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T H E O N LY ALL-D IGITAL ALL -B US IN E S S R E S O UR C E F O R C R E D IT UN ION S THE YEAR END ISSUE CEO SPOTLIGHT Interviews with Top CEOs DECEMBER 2015 VOLUME 10 ISSUE 12 DEB GALLAGHER How Deb Gallagher s Focus and Consistency Leads to Success at Capital CU SCOTT MCCLYMONDS HISPANIC MARKETING Hispanic Millennials (Heart) Credit Unions MIRIAM DE DIOS EMV TRANSITIONS The Realities Credit Unions Need to Hear About EMV WILLIAM TRAN Managing Risk Doesn t Have to Be a Juggling Act It doesn t matter if you have 100 or 100 000 loans risk management is a vital component of the success of your institution. But with a complex loan portfolio limited resources and an ever-changing regulatory environment it can sometimes feel like a juggling act. With multiple turn-key user-friendly risk management software and service programs SWBC can help you gain control of your risk management goals. Visit autopilot.swbc.com or call 866.647.8749 today to learn more AUTOPILOT COLLECTIONS AND RISK MANAGEMENT COLLATERAL PROTECTION INSURANCE (CPI) ASSET RECOVERY LENDER PLACED TRACKING AND PLACEMENT DEFAULT RISK MITIGATION 2015 SWBC. All Rights Reserved. 5540-1327 0415 TABLE OF CONTENTS DECEMBER 2015 VOLUME 10 ISSUE 12 THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS Managing Risk Doesn t Have to Be a Juggling Act 4 6 10 16 16 21 24 PUBLISHER S POV Tim O Hara CEO VELOCITY Visit autopilot.swbc.com or call 866.647.8749 today to learn more Reasons to Be Thankful Deb Gallagher How Deb Gallagher s Focus and Consistency Leads to Success at Capital CU Scott McClymonds LENDING SOLUTIONS 27 30 33 36 38 42 44 VIEW FROM A CROW S NEST Creating....Protecting....Sustaining a Strong and Tustworthy Brand Juli Anne Callis HISPANIC MARKETING Miriam De Dios BRANCH BUSINESS Hispanic Millennials (Heart) Credit Unions Branches Give FIs Advantage in Digital Age but 5 Things Are in the Way Meredith Deen COMPLIANCE UPDATE Trend Analysis Utilizing Our Best Resources Lorrie Wohlfeil CFO CURRENCY Measuring and Monitoring Interest Rate Volatility Alec Hollis CU BUSINESS Five Compliance To-Dos for Credit Union Marketers Brian Godwin MEMBER BUSINESS LENDING Raising the Bar to Meet the New Definition of Service Jack Lynch THE LAW Do s and Don ts for Successful Small Business Lending Ryal Tayloe EMV TRANSITIONS The Evils of Arbitration According to the CFPB Brad R. Bergmooser RECRUITMENT The Realities Credit Unions Need to Hear About EMV William Tran STRATEGIC PLANNING Recruiting Top Talent for Your Compliance and Secondary Marketing Departments Adam Consiglio Strike a Strategic Balance between Human Expectations and Operational Tactics Marvin C. Umholtz 1 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M ABOUT US THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS PUBLISHING TEAM Tim O Hara Editor & Publisher tim cubusiness.com Ashok Kumar Associate Publisher ashok cubusiness.com Patti Manzone Designer PUBLISHER S POV Tim O Hara CEO VELOCITY Scott McClymonds THE LAW Brad R. Bergmooser VIEW FROM A CROW S NEST Juli Anne Callis STRATEGIC PLANNING Marvin C. Umholtz LENDING SOLUTIONS Lorrie Wohlfeil CFO CURRENCY Alec Hollis RECRUITMENT Adam Consiglio HISPANIC MARKETING Miriam DeDios BRANCH BUSINESS Meredith Deen MEMBER BUSINESS LENDING Ryal Tayloe CU BUSINESS Jack Lynch EMV TRANSITION William Tran COMPLIANCE UPDATE Brian Godwin SUBSCRIPTIONS Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr x 3 ( 225). An online membership form is available at www.cubusiness.com register. SALES AND ADVERTISING Tim O Hara Publisher tim cubusiness.com or 561-282-6015 1 CONTACT INFORMATION Credit Union BUSINESS Magazine P.O. Box 2223 Palm Beach FL 33480 (561) 282-6015 (561) 588-7711 (fax) tim cubusiness.com THE ON LY AL L -DI GI TAL AL L -BUSI N E SS RE SOURCE F OR CRE DI T UN I ON S THE YEAR END ISSUE CEO SPOTLIGHT Interviews with Top CEOs DECEMBER 2015 VOLUME 10 ISSUE 12 DEB GALLAGHER How Deb Gallagher s Focus and Consistency Leads to Success at Capital CU SCOTT MCCLYMONDS HISPANIC MARKETING Hispanic Millennials (Heart) Credit Unions MIRIAM DE DIOS EMV TRANSITIONS The Realities Credit Unions Need to Hear About EMV WILLIAM TRAN 2 C R E D I T U N I O N B U S I N E S S D E C 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. pscu.com 888.918.7357 PUBLISHER S TAB POV BY TIM O HARA A Reasons to Be Thankful CU trade weekly like CU Times or the mainstream Time magazine or even the once mighty Sports Illustrated many now appear downright anemic. And daily newspapers around the country have also been affected. Several have offered readers digital editions and research is pointing to universal acceptance of the easier and less wasteful media. Prior to the digital conversion CUB was produced as a high-quality monthly magazine on glossy paper and was handed over to the U.S. Post Office to deliver. The entire process took the better part of two weeks. If there was (God forbid) a typo or error in the publication there it remained forever. Nowadays we are able to produce the same highquality magazine designed by the award-winning design studio of Patti Manzone. In addition the bonus mentioned at the top of this page refers to the four weekly eNewsletters we launched in January and added to our publishing stable. We used the money we save from printing to invest back into our editorial products. It s a win-win for our subscribers I m very thankful that all of this hard work is just now being noticed and approved by many inside and even outside the credit union industry. In fact I m proud to announce that the CU BUSINESS website (www.creditunionbusiness.com) has been selected out of all of the CU industry websites to partner with NASDAQ the second largest stock exchange in the world to display its financial service RSS feed. Finally I am thankful for the excellent quality of contributing writers whose work shines above the rest CUB proudly dispenses excellent advice from some of the top experts working in the credit union field. And we re always on the lookout for new writers to add to our most helpful BUSINESS information for credit union professionals Please contact me with any suggestions. Thanks for reading Tim O Hara 2 0 1 5 C U B U S I N E S S . C O M s I write this column for the final edition of CUB for 2015 today is the Sunday morning before Thanksgiving and it occurs to me that I have much to be thankful for again this year. In addition to all of my many personal blessings of good health a wonderful family and a consistent feeling of well-being our magazine has been successfully transformed from print to digital production and delivery over the past 12 months. And some bonuses were thrown in for good measure Many reasons to be thankful that s for sure Late last year we were wrestling with the plan to convert Credit Union BUSINESS magazine from print to a totally digital publishing platform. Twelve months later it s mission accomplished We live in a fantastic time with technology making it possible to do many things that seemed impossible just a short while ago. And the change is so rapid For example just as we got used to the wonderful opportunity to avoid movie theatre crowds altogether by renting movies from the Blockbuster store those stores were replaced by the most wonderful of all inventions the streaming video This same kind of rapid change that technology offers has made it possible and in some cases even necessary to bypass outdated technologies like the printing press. We can now go direct to reading on our portable devices which not that long ago were also just a dream. And just in the nick of time too Anyone who has looked at just about any print periodical in the past few years will notice a thinner publication. Whether a 4 C R E D I T U N I O N B U S I N E S S D E C E M B E R IT S GIVING SEASON. INCREASE YOUR DONATIONS TO THOSE IN NEED--WHILE IMPROVING YOUR BOTTOM LINE. With a Charitable Donation Account (CDA) from CUNA Mutual Group you can donate a portion of your earnings to any 501(c)(3) charity while retaining a portion as credit union income. The CDA takes advantage of a variety of potentially higher-yield funding options recently approved by the NCUA. Learn more at CUNAMutual.com CDA or call the CUNA Mutual Group Executive Benefits Service Center at 800.356.2644 Ext. 665.8576 today. CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company a mutual insurance holding company its subsidiaries and affiliates. Proprietary insurance is underwritten by CMFG Life Insurance Company. Proprietary and brokered insurance is sold by CUNA Mutual Insurance Agency Inc. a wholly owned subsidiary. This insurance is not a deposit and is not federally insured or guaranteed by your credit union. For more information contact your Executive Benefits Specialist at 800.356.2644. Representatives are registered through and securities are sold through CUNA Brokerage Services Inc. (CBSI) member FINRA SIPC 2000 Heritage Way Waverly IA 50677 toll-free 866.512.6109. Insurance and annuity products are sold through CMFG Life Insurance Company. Trust services available through MEMBERS Trust Company 14025 Riveredge Dr. Suite 280 Tampa FL 33637. Non-deposit investment products are not federally insured involve investment risk may lose value and are not obligations of or guaranteed by the credit union. TBPF-1303856.1-0915-1017 CUNA Mutual Group 2015 All Rights Reserved. CEO TAB VELOCITY HERE BY SCOTT MCCLYMONDS How Deb Gallagher s Focus and Consistency Leads to Success at Capital CU M This month s CEO spotlight comes direct from the Credit Union Directors and CEO Conference. Keep reading to find out what chief executive officer Deb Gallagher s lifelong career there has meant for Capital Credit Union in Bismarck ND. Discover insights into the legacy she hopes to leave behind for her CU and what advice she has for other credit union CEOs. y CEO spotlight this month is on Deb Gallagher of Capital Credit Union in Bismarck ND. Capital has about 400 million in assets and 10 branches. I met Deb at the Credit Union Directors and CEO Conference this past August where she was a guest panelist for one of the main sessions. I was impressed with her thoughtful answers and the way she led Capital and I asked her to discuss credit union leadership with me. What impressed me most about Deb was her calm demeanor and disciplined focus on fundamentals like culture strategy members and financials. One key to this focus is Capital s strategic roadmap which is a living breathing document rather than something collecting dust on a shelf or hibernating on the CEO s laptop. Deb considers that roadmap critically important to her leadership. It helps her and her team focus resources and efforts annually. It also serves as a filter to help her team exclude certain efforts or investments that look good but fall outside the scope of the roadmap. Deb Gallagher of Capital Credit Union Deb s CEO Journey Diligent learning and passion for her credit union have characterized Deb s CEO journey. Beginning her 6 C R E D I T U N I O N B U S I N E S S professional life at Capital as a high school senior when she was 17 years old Deb has spent her entire career there. Early on the CU had only 5 million in assets and eight employees. She enjoyed the credit union s philosophy and mission and eventually became CEO a position she has held for 21 years. When Deb first became CEO the greatest challenge was comprehending the responsibility of the job. As a new CEO she was in awe of the role and the faith her board had placed in her. Her first few years were spent 2 0 1 5 C U B U S I N E S S . C O M D E C E M B E R CEO VELOCITY Managing Risk Doesn t Have to Be a Juggling Act Visit autopilot.swbc.com or call 866.647.8749 today to learn more understanding her responsibility growing into it and delivering on it. It was much more about dotting the i s and crossing the t s in her early years. After becoming more comfortable in her position Deb began migrating out of a hands-on role to developing more of a vision of what Capital could consider and achieve. Evolving through the first few years helped her better understand the process Capital needed to undertake to grow and thrive. All in all it has been a consistent journey of growth as both a person and leader especially in the aspect of engaging and energizing other people as the industry has changed and Capital has evolved. One thing I hear continually from seasoned CEOs like Deb is that you have to learn to let go of certain actions and responsibilities and you have to work very hard to attract and retain bright hard-working people. Both of these mindsets have been instrumental in Deb s success and Capital s growth. like Lean 6 Sigma to improve operational excellence. Another best practice Deb is working on is the creation of a strong brand promise that will unite employees around how they desire to impact the lives of their members and the communities they serve. Next Three to Five Years Like many in the credit union movement Deb and her team are trying to understand the changes in the industry. Specifically their goal is identifying the game changers and determining how they will affect Capital. For example getting the right products to Millennials is a critical issue that s here to stay. Connecting with people the way they want to do business is essential. Otherwise they will go somewhere else if they can t get their desired services through the channels they want. That s why Deb and her team have investigated a new product called Otter from Bay-area fintech company Linqto. Otter allows credit unions to deliver important branded apps to Millennials inexpensively. In addition to understanding how to deliver what s important to Millennials in their desired channel Deb is also working on connecting culture and mission. She was intrigued by Simon Sinek s book Start With Why and has intensified her focus on creating a brand promise that will unite Capital s culture with the consumers in her marketplace. Sinek says the market will respond to the underlying reason you do something your why more strongly than simply what you do or how you do it. In a Millennial-oriented culture that is 7 Continuing the Journey What I liked hearing most about Deb s CEO journey is that after 21 years she hasn t stopped learning and progressing. She is still passionate about her credit union and leading it forward. She sees herself as being in the final phase of her career and has started to reflect on the condition in which she wants to leave Capital and what needs to happen to achieve that aim. There are still some very specific impacts Deb would like to make to the credit union before she retires and one of those is adopting some best practices C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY socially conscious having a genuine reason why you do what you do is tremendously important and that s where credit unions have a trump card. in by your reason for doing business. The fact that credit unions have this built-in why is something they should capitalize on to increase their community impact and financial strength. The Answer Is Closer than You Know From speaking with numerous CEOs Capital s focus on strengthening its brand promise and realigning its practices to fit changing consumer demands is something the entire industry is in the midst of. Creating a powerful brand promise that rallies employees around the cause of delivering high value to members is not an easy task. It involves knowing a lot about your specific members understanding what is valuable to them even beyond financial products and services and delivering that value throughout your credit union. That sounds like a tall order and it can be. However the building blocks may already be in place at your credit union. In fact Deb s focus on Millennials and creating a unifying brand promise reminds me of the all-time classic story Acres of Diamonds by Dr. Russell Conwell. In the story a farmer sells his land in search of riches. The farmer goes broke but the people who bought his land discover the world s largest diamond mine right beneath their feet. For credit unions the very purpose of their creation is a high-value distinguishing factor that people in the movement may be overlooking as a strong differentiating reason to use them. The idea of a coop that helps other community members of all income ranges is a baked-in cause that should be utilized to attract cause-driven Millennials and other generations. For example federally chartered credit unions have a mandate of social responsibility and providing financial services to moderate-income people. Building a why around that as well as community involvement is a fantastic recipe for virally attracting Millennials and other like-minded people. While this approach won t attract everybody it doesn t need to. To paraphrase author Simon Sinek again you want to attract people who are drawn Advice for Other CEOs Deb s primary advice for her peers is to stay engaged with your board employees and members instead of letting subordinates do everything. She is concerned that some CEOs have become either disengaged or distant from what is occurring in their credit unions and she recommends understanding and participating in key initiatives. Another piece of advice is having a defined plan and executing it instead of being reactionary. As we have already seen Deb places a high priority on the roadmap her board developed and she credits Capital s success to following it. There is no need to be winging your operation or overloading it with too many objectives. From my experience having more than 10 objectives equates to nothing getting accomplished so Deb s emphasis on creating a focused plan is spot on. The third piece of advice from Deb involves building a positive culture with high expectations. Too many executives are strategy and systems focused and they forget that it s the people in their organization who truly set them apart. As I have stated in other articles and presentations leadership systems and people have to work in tandem for an organization to have strong velocity. When culture is ignored one-third of the velocity question does not function well. So it is vital for CEOs to spend time actively building and nurturing a strong culture with high expectations. Questions for CEOs 1. Do you have a strategic roadmap approved by your board 2. Is it used and updated regularly How well do you execute upon it 8 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M CEO VELOCITY 3. What is your stated brand promise How many people in your CU know it and how often do you communicate it 4. Would your board employees and members consider you engaged or distant How do you know 5. How much time and attention do you devote to understanding employee needs and concerns 6. What are your personal growth goals as a CEO for 2016 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 realworld 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 ceovelocity.com 479.263.0774 or https www.linkedin.com in scottmcclymonds. Scott has more resources for CEOs at ceovelocity. com. 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 ceovelocity.com to request a free paper on how to find and close earnings gaps in your credit union. 479.263.0774 C R E D I T scottm ceovelocity.com ceovelocity.com U N I O N 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 2 0 1 5 C U B U S I N E S S . C O M D E C E M B E R LENDING TAB SOLUTIONS HERE BY LORRIE WOHLFEIL CLE Trend Analysis Utilizing Our Best Resources I Is your credit union staff using your best resources to diagnose the direction of borrowing customers credit scores While it might sound counter-intuitive looking to the past is your best means of predicting the future. Here s why and how studying historical activity can prevent you from selling your members and your CU short. n last month s article I discussed how critical it is to have a strong loan-to-share ratio as well as a lucrative loan yield. As prefaced last month our upcoming articles will discuss strategies on how to successfully build your C D and E loan portfolio. One of the key philosophies we teach at Lending Solutions Consulting Inc. (LSCI) is to catch them on their way up and protect the credit union on the way down. This month s article specifically teaches your staff how to use your best resources to diagnose the direction of the score. This ability will ultimately provide your staff with guidance on how much risk makes sense. How often do we think We re one loan too late Could we have done a better job Found the problem earlier Afforded to take more risk In this month s article we are going to discuss how to utilize the past to help determine the future. The best prediction of future behavior is studying the past. This is why we believe in and use the coveted report card in decision making the credit report. But ... are we really using it to its advantage In my experiences of helping credit unions identify why some loans perform and some don t I have discovered they oftentimes don t truly study the past on their member. At best they merely scratch the surface by looking at what the current credit report may be telling them on how their member pays but in actuality they are stopping short. The credit union relationship is given the same credence as if this were its first experience with the member. What does this do It causes the credit union to either make a loan it shouldn t or perhaps not recognize where things may have improved. Listed on the next page is a sample tracking chart of what your staff should be analyzing any time they have the benefit of a true past with the member. I ll discuss why each of these criteria is vital as we address the significance of the bulleted numbers. 10 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS TAB Trend Analysis Chart Use the below chart to compare current and past credit reports application data and HYLS to determine the direction your member s score is headed and ultimately the risk you can afford to take. 1. CREDIT SCORE 2. OF NEW ACCOUNTS IN 24 MONTHS 3. UNSECURED AMOUNT OUTSTANDING 4. UNSECURED DEBT RATIO 5. SECURED AMOUNT OUTSTANDING 6. WHERE DOES CODE 10 FALL IN THE PECKING ORDER 7. HYLS SCORE 8. HOW MANY MISSED PAYMENTS ON CREDIT REPORT 9. INCOME FLUCTUATION DATE Which trends to monitor... 1. Credit Score Is the score going down Even more critically is it going down with no late payments How often does your staff look at previous credit bureau scores and interpret the trend For example if this is the third time your member has applied in four years and the score is a 680 to an untrained underwriter the knee-jerk reaction is most likely that the score is A and they are golden. What if your staff were using their best resources and were required to look at all the previous scores on file What if the trend looked like this 730 700 692 680... How strong does the A score look now Does your staff understand where that score should be with a potentially perfect pay history On the flipside what if the score was 605 Would the knee-jerk reaction be to deny the loan What if the previous scores were analyzed and your staff saw this trend 550 589 605... What does this tell us We can see that your member is now making the steps to improve his or her credit. Would we be able to take more risk now Increase the member s small credit line Put him or her in a reasonable car giving him or her reliable transportation 2. Number of New Accounts in the Past 24 Months Increased spending habits may indicate the member is living on inflated income. (The guideline is no more than two to three per year.) At LSCI we believe accelerated spending is one of the biggest signs of imminent bankruptcy. People 11 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M LENDING SOLUTIONS are creatures of habit. Spending patterns are no different. Spending is an addiction much like other non-healthy behaviors many in society face. If the number of new accounts has changed drastically your interviewer must identify specifically how many and what subliminal message this trend may be sending. 3. Total Unsecured Outstanding What are the changes in unsecured balances obligations This criterion may indicate in conjunction with 2 that there is something going on. Even if the total debt isn t too high if it has accumulated at a rapid clip this is a concern. For example to an untrained eye if your member came in wanting a credit card and the credit report suggested the member had 7 500 outstanding on a 40 000-a-year salary you may think this is OK considering the unsecured debt ratio is at 19 percent. What if the previous two credit reports from the past three years suggested the unsecured debt had gone from 750 to 3 500 to 7 500 Do you feel as confident as you did before If your staff isn t looking back this concerning trend may be missed 4. Unsecured Debt Ratio (UDR) An increase in any percent would be a cause for concern (in particular when unsecured debt ratio increases over 25 percent). We believe there is no greater indicator of bankruptcy than measuring unsecured debt ratios. The majority of financial institutions look far closer at debt ratios. We will argue that C M Y CM MY CY CMY K 12 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M LENDING SOLUTIONS TAB the vast majority of bankrupt consumers paid their bills on time for years and their debt ratios fit. This is why lenders continued to give them more and more debt. The unsecured debt ratio especially when it is dramatically rising is by far your biggest concern in analyzing recent trends. 5. Secured Outstanding Secured debts can become problematic just like unsecured. For one they carry high payments that can wreak havoc on budgets. Secondly an increase in secured debt typically starts to highlight a pattern we see all too often at LSCI where members throw thousands away by turning in too quickly. What does this say about their value of money when they are willing to lose thousands of dollars of their own cash We have seen members losing 10 000 simply because they want a newer model on a vehicle they have had for fewer than 24 months. Consider this scenario your member makes 250 000 a year and wants a 20 000 Harley Davidson. He or she is golden. All the ratios fit and he or she is a 680 score. What if closer analysis of previous credit reports suggests that the member s secured debt (cars and toys) has increased from 40 000 to 85 000 to 175 000 in less than three years When you couple this fact with the above FICO score decline how golden is the member now Secured debt is most critical if it has elevated to more than 75 percent of an individual s income. 6. Pecking Order One of the biggest problems with credit scores is they show only a picture of where the score is now. Your loan has to survive months or years. When you review previous credit reports if the score is trending down the order of the score cores will tell you why. Pay close attention if capacity inquiries and revolving vs. installment have moved up on the list. 7. HYLS HYLS stands for High Yield Lending Strategy. This is an underwriting guide LSCI has designed to help determine how much risk you can afford to take. As discussed in last month s article we believe the credit unions that make the most money have a net loan yield after charge-offs of 6.5 percent or greater. HYLS has a scorecard that indicates the direction the score is headed by either increasing or decreasing the traditional score and combining key factors from both the application and the credit report something the traditional credit scores do not do. If the score decreases this would be cause for concern. Lenders need to look at the HYLS scorecard which summarizes the top negative factors and the top positives. When HYLS drives up the score and has had a history of driving up the score on previous HYLS scorecards the risk you are taking can increase. On the flipside a continual drop in HYLS scores can be a strong indicator that your member is struggling. HYLS also drives the interview and solid interviewing is one of the most difficult yet important skills of a good decision maker. 8. Number of Delinquent Trade Lines New even sporadic missed payments that are occurring when a previous credit report had perfect pay history may be cause for concern. This tendency may indicate a decline in household income or that new obligations have grown faster than household income. Conversely if the loan was denied in the past for delinquent repayment patterns but the member is now holding up his or her end of the bargain by paying on time he or she may be a good risk. 9. Income Fluctuation Credit unions often struggle with when to verify incomes and when to take the member s word at face value. Utilizing the Trend Analysis Chart will help decision makers analyze 13 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M LENDING SOLUTIONS income trends and point out when members may be mispresenting themselves. It will also highlight a concerning trend when debts are increasing yet income is maintaining. Such a revelation may guide staff to either have a conversation or require verification. Listed below is a sample of the Trend Analysis Chart in use. You can see there is strong evidence that the member has mispresented his or her income on the application dated 9 2015 because his or her job has not changed and his or her income has increased by 1. CREDIT SCORE 2. OF NEW ACCOUNTS IN 24 MONTHS 3. UNSECURED AMOUNT OUTSTANDING 4. UNSECURED DEBT RATIO 118 percent. Other notable factors on the chart include that both the credit score and HYLS are trending down which is being driven by a rapid increase in unsecured debt and capacity suffering (code 10). One can see how valuable this information is and in the majority of credit unions it is not analyzed to this degree. This member was looking for more unsecured debt and in many credit unions he or she would get approved because he or she is a B paper. And with the stated income the UDR would have been an attractive 17 percent instead of the actual 35 percent. 5. SECURED AMOUNT OUTSTANDING 6. WHERE DOES CODE 10 FALL IN THE PECKING ORDER 7. HYLS SCORE 8. HOW MANY MISSED PAYMENTS ON CREDIT REPORT 9. INCOME FLUCTUATION DATE 2 2014 12 2014 9 2015 656 645 640 6 7 9 7 963 10 214 11 923 24% 30% 35% 390 0 0 2 1 1 635 541 535 6 6 6 33 600 33 600 71 800 Remember this information is free and already at your disposal. Monday-morning quarterbacking doesn t have to happen only after a loss has occurred. Utilizing your resources will help your staff make better and more consistent decisions to catch your member on the way up and protect your credit union on the way down. If you would like LSCI to come onsite and train your staff on how to utilize your best resources as demonstrated by your own loan examples please contact Scot Vackar at (877) 915-7675 x70. Lorrie Wohlfeil began her career at LSCI in August of 1995. Lending Solutions Consulting Inc. (LSCI) is the industry leader in providing consumer lending advice to credit unions across North America. 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 s 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). Spending four years as an onsite consultant for LSI she personally trained many of their loan underwriters. 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. 14 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO TAB CURRENCY HERE BY ALEC HOLLIS Measuring and Monitoring Interest Rate Volatility A vital component in managing your credit union s balance sheet is measuring and monitoring interest rate volatility. But that task can be more complicated than it sounds thanks to widely varying perspectives of market volatility. Experts on the subject break the matter down for your CU. 2015 has been tumultuous for financial markets with significant volatility occurring in the interest rate equity and commodity markets. Substantial uncertainty over China s persistent weakening economy and its impact on the United States led to a miniature market shock in the third quarter palpable in the market volatility it caused during that timeframe. Market volatility is a symptom of stress in financial markets so understanding how to measure and monitor volatility particularly interest rate volatility yields important insight necessary for managing a balance sheet. There are two primary perspectives of market volatility implied and historical. Implied volatility is the volatility assumption based on an option s market price. It is a forward-looking measure representing an expectation of future volatility. To calculate implied volatility the market price of the option is entered into an option-pricing model and the volatility assumption that yields that market price is outputted. Monitoring implied volatility is vital to determining the richness or cheapness of an option greater implied volatility indicates a richer valuation and vice-versa. Historical volatility refers to ex-post or after the fact volatility. It is realized actual volatility and therefore is backward-looking. It is typically measured in annualized standard deviation based on continuously compounded daily changes in yield using the convention of 250 trading days. It gives no insight into directional movement however increases in historical (and implied) volatility tend to represent market stress. Implied volatility tends to be greater than forecasted realized volatility which suggests the existence of a volatility premium. This premium represents the theoretical required compensation to bear volatility risk. Thus implied volatility can be broken down into two components the market s expectation of future volatility and the market s price to bear it. Implied volatility encompasses both investor expectations and sentiment and it is a gauge of the market s appetite for risk. Keeping track of volatility indices is a great way to monitor implied volatility. In the stock market the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) often referred to as the fear index is widely followed. The VIX is based on the implied volatility of S&P 500 stock index options and it 15 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M CFO CURRENCY represents market expectation of the index s volatility over the next 30 days. The VIX increased substantially over the third quarter as illustrated in Exhibit 1. This increase represents additional premium required for purchasing options to protect investors from volatility. Exhibit 1 CBOE Volatility Index 3-Month Chart Source Bloomberg The MOVE Index had been elevated since the beginning of 2015 as the VIX and the MOVE became increasingly divergent. Such a divergence indicates differing expectations between bond and stock market investors. Exhibit 3 shows that the disparity between the two indices was quite large for most of the first two quarters of the year but that disparity has since decreased. The large spread between the two indices was quickly closed in the third quarter when the market was shocked resulting in increased index values and correlation between the two indices. Rapidly increasing correlations are typical during market shocks. Another interesting note is the VIX increased much more sharply than the MOVE. This tendency is perhaps due to less preparedness in the stock market as the first half of 2015 was characterized by low levels of implied stock market volatility compared with the levels of implied interest rate volatility which had been elevated since the beginning of 2015. The most popular index-tracking implied interest rate volatility is the Merrill Lynch Option Volatility Estimate (MOVE) Index often thought of as the bond market s VIX. It is based on the implied volatility of options on U.S. Treasury bonds and like the VIX represents an expectation of 30-day volatility. As illustrated in Exhibit 2 the MOVE Index did not experience the same drastic increase as the VIX did in the third quarter. Exhibit 3 VIX and MOVE Indices Beginning 2014 Exhibit 2 MOVE Index 3-Month Chart Source Bloomberg Source Bloomberg 16 C R E D I T U N I O N B U S II N E S S B U S N E S S Tracking historical (realized) interest rate volatility is a little trickier there are no historical volatility indices. However the calculation of historical volatility is fairly straightforward and it can be manually computed and tracked by obtaining historical yields. To illustrate this process graphs of the rolling 30-day historical volatility of the industry-significant 10-year Treasury DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M CFO CURRENCY CURRENCY CFO CFO CURRENCY 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 yield are provided similar to amortizations. yield the output should be recalculated to compared withand and They have already become the standard for pricing and decay rates that arein Exhibits 4 and 5. Exhibit 4 offers market. is in today s market environmentdetermine the impact this can take weeks. a Dividend and discount rates the analysis beginningvaluemany previous decade. long-term perspective with allow for the present in the corporate bonds. of a different assumption. If you are uncertain as to 1990 Figure 5 provides this metric interest rate 2014. calculations (premiums) in each modeledbeginning inscenario. Knowing where swap rates and spreads are will allow the many requirements The examination of long-term changes in historical Exhibit 4 and investment execution. When investors need of Effective duration calculations can then mathematically bebetter hedging30-Day Rolling Historical Volatility of the Conclusion interest rate volatility must include the Federal Open gauge credit Treasury Yield applying and using derivatives compared to that of the institution s assets. In this case effectiveto10-Year U.S.risk and market be viewed as aswap curve is Non-maturing deposits can sentiment the franchise value consider Market Committee (FOMC) actions which have had becoming the more important curve to analyze.engaging an external duration is calculated by merely backing into the price change or benefits generated from loyalty of the membership when service provider to help you drastic impacts on realized interest rate volatility. formula. For example if the liability present value is 100 in the deposits are retained when dividend rates are low in a higher Prior to 2008 actions to manipulate the long-term Emily Hollis CFA is a partner with ALM the steps. through First Financial base 101 in theunheardbasis But in late 2008 99 inFederal market environment. And vice versa A financial derivatives rates were up 100 of. point scenario and the the downAdvisors LLC. Properly used institution 100 basis point scenario the effectiveEasing (QE) one percent that offers a non-maturity dividend rate higher than market Reserve announced Quantitative duration is 1 and the can offset interest rate risk (i.e. (101-99) 200). a Zero Interest Rate Policy (ZIRP). to attract hot money will decrease the economic withinofthe implementation of that is inherent value its liabilities. It is imperative to model these accounts for a more This was the first of many market manipulations to drive competencies to meet the final requirements. The second part credit union industry today. This is vital because as competition accurate depiction of allow rate unions Sensitivitylevel of interest rates.when implementation of grows derivatives can interestcreditrisk. to compete more down the Analysis The and final application is submitted all requirements are The regulator strongly had drastic impactsanalyses as arates effectively. such measures has suggests sensitivity on interest means completed including dealer contracts. to with an increase in realized interestassumptions. Sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial quantify the effects of changing rate volatility being Setting up a line at a dealer is similar to becoming a one are essential because the core share evaluation may Advisors LLC. analysesof them. Looking at 25 years of data beginning Emily Hollis CFA is a partner with ALM First Financial member of Figure 4 shows be laborious and takes a 10-year Source Bloomberg in 1990 the FHLB--it can just how volatile the good deal 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. 17 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M www.cubusiness.com November 2014 Credit Union BUSINESS 15 CFO TAB CURRENCY Exhibit 5 30-Day Rolling Historical Volatility of the in 2015. Options are often used to manage interest rate volatility because their positively convex price 10-Year U.S. Treasury Yield Figure 5 gives insight into the recent activity of profiles offset the negative convexity often exhibited by institutional balance sheets. By most metrics current interest rate volatility is rich relative to historical standards indicating a heightened degree of uncertainty and distress in financial markets. Elevated volatility indicates robust compensation for bearing volatility risk and it may indicate a good time to take on convexity risk. Understanding the insights of interest rate volatility enables balance sheet managers to more aptly assess risk tradeoffs and lends to informed strategy for managing interest rate risk. Alec Hollis joined ALM First Financial Advisors in 2012. Mr. Hollis performs asset liability analyses for financial institutions various what-if analyses budget forecasting liquidity forecasting and any other modeling requirement to fit the needs of ALM s clients. As an Associate Mr. Hollis s additional responsibilities include the presentation of results to client ALCOs and senior management as well as mentoring new financial analyst team members. Mr. Hollis holds a bachelor s degree in finance from the University of Notre Dame in South Bend Indiana. historical interest rate volatility. In 2014 realized interest rate volatility was low and option sellers were rewarded handsomely. Low realized volatility improves returns due to diminishing option values. Option sellers can also be thought of as buyers of convexity risk. If realized volatility turns out to be lower than implied volatility when taking on convexity risk then a positive return is generated. It is similar to a buyer of credit risk with positive returns being generated when realized credit losses are lower than expected credit losses. In contrast to 2014 beginning in 2015 both realized and implied interest rate volatility increased. Positive convexity becomes more valuable given an increase in interest rate volatility therefore institutions owning options were rewarded beginning 18 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M CU BUSINESS BY JACK LYNCH SVP OPERATIONAL SERVICES AT PSCU Raising the Bar to Meet the New Definition of Service T Serving members what does this credit union mantra really mean If your members don t think they re being well served by your CU it doesn t matter how much effort you think you re exerting on their behalf. These tips will help you align your credit union with the new definition of service. Service has moved to being defined by consumers as 24 7 access across all channels. They want what they want when they want it how they want it whether that be through mobile web branch or phone. When your members reach out for help they expect to ell me if this scenario sounds familiar Your credit union rolls out the latest and greatest mobile application. Despite all the bells and whistles a member encounters an issue after regular business hours on Friday evening. The member does his own troubleshooting online to no avail. He then calls you only to be greeted with an automated recording informing him that no one will be available to provide assistance until Monday morning. The result An unhappy member and a headache for you on Monday morning. The credit union industry has touted its service to members as its primary focus for years. But what does that really mean How does your vision of service translate into results for current and future members Will your service message lead to an increase in membership or higher member satisfaction Great service is now about more than just greeting your members when they walk into your branch. Many of our competitors in the financial services industry have recognized the importance of friendly in-branch customer service and have made improvements on that front accordingly. And even if you outshine your competitors with a great branch experience does this really mean you are winning the overall service battle for members Probably not because members definition of service has likely changed. Managing Risk Doesn t Have to Be a Juggling Act Visit autopilot.swbc.com or call 866.647.8749 today to learn more 19 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M CU TABBUSINESS experience your commitment to service across all of those channels. Credit unions have a leg up on the competition thanks to our long history of service to members. This history gives us a built-in advantage over other financial institutions. It is our job not only to meet evolving consumer expectations of service but also to help educate the millions of people out there about just what makes credit unions so unique. And one of those differentiators should be that we are available to our members when they need us in the channel or channels in which they want to engage with us. Everyone in the credit union industry needs to ask themselves Are we aligned with our members new definition of service To answer this question honestly requires ongoing assessments across all channels. It also necessitates measuring how you stack up against the competition. Identify the gaps and create a roadmap for improvement. In what areas do you need to invest to create the service current members demand and for which future members are looking It is easier said than done when confronted with day-to-day business challenges. The gap may seem insurmountable when some of your competitors are the largest financial institutions in the country and have the resources to make huge investments in service delivery. Leveraging your partners across all channels can help as you develop an overall plan designed to meet the new definition of service. For example PSCU s Total Member CareTM call centers work with credit unions to communicate effectively with their members about conversions mergers EMV upgrades home banking conversions and regulatory changes in addition to handling inquiries on a variety of financial services. All services are available 24 7 365 to ensure maximum satisfaction and loyalty. PSCU prides itself on collaborating with its owner credit unions to provide an unparalleled level of service to its members. The payments landscape is changing rapidly and so is the definition of what it means to serve. Can you confidently say your service is superior to your competitors service when a member engages with you across all channels As you plan for the future service should be a part of every strategic discussion. This is an opportunity to differentiate yourself from the competition and not only retain current members but also expand your membership as you help them meet and exceed their new definition of service. Jack Lynch oversees PSCU s operations service delivery to credit unions including implementations project management and CU Learning. Jack has over 25 years of leadership experience in delivering operational services project management client implementations process reengineering account management and technology services. 20 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M THE TAB LAW HERE BY BRAD R. BERGMOOSER FREEBORN & PETERS LLP The Evils of Arbitration According to the CFPB O Will possible proposed rules by the Consumer Financial Protection Bureau alter the way your credit union customers open a bank account or credit card Arbitration provisions are facing greater scrutiny. Here s what you need to know about how these potential changes may affect the products and services your CU offers consumers. ignores the expansive system of consumer-friendly laws and regulations currently in place that serve to resolve many issues before the consumer is faced with the decision to pursue further legal action. n October 7 2015 the Consumer Financial Protection Bureau (CFPB) issued a proposal to a proposal aimed at limiting arbitration clauses in consumer agreements. A proposal to a proposal means there is no official proposed rule ... yet. The CFPB does not like class action prohibitions in arbitration clauses and feels they create disastrous results for consumers. Specifically CFPB Director Richard Cordray has stated [C]onsumers should not be asked to sign away their legal rights when they open a bank account or credit card. Broad generalizations and factual inaccuracies aside contractual provisions such as arbitration clauses are an important tool to mitigate and account for risk an essential issue for financial institutions and (ironically) their regulators. The rationale for the proposed rules comes from the results of a study released by the CFPB in March. According to the Bureau the study showed that arbitration clauses restrict consumers relief for disputes with financial service providers by allowing companies to block group lawsuits and very few consumers individually seek relief through arbitration or the federal courts while millions of consumers are eligible for relief each year through group settlements. Making the connection between the proposed arbitration restrictions and the data suggesting that consumers do not heavily utilize the arbitration process however What the CFPB Wants to Propose The proposals under consideration are not a blanket ban on arbitration provisions but they would prohibit such clauses from restricting consumers rights to pursue or become party to a class action suit. Additionally the proposals are contemplating CFPB involvement in the remaining arbitration process. Initial arbitration claims would be submitted to the Bureau for review under the concept of aggregating the data to ensure fair administration of arbitrations. In addition the CFPB would receive and analyze final arbitration rulings. The proposal is even considering allowing the Bureau to post the rulings on its website. 21 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M THE LAW The current scope of the proposal covers practically all products and services offered to consumers by credit unions from credit and debit cards to any form of share or checking account and all the services that come with them. With no proposed rule published discussion of an effective date for a final rule is still very much an estimate. The CFPB stated in the proposal that an effective date of 30 days following publication of a final rule is being considered along with a 180-day ramp-up period to give financial institutions time to comply. Factoring in a comment period and the lag time before a final rule is published compliance with any arbitration restrictions is likely to be up to a year out or more. If finalized any prohibitions would not apply to contracts already entered into with members. The Often Overlooked Unintended Consequences Credit unions don t create and use contracts to abuse members or to maliciously strip them of any rights they have. Contract provisions such as arbitration procedures are in place in part to help financial institutions counterbalance the uncertainty of potential losses under the current legal framework. Consumer financial products and services operate in a highly regulated market and especially since the passage of the Dodd-Frank Wall Street Reform Act one that is very consumer friendly. Regulations placing responsibility for consumer losses on the financial institution (the unauthorized transfer provisions in Reg. E for example) produce an indeterminable calculation for costs associated with many products and services. In the unlikely event an issue goes beyond the process provided by regulation contract terms requiring FREEBORN S CREDIT UNION INDUSTRY TEAM o ers a full range of legal services to credit unions and credit union service organizations to address and manage the complex challenges facing the financial institutions industry. To account for the full range of business needs of credit unions Freeborn s Credit Union Industry Team delivers a broad range of legal services including Regulatory and Legal Compliance General Corporate Representation Commercial Finance Board Governance Real Estate Services Labor and Employment Vendor Contract Representation Intellectual Property Counsel Investments within ICUA and FCU Parameters Mergers Commercial Lending and Bankruptcy Insurance and Charter Conversions Risk Management Send an email to CreditUnionsCommittee freeborn.com to subscribe to our legal newsletter. CHICAGO 311 South Wacker Drive Suite 3000 Chicago IL 60606 (312) 360-6000 (312) 360-6520 fax www.freeborn.com 22 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M THE LAW TAB Managing Risk Doesn t Have to Be a Juggling Act arbitration in lieu of the judicial procedure offer some consistency and cost savings while still allowing an objective review and resolution to the matter. Removing this option would only create greater and more unknown costs for financial institutions. In turn this would lead to more costly and a reduced variety of products and services available to consumers. A credit union s contract with a member for a product or service is only one piece of a connected chain of relationships. With a debit or credit product for example there is a processor relationship and in the case of an affinity product perhaps a relationship with another institution that is connected to the transactions involved with the card. If those agreements which so far have not been included in the proposal mandate arbitration then the credit union is stuck in the middle with different standards and different costs for each. From a contract-drafting standpoint to the greatest extent possible it is important for the terms of agreements linked together to match. Visit autopilot.swbc.com or call 866.647.8749 today to learn more Proactive Credit Union Actions There has yet to be any official action by the Bureau to begin the rulemaking process that will prohibit or restrict arbitration clauses. That does not mean however there is nothing a credit union can do to prepare. The best course of action would be to conduct a self-assessment of the credit union s current contracts both member agreements and agreements with vendors. In general periodic review of its relationships is never a bad thing for a CU. It will give management an understanding of where the organization stands and what agreements it should seek to amend if the proposal is finalized. Brad R. Bergmooser is Senior Counsel at Freeborn & Peters LLP and a former Assistant General Counsel for Illinois Credit System. He is a member of the firm s Corporate Practice Group and Credit Union Industry Team and concentrates his practice on matters involving credit unions and other financial institutions. He can be reached at bbergmooser freeborn.com. 23 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M TAB RECRUITMENT HERE BY ADAM CONSIGLIO Recruiting Top Talent for Your Compliance and Secondary Marketing Departments T Only with the right talent can a credit union increase its returns and remain competitive. But how does your CU recruit top-tier team members when their services are in such demand everywhere but in particular in the sought-after compliance realm The qualifications and competencies required for compliance employees can be challenging for credit unions seeking to make new hires. Critical skills for a chief compliance officer include a comprehensive understanding of current laws regulations and rules along with the ability to stay fully informed of any pending regulatory changes and how they will impact the credit union industry. Compliance officers must also be able to develop administer and monitor policies and procedures that ensure compliance with laws regulations and rules as well as identify and resolve deficiencies in the area of compliance throughout the organization. As the implementation of rules generated by laws such as the Dodd-Frank Act among others continues to reshape the regulatory landscape credit unions need to employ competent professionals who can assess risk and insulate themselves from falling out of line with regulatory requirements. This has led to strong he credit union system in the United States continues to experience steady growth in members and assets. According to the National Credit Union Association as of March 31 2015 there were 6 206 credit unions serving 99 969 794 consumers and member businesses. Together these credit unions hold in excess of 1.1 trillion in assets. As credit unions continue to look for ways to increase returns and be competitive while effectively managing operating costs and remaining compliant hiring the right talent and doing so efficiently is critical. This article briefly touches upon two specific areas of operations compliance and secondary marketing. Compliance Today s credit unions are confronted with the increasingly daunting task of providing robust and convenient access to member services in the most secure way possible. Each year the effort to manage complex systems intensifies as credit unions struggle with the burden of compliance and the need to strengthen the integrity of their infrastructure. It seems as though new regulations and changes to existing rules and regulations occur almost daily requiring credit unions to create numerous policies and procedures to ensure compliance and to document adequate internal controls. 24 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M RECRUITMENT competition for compliance professionals who are also highly sought after by the banking industry. Secondary Markets Ideally credit unions fund loans with member deposits. However demand for funding that exceeds their capacity to hold mortgages in their portfolio along with being able to offer competitive mortgage products and pricing requires involvement in the secondary market for mortgages. The mortgage volume any individual credit union is funding and what that CU s plans are for future growth can help determine to what degree a secondary marketing or capital markets department should be staffed. Just as there are many different ways in which a secondary marketing department can be structured from entities that run a simple secondary desk handling The mortgage volume any individual credit union is funding and what that CU s plans are for future growth can help determine to what degree a secondary marketing or capital markets department should be staffed. transactions on a flow basis to robust capital market departments that have complex hedging strategies and a variety of delivery options available there is also a wide spectrum of talent to pull from. A key component to staffing in this area is to ensure that the experience and abilities of the candidate are truly in line with 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. join.makeyourmoneymatter.org 888.918.7357 25 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M RECRUITMENT the employer s current platform and any anticipated evolution thereof. A solid secondary marketing or capital markets manager has the ability to dramatically impact the bottom line of a mortgage department and the capability to source key individuals is critical to achieving the best returns possible. talent. Using a professional recruitment firm to fill key positions with top talent can shorten the search time speed up the hiring process and in the long run save money. Adam Consiglio is a Managing Member of Consiglio-Mattei Executive Search Group LLC an affiliate of executive recruitment franchise organization MRINetwork. He has over 30 years of experience in various aspects of banking and mortgage lending and his search practice is focused on the mortgage and banking industries in the areas of compliance secondary capital markets and production. To learn more about Consiglio-Mattei Executive Search Group visit www. cmsearchgroup.com. Conclusion The demand for talent in the area of compliance is extremely strong and finding a right fit for your secondary marketing department can be challenging as well. That being said there are extremely talented individuals in each of these fields doing their jobs every day. They aren t typically looking for a new job but they are open to exploring new opportunities. The challenge for hiring managers is finding this hidden Loan Originator training You ve got this. Do you still need to satisfy your training requirements Look no further than the comfort of your own office. A new NMLSapproved self-study course is specifically designed for credit unions and meets the continuing education requirements of Reg Z. Enroll today at www.cuna.org MLO Check it off your to-do list Enroll today at www.cuna.org MLO OFFERED BY INSTRUCTED BY The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM 26 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M VIEW FROM A TAB CROW S NEST HERE BY JULI ANNE CALLIS Creating ... Protecting ... Sustaining a Strong and Trustworthy Brand. When the winds of change point the sails of credit unions into new fields of membership it is time to prepare. Creating protecting and sustaining a strong and trustworthy brand are the key elements of this preparation. To reach a port we must sail sometimes into the wind and sometimes against it but we must not drift or lie at anchor. Oliver Wendell Holmes n the past decade a multitude of credit unions have determined that it was time to change their charters their scope of services and routinely their brand. These measures are often taken by an organization during times of distress triggered by matters beyond that organization s control. That was the case of Meriwest Credit Union. The proud legacy of this Silicon Valley based organization was built on the IBM success story. But as time passed what had been the very essence of the strength became the CU s greatest challenge. There came a time when the ship could have been sunk because IBM was no longer going to be the source of the organization s vitality. As with so many credit unions the founding sponsors could no longer be the wind in the sails propelling the organization forward. This drove Meriwest to seek out new opportunities that would sustain the organization. The journey of leading Meriwest Credit Union successfully through the gales of change has demanded a skilled and steady hand at the helm. Focusing on being a treasured brand to those the CU serves has been its captain s cornerstone. As Julie Kirsch stepped up to the helm as CEO of her large and growing vessel her core strengths and experiences led her to focus the organization on being a trustworthy ship. She wanted to ensure her crew and I members could count on the CU as they navigated many changes simultaneously in field of membership the economy and regulatory environment. Julie knew the credit union would experience a number of significant challenges in this transition from the IBMcentric brand. As it worked to build the future Meriwest Credit Union in one of the nation s most diverse and demanding communities it would certainly encounter some rough seas. Julie utilized her strengths in strategic design and operations to successfully lead the organization 27 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M TAB FROM A CROW S NEST VIEW through these transitions. With a determined purpose she knew the brand would need to be strong and actively protected to be sustained. For some members Meriwest would need to be a rescue vessel during their times of financial distress. For others it would need to be a safe retirement cruise ship. Julie shared that she instinctively knew the future of any financial institution could not rely on past successes. So it would take much more than heading out to sea with optimism. Somehow expecting friendly winds to propel all on board safely to shore just wouldn t cut it. This is also true today for many financial institutions coast to coast that are determined to sail on for future generations. Julie recently shared the details of the very successful actions in response to Meriwest challenges. I think of the branding journey we have been on in three very distinct phases situations she explained. The creative strategies were implemented Developing the Meriwest Way and a culture of Brand Stewards Creating the retail branch concept to make the brand visual and visceral Looking at high-performing retail stores as the model and hiring professionals in that space 2. Protecting The challenges were identified Great recession large losses The community charter does not create the affinity bond of a single sponsor loyalty more difficult to attain. The strategies were deployed Good loans to good members whom bad things happened to Strategic decisions to lower that cost structure and shrink the balance sheet Decisions made to protect brand equity and CU reputation Huge investment in community outreach Significant involvement with local agencies and the FHLB to generate grants for a number of initiatives Frequent staff recognition and low-cost events Not losing any staff Focusing on improving areas where a gap in member satisfaction existed Significantly improving overall satisfaction scores Leveraging the opportunity to look inward and implement best practices 1. Creating The challenges were identified The organization had to transition due to the brand disruption that resulted from going to a community charter when the sponsor left and the name changed. The staff needed to develop from dedicated transaction order takers. There would be a loss of the homogenous market (i.e. very loyal with high affinity). The need existed to develop a means of communicating the brand essence (i.e. empty vessel filled with what the brand is and means). The name pronunciation Meriwest (as America) not Merrywest 28 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M VIEW FROM A CROW S NEST 3. Sustaining The challenge is ongoing and the strategies will continue to be developed. They currently include Company-wide effort to stay relevant to Meriwest members and the community Employee-driven committees 100 percent employee community outreach Strategic branch commitment Digital commitment and enhancements Knowledge-based training and genius bench concept Strategic partners San Jose State Sponsorship with the Spartan Athletics Affinity debit card creation for Alumni and Spartan Football Reaching students through Real World Budgeting San Jose Earthquakes Numerous middle and high schools throughout the market HEART of San Mateo County As a humble leader I found Julie clearly more comfortable talking about the success of the people who make up the successful Meriwest culture than her own accomplishments. She noted that the CU would need to defend the organization against industry disrupters and that innovation and technology initiatives would be anticipated. Therefore the crew would need permission to fail as they explored new approaches to serving current and future members. In closing she did note In each phase from the birth of the brand to sustaining it there were and are distinct challenges that shape all of us as leaders. Employees look to leadership during massive change and when facing adversity. The biggest lesson is you can t over-communicate you can t promise and you have to deliver little wins along the way. With over 25 years of technical banking experience Julie Kirsch brings depth to the CEO role. In her tenure with Meriwest she has successfully lead the credit union through numerous transitions and innovations. Through her strong market analysis and expansion skills Kirsch navigated the credit union from a single sponsor to community based this move also included a name change and branding efforts. Juli Anne Callis is a nationally recognized industry leader with a substantial track record as a pragmatic innovator. She has served in numerous executive roles in both the credit union and banking industries. From her early days at Citibank working in market segmentation to Langley FCU in Virginia and over a decade in Silicon Valley at AEACu KeyPoint Callis has led in the development of new technologies and business models which landed numerous awards in the financial services industry. She was also an original founder of the CUNA Councils. 29 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M HISPANIC TAB MARKETING HERE BY MIRIAM DE DIOS CEO OF COOPERA Hispanic Millennials (Heart) Credit Unions R What is your credit union s motivation for serving its young Hispanic members If your CU is fueled by profits over serving the humans behind the dollar signs you re following the wrong track. To earn long-term Hispanic membership especially those of the Millennial generation requires building certain mutually beneficial relationships. elationship marketing the pursuit of longterm engagement rather than short-term sales has been called a game-changing marketing trend for 2016. Credit union leaders may find that a bit amusing given relationship marketing is less of a trend and more a way of life within the movement. What more credit unions are learning however is this deeply rooted competency for relationship building is better suited to some consumer segments than to others. As certain financial products become commodities for some individuals they remain coveted potentially life-changing services for others. Take Kenia Calderon for example. The 21-yearold El Salvador native has been in the United States for nearly 10 years. After what she describes as a bad experience with a major U.S. bank she watched her parents pull out of the U.S. financial system altogether. Today the double-major university student and president of her school s Latino student group manages her entire family s finances with the help of Village Credit Union in Des Moines Iowa. Kenia Calderon 30 C R E D I T U N I O N B U S I N E S S Serving the Latino community is hot these days said Calderon. But for most big companies that s because they see dollar signs. My credit union put humanity ahead of profit. By helping me and my family better our lives they have impacted generations to come. It s a domino effect. In my family alone we will have three college graduates leaving school debtfree thanks to the help of Village Credit Union. Knocking Over the First Domino Earning the business of more Millennials like Calderon the second largest Hispanic demographic in the D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M HISPANIC MARKETING TAB country may require a new way of thinking for U.S. industry. For credit unions though it s about getting back to the basics of building mutually beneficial relationships albeit with a twist. Young Hispanic consumers have some unique and somewhat conflicting tastes. For instance While face to face is important digital access is critical. While they speak Spanish they also speak English. While savings and loans are huge everyday services are just as vital. We can see a bilingual preference extend far beyond interactions with financial advisors. Take entertainment for example. While 44 percent of Millennial Hispanics report watching TV most often in English 35 percent prefer programming in both Spanish and English equally. Calderon who is fluent in both languages says bilingual staff signals more than a credit union s openness to communicate. For me it s more important that the institution is hiring Latinos than hiring Spanish speakers. It demonstrates they are giving people like me an opportunity to serve their community and they appreciate diversity and inclusion. Human Interaction Meets Digital Access Hispanic Millennials like in-branch support from people who share or at least understand their culture and background. Yet digital access is also extremely important. Millennial consumers of all cultures are nearly 2.5 times more likely than Baby Boomers to use their mobile phones for things like online shopping and instore payments. When we look at the Hispanic culture specifically we see an even greater desire to use digital means to accomplish everyday tasks. Calderon says being able to bank from every device is important. If I m in class for instance and can t use my phone I ll quick open a browser on my laptop and make my loan payment. She also reports excitement for mobile payments like Android Pay and more advanced banking apps that make her life that much easier. At the same time Calderon calls herself a little old-fashioned citing the importance of oneon-one interaction with credit union staff. Products of all Shapes and Sizes Like Millennials of all cultures young Hispanics in the United States are experiencing significant life changes (graduation new jobs marriage parenthood etc.) at a rapid pace. Obviously this makes them ideal consumers of financial products and services. Yet some Hispanic Millennials lack the financial education sometimes even the credit or U.S. resident status to obtain them easily. This is where credit unions can differentiate themselves. For older Millennials homeownership support may become more enticing as this segment of the U.S. consumer population faces rising rent. Millennials who entered the workforce during and immediately following the Great Recession haven t accumulated wealth at the same rate as previous generations causing many to delay homeownership. This tendency has increased demand (and pricing) of rental homes. Hispanic households paying more than half their income toward rent is expected to rise by 27 percent. This may push more Hispanic Millennials to pursue home-buying earlier than the industry may have anticipated. Keep in mind that while this segment is in pursuit of big dreams like a college degree Hispanic Millennials are also in need of everyday services Message More Important than Language While they are likely to speak Spanish in the home Hispanic Millennials are proficient in English and comfortable switching back and forth between the two languages sometimes within the same conversation. 31 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M HISPANIC MARKETING TAB like check-cashing. This is often because they are managing finances for older family members who are uncomfortable with or distrusting of U.S. financial institutions. Earning Trust One Family Member at a Time Hispanic children and young adults carry a tradition of strong family ties which makes them more likely than children of other cultures to be influenced by parents and grandparents. Families who have immigrated to the United States may have carried mistrust of financial institutions with them one that gets passed on to children and teens. That does not translate to a lost cause however. With a new generation comes a new opportunity to reshape that perception and at the same time make a real difference in the lives of big dreamers for generations to come. Miriam De Dios is CEO of Coopera which partners with credit unions to help them grow by reaching and serving the Hispanic community. A native of Jalisco Mexico De Dios has significant experience in the financial services arena having worked with State Farm Insurance Companies and John Deere Credit. Witnessing her own parents struggles to navigate the U.S. financial system she is passionate about furthering Coopera s mission of connecting more Hispanics both immigrant and U.S. born with the financial mainstream. Credit unions she believes are the answer. 32 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M BRANCH BUSINESS BY MEREDITH DEEN Branches Give FIs Advantage in Digital Age but 5 Things Are in the Way F Is your credit union feeling the pressure from the new crop of non-traditional market entrants The competition might be growing but CUs still possess the advantage if they can adapt to the changing times. Discover the five obstacles standing in the way of doing things the new way and how to overcome them. inancial institutions face a growing threat from new market entrants. Silicon Valley lenders Target and Walmart Google and PayPal and even virtual payments and bitcoins are gaining mainstream acceptance. These market disruptors challenge the traditional financial services business model. For example online lenders like Kabbage and Lending Club focus on operational efficiency as well as speed and convenience of product delivery. And Walmart s nofrills no-overdraft GoBank checking account is all about simplicity and low cost. As banks and credit unions react to this market disruption by streamlining operations and increasing attention to electronic delivery they have an advantage the new online competitors do not their branches. Consumers certainly love the convenience of mobile and online yet there is only so much that hitting the FAQ button or live chat can offer. When it comes to important financial decisions consumers like to talk face to face with a real person. That is even true of branch-phobic Millennials according to several studies. Branches are the right setting for consultative services. But the approach of FIs shifting their bricksand-mortar locations from transaction hubs to sales and advice centers is the old way of doing things. Indeed many remain tethered to an outdated deposit-centric branch model despite their customers and members heavy adoption of mobile and online banking. Research conducted by FMSI indicates five things are holding banks and credit unions back from making this transition. 33 C R E D I T U N I O N B U S II N E S S B U S N E S S DDE ECCE EMMBBE ERR 22 00 11 55 C U B U S I N E S S . C O M BRANCH BUSINESS Obstacle No. 1 Focusing Too Much on Traditional Obstacle No. 3 Stuck on the Traditional Branch Accountholders in the Branch Model Designs Yes branch transactions are falling as FMSI s 2015 Teller Line Study indicates. But the branch is not dying. It is merely transitioning to sales and advice centers. While simple deposits and withdrawals still make up the vast majority of branch interactions it is a mistake to focus on these traditional accountholders. Attention should be paid to the new wave of consumers who offload the simple transactions to their phones and then visit the branch for advice and to complete an important financial transaction like closing a loan. The institutions that have the right employees in place to better handle these in-person conversations will likely see significant increases in product sales. That is because these interactions are higher-quality exchanges that lead to product sales and a greater share of consumers wallets. So institutions that maintain a deposit-centric staff approach will likely fall behind in the competitive landscape in the years to come. The traditional branch model won t serve financial institutions well in the not-too-distant future. With teller counters that don t invite accountholder conversations and little if any interactive or self-service technology to free up staff for relationship-building activities such a model is quickly falling by the wayside. By employing a deliberate systematic approach and by leveraging the right blend of technologies training and architectural designs including open floor plans that invite one-to-one interactions FIs can make significant strides toward creating profitable sales-centric branches today. Most importantly they can progress toward sustainable locations that remain viable in the future. Obstacle No. 4 Do Only What Other FIs Are Doing Generally speaking most financial institutions stay in the herd when it comes to technology adoption and process improvement. With a whole world full of great ideas and best practices spread throughout other industries it s a missed opportunity to ignore them. Banks and credit unions need to follow the lead of other industries. Take restaurants for instance which are rolling out tabletop ordering. Similarly hotels offer preferred customer programs and treat their highestvalued guests with white gloves and VIP lines for the fastest service. And retail stores allow consumers to set appointments through smartphone applications. Obstacle No. 2 Hiring Only Individuals with Banking Experience Financial institution hiring managers prefer candidates with industry experience which typically leads to reduced learning curves and higher new employee performance in the traditional branch model. However requiring financial services experience when hiring managers in the new branch model is likely leaving out an enormous pool of potential high performers who can deliver higher-quality interactions with accountholders. Simply put some people are salespeople and some are not. You are much more likely to teach a good sales representative product knowledge than to turn a branch employee with no sales experience into a consummate seller. Obstacle No. 5 Unnecessary Risk and Compliance Concerns Paying attention to risk and compliance is always good practice but allowing risk concerns to get in the way of growth is not. For example some FIs fear that replacing tellers with self-service kiosks increases chances for fraud. Many FIs won t make the move because they feel tellers are the first line of fraud defense yet they have 34 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M BRANCH BUSINESS TAB little data that shows risk increases with self-service machines. The risk pendulum as well has swung too far when the financial institution requires a signature for almost every transaction. A signature creates paper which creates manual processes which in turn takes up staff time and eats into the minutes front-line personnel can spend consulting with accountholders. Savvy banks and credit unions challenge inefficient processes creating more streamlined practices and eliminating steps. more virtual banking world it will be those who adapt the best to fit in their environment that will survive. Those FIs that meet changing consumer needs will have the greatest success in the future. And for banks and credit unions that means rethinking and changing the old ways of doing things with a competitive advantage they have over fintechs their branches. Meredith Deen is the President of FMSI. FMSI provides easyto-use yet sophisticated business intelligence and performance management systems that facilitate efficient staff scheduling and systematic lobby management of the branch. She can be reached at meredithd fmsi.com. For more information visit www.fmsi.com or call (877) 887-3022. Adapting to Survive Yes competition is getting tougher and it s coming at financial institutions from new market entrants whose low-cost digital business model is changing product pricing and consumer expectations. But in the battle for market share in what is quickly becoming a 35 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE TAB TAB UPDATE HERE HERE BY AUTHOR NAME HERE BY BRIAN GODWIN Five Compliance To-Dos for Credit Union Marketers The stream of regulations credit unions must adhere to these days seems virtually endless. And staying compliant with all these rules can get in the way of CU marketers execution of prosperous campaigns. These five easy strategies will ensure both compliance and success. A ccompanying every regulation financial product and marketing channel is a new set of rules. With so many minute consumer-protection requirements across financial product lines it s important for credit union marketers to ensure they do not miss important details as they go through the day-to-day effort of promoting their cooperatives. What follows are five simple tips for helping credit union marketers plan and execute successful compliant marketing campaigns. Get all hands on deck. Today s complex regulatory world calls for an allhands-on-deck approach. When designing and approving marketing materials work as a team albeit with clear separation. Be sure the individual or group creating the material is independent of the individual or group reviewing it. If possible the same individual or group should review each and every item that leaves the credit union. (This includes social media posts.) managing Twitter Facebook Snapchat and other social accounts on the use of trigger terms as well as the additional disclosures they could require. Many of these social platforms do not allow sufficient characters to include all necessary disclosures should they be triggered. It s also a good idea to provide a high-level overview to all staff as it relates to personal posts on their social media outlets. A well-intentioned employee may post about a specific interest rate on his or her personal platform without stating the rate as an APR or without including other applicable disclosures. Even personal posts may carry some compliance risk if it is apparent the individual is associated with the credit union. Remember the website. In the world of digital marketing content is forever in flux. New content in the form of fresh posts or updated copy is added often and typically very quickly because that s what an online audience demands. This speed to deliver can make compliance reviews tricky. In cases where your credit union needs a quick turnaround consider working with a partner that specializes in turn-on-a-dime reviews. Websites social accounts and mobile marketing are extremely visible to members and regulators too. Make sure your online communication is on point checked often and follows a good compliance review procedure before clicking Publish. Train train and train again. To ensure marketers are set up for valuable contribution to the credit union s compliance program invest in relevant regulatory training for them. Ensure new marketers are trained immediately or shortly after their start dates. Create checklists to help them achieve compliance easily painlessly and in a way that doesn t strangle creativity. Educate those marketers who are 36 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M COMPLIANCE UPDATE insights An instance of capturing the true nature of a thing. Be very mindful of UDAAP. Put yourself in the shoes of the average member or prospective member when developing new products and reviewing marketing materials. Viewing your products communications advertisements and public statements from the consumer s perspective can help you avoid the use of industry acronyms that can be confusing or off-putting. Be careful not to use affirmative statements such as Get a loan That kind of language could be considered misleading because not all who apply may be approved. in a specific geographic area can also present fair lending challenges. Some cities and towns have distinct minority variations throughout the community. By marketing to certain neighborhoods the credit union may inadvertently exclude a protected class creating a fair lending concern. Marketers love to flex their creative muscles. It s in their nature to push the boundaries. Getting your marketing house in order will ensure they can do exactly that with the added assurance they won t fall over the edge. Consider fair lending. As you are reviewing from inside the consumer s shoes ask yourself Is this advertisement direct mail or web banner welcoming to all Is it inclusive of each demographic that makes up our entire community Be cognizant of the people used to illustrate your print ads billboard creative and social network account pages. It should be a goal to represent each of the member groups in your field of membership. In addition be aware of the contacts in your target audience database and the channels you are using to reach them. Care must be taken when using addresses for example to craft a direct mail campaign. Emerging methods such as geofencing which targets consumers Brian Godwin is director of compliance solutions for regulatory compliance firm PolicyWorks a national leader of credit union compliance solutions. He can be reached at briang policyworksllc.com. 37 C R E D I T U N I O N B U S I N E S S D E C 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 VICE PRESIDENT CREDIT UNIONS NCINO Do s and Don ts for Successful Small Business Lending A s we approach the end of 2015 it is a great time to look back at the ground we have covered. Over the past year in this space I ve shared some best practices to help you develop a world-class member business lending program. Topics have included Why credit unions should offer MBL Building a winning MBL team The role of CUSOs in successful MBL programs Creating a better experience through cross selling Best practices for navigating MBL regulations and The pros and cons of participation loans practices. To wrap up the year this month I ll focus on some Do s and Don ts that successful credit unions have followed in building their MBL programs. For inexperienced credit unions the transition into business lending can be particularly daunting and this may be why comparatively few small institutions have taken the leap (see chart). Business lending is fundamentally different from mortgages and consumer lending the traditional markets for credit unions. Studying best practices employed by those credit unions with successful track records in member business lending can help credit unions getting started to avoid some common pitfalls. So let s dive in opportunity to lend to operating businesses. According to Dana Sumner president of DFTC Inc. a credit union business lending consulting firm this is a mistake. Credit unions have a great opportunity if they are willing to shake off the focus on collateral lending especially in the area of CRE she says. Real estate loans do not have the same impact on a credit union s local community or the membership as a whole as does a loan to an operating business. If you help a business with a working capital line of credit or loan to purchase a new piece of equipment it may result in that firm being able to create two or three new jobs. In addition the pricing on these types of loans can help increase your return on the portfolio exponentially. DO understand the risks going in. Senior management should fully grasp the unique nature of business lending and how different it is from traditional consumer and mortgage lending. Without management buy-in and engagement your member business lending program is doomed to fail. You need to have realistic expectations it is a business of risk there will be charge-offs Sumner says. Many senior management teams and boards simply do not understand the resources required to make member business lending successful. Credit unions have a tendency to avoid staffing their business lending shop appropriately and they make the mistake of setting up for origination not risk management. DO select your market carefully. Many credit unions enter the business lending arena deciding to focus only on commercial real estate (CRE) lending or up to four-family residential rental properties ignoring the 38 C R E D I T U N I O N B U S I N E S S D E C 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 TAB DO familiarize yourself with credit union business lending regulations. NCUA is currently undergoing a major overhaul of its MBL regulations with the stated goal of providing credit unions with greater flexibility to write their own policy limits. But until these changes are approved and fully implemented it is important to recognize that NCUA and state regulators have established very specific requirements for MBL programs that are generally more restrictive than those of commercial and community banks. In addition to the statutory cap on a credit union s total MBL portfolio NCUA has imposed maximum loan-to-value (LTV) and length-of-term requirements limits on total construction and development and unsecured lending and single-borrower limits. Personal guarantees are required in most cases and credit unions are not allowed to charge pre-payment penalties. Waivers are currently available for some of these requirements but not all. Above all it is critical that you have a boardapproved written policy that covers both NCUA s or your state s specific business lending requirements and your credit union s appetite for risk. DON T try to learn business lending on the fly. For credit unions with long histories in the mortgage business and consumer lending the transition into business lending can be rocky. Business loans must be monitored routinely. This may mean gathering and analyzing financials annually for covenant tracking reviewing collateral positions regularly for borrowing base purposes and conducting routine onsite collateral inspections. Originate a mortgage or car loan and the work is done. Originate a business loan and the work is just beginning. DO hire experienced business lenders to lead the effort. It can be easy to underestimate the importance of the expertise and experience needed to successfully navigate the complexities of credit risk portfolio risk operational risk compliance risk rate risk and so on. In general it s a mistake to transition a career mortgage or consumer lender into a business lending role until the program has matured. A more advisable approach is to hire outside staff with extensive business lending experience. This early step alone will help a credit union avoid a number of pitfalls. 39 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING TAB Jason Bierman VP and chief administrative officer of Corning Credit Union says For credit unions looking to enter into this market it is important to gain the experience by hiring seasoned commercial lenders and credit analysts and or utilizing the services of an outside consultant or CUSO [credit union service organization]. DO use technology to set up standardized workflow processes keep track of your audit trail and report on your pipeline and portfolio daily. Modern loan origination systems and portfolio management tools can quickly be configured to any credit union s specific needs and by utilizing secure cloud-based technologies reports and applications can be accessed on the fly in the office at home or on a tablet or smartphone. SAFE Credit Union recently implemented technology to help improve its business lending processes. Karen Banda business lending manager at the 2.1 billion credit union says I live in the system my team lives in the system. Things are moving much quicker than when we had paper files. An integrated platform can be tremendously helpful adds Sumner. Systems can provide an easier path through the process from origination through closing and servicing. For us at DFTC having all of the data in the cloud is hugely helpful from an efficiency standpoint. The 1 Solution for Member Business Lending ncino.com 40 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M MEMBER BUSINESS LENDING TAB DON T forget about checks and balances. The credit union must ensure that management is able to monitor the new business portfolio on an ongoing basis. Credit unions often struggle with reporting from their core systems because the business lending team member typically needs to involve IT and a point in time report is pulled as opposed to one that stays current automatically. Using reporting from the credit union s core system its origination system and its customer relationship management (CRM) solution management should be able to quickly easily and regularly review metrics pertinent to the size and complexity of the portfolio. It is important to hire experienced business bankers to manage this business line it is also critical to properly monitor and supervise those individuals. No one gets a blank check DO consider using SBA lending programs. The U.S. Small Business Administration (SBA) offers a number of options including the 504 program the flagship 7(a) and the SBA Express guarantee programs. In early 2015 the NCUA announced a new three-year partnership with the SBA on a series of educational and public outreach initiatives aimed at helping small businesses connect with local credit unions to get better access to capital. The SBA s programs can be a cornerstone for effective credit risk management however some require a substantial amount of paperwork and add time to closing. Through the use of cloud-based technology that integrates directly with the SBA s E-Tran (Electronic Loan Processing) service credit unions can add efficiency to this process allowing them to successfully grow an SBA portfolio. And as a bonus the guaranteed portions of SBA loans do not count against the credit union s 12.25 percent of assets business loan cap. Business Lending Can Be a True Win-Win Proposition for Credit Unions Credit unions across the country are entering the business loan marketplace and they re winning business. Members appreciate the culture of doing business at credit unions and see business banking products as a desirable value-added service. Credit unions are seeking to diversify the loan portfolio increase wallet share and of course provide first-class financial products to their member base. For many credit unions member business lending is a new market that requires new processes people and ways of thinking. Successful credit unions will hire experienced business lenders to design and lead the portfolio and they ll put to use robust technology to provide the infrastructure. The commercial and small business loan market is strong and a significant amount of growth opportunity remains for both established credit unions and new entrants into the market. Now is the time to seize the opportunity Ryal Tayloe is vice president of credit unions for Wilmington N.C.based nCino the leader in cloudbased operating solutions for the financial services industry. Through its flagship operating system nCino leverages the power of Salesforce.com to provide credit unions and other financial institutions with superior transparency and clarity into their existing loan production pipelines portfolios and operating efficiencies across all business lines resulting in increased profitability productivity gains and regulatory compliance. For more information visit www.ncino.com or connect with the company on LinkedIn and Twitter nCino. 41 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M EMV TRANSITION BY WILLIAM TRAN The Realities Credit Unions Need to Hear About EMV D Is your credit union one of the holdouts when it comes to EMV transition It s not too late to get in the game and the perceived obstacles are surmountable. This list of realities may just spur on CUs like yours that are still contemplating their move toward EMV. uring the long march up to the October 1 Europay MasterCard and Visa (EMV) fraud liability shift it may have seemed to some credit unions that the walls standing between them and the EMV deployment process were relatively insurmountable. While we ve known for some time that the transition to EMV was going to be a massive challenge many regional banks and CUs have chosen the road of least resistance and have opted not to migrate yet. Reasons for that business decision range from monetary investment to technical complexity to a lack of education and awareness about the ROI of such an undertaking. Fortunately both perceived and verified EMV hurdles can be overcome. To surmount such obstacles CUs must be receptive and committed to understanding where they currently stand with EMV why it is still important to take action and why falling further behind could cost their bottom line. Abraham Lincoln once said I am a slow walker but I never walk back. CUs need to take a similar mindset. It s never too late to begin making the move to EMV no matter how gradual or belated as long as they are indeed making forward progress. Here are a few realities that should spur on those CUs still questioning their journey toward EMV. The transition has not passed CUs by. Just because the October 1 deadline has been eclipsed a CU shouldn t drop the transition it s in the midst of regard 42 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M a lack of progress as complete failure or decline to begin the process altogether. Think of the October 1 deadline as a suggestion albeit one that could have material ramifications under the right set of unfortunate circumstances. There s an industry-wide expectation for it to take a couple years for EMV cards to reach ubiquity. So as long as CUs set and stick to a schedule now they will still be ahead of many competitors. Timing and rate for a deployment should be managed by the CU in a way that makes all stakeholders comfortable rather than rushed. But every day out of compliance with the EMV mandate is another day a CU has to be concerned about potentially covering fraud perpetrated against its members. You don t want to be the last target standing by playing a game of wait and see. As previously mentioned while the total migration will take time 575 million EMV cards will be in use in the U.S. EMV TRANSITION market by the end of 2015. As the majority of the market converts to EMV fraudsters shift their focus to paths of least resistance one of which is the shrinking pool of cards that remain unconverted. By waiting CUs leave themselves exposed to traditional card fraud threats that could be harmful to their members in a way that becomes more like shooting fish in a barrel. Members are on the lookout. The media s coverage of the EMV transition including all manner of EMV card FAQs how-to guides previews and reviews plus larger banks marketing initiatives and consumers instore experiences means that public awareness of the technology has spread far and wide by this point. No financial institution wants to be seen as irresponsible or a laggard when a member inevitably asks why he or she isn t protected by the new cards yet. When that contingent of members does come calling if the CU doesn t have its infrastructure and vendor relationships in place to respond and issue EMV cards quickly there s a high likelihood of those customers defecting to another establishment that has already migrated. The back-end always takes longer than you think. Speaking of infrastructure if a CU is lagging on the card procurement process chances are it is not yet addressing its backend payment systems certifications and relationships with technology partners. It s not a simple snap of the fingers to make EMV transactions work seamlessly even once the cards are in the hands of consumers. EMV integration has been simplified for CUs with pre-certification best practices and programs around processor integration and standardized profiles. Handling the backend is almost as integral as card procurement manufacturing personalization and fulfillment processes. As some industry analysts have pointed out certifications can be the most timeintensive step so if a CU isn t starting those sequences now they can be compounded into months of critical delay down the road. CUs can learn from their peers that have already made the move and don t have to feel like they re starting from scratch but it still does take time. C R E D I T U N I O N B U S I N E S S Lay the security foundation with EMV first then tackle the next weakest link. From EMV transitions in other regions it is already known that the updated protection for cards at point-of-sale terminals means fraudsters will move to the next weakest link like online banking or eCommerce (card not present or CNP) transactions. The Nilson Report estimates that total global fraud losses were 16.31 billion in 2014. Already CNP fraud accounted for 25 percent of the total (roughly 4 billion) and that proportion is set to increase significantly with EMV securing the counterfeit card market. Using cards for online fraud is going to be the next battle for both banks and retailers to fight on behalf of their customers. Do CUs really want to be worrying about legacy pitfalls (like magstripe cards) and the liability that comes with them while trying to fend off and innovate for emergent threats Luckily for those CUs that are taking the roundabout route with EMV a host of technology partners have stayed the EMV course and are ready and willing to help them take the first step. Those partners know what it takes to get a transition process off the ground. They are also armed with ways to avoid or mitigate many obstacles and understand how a better late than never approach can still save CUs much anxiety and customer attrition. It doesn t take a hero or a genius to complete the EMV migration process it just takes a rational strategy a realistic point of view a commitment to forward progress and a little bit of responsiveness to market forces and advice. If CUs are willing to take the plunge they ll find out that the impending migration is both smoother and more impactful than they ever thought it would be. William Tran is a marketing manager who works with CUs and regional banks on behalf of digital security provider Gemalto and Shoreline one of Gemalto s subsidiary companies. 43 D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING BY MARVIN C. UMHOLTZ Strike a Strategic Balance between Human Expectations and Operational Tactics I Are your strategic and operational plans meeting the unique needs of your CU s future Overcoming today s strategic and operational challenges is as much a human expectation experience as it is tactically strategic one. Read on to discover the elements behind a good strategy. think many credit union CEOs think consultants and strategic planners are the proverbial consultant who rides into town makes a big fuss and then rides out. Often this is a very accurate assessment of how certain one-size-fits-all consultants work. They have a canned template they attempt to use in every situation. With the diverse asset sizes and the variety of business plans within the credit union industry not to mention the different regions of the country CUs are located in that single template simply doesn t work anymore if it ever did. Every credit union s leaders should craft their institution s unique forward-looking strategic and operational plans. Additionally these days the state and federal regulators expect each credit union s leaders to own their strategic plan and to treat strategic planning as an ongoing way of life rather than as an annual event. They also believe that strategic planning is intertwined with enterprise-wide risk management as well as with a credit union s risk philosophy its risk policies and its risk-mitigation practices. Throw in regulator-mandated stress-testing and mandated liquidity planning and it would seem that strategic planning is already a full-time forward-looking activity. And of course a credit union s strategic direction its operational business plans and its annual budget are all integrally linked. Risk Avoidance Hardwired in the NCUA Examiner s Handbook As an aside I recently re-read the Management chapter in the NCUA Examiners Handbook that among other things covers the topics of strategic and operational planning. This is the chapter that guides the NCUA examiner toward assigning the M in the CAMEL rating. It was mostly the non-planning sections of the chapter Red Flags Board Responsibility Board Oversight of Operating Management Risk 44 C R E D I T U N I O N B U S I N E S S D E C E M B E R 2 0 1 5 C U B U S I N E S S . C O M STRATEGIC PLANNING TAB Return Tradeoff Conflicts of Interest and similar ones that gave me the distinct impression that riskbased examination was a very accurate name for it. Or perhaps risk-avoidance examination would be more accurate. It s no wonder that the NCUA examiners don t want anyone to take any risks risk avoidance is hardwired in the handbook. I find credit union strategic discussions at meetings including the classic board and management planning session to be both illuminating and useful. It becomes abundantly clear during those meetings that the group is highly invested in the credit union s success. It is also very clear that they are challenged by their many projects and initiatives at the credit union. Having assisted credit union executives and boards with strategic and operational challenges for many decades I have observed that the process is as much a human expectation experience as it is tactically strategic one. Nonetheless a significant amount of usable content comes out of the strategic conversation. I also believe that wrestling with challenges from a strategic mindset serves a cathartic value that sustains the organization going forward. sponsored 2007 vintage BoardSource-written The Source 12 for Credit Unions Twelve Principles of Governance That Power Exceptional Credit Union Boards is a favorite educational tool. The lessthan-20-page document is a quick-read approach to understanding Board of Director duties that hits the bull s-eye with the elegance of a finely-crafted archer s arrow. Principle 12 Revitalization addresses succession planning and volunteer recruitment. The principle says Exceptional boards energize themselves through planned turnover thoughtful recruitment and inclusiveness. The principle is further explained in several paragraphs. The discussion of succession planning is one I often recommend be done first in a CEO-withChairman situation and then in a CEO-with-Board situation (unless the board s Executive Committee has an expectation of a turn by themselves prior to the full board). The fewer staff in the room during that discussion the better. The board members need to feel comfortable with being candid and with speaking what s on their minds. Board Succession Planning and Volunteer Recruitment Strategies The credit union s volunteer officials inevitable vacancies and the associated in-training associate groups of volunteers like the talent search issue are other issues many credit unions are experiencing. I have a huge e-file full of Board of Directors succession planning and replacement director recruiting information. That includes candidate assessment issues that coincide with the organization s point about moral character. I have also recently done survey work on these topics. The thought process concerning volunteer succession planning recruitment and qualification is among the most important strategic topics a credit union s leaders face. The Filene Research Institute Succession Plan & Candidate Recruitment and Qualification Survey Questions Having an effective succession plan and volunteer recruitment process is certainly an element of a good strategy. However it also is a complex conversation that could overwhelm the timeframe of a regular board meeting or strategic planning session. It might also help to ask the board and committee volunteers a few questions prior to the discussion about volunteer succession planning recruitment and qualification. These survey questions were actually used with clients prior to their board discussions. 45 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M STRATEGIC PLANNING TAB Board of Directors and Committees Succession Plan & Candidate Recruitment and Qualification Survey Questions 1. Select the five most important qualifications you believe a candidate should have in order to be given serious consideration to serve on the credit union s Board of Directors or volunteer committees. Values professional accountability and has personal integrity Is a credit union member in good standing Is capable of making informed judgments Is financially literate and understands financial statements Has experience on other boards and committees Is capable of retaining confidences and refraining from divulging confidential information Does not have a criminal record Is always respectful of others points of view Possesses the integrity not to use his her board or committee position for personal gain or benefit Is capable of evaluating the facts to reach sound independent unbiased decisions Can represent the credit union as an institution and not represent a constituency Is able to contribute productively and constructively Can be courageous in terms of dealing with difficult people issues Has appropriate professional experience and or expertise Asks management as well as fellow volunteers probing and challenging questions Has a genuine interest in serving attending meetings and keeping informed Other (Please explain) 2. In a hypothetical scenario where half of the credit union s board members and half of its committee members all resigned during the same month what one phrase would best describe how prepared the credit union s officials would be to identify and recruit qualified replacement volunteers who possess the necessary personal and professional backgrounds and experiences We have an organized continuous volunteer recruitment process. Collectively we know enough people who might qualify. We would do what was necessary but it would take longer than we would like. We would call the regulator and ask for guidance. We would be surprised by how many qualified people won t or can t commit the necessary time. I don t know. Other (Please explain). Comments What s Keeping You Up at Night While on the topic of pre-meeting surveys concerning strategic topics a recent client of Umholtz Strategic Planning & Consulting Services used a multi-question survey of participants prior to the organization s annual planning session. That survey included the proverbial What s keeping you up at night type of question. The question was What one present or future development factor occurrence or event affecting the credit union or potentially affecting the credit union is keeping you up at night Comments The response choices were 1. Assets out-growing our ability to grow capital (net worth) 46 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M STRATEGIC PLANNING TAB 2. Not finding talented and affordable employees whose skills match today s and tomorrow s needs 3. Cybersecurity failure and or Internet hacker criminal theft 4. Internal fraud or theft by an employee 5. Government mandates misaligned with our mission 6. New competitor whose unique business model disrupts the marketplace 7. Loss of reputation due to litigation or public misperception 8. Headquarters or a branch office burns down or is destroyed by a tornado 9. Key management personnel are recruited away from the credit union or 10. Other Please explain. engaged in strategic thinking. When the board asks what if that river flows faster or alters its course it is engaged in strategic thinking. If the board focuses on the color of the boat or the width of the paddle it is not thinking strategically. That is obviously a cautionary tale. An effective strategic planning process also emphasizes where we have been about 1% where we are now about 9% and where we are going about 90%. Forward-Looking Strategic Quotable Quotes Comments No sensible decision can be made any longer without taking into account not only the world as it is but also the world as it will be. Isaac Asimov (1920 1992) astronomer biologist mathematician religion writer literary biographer and science fiction writer The results from the survey were summarized and analyzed. An infographic was then developed to visibly illustrate how often each insomnia-causing response choice was selected. The Other Please explain and Comments responses were also fascinating strategic discussion-starters. These days the list of responses to the What s keeping you up at night inquiry could have been two or three times longer. The survey would then get too depressing however and the respondents might not complete the rest of it. It s important to remain focused on the possible when crafting a credit union s strategic plan particularly for the near-term. Also I have forgotten the origin of the content but it wasn t original to me. Keeping focused on the strategic rather than on the day-to-day implementation is essential. The best way to predict the future is to create it. Peter F. Drucker (1909 2005) management-by-objectives consultant educator and author The illiterate of the 21st Century will not be those who cannot read and write but those who cannot learn unlearn and relearn. Alvin Toffler (born 1928) consultant author and futurist Board of Directors Strategic Thinking... When the board studies the direction and flow of the river with all of its undercurrents and rapids it is 47 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M 22 00 11 55 C U B U S I N E S S . C O M STRATEGIC PLANNING TAB The greater danger for most of us lies not in setting our aim too high and falling short but in setting our aim too low and achieving our mark. Michelangelo (1475 1564) Italian Renaissance sculptor painter poet and architect human expectations with the real-life challenges of implementing operational tactics will strategically sustain the credit union forward into 2017. Marvin Umholtz is President & CEO of Umholtz Strategic Planning & Consulting Services based in Olympia Washington south of Seattle. He is a 40-year financial services industry veteran who has held many leadership positions with credit union organizations and with financial services industry vendors. A former association executive and lobbyist he candidly shares his credit union industry knowledge and analysis with public policymakers financial industry executives and vendor companies. marvin.umholtz comcast.net www.linkedin.com pub marvin-umholtz 10 909 bb9 A ship in port is safe but that s not what ships are built for. Rear Admiral Grace M. Hopper USN Ph.D. (1906 1992) computer scientist computer code-writer inventor and U.S. Navy Rear Admiral The year ahead is filled with challenges and with changes. Remembering to strategically balance How would your customers rate their experience at your drive up Maximize Teller Productivity with a Currency Dispenser (or Recycler) Contact us at Proven Performance and Quality Phone 800-243-2624 Email dispensers magner.com Online www.magner.com 22 00 11 55 C U B U S I N E S S . C O M 48 C R E D I T U N I O N B U S II N E S S B U S N E S S DDEECCEEM BBEERR M LIMITED TIME OFFER Introductory Rebate