message and the call to action of that message is open a checking account with us right here right now. Your website should efficiently guide prospective members through all of the decision making and sign-up processes necessary to join your credit union and open a checking account. Visit your site and see it through the eyes of the new visitor Can you find all of the necessary information and how-to steps that you would need to open a checking account Is everything laid out in a clear intuitive user-friendly way that maps out--literally and figuratively--a path from writing your first check to becoming a valued delighted member 3. Use behavioral demographics to know your members and reach out to new ones. Did you know that the new members your credit union acquires will most often mirror your existing members in terms of their behaviors and preferences This behavioral demographic insight will form the bridge between optimizing your credit union s existing checking strategy and using checking as a campaign to drive future growth. Begin the philosophical shift from status quo to aggressive checking account acquisition mode by profiling and understanding the demographics of your members who currently utilize your checking products. That will lay the groundwork for your credit union to develop an overall checking growth segmentation strategy that systematically maps out and ranks prospecting opportunities according to how similar their behavioral demographics are to your existing members. Going Pedal to the Metal on Checking Growth With your checking product line optimized a strategy in place for multi-channel delivery of outstanding member service and a strong understanding of your existing member base your credit union is ready to reap the rewards of a checking account acquisition growth campaign. A well-crafted direct mail campaign will most likely lead to improved membership and account growth from targeted prospects alone. But it is a thrilling bonus for most credit unions when they realize that new checking accounts from new prospects represent only the tip of the iceberg for the member and deposit growth opportunities they can expect from their campaign. When our Advisors Plus Marketing Services team conducts a checking account acquisition campaign dramatic growth in membership and profitability also come from New members who open checking accounts and go on to open additional accounts (such as CDs credit cards and loans). Existing members who open new checking accounts and purchase additional products (including auto loans and mortgages) in response to the offer. Prospects who do not respond to the mailing by opening checking accounts right away but do open other product accounts. www.cubusiness.com 36 Credit Union BUSINESS October 2014 CU OPERATIONS Bottom line checking campaigns typically deliver both the gift of lift from their initial campaign marketing efforts but an ongoing lift in additional deposits cross-sale revenues from the purchase of other products and enhanced visibility in the marketplace that leads to increased participation from both existing members and prospects. Craft and deliver the most appealing product offer possible ideally a state-of-the art checking product that includes a debit card direct deposit and mobile and online banking with remote deposit capture as well as enrollment in an attractive CURewards program of redeemable purchase points. Use your direct mailing as a highly visible opportunity to advertise your credit union s WOW factor by developing an overall look for the mail piece that integrates its graphic identity with your credit union s overall branch and digital brand identity. Create multiple channels for responding to the offer including your branches contact center and website. Be sure to enable prospects to open accounts directly through the website and track the accounts opened online for future on-boarding follow up. Put additional on-boarding and cross-selling strategies in place to deepen and broaden the member experience especially during the first 90 days but ongoing as well. Your Checking Campaign Slogan Be the Best You Can Be However just like credit unions differ in size geography and mission not all checking account acquisition campaigns are created equal when it comes to the short and long-term results they can achieve. Based on our consistent track record of delivering industry-leading results our team at Advisors Plus has identified the following factors as vital to creating a checking account growth campaign that will achieve sizzling and sustained growth in membership and balances Begin with a comprehensive competitive analysis to identify and understand your credit union s market its key competitors and their market shares your and their differential strengths and weaknesses and any unique economic or geographic challenges you need to factor in. Such an analysis forms the basis for setting and achieving aggressive but realistic campaign objectives. Utilize cutting-edge predictive and behavioral analytics to identify and precisely target not only your prospects and but existing members who should receive your offer. Check Out These Additional Resources We believe that checking account acquisition has the power and reach to form the cornerstone of your credit union s growth strategy. For more on the philosophy and research behind Advisors Plus thinking check out these additional resources Want to order up some sizzling membership growth for 2014 Check please By Michelle H. HillenbrandWhale (www.CUinsight.com) Is checking account acquisition your credit union s www.cubusiness.com October 2014 Credit Union BUSINESS 37 CU OPERATIONS Exhibit 4 The outputs cFO cUrrENcy cUrrENcy cFO have significant implication on the ALM conclusion. The of time. Credit will need to holy user to model campaign By an end maturity assumptions is Program Manager for Advisors Plus be inputs allow thegrail marketing cash flows withJessica Duncan Jessica Duncanusedashould be changed in progressive intervals reviewed and authorized and Marketing output should be she supports to determine the impact (www.CUinsight.com) and the Services where recalculated credit unions with and decay rates that are similar to amortizations. this can take weeks. of a campaign strategy Dividend and discount rates allow for the present value customdifferent assumption. and analytics for both credit 3 ways to WOW them on your website. By Kari Anne cards and checking. if you are uncertain as to calculations (premiums) in each modeled interest rate scenario. Arnosk (www.CUinsight.com) the many requirements of effective duration calculations can then mathematically be Advisors Plus works with credit unions to help them meet Conclusion applying and using derivatives to even more information on how a checking their business challenges and grow. Our industry experts compared Forthat of the institution s assets. in this case effective non-maturing deposits can be viewed as a franchise value consider and marketing create insightful data-driven financial engaging an external duration isaccount acquisition campaign into jumpstart change or benefits generated from loyalty of the membership when calculated by merely backing can the price your lead the industry service provider to help you in measurable credit union s the liability present value is 100 in the solutions that retained when dividend rates are low results. formula. For example ifgrowth strategy visit our website(www. deposits are in a higher through than 200 years of combined the steps. 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And vice versa financial services to scenario our case study base 101 in the up 100 basis market A financial institution Properly used derivatives Advisors Plus Checking Acquisition Campaign Sends experience and proprietary analytics Advisors Plus consults 100 basis point scenario the effective duration is one percent onthat offers a growth campaigns credit higher than market can offset interest rate marketing non-maturity dividend rate cards debit & risk Pen Air s Membership and Account Growth Soaring (i.e. (101-99) 200). to attract hot money will decrease the economic withinof its checking and contact center & operations optimization. the that is inherent value (www.CUinsight.com) and and while you re at it liabilities. is imperative This is vital credit Plusitindustry today.to model these accounts for a more competencies investigate our unique interactiveThe second part Advisorsunionis a subsidiary of PSCU. because as competition also to meet the final requirements. Instant Insight accurate depiction of allow rate unions sensitivity Analysis submitted when all requirements are grows derivatives can interestcreditrisk. to compete more and final Checking Diagnostic application is The regulator strongly suggests sensitivity analyses as a means effectively. completed including dealer contracts. are calculated figures not assumptions. The to quantify the effects of changing assumptions. sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial setting up a line at a dealer is similar to becoming a Advisors LLC. analyses are essential because the core share evaluation may Emily Hollis CFA is a partner with ALM First Financial member of the FHLB--it can be laborious and takes a good deal Advisors LLC. 38 Credit Union BUSINESS October 2014 www.cubusiness.com www.cubusiness.com www.cubusiness.com March 2014 January 2014 credit Union BUSINESS credit Union BUSINESS 17 13 CU MARKETING Critical to Hispanic Membership Growth hether your credit union has served Hispanic members for years or is just getting introduced to this influential community you have a reason to celebrate. By investing in service to the largest fastest-growing youngest and most underserved population in the U.S. your cooperative truly is walking the walk. For many credit unions National Hispanic Heritage Month provides the perfect backdrop for honoring their dedication to the people helping people philosophy. Running from September 15 to October 15 the 30-day celebration is an ideal time to get face-to-face with their Hispanic members and prospects. But what happens after the month-long celebration concludes It certainly takes longer than 30 days to establish trust-- a critical component to any consumer s relationship with his or her financial institution. How are those credit unions that successfully honor the cultures of Latin America during the holiday able to keep the momentum going What follows are three ways credit unions can turn traditional Hispanic Heritage month events into ongoing activities to demonstrate a cooperative s commitment to the community. W By Anna Pena There are all kinds of open houses you can host. You may choose to organize smaller events held for a couple of hours during the week where information and snacks are set out at your branches. Or you may look to host larger weekend events with children s games and other engaging activities for members and their families. Host an Open House Word-of-mouth referrals are like gold to any targeted marketing strategy. This is especially true for credit unions looking to reach members of a tight-knit Hispanic community. By welcoming your Hispanic members to an open house event you make it easy for them to show you off to their friends and family. www.cubusiness.com October 2014 Credit Union BUSINESS 39 CU MARKETING The most successful open houses are organized by a committee of credit union employees. To take it up a notch however consider partnering with a few established organizations trusted by the Hispanic community to co-host the events alongside the credit union. Take Part in Another Organization s Event If it requires too many resources to plan your own event scan your community calendars to see who else is planning activities in the local Hispanic communities in your area. Get in touch with the event organizers and offer to help. You could sponsor the activity in exchange for a presence at the event or simply offer to promote it among your membership. Don t be afraid to share your objective with event organizers. After all bringing fair dignified and trustworthy financial services to the Hispanic community is an honorable undertaking. Explain that your commitment is to tailor your services to Hispanic members rather than expect them to adapt to your credit union s way of doing things. If you have specific Hispanic products and services share them with the event organizers and see if there is a creative way to incorporate those offerings into the event. National Hispanic Heritage Month provides the perfect backdrop for honoring their dedication to the people helping people philosophy. communicating with members. There are newsletters statement stuffers web banners branch materials and of course social media. Don t forget your own staff. Include information about your existing Hispanic members in staff newsletters and talk about their successes and engagements with your credit union in meetings. Particularly for a credit union at the outset of a Hispanic growth strategy this can be a great first step in readying your staff for service to this distinct growing community. Anna Pe a is client relations manager for Coopera a fullservice Hispanic market solutions company with a specific focus on credit unions. She works closely with Coopera s clients providing assessments consulting training translations and assisting with the development of Hispanic consumer products. Anna can be reached at pena cooperaconsulting.com. Shine the Light on Hispanic Community Culture and Successes If aligning with another organization s event is not an option don t despair. This final idea is one every credit union can do with minimal preparation and time commitment. It s simply this spread the word. With several different cultures represented in the U.S. Hispanic community there is a wealth of information that can be gathered and shared. Use Hispanic Heritage Month as inspiration to find content. The month celebrates the contributions of American citizens whose ancestors came from Spain Mexico the Caribbean and Central and South America. Knowing the cultural makeup of your Hispanic community can influence how and on what days you may choose to host your events or the content you develop for staff and members. Use your communication channels to educate members about the Hispanic culture and your local Hispanic community leaders successes. Today credit unions have multiple ways of 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 40 Credit Union BUSINESS October 2014 CU SALES & SERVICE O CAMELOT By Brad Roteman n Valentines Day of this year I visited the main branch of Healthcare Systems Federal Credit Union (HSFCU) for the final time as a fulltime employee. It had been exactly nine years to the day since I had come to work there as an instrument of change. The credit union leadership had realized that it could no longer afford to be a transactional-based institution. In order to survive and maintain relevance to its membership and the hospitals with which it partnered it had to become firmly based as a service and sales culture organization. Before I left the office that final morning the team I worked with presented me with a pocket watch with the following inscriptions In short there s simply not a more congenial spot for happily ever-aftering than here in Camelot. On the other side Thank you for building Camelot. Love your kids. How we accomplished that transformation and the significance of those quotations to that process is a story I want to share with as many people as I can find who are willing to listen. I believe there are lessons in that story for all credit union leaders. I hope you will listen. Camelot by Lerner and Lowe is an award winning musical based on the story of King Arthur and his Knights of the Round Table. What could that have to do with the cultural transformation of a credit union in the 21st century The answer quite simply is that Camelot s lessons became the foundation of values upon which HSFCU s culture was built and maintained. This was done despite the fact that the movie version was released in the 1960 s years before any of our team members were born What values and virtues could be so strong as to have a meaningful and lasting impact on an audience so diversely comprised of African Americans Hispanics Caucasians men and women First let me say that I do not mean to suggest that Camelot is the answer for everyone. While it served us well each leader must find his or her own way to get their particular message across. Camelot worked for us. The following are the primary messages it helped us instill in the hearts and minds of our team members 1. Display passion for doing the right things just because they are the right things to do every day without exception. 2. The need for teamwork to get things done. 3. The importance of leadership by example to get others to become the best they can be and to help the team achieve their goals. 4. The necessity for clear communication. 5. Seeing compassion as a strength not a sign of weakness. www.cubusiness.com October 2014 Credit Union BUSINESS 41 CU SALES & SERVICE 6. Understanding how shared values and vision can create an environment that nurtures achievement. 7. How loyalty is needed for leaders to overcome obstacles. 8. That change and resistance to change are both normal and constant. 9. It s better to have one bright shining moment than to have had none at all. 10. Everyone should be treated with respect and dignity. 11. We are judged by our successes not by our failures. 12. Our emotions determine our actions. You cannot imagine how difficult it was to get the first of the team members into my office to see the movie None of them had even heard of the actors. Worse those from South and Central American countries had never even heard of King Arthur of England and his Knights of the Round Table headquartered at Camelot. I had to introduce them to the characters and the concepts before we sat before the screen. Then we began with numerous pauses for me to question them about what they were seeing and hearing. I was looking for more than simply the regurgitation of the scene and song content. I was searching for meanings. I wanted them to contemplate the meaning. What for example did Arthur mean when he told Guinevere that wars were fought over borders that when looked down upon by a hawk from the air did not exist Why did King Arthur feel trial by jury and its impartial nature would be more preferable to trial by combat and that it should be available for all What did Guinevere mean when she asked Lancelot if humility was not in fashion in France this year At the end when Arthur says he has won his battle realizing he is to die that very day in battle what is he thinking Last and most important we discussed what all of this had to do with each of us as an individual at home and at work and what it could mean to our team and members if we put what we learned to use What had we learned We learned of a vision of a place where might was used only for right a place where all knights would sit at a table to discuss issues and make decisions peacefully and also enact laws a table that was round so there would be no head and everyone s voice would be heard as one equal to the other a place where keys would no longer be needed on doors to keep evil outside a place where knights would only draw a sword to right a wrong and then only as a last resort a place where compassion would be a noble virtue a place where lessons are learned from mistakes and failures so that the future can be better for all a place where loyalty between friends can never be fully broken a place where each person s efforts are accepted and appreciated without judgment and jealousy and a place that even upon its failure would never be forgotten but forever would serve to inspire people to rise above whatever ills may befall them. That was the vision of Camelot that had taken hold of our spirits and helped us focus on making dreams come true. People respond to stories the psychologists tell us. People want to have a purpose in life and at work so too the psychologists also say. Leadership entails helping people work together toward common goals and providing them with a vision toward which to strive. For us at HSFCU Camelot was a means of providing the vision and the story. Yours will be different. But I submit as leaders not merely managers or administrators we have a moral obligation to those who follow us as well as those whom we seek to serve. We must provide the story and vision that best fits our own organizations. On that last day Valentines Day February 14 2014 when my kids cried as the inscription on my new pocket watch was read to me I knew that like King Arthur I had won my battle. Here was a team of people who truly believed that good things happen when good people get together to do the right things for the right reasons. Here was a group of people who cared deeply about each other and the credit union. Here was a team determined to be the best they could be and to help one another to maximize strengths and minimize weaknesses. Here finally were my Knights of the Round Table Brad Roteman is a retired vice president of Member Advocacy at Healthcare Systems Federal Credit Union in Virginia. He contributes articles to CUinsight.com and is a popular speaker to audiences internationally on service sales and leadership. He can be reach at broteman comcast.net. 42 Credit Union BUSINESS October 2014 www.cubusiness.com CU SPOTLITE The Wheels on the Bus at Point Breeze Credit Union N By Sharon Sweda the change. Another advantage the CEO has enjoyed is the benefit of a very engaged board of directors. He appreciates the fact that they are a very smart group of volunteers who provide significant support. At Point Breeze we emphasize the need for employees to understand the numbers and to see how the financial health of our organization impacts each of them the CEO explains. In our quarterly meetings we share that information with the staff. Everyone needs to have a clear picture of where we stand because it impacts all of us. The clear picture has blossomed with McLaughlin at the helm. Change has manifested into solid results. During McLaughlin s short tenure the credit union has increased its loan portfolio by an astounding 11 percent without changing personnel. McLaughlin led the second highest net loan growth percentage performance in Point Breeze s history but defers any credit for the achievement to his team. Much of the growth resulted from a deliberate re-tooling of the product line and teaching key individuals the art of promoting those products. The credit union was also a 2014 recipient of CUNA s Operations Sales and Service Council s national efficiency award for credit unions with assets greater than 500 million. As Jim Collins tells in his book Good to Great not only do you need the right people on the bus--but they need to be in the right seat reminds McLaughlin. I agree and we have focused on that--but then the bus has to move. No one can argue that the proverbial bus at Point Breeze Credit Union is clearly in motion with no sign of resistance or slowing. Sharon Sweda is a freelance writer who has worked in the real estate and finance industries for the past 28 years. Contact Sharon at sharonsweda sharonsweda.com to Spotlite Your credit union. www.cubusiness.com oted author Stephen R. Covey has said Management is efficiency in climbing the ladder of success leadership determines whether the ladder is leaning against the right wall. Since February of 2013 and the appointment of Bernard McLaughlin as President and CEO of Point Breeze Credit Union--the Point Breeze ladder is indeed leaning against the right wall. Point Breeze Credit Union with branch offices in Hunt Valley Bel Air and Baltimore Maryland staffs 90 employees who have no doubt felt the ladder shift. The energetic and enthusiastic McLaughlin puts life into his leadership role and principals are put to practice in ways that translate into measurable growth for employees and members alike. People cannot succeed without the proper tools and training and it is important to communicate expectations. I want our people to know that they matter and that I value their contribution emphasizes the president and CEO. McLaughlin is a visible hands-on leader who conducts quarterly meetings at each branch and meets with his senior management team on the fourth. Point Breeze has five senior managers responsible for marketing finance retail lending and human resource. McLaughlin interjects his positive and infectious presence to empower his team rather than to micro manage. It is important to put the right people into the right positions then trust that they will succeed. Even when their approach might differ from my own I know that they must be trusted and given the opportunity to succeed or fail on their own concedes McLaughlin. It typically takes four to five years to modify a culture or environment. Resistance to change is normal McLaughlin says. Ironically it is not always the employee who has been here the longest that has the greatest difficulty with change although it can be and regardless it is important to have everyone buy into 44 Credit Union BUSINESS October 2014 VISIT THE MARKETPLACE PAGE AT WWW.CUBUSINESS.COM MARKETPLACE Card Processing Payment Solutions Currency Coin Handling What Does Automating Your Currency Handling Needs and Providing Self Service Coin Redemption do for Your Branch It Gives Your Tellers Tools for Success Increases Branch Teller Increases Cross Selling Efficiency Opportunities Helps to Meet Member Strengthens Member Expectations Retention Reduces Costs Adding to your Bottom Line What Does it Take to Learn a Little More Not a Lot... Just ask your Magner Representative Phone 800-243-2624 Email solutions magner.com Online www.magner.com Let s talk about doing things the right way... 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