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THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS THE TEAM BUILDING ISSUE CEO SPOTLIGHT Interviews with Top CEOs NOVEMBER 2015 VOLUME 10 ISSUE 11 Rod Staatz SCOTT MCCLYMONDS Leading Maryland s SECU into the Digital Revolution AUTO LENDING How Tower FCU Increased Auto Lending by 5 Million ERIC GAGLIANO LENDING SOLUTIONS What s Actually Behind Your Flagging Earnings Conundrum LORRIE WOHLFEIL CLE TABLE OF CONTENTS NOVEMBER 2015 VOLUME 10 ISSUE 11 Credit Union BUSINESS THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS 4 6 PUBLISHER S POV The Team Builder Program Is Up and Running Tim O Hara CEO VELOCITY 25 28 AUTO LENDING Accelerating Growth in Your Auto Loan Portfolio Eric Gagliano DATA ANALYTICS Rod Staatz Leading Maryland s SECU into the Digital Revolution Scott McClymonds Don t Take a Leap of Faith Sensible Strategic Planning for the Advanced Analytics Imperative Steven D. Simpson 11 13 15 PAYMENTS Rewards Program Pays Big Dividends for Citadel Chuck Fagan PLANNING 32 36 39 41 MEMBER BUSINESS LENDING Getting Started with Loan Participations Carpe Diem Ryal Tayloe TECHNICALLY SPEAKING A More Thoughtful Approach to Planning Kenneth M. Levey LENDING SOLUTIONS Tiny Big Shrimp Communication Culture and Dysfunction Adam Anderson CYBER SECURITY What s Actually Behind Your Flagging Earnings Conundrum The Answer Might Surprise You Lorrie Wohlfiel Cabrillo A Case Study in Credit Union Cyber Security Tom Neclerio DATA BREACHES 20 23 CFO CURRENCY Modeling Interest Rate Volatility Alex Hollis TECHNICALLY SPEAKING New Authorities Multiply Fines for Data Breach Non-Compliance Stephen Treglia Software Substantially Saves Christian Credit Union Scott Cowen 1 B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M U N I O N C R E D I T TAB THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim Ashok Kumar Associate Publisher ashok Patti Manzone Designer PUBLISHER S POV THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS THE TEAM BUILDING ISSUE CEO SPOTLIGHT Interviews with Top CEOs NOVEMBER 2015 VOLUME 10 ISSUE 11 Rod Staatz SCOTT MCCLYMONDS Leading Maryland s SECU into the Digital Revolution Tim O Hara CEO VELOCITY AUTO LENDING How Tower FCU Increased Auto Lending by 5 Million ERIC GAGLIANO Scott McClymonds PAYMENTS LENDING SOLUTIONS C Chuck Fagan PLANNING What s Actually Behind Your Flagging Earnings Conundrum LORRIE WOHLFEIL CLE M Y Kenneth M. Levey STRATEGIC PLANNING CM MY Marvin C. Umholtz LENDING SOLUTIONS CY CMY K Lorrie Wohlfiel CFO CURRENCY Alex Hollis TECHNICALLY SPEAKING SUBSCRIPTIONS Scott Cowen AUTO LENDING 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 register. SALES AND ADVERTISING Eric Gaglioni DATA ANALYTICS Steven D. Simpson MEMBER BUSINESS LENDING Tim O Hara Publisher tim or 561-282-6015 1 CONTACT INFORMATION Ryal Tayloe TECHNICALLY SPEAKING Adam Anderson CYBER SECURITY Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim Tom Neclerio DATA BREACH Stephen Treglio 2 C R E D I T U N I O N B U S I N E S S N O V E M B E R 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. traf c Copyright 2014 Cummins Allison Inc. All rights reserved. PUBLISHERS TAB POV BY TIM O HARA E The Team Builder Program Is Up and Running ver since we announced the Team Builder subscription program last month the reaction has been just terrific Credit union leaders just love the idea of helping every member on their executive team by providing them with timely and helpful information and best practices sent directly to their inboxes. Now the director of lending will learn about best lending practices from Rex Johnson s monthly Lending Solutions column and the CFO will receive the CFO Currency columns from Emily Hollis of ALM First Financial Advisors. What s more this content will reach them just after it leaves the editing department and in most cases before the magazine is even published. Now that s SERVICE What also excites these leading credit union professionals is the fact that 20 percent of their 500 group subscription or 100 goes directly to a favorite charity the Children s Miracle Network s Credit Unions for Kids campaign. It s a win-win for the CU and the CU s community And beginning early in January we ll post a daily shout out to the Team Building CUs on our website www. with a Wall of Fame represented by a map of the USA shining on participating credit unions for improving their CUs and their Communities with the Credit Unions For Kids donations. Both will hit home for participants. The information program extends from the CEO to the CFO COO CIO CLO CMO and Compliance Chief. Also included in this list is the Executive Assistant to the CEO who will also benefit from the team building. Signing up couldn t be easier. Simply send me a list of up to 10 executives with titles and email addresses along with a check payable CU BUSINESS Magazine which I ll share with the Kids 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 N O V E M B E R 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 t any branch con guration 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 letstalk 2014 Cummins Allison Inc. All rights reserved. CEO VELOCITY BY SCOTT MCCLYMONDS Rod Staatz Leading Maryland s SECU into the Digital Revolution This month s CEO spotlight shines on Rod Staatz chief executive officer of Maryland s largest credit union SECU. This Most Admired CEO recipient sits down with CU Business to discuss value alignment the credit union s future Millennial engagement and community involvement. In the process he reveals the secret to SECU s four-point winning strategy. O ne of the most rewarding aspects of my executive coaching and consulting business is meeting so many outstanding credit union CEOs across the country. This month was no exception as I had the opportunity to discuss leadership and strategy with Rod Staatz CEO of SECU in Maryland. SECU is Maryland s largest credit union with 22 branches throughout the state and an asset size of 2.8 billion. Rod has led SECU for 12 years and recently received the 2015 Most Admired CEO Award from the Maryland Daily Record. Recipients of that award are chosen based on their commitment to their businesses employees and communities. Since these attributes closely follow my 3 Cs of capital culture and community I was eager to speak with Rod. Our discussion touched upon SECU s strategy keeping a credit union aligned around its values the future of the credit union movement Millennials and community involvement. Rod Staatz CEO of SECU. business so tight alignment around core values vision and strategy is a must to have any success at all. CEO of the Year While noting that being named Maryland s Most Admired CEO was quite an honor Rod quickly pointed out that his senior team and staff are outstanding and vital to his success. Whenever I hear comments like that my mind immediately goes to organizational alignment meaning the level of focus an organization has around clearly defined objectives. Such concentration is one of the primary jobs of every CEO. Credit unions without alignment and focus are average or go out of 6 C R E D I T U N I O N B U S I N E S S A Two-Pronged Approach to Alignment Despite having a top-notch team Rod said no one is ever perfectly aligned. However it is something SECU works hard at by focusing on a balanced scorecard and exerting a ceaseless effort to help people understand and focus on SECU s why. For the scorecard SECU uses traditional financial ratios as well as measures such as how members rate the credit union s service the numbers of products and e-services members have loan growth loss ratios ROA and growth in active transaction accounts. N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY The CU s vision is to be known valued and utilized and to make a positive difference in the financial lives of its members. SECU s way of achieving this vision is through its core values of service education commitment and understanding (which also just happen to spell out SECU). The credit union s scorecard is designed to reflect how it is performing against the vision and core values. SECU s Four-Point Winning Strategy Focusing on the Wow ... in Person and Digitally Rod said it s unlikely that the credit union will ever be an innovator like Apple or a low-price leader like Walmart so SECU focuses instead on excellent service. While everyone talks about such excellence SECU is aggressively seeking to discover what that means to members and how the CU can measure it. The Wow SECU wants to convey is that it truly does care about its members. It sounds simple but it is definitely a winner if members can truly experience such caring. To achieve this Wow SECU has focused its strategy on three words easier faster and simpler. Those words describe SECU s goals for its member experience both for consumers and small businesses. Rod and his team want to be able to deliver service with a member-centric focus through any digital device immediately without waiting and they are focusing their resources in that direction. Obviously achieving this Wow requires keeping employees focused on truly caring about members while simultaneously investing in the technology to deliver the Wow in person or digitally. SECU s management believes it is critical to be the mobile wallet or at least a part of the digital wallet in order to provide the app-based services Millennials require. To that end the credit union is placing great emphasis on delivering its services in a much more streamlined way through digital channels. 7 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY Be Careful of Shiny Objects As an editorial comment based on my experience researching the dizzying assortment of technology options available to credit unions requires patience discipline and discernment. It is easy to acquire bright shiny technology objects that end up not playing well with your other systems so developing a wise technology and analytics strategy that supports your vision is more necessary than ever. You want to make sure your technology empowers employees and members instead of frustrating them. With the explosion of app-based services and their popularity with Millennials credit unions without a well thoughtout IT strategy can add a great deal of expense and waste in this area if they are not careful. Fortunately services such as Linqto s App Store and Otter service are available that can help credit unions choose and brand the most appropriate apps for their members while also receiving helpful analytics on app utilization and member behavior. decisions during the course of their lives. Listening to them carefully and taking care to address their concerns is a great way to gain lifetime loyalty and positive recommendations to their friends and family. Collaborating with Other Credit Unions In addition to investing in digital and attracting younger members a third element of SECU s strategy is collaboration with other credit unions. Rod believes this will be a critical success factor for credit unions in the next three to five years and he said credit unions need to be willing to give up a little control to create streamlined lower-cost processes especially in back-office functions. As an example since 2008 SECU has been involved in a partnership with two other credit unions to consolidate its backoffice operations including deposit operations collections real estate origination and a host of other functions. The partnership called S3 reduces operating costs and frees up more money for technology investments. At the same time it delivers value to members and the community. As CEO Rod has to lead the effort at SECU and has set the tone for this collaboration. He said that all three CEOs in the partnership are aggressive and progressive in their credit unions. In the collaborative arrangement however they all have to check their egos at the door and determine what is in the collective best interests of all three credit unions. I asked Rod if he had considered turning the collaboration into a business that served other credit unions and enabled the partners to deliver more money to their members. He told me they had considered it but decided not to pursue the idea at this time. Adding other credit unions would create complexity that would require additional time money and attention from each CU and that brain drain could potentially dilute the service quality each credit union delivered to its members. From my perspective one logical area of collaboration among credit unions is big data and analytics. This function is critically important to the credit union of the future but highquality people and systems are not cheap. Collaboration is a great way to receive the benefits of professionals while absorbing only a fraction of the cost. Attracting Younger Members As Vice-Chair of CUNA s Board of Directors Rod has deep insight into the industry s direction. He told me it is essential for credit unions to decipher the best ways to appeal to young people and build a strong base of them for the next 10 to 20 years. To this end SECU has complemented its digital strategy by developing partnerships with nearby universities such as Towson State University and the University of Maryland. SECU s focus at Towson State and Maryland has been on improving financial literacy. Besides being the right thing to do Rod believes in exposing young adults to credit unions during their college years so they can clearly see the positive effects credit unions can have upon their lives. Beyond financial literacy SECU has forged a strong partnership with Towson State as part of its growth strategy. The credit union recently acquired naming rights to the university s new arena and it has frequent communication with faculty and staff. As SECU has experienced partnering with a university is an excellent way to stay up to date with the needs and expectations of young adults especially as credit unions seek to grow their brands among Millennials. It s like having a built-in focus group while helping these young adults prepare to make wise financial 8 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY Keeping the Fire Lit With all the transformation occurring in the financial services industry I was curious about how Rod keeps up with the pace of change. In today s environment having a forward-thinking CEO is essential for any credit union that wants to remain relevant stay financially strong and impact its community. If a CEO stops growing and begins to stagnate as many do the rest of the organization will follow suit. According to Rod CEOs absolutely can stagnate if that s what they choose to do. Unfortunately I have witnessed this stagnation many times and it has a debilitating effect on others in the organization who want to keep improving. One CEO of a small institution recently told me I m in cruise control until retirement. I like our business model I m comfortable with it and I don t mind admitting it. I won t judge that CEO but I know his employees are suffering because his mindset is squashing their ideas to move forward. Obviously Rod is the very opposite of the CEO I just described. To keep growing and up to date he reads voraciously to help him understand what businesses are doing around the nation what s working and how SECU can benefit from it. Rod also gets involved in CEO roundtables with CEOs of other large CUs. I recently attended a CEO roundtable of chief executive officers from across the nation and it was easy to see that they enjoyed the discussion and benefitted from it. From my experience both as a moderator and participant in these types of forums having a workable number of the right people as well as the right format will determine whether or not they create value. You want these groups to challenge you and even make you feel uncomfortable in order to become a better leader and strategist. If you re really brave you will ask members of your group to hold you accountable for addressing particular issues. Groups like this which can be facilitated by video-streaming technology can even lead to the types of cooperative efforts forged by Rod and his two other partners. 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 Email scottm to request a free paper on how to find and close earnings gaps in your credit union. scottm 479.263.0774 U N I O N C R E D I T B U S I N E S S Scott McClymonds is one of the most creative strategists in the financial services industry. - Elio Spinello Principal RPM Consulting 9 N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY Another source of CEO growth Rod recommends is being connected to the community as well as the industry. Sitting on boards and taking leadership roles in the community gives him perspective on what s going on in his marketplace and being on the CUNA board gives him not only a view of issues affecting the industry but also an opportunity to influence them as well. Summary Clearly the credit union movement is in a period of rapid and extensive transformation. To some extent it s sink or swim. CEOs cannot afford to stand by and be content with the old business model. As the next generation becomes more prominent and influential management teams will need to change their model and mindset to remain relevant. Longstanding relevancy is achievable but credit union CEOs must take the same mindset as forward-thinking CEOs like Rod Staatz who is aggressively leading SECU into the digital revolution. Scott McClymonds is an executive coach and consultant who helps credit union CEOs raise the bar on their financial performance relevance to members and community impact. His real-world expertise in aligning leadership employees and systems to generate high-impact results helps his clients build sustainable competitive advantages. A regular speaker at conferences and a contributor to credit union publications Scott has been called a pragmatic visionary and one of the most creative strategists in the financial services industry. He can be reached at scottm 479.263.0774 or https www.linkedin. com in scottmcclymonds. Scott has more resources for CEOs at CEO Challenge Exercise 1. What are your core values and strategy and how are you aligned around them 2. List your goals and see how they tie back to your core values and strategy. Do this for every division of your credit union. 3. What process do you have in place to communicate these values and strategies throughout your credit union 4. What is your mobile and digital strategy 5. How do your members rate their digital experience with you 6. Where do you want to be with digital and mobile in three to five years 10 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M PAYMENTS BY CHUCK FAGAN PSCU PRESIDENT & CEO Rewards Program Pays Big Dividends for Citadel What kind of incentives does your credit union offer on its debit and credit cards If you re not meeting the expectation of cardholders in terms of rewards you may be missing out on a revenue goldmine. See how one CU drove significant sales growth through the addition of a total loyalty program. C ardholders expectations for value in their most frequently used (top-of-wallet) credit or debit card have risen to rather lofty levels. Back in the day when credit cards first appeared on the payments scene many folks were happy just to get a credit card because it extended their buying power in the absence of ready cash on hand. But now people expect far more. What was once an optional component is now essential to card program growth. Today rewards incentives double points charitable donations cash back sweepstakes contests and lifestyle perks are necessary add-ons for issuers to effectively drive consumer acceptance and usage. A solid rewards program is quite often the top reason consumers choose one card over another. We like getting stuff when we spend. And when we do we spend more. It s a fact. Cardholders with a rewards card spend on average 60 percent more and conduct 30 percent more transactions than non-rewards cardholders. Rewards are a differentiator. Let me tell you a present-day rewards story . . . Rewards in Action at Citadel Citadel a credit union based in Exton Pennsylvania reports a strong overall portfolio due to participation in rewards programs. Citadel is a 10-year PSCU member and has worked with PSCU to introduce and even customize several rewards programs for its members since 2004. In 2008 Citadel added CURewards to its debit cards and has averaged a 12 percent growth on debit sales year over year since then. Due to the successes from the cashback programs which were introduced in 2011 Citadel worked closely with PSCU to launch a cash rewards card and a pilot Cash Back Mall in May 2015. An additional merchant-funded piece was added to give members the opportunity to earn even more points and redeem them where they want. Citadel optimizes rewards programs aimed at increasing usage and giving back to members which includes participating in PSCU s Magic MinuteTM sweepstakes. Magic Minute is a program that recognizes and rewards credit union members for their trust and loyalty to their credit union. The event itself a 60-second dash through a warehouse packed with highend merchandise is a different take on the classic rewards program model. It is geared toward bringing the credit union spirit to life and providing a way for credit unions to achieve deeper engagement promote loyalty and drive usage overall. Last year s Magic Minute dashers loaded up on MacBook Airs 11 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S N O V E M B E R PAYMENTS iPads Canon EOS Rebel DSLR cameras Dyson vacuums Dooney & Bourke designer handbags 50-inch flat-screen TVs and other goodies worth about 36 000 altogether. The Magic Minute sweepstakes is open to all PSCU member-owner credit unions that are enrolled in the company s CURewards loyalty programs. The sweepstakes aims to benefit participating credit unions through increased membership higher card activation and usage rates and the gathering of cardholder e-mail addresses for use in future targeted marketing campaigns. Loyalty is a two-way street that rewards both members and their credit unions. For more information on PSCU s Total Member Loyalty Rewards program visit loyalty. Total Member Loyalty Rewards The most effective rewards programs are built for the unique needs of credit unions like Citadel and their members with a goal of increasing loyalty that ultimately translates into growth. A consultative and custom approach to loyalty programs allows credit union members to address their specific needs and create a rewards program that targets their unique objectives. PSCU has collaborated with hundreds of credit unions and has helped them build successful rewards programs that truly engage members build relationships and grow program value and profitability. So rewards programs now need to consider the entire scope of a member s relationship with their credit union not just the debit or credit card account. PSCU s Total Member Loyalty Rewards program has generated record sales growth and has increased engagement for credit unions since its launch. Three million cardholders and 280 credit unions currently utilize PSCU s rewards platform to successfully build member relationships and increase revenue. Started nearly 20 years ago the CUSO s rewards program has evolved based on member and market needs and is driven directly by input from member-owner credit unions. Total Member Loyalty Rewards offers five programs tailored to connect with members lifestyles Transaction Level Rewards Member Loyalty Rewards Rebate Rewards CURewards Select and CURewards Mall. Credit union members enrolled in the company s rewards program can use the CURewards mobile app to view merchandise redemption options check on points and review offers. Members can also use the mobile app to redeem points for special travel offers and hotel bookings. 12 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M Chuck Fagan President and CEO of PSCU PLANNING BY KENNETH M. LEVEY VP FINANCIAL INSTITUTIONS AXIOM EPM A More Thoughtful Approach to Planning Is your credit union leveraging scenario planning to its maximum potential This tool is becoming an increasingly indispensable one for CUs in terms of both risk avoidance and growth identification. Find out which type of scenario planning is right for your financial institution and how you can put more thought into implementing it. hile scenario planning is not a new concept (asset liability models have been used for decades to help credit unions better understand the true volatility of their financials) we are seeing rapid recent adoption in its application. In a recent survey conducted by Axiom EPM nearly 30 percent of financial institutions state that they regularly process and present alternative financial scenarios representing a jump from just 19 percent one year ago. Scenario planning helps credit unions better manage uncertainty by providing alternative views of the future against which proposed strategies tactics and budgets can then be tested. When done well scenario planning becomes a valuable tool not just for avoiding risk but for identifying and seizing growth opportunities whether it involves a simple sensitivity analysis approach or a more formalized storyline-based scenario. for its simplicity it is still incredibly helpful to call attention to how a single change in an underlying driver variable can impact the credit union. Multi-variable narrative-based scenario planning follows a particular storyline to measure the impact of various uncertainties occurring jointly. For example credit unions could piece together the possible relationships of market factors they are certain of and factors that are more difficult to predict such as volume and rate changes. Initiative-based scenario planning packages different sets of initiatives into a composite plan or strategy. Stakeholders can develop various self-contained initiatives such as adding a new branch or product inclusive of a full set of financials. Using this approach credit unions can better manage overall goals and operating constraints by layering various combinations of initiatives on top of a baseline. Stochastic-based modeling is typically a computer simulation model that employs random number generation processes against a key variable (or variables) to determine profitability distributions of outcomes. These types of models generate thousands of scenarios. Stochastic modeling can be used to model interest rates and commodity prices among other factors which can be incredibly helpful to manage risk. Most credit unions have the desire to adopt scenario planning but they often lack the required bandwidth. The budgeting process can be incredibly challenging and many credit unions spend hundreds if not thousands of hours completing a single budget based on just one underlying set of assumptions. 13 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M W Types of Scenario Planning There are four primary types of scenario planning most commonly used by credit unions today Single-variable sensitivity analysis changes one variable at a time while holding the others constant to quantify the impact of that singular change. This approach is a great starting point as it is generally the easiest to model but still helps credit unions identify which drivers or model inputs will have the most impact on the institution. While this approach is sometimes criticized PLANNING Additionally credit unions cite common challenges related to technology configuration and data deficiencies as obstacles to implementing a robust scenario planning strategy. Overcoming Common Hurdles In the recent Axiom EPM survey seven out of 10 financial institutions state that the time needed to model multiple scenarios is one of the biggest hurdles in scenario planning but the reality is that scenario modeling does not need to be a significant time drain. Well-designed modeling technologies that combine the right data and business logic have the ability to create multiple scenarios very quickly. For instance a singlevariable sensitivity analysis approach should take only a short time to process. With the right technologies in place the more involved story-oriented scenarios should take a day or even a few hours not months to process. More often than not however a credit union s underlying planning technology was not designed to quickly create and process multiple scenarios. More than three-quarters of financial institutions leverage Microsoft Excel as their undisputed tool of choice but spreadsheets fall short in managing and incorporating a credit union s financial and operational data. There are many forecasting solutions available that support scenario modeling in their data structure but many fail to deliver a robust business logic layer that is easy to set up and maintain for ongoing modeling. To mitigate data deficiencies the technology system s implementation team must invest time in configuring models that have robust cause-and-effect relationships built into the business logic layer of the application. General ledger history cannot serve as a credit union s primary data source for planning. Simply inputting a credit union s income and expenses to aggregate results fails to account for variables both internal and external that have critical influence on the institution s financials. Additionally the storage of these internal and external variables must be dynamic enabling the ability to easily adjust extract and plug in driver assumptions as needed which simply cannot be achieved solely with spreadsheets. The interplay between these variables and financial outcomes is the heart of any scenario planning model. With this level of insight credit unions can model externally-oriented scenarios that focus on demographic shifts competitors entering exiting the market and new partnerships as well as internally-oriented scenarios that focus on new service lines or products changes in productivity and workforce growth expectations or a blend of both. How to Get Started The best way for a credit union to implement a more thoughtful approach to scenario planning is to first conduct a workshop with its key stakeholders to shape the most relevant scenarios for the institution. Stakeholders should identify key business drivers and then rank them in order of their impact or influence upon the institution. A credit union s planning team should also rank those business drivers based on their level of uncertainty. Drivers that are both highly influential and relatively uncertain typically represent the best opportunities for scenario modeling. These types of drivers are great candidates for a single-variable sensitivity analysis scenario or a more comprehensive multivariable storyline scenario (provided they are not mutually exclusive). When it comes to planning too many credit unions are content with completing the budget or forecast without addressing the issue of uncertainty. A false sense of security is thus created because underlying assumptions are treated as facts rather than assumptions masking both exposure and opportunity. Taking a more thoughtful approach to planning sheds light on biases that are otherwise hidden expanding the scope of what is possible with regard to a credit union s strategy. Kenneth M. Levey is the vice president of Financial Institutions for Axiom EPM a leading provider of financial planning and performance management software for financial institutions. For more information visit www. 14 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS BY LORRIE WOHLFEIL CLE What s Actually Behind Your Flagging Earnings Conundrum The Answer Might Surprise You Why should loan growth be a top priority for your credit union Because when it comes to outperforming your peers everything else hinges on such growth. Credit Union Business s lending expert uses cases studies to illustrate the keys to growing both yield and ROA. Some of these strategies may not be what you think. t Lending Solutions Consulting Inc. (LSCI) credit unions almost universally contact us for help with how to boost their return on assets. This has become the measure of performance for credit unions and is a tool to see whether you are outperforming or underperforming against your peers. Much like receiving a passing grade in school achieving a positive ROA is not an entitlement but it has become a mandatory requirement. If you can outperform peers and achieve an ROA over one percent you have made the Dean s List. Again much as achieving the Dean s List in school is acquired through hours of studying understanding why some credit unions can achieve strong earnings and others struggle requires the same analytical approach. To begin our discussion we believe there are distinct characteristics credit unions that continually outperform their peers and achieve a high ROA have in common 1. Loan-to-share ratios above 90 percent. 2. Net loan yields of 7.5 percent Net yield is described as gross yield less charge-offs. 3. Unsecured loans that comprise 15 percent to 20 percent of the total loan portfolio. 4. Mortgage loans that comprise 40 percent or less of a total loan portfolio A target should be on acquiring a greater segment of the non-conforming loan business. A 5. A 13 percent to 15 percent spread in their rate matrix. 6. Between 15 percent and 20 percent D & E paper This has to be largely acquired through smart car loans where the payments are reasonable for the salaries backing them forced payments are in place and evidence of stable jobs exists. 7. Delinquencies and charge-offs higher than peers This is not a misprint. 8. Double-digit loan growth. Bullet points number 1 and 8 both pertain to total loans and loan growth goals. It is the core belief of our organization and what LSCI was founded on that everything follows loans. The following charts taken from a credit union s financial 15 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S N O V E M B E R Investments 37 000 000 245 000 LENDING SOLUTIONS performance reports will point out to you the significance of making loan growth a top priority. As a credit union s loan-toshare ratio declines so does its ROA. For XYZ Credit Union since 2011 total loans outstanding has dropped by 4 000 000 with a reduction in loan to share of 35 percent. In that same time period ROA has also declined by approximately 50 percent. Bullet point 7 on the successful credit union characteristic list often surprises credit unions and can go so far as to make them nervous. Going back countless years credit unions have been preached to that the good word states to keep losses at bay. In fact it s not hard to do this. If you loan your money out to only the highest-qualified members at your credit union with the added security of collateral you will in fact have very low delinquency and ultimately losses. The problem becomes that your spread between your loans and investments isn t enough to cover expenses and as a result your yield will struggle. This tendency will be discussed in further detail later. You can loan your money out with very low delinquencies can loanlose money out with very low delinquencies You and your a substantial amount of and lose a substantial amount of money. money. Relationship among Delinquency ROA & Loan Yield 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2013 ROA 2014 Delinquency Jun-15 Loan Yield Everything Follows Loans Credit unions will continue to get squeezed if they keep their The above chart reflects the following for XYZ Credit Union. money in investments instead of loaning it out. The following Delinquency has decreased by 42 percent since 2013 chart illustrates how critical it is to increase loans outstanding. however earnings have decreased by 34 percent. While Credit unions will continue to get credit union keep their money in investmentsin loan You can see that this squeezed if they made 560 000 more instead of we don t endorse higher losses most credit unions loaning it out. The following chart illustrates how critical it is to increase loans outstanding. You can see that thiswith almso 12.6 million in loaninvested in loans. million less income credit union made 560 000 more less income with almso 12.6 that make the most money have a higher tolerance for invested in loans. loss. This is because they understand that their overall Total Income earnings driven by a lucrative yield will be higher due to Loans 24 445 000 805 000 Investments 37 000 000 245 000 The above chart reflects the following for XYZ Credit Union. a higher tolerance for risk. This concept will be discussed Delinquency has decreased by 42 percent since 2013 however earnings have decreased by 34further detaildon t endorse higher losses most credit unions that make the in percent. While we below. most money have a higher tolerance for loss. This is because they understand that their Bullet point 7 on the successful credit union characteristic list often surprises credit unions and overall earnings driven by a lucrative yield will be higher due to a higher tolerance for Bullet as to make on the successful countless years characteristic list can go so far point 7them nervous. Going backcredit union credit unions have been risk. This concept will be discussed in further detail below. preached to that the good word states to keep losses at bay. In fact it s not hard to do this. If often surprises to only the highest-qualified members at your creditmakewith the Are we applauding the wrong criteria credit unions and can go so far as to union them you loan your money out Are we applauding the wrong criteria added security of collateral you will in fact have very low delinquency and ultimately losses. nervous. Going back countless years credit unions have been The problem becomes that your spread between your loans and investments isn t enough to Credit Union 1 Least Desired cover expenses andto result your yield will struggle. This tendency willlosses at bay. preached as a that the good word states to keep be discussed in further detail later. Loan Unsecured Year Loan Yield Loan Income ROA In fact it s not hard to do this. If you loan your money out to Delinquency Growth 2012 1.37% 5.4% 6.33% 5 869 849 0.87% You can loan your money out with your delinquencies only the highest-qualified members at very lowcredit union with 2013 0.59% 4.1% 5.69% 5 217 594 0.38% and lose a substantial amount of money. the added security of collateral you will in fact have very low 2014 0.60% 1.9% 5.15% 4 839 355 0.53% Mar 0.44% 4.5% 4.86% 1 174 981 0.38% delinquency and ultimately losses. The problem becomes that Relationship among Delinquency ROA & 2015 30 percentile Loan Yield your spread between your loans and investments isn t enough 5.00% to cover expenses and as a result your yield will struggle. This Credit Union 2 Most Desired 4.00% tendency will be discussed in further detail later. 3.00% Loan Unsecured th 2 Year 2012 2013 2.00% 1.00% 0.00% 2013 ROA 2014 Delinquency Jun-15 Loan Yield Delinquency Growth 2.01% 2.22% 1.78% 1.22% 83rd percentile 24.1% 22.1% 3.4% 5.3% Loan Yield 6.42% 6.09% 5.92% 5.79% Loan Income 15 646 253 17 118 280 18 827 751 4 876 556 ROA 1.67% 2.14% 1.86% 2.28% 2014 Mar 2015 2 16 C R E D I T U N I O N B U S I N E S S We applaud ourselves for lowering losses however look at the relationship between appetite for risk and yield. (Look at the differences on the previous charts between both credit unions.) Credit Union 2 s delinquency is 176 percent higher. (Note Both credit unions have reduced their delinquencies.) Credit union 2 has earnings that are 500 percent higher. Which credit union do you want to be N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M 3 LENDING SOLUTIONS We applaud ourselves for lowering losses however look at the relationship between appetite for risk and yield. (Look at the differences on the previous charts between both credit unions.) Credit Union 2 s delinquency is 176 percent higher. (Note Both credit unions have reduced their delinquencies.) Credit union 2 has earnings that are 500 percent higher. Which credit union do you want to be What does the relationship between earnings and yield show Bullet points 2 3 and 4 pertain to loan yield and portfolio mix. While a decline has happened industry wide due largely to the economy credit unions have to stop hiding behind this excuse. The prime rate has been flat and industry trends suggest auto rates are increasing. The declining trend should be closely analyzed and reversed. It is my belief that the majority of credit unions declining loan yields are due to portfolio mix appetite for risk and pricing and not exclusively uncontrollable outside factors. In the previous chart you will see that the credit union making the Dean s List has a yield that is almost one percent higher than its peer. There is no question that loan yield can measure your earnings success and what your appetite for risk is. 17 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS What does the relationship between earnings and yield show What does the relationship between earnings and yield show points 2 3points 4 pertain to loan to loan yield portfolio mix. Whilea a decline has happened Bullet and 2 3 and 4 pertain yield and and portfolio mix. While decline has happened y wide industry wide due the economy creditcredit unions have tostop hiding behind this this excuse. due largely to largely to the economy unions have to stop hiding behind excuse. me rateThe prime rate hasand industry trends suggest auto rates are increasing. TheThe declining has been flat been flat and industry trends suggest auto rates are increasing. declining trend should be closely and reversed. It is It is belief that the majority credit unions hould be closely analyzed analyzed and reversed. my my belief thatthe majority of of credit unions declining loan yields are due to portfolio mix appetite for risk and pricing and not exclusively ng loan uncontrollable outsideportfolio the previous chart you will andthat the credit union making the yields are due to factors. In mix appetite for risk see pricing and not exclusively ollableDean s List has a yield that isprevious chart you will see that the creditquestion making the outside factors. In the almost one percent higher than its peer. There is no union that loan yield that is almost one percent higher than appetite There is List has a yieldcan measure your earnings success and what yourits peer.for risk is. no question that What earnings success and looks like eld can measure youra declining yield what your appetite for risk is. What a declining yield looks like Year Dec 2011 Loans Outstanding 317 560 000 What a declining yield looks like Loan Yield 5.37% Loan Income 17 052 000 Portfolio Allocation 300 000 000 250 000 000 Year Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2012 Dec 2014 Jun 2015 Loans Outstanding 354 930 000 354 930 000 393 980 000 411 100 000 Loan4.83% Yield 4.54% 5.37% Loan Income 17 143000 17 886 000 17 052 000 17 882 000 8 990 000 Dec 2013 393 980 000 317 560 000 422 100 000 4.83% 4.54% 4.35% 200 000 000 150 000 000 4.26% 17 143000 411 100 000 4.35% 17 882 000 peak from 2011 the credit union and be on track earn loans outstanding Averaging December 2014wouldJune 2015tototal approximately 22 370 000 in 50 000 000 loan income. What would an additional 5 000 000 do for this credit 8 990 000 line union s bottom Jun 2015 422 100 000 4.26% and utilizing XYZ yield peak from 2011 the credit union would or yours 0 2011 2012 2013 2014 2015 be on track to and approximately loans outstanding Not all total 22 370 000 in loan utilizing Averaging December 2014earn June 2015 loans are created equal chart andincome. XYZ yield Real Estate Loans Unsecured Loans Other Loans peak from 2011 the credit union would 5 000 000 to earn this credit union s be on approximately 22 370 000 in What would an additional 2012 track do for 2014 2013 2015 The above loan income. What wouldLoanadditional 5.1% an Yield 5 000 000 do for 4.32% this credit union s bottom line chart reflects that the majority of ABC CU s growth is occurring in its lowestbottom line or yours 4.6% 4.21% yielding product. or yours ROA 0.56% 0.40% 0.32% 0.24% The above chart reflects that the majority of ABC CU s growth Bullet point 6 references appetite for risk. Credit unions deny far too many loans. When your % of Real Estate 52.00% 59.00% 66.00% 67.00% is occurring in its lowest-yielding key elements lenders are looking at a loan they should focus on twoproduct. with FICO scores Not created created equal chart Not all loans areall loans areequal chart The above table reflects the following Bullet point 6 references appetite for risk. Credit unions deny The negative relationship between real estate and loan yield. (You could 1. What would the score be if it was based on repayment with the credit union exclusively 2012 auto2013 and the negative impact2015 be 2. far too manyscore be if When your lenders are looking loans (i.e. 2014 substitute real estate for A A loans would the What would the loans. you were measuring performance on like at a loan purchasing an auto and analyzing past auto performance) Loan Yield 5.1% 4.6% 4.32% 4.21% same.) they should focus on two key elements with FICO scores ROA The negative relationship between a declining loan yield and ROA. 0.56% 0.40% 0.32% 0.24% % of Real Estate desired data credit union 2 averaged 11 percent growth and more critically more loans with sought-after lucrative yields. Many credit unions from 59.00% 66.00% 67.00% in union 1 least 52.00% 100 000 000 Averaging December 2014 and June 2015 total loans outstanding and utilizing XYZ yield 17 886 000 When Referencing the credit union 2 most desired data above versus the credit your lenders do this they will start being able to approve far more loans than they are now their Boards of Directors down to their employees fear having 15 percent to 20 percent of their unsecured loans over the past four years while credit union 1 averaged negative 1. What would the score be if it was based on repayment portfolios three percent growth. The correlation between yields and product mix growth is in D and E paper. They fear becoming known as a sub-prime shop. I will argue The above table reflects the following the following with the credit union exclusively illustrated and also supports that all loans The above table reflects the following are indeed not created equal. The negative relationship between real estate and loan yield. (You could Bad things happen to good people. substitute The negativeA A auto loans and the real estate and would be 4 pay their credit unions oftentimes when theyif youone else. measuring real estate for relationship between negative impact loan People 2. What would the score be pay no were the Your sub-prime rates are far lower than what you will be throwing your member to when same.) performance on like loans (i.e. purchasing an auto yield. (You could substitute real estate for A A auto you deny them. The negative relationship between a declining loan yield and ROA. You have A andanalyzing past auto performance) you. and B members who will file bankruptcy against loans and the negative impact would be the same.) Referencing the credit union 2 most desired data above versus the credit of your D and E past bankrupts represent far less risk than your indebted low Some union 1 least desired data credit union 2 averaged 11 percent growth in members that are trending down. The negative relationship between a declining loan yield A trend of the score is The unsecured loans over the past four years while credit union 1 averaged negativeyour lendersfar more important thanstart being able to approve do this they will where it is today. When Your staff and ROA. The correlation between yields and product mix growth is if trained properly should be in the business of helping members re-establish three percent growth. their scores. far more loans than they are now and more critically more illustrated and also supports that all loans are indeed notdesired equal. Referencing the credit union 2 most created data above versus the credit union 1 least desired data credit union 2 averaged 11 percent growth in unsecured loans over the past four years while credit union 1 averaged negative three percent growth. The correlation between yields and product mix growth is illustrated and also supports that all loans are indeed not created equal. 18 C R E D I T U N I O N B U S I N E S S loans with sought-after lucrative yields. Many credit unions 4 from their Boards of Directors down to their employees fear having 15 percent to 20 percent of their portfolios in D and E paper. They fear becoming known as a sub-prime shop. I will argue the following Bad things happen to good people. 5 N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS People pay their credit unions oftentimes when they pay no one else. Your sub-prime rates are far lower than what you will be throwing your member to when you deny them. You have A and B members who will file bankruptcy against you. Some of your D and E past bankrupts represent far less risk than your indebted low A members that are trending down. The trend of the score is far more important than where it is today. Your staff if trained properly should be in the business of helping members re-establish their scores. Lorrie Wohlfeil began her career at LSCI in August of 1995. As a business analyst Lorrie is primarily in charge of the Portfolio Analysis program an external audit dedicated to helping credit unions make stronger loan decisions and seek sales opportunities. Lorrie also works hand in hand with our onsite consultants and has attended numerous Rex Johnson University of Lending and specialty schools. Before starting the Portfolio Analysis program Lorrie designed the highly successful training program in place at Lending Solutions Inc. (LSI) and personally trained many of the loan underwriters at LSI. Lorrie also spent four years as an onsite consultant for LSI. During that time she not only educated credit unions on lending but also trained their staff to make superior lending decisions. Lorrie graduated from the University of Kansas with a degree in Business Communications. millennials A generation marked by increased use of social media and digital technologies. Would this ad matter to the generation that can make or break a brand within a few keystrokes These digital natives are the current prime target for credit unions everywhere and PSCU has the social media tools and insights you need to reach them in a way that s relevant. The leading CUSO for 30 years we know a thing or two about embracing change and having conversations that matter. Let us show you how. 888.918.7357 19 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY BY ALEX HOLLIS ASSOCIATE ADVISORY SERVICES Modeling Interest Rate Volatility In the financial arena volatility is virtually unavoidable. But there are ways to circumvent the risk and uncertainty. Interest rate volatility modeling is one of these workarounds. Read on to learn why such modeling techniques are vital to sound interest rate risk management at your credit union. C onventional financial wisdom equates risk to volatility. Understanding volatility is to understand that we invest in markets characterized by uncertainty. Volatility in interest rates has a major impact on the pricing of financial instruments with embedded options such as mortgages callable bonds and interest rate derivatives. Therefore modeling interest rate volatility is vital to sound interest rate risk management. Modeling interest rate volatility is essential because options are widely present in a variety of financial instruments on a typical balance sheet. The presence of options means cash flows are contingent on the path of interest rates. Simple discounting methodologies cannot capture the effect of path dependencies thus making it necessary to use interest rate volatility modeling techniques. Lattice-based models and the Monte Carlo stochastic approach are the most commonly used methods to model interest rate volatility. The nature of the instrument being valued determines which method is more appropriate. In general lattice-based valuation most commonly binomial option pricing is sufficient for weakly path-dependent instruments but the Monte Carlo approach is necessary for strongly path-dependent instruments. Weakly path-dependent instruments have cash flows that depend only upon prevailing interest rates whereas with strongly path-dependent instruments ... cash flows are reliant upon the path rates have traveled in the past as well as present interest rate levels. Weakly path-dependent bonds include callable bonds interest rate caps and floors range floaters and swaptions whereas strongly path-dependent instruments include mortgage loans mortgage-backed securities collateralized mortgage obligations and index-amortizing notes. While a Monte Carlo simulation theoretically could be used to value weakly path-dependent instruments lattice-based valuations provide satisfactory valuation results with fewer computational requirements. Lattice-based techniques use interest rate trees which make assumptions about the future path of interest rates. Nodes are constructed with each node representing a discrete point in time in which interest rates can follow one of two movements up or down. The magnitude of each movement is determined by the interest rate volatility assumption in the model. The time interval of the nodes is called the tree step. Once the tree is created the option payoffs are calculated at each node and the present value of these expected cash flows is calculated to derive the value of the option. The value of the option becomes larger as the volatility assumption is increased due to the larger payoffs created from the more extreme movements in interest rates. Remember option values can never be negative so greater volatility increases the upside payoffs but the downside is floored at zero. Exhibit 1 shows an example of a two-period interest rate tree with a yearly step producing a total of six nodes. In practice interest rate trees are quite a bit larger because steps are typically in days think tens of thousands of nodes Step sizes typically range from daily to monthly but they should not be greater than monthly. 1 ZM Financial Systems Inc. (2013). Formulas and Methodologies. C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M 20 CFO CURRENCY Exhibit 1 Two-Period Interest Rate Tree with Yearly Steps Now that we have explored lattice-based option pricing let s review the techniques of the Monte Carlo approach. The Monte Carlo approach is an application of stochastic modeling. Stochastic by definition means random and represents the converse of a deterministic process. A deterministic process includes no parameters for variability (volatility) or randomness whereas a stochastic process allows for such randomness according to the parameters of the model. The major implication of a stochastic versus deterministic model is that a deterministic model cannot properly model options. Interest rate volatility is a required input for option pricing. Stochastic modeling is rapidly becoming the norm and is frequently used in financial modeling considering financial markets exhibit random variability. To model interest rate volatility a Monte Carlo simulation creates many specific interest rate paths with each path producing its own unique set of cash flows. The value of an instrument using the Monte Carlo approach is the average of the present values calculated over the many paths. The Monte Carlo approach is an iterative process that repeatedly generates interest rate paths using the inputs employed in the model. These inputs determine the number and dispersion of the paths. The basic inputs for a Monte Carlo simulation include the interest rate model number of paths and in some cases a mean reversion speed. Also required is an assumption for interest rate volatility. The interest rate model defines the behavior of interest rates and how they evolve over time. The most basic of such is a one-factor interest rate model also known as a short-rate model so named because future interest rates are determined by the variability of one rate the short rate. The short rate is a theoretical meaning not directly observable monthly rate and it is derived from the current-term structure of interest rates. Once the short rate is derived the variability of all interest rates is driven by the variability of the short rate. Short-rate models thus suffer from the drawback that there is only one factor driving interest rate variability. Multi-factor interest rate models are more advanced and allow for multiple sources of interest rate variability from which future rates evolve. Exhibit 2 illustrates a 100-path Monte Carlo simulation of one-month LIBOR over 60 months using ZM Financial Systems proprietary short-rate model and a mean reversion speed of 0.12. In this case the deterministic path is determined by implied forward rates and is emboldened. Remember if a stochastic process is not used then the evolution of interest rates has no variability within the model and is assumed to follow a single path with certainty. Exhibit 2 60-Month Monte Carlo Simulation of OneMonth LIBOR 100 Paths 21 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY CFO CURRENCY CURRENCY CFO CFO CURRENCY are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. Credit will need to be assumptions used should be changed government bond inputs allow the user to model cash flows with an end maturitybenchmark if budget surpluses dry up thein progressive intervals reviewed and authorized and market. the output should be recalculated to determine the impact and They have already become the standard for pricing and decay rates that are similar to amortizations. this can take weeks. Interest rate and discount multi-dimensional complex topic. many corporate bonds. Dividend volatility is a rates allow for the present value of a different assumption. If you are uncertain as to There are many ways to model it with varying degrees of calculations (premiums) in each modeled interest rate scenario. Knowing where swap rates and spreads are will allow the many requirements of complexity and accuracy. Given Effective duration calculations the current state of technology bebetter hedging and investment execution. When First Financial can then mathematically Conclusion Alec Hollis joined ALM investors need applying and using derivatives modeling interest rate volatility is no longer a luxury it is a Advisors sentiment the franchise value compared to that of the institution s assets. In this case effectiveto gauge credit risk and market in 2012. Mr. Hollis performs Non-maturing deposits can be viewed as aswap curve is consider requirement. Proper risk modeling allows for better decision- becoming the more important liability analyze.engaging an external asset curve to analyses for financial duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when to help making capabilities and deterministic models are rapidly institutions service provider what-if you various formula. For outdated as they liability present value is 100 in the deposits are retained when dividend rates are low in a higher example if the give way to better techniques for becoming through First Financial Emily Hollis CFA is analyses budget ALM the steps. a partner with forecasting liquidity base 101 inrisk.up 100 basis point scenario and 99 in the down market environment. And vice versa A financial derivatives institution modeling the forecasting andProperly used any other modeling Advisors LLC. 100 basis point scenario the effective duration is one percent requirement atonon-maturity dividend rate higher than market that offers fit the needs of ALM s clients. As anrisk can offset interest rate (i.e. (101-99) 200). to attractMr. Hollis s additionalthat the economicinclude the hot money will decrease is inherent withinof its Endnote Associate responsibilities value liabilities. It is imperative model these accounts senior The author would like the final requirements. The second part credit union industry today.toto is vital ALCOs as for a more competencies to meet to thank Robert Perry Managing Director the presentation of results This client becauseandcompetition accurate depiction as mentoring new to compete more rate unions Sensitivity Analysis submitted when David Montgomery management as wellof interestcreditrisk. financial analyst Investment Management Group and and final application is all requirements are grows derivatives can allow The regulator stronglyAnalytics and Development at as a means team members. Managing Director suggests sensitivity analyses ALM First effectively. completed including dealer contracts. to Financial Advisors for their contributionassumptions. Sensitivity EmilyHollis Hollis aCFA is a partner withfinance from the quantify the effects of changing and directional insight. Mr. Mor holds bachelor s degree in ALM First Financial Setting up a line at a dealer is similar to becoming a Advisors Notre Dame in South Bend ALM First analyses are essential because the core share evaluation may University ofLLC.CFA is a partner withIndiana. Financial member of the FHLB--it can be laborious and takes a good deal Emily Hollis Advisors LLC. Exhibit 4 The outputs Some analysts view swaps as the most likely replacement for Treasury bonds as a financial benchmark if budget surpluses dry up the government bond market. 22 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M November 2014 Credit Union BUSINESS 15 TECHNICALLY SPEAKING BY SCOTT COWEN Software Substantially Saves Christian Credit Union Is wading through paperwork preventing your credit union from being able to fully serve its customers An enterprise content management system may be the key to resolving this issue. Learn how such software saved one CU time money space compliance headaches and manpower and could do the same for yours. aith finances and technology may not seem like the holiest of trinities but for Evangelical Christian Credit Union (ECCU) the three form a powerful alliance to deliver ministry-centric financial services to churches schools missionary organizations and individuals. The credit union prides itself on serving its members and part of that mission is being able to answer questions and verify transactions quickly. When those questions and transactions must meet faith-based as well as accounting standards it adds an extra layer of paperwork for ECCU loan officers. It was the paper in all that work that was the problem. Tellers and customer service representatives had to travel from building to building to track down hard copies of transaction authorizations among other inconveniences. Even after the organization consolidated its operations into one building anyone who needed to verify that an agreement or signature card was on file still had to dig through cabinets full of paper. It was a time-consuming inefficient process that meant members had to be put on hold wait for a call back or wait patiently at the teller window. The time wasted was enough to drive ECCU to look for a solution. ECCU needed to make documents more accessible to tellers and customer service representatives so they could better focus on the member services side of operations. The credit union wanted a solution that would provide the features needed for a reasonable cost but would still have the option of expanding into other areas in the future. Additionally the system the CU F ultimately chose needed to be Oracle-based for its internal IT requirements. After evaluating several options ECCU chose a Laserfiche enterprise content management system installed by Utahbased document management solutions specialist Millennial Vision (MVi). The system offered the features the credit union required and MVi which specializes in credit unions was able to not only quickly assess ECCU s needs but also design an electronic records management system to meet them according to MVi s application manager Kenny Fox. The team created templates for corporate and consumer transactions that would be populated from the Oracle database and would require only a few fields like dates and document type classification to be entered manually Fox explains. 23 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S N O V E M B E R TECHNICALLY SPEAKING Dramatic Cost and Manpower Reductions Abound Implementation went smoothly but what was even better for ECCU is how it managed to significantly reduce the time and costs involved in approvals and document searches. Approximately 90 000 is saved per year just by having electronic copies instead of paper documents. The time it took to fill out forms for members totals a 42 000 one-time savings and over 8 000 per year thereafter since the workflows built into the system automatically populate forms with information already in the database. On top of all that there is also less of an opportunity for human error. Customer documentation is almost instantaneously accessed in Laserfiche now according to Fox which allows transactions to be validated and questions to be answered while the customer is on the phone or at the teller window without service gaps. It s a better member experience overall he says. Additionally ECCU further leveraged the system s paperless capabilities by creating a web portal. That means investor customers are now allowed to access documents that need review. No more waiting for large paper packages to arrive by snail mail. Fox expects the ROI on this project to reach a substantial sum over five years in terms of both staff time saved and reduced shipping costs. Meanwhile Field of Membership (FoM) approval also known as account approval has gone from one to three days to a few hours allowing customers to start using their accounts more quickly. Because the process is so fast the sales team often runs the FoM approval process instead of searching out an FoM officer. Additionally the FoM documentation is searchable using keywords contained in the documents providing greater visibility into approvals and denials. legal department can quickly and reliably retrieve documents including mentions of specific words in document subsets. Visits from regulators don t slow down operations according to Fox. The system s simplicity allows ECCU staff to show outside auditors and regulators how to find the documents they need to view on their own. This has made a huge impression on those regulators Fox says because it introduces a whole new level of transparency at ECCU. It has also shaved off 160 hours of staff time per year that was previously spent retrieving and preparing documents for regulators. Now it is a self-service operation Fox says. Bonus Space Consolidation and Savings Once the paper is scanned and moved to a remote location or destroyed that leaves a lot of space in the building. For ECCU that meant being able to consolidate operations into just half of its existing space and rent the other half of the building resulting in additional savings and income. In the future Fox is planning to extend the system into other departments such as HR contracts and accounts payable. The system s ease of use allows for creating electronic business process prototypes so that users in these new departments can see what the automated workflows will look like before they go live. It allows you to cultivate a deep understanding of what the system can do before it s deployed Fox says. That makes it so much easier to get the enthusiastic buy-in needed to help new departments make these rather significant transitions in their business process management. By putting its faith in Laserfiche ECCU was able to achieve a nearly six-figure-per-year return on investment in addition to allowing thousands of dollars in other savings to now be diverted into its grants to missionary organizations and projects. Scott Cowen at Millennial Vision scottc Regulatory Compliance Made Easier with Workflow In the heavily regulated banking industry compliance with regulations is critical to operations. An Annual Financial Review workflow MVi designed with Fox makes it possible to track and report on a process that touches five business units. At the same time it allows ECCU to track documents for retention purposes. Through the system s full text search capabilities the 24 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M AUTO LENDING BY ERIC GAGLIANO Accelerating Growth in Your Auto Loan Portfolio W Looking for a way to grow your auto loan portfolio An automotive pricing platform like TrueCar might be the answer. See how Tower Federal Credit Union s initial rollout of such a service helped the CU capture a significant amount in auto loans last year. ith more and more buyers especially Millennials intent on taking the car buying process as far as possible online before walking into the showroom the value of an automotive pricing platform should not be overlooked. It provides credit unions with a proven way to capitalize on this evolving approach to car buying. Tower Federal Credit Union the largest federal credit union in Maryland by asset size at nearly 2.8 billion in assets and with 137 000 members started working with such a platform TrueCar in late 2014. Since then the CU has averaged about 85 auto loans per month. The car buying service appears on its website as Tower Car Buying Service powered by TrueCar and in the year since its launch Tower has funded over 22 million through the program according to Jenny Vipperman Vice President of Consumer Lending. Tower s focus is member service and with TrueCar we can provide members with an easy and convenient way to research and choose their next vehicle online explains Vipperman. Through its relationship with Frost Financial Tower Federal Credit Union gained access to the program and branded it Tower Car Buying Service powered by TrueCar. As of today new auto loans account for roughly 16 percent of Tower s total loan portfolio. TrueCar A look under the hood The service is designed to give credit unions a way to provide a transparent and hassle-free car buying experience for their members. Further users of TrueCar can access special purchase incentives and let dealers know the car they are interested in by choosing the exact options color and features they want. Over 8 500 franchise dealers participate in the service representing every major make and model. TrueCar also allows members to access a robust inventory of used cars and affords them the opportunity to obtain special member discounts on used cars from participating dealers in most states. 25 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M AUTO LENDING Unlike other online auto buying sites the TrueCar service allows participating local dealers to offer members guaranteed savings off the MSRP of new cars. Historically users of TrueCar-powered auto buying programs save an average of 3 221 off MSRP. Having members use the TrueCar service is not a guarantee your credit union will get the loan of course. A member may well find his or her car through TrueCar but get the loan elsewhere. Though in Tower s case the numbers remain impressive. About one out of four members who receive a quote end up using the service to buy a vehicle. About three-quarters of those members finance with Tower. Vipperman says These stats are far better than any we experience through other channels or marketing promotions. We attribute this success to becoming a part of our members buying process during the research period often before they ve engaged with any other financial institutions or even visited a dealership. How does that early engagement translate into loans In talking with Vipperman we found that in the first three months of the program Tower helped 273 members get excellent deals and low rates on their vehicle purchases and the CU closed over 5 million in auto loans. The other story is a member who is a veteran car buyer. He is friends with the general manager of a local dealership and was skeptical of the program but decided to try it out anyway. We found the vehicle he was looking for a Honda CR-V and got three certificates one of which was from his friend s dealership. He was also pre-approved at the time and given an Auto Express Loan Check to pay for the vehicle. He was contacted by a salesman told the salesman which vehicle he wanted and showed up the next day at the dealership during lunch. The CR-V was ready to go he handed over his Guaranteed Savings Certificate wrote out the check and was done in a record 35 minutes He got a great deal at a great rate and didn t even have to go back to the branch to complete his paperwork because he used the Auto Express Loan Check Leveling the Playing Field Although the way people shop for and buy cars has changed considerably one thing has not. A lot of people still find going to the dealership to be stressful. An automotive pricing platform like TrueCar helps relieve that stress by enabling users to obtain market-based pricing data on new and used cars which makes the car buying experience simpler and more transparent. Success Stories According to Vipperman member response to the service has been overwhelmingly positive. She shared two specific stories that typify the TrueCar experience. There was a young member buying her first car and she had already chosen the vehicle and negotiated a price with the salesman. Her dad learned about Tower Car Buying Service when he inquired about a loan and even though they thought they had gotten a great price they gave it a try. It turns out that the savings the member was able to get using TrueCar was so good that [she] was able to upgrade from the front-wheel-drive base model to a four-wheel-drive on a better trimline AND still save money As Vipperman sees it TrueCar allows members to level the playing field by eliminating the knowledge gap between prospective car buyers and dealers. Dealerships sell cars every day so they tend to have an advantage when it comes to negotiating the price of a car. TrueCar changes that. We can scan bar codes at the store and compare prices to the best price on the Internet 26 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M AUTO LENDING and TrueCar s Guaranteed Savings Certificate sort of does the same thing. Members can research their new or used vehicle to find the best fit for them get upfront pricing information from Certified Dealers receive a great rate from Tower and buy with confidence. Lastly while Tower s relationship with members is paramount indirect dealer relationships are important too and according to Vipperman the TrueCar buying service has had no negative effect on indirect dealer relationships. Getting the Word Out Tower aggressively promotes the service across all marketing channels direct mail the credit union s website (front page and auto page) e-mail blasts and login prompts. Additionally staff are fully engaged in promoting the Tower Car Buying Service to members in the branches online and over the phone. They are making sure to tell members this service is provided by TrueCar which has high name recognition as well. We also have a dedicated Tower Car Buying Service representative who calls all members who print a certificate to follow up answer any questions they may have about the service and encourage them to get a loan with Tower adds Vipperman. Vipperman believes in the TrueCar service so strongly that she has recommended it to numerous other credit unions. It s not often that you find a product or service that brings value to members strengthens relationships and creates loyalty while improving the bottom line. TrueCar is changing the way consumers shop for buy and finance their vehicles and I want to see every credit union member have access to it through their credit unions. Jenny Vipperman Vice President of Consumer Lending Dave Mercer of Frost-Mercer Group a partner firm for TrueCar through an agreement with Frost Financial shares Vipperman s viewpoint. The web is a natural first stop for members in their auto search and this service allows the credit union to see exactly when a member is in the market. [It also] helps guide them through the pre-approval process all while increasing their loan volume. Plus with Guaranteed Savings Certificates members reap the rewards of their credit union relationship through convenience and savings. Eric Gagliano is a leading credit union marketer with more than 20 years of marketing experience. As Executive Vice President at MarketMatch Eric helps to guide credit unions with focused marketing strategy designed to generate momentum and yield proven results with an ROI Guarantee. 27 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M DATA ANALYTICS BY STEVEN D. SIMPSON Don t Take a Leap of Faith Sensible Strategic Planning for the Advanced Analytics Imperative Does your credit union have a solid plan in place for leveraging advanced data analytics If not you re already behind the curve. Read on for an explanation of why initiatives that encompass strategic mining of member data are a CU priority when it comes to competitively differentiating oneself in 2016. team can follow and track. Starting this systematic process now compels leadership and management to ask and answer the most critical questions. And it will empower the credit union to pinpoint and plot both the right course and end destination so you can maximize your data analytics investment payoff right away. T he topic of advanced analytics has propelled itself to the top of agendas industry conferences and trade publications this past year. Data initiatives are quickly becoming strategic priorities for many credit unions. It s no longer a question of Are you ready to leverage data analytics The time to prepare for the advanced analytics imperative is right now. A solid plan will be your best guide. As automated analytics takes flight credit union leaders know that using key metrics on member data will become an increasingly important point of competitive differentiation. Credit unions hold massive amounts of data on their members a goldmine of insights and mining this data strategically will provide transforming impacts to member services operations compliance revenue generation and much more. Even with many credit unions being data ready my observation is that some are not only leery but simply unsure of how to proceed with implementation how to align big data with their institution s mission and vision and who will manage the entire process. With year-end approaching now is the time to make a plan to be data ready in 2016. It may sound obvious but too often the missing initial step in deploying any new innovation or technology initiative is developing a strategic plan first. Embarking on an advanced analytics program is a critical component of your credit union s future. Therefore it s necessary to determine your priorities establish goals and assess your budget technological capabilities and talent to formulate an effective clearly defined roadmap that your 28 C R E D I T U N I O N B U S I N E S S The Big Question Where Are You and Where Do You Want To Be As you dive into your strategic planning process take a step back to appraise your readiness for an advanced analytics imperative. Key questions Does your credit union currently use a system that enables your team to take prescribed action based on identified data segments that are statistically evaluated to create recurring best practices Does your credit union currently have a process in place to identify untapped potential and uncover meaningful insights from related integrated and cleansed data from many systems and external sources Does your credit union have a process to assess internal resources and capabilities and has it begun gathering data into a centralized data storage to develop an advanced analytics platform Does your management and leadership understand the value of an analytics solution and are they diligently working to prioritize and align an analytics investment with the credit union s future goals N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M DATA ANALYTICS 29 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M DATA ANALYTICS Establish a Clear Road Map Your credit union s strategic plan for 2016 and beyond will naturally outline how you will offer new and different products and services how you will engage in greater portfolio diversity how you will mitigate threats and cyber security concerns and how you will increase member business loan portfolios just to name a few. As you meet with your management team this fall make sure part of the strategic planning process around an advanced analytics imperative includes the following key elements. immediate opportunities track success and improve cross-sell opportunities that enhance your competitive advantage. Assemble and Integrate Data Do you have the technological capabilities to collect cleanse access refine and transcend a data warehouse What data analytic tools are needed to prepare and present data in an actionable way that guides decision making Your planning process for an advanced analytics imperative must incorporate a game plan for assembling and integrating the credit union s data. The infrastructure needs to maximize long-term franchise value. This approach includes a process to collect the data from multiple sources both internal and external. You need the ability to cleanse the data to maximize accuracy so your uncovered insights are correct. Successful integration of the data includes computing endless advanced analytics algorithms from your data to identify trends and extract actionable information thereby enabling your credit union to drive tangible results. The phase is consuming the data which allows the end-user to make data-driven decisions leading to improved business and increased revenue. Making your data a useful and actionable asset will often require an investment in new data capabilities. Your strategic planning process may uncover the need for new data architecture and staff. A better solution may be to outsource to data specialists who offer sophisticated ready-to-use software customized for your credit union s needs and goals. Determine Priorities and Set Goals Assess your credit union s top priorities for an analytics imperative. What are your future goals beyond 2016 and how will you get there In this process you need to establish a plan to collect and organize data and a way to measure how data analytics can create long-term member value. When you align your business goals with your credit union s internal culture vision and mission you will maximize your ROI and improve franchise value. Make sure everyone is on board with the plan and the process from the C-suite to management. All should be able to access share and see data on any aspect of the institution. Do your research and make all key players part ofthis vital first step. Assess Current Talent & In-House Capabilities Do you have the staff and budget to hire train retain and manage data-savvy personnel Do you have analytically-minded leaders in your own credit union Professionals who can deliver data-backed insights that create business value are hard to find. During the planning process assess your data analytic needs and look internally for talent that has experience with business analytics data technology data visualization and data-driven decision making. Once you appraise your internal resources you will discover gaps. Figure out who can be trained and cross-trained. This step may lead you to discover that outsourcing is the best path. Consider external resources like a data scientist consultant or proven data analytics partner. Similar to how data scientists at larger banks have been trained to turn mountains of information into quick insights a virtual data scientist will advise your decision makers to take action on Take Prescriptive Action Meaningful and sustainable marketing and sales require accurate consumer information and an action plan. Once the data is collected cleansed computed and consumed now it s time for the pay-off and a solid plan to take and measure that action. You need real-time insight into how your credit union is performing what risks you can mitigate what marketing campaigns are not pulling what shifts in member demographics are taking place and what new product mixes are consistent with the needs of current and future members. Plans should include building upon descriptive and predictive analytics. Predict what will happen when it will happen why it will happen and what the best course of action is to optimize outcomes and 30 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M DATA ANALYTICS insights An instance of capturing the true nature of a thing. manage risk. Assign the right talent to focus their efforts on the most promising opportunities resulting in an immediate and sustainable boost to revenue or business goals. Create a game plan of how the credit union will segment customers predict behaviors and identify and target tailored messages for effective marketing. A plan to track and improve results received by these data-driven decisions and campaigns is also vital to your planning process. It will help you prepare for the future and get better at seeing what was once invisible. What s Your Plan The era of data analytics is alive and well. Leading credit unions are already using data analytics prospectively by anticipating behavior and automating prescriptive decision making that uncovers opportunities while minimizing risk and loss. Mining of data for predictive insights creates information assets you can leverage to be more competitive and efficient. Don t dive in head first. Make planning for your big data initiative an integral part of your strategic planning process. The essence of a good game plan around an advanced analytics imperative will highlight the critical decisions trade-offs expenses and next steps. It will also keep everyone in the organization accountable and aligned working together toward a more successful outcome. Steven Simpson is Senior Vice President of financial institutions at Saggezza a global solutions provider that develops and implements leading analytics products and software. He can be reached at Steven.Simpson Saggezza. com or 786-859-4100. 31 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING BY RYAL TAYLOE VP CREDIT UNIONS nCINO Getting Started with Loan Participations Carpe Diem Credit unions purchased loan portfolios have grown by leaps and bounds over the last half decade. But the window of opportunity hasn t been slammed shut yet. Find out how your CU can still seize the day with loan participations to compete more effectively with banks on the business lending front. s many credit unions across the country have built out member business lending (MBL) operations in recent years some have chosen to test the participation loan marketplace as a way to manage and expand their loan portfolios. Consider that at the height of the recession in 2009 the average purchased loan portfolio per credit union was just 1.4 million. As of the second quarter of 2015 the average has doubled to nearly 3.0 million (see chart). Yet given the credit union industry s long history of collaborative innovation there remains a huge opportunity for credit unions to seize the day using loan participations as a tool to compete more effectively with banks on the business lending front. In addition to capturing more business loan market share buying and selling participation loans can be an effective tool to help credit unions manage concentration risk diversify loan portfolios and serve their members more effectively. Credit unions may decide to sell portions of specific loans off their books to reduce concentrations to a single member or within a particular geographic area or industry. A few years ago I skydived over Capetown South Africa. As a first-time skydiver I was naturally a bit apprehensive. So I did a lot of research selecting a top-notch reputable diving outfit to guide me through my first jump. And when the time came to make the leap I not only had a parachute but I also attached myself to an experienced guide. As in other risky pursuits such as skydiving it s advisable to ensure that you have done your research that you have an experienced guide and that your parachute is in full working 32 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M A order before jumping into loan participations. In this article I outline some of the key benefits of participation lending along with a few risks to consider before diving into the bright blue sky. Targeting the Drop Zone through Participation Lending Participation lending offers a number of advantages to credit unions that are considering making the leap. Participation lending can help you to MEMBER BUSINESS LENDING 1. Manage Your Balance Sheet Efficiently. A few years ago in the depths of the recession credit unions struggled to keep their loan-to-share ratios at a robust level. Members pulled funds out of the stock market and from accounts at the mega-banks pursuing a flight to the relative safety of their neighborhood credit unions. It was difficult to pace this sharp growth in shares with new loan generation and many credit unions searched for innovative methods to grow their loan portfolios. One way is to pursue a non-member participation purchase program in tandem with other tactics such as aggressively-priced loan sales and indirect lending. With the economy in the midst of recovery many credit unions now find themselves with strong loan-toshare ratios and they are looking to sell loans on the participation market. St. Joseph Mich.-based United Federal Credit Union ( 1.9 billion) is in such a selling position. Jeff Curry vice president of operations says that United FCU started getting heavily involved in participations a few years ago when Curry joined the cooperative following prior stints in the logistics and banking industries. When I started about three years ago we were around 80 percent loan-to-share so we needed loans Curry says. We were a purchaser. Obviously now at 130 percent loan-to-share we re a seller but we know at times we need to be a purchaser as well. Beyond loan-to-share considerations selling participation loans also allows credit unions to strategically divest portions of their portfolio within geographic industryspecific loan type and term structure categories. 2. Stay within Your MBL Cap. Credit union MBL portfolios have grown substantially over the past decade. Since 2004 MBLs have doubled as a percentage of total credit union assets. This means that a growing number of credit unions are rapidly approaching their federally-mandated statutory MBL cap of 12.25 The 1 Solution for Member Business Lending 33 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING percent of total assets. Currently approximately eight percent of credit unions are at least 50 percent toward their cap (chart). This is where a participation sales strategy comes in. Credit unions may choose to sell off portions of their business loans to free up additional room in their portfolio. Doing so in turn allows them to add new loans on their books. This keeps the portfolio from becoming stagnant and although it may result in the loss of some interest yield credit unions can make up for a portion of the lost income through servicing fees. 3. Say Yes to Your Member. Active participation lenders agree that the ability to continue to serve your members is the most important advantage of a participation lending program. By selling off portions of existing loans credit unions can free up cap space for new loans to their current and prospective members. Loan participations also allow credit unions to take on larger deals that may be just a little outside their normal comfort zone. First and foremost participations allow you to say yes to your member Curry says. Some credit unions will get a request and it s just a little too big for them. They re not comfortable with it and they walk away. Don t ever walk away from a member 4. Jump in Tandem with Other Credit Unions. Buying and selling participation loans offers the additional benefit of allowing you to develop strong and symbiotic relationships with other credit unions. For credit unions just starting out in member business lending collaborating with other cooperatives that have strong and well-established programs can be invaluable. One of the side benefits of participation lending is that we learn from those with whom we partner Curry says. We all have strengths and weaknesses and we ve learned some things from other credit unions we ve worked with that are helpful. How to Land Gently Entering the participation market is not without its turbulence. Here are a few aspects to consider before jumping out of the plane 1. Establish Trust with Your Participation Partner. Trust and collaboration are hallmarks of the credit union movement and they are characteristics that set credit unions apart from other segments of the financial services industry. Credit unions do not typically consider themselves to be competitors with each other even if they are serving the same geographic markets. This teaming up can take a different turn if you decide to partner with a bank on a participation loan. Jeff Curry recalls a specific situation where United FCU decided to participate with a local banking institution. The bank had a hard time trusting us says Curry. To us that was foreign but in their world it was business as usual. Their world is very competitive trying to drive shareholder value and stock appreciation. They had no reason to distrust us but that was the world from which they came. 2. Understand the Market. One common mistake that new participation lenders make is to not fully understand the loans they are buying. In the case of an MBL this includes having a good understanding of the geographic market the industry and the structure of the loan you are purchasing. Without having a solid grasp of all risk factors it will be very difficult to underwrite the loan and to know whether it is priced appropriately for those risks. Some small credit unions that are purchasing commercial loans don t have internal business lending staff Curry says. The risk they run is not having the expertise to know what they re buying and whether it is of high credit quality and or priced sufficiently to offer the proper return to the credit union. 34 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING 3. Underwrite the Loan before You Purchase. If your credit union doesn t have any experience with member business lending you might want to reconsider jumping into purchasing participations headfirst prior to getting some experience under your belt. NCUA requires that the purchasing credit union conduct full underwriting and financial analysis of the credit prior to putting it on its books. Credit unions may choose to outsource this responsibility to a CUSO or a contract underwriter but it is important to realize that it is ultimately your responsibility to ensure that the loan meets your internal risk parameters and loan policies. process Curry says. That s the key to being able to say yes to a member. He adds The technology just makes it so transparent. It allows you to accomplish things within a respectable amount of time. It also allows you to completely understand the credit if you re a buyer. United FCU leverages a cloud-based system to help streamline its credit operations including participation loans. United FCU s MBL portfolio has grown threefold since Curry joined the organization but the credit union hasn t missed a step. We re managing right now a 260 million portfolio with participations being a key part of our strategy. [And we re doing it] with about the same number of underwriters we had with a portfolio of just 80 million Curry says. My assets per underwriter have more than doubled without much strain. It s really due to the technology. 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 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 resulting in increased profitability productivity gains and regulatory compliance. For more information visit or connect with the company on LinkedIn and Twitter nCino. Technology Can Help Steady the Plane Fortunately modern technology solutions can help create efficiencies within the participation lending process. They can also foster collaboration among partner credit unions. If you have a vibrant participation network that s efficient with a robust cloud-based technology as the tool it allows credit departments almost to work in tandem while a deal is in 35 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M TECHNICALLY SPEAKING BY ADAM ANDERSON Tiny Big Shrimp Communication Culture and Dysfunction If the communicative relationship between your credit union and its technical staff resembles a string of foreign translation gaffes then time productivity and outcomes are likely being squandered. Learn what your tech team really means by some of its most common utterances. Spoiler alert It s likely not at all what you thought. ere is a fun party game when you have a meeting that includes international participants and a translator. First focus on speaking as idiomatically as possible and using expressions that are highly regionalized. Next ensure that every native English speaker understands the subtle implications of your turn of phrase. Last watch hilarity ensue as your translator is forced to struggle through translating idioms like throw under the bus or you can t have a baby in one month with nine women. Bonus points if you are at dinner enjoying some alcohol and then start to incorporate the saltier figurative language that English is known for. The suggestion above is in jest of course as this is not only a terrible way to communicate with anyone but is also likely to result in wasted time and terrible partnership outcomes. I once spent 15 minutes at a Cajun restaurant trying to get the word crawfish adequately translated into Japanese. The translator eventually settled on chiisai oebi which literally means tiny big shrimp. I realized this using my rudimentary Japanese skills from college and proceeded to waste another 30 minutes ridiculing his translation work. Fun Hell yes. Productive Not in the least. Unfortunately the relationship between business and technical staff in many settings follows this pattern (although with less hilarity and more tragedy). Both sides of the conversation use jargon and heavily loaded language that is not culturally compatible across the two groups. If you think that culture doesn t matter in communication stop reading here I guess because the rest of this piece won t really resonate with you. In my experience communicating cross-culturally is difficult at best and the results of doing it poorly are disastrous. Here are three things that technical resources will say and what they are likely to actually mean in contrast to what they literally mean That will never work. In your financial institution you probably have a series of processes that execute overnight (accrual posting fee processing GL updates) and you need to complete the processing cycle more rapidly. You suggest to a developer who maintains these processes that your ordering would be more efficient and would allow some parts of the process to operate in parallel. On presentation of your idea you are told flatly and without explanation That will never work. This feedback rarely means that your suggestion or request is actually impossible. It likely means that the individual or team has not really given this option any thought or has dismissed it out of hand because it is fundamentally not aligned with how they approach the problem. Often this kind of very emphatic and sometimes combative feedback (frequently accompanied by large hand gestures or a comically weary frustrated tone of voice and substantial lack of eye contact) is the result of pushing for an answer to what feels like a simple question. To avoid this roadblock it can be useful to separate the what aspect of your issue or request from the how of the implementation or solution detail. It is very likely that when you get this response you may be triggering resistance to the H 36 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M TECHNICALLY SPEAKING TAB proposed solution instead of bringing focus to the problem you want help solving. For someone who lives with the intensive detail of writing code or configuring software and hardware being told how to fix a problem can trigger exceptionally negative reactions. In many cases laying out the business problem and the constraints around it and then giving an engineer time to think through the ramifications of various approaches will result in a substantially better result and a less strained interaction. We ve already done that. This feedback generally follows a comment about something that would be a good idea or that someone else is pursuing particularly a competitor. An example might be adding a favorites element to a user interface to allow end users to quickly select a particular task they have previously performed. The feedback that we ve already done that typically means we aren t doing that at all at this time but with the caveat that it was an idea that once briefly crossed someone s mind as a tangential thought while fighting some defect. In the software development community and the IT community in general forethought and planning around future needs and features are highly valued activities. Declaring that something is already done reinforces a view that the organization is thoughtful and forward-looking. It also gives the people declaring it agency in the choices around what they pursue. The alternative is to appear backward thoughtless and retrograde. The problem that arises is that it is very difficult to anticipate uncommunicated needs. Moreover the thing that is already done is unlikely to meet the business need that has been articulated by the person with the idea being discussed. Since most colleagues on the business side are not really in a position to independently evaluate whether or not a particular software feature process step or infrastructure is in place this particular communication gap can be very problematic if the item in question has not actually been completed. Additionally 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 Online 37 2 0 1 5 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S N O V E M B E R TECHNICALLY SPEAKING it might be the case that some of the work is done but the function is untested or not yet exposed which is functionally equivalent to not done. If you went to the grocery store and obtained the components for a delicious sandwich you would not tell someone that you already made a sandwich. In the technology world it s not uncommon to regard a partially completed framework or prototype as something that is already complete even though it lacks design usability testing functional testing or documentation. (Thinking of deliverables the way you think of sandwiches can help for instance does it exist and can you eat it ) When new functionality or capabilities are requested positioning the request in a way that isn t threatening to the technical stakeholder can help avoid this challenge. Asking for a demo of the capability if it s believed to exist is also useful. In the event that the requested feature or item isn t actually present or available expect a renegotiation of the terms of its definition. Oh you wanted that. We can t do that because it s different from the thing you asked for. Pressing for a deeper dive into the request and spending the time to ask for and observe the feature or function can eliminate a lot of disconnect. The requirements changed. If you have ever interacted with children you know how this dysfunction works. You offer to provide a child with a sandwich and then discover after constructing it that it is not the sandwich they wanted. The sandwich they wanted was pizza or chocolate cake. Since children are terrible at requirements gathering and artifact construction this outcome happens frequently so much so that you have probably evolved a strategy to avoid it such as asking painfully detailed questions about the composition of the offered sandwich. (Peanut butter Jelly Grape or strawberry White bread or artisanal rye loaf with caraway seeds Crust on or off Horizontal or diagonal sandwich bisection ) It is staggering how detailed the pursuit of complete sandwich definition can actually be. Software development amplifies this problem scaling it up by several orders of magnitude. At some point in any non-trivial project the technical team will likely declare that the requirements have changed. Whether or not this happens before or after the timelines in the project have slipped is a good reflection on the maturity of your planning process. (A more structured process will result in this news coming earlier although this does not make the news any more welcome.) I will not endeavor here to provide a prescriptive approach to determine how to gather requirements nor will I outline the appropriate process for managing their evolution. Instead I will refer you to the thousands of text and online pages on that topic. My point to you here is that the requirements have changed since the inception of the project because such change is inevitable. It is not possible to anticipate everything that is required for success or all the obstacles you will discover while attempting to implement a project. The only way to entirely identify what will be necessary is to complete the project and then note what you did. Unfortunately actually doing something to determine how long it will take is not an optimal project methodology for estimating effort or the resources required. (You would not walk to work to determine if it is feasible to walk to work on your morning commute for instance.) When you hear this feedback from your tech team however the way in which you choose to react to it and how you move forward can have an extraordinary impact on the rest of the project. It is not reasonable for a technical team to use this excuse as a get out of jail card for being late or for executing a poorly planned project. Similarly it is just as problematic to expect developers or IT staff to absorb the entirety of the risk that arises during a project. What this feedback means at its core is that new information was uncovered and that it must be absorbed and rationalized in the course of the project. It is costly to acquire this information upfront. (This is why creating complete requirements is impossible. Just try writing the finitestate machine for something as simple as the keyless entry on your car sometime. It will drive you to madness.) Acknowledging the new reality that the business and technology stakeholders now face and trading off resources or scope to absorb it is the only way to move forward. This argument from one side of the team really means that you are making enough progress in the project that you are now starting to see what it will really take to actually complete it. Adam Anderson is Executive Vice President and Chief Technology Officer at Q2 Holdings Inc. (Q2). 38 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M CYBER SECURITY BY TOM NECLERIO Cabrillo Credit Union A Case Study in Credit Union Cyber Security With IT staff stretched thin and with a constrained budget a California credit union needed a cutting-edge cost-effective cyber security solution for e-mail security. By partnering with a physical and virtual protection agency Cabrillo CTO Frankie Duenas bought a new lease on life for member security. C abrillo Credit Union has long been defined by steady progress and sensible growth. Headquartered in San Diego California Cabrillo was founded in 1955 by Joseph Lawrence. Lawrence a local law enforcement official originally intended Cabrillo to provide loans exclusively to the eight U.S. Border Patrol agents under his command. Today as Cabrillo celebrates its 60th anniversary what began as essentially a one-man operation is now a regional employer to more than 100 people and a thriving credit union with a membership of 25 000. That evolution has brought with it new security demands. For any highly customer-centric not-for-profit organization protecting information technology (IT) infrastructure and data not to mention cyber risk avoidance is in 2015 a challenge. But for Cabrillo which had expanded in part by merging with other credit unions in the greater San Diego area that challenge was compounded by the ongoing need for platform re-configurations and a rapidly mounting number of remote access users. Cabrillo under the leadership of Chief Technology Officer (CTO) Frankie Duenas and in partnership with the cyber security team at BAE Systems has significantly updated its approach to cyber security. Duenas is responsible for securing mission-critical IT assets a job requirement that according to Duenas costs sleep in addition to labor and time. Formerly a senior airman with the United States Airforce Duenas joined Cabrillo in 1996 when the credit union launched its interactive website. By 2011 after nearly a decade as vice president of IT for Cabrillo Duenas was named CTO. By then the credit union had recently C R E D I T U N I O N B U S I N E S S introduced mobile banking services creating new challenges in cyber risk. Despite its best efforts as the company grew and the cyber landscape became more complex overextended Cabrillo IT staff needed to handle everything from managing Microsoft Exchange to setting up desktop spam filters. Cyber security became a growing area of concern and focus. Particularly Duenas worried about phishing the criminal act of acquiring sensitive information by masquerading as trustworthy electronic communications mostly e-mail from trusted sources. The technique is used to lure staff to click on links or visit websites infected with malicious software or malware. On a day-to-day basis Duenas and his staff considered the best approach to address mandated regulatory compliance and the threat of data breaches a threat identical to that of a Wall Street firm. However as a nonprofit hiring more personnel and purchasing multiple technology systems was cost prohibitive. In 2007 before becoming Cabrillo s CTO Duenas partnered with a company SilverSky (which was later acquired by BAE Systems) to manage its firewall. SilverSky also became known as the network security system responsible for monitoring and controlling incoming and outgoing network traffic. Firewall management is labor and resource intensive demanding a high level of IT expertise to prevent unauthorized network access and data security breaches. The technology required to manage a firewall must be provisioned and upgraded constantly. Duenas wanted a cloud-based network and e-mail protection to help reduce the time and effort his staff spent on security 39 2 0 1 5 C U B U S I N E S S . C O M N O V E M B E R CYBER SECURITY and compliance. In cloud computing computer hardware is owned and operated by a provider rather than being housed and maintained onsite by the credit union. To defend Cabrillo against phishing attacks Duenas decided to outsource e-mail and network security to BAE Systems. The BAE Systems Email Protection Suite offering data loss prevention (DLP) encryption security continuity and archive has saved Cabrillo from capital- and labor-intensive in-house processes said Duenas. The threat protection service has also allowed Duenas to sleep better at night. Cabrillo has put an extraordinary amount of trust in BAE Systems said Duenas which is something no risk defender like BAE ever takes lightly. Though Cabrillo itself has benefited from partnering with BAE Systems a global cyber security provider the real benefit in the alliance is for the credit union s county-wide membership. BAE Systems has a holistic and simple approach to cyber security that has empowered our IT staff to become more strategic explained Duenas. Now we can focus on tailoring our IT and web services to our busy on-the-go members. Since partnering with BAE Systems we have rolled out [everything from] remote deposit applications to online web chat services to mobile banking options. Our partnership with BAE Systems has enabled us to offer members a number of innovative solutions [that are] often reserved for the largest enterprise banking organizations. In detailing the benefits of using managed security services as a credit union Duenas highlighted the following 24x7x365 support Cabrillo Credit Union has realized significant cost savings by keeping internal network administration to a minimum. Today only one dedicated employee is required. Since implementing BAE Systems advanced e-mail DLP technology false positives (ambiguous events that could appear to be data breach incidents) have been reduced by 40 percent. Duenas can easily build and enforce granular policy to block quarantine or automatically encrypt sensitive inappropriate and risky messages using the tunable BAE Systems policy-driven rules engine. BAE Systems robust e-mail DLP reporting module has allowed Duenas to identify pockets of power users who are inadvertently misusing vital resources. Since implementing e-mail protection services at Cabrillo the use of e-mail encryption has increased by nearly 50 percent a clear indication that e-mail DLP is successfully catching sensitive content before it leaves the organization. Duenas s creativity and ability to continuously expand the informational and technological services of Cabrillo Credit Union while safeguarding the assets of its members has played a critical role in the CU s continued growth and success. Tom Neclerio is Vice President Commercial Cyber Consulting Services for BAE Systems Applied Intelligence a division of BAE Systems. He is responsible for developing implementing and overseeing cyber security for the company s corporate clients worldwide. 40 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M DATA BREACHES BY STEPHEN TREGLIA New Authorities Multiply Fines for Data Breach Non-Compliance Data security regulations are tightening for financial institutions putting a heavy burden on credit unions when it comes to compliance. To make matters worse the fines for non-compliance can overlap among the various regulators. CU Business sorts out why protecting sensitive data is more imperative than ever for CUs. W With the increasing risk of cyber attacks and heightened public awareness of the consequences a range of industry and federal regulators are stating their concerns regarding the data security standards within the financial services sector. This list includes the U.S. Senate Banking Committee to the Federal Communications Commission (FCC) Federal Trade Commission (FTC) Securities Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) A Costly Burden for Financial Institutions U.S. Consumer Bankers Association (CBA) In 2014 there were 42 data breaches in the banking credit Institutional Shareholder Services (ISS) and financial sector accounting for only 5.6 percent of data Even state regulators such as the Department of Financial breaches overall. But you must also consider that financial Services (DFS) of New York institutions are significantly impacted by data breaches that occur in other industries where they often absorb the costs Every acronym has its own opinion but the message is clear to re-issue credit cards or apply restrictions when consumers financial organizations need to take data security seriously. For financial records are breached. For example a report from those that don t the penalties could be severe. the U.S. Consumer Bankers Association (CBA) indicates that re-issuing cards affected by the Target data breach cost over Financial organizations that experience a breach will find 172 million without factoring in the costs of fraud that these themselves subject to state and federal civil regulatory liability. 41 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M hile many high-profile data breaches have occurred in the retail and healthcare industries the financial services sector is not immune. This year data breaches have occurred at some of the country s largest financial institutions leading to a renewed discussion about the role that regulators should play in holding financial organizations accountable. To complicate the issue there are multiple governing regulatory bodies. Many state and federal regulators are stepping up turning their focus to data security. They are conducting their own examinations and investigations and ultimately levying fines for non-compliance. These actions are not coordinated and thus financial organizations who are found to be negligent may find themselves subject to multiple fines and lawsuits. financial institutions have to swallow. These costs are borne by the financial services industry not the organizations where the data breach may have occurred. Multiple Regulators Claiming a Stake in Protecting Data DATA TAB BREACHES In fact financial institutions are discovering themselves the a report that recommends seven out of 10 of Target s Board of focus of investigations and fines from governing bodies with Directors be replaced after failing to provide greater oversight overlapping jurisdictions not to mention consumer lawsuits on governance and IT security risks. The impact of a data breach can be dire not just for the related to breached data. institution but also for consumers shareholders and the integrity of the financial markets. To avoid a data breach Navigating data compliance Subject to these numerous regulatory bodies it is challenging financial organizations must implement a layered approach to for financial organizations to understand and comply with the governance and compliance including Regular risk assessments many well-meaning requirements of each regulator particularly Frequently updated data breach response plans that if such requirements are veiled as guidelines. reflect the changing regulatory environment For example in New York the DFS recently put into effect Involvement at the board and C-level to ensure protective new regulations that would require cybersecurity insurance as measures are in place well as examinations on the use of multi-factor authentication and identity and access management systems. The requirements have also expanded to include the hiring of a qualified chief information security officer more checks and balances on governance and training and increasingly stringent management of third-party services. New York is not alone in expanding its governance programs. It is expected that guidance from the upcoming Federal Financial Institutions Examination Council (FFIEC) will include these protections as new requirements for financial organizations. As well the SEC recently reaffirmed its intention to play a role in the security of data. The SEC and FINRA are both conducting independent examinations and investigations on areas of cybersecurity governance including an inventory of devices software and apps maps of data flows network security and security policies. Following a data breach financial institutions may find themselves subject to overlapping investigations and fines. Two years after its own data breach a large North American bank is still settling with regulators the latest being a 625 000 fine issued by the Massachusetts Attorney General. The total cost for penalties is now up to 1.5 million. Recent attacks have demonstrated that there are numerous entry points for data breaches to occur. One of the most vulnerable points of attack is through mobile devices that connect to your corporate network. Malware insider theft lost or stolen devices phishing disabling of encryption technology many openings for cyber attacks begin with human error not necessarily as a result of security oversight. Protecting data in motion on mobile devices is imperative. With technology built into the firmware of a device which provides a constant connection to the mobile device ecosystem even if a sophisticated attack attempts to subvert the technology the connection will sustain. This will allow IT to remotely invoke security commands such as remote data retrieval or deletion Responding to a data breach Following the breach at Target regulators have made it clear that responsibility for data breaches needs to go as high as the board level. Target has replaced its CEO and CIO and has hired a CISO. Also the Institutional Shareholder Services (ISS) issued 42 C R E D I T U N I O N B U S I N E S S N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M 42 TAB freezing of a device and the provision of valuable insight such as whether or not any sensitive data was accessed during the attack. This kind of technology not only helps mitigate the risk of a data breach but also provides valuable audit information when dealing with investigations and regulatory bodies. The ability to prove data has not been accessed can potentially diffuse an otherwise damaging breach situation. With more regulatory oversight than ever before financial institutions must ensure that they are prioritizing the protection of their sensitive data across all levels of the organization. As Legal Counsel at Absolute Software Stephen Treglia provides oversight and guidance on regulatory compliance related to data breaches and other security incidents. Stephen counsels the Absolute Investigations team who conduct data forensics theft investigations and device recoveries. He has extensive knowledge of the U.S. regulatory landscape including SOX HIPAA and other industry-specific regulatory bodies. 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 MLO Check it off your to-do list Enroll today at 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 N O V E M B E R 2 0 1 5 C U B U S I N E S S . C O M cuso A community joined together for a common purpose. In what ways does collaboration benefit a credit union Can it expand reach and outpace the competition Provide greater services and prevent newer risks At PSCU we know that credit unions are stronger when they stick together. And we re proud to be a 30-year leader in credit union connectedness. When you join PSCU you re joining the ranks of more than 800 credit unions nationwide that leverage the power of our cooperative. 888.918.7357 TAB LIMITED TIME OFFER Introductory Rebate 45 C R E D I T U N I O N B U S I N E S S N O V E M B E R C U B U S I N E S S . C O M