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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 JUNE 2015 VOLUME 10 ISSUE 6 CEO VELOCITY CEO Jim Laffoon s Six Leadership Attributes for CU Growth Profit and Meaning SCOTT MCCLYMONDS Security Service FCU Managing Risk Doesn t Have to Be a Juggling Act It doesn t matter if you have 100 or 100 000 loans risk management is a vital component of the success of your institution. But with a complex loan portfolio limited resources and an ever-changing regulatory environment it can sometimes feel like a juggling act. With multiple turn-key user-friendly risk management software and service programs SWBC can help you gain control of your risk management goals. Visit autopilot.swbc.com or call 866.647.8749 today to learn more AUTOPILOT COLLECTIONS AND RISK MANAGEMENT COLLATERAL PROTECTION INSURANCE (CPI) ASSET RECOVERY LENDER PLACED TRACKING AND PLACEMENT DEFAULT RISK MITIGATION 2015 SWBC. All Rights Reserved. 5540-1327 0415 TABLE TAB OF CONTENTS HERE BY S S TAB V O L U M E 10 I AUTHOR6 UE Credit Union BUSINESS Managing Risk Doesn t Have to Be a Juggling Act 4 6 11 16 19 PUBLISHER S POV Visit autopilot.swbc.com or call 866.647.8749 today to learn more People Helping People Tim O Hara VIEW FROM THE CROW S NEST 27 29 31 RISK MANAGEMENT Risk Management in the Data Breach Era Bridging the Data Breach Steve Ruwe MEMBER SERVICES Setting a Successful New Course from Sea to Shining Sea ... Juli Anne Callis MORTGAGE LENDING Exceptional Customer Service Starts with Collaboration Nick Romano MEMBER BUSINESS LENDING Simply Outsourcing Your Lending Operations Isn t Enough to Stay in the Mortgage Game Dennis Hardiman E-SIGNATURES Seize the Opportunity Why It s Time for Your Credit Union to Offer Member Business Lending Ryal Tayloe LENDING SOLUTIONS 3 E-Signature Takeaways for Credit Unions John Harris CFO CURRENCY 34 39 42 Opportunities to Increase ROA Bob Schroeder TRANSITION TO EMV If Credit Risk Is Inherent In Your Balance Sheet Stress Testing Interest Rate Risk Isn t Going To Help Emily Hollis CEO VELOCITY The Missing Piece in the Transition to EMV Vadim Kagan COMPLIANCE UPDATE 22 Passion for Excellence Jim Laffoon s Six Leadership Attributes for CU Growth Profit and Meaning Scott McClymonds Calm Before the Storm Brian Godwin 1 1 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M ABOUT US TAB PUBLISHING TEAM Tim O Hara Editor & Publisher tim cubusiness.com Iliana Nord Operations Manager iliana cubizmag.com Patti Manzone Designer Ashok Kumar Associate Publisher ashok cubusiness.com PUBLISHER S POV T H E S T R AT E G I C P L A N N I N G I S S U E JUNE 2015 VOLUME 10 ISSUE 6 CEO VELOCITY CEO Jim Laffoon s Six Leadership Attributes for CU Growth Profit and Meaning SCOTT MCCLYMONDS Security Service FCU Tim O Hara VIEW FROM THE CROW S NEST Juli Anne Callis MORTGAGE LENDING Dennis Hardiman E-SIGNATURES John Harris CFO CURRENCY Emily Hollis CEO VELOCITY Scott McClymonds RISK MANAGEMENT SUBSCRIPTIONS Steve Ruwe MEMBER SERVICES Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr x 3 ( 225). An online membership form is available at www.cubusiness.com register. SALES AND ADVERTISING Nick Romano Ryal Tayloe MEMBER BUSINESS LENDING LENDING SOLUTIONS Tim O Hara Publisher tim cubusiness.com or 561-282-6015 1 CONTACT INFORMATION Bob Schroeder Vadim Kaga COMPLIANCE UPDATE Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim cubusiness.com 2 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M 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. PUBLISHERS POV BY TIM O HARA Editorial Content is Not for Sissies lmost nothing makes me happier than receiving compliments about Credit Union BUSINESS magazine. Although mostly regarding the nononsense editorial content these compliments can also range from the easy-to-read design or the fact that the new all-digital formats read equally well on a large-screen computer as they do on the smallest smart phone. But most of the praise comes from the excellent quality of our editorial contributors each of them experts in their fields. A CUB editorial content is not for Sissies Our recurring monthly columns are provided to help credit union executive leaders. And you really appreciate that help no matter what department you happen to work in and in most cases direct. Starting at the top of the C-Level my friend Scott McClymonds offers up an excellent CEO Velocity interview each month. This section features in-depth interviews with big league Chief Executive Officers like James Schenk CEO of PenFed Credit Union and Donna Bland CEO of California Golden 1 CU. On page 20 of this issue read how Security First FCU s CEO Jim Laffoon developed six leadership attributes for CU growth profit and meaning. (Editor s Note Later this year we ll publish a special issue featuring Scott s excellent Q&A sessions with each of these strong credit union leaders.) Another fine example of our editorial excellence It helps if you are actually a Chief Financial Officer to understand CFO Currency the monthly column penned by Emily Mor Hollis principal of ALM First Advisors LLC located in the Dallas Texas area. Phrases like Deterministic Asset Liability Models and Concept of Duration and Interest Rate Risk Profiles are greatly appreciated by the investment professionals who benefit from the column. Also Rex Johnson s Lending Solutions column in which he shares writing chores with his professional associates at his firm bearing the same name as the column offers a fresh look and problem solving for CU lenders no matter what level at which they are working. This column is all about getting the most from your lending program. Marketing Compliance and Technology are also covered every month. And in an ongoing effort to cover the entire C-Level with great advice and best practice coverage this month we re debuting a new column on Member BUSINESS Lending. Thanks for reading Tim O Hara 4 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M Experience the Power of Plus. Let Advisors Plus give your credit union superpowers... minus the cape. Can t lift a bus with superhuman strength can optimize your debit portfolio. Can t leap a building in a single bound can integrate product delivery. Can t see through walls with X-ray vision can enhance your profitability. Our delighted clients turn to our team of superhero consultants to solve their business problems and power their growth. Business Strategy Marketing Strategy Marketing Growth Campaigns Predictive Analytics Credit Card Portfolio Analysis Debit Card Portfolio Analysis Personal & Small Business Checking Strategy Credit Card Start-up Programs Contact Center Optimization Operations Optimization Credit Card Risk & Collections Analysis Branch Sales Training Make Advisors Plus YOUR secret weapon. Call 727.299.2535 or visit us today at AdvisorsPlus.com. VIEW FROM THE CROW S NEST BY JULI ANNE CALLIS Setting a Successful New Course from Sea to Shining Sea Successful credit unions across the nation are finding ways to turn their sails into the wind to achieve very smooth sailing. How are they accomplishing such calm waters when so many CUs have been fighting the waves Ride along with two successful navigators as they share the secrets to their victories at sea. rom the Pacific to the Atlantic Oceans the rise and decline of many credit unions has been well documented as even the most seasoned helmsmen have found these times very challenging to navigate. There are far too many tales of historically sound credit unions that hit choppy seas rendering their ships virtually adrift at sea. Unable to get sufficient wind in their sails they failed to stay afloat. In this article two successful navigators will offer a bird s-eye view of what led to victory at sea for their organizations. Today the successful helmsman is charting a new course. He is diligently navigating opportunities to lend more to a broader base while responding to emerging regulatory requirements and economic conditions. Although there is not a singular course to be set for the industry there are many potential practical approaches to be considered as you plot out the future course of your organization Mike Lee CEO of Kane County Teachers Credit Union is a seasoned industry executive who recently plotted a new course that took one credit union off the rocks. He accomplished this righting of his ship by having the entire crew pulling hard on the oars and by broadening the view to include new partners for future success. He offers six questions to ask yourself as he shares the philosophy and strategy that now has KCTCU sailing along quite nicely In August of 2013 I became the CEO of Kane County Teachers Credit Union. I walked in on a credit union that had incredible potential but for the last two and a half years had lost money. The losses derived from a number of areas but mainly from the inability to lend. I am happy to say that in 2014 we enjoyed a profitable year. We focused on many areas but ultimately it was increasing our loan portfolio by approximately 20 percent that made us profitable. Below are some of the things that I feel led us to these results. F Vision and Leadership Is everyone on board and rowing in the same direction I am a big believer in having a strategic plan on paper that is communicated to board staff strategic partners etc. Not only identifying where we want to go but how we are going to get there. I also think that each initiative in that plan needs to have a specific business plan that captures the risk. That includes an exit strategy if the initiative fails. Even more important is 6 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM THE CROW S NEST leadership. Not the kind that dictates but the kind the serves everyone in the organization. Servant Leadership involves everyone so that you utilize all the knowledge and experience of the organization and through that [collaboration] everyone has a sense of ownership and empowerment. To be a great lender you have to get everyone on the page. Sales Culture Is your crew really committed How many of us have staff that does just enough to get by each day As an old sales executive I know the value of having a company-wide incentive plan. Not only does it focus each staffer on how we measure success but it is also the best tool I know of to fight mediocracy. Allowing such an attitude to develop in your Philosophy organization will destroy productivity. Recognizing our team Where are you heading the ship members who went above and beyond expectation had a great What are you trying to accomplish by being a lender Getting impact on our lending ... maybe the biggest impact. people into debt that will cripple them financially At our credit union we are trying to show people how to do debt better by Reporting providing Debt Checkups. Almost everyone has debt in their Are you monitoring the course you have charted lives but are they doing it well As a not-for-profit cooperative Do you utilize reporting to do target marketing When you financial institution it s our job to show people how to live conducted a marketing campaign was it successful When you better lives financially. did an auto loan special what was the blended rate the 1.49 Every member that comes in our doors gets the same treatment percent campaign brought in Reporting is the tool that takes the first of all we do not judge where they are at financially but we guesswork out of running a credit union. Measure everything do judge were they are headed. We look at them as a market of Our ability to identify individual needs and to measure risk one as opposed to trying to categorize them. Thus we customize made a big difference in our lending improvements. loans for their [specific] situation. You are probably thinking that this is old thinking and yes Marketplace it is. But this philosophy is contagious and if you can capture Are you heading into blue oceans it people will tell their coworkers friends family and they will We all have a niche or sweet spot potential market but are you come. Why Because you care and are not treating them like maximizing that potential At KCT we were originally chartered the bank down the street. You are not getting members you are as a teachers credit union and from there obtained most of getting advocates the municipalities police firemen etc. as SEGs. Like so many Staff and Training Is your crew really ready Many credit unions seem to keep lending in a specific area of the organization with certain people having all of the keys. It requires years of education and experience to be an underwriter and the front line just can t do it. I am not saying all of your front line staff should be making calls on marginal loans but it is essential to equip your crew so that the entire organization can talk intelligently about your value proposition. As many of you we close every Wednesday morning for training and for all staff meetings. One thing I discovered years ago is that people will not talk about things they do not understand. other credit unions we re-chartered as a community credit union a number of years ago with the idea that everyone in the community would flood into our lobbies. Well that did not exactly happen We do great things for the people who enter our branches but we suffer from a lack of awareness that we exist. With this realization a big part of our road back to profitability was obtained by getting back to our roots working closely with the SEGs that originally chartered the credit union but in a different manner. The Consumer Financial Protection Bureau (CFPB) recently did a white paper about the impact of financial stress in the workplace and how it is affecting productivity. I use this publication with the SEGs. Not only does 7 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M VIEW TAB FROM THE CROW S NEST it get the attention of the CEOs and or HR Executives at those SEGs but they feel helpless in their fight against this issue that is plaguing so many American workers. What an opportunity for credit unions to reinvigorate our relationship with our SEGs through financial training but even more importantly through debt consolidation loans free checking secured credit cards and all of the other products we have in our arsenal to combat the loss of Americans financial hope. When it comes to building a strong vessel that can sustain a battering in the storm Bill Vogeney EVP Chief Lending Officer at Ent a flagship CU in our industry is a powerhouse. Bill has consistently shared invaluable insight and sage wisdom as the former Chair of the CUNA Lending Council. His seasoned advice is indispensable for all who seek to build a seaworthy vessel. Bill shares his perspective on opportunities for credit union lenders to build strong loan portfolios for the purposes of profitability and soundness. Making loans isn t all that easy if you believe in keeping lending standards relatively stable. While 2014 saw very strong loan growth for the industry I know for a fact that many credit unions made lending policy changes they ll have to reverse when loan performance declines and it will. Auto loan performance across all lenders really is unsustainably high because used car values have been at record levels for three to four years. Inventory was impacted tremendously first by leasing s near death experience from 2008 to 2010 and then by Cash for Clunkers that took so many budget-priced vehicles off the road. That impacted Buy Here Pay Here customers and then had sort of a trickle up impact on stronger borrowers. Trickled up in the form of higher prices as well. I m a big believer in trying to build sustainable loan quality and quantity. Yes you ll have ups and downs for both I m trying to minimize them. To build a strong portfolio credit unions have to think like a credit card issuer and manage virtually their entire portfolio that way. Think about what card issuers do. If you aren t using your card or you have a lot of available credit they ll promote balance transfers. They offer incentives to promote additional card usage if your new purchase activity has dropped. If you try to pay off and close your card they ll do anything to keep your card open and active. It s almost impossible to close a major credit card if the company is any good. 8 C R E D I T U N I O N B U S I N E S S So how does this translate into auto loans home equity loans and mortgages First of all credit unions have to expand prequalified credit offers beyond credit cards. My credit union Ent has been fairly aggressive in promoting prequalified credit offers (not preapprovals requested by the borrower but initiated by the CU through a credit bureau pre-screen) for auto loans and personal loans. At some point in time we ll expand this to include home equity loans because we ll blend credit data with estimated home values. And we do this with very little direct mail. Most members receive their offer with their monthly e-statement. They can review any existing offers through a special tab in home banking and [they can] also see the offer in mobile banking. We push the offer out to our front line through our core system and [we] use face-to-face and phone interactions to remind members about the offers. We ve seen response rates in the six to 10 percent range as a result. Secondly you have to understand when a member potentially can leave you. Over the last three years we ve utilized a proprietary process on auto loans to offer a lower rate if the member requests a payoff. Based on the member s existing rate the time the account has been open and his or her credit score if an employee quotes a payoff he or she can also run a simple request in our core system to determine if the member qualifies for a better rate. And if the member does qualify the employee can immediately make the offer to retain the loan with us. Over this period of time we ve probably saved a total of 50 million in loan balances. Something else we ve also done is analyze several years of early auto loan payoffs from our Indirect program. Using all of the data we have at our disposal including dealer code APR term LTV etc. we ve statistically determined what loans have forward Moving toward the future or a more advanced condition. J U N E 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM THE CROW S NEST an extremely high likelihood of paying off within a year. Given that we ve paid the dealer a few [Benjamins] to originate these loans these early payoffs can be highly unprofitable. We re in the process of implementing a couple of additional strategies to either retain the business or price it in such a manner that we don t lose money or we don t attract this slice of our business at all. Seeing that mortgage rates have fallen again in the last 45 days it s probably top of mind to talk about loans that likely could refinance elsewhere. What are you going to do to retain them Do you know how much of your portfolio could refinance elsewhere What will your credit union do to retain the business We understand how much of our portfolio is at risk and we ve built into our process simplified options for existing loans to lower their rate with minimal paperwork. This allows us to spend more time in generating new loans purchases and refinances. Home equity lines have a lot in common with credit cards. Sometimes it takes an incentive for borrowers to use their lines. We recently identified about 800 borrowers with over 55 million in available home equity credit whose lines had been open more than six months and who were utilizing less than 25 percent of their total line. I did some modeling on pricing and realized there was an opportunity to make an offer to lower their rate for a 24-month period to incentivize the use of their line. We ve picked up several million dollars of balances and have exceeded our breakeven growth requirement. Finally sustainable loan quality and quantity needs a well-developed sales culture. Business isn t going to come walking in at most credit unions you have to make the most of every opportunity. I d say we have a strong cross-sale frame of mind. We also use some outbound sales a nice way of saying telemarketing to build business as well. We contact new members acquired through the Indirect channel and first try to expand our lending relationship. One of our goals for the next two years is to expand our outbound efforts we have more opportunities to capture business than we have people to make the contacts. While the tides of change promise to make the days ahead a grand adventure for credit union leaders it is clear that credit unions of all sizes across the nation are finding victory at sea R. Michael Lee Mike became the President CEO for KCT Credit Union in August of 2013. KCT is a not-for-profit financial institution with branch locations in Aurora Geneva and Elgin. It serves member businesses and member consumers living or working within the counties of DeKalb DuPage Grundy Kane Kendall McHenry and Cook County west of Rt. 83. As an experienced executive in the financial industry Mike s background includes insurance investments correspondent services lending product development technology customer member support sales call center training management and an overall knowledge of the financial industry. His career has been highlighted as a Senior Officer at a number of organizations in both the insurance and credit union industries. Mike has been recruited by a number of organizations in his career to be a change agent. In particular his expertise has been utilized to bring in a sales culture. To that end he focuses on not only members customers but also 9 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM THE CROW S NEST remembering that the first sale in any organization needs to happen with the staff. His overarching aim is to create a workplace environment that nurtures staff to accomplish individual and cooperative goals that they never thought they were capable of. Mike s personal philosophies fit well within the credit union motto People helping People and he views himself as a Servant Leader serving his family fellow employees community and the members of KCT His personal goal is to enrich the lives of those around him. Much of Mike s personal time is spent with family and friends and serving at his local church where his wife dedicates time to building strong marriages. He also serves as a Director on the Boards of the following organizations Credit Union Executive Society of Illinois Illinois Credit Union Foundation Ministry Partner Credit Union Service Organization and MP Securities. Juli Anne Callis is a nationally recognized industry leader with a substantial track record as a pragmatic innovator. She has served in numerous executive roles in both the credit union and banking industries. From her early days Citibank working in market segmentation to Langley FCU in Virginia and over a decade in Silicon Valley at AEACu KeyPoint Callis has led in the development of new technologies and business models which landed numerous awards in the financial services industry. She was also an original founder of the CUNA Councils. Bill Vogeney Bill Vogeney is the Executive Vice President Chief Lending Officer of Ent Federal Credit Union. Bill served on the executive committee of the CUNA Lending Council for seven years and as the chair in 2013 2014. He is a wellknown author having written numerous articles for CUES Credit Union Management Magazine and the Lending Council. Bill has also authored the lending chapter for CUNA s E-Scan strategic planning publication since 2009. Bill previously served as Vice President of Loan Services at FAIRWINDS Credit Union for 12 years before joining Ent. Bill is a 1983 graduate of Penn State University with a Bachelor of Science degree in Business and received a master s degree in Business from the University of Central Florida in 1996. Managing Risk Doesn t Have to Be a Juggling Act Visit autopilot.swbc.com or call 866.647.8749 today to learn more 10 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE LENDING BY DENNIS HARDIMAN FOUNDER CEO OF EMBRACE HOME LOANS Simply Outsourcing Your Lending Operations Isn t Enough to Stay in the Mortgage Game Is your credit union a contender in the mortgage game If you re not meeting the expectations of your members then you could be knocked out of the competition in the first round. Discover how continuing to provide superior mortgage lending service via outsourcing can lead to superior member loyalty and retention. Member Service Credit unions are known for providing exceptional service. A recent survey by CO-OP Financial Services on Millennials attitudes toward financial institutions revealed that 81 percent of Gen Y credit union members believe their institution provides an outstanding customer experience compared to 59 percent of bank customers responding so for their banks. A total of 96 percent of credit union members said they were very satisfied or somewhat satisfied with their credit union while that figure was lower for bank customers at 88 percent. As Millennials quickly become the largest consumer group in U.S. history credit unions must ensure they are maintaining the level of service they are known for. The rub here is that exiting the mortgage business can actually result in tarnished service. Consumers increasingly expect their credit union to offer different products and services including mortgages but when your CU fails to meet their expectations member satisfaction can quickly decline. T oday s lending environment is a challenging one. Originations in 2014 are projected to be at a 15year low while the cost to originate is at an alltime high. Strict regulatory requirements have created other challenges as it now requires an entire team to understand implement and monitor the more than 900 pages of CFPB mortgage rules. Even more failure to comply can result in substantial fines in the 1 million ballpark adding costs to lending operations either way. According to a Thomson Reuters Cost of Compliance Survey released last year more than half of the 800 compliance executives surveyed stated that their compliance budget will substantially increase this year. In turn many financial institutions are investing in technology and staff to remain compliant. For these reasons and others many credit unions have opted to exit the mortgage business but doing so may impact their member base. Consumer expectations are rising and members are increasingly expecting their credit union to offer a multitude of products and services including mortgages. When you fail to deliver on their expectations and needs one of three (or all three) outcomes is likely to occur 1) poor member service which leads to 2) poor member loyalty which in turn can then lead to 3) poor member retention. Member Loyalty As their members satisfaction declines credit unions must also consider loyalty. Today more than ever consumers especially Millennials are more likely to shift their loyalties to another 11 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE LENDING forward Moving toward the future or a more advanced condition. institution that does offer the products they want. As a result members who work with another financial institution for their home financing needs are at a greater risk of moving other accounts for convenience s sake. In fact the Pew Research Center referred to the Gen Y population as open to change they have no problem switching institutions to get the service and products they want. Even if they don t proactively switch it s likely that the other financial institution they are dealing with will aggressively cross-sell to them until they do. The end result is you not only failed to deliver the product your members wanted but you lost them completely. Member Retention The other challenge faced is protecting your CU s existing products and services. To offer mortgage products credit unions must allocate time resources and funds which can mean taking away resources from other existing product offerings. This allocation can significantly impact your overall service so credit unions are asking themselves Do I offer mortgage products at the risk of offering an entire product suite that is mediocre across the board Or do I eliminate mortgage products better leverage existing resources and provide a few excellent products You may be able to keep existing members now but what about in the future Outsourcing Your Lending Operations So credit unions now face a conundrum eliminate mortgage products from their offering and risk losing members or face increased expenses to provide home financing that may actually cause other products to suffer. To continue offering mortgage products in a cost-effective and efficient way outsourcing is key. Not only does outsourcing provide a favorable option because 12 C R E D I T U N I O N B U S I N E S S of cost savings but it also helps credit unions remain compliant and avoid substantial fines. The new and cumbersome CFPB guidelines coupled with added and required documentation and reporting mean that an entire team is now needed to manage all the changes. To add just a single compliance expert can cost an institution up to hundreds of thousands of dollars each year not including training expenses and the manpower needed to stay up to date on changes. Additionally a study by George Mason University found that 83 percent of community institutions in the United States say their compliance costs have increased more than five percent due to Dodd Frank and this is just the beginning. The staff required to understand implement track and monitor the more than 900 pages of compliance rules is enormous and the risk is real. Credit unions must now seek a fully outsourced solution that is private labeled (branded in the credit union s name) and that removes all regulatory oversight from the credit union. Not only will doing so better ensure regulatory compliance but a solid outsourced solution can save money on technology staff and increased training requirements. By leveraging a skilled team to manage their lending operations credit unions can also focus more time and resources on their existing products. In addition they can increase their focus on member relationships. Outsourcing provides an opportunity to devote more time and resources to core products and services while also offering a competitive mortgage product. Credit unions are able to provide excellent member service by offering the products their members want while eliminating the possibility of other products suffering as a consequence. In turn CUs remain competitive and keep their longstanding reputation for providing superior service. J U N E 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE LENDING Challenges of Outsourcing While outsourcing can prove advantageous it does not come without its own set of challenges. Outsourcing is often associated with poor service and oftentimes that association is true and for very good reasons. In an outsourced model many third-party providers outsource back-office operations and member service tends to suffer because there is limited focus on personalized service. As a result credit unions reputations are put at risk. To avoid this tainting of your credit union s reputation you must make sure member service is a top priority. Ask potential partners what their member satisfaction rate is. If they re unable to provide it then they re likely not tracking it which means it s not a priority. Credit unions must also avoid outsourced providers that are process-centric versus member-centric. In this former oriented model member service can be tarnished. There are also competitive risks when outsourcing. Oftentimes an outsourced partner is a large bank or a bank that sold the loan to another bank that now has complete access to your member s information. Now that the bank has that information it will likely begin to market other services such as checking accounts or other depository services to your member. When considering outsourcing it is critical to make sure your partner will not cross-sell to your members and expose you to competitive issues. member satisfaction. Human sigma is also critical. Under such an approach organizations will focus on emotional connection to better engage with your members. Not only can this result in excellent service but it can also create member loyalty. Cross-Selling Capabilities Remember that one of the dangers of outsourcing is opening yourself up to competitive risks big banks that provide your members with mortgage products begin offering them competitive products as well. It is critical to ensure that your lending partner will not solicit members or present competitive issues and that it will focus on strengthening your relationships. However your credit union should also look for partners that are willing and able to cross-sell your other products and services such as auto loans other deposit accounts or small business solutions during the settlement process. Every interaction should be meaningful and should support your credit union s efforts. Branding Typically outsourcing your lending operations means sending members to another institution. Credit unions should look for outsourced options that allow for consistency across all products. To do so partnering with organizations that private label their mortgage product is ideal. In addition your credit union should look for partners that not only brand the mortgage products as yours but also offer custom-branded collateral to successfully market to new and existing members. This will also further advance your credit union s brand. Your credit union must also partner with organizations that value education and are capable and willing to train your staff and provide them with the needed skill sets to become solid mortgage professionals themselves. While credit unions teeter on the idea of staying or leaving the mortgage business they must consider their members. Mortgage lending is growing and if you are unable to offer mortgage products to your members your competitors will. But outsourcing should also be carefully considered. Not all Vetting the Right Outsourcing Partner To avoid these outsourcing challenges vetting the right partner is critical. To ensure success credit unions must consider the following criteria when searching for a partner Member-Centric Values Credit unions should partner with a third-party provider that has similar member-centric values as opposed to processcentric ones. As mentioned earlier a process-centered approach has the potential to tarnish member service but in a member-centric model a greater emphasis is placed on 13 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M MORTGAGE LENDING providers are the same or have the same intentions and must be vetted carefully to avoid poor member service or competitive risks. Outsourcing to the right partner however can not only keep you in the mortgage business but also keep you ahead of the competition in terms of service and other product offerings a win-win for today and in the future. Dennis F. Hardiman is founder and chief executive officer for Embrace Home Loans an approved lender for FHA and VA and an approved seller servicer for FNMA FHLMC and GNMA. Embrace Home Loans has remained a prominent leader in the industry having provided hundreds of thousands of individuals and their families with mortgage loans. For more information please contact Jacqueline Weed at jWeed embracehomeloans.com or visit www.embracehomeloans.com affinity. The Power of Problem Solving The Power of Potential The Power of Profit With 200 years of industry experience our consultants have been there fixed that. We combine experience with analytics to identify high-impact growth opportunities. We create high-ROI results you can take straight to the bottom line. The Power of Partnership Our team works with your team on products and marketing to delight your members. Bring your credit union to the Plus side Call 727.299.2535 or visit us at AdvisorsPlus.com. 14 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M insights An instance of capturing the true nature of a thing. Do you know your members Insights are everywhere and coming at you fast. To make the best of this information you have to know what to ask. Member Insight from PSCU is a set of tools that consolidates the details of your members spending habits to make for richer portfolio performance. After more than 35 years as the leading CUSO we know a thing or two about the true nature of credit union growth. pscu.com memberinsight 888.918.7357 ETAB SIGNATURES BYJOHN HARRIS SENIOR VICE PRESIDENT OF PRODUCT MANAGEMENT AT SIGNIX 3 E-Signature Takeaways for Credit Unions Has your credit union s growth prompted you to consider incorporating e-signatures to deal with the mounting paperwork If so you re not alone but there are three key things to keep in mind before your CU implements an electronic signature strategy as part of its business model. ccording to recent figures released by the National Credit Union Administration in 2014 loan growth at federal credit unions increased at its highest rate since 2005 with 712.3 billion in loans generated last year. These federally insured credit unions also added an impressive three million new members in 2014. This positive trend is encouraging news for the credit union industry which has long been forced to compete with the mammoth marketing presence of big banks. Yet with growth comes growing pains especially when it comes to all the resources credit unions must devote to processing the ever-increasing number of member applications and loan agreements. Given the heavy load of paperwork it s no surprise that more credit unions are incorporating e-signatures into their business models. For example here s how John Hays the chief operating officer of Access Community Credit Union located in Amarillo Texas explains his decision to implement e-signatures in the summer of 2013. We were sending loan documents to members through secure e-mail but they still had to print sign and send documents back to us by e-mail fax or mail. Not only was this inconvenient for our customers but we routinely received documents that weren t legible. So we d have to go through the process all over again. But now about 25 percent of our loan applications are completed online with the use of e-signatures and it s really helped to streamline our back-end workflow not to mention save money. 16 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M A As e-signature technology becomes even more essential in a digital first business arena there are three key takeaways for credit union executives to consider in implementing an e-signature strategy 1. Using e-signatures can boost the bottom line. Using electronic signature technology saves time and money streamlines internal processes and enhances security which can translate into happier members higher revenue and healthier margins. Time What can take days or weeks of arranging schedules and shipping documents that must be manually signed can be done in minutes or hours with e-signatures. This time compression means membership applications and E-SIGNATURES TAB agreements can be processed much more quickly and loans can be closed whenever all parties are ready to execute the deal whether or not they are all in the same place. E-signatures can be executed remotely on virtually any digital device including phones and tablets. Resources Digital signatures allow credit unions to save thousands of dollars in paper ink shipping and courier costs. In fact according to analyst CEB TowerGroup paper processes cost 14 times more than electronically automated processes. Additionally employees who were formerly tasked with printing packaging and filing paper forms can now focus on projects that generate revenue instead of overhead. Member relationships While many members interact with their credit unions in person face to face is not always convenient for every transaction. E-signatures eliminate the necessity for in-person interactions and allow busy members to sign documents in a way that fits their lifestyles. Some credit unions have even adopted a hybrid in-person remote approach in which a credit union representative drives to a member s home or office to assist in completing the transaction electronically. The bottom line is that using e-signatures allows credit unions to tailor their customer service to each customer. Security Ink signatures which can be forged and generally don t require an identity verification process don t have the robust security protections of digital signatures which include audit trails tamper-evident protection and sophisticated identity authentication processes. identity and 3) determine whether the person appears on lists of known or suspected terrorists or terrorist organizations. The surest way to verify a signer s identity is to use knowledgebased authentication in which signers are asked out of wallet questions about themselves based on information and relevant facts from dozens of public record databases. For example the customer might be asked what kind of automobile he owned 20 years ago or to verify a previous home address. These types of questions are called out of wallet because they cannot be answered by simply looking at information commonly found in a wallet so someone who stole a wallet cannot pretend to be someone he is not. 2. Strong authentication is essential. Because e-signatures offer remote signing options it is essential to authenticate the signer s identity. In some cases this is mandated by law such as the USA PATRIOT Act s requirement that financial institutions implement reasonable procedures to 1) verify the identity of a person seeking to open an account 2) maintain records of the information used to verify the person s 3. Proof of validity should be independently verifiable. While security is usually top of mind when anything digital enters the conversation credit union executives can t ignore an equally important characteristic of some e-signature technologies the level of its dependence on the e-signature vendor itself. A fully independent e-signature system leaves the ownership of the signature signed documents and evidence in the hands of the credit union and does not require an Internet browser or a vendor s server to verify the e-signature. Rather because verification information is embedded directly into the PDF document signed by the e-signature service the evidence is immediately verifiable at any time online or offline. Dependent e-signatures on the other hand must link back to the e-signature vendor for verification because the validity proof and or evidence of the e-signature is permanently linked to a vendor s server or process. Should links break or Internet access fail essential legal evidence of the e-signature s validity may not be immediately available or ever available if disaster strikes. The lack of ownership and dependence on a third party create unnecessary risks for a credit union. Further many vendors of dependent e-signatures rely on internal proprietary standards to create and validate their e-signatures leaving the signature s long-term validity completely in the vendor s hands. Because independent 17 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M E-SIGNATURES TAB John Harris is the e-signatures are based on international published standards senior vice president of the validity of a signature will always be enforceable. For product management at the credit union industry this is especially important. Many SIGNiX a Chattanooga e-signatures will need to be trusted over long periods of time to Tennessee-based protect the validity of for instance a 15-year loan. electronic signature The credit union industry is a competitive marketplace. solutions provider E-signatures offer credit unions an opportunity to be a step that makes signing ahead of the technology curve and to offer experiences that will documents online help keep members loyal committed and excited about their relationships with their credit union. At the same time they safe secure and legal for any business. SIGNiX offers the aid in building internal processes that both complement an only independently verifiable cloud-based digital signature solution which combines workflow convenience with increasingly electronic era and withstand the test of time. superior security. Learn more about what makes SIGNiX different at www.signix.com 18 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY BY EMILY HOLLIS CFA PARTNER If Credit Risk Is Inherent In Your Balance Sheet Stress Testing Interest Rate Risk Isn t Going To Help Stress tests play an important role in identifying and analyzing interest rate risk outliers for credit unions. However if your CU has a high amount of credit risk such analyses are not going to alter your risk category. Learn why selecting the appropriate factors to stress is key. inancial institutions face three types of financial risk interest rate risk credit risk and liquidity risk. Generally the net economic value (NEV) and net interest income (NII) simulation analyses test interest rate risk. Additional stress tests in the form of altering the shape of the yield curve non-maturity deposit assumptions volatility etc. are critical to identify and analyze outliers of interest rate risk. But will these analyses help if a financial institution has a high amount of credit risk The answer is no. testing requirements of Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act are collectively an important set of supervisory expectations for banking organizations with greater than 10 billion in assets. These large organizations are required to conduct stress tests in accordance with the Dodd-Frank Act Stress Testing (DFAST). In its October 18 2012 guidance the OCC emphasized that national banks with assets well below 10 billion should begin their evaluations with a simple stress test of their loan portfolio. The OCC also suggested that such tests be conducted annually. In addition the OCC recommended banks stress test at the individual loan level and on credit concentrations of concern such as commercial real estate. This new guidance suggests that financial institutions should calculate and document what loss rates would be in a two-year stressed scenario. These losses are then carried forward onto the income statement and the balance sheet where the capital ratios are tested. The guidance requires a minimum of three scenarios baseline adverse and severely adverse. While the guidance exists the process is left up to the financial institutions. At ALM First we approach these stress tests from the bottom up by focusing on stressing individual loans. The loans are linked to various inputs such as annual default rates loan-to-value and loss severity ratios voluntary prepayments and recovery lags to project potential loss under possible adverse circumstances. When valuing commercial 19 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M F Stress Testing Stress testing has been a hot topic over the last couple of years. Generally stress testing is a forward-looking quantitative evaluation of adverse macroeconomic environments that could impact a banking institution s financial condition and capital adequacy. These risk assessments are based on assumptions related to potential adverse external events such as changes in real estate or capital market prices or unanticipated deterioration in a borrower s repayment capacity. These stress tests are used to evaluate credit risk and can also be used to ensure capital is sufficient to withstand an economic downturn. Regulatory Guidelines The Supervisory Capital Assessment Program its successor the Comprehensive Capital Adequacy Review (CCAR) and the stress 1 The 2006 Guidance on Concentrations in Commercial Real Estate Lending Sound Risk Management Practices and the 2001 Expanded Guidance for Evaluating Subprime Lending Programs TAB CFO CURRENCY loans it is imperative that additional risk factors be included such as debt-service coverage ratios net operating income potential property value depreciation occupancy status lease rates and other economic factors such as changes in local employment and home prices. Institutions with CRE and subprime lending concentrations should perform portfolio-level stress tests or sensitivity analyses to quantify the impact of changing economic conditions on asset quality capital and earnings. These issuances recommend that institutions consider the sensitivity of the performance of portfolio segments with common risk characteristics to prospective changes in market conditions. Importantly the guidance emphasizes that the sophistication of stress testing should be consistent with the size complexity and risk characteristics of the portfolios and balance sheet structure. appropriate factors to stress depends on the nature of the bank s concentration risk. If the results of the stress test indicate capital ratios could fall below the level needed to adequately support the depository s overall risk then appropriate steps should be taken to mitigate such an occurrence. C Practical Application Imagine a financial institution that in late 2007 had an entire portfolio of HELOCs and variable rate commercial loans. Suppose that various tests were performed to alter the shape of the yield curve modify non-maturity deposit assumptions and alter volatility. None of these tests would alter the institution s risk category because the variable nature of the assets would result in low price volatility and subsequent low interest rate risk. In other words rates move up and the coupons of the variable rate loans also move up representing little economic loss. The result of these stress tests would give the financial institution a false sense of security. Imagine if this same financial institution in late 2007 stressed the financial institution s loan portfolio and realized that a 25 percent decline in real estate values would have a significant impact on its earnings and capital. This financial institution would have a completely different depiction of its risk to capital and most likely would have altered its strategy. The OCC states A review by senior management may reveal two or three key concentrations in the loan portfolio such as loans dependent on a type of agri-business loans with construction-related risks long-term fixed rate municipal securities commercial mortgage loans dependent on local market values or consumer residential loans. Selecting the Emily Hollis is a partner with ALM First Financial Advisors LLC. M Y CM MY Resources Information on the FDIC and OCC guidelines can be found at the following links https www.fdic.gov regulations examinations supervisory insights sisum12 stress.html http www.occ.gov news-issuances bulletins 2012 bulletin-2012-33.html CY CMY K 20 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M With 80% of U.S. households saving coins coin processing is in demand especially at nancial institutions where most prefer to redeem their change. Give customers the means to do it themselves and you can increase their satisfaction by as much as 20%. That s the power of self-service coin counters. Now Cummins Allison gives you more ways to add coin machines to your branch. Choose from fast quiet and reliable coin counters that you can buy rent lease or place free of charge. We ll even pick up and process your coins. Coin counters are a proven way to increase traf c and member satisfaction -- let us show you how. Get a custom report comparing your self-service coin options. cumminsallison.com traf c Copyright 2014 Cummins Allison Inc. All rights reserved. CEO VELOCITY BY SCOTT MCCLYMONDS Passion for Excellence Jim Laffoon s Six Leadership Attributes for CU Growth Profit and Meaning Listen in as CU Biz s financial services expert sits down with a 26-year veteran of the credit union industry as he shares his six key leadership philosophies. Leverage CEO Jim Laffoon s expansive breadth of CU experience to help your credit union overcome its development challenges. uring the course of my career as both an internal and external consultant my best experiences have always been with executives who were truly passionate about what they did. Working with people who love what they do seems to be contagious and makes everyone around them more effective. There are a great number of passionate CEOs in the credit union industry and Jim Laffoon of Security Service Federal Credit Union in San Antonio Texas is one of them. He has served the credit union since 1989 exuding passion and enthusiasm for his job institution employees and members. During Jim s tenure at Security Service its assets have grown from 387 million to over 8 billion so he has had the experience of working in a small medium-sized and now one of the largest CUs in the nation. That breadth of experience has given him a good perspective of the challenges involved in each phase of a CU s development. In our conversation I found Jim not only passionate but competitive as well. The mission of Security Service is to be the best credit union in the United States and the CU s entire operation is built upon that goal. D CEO Jim Laffoon of Security Service Federal Credit Union The Importance of Culture Peter Drucker supposedly said culture eats strategy for breakfast and Jim and his Security Service team focus hard on creating the type of culture that will enable them to be the best credit union in America. Two dominant characteristics of that culture include Aligning the board management and employees around Vision Mission Core Values and Strategy Creating a safe environment where employees can win 22 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY TAB thrive excel take ownership and innovate without fearing failure. Aligning your credit union around common values and goals and creating a safe environment where employees can thrive and innovate seem like fairly standard ideas but if they were 70 percent of the American workforce wouldn t be disengaged and over 60 percent of non-management employees wouldn t say they don t know what their company stands for. As readers of this column know I discuss leadership and strategy with the leading CEOs in the credit union industry and every one of them understands the need to focus on culture and employees as a profit strategy. Reading about outstanding leaders like Jim Laffoon may cause you to think that what they re doing in the realm of culture and people is the norm. I assure you it is not the norm in American business and as my CU BUSINESS article on maximizing executive performance pointed out there is clear evidence proving how rare leaders like Jim are. While Jim is clearly competitive and has a focus on being the best credit union in the country it is also refreshing to hear that a CEO of his stature can maintain his focus on contributing to people s lives. Previously in this column I have mentioned my focus on capital culture and community and it is clear that Jim and Security Service share those ideals. Here are Jim s six key leadership philosophies that have allowed Security Service to grow and prosper 1) Everything a credit union does has to be done with a vision plan and alignment of everyone involved 2) A CEO should be both a teacher and a student 3) It is a priority to create a culture where employees are cared for and respected even over members 4) Creating a safe environment for innovation unlocks the intellectual power of the workforce which propels the company forward 5) Focusing on excellence in every interaction down to the last detail is crucial to maintaining a strong member focus 6) Making a difference in the lives of your members keeps employees engaged and motivated. Let me dissect these six attributes a bit for you. I will then proceed to the details of our discussion. CEO Surprises Jim told me that two things surprised him the most about being a CEO. The 24 7 nature of the job A CEO has to be ready to respond at all times and must always be thinking ahead making it difficult to unwind even at home. The impact Security Service has on its members lives Jim receives appreciation letters each month from members thanking him or acknowledging an employee for exceptional service. Members often have troubling life situations and in a world where so few are willing to help they are extremely appreciative when the credit union s employees treat them with patience and kindness while going the extra distance to find meaningful solutions. Helping members through life s challenges is emotionally rewarding for the employees and for their CEO. Obviously a CEO has to be passionate about his or her role and have an understanding family to endure the 24 7 nature of the job. Having a competent and trustworthy management team to share the burden is also an absolute must. C R E D I T U N I O N B U S I N E S S Vision Plan Alignment Jim mentioned the importance of vision planning and alignment several times in our conversation so it is clearly a priority. Achieving this goal with an organization the size of Security Service is no average task and Jim likened it to a fleet of navy ships navigating toward the same destination but having individual commanders and navigation lanes. Once at sea all ship captains must have a deep understanding of an enterprise plan in order to navigate their individual ships through distractions and challenges and to keep pace with the rest of the fleet. Aligning the corporate vision and plan is the foundation for empowering division leaders and establishing a culture where exceptional results can be consistently achieved. Jim mentioned that everything has to be done with this aim in mind. Not some things but everything. 23 J U N E 2 0 1 5 C U B U S I N E S S . C O M TAB VELOCITY CEO This approach throughout the organization from top to bottom and across divisions sets the tone for the all-important culture Jim and his team have built. It is the key to excellence because it keeps priorities front and center and helps employees avoid distractions. Highlighting the importance of alignment Jim s senior executives share the same set of goals and are evaluated and compensated on whether or not they were accomplished. This creates a team environment at the top of the organization and it incents leaders and their teams to collaborate with and support each other. helm who is humble enough to focus on learning and innovation serves as an example to employees that it is okay to do the same. It also creates an environment where they feel comfortable approaching senior managers with new ideas. A Culture of Care and Respect Using another military metaphor Jim described employees as individual weapon systems meaning that every employee has an obligation to unlock his or her intellectual power questioning any credit union method procedure or offering that may be improved. On every interaction individuals have the opportunity to earn the respect of the members or employees they are assisting. Respect for oneself others and the credit union is the foundation for building pride and a competitive attitude. Pride and a competitive attitude build the confidence that is essential for employees to truly provide exceptional sincere service delivered with patience and kindness. They also impart the knowledge that members are receiving the best offerings available in the marketplace. Jim asks employees to imagine themselves giving financial CEO as Teacher and Student You don t take a credit union from 387 million to over 8 billion without having a few lessons to teach but Jim likes to focus more on where Security Service is going than where it has been. He realizes he needs to keep an open mind to the innovation occurring both within his company as well as the industry. As I mentioned in a previous article having a CEO at the Scott M cClymonds and CEO Velocity help financial institutions like yours increase earnings member loyalty and employee productivity. Scott has helped hundreds of CEOs and senior managers find answers and solutions to tough questions like Who are your most profitable members and how vulnerable are they to attrition Where can you find m ore of them Are they already doing business with you How does your strategy need to be adjusted to improve your results by 20% or more What technology updates will give you the highest payback How should you develop your most promising leaders Scott McClymonds is one of the most creative strategists in the financial services industry. - Elio Spinello Principal RPM Consulting scottm ceovelocity.comceovelocity.com 479.263.0774 U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M Email scottm ceovelocity.com to request a free paper on how to find and close earnings gaps in your credit union. C R E D I T CEO VELOCITY TAB advice or service to their mother grandmother or someone they love. Are they 100 percent confident that Security Service offerings are the best solution Do others seem to have a better product or service If an employee is not 100 percent confident he or she has an obligation to point out that uncertainty and have it resolved. As a result employees feel empowered to provide ideas that improve their ability to serve members. They feel deeply engaged. One good idea from an employee can change the world at SSFCU and it often does. Jim calls this cultural innovation and it creates an exciting environment where individuals are encouraged and expected to use their intellect at all times. Jim and his management team believe the time they spend focusing on employees is more important than their focus on members because they know that employees who are proud inspired confident and competent will take exceptional care of members. Looking at their results who can argue Since no CEO can create a culture on his or her own Jim has built a high-performing management team around him. When I asked how he chooses leaders the first characteristic he mentioned was looking for people who are intelligent primarily good human beings who understand integrity communication interpersonal skills and loyalty and who are not afraid to fail. Obviously skill is important but as high-performing CEOs know skills are a given when choosing a leader. It is assumed they are present. What differentiates outstanding leaders from average or poor ones is their mindset and cultural fit. Jim s leadership selection is clearly based on the culture he has created at Security Service. must do so cautiously and strategically within their capabilities. Of course with innovation comes failure. Not intentionally it is just part of the process. Any aggressive entrepreneurial individual or business unit is going to have failures and if innovation is a core value a board and management team has to be willing to not only accept a certain degree of failure but also reward it to an extent. On the flip side management has to become adept at evaluating calculated risk-taking and understand when to say yes no or not yet. This is one area where core values and cultural alignment come into play. Innovation focused within the context of the company s strategy and mission will always have priority over something that sounds good but is outside those boundaries. Excellence in Every Interaction Credit unions grow from 387 million to 8 billion by mastering details as well as the big picture and striving for excellence in every member interaction has been a key component of Security Service s success. How does this happen Not by accident. It begins with the culture of caring for employees and realizing they have to be optimal emotionally physically and financially to give an excellent performance each day. Security Service s employee assistance program helps employees manage situations outside of work and hiring leaders who are primarily good human beings helps provide employees with the nurturing they need inside the company. This is a prime example of how business goals intersect with culture and it shows why creating a culture that values people is so important. How hard is it to understand that if you take care of your employees they ll take care of your members I repeat easy to understand but not often accomplished. Creating a Safe Environment for Innovation Quoting Drucker once again People who take risks make about two big mistakes per year while people who don t take risks make about two big mistakes per year. Jim Laffoon is clearly on the risk-taking side which is why Security Service has innovation as one of its core values. It helps that the company is operating from a position of financial strength so one or two mistakes aren t going to seriously jeopardize an 8 billion institution. Jim noted this as a constraint for smaller credit unions ... a constraint not an excuse. Jim believes even smaller CUs can innovate but they 25 C R E D I T U N I O N B U S I N E S S Making a Difference in Member Lives No matter how much is written or said about Millennials digital this or that mobile banking or other types of automation and technology at the end of the day we re all still people and we all want jobs with meaning and significance. Creating companies and jobs that improve the lives of other J U N E 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY TAB people is never going to go out of style. If anything it is a clear differentiator that separates successes from failures. While creating an 8 billion credit union Jim Laffoon and his team have never taken their eyes off the goal of improving their members lives and the best CEOs in America infuse that objective deep into their credit unions. It helps keep employees motivated and it creates incredible word-of-mouth endorsements as members tell their stories to friends families and colleagues. 4. Is your CU innovative a. What innovations have you developed in the last 12 months that have materially affected members employees or your profitability b. Where or from whom do innovations come within your organization c. Are mistakes based on innovation rewarded or punished in your CU 5. What percentage of your member interactions are done with excellence a. Are you actively surveying members to evaluate this information b. What are you doing for employees to ensure this high level of service 6. Are you making a difference in the lives of your members a. Do you have the member stories to prove it b. Are you circulating those stories among employees to keep them energized and inspired c. Are member stories from years ago or are they continuing to happen Scott McClymonds is a veteran leader in the financial services industry and an expert at creating and executing profitable strategies that make businesses grow. His company CEO Velocity is a strategic consulting firm that helps CEOs of financial services firms and small to mid-sized enterprises create greater customer loyalty profits and company value. You can reach Scott at 479.263.0774 scottm ceovelocity.com or scottmcclymonds. Challenge Questions for You Before proceeding to my Q & A with Jim take some time to reflect on and answer the following questions based on Jim s six leadership attributes 1. How tightly aligned is your credit union around vision strategy and core values a. Are you your management team and board completely unified b. Do your employees know and understand your vision strategy and core values and do they know how their jobs help achieve them c. Do you have clear measures for each division and employees who are tied to strategic goals d. Does your management team have common goals it is working on as a team 2. Are you a leader and a student a. What are the lessons you should be teaching your board employees and members b. What have you learned lately from the people in your organization and industry c. Would your employees and board members say you listen to them with a sense of urgency 3. What are you doing to actively care for and nurture your employees a. Would they say they feel inspired engaged and motivated b. How would they describe your CU s culture c. What more do they need from you to be more satisfied and to perform at higher levels 26 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M RISK MANAGEMENT BY STEVE RUWE CHIEF RISK OFFICER FOR PSCU Risk Management in the Data Breach Era Bridging the Data Breach After a history of ups and downs fraud levels are at an all-time peak. In this data breach era it is more important than ever for credit unions to know how to react when a breach strikes because sooner or later it will. EMV and tokenization are two new risk management tools intended to mitigate such threats. t comes as a shock to few people that we re currently in a period of high fraud. We reside in an environment that can be characterized with words like high risk and unstable. We ve been here before the history of fraud in the U.S. market has consistently been one of ups and downs in terms of its activity level. Most of these swings in fraud levels were driven by new threats and the remediation of those threats. Those of us who were around pre-CVV remember fraudto-sales ratios in the 17 to 18 bps range as the norm of the time. Now the data breach era is upon us. In 2012 there were a total of 1 154 data breach alerts nationwide that number rose to 1 434 in 2013 and 1 697 in 2014. These breaches varied in size from very small to very large (think Target and Home Depot) but in total they affected hundreds of millions of cardholders. The question is no longer if you ll be involved in a breach but when and how you ll react when it happens. So what does the current fraud situation really look like And how did we get here Attacks on data have become more sophisticated. Merchant PCI-DSS compliance isn t close to where it should be especially for mid-size and smaller merchants. Data thieves are aggregating stolen data from disparate sources. And the change in fraud patterns to footprint attacks makes it harder for our prevention systems to detect fraud. That is because the perpetrators are now shopping in our members own backyards where they would normally shop. With all this being said is there any good news Thankfully for members everywhere being involved in a breach doesn t necessarily mean you will become a victim of fraud it just means you were involved in a breach. At PSCU while we have seen an increase in the number of fraud cases we ve been successful in limiting the dollar loss in each of those cases. What s next Europay MasterCard and Visa (EMV) has been tapped as the answer to card-present fraud facilitated by data breaches. The U.S. market is really just now gearing up on EMV and most of the activity seen on EMV today is being driven by the October 2015 liability shift. The United States is currently behind the rest of the world in terms of EMV card-present transactions. From June 2013 through June 2014 only 0.03 percent of transactions in the USA were EMV as opposed to 19 percent in Asia 75 percent in Africa and the Middle East 83 percent in Canada Latin America and the Caribbean and between 60 and 96 percent across the whole of Europe. The U.S. market s deployment of EMV has been more complicated. This is largely due to the fact that EMV deployment in this country has been driven or stalled by issues more to do with merchant pricing than risk prevention. Nonetheless momentum on the U.S. issuer side has begun to strengthen. Several keystone issuers like Citi Chase and Bank of America report that they will have strong EMV issuance completed by the end of 2015. On the U.S. merchant side of things it appears that Tier 1 merchants will be somewhat in 27 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M I RISK MANAGEMENT TAB form by year end. Some industry sources report the percentage of Tier 1 merchants that will be EMV enabled by year end at 70 percent. Small to mid-size merchants will not be there in 2015 and likely will not catch up for another 12 to 18 months. For its part PSCU recently announced that EMV credit card program deployments for its member credit unions officially surpassed the one million card mark. One hundred of its member credit unions are currently certified for credit EMV with 350 credit unions slotted for credit EMV certification this year and another 126 slotted for debit EMV certification. The good news is that EMV chip technology will address the current strain of card-present counterfeit fraud. EMV has proven to be successful in defeating counterfeiting in the markets where it has been deployed. The bad news is that the side effects of EMV success have been consistent in the markets where the standard has been deployed increases in card-not-present fraud. Card-not-present fraud already makes up 16 percent of the U.S. card fraud picture today. This statistic represented more than 5.3 billion in losses to both issuers and merchants in 2013. Card-not-present fraud growth is being fueled by consumer comfort with online transactions a trend likely to continue given that U.S. consumers are expected to spend more than 430 billion on e-commerce transactions by 2017. As EMV matures in the U.S. market there will be more of a need to address card-not-present fraud as it will undoubtedly become a larger component of the U.S. fraud environment. Enter tokenization. While tokenization is in its early days in the United States it is the underlying security for Apple Pay transactions and other use cases like Samsung Pay. Tokenization is enabling the faster adoption of mobile payments by replacing a card s primary account number with a random numerical sequence unique to a specific device merchant transaction type or channel. For financial institutions tokenization is easier and quicker to deploy than EMV the total implementation process should take just three to five weeks. For merchants tokenization is easier and cheaper since it s a software issue only (no new hardware is required) which is promising news since merchants have the most to gain from preventing cardnot-present fraud through tokenization adoption. Apple Pay has sparked interest in tokenization as the underlying security standard for mobile payments. But this 28 C R E D I T U N I O N B U S I N E S S is only the beginning new use cases are likely coming soon along with a ramp-up in new requests for tokenization. If history repeats itself we ll likely need to experience a new spike in card-not-present fraud to spur the industry s energy on deploying tokenization at the card-not-present point of sale. Hopefully we ll learn from the experience of the markets that have adopted EMV and avoid as much card-not-present loss as possible. PSCU has been and will continue to be committed to supporting member credit unions on EMV tokenization and any other credible risk management tools that rise to relevance. The current risk environment is certainly a daunting challenge but it s also just another chapter in the evolution of the payments industry. EMV and tokenization will address our current threats and somewhere down the road we ll no doubt encounter a fresh set of risk challenges and threats to manage. Credit unions will have to accept those challenges in order to continue to deliver on their promise to members and to preserve their relevance in the payments industry. Steve Ruwe leads the enterprisewide risk management strategy for PSCU with a focus on preventing fraud and minimizing risk in the credit and debit card portfolios of Member-Owner credit unions. Advocating risk management practices for the industry Steve serves as the Chairman of the Credit Union Risk Council and sits on the MasterCard U.S. Fraud Advisory Council. Prior to joining PSCU Steve served as Visa USA s Executive Vice President of Operations and Risk for 13 years. Steve has testified as a risk management expert before Congress numerous times on issues related to data security Internet gaming and Internet pharmacies. He has served on the Board of the Economic Crime Institute and the Financial Services Sector Council for Critical Infrastructure Protection and Homeland Security. Steve can be contacted at sruwe pscu.com. J U N E 2 0 1 5 C U B U S I N E S S . C O M MEMBER SERVICES BY NICK ROMANO Exceptional Customer Service Starts with Collaboration There s no easier way for credit unions to boost their customer satisfaction than through enhanced collaboration and empowered employees. And despite the growth in mobile transactions nothing can replace the personal touch of face-to-face encounters. Read on for tips on how not of fall into the communication trap with your CU s third-party partners. n any industry enhancing collaboration and empowering employees are surefire ways to boost agility when it comes to responding to market changes and ensuring a consistent and positive customer experience. While a dominant trend in retail banking revolves around the growing customer preference for conducting daily transactions via self-service and mobile channels branch representatives nevertheless continue to play a vital role. Indeed they serve as catalysts for cross-promoting products completing many transactions and building customer loyalty. Mobile is great for enhancing convenience but customer-facing employees can t be replaced for conveying a sense of community and personal touch to credit union customers. Giving credit union employees the tools they need to provide exceptional customer service is an obvious requirement for them to be able to perform at their best. One area that should not be overlooked is the extent to which collaboration is possible between front-line employees and the third-party print service providers (PSPs) many credit unions use to improve costs and efficiencies while preserving resources for their core functions. No one is more knowledgeable about your credit union s offerings your marketing strategies and your members expectations preferences and needs than your customer-facing employees are. Unfortunately if your outsourcing partner creates a barrier between your employees and vital member documents and data your staff will not be in a position to impact the customer experience to their full potential. C R E D I T U N I O N B U S I N E S S I Escaping the Communication Trap Often a rigid workflow and complex processes between the credit union and its PSP create a communication trap inhibiting the ability for customer-facing employees to request documents manage content and make even the smallest changes to communications such as member statements welcome kits and letters. When such inhibition occurs the opportunity to make the communication more relevant and effective through personalization honoring member channel preferences and targeted cross-selling is lost. Moreover working within a PSP s system for document change requests can be costly slow and frustrating to employees. Similarly without a single system to manage all messages and to access member data it is difficult for a credit union to maintain the consistency across all channels that members now expect. Ensuring regulatory compliance and maintaining brand standards also become more difficult. Implementing a customer communication solution that enables easy collaboration between the PSP and credit union and that places the ability to control messaging securely and compliantly in the hands of customer-facing employees can overcome the messaging disconnect that often exists in the PSP credit union relationship. Time-to-market can be vastly improved by placing full control of messaging content in the hands of those closest to your members. Employee effectiveness of customer service agents will be improved when they have the ability to request customize and personalize member documents 29 J U N E 2 0 1 5 C U B U S I N E S S . C O M MEMBER SERVICES TAB quickly and easily. The cost-efficiency of communications will also be enhanced by eliminating the need to rely on the PSP to implement document changes. Credit unions looking for ways to cost-effectively differentiate themselves from the competition should take a close look at what they are doing to make their most valuable asset their customer-facing employees as effective as possible. Avoiding the communication trap that often exists in the credit union PSP relationship is one step in the right direction. Nick Romano P. Eng. Cofounder and CEO Mr. Romano specializes in business process re-engineering for enterprises migrating to new document delivery solutions. His primary expertise is on implementing messaging and personalization strategies workflows and ROI tracking. Romano is a popular international speaker on the implementation of successful document solutions with topics ranging from design messaging and personalization to shop floor automation and advances in document delivery. Under his direction Prinova is helping companies achieve savings flexibility and integrity in the document design and development process. How would your customers rate their experience at your drive up Maximize Teller Productivity with a Currency Dispenser (or Recycler) Contact us at Proven Performance and Quality Phone 800-243-2624 Email dispensers magner.com Online www.magner.com 2 0 1 5 C U B U S I N E S S . C O M 30 C R E D I T U N I O N B U S I N E S S J U N E MEMBER BUSINESS LENDING BY RYAL TAYLOE VICE PRESIDENT CREDIT UNIONS NCINO NEW Seize the Opportunity Why It s Time for Your Credit Union to Offer Member Business Lending There s no better time for credit unions to capitalize on the momentum that is taking place in the industry. And member business lending offers them an unparalleled opportunity to not only drive growth but also enhance member satisfaction. Find out how two credit unions seized their share of the pie. credit unions are recognizing the substantial opportunity that member business lending (MBL) provides to drive growth as well as member satisfaction. According to the U.S. Small Business Administration member business loans at federally insured credit unions more than quadrupled from 11.3 billion to 47.5 billion over the past 10 years. At the same time the percentage of total credit unions that had member business loans on their balance sheets nearly doubled from 18 percent in 2004 to 34 percent in 2014. And it s easy to see why. If a credit union member who owns his or her own business has a mortgage shared savings and primary checking account all with the same credit union that member may be open to a convenient and complementary commercial real estate or small business loan to better satisfy his or her total financial needs. T raditionally focused on share accounts and consumer-related loan services credit unions are known today more for their expertise around products such as auto and student loans. The financial crisis of 2008 was a trying time for businesses across the United States but it also presented an opportunity for credit unions to realize they can do even more for their members. While banks tightened their credit requirements and worried about profit margins credit unions continued to do what they do best take a careful and conservative approach to lending and focus on serving the needs of their members. As a result of this commitment to delivering value and service today credit unions across the country are building assets and growing memberships. According to the Credit Union National Association (CUNA) credit unions saw annualized asset growth of 4.8 percent in 2014 compared with 3.9 percent growth for the year prior. This growth was driven by a solid increase in deposits (5.7 percent in 2014 vs. 3.9 percent in 2013) along with an impressive 10.5 percent uptick in loan balances (over 7.3 percent in 2013). Total credit union membership increased across the nation as well from 2.5 percent in 2013 to 3.1 percent in 2014. In light of these positive trends along with an improving economy and national employment rate many credit unions are looking to capitalize on this momentum to further grow and expand their offerings. Specifically an increasing number of 31 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING TAB also currently made in a variety of circumstances (low income designated agricultural loans etc.). However the majority of credit unions are well below this limit as illustrated in the following graph. Despite regulation plenty of growth opportunity remains for both established credit union lenders and new entrants into the market. The time is ripe for credit unions to take their share of the pie. SAFE Credit Union a 2.1 billion credit union headquartered in Sacramento Calif. has recognized the MBL opportunity and is quickly seizing it. Over the last few years SAFE has focused efforts on serving its business members realizing that its member business owners are the leading job creators in the local community. Henry Wirz CEO of SAFE Credit Union describes business lending as the engine of growth in our community. He adds We want to do everything we can to help small businesses succeed. As such SAFE made a commitment to expand its suite of products and services for business owners. It put this vow into action by creating internal processes to support business lending and in time instituted independent loan operations building a distinct sales team and establishing credit and deposit services to support its business members. But you don t need to be one of the largest credit unions in the country to offer member business lending. Credit unions of all sizes have the same opportunity to strengthen relationships and better serve members through such loans. For example last year 419 million Michigan-based Educational Community Credit Union (ECCU) began strategically building out an MBL program recognizing these products Source U.S. Small Business Administration. Note excludes unfunded commitments. Credit union business loan portfolios are limited by statute to 12.25 percent of total assets (or 1.75 times net worth whichever is less) whereas business loans are defined as loans for business purposes over 50 000 (with certain exceptions). Waivers are Source U.S. Small Business Administration Total MBL by Count Relative to Statutory Share of Asset Cap All Non-Exempt FICUs (includes unfunded commitments) U.S. 2014 Q3 32 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M TAB MEMBER BUSINESS LENDING potential as enterprise growth opportunities and benefits for members. ECCU s commercial activity was once rolled into the consumer lending group but is now an independent department and the team has successfully quadrupled its MBL portfolio in one year. Regardless of geography or asset size credit unions interested in getting in on the MBL action should keep a few key tips in mind Hire the Right People. Hire people with business lending experience to manage the program and make sure they also fit into the culture of your organization. Just because someone was a loan officer at a bank for 10 years doesn t mean he or she is the right person to build your MBL presence. Make sure the people you hire have sufficient lending experience but also support the core values mission and vision of your credit union. Consider a CUSO Partnership. Credit unions that are new to member business lending particularly those with fewer resources to dedicate should consider engaging in a CUSO partnership to help offset the costs and manage the risk. CUSOs are domain experts and can help in a variety of areas including underwriting portfolio servicing and finding participation partners. To learn more about CUSOs and to find one that s right for your credit union visit https www.nacuso.org nacusomatch . Utilize Technology. Without the right system in place credit unions can become overwhelmed with the amount of paperwork and documents involved during the loan origination process. With technology as a vital part of the MBL program credit unions can increase efficiency improve risk management and provide better and timelier service to members. I ll delve more into each of these three topics in future columns so be sure to check back in the months ahead. Until then I hope you recognize the value of member business lending as a key growth driver across the credit union industry. Opportunity is knocking. Will your credit union open the door Ryal Tayloe is vice president of credit unions for Wilmington N.C.-based nCino the leader in cloud-based operating solutions for the financial services industry. Through its flagship operating system nCino leverages the power of Salesforce.com to provide credit unions and other financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines. The end result is increased profitability productivity gains and regulatory compliance. For more information visit www.ncino.com or connect with the company on LinkedIn and Twitter nCino. The 1 Solution for Member Business Lending ncino.com 33 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS BY BOB SCHROEDER Opportunities to Increase ROA What are top-performing credit unions doing differently when it comes to their ROA It turns out they share a surprisingly long list of traits. Is your CU up to snuff in joining them at the pinnacle of your peers A lending expert weighs in with strategies to take you to the summit. Loan growth of 10 percent annually Earnings will follow loans. Grow loans and you grow earnings. Declining loans will result in declining earnings. A large concentration of members with direct deposit Delinquencies and charge-offs higher than their peers Credit unions that take more risk have higher-thanaverage delinquencies and charge-offs and also earn more income. Look at your credit union loan portfolio. You make a greater ROA on your unsecured loans with higher delinquency and charge-offs than you do on your real estate loans. Incentive plans for all staff You need a strong sales culture to be a top-performing credit union. It will be difficult to establish a sales culture without a generous incentive plans for all staff members. We have specific plans that can be implemented at your credit union. Smaller-than-average loan balances Mr. and Mrs. A want a 40 000 loan for their Lexus. You offer 2.9 percent and they ask you to do the limbo. How low will you go You settle at 1.99 percent for 60 months and your total finance charges are 2 056 assuming the loan is not paid off early. Take the same 40 000 and lend it for 48 months at 12 percent to four members who live on D street and earn 10 560 in finance charges assuming no loan loss or prepayments. That is over five times the earnings in one less year. Notice I did not include reducing expenses as a way to improve ROA. It may help for the short term however I was always concerned with the loss of revenue stream the expense reduction would cause. I was asked to make a presentation at a Financial Executive Council meeting in April. I am always glad to get the work and was excited about the opportunity to present to a number of decision makers who hire consultants like me. The event planner wanted my presentation to focus on increasing ROA specifically through lending opportunities and pricing strategies. I added a brief section on other income because this is a critical component of ROA in today s environment. When I was asked to write this article I thought I would share some of the concepts. In the current interest rate environment many credit unions are struggling. Investment yields are below one percent and declining loan yields are squeezing margins. However not all credit unions are suffering. I thought it would be interesting to look at the top-performing credit unions as measured by ROA. Traits of Credit Unions with a Strong ROA It is our experience that these credit unions have the following characteristics Loan-to-share ratio of 90 percent or greater These credit unions put their money to work in loans. Each 100 000 you take out of one percent investments and put into six percent loans generates 5 000 in revenue per year. Net loan yields (loan yields less charge-offs) higher than peers Some are as high as of 7.5 percent. Other income to assets of two percent or greater Other income is critical for credit unions with declining loans and or loan yields. You can t be a top performer without other income above your peers. 34 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M TAB LENDING SOLUTIONS To improve ROA you need to increase loans loan yields and other income. Let s take a look at how to make this happen. Philosophy It all starts with our loan philosophy The only reason a member should ever be turned down is when we believe the credit union will not be repaid. Note that it does not say past or present delinquencies with others insufficient collateral or insufficient income which are credit unions favorite reasons to turn down a loan. Loan Policies Loan policies need to be flexible enough to make loans when it makes sense to the member and the credit union. Focus on removing barriers to making loans. The following are common recommendations Authorize the CEO and or Vice President of Lending to make loans outside of the policy and report the details of the loan at the next scheduled board meeting. Use guidelines as opposed to limits. Limits are barriers to lending. When exceeding guidelines have your loan officer document in the loan notes why he or she felt the credit union was going to be repaid. Guidelines work well with debt-to-income ratio loan-tovalue limitations loan limits term etc. Unsecured loan limits need to be aggressive. We feel unsecured loans up to 25 percent of annual gross income are reasonable. If you agree and allow unsecured loans only to 25 000 then you do not want to be the only financial institution to those members making over 100 000 per year. Such individuals should be able to handle more than 25 000 in unsecured loans. Unsecured loans are one of your most profitable products. Push University of Lending May 11 - 15 Crystal Lake IL August 10 - 14 Crystal Lake IL 4th Quarter 2015 Las Vegas NV C M Y CM MY CY CMY K Management Institute for CEOs and Managers September 15 - 17 Phoenix AZ Collections Institute April 7 - 9 Chicago IL October 6 - 8 Phoenix AZ Indirect Institute May 4 - 6 San Antonio TX 35 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS unsecured loans up to 20 percent of your loan portfolio. We are coaching clients on extending loan terms on car loans. LSCI recommends terms of up to 108 months or nine years. (No this is not a typo.) This length will allow you to compete on payment and not give up yield. We recommend a one to 1.5 percent rate increase for each year over 60 months. You can earn 4.6 times more income on a 108-month loan over a 60-month loan. You will earn 2 224 on a 30 000 loan for 60 months at 2.95 percent. In comparison you earn 10 198 on a 30 000 loan for 108 months at 6.95 percent. Make sure you include a mileage analysis when extending loan terms. This is a great strategy to help both loan growth and loan yield. You get more loans with lower payments and increase yields with the higher rates on longer terms. You will set the trend because we predict this will become the norm within the next few years. Check with your GAP and your credit life and disability providers to see product limitations on extended term loans. Do you currently finance 2009 cars for 48 months Serve members who have caused you a loss Not serving them is a barrier to lending. Many members file bankruptcy and cause you a loss but they may not know you took that loss. In Chapter 7 the bankruptcy declarer pays into the plan and the trustee repays the creditors. Hence the member likely did not know you received only 10 cents on the dollar. If such a member caused you a 2 500 loss on a Visa card you can easily make that up on a 15 000 auto loan at 15 percent. You will earn 6 410 in finance charges With bankruptcy reform and risk-based lending this policy statement needs to be removed. Increasing Loans and Loan Yields You need to determine the member s motivation for coming to you. Why us Why now Motivation is the key to serving members. Train your staff how to identify bankruptcy indicators and how to serve those members who are about to file bankruptcy. Bankruptcy indicators include excessive unsecured debt to AGI many new accounts with 36 C R E D I T U N I O N B U S I N E S S J U N E balances many inquiries balances near limits and high debt-to-income ratio. I would guess if I were to walk into every credit union loan office in America and I were to tell them I was considering filing for bankruptcy I would be denied 95 percent of the time. The other five percent who are well trained and the best of the best understand how to make loans that survive bankruptcy. How would your loan officers perform Use the LSCI High Yield Lending Strategy or the HYLS scoring model to assist your staff in looking for loan opportunities and in identifying bankruptcy risk. HYLS reviews many critical components to lending that FICO does not. The FICO scoring model has no idea on underwriting ratios such as debt to income unsecured debt to income loan amount to income and loan to value. A person with 15 000 in unsecured debt is not a problem if he or she makes 80 000 per year. You have a big problem at 25 000 per year yet these two individuals have the same FICO score. In addition the FICO score underestimates accumulation of debt and the problems this causes. HYLS will let you know when you have a problem. Use credit score enhancement services to build loans. Review the member s credit report with him or her and provide specific strategies on how to improve his or her score. Teach these members how much they can save in finance charges with a good score. When reviewing the credit report with the member you should be able to come up with a better financial solution using your products and services. Train your loan officers to identify the trend in the credit score. If the credit score trend is moving up you have a great yield and decreasing risk. It is unfortunate that many credit unions do not see this opportunity. If the credit score is going down you get a low yield and increasing risk. Not a good combination. I would prefer to lend money to a 590 score moving up than a 710 score moving down. The value of interviewing skills is underestimated. We feel many loans are being turned down because of an inadequate interview. When reviewing loan denials at the credit unions I work with I agree that most turndowns 2 0 1 5 C U B U S I N E S S . C O M TAB LENDING SOLUTIONS can t be made. I also believe that such members should not be denied without getting the entire story. What was the motivation What assets do they own What is the equity position of the home and cars Do they have any other income Oftentimes credit unions approve previous turndowns after conducting a thorough loan interview. Have your loan officers open new accounts. No one will be able to sell your loans better than your loan officer. Many credit unions use their member service or teller staff to open new accounts. When I review new accounts I see many opportunities left on the table. The two best times to steal loan accounts is when the account is being opened and during a loan interview. Pricing If you get the member by rate you will lose the member by rate. Most credit unions will not be able to survive using a low-cost-provider business model. Having said that I see many credit unions spend their marketing dollars advertising loan rates less than two percent. Our recommendations are Make sure you have rate increases for older vehicles and higher loan-to-value ratios. We recommend a three percent increase in rates both on vehicles 2008 or older and loan to values in excess of 121 percent. I have seen credit unions reduce pricing for promotions that cost them a lot of money. An example is unsecured promotional rates at seven percent reduced three percent from 10 percent for a limited time period. In this example you need a 50 percent increase in business to increase earnings. Normal volume 1 000 000 at 10 percent generates 100 000. 20 Percent increase to 1 200 000 at seven percent generates 84 000. 30 Percent increase to 1 300 000 at seven percent generates 91 000. 40 Percent increase to 1 400 000 at seven percent generates 98 000. 50 Percent increase to 1 500 000 at seven percent generates 105 000. Solution Do not give everyone the special rate use a coupon or code. Closing the Beat Your Rate Deal Offer the savings upfront if the member is not excited about the reduction in payment. Example Offer one percent cash back instead of beating the rate by one percent. Example Loan amount of 25 000 with 58 months remaining at 4.5 percent Option 1 One percent cash back same 4.5 percent rate 2 864 in finance charges at 4.5 percent if the loan is paid to term 250 one percent rebate cash back 2 614 Option 2 Beat the rate by one percent or 3.5 percent APR 2 210 in finance charges at 3.5 percent if the loan is paid to term Do not require down payments and pick up extra earnings. Make sure your staff understands the cost of a down payment Purchase Price 10 000 Option 1 Down payment of 10 percent or 1 000 with Current Loan Beat the Rate Loan Amount 25 000 APR of Payments Payment Amount Reduction in Payment Cash to Member 4.5% 58 480.41 25 000 3.5% 58 469.15 11.26 0 Savings Upfront 25 600.18 3.5% 58 480.41 0 600.18 a loan amount 9 000 at nine percent for 48 months. Finance charges are 1 750. ( 194.44 per 1 000) Option 2 No down payment and loan amount of 10 000 at 10 percent for 48 months. Finance charges are 2 174. (217.40 per 1 000) Option 2 generates 24 percent more earnings The last 1 000 generated 424 in additional finance charges or 19 percent APR (10 percent plus one percent extra on the first 9 000). 37 J U N E 2 0 1 5 C U B U S I N E S S . C O M Market solutions not rates. Use promotions such as Debt happens we have solutions or credit score enhancement services. C R E D I T U N I O N B U S I N E S S LENDING SOLUTIONS TAB I love lending money at 19 percent APR If the member will pay you 9 000 he or she most likely will pay you 10 000. If the member is a bankruptcy threat you may need the down payment to make yourself bankruptcy proof. Other Income Members are demanding loan rates below our cost of operations. We have to make it somewhere. We recommend you target other income of two to three percent of assets. According to CUNA the industry average is 1.32 percent. NSF and Courtesy Pay is a big revenue generator for nearly all credit unions. The following is what I see as opportunities to increase other income. Credit unions usually price GAP insurance between 250 and 350 while dealers price it at 700 to 1 100. Bump your price to 595 pay a nice incentive to your sales staff and watch your other income skyrocket. Mechanical repair coverage is a great opportunity for credit unions. When I was CEO I struggled to get my team to sell this coverage until I hired a used car salesman as a lender. He sold over 50 percent and trained my other loan staff. Credit life and disability or payment protection is not sexy but the other income it can produce is. I have seen credit union reimbursement range from two percent to 40 percent. Negotiate a healthy reimbursement pay a good incentive and boost your earnings. Case study on ELGA Credit Union in Flint Mich. 407 million in assets Fee and other income to assets 3.23 percent Life and disability reimbursement for 2014 totaled 413 000. Life and disability claims for the year were 630 000. GAP profit after paying CUNA for the policy was 495 000. Over 75 GAP claims were paid out. Warranty income after paying CUNA was 30 000. 43 warranty claims for over 34 000 in covered repairs were paid. According to Terry Katzur ELGA s Executive Vice President the above income figures are net of costs so it is bottom line 38 C R E D I T U N I O N B U S I N E S S income totaling nearly 1 million. He went on to say These are products that help their members protect their livelihoods and their credit. Without them we would see more members in financial distress. A 2013 Filene white paper polled members about which sources of NII they felt provided the greatest benefit to them (the credit union member) and 94.4 percent said GAP 92.1 percent CL CD and 84.4 percent mechanical repair coverage. The times have changed. Have you If you need help implementing new strategies to enhance your ROA rest assured we are only a phone call away. Bob Schroeder vice president consultant of Lending Solutions Consulting Inc. or LSCI began his 30 -year credit union career in collections before moving on to lending. He has 11 years of 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 21-year tenure as CEO the credit union experienced a period of rapid growth and strong earnings. Bob can be reached at bschroeder rexcuadvice. com or (815) 761-0135. J U N E 2 0 1 5 C U B U S I N E S S . C O M TRANSITION TO EMV BY VADIM KAGAN DIRECTOR OF BUSINESS DEVELOPMENT AT SHORELINE The Missing Piece in the Transition to EMV As the United States transitions to EMV implementation does your credit union have a clear understanding of what s needed to guarantee success Regardless of your CU s size a number of considerations apply. Read on to find out what may be missing from your EMV migration plans. ountries around the world (standouts include Canada Australia and the U.K.) have been reaping the benefits of EMV for years. With the United States making the shift this year there is a unique advantage in seeing the results and benefits from successful moves to EMV. There is also benefit in having a clear view into what s needed to guarantee that success. For financial institutions of all sizes the pressure is on to prepare for the fraud liability shift taking effect in slightly under six months. It s been widely documented that the top 10 or so large national banks are well on their way to implementing EMV. Many of their customers have already received chip-protected cards in the mail. It s a bit of a different story for the majority of U.S. credit unions and community banks which often are more resource constrained and may be slightly behind on their migrations. On the path to EMV there are a number of considerations that apply to all financial institutions. Some are more complicated and time consuming than others including updating profiles manufacturing cards customization issuance personalization and even altering ATMs. With those realities in mind some credit unions are taking a wait and see approach and planning to make the migration within the next two to three years. However ensuring that all bases are covered sooner rather than later is key to avoiding liability for future fraud. It is also critical to securing and retaining every valuable customer. To that end it might be helpful to point out a thing or two missing from many CUs EMV migration plans. Since we re well aware of the many tangible benefits EMV technology has to offer from preventing cloned cards to universal card acceptance across the globe it s easy for CUs to fall into technology-centric migration strategies. These include complex but integral back-end infrastructure adjustments and other technical and compliance requirements that focus on relationships with payment acquirers and merchants. That coordination planning and execution is undoubtedly essential but there is another part of the equation that often gets overlooked consumer education. Just as important as the technical factors the knowledge and awareness building it takes to drive member understanding as well as comfort with and acceptance of EMV cards is also the responsibility of the C Managing Risk Doesn t Have to Be a Juggling Act C R E D I T U N I O N B U S II N E S S B U S N E S S JMU AN Y E 22 00 11 55 Visit autopilot.swbc.com or call 866.647.8749 today to learn more 39 C U B U S I N E S S . C O M LIMITED TIME OFFER Introductory Rebate TRANSITION TO EMV TAB financial institution. While awareness building takes serious time and investment it also presents an opportunity to provide engaging and informative resources to current and potential cardholders and to build your member base. By executing consumer education tactics now credit unions and small banks can be sure their cardholders are prepared. They can also take advantage of significant business benefits in the ramp-up to EMV. Saving Time and Resources for Both Parties Online FAQs video tutorials e-mail and direct mail campaigns as well as employee education programs can all be developed to proactively answer member questions. By not having to worry about fielding customer service calls on what chips are how they are used or why the change is occurring precious time and resources can be saved. Larger banks with vast marketing resources have created excellent examples of these materials (Bank of America and Chase for example) but more budgetconscious CUs are still getting the information out there for consumers to reference before they try to use their cards at merchant terminals. Fostering Member Trust Information sessions at branch locations provide a forum to connect in person and to communicate what EMV means to your members thereby furthering the feelings of care and community surrounding the CU. In addition by preemptively alerting customers about the switch to EMV cards via e-mail mail and dedicated landing sites they will know what to expect and when to anticipate a new card. Proactivity breeds confidence and trust. Finally the more secure customers feel regarding counterfeit card fraud lost and stolen cards or online fraud mitigation the more they inherently trust their credit unions to make future technology and business decisions. When migrating to EMV cards there is a natural opportunity to evaluate or proactively offer additional technology updates that can be made to launch new differentiated services and increase customer satisfaction. Fending Off the Competition or Advancing Competitive Strategy If CUs aren t communicating with their members chances are their competition will. If consumers start to learn about the benefits of EMV cards but don t receive one or if they are left without the appropriate education altogether they may look elsewhere (especially to larger banks) for an EMV card or information. Conversely EMV could be the ideal selling point to attract new customers. SDFCU for example uses EMV in its sales materials appealing to potential members for whom security is a key concern. Preparing basic education programs and tools for your credit union team can have great impact. The business benefits speak for themselves proving how important and valuable public education will be in the EMV migration process. With more than 3.2 billion cards expected in the USA the rollout will surely extend beyond the October deadline but that doesn t mean that CUs and smaller banks shouldn t act with immediacy. As previously mentioned it takes significant time to diffuse information raise awareness and influence behavior on such a broad scale. It is crucial for credit unions to commit the planning time and resources to ensure the EMV switch happens smoothly and keeps what is most important at the heart of the migration your credit union member. Vadim Kagan is director of business development for Shoreline a Gemalto company. In this role he is responsible for the promotion and coordination of EMV-related activities for Shoreline clients and business partners. Prior to joining Shoreline Vadim worked at Serverside Graphics Sungard Data Solutions Reuters and Multex.com. A Juncture for Customized Services Value-added services like instant issuance personal card customization or even environmentally friendly biodegradable card options have proven to be in high demand with customers. 41 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE BY BRIAN GODWIN POLICYWORKS DIRECTOR OF REGULATORY COMPLIANCE Calm Before the Storm Use regulatory down time to check in on long-term compliance strategies T he regulatory seas are somewhat calm at the moment a rarity in this new climate of intense rule proposals. Credit union compliance managers may want to take advantage by giving some long-overdue attention to areas that may have taken a back seat to mortgage lending in recent years. Rest assured with TILARESPA rules in effect August 1 and an anticipated HUMDA rule soon to appear the mortgage department won t be left alone for long. Four areas you may want to turn attention to in the meantime are marketing deposit accounts Bank Secrecy Act (BSA) and consumer loans. Of course many of your members and prospects interact with you online. Perform a similar through-the-eyes-of-the-member audit of your website. Be sure to view it from as many different devices as possible. Are the proper disclosures provided based upon the content of the site Are they visible on a tablet or smartphone Are there any items that are potentially misleading or confusing to members and consumers Deposit Accounts Increasingly free checking is becoming a differentiator for all financial institutions. For that reason it can be tempting to refer to a deposit account as free no cost or something similar. Keep in mind however Truth in Savings requirements do not allow credit unions to use these terms if there are any maintenance or activity fees whatsoever on the account. If you ve made any changes to your deposit accounts double check to be sure corresponding advertisements or promotions have changed as well. Check account-opening disclosures to ensure they remain compliant. Ensure that all software updates have been installed and the newest forms are currently in use. If software has been Marketing To attract new members and keep existing members engaged your staff likely launches a series of marketing campaigns each year. This summer sit down with your marketers to understand the procedures in place to trigger inclusion of appropriate disclosures within each of your advertisements promotions and other marketing activities. Another suggestion is to review materials that have a tendency to stay in place for longer periods of time. Signage at your branches for instance becomes part of the everyday environment for staff. You may want to walk the lobby to see your credit union through the eyes of a member or prospect. Perform a quick spot check to make sure each of the following notices logos are properly addressed with signage HMDA Fair Housing Funds availability Patriot Act NCUA logos 42 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE updated it is important to check the disclosures to ensure there are no mapping issues. Review periodic statements to ensure information is accurate and all required information is disclosed. Evaluate Regulation D excessive transaction reports to ensure notices are being provided to members and those that continue to have excessive transactions are addressed appropriately. BSA There are essentially four components to sound BSA compliance the BSA compliance officer education training internal controls and independent testing. Review the credit union s BSA Policy to ensure the BSA Compliance Officer is identified. If the policy has not been updated for a period of time the designation may no longer be accurate. Has this role been reassigned since the policy s last revision Next check up on the officer s training. Periodic training especially as a credit union s risk profile or regulatory requirements change is critically important. But don t stop with the officer. Anyone with direct BSA responsibilities should receive training specific to their duties at least once a year. As well an overview of BSA should be given to all staff during new employee orientation. Now is an ideal time to review both the content and the timing of your BSA training program. Effective internal controls include policies procedures and processes that identify high-risk operations and satisfy regulatory reporting requirements. Take this opportunity to perform an update of the credit union s risk profile as well as to check-in on all reporting requirements. Are they being met at each branch Double check staff are engaged in these procedures and have a good understanding of their individual roles in BSA compliance. As for independent testing this is a perfect time to conduct a review of your audits. BSA testing should be performed by Loan Originator training You ve got this. Do you still need to satisfy your training requirements Look no further than the comfort of your own office. A new NMLSapproved self-study course is specifically designed for credit unions and meets the continuing education requirements of Reg Z. Enroll today at www.cuna.org MLO Check it off your to-do list Enroll today at www.cuna.org MLO OFFERED BY INSTRUCTED BY The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM 43 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE an independent internal auditor or an outside consultant every 12 to 18 months. The individual conducting the testing should not be the same person writing policies procedures or running your annual training. Findings should be reported to the board or a committee of the board. During this regulatory lull take a look at the results of your last audit. Was corrective action implemented and did it resolve the issues time are few and far between. Compliance officers senior management and boards of directors should take advantage of them when they can. Brian Godwin is director of regulatory compliance for PolicyWorks a national leader of credit union compliance solutions. He can be reached at briang policyworksllc. com. Consumer Loans There are several ways to perform a check-in on your credit union s various consumer loans. The first thing you may choose to do is to take a look at new account disclosures. Are they upto-date and accurate Second you may opt to perform some testing of your system especially if it has changed in recent years. Is the system calculating and applying payments correctly Is it alerting staff to trouble accounts when appropriate Do your procedures align so team members understand what to do upon receipt of such notifications For each of the above areas you may want to consider additional staff education. Review training records to see if there are any red flags or gaps. Refreshers for tenured team members and new information for employees who may have joined the credit union recently will ensure everyone is up-to-date and working on compliance as a team. Mortgage loan originators too may find now an appropriate time to receive their regulation-mandated training. To obtain a Reg Z safe harbor a loan originator may receive training approved by the NMLS for continuing education. To make this easier for these already busy individuals CUNA has launched an online SAFE comprehensive mortgage loan originator course that meets these requirements. The 8-hour course can be paused and restarted so staff can work at their own pace. Marketing deposit accounts BSA and consumer loans are just a few of the areas from which you may have felt pulled in recent years. The departments most in need of compliance maintenance at your credit union could be different. The exercise is about diligence but it s also about getting into the habit of checking in on the less obvious functions and programs of your cooperative when time allows. These moments of down Managing Risk Doesn t Have to Be a Juggling Act Visit autopilot.swbc.com or call 866.647.8749 today to learn more 44 C R E D I T U N I O N B U S I N E S S J U N E 2 0 1 5 C U B U S I N E S S . C O M insights An instance of capturing the true nature of a thing. Do you know your members Insights are everywhere and coming at you fast. To make the best of this information you have to know what to ask. Member Insight from PSCU is a set of tools that consolidates the details of your members spending habits to make for richer portfolio performance. After more than 35 years as the leading CUSO we know a thing or two about the true nature of credit union growth. pscu.com memberinsight 888.918.7357