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T H E ON LY A LL-DIGITA L A LL-B USINESS R ESOUR CE FOR CR ED IT UNIONS T H E D ATA I S S U E SEPTEMBER 2016 VOLUME 11 ISSUE 9 CEO VELOCITY How to Create a High Velocity Credit Union SCOTT MCCLYMONDS CU TRAINING What s in a Name KENNETH C. BATOR BUSINESS TRENDS Diversifying Your Business Services Program Pays Off in Many Ways LARRY MIDDLEMAN Empower Your Credit Union with Enhanced Member Service Empowered C-Level Employees and Create Miracles In Your Community 500 PER YEAR WITH A 20% INTRODUCT ORY DISCOUNT C R E D I T U N I O N B U S I N E S S A U G U S T 2 0 1 6 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 UP FRONT Tim O Hara CU TRAINING Kenneth C. Bator TECHNICALLY SPEAKING Lars Holmquist CU DATA Brewster Knowlton COMPLIANCE UPDATE Jason Skemp CFO CURRENCY Emily Hollis BRANCH BUSINESS Sean O Donovan CEO VELOCITY Scott McClymonds HUMAN RESOURCES Alfio Carroccetto CU PAYMENTS Terrence Griffin BUSINESS LENDING Murray Halperin CU BUSINESS Corinne Kalsky DIGITAL BANKING Jeremiah Lotz BUSINESS TRENDS Larry Middleman LENDING SOLUTIONS Lorrie Wohlfeil 2 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M T HE ON LY ALL-DIGITAL ALL-BUSIN ESS RESOURCE FOR CREDIT UN ION S T H E D ATA I S S U E SEPTEMBER 2016 VOLUME 11 ISSUE 9 CEO VELOCITY How to Create a High Velocity Credit Union SCOTT MCCLYMONDS CU TRAINING What s in a Name KENNETH C. BATOR BUSINESS TRENDS Diversifying Your Business Services Program Pays Off in Many Ways LARRY MIDDLEMAN SUBSCRIPTIONS Credit Union BUSINESS is published monthly (12 issues per year) by CU Business Magazine Inc. A one-year Digital membership is 75 yr An online membership form is available at www.cubusiness.com subscription. TEAMBUILDER https creditunionbusiness.com the-teambuilder 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 TABLE OF CONTENTS SEPTEMBER 2016 VOLUME 11 ISSUE 9 TAB THE ONLY ALL-DIGITAL ALL-BUSINESS RESOURCE FOR CREDIT UNIONS 4 6 12 16 18 20 22 25 UP FRONT Our Mission Helping to Build STRONGER Teams One Credit Union at a Time Tim O Hara CU TRAINING 34 36 Scott McClymonds CU PAYMENTS Defensein Depth Creates Stronger Wall For Cybersecurity Terrence Griffin BUSINESS LENDING What s in a Name Kenneth C. Bator TECHNICALLY SPEAKING Getting Ready for NCUA s New Member Business Lending Rules Personal Guarantees Supervision Managing Concentrations Murray Halperin What s Old Is New Again Kind Of How Technology is Encouraging Loyalty and Making Credit Union Business Easier Lars Holmquist CU DATA 44 47 52 56 CU BUSINESS CECL Is Coming Is Your Credit Union Prepared Corinne Kalsky DIGITAL BANKING When Life Gives You Data Make Information Brewster Knowlton COMPLIANCE UPDATE It s No Secret Measuring Your Members Position on the Digital Transformation Spectrum Jeremiah Lotz BUSINESS TRENDS Examiners Paying Close Attention to Bank Secrecy Act Jason Skemp CFO CURRENCY Diversifying Your Business Services Program Pays Off in Many Ways Larry Middleman LENDING SOLUTIONS Lorrie Wohlfeil 4 Reasons to Consider a Registered Investment Advisor Emily Hollis BRANCH BUSINESS When A-Paper Loans Go Bad Case Study Conexus Credit Union Keeps Members Close Using Doxim CRM Sean O Donovan CEO VELOCITY How to Create a High Velocity Credit Union 3 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M UP FRO NT BY TIM O HARA Our Mission W Helping to Build STRONGER Teams One Credit Union at a Time e ve had a busy summer signing up credit unions of all sizes and from all parts of the USA to our Team Builder group subscription program. The program is the best way to rifle-shot great business information directly to the inboxes of CU professionals anxious to learn of new and better ways to serve their members educate employees and to benefit the communities in which they live and work with an automatic donation to the Children s Miracle Network with every Team Builder subscription. For more than a decade CUB content has been divided between operations within the credit union. Finance Leadership Lending Marketing Compliance Training Branch Operations and Member Business are eight very popular areas and each is treated with a dedicated monthly column written by major credit union industry experts. The readers and their credit unions always benefit. Although most CUs sign up an average of 25 employees for the Team Builder subscription now is the time to join because there is currently no limit on the number of team members eligible to join including C-Level department heads branch personnel and executive assistants whose jobs depend on knowledge of successful credit union operations. And the introductory discounted price of just 400 per credit union for the entire year is even a better bargain when you divide it by 25 people ( 16 per year per person). You can hardly buy lunch for that amount Another popular feature of the program is total access to our website www.cubusiness.com and it s more than 72 monthly back issues each one containing lots of valuable information. Also handy is the Google 4 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M Search Bar on the main page which allows for easy research for a myriad of topics. It s a lot like having a virtual library stocked with best practices and how to s ready for your team day or night. Bottom Line How much is just one good idea worth to your credit union Once your credit union joins the march toward the Team Builder program the ideas will flow and the bottom line will grow Oh and one more thing this program is on-going so each year your credit union s members will enjoy superior service from a Team of steadily improving professionals and the community will benefit from contributions to the CMN s Credit Unions for Kids campaign. You can get the wheels turning by clicking this button Thanks for reading Tim cuso A community joined together for a common purpose. PSCU 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. A W AR DED BY NAC US O pscu.com 844.367.7728 CU TRA INING BY KENNETH C. BATOR MBA What s in a Name Is your credit union contemplating a name change Such a decision shouldn t be undertaken lightly but it can be the right one in certain situations. Keep reading to see how rebranding helped one CU not only completely reprioritize but also stand out from the crowd and soar to new heights. In contrast see why one CU chose an acronym instead of renaming. O ne of the primary brand associations of any business is its name. But what if that name starts to become a hindrance to your overall B C S Formula What if it begins to detract rather than add to the B your Brand What if it starts causing negative ripples through the C your Culture because some staff want a name change and others don t What if it stagnates the S UMe Federal Credit Union Burbank CA your Strategy because the name is an obstacle among certain target markets The knee- interviews would go to a credit union with a similar jerk reaction may be to begin the process of a name name on the same street instead. Many even thought it change. But even in these situations that isn t always was a branch. Apparently even the paramedics went to the best path to take. the other credit union by mistake during an emergency It was the right path for UMe Federal Credit call. Robert s credit union needed a new identity. Union however. Becoming UMe clarified our And what a new identity they created For all those priorities states the CU s CEO Robert Einstein. CEOs who like to bellow What s the ROI when Once we determined that the relationship between us someone brings up the idea of branding listen to these and our members You plus Me was the very core of results. A little over five years ago when we changed everything we are we began to care more about every our name we had 11 700 members and 120 million touch point every detail and every member interaction. in assets Robert reports. Today we have grown Before the credit union became UMe about five almost 2 000 members organically and to over 180 years ago it was known as Burbank Community FCU. million in assets. That is nearly a 20 percent growth Robert laughs as he tells stories about how prospective in membership and a 50 percent growth in assets. I members and job candidates who were coming in for believe fully that it is our brand that has been a big 6 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING contributor to that growth. Before our rebrand we had stagnant membership growth for 15 years. Some months we would lose five or 10 members. Maybe we would grow a few. Since the rebrand we consistently grow members at a pace we have never seen before. Robert and his team understand that UMe is not only more than a name but also more than an image. UMe feeds the culture and strategy as well. At UMe our purpose is to deliver an all-around WOW experience. WOW service is creating a personal emotional connection with every member we come into contact with. WOW doesn t stop with our members. We live it with our staff. We empower our staff we listen to our staff s ideas and most of all we think of our staff as our family. We care that our employees like where they work are paid fairly are provided great benefits and have the opportunity to continuously learn and grow. We also care that they have fun So we do things together like go bowling and to baseball games. We provide lunch frequently and we have family events. We genuinely like spending time together. Robert adds Our strategy aligns with our four key attributes Genuine Quirky Enthusiastic and Striving. Everything we have done over the last five years has been measured against those attributes from the people we hire to the products and services we offer our members. The things we work on change from year to year but what does not change is the thought behind what we do and why we do it. Toward the end of our discussion I quipped with Robert that it seems as though the C and the S were always solid and that the creation of UMe brought the B into alignment. That is evident in the way everything is UMe--fied. As expected the latest marketing campaign is UMe--fied as If It Matters to U It Matters to Me. (See related video.) Every document whether it s a marketing piece or a disclosure is UMe--fied so it feels like us. Consistency of our brand really matters to us. One of the final questions I asked Robert was What would you recommend to other credit unions 7 C R E D I T U N I O N B U S I N E S S that may be thinking about a name change or may have recently begun the process He replied My best advice is to be all in. You can t rebrand halfway. You can t do it within certain parameters that feel safe. You need to do it all the way. You should commit to it. It ll be a wild ride it will stretch you and it will make you better. You will really need to find out who you are. And what I mean by that is to dig in and understand the personality of your business who you are and why you do what you do. You ll need to ask yourselves and ask your stakeholders the difficult questions. All of that knowledge will lead you to your brand attributes which led us to our name and brand. If you do all of the work right you ll find a name that really aligns with your brand. It will be an easy story to tell because it will be authentic. You will be able to live it because it will come naturally to you and your employees. Our UMe name took a little time for our members and community to understand. But for our staff and Board of Directors it fit like a glove because of what the name meant to us Simple You plus Me. One of my clients who similarly has the C and the S in place is all in in a different way. That client is Cincinnati Ohio Police FCU COPFCU for short. The credit union has an interesting predicament. One that other credit unions growing through mergers can easily face. It s an identity problem in that the CU wakes up one morning and realizes that it is serving very different groups. In the case of COPFCU it not only serves law enforcement in the greater Cincinnati metro area S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CU TRAINING but also firefighters educators and government employees. We have found that each group we have the honor to serve has some unique needs observes Barb Harper COPFCU s CEO. This is true not only from the standpoint that each sector s profession is quite different but also from the fact that each group may even work at different times of the day week and year. Not to mention that each group has members with a strong affinity to those with the same vocation. From direct experience Barb Harper s credit union has certainly learned some of these clear distinctions among the groups it serves. Our staff would go to a school or a teachers event with our marketing materials and we would hear something like Why would I join a police credit union [while the individual pointed to] the Cincinnati Police Federal Credit Union logo shares Barb. Those experiences led to some of the staff and management team suggesting a name change. Rightfully so no one wants to alienate a group of people they truly want to serve and that also represents a significant area of growth for the credit union. While she could understand the perspective of wanting to change the name Barb was more concerned about alienating the group that was responsible for starting the credit union in the first place. We have been serving police officers for over 80 years. I don t want to lose that tradition Barb proudly exclaimed. The name also aligns with the culture in a number of ways. One specific aspect is the brand association of security. As someone who has worked at other financial institutions and has experienced more than one robbery I was more than happy to come work for a credit union with the name Police right on the front of the building She went on to mention that it is one of the drawing points in the hiring process. The name adds another level of security. When I explained to her that the credit union neither had to lose its tradition nor change the name in order to grow I m pretty sure I heard a big sigh of relief on the other end of the phone. In so many words I did suggest that they would have to go all in with their acronym of COPFCU. As an example I explained that 3M stands for Minnesota 8 C R E D I T U N I O N B U S I N E S S Mining and Manufacturing Company. While they are still headquartered in Minnesota I don t think any of their employees have mined any stone quarries for several decades. We also have an excellent example within the credit union industry. I challenge anyone to go to Baxter Credit Union s website www.bcu. org and find anything other than the BCU acronym anywhere. As they have grown impressively over their 35-year existence they have embraced the BCU brand and the principles that support it more so than the full name. I couldn t even find Baxter Credit Union spelled out on their About Us page COPFCU has begun to embrace a similar approach. We are slowly migrating from the full Cincinnati [Ohio] Police Federal Credit Union to COPFCU acknowledges Barb. We had a detailed discussion on the significance between the words cop and police. As a branding expert the last thing I wanted to do was make a suggestion that would alienate the credit union s core membership. As it turns out among law enforcement in the greater Cincinnati area cop and police are considered synonymous. When we attend a roll call at a local police station COP FCU works just fine mentions Barb. The acronym still acknowledges the tradition in a respectful way but also allows for effective brand messaging to firefighters educators and government workers without the name TURN ON YOUR BRANCH SUPERVISORS & MANAGERS withTEAMBUILDER. 4 BRANCH BUSINESS C U B U S I N E S S . C O M www.cubusiness.com teambuilder buy 2 0 1 6 S E P T E M B E R CU TRAINING being a hindrance. The credit union is strategically looking at ways to use COPFCU and a few play-on-word options to market to the distinct member groups in 2017. The first step was launching a new website earlier this year. We are really happy with the updated look and functionality states Barb. While the logo on the site is still the full Cincinnati Police Federal Credit Union name for now a new stylized COPFCU is in the works. However in the process of phasing in the acronym the majority of the webpage copy references the institution as COPFCU rather than the full name. An important part of the transition is the bold tagline on the homepage A Credit Union for the Public Sector. This phrase not only finds the commonality among all of the groups the organization serves but also provides a foundation for the brand principle and future marketing. We see it as an easy transition adds Barb. The timing is right as we go through a core conversion. All of our forms need to be changed anyway. So we are updating each form with the COPFCU name rather than our old logo with the police club. More important the transition is creating the leverage for COPFCU to become a very relevant provider of financial services within the Cincinnati metropolitan region. So these are two credit unions with asset values between 100 and 200 million taking different approaches. What can we learn from both of them about what s in a name If we take nothing else from these two case studies it is the necessity to realize and understand each unique B C S Formula that supports each credit union name. Going all in doesn t always mean a name change but it does mean being all in with who you really are. That is what UMe FCU and COPFCU are doing each and every day. 10 C R E D I T U N I O N B U S I N E S S Bator Training & Consulting Inc.(BTC) established and founded by Ken Bator in 2001 creates environments where employees actually want to come to work and members want to keep coming back. BTC accomplishes this through a combination of Branding Culture building and Strategic planning. This is the unique B C S Formula created by Bator and featured in his latest book. Contact Ken directly at 714-681-2821 or kbator btcinc.net. Ask about our new service the B C S Audit And learn more about BTC s presentation topics at www.btcinc.net. S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M 250 000 Credit Union Employees 92 Million Members 100 Million Miracles Since 1996 Credit Unions for Kids has raised more than 100 million for Children s Miracle Network Hospitals giving hope and healing to kids in your local community. YOUR FUNDRAISING DOLLARS IN ACTION MILLION 10 2 1 iMRI machine and surgical suite 1 Cardiac X-ray machine 1 Ultrasound machine 1 Bone marrow transplant 1 Fully-equipped Giraffe OmiBed incubator MILLION THOUSAND 270 THOUSAND 250 THOUSAND 100 TEC HNIC A LLY SPEA K I NG BY LARS HOLMQUIST SVP AMERICAS COLLINSON GROUP What s Old Is New Again Kind Of How technology is encouraging loyalty and making credit union business easier W If you believe your credit union is too small to compete with the big banks when it comes to cutting-edge technology you re probably off base. Sometimes it s more about the race than the finish. See how speed of adoption can win you customer loyalty and make you a contender against the bigger competition. hile big business can often leave customers feeling like a nobody credit unions have the opportunity to ensure their customers are a somebody by providing personalized service where traditional retail banks simply cannot compete. This personalized service encourages ease of use both through technology and traditional means. Maintaining relationships with both individual customers and small businesses alike is a key strength of credit unions. Loyalty in financial services is already strong. Recent research by Collinson Group polling the affluent middle class demonstrates that 68 percent of respondents said they were loyal to their bank. This response rate is well above other sectors such as travel retail insurance and telecom. Credit unions have done a great job at building loyalty. With a loyal customer base already existing how can credit unions leverage technology to encourage customer retention and entice new members in an age of rapid-fire promotions and product innovation it crucial to stay up to date with the latest technology trends and offerings. Collinson Group s Mass Affluent Survey shows that 45 percent of respondents use a banking app on their phone or tablet. Yet one of the biggest issues credit unions face when serving customers is adapting to new technology and acquiring it quickly. For example not long ago technology was implemented to conduct check deposits on a mobile device by taking a photo. Now very few banking customers sign a check and walk into a branch to deposit it. Instead millions of deposits are made via mobile app. Big banks launched this functionality a few years ago and now consumers not only expect it but require it. TURN ON YOUR TECH STAFF withTEAMBUILDER. 4 TECHNICALLY Technology and Ease of Use The Technical is Personal Technology definitely has a way of making life easier. It allows business to be conducted more easily making 12 C R E D I T U N I O N B U S I N E S S SPEAKING www.cubusiness.com teambuilder buy 2 0 1 6 C U B U S I N E S S . C O M S E P T E M B E R TECHNICALLY SPEAKING used to know and greet customers by name often asking about their families. Now technology affords credit unions the ability to know their customers their preferences and how they like to bank. Modeling Loyalty Incorporating Legacy Solutions in a Modern Age Two-thirds of America s affluent middle class use banking and finance apps to engage with their financial services organization demonstrating the importance of technology in a customer s banking experience. Along with providing customers with digital solutions to create a more satisfying and personalized experience credit unions can utilize technology to create personalized loyalty offerings as well. In Collinson Group s Mass Affluent Survey 66 percent of respondents said they are loyal to a brand because of the choice of rewards and benefits. A more targeted customer experience with an easy-to-utilize customer loyalty program will encourage customers to not just come back but look favorably upon the wide array of services credit unions can offer. Technology can play a key role in ensuring this happens. Some ways credit unions can take advantage of this opportunity include Leveraging data for personalization Credit unions already have a sizable pool of customer data and can utilize it to create personalized initiatives such as loyalty programs for a broader range of their customers. Credit unions should also consider using third-party data to complement their own which will help build a better understanding of customers. In so doing it will enhance the level of personalization offered. CRM analytics can now be combined with digital analytics for powerful insight helping to create an offering of tailored initiatives. Beyond credit card rewards Provide a collection of consumer-oriented services because credit unions are in a strong position to reward customers for overall loyalty instead of 13 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M This example clearly illustrates that credit unions cannot afford to fall behind with innovative technology. While credit unions do not have to be the first they do have to be fast followers. Since they re smaller and can t innovate at the cutting edge when new developments are there they simply have to be aware of what their customers want. Then they have to be able to offer it quickly whether it be through partnering or purchasing technology. As a whole the banking industry will benefit from redefining its approach. It is time to think about what customers actually want to do rather than design experiences around products. Credit unions still have plenty of in-person branches which serve as a relevant resource center for complex customer concerns. Without question these branches demonstrate value to credit unions and customers alike. However by intertwining digital services with these branches credit unions will not only save on costs but also fill the demand for customer self-service. For example employing mobile apps for balancing checks payments transfers and deposits or financial tools to support budgeting retirement planning and other goals complements the in-person branch for an empowered customer experience at credit unions. Deep meaningful relationships can be delivered by digital services and products creating a huge opportunity for financial institutions to re-establish the trust and type of personal relationships previous generations had with their banks. Branch managers TECHNICALLY SPEAKING just for a particular credit card (like traditional retail banks). CUs could benefit from additional cross-selling of products and deepening the customer relationships they already have. Even reward programs must be more personalized with lifestyle-oriented rewards and targeted earning opportunities getting to the heart of what the consumer wants. Surprise and delight Points earnings promotions for buying extra service customer anniversary rewards you name it credit unions should be doing it. Invoking old-fashioned loyalty perks with a technological spin works for credit unions in a big way as an extreme customer focus is never wrong. By clearly demonstrating the value that credit unions can provide to their customers they can establish a fruitful long-term relationship. Embrace digital Digital tools are going to play a significant role for the future of financial services with nearly two-thirds of the mass affluent making digital payments whenever they can. Digital banking is very important and enhancing the way service is delivered digitally will build a more meaningful customer relationship. For example being able to contact consumers via smartphone about a new offer (or in a more unfortunate case a fraudulent purchase) will establish a greater sense of trust between the customer and the brand. Embracing technology can help credit unions go beyond just understanding customers. It can help these institutions deliver exactly what customers want creating a more simplified yet personalized experience. link a customer s checking account with his or her mobile phone or computer. It is a key resource for communicating with and getting to know customers on a more personal level. Credit unions will truly benefit from a holistic loyalty strategy with modern technology upgrades ultimately making them the go-to resource for all customer needs. Although credit unions may not be able to develop cutting-edge technology speedy adoption is absolutely critical to simplifying the customer experience making the time customers spend more streamlined. Incorporating legacy loyalty strategies with new waves of technology is key to improving customer experience. Vital to their success credit unions must get to know customers and what they want and using modern technology can help. By ensuring customers are a somebody through the use of technology credit unions will encourage loyalty across service lines within their organization. Lars Holmquist is SVP Americas at Collinson Group a behavior consultancy firm advising Fortune 500 financial services airline and retail companies on how to influence customer behavior. Contact Lindsay Sweeney Account Executive Corporate Communications MWWPR T 646.376.7037 M 908.477.5514 lsweeney mww.com Final Thoughts It is no secret that technology will continue to evolve and credit unions cannot fall behind the latest trends. However technology can do more than just 14 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M C U DATA BY KNOWLTON When Life Gives You Data Make Information F Credit unions are living in the age of data overload but all that data availability means nothing if you can t turn it into useful information. These simple steps will help your CU practically apply data so you can transform your organization into a data-driven culture. or starters yes the title of this article is a terrible play on when life gives you lemons make lemonade. Bad jokes aside I hear too frequently how organizations need more and more data. I m a data guy I m all about data. But there is a subtle difference between having more data and having more information. Here is one of my favorite quotes about data Without data you re just another person with an opinion. W. Edwards Deming Opinions are the foundation of subjectivity and fundamentally subjectivity is devoid of data as support. Decisions driven by opinions without data are counter to everything The Knowlton Group (and I personally) stand for. Our primary mission is to enable every organization to become data-driven. But as much as I like Deming s quote I also love this quote from a 2015 Forbes article The converse of Deming s quote is equally accurate. Having data without an opinion or interpretation of that data is as bad as forming opinions without any data to back you up. With all of this data out there it is foolish to believe that any of it will tell us what we need to do. All data requires interpretation and opinions to be formed before it can be practically applied. The Proper Way to Use Data Though this section is a gross oversimplification it boils down the proper way to use data into a few simple steps. Following this process will enable you to turn data into information. Without an opinion you re just another person with data. Milo Jones and Philippe Silberzahn 1. Ask a Question. Every actionable use of data must start with a question. 16 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CU DATA TAB These questions can be relatively simple like How many members do we have unless there is no consistent definition for a member The questions you ask can also be more complicated like Do we need a new branch Regardless of what the question is properly leveraging data and analytics requires asking one to which you hope to discover an answer. Simplicity is the ultimate sophistication. Leonardo da Vinci Make simple tasks simple Bjarne Stroustrup 4. Analyze Findings and Provide an Explanation. This is one of the most overlooked steps of the process. Asking the right question of your data is crucial but you must provide an explanation or recommendation based on your analysis. Too often I see fancy documents put together with many pages and loads of charts and spreadsheets. In these instances you ve written a lot but said little. Be concise be clear and provide an answer (for simple business questions) or a recommendation (for more complicated business questions). 2. Form a Hypothesis. Like the null hypothesis in statistics I strongly believe that you must start with a hypothesis. This is where your opinion and subjectivity can come into play. Use this hypothesis as a method against which you test your analysis. Be sure that confirmation bias doesn t play into your analysis. If your hypothesis turns out to be incorrect who cares I have not failed. I ve just found 10 000 ways that won t work. Thomas Edison 3. Test Your Hypothesis. With a question asked and a hypothesis formed now you can begin to discover an answer to your question and test your hypothesis. This is where we can start to dig into the data (and the fun really begins). Simpler questions may require you to gather data from a single source. More complicated questions can require analyzing data from multiple data sources. For the more complicated questions a data warehouse really starts to prove its worth Avoid gathering more data than you need and overcomplicating the process. Paralysis by analysis is a real thing. Gather and analyze only the data you need to test your hypothesis. Here are some of my favorite quotes sayings on avoiding unnecessary complexity to motivate you Wrapping Up Properly using data and analytics is becoming invaluable and ultimately necessary for most organizations. To begin developing a data-driven culture have your staff read this article to learn how to properly turn data into information. There is A LOT of data out there. The most successful companies (and people) know how to turn that data into information. Brewster Knowlton is the Founder and Principal Consultant of The Knowlton Group. Through his extensive experience in business intelligence development and strategy Brewster and The Knowlton Group have developed a deep understanding of the required aspects of implementing a successful data and analytics program for credit unions. The combination of technical and strategic expertise allow Brewster and his team to advise credit unions on their analytics readiness and enable them to use data and analytics to make better business decisions. 17 KISS Keep it Simple Stupid. Kelly Johnson Late Lead Engineer for Lockheed Skunk Works 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M COMP LIA NC E UPDATE BY JASON SKEMP It s No Secret Examiners Paying Close Attention to Bank Secrecy Act Your credit union is under greater scrutiny than ever before thanks to the Bank Secrecy Act. What does all this critical observation mean for your CU Read on for a list of must-dos when it comes to passing muster with examiners. A s criminal and terrorist activity in the United States broadens in scope scrutinizing Bank Secrecy Act (BSA) compliance tops the to-do list of many examiners. What does this mean for the average credit union When it comes to BSA there is quite simply no room for error. Luckily not much has changed with regard to BSA regulation in the last several years. Although FinCEN recently published its final rule on the collection of beneficial ownership information compliance with that rule isn t required until May 2018. While the fundamentals remain the same examiners are applying additional scrutiny in new and interesting ways. Affiliations with money services businesses (MSBs) for example have become especially noteworthy to examiners. In fact NCUA has called out MSBs as a specific focus this year. Knowing which of your business members qualify as MSBs is a must. Do your research ask questions of your business members and talk with your compliance specialist because the definition of an MSB is far from black and white. Digital wallets mobile payment systems and peer-to-peer transfer systems for example are all considered MSBs. Of course MSBs are not the only type of relationship necessitating that credit unions get their BSA ducks in a row. Others such as cash-for-gold 18 C R E D I T U N I O N B U S I N E S S businesses are attracting the attention of examiners who are concerned about money laundering schemes. We ve all heard the cash-for-gold ads on TV and radio. So have criminals with too much cash on their hands. If they buy gold with that cash they ve not only gotten rid of their dirty money but they ve also set themselves up for even further anonymity if they resell the gold to another cash-for-gold dealer. The outdated belief that criminals use only large financial institutions to launder money has been proven untrue time and time again. As you work to identify the MSBs within your business membership base go one step farther. Find the jewelers and precious metal dealers with which your credit union has an affiliation. Monitor their activity for unusual cash transactions. Examiners will want to see that staff has the appropriate training to handle MSB accounts and that systems are in place to monitor them. This can be a part of your overall BSA training which by the way must include your board of directors. A significant portion of your BSA training has to be focused on best practices for filing reports and keeping solid records. This is a continued shortcoming noted by FinCEN in recent years. Are SARs and CTRs being filed on time and just as important are they accurate Don t forget to include the new certification form that must be completed for any new account opened on behalf of a legal entity (part of that new beneficial S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M COMPLIANCE UPDATE owner rule that s hot off the presses). Although you won t need to comply with this particular rule for a couple of years it s not a bad idea to get into the rhythm now. The most important aspect of ongoing training is that it is indeed ongoing. Even when employees get it during their BSA education being on the lookout for unusual activity requires reinforcement. Don t think of ongoing training as a big offsite expensive event. It can be done with something as simple as occasional email reminders articles in a newsletter discussions at staff meetings or any other way that gets the reminder message out on a continual (and documented) basis. In addition to training FinCEN is also focused on written anti-money laundering (AML) programs. When was the last time you reviewed your AML document or updated your policies and procedures Independent testing is another component of sound BSA compliance that examiners want to see. Do you have your risk assessments and testing appointments scheduled on a calendar Many of the components to BSA compliance can be challenging particularly for credit union staff who pride themselves on knowing their customers (and not just because it s the law). It can be difficult to set up systems and configure attitudes to consider transactions as unusual or suspicious. This is especially true when those transactions are conducted by members who are well known to the credit union. However BSA is there for a reason. It is possible to develop a culture of healthy skepticism and in today s environment such a culture is a must. Jason Skemp is manager of compliance solutions for PolicyWorks a national leader of credit union compliance solutions. He can be reached at jasons policyworksllc.com. 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 C R E D I T The services provided by PolicyWorks should not be construed as legal services legal advice or in any way establishing an attorney-client relationship. 19 Making compliance easy for you. 866.518.0209 POLICYWORKSLLC.COM S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M U N I O N B U S I N E S S CFO CURRENC Y BY EMILY HOLLIS CFA PRESIDENT CEO ALM FIRST FINANCIAL ADVISORS LLC 4 Reasons to Consider a Registered Investment Advisor T Think there s only one route to getting investment advice for your credit union Think again. Registered investment advisors offer a unique approach over broker-dealers. Credit Union BUSINESS s CFO Currency expert breaks down the differences in their investment advising styles so you can decide which is a better fit for your CU. here are two ways credit unions can obtain investment advice working with an SECregistered fee-based advisor or through a broker-dealer. CFOs and investment managers are busy people with a lot on their plates and tapping into specialized expertise can help to ease that burden while saving time and money. But there are big differences between working directly with a broker vs. a registered investment advisor (RIA). Only RIAs are guaranteed to offer unbiased opinions both because they aren t dependent on commissions and because they have a fiduciary responsibility to make recommendations that serve the client s best interests. Credit unions frequently receive calls from brokers giving advice on various investments they want to show and proposing to place transactions. RIAs offer another approach. Here are a few of the key ways RIAs and traditional broker-dealers differ Fee vs. commission Because investment advisors are compensated on a fee basis (or as a percentage of the total assets they manage) as opposed to receiving commissions from sales of specific securities clients have the assurance of knowing their advisor will not recommend a particular investment unless s he truly believes it is worthy and fits the client s portfolio. Fiduciary responsibility RIAs have a fiduciary responsibility to always act in a client s best interests. Instead brokers are only required to decide that an investment is suitable for their clients. What s more RIAs may not participate in any practice or dealings that would represent a conflict of interest with their clients. SEC-registered Depending on the total assets managed for their clients registered investment advisors are regulated by either the Securities & Exchange Commission or their state regulator. Because RIAs don t own securities or have balance sheets they don t base their investment recommendations on the transaction of securities. 20 2 0 1 6 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S S E P T E M B E R CFO CURRENCY CURRENCY CFO CFO CURRENCY CFO CURRENCY TAB are calculated figures not assumptions. The have significant implication on the ALM conclusion. The of time. 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If you are will allow Regulatory Authority (FINRA) does rate scenario. to details and reporting. spreads are uncertain as Knowing where swap rates andAnalyzing investments to calculations (premiums) in each modeled interest not require the many requirements of and selecting Effective broker-dealers and registered representatives tobebetter hedging and investmentbest option is ainvestors need duration calculations can then mathematically Conclusion the execution. When complicated register as investment advisors because they business that can make aapplying and using derivatives real difference in the compared to that of the institution s assets. 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And vital Properly used institution for credit unions to Holistic view Rather Advisors LLC. 100 basis point scenario a go or duration is one percent that offers a non-maturity dividend whathigherof advicerisk understand rate type than market investment as the effective no go decision can offset interest rate (i.e. (101-99) 200). advisors look at the institution as a to attract hot money will decrease the economic withinofthe they are receiving and whether its investment that is inherent value liabilities. It is imperative to model these accounts for a more it intersects with their interests whole and consider whether or not an investment competencies to meet the final requirements. The second part credit union industry today. This is vital because as competition accurate depiction of allowthat of the Sensitivity Analysisbased on factors all requirements are grows derivatives can interestcreditrisk. provider. or rate unions to compete more is appropriate such as its overall and final application is submitted when The regulator strongly suggests sensitivity analyses as a means effectively. investment objectives liquidity needs and risk completed including dealer contracts. profile effects of changing assumptions. Sensitivity Emily Mor Hollis CFA is a partner with ALM First Financial Emily Hollis CFA is to quantify the and appetite. Setting up a line at a dealer is similar to becoming a The essential markets are constantly in flux ALM First Advisors LLC. analyses are financial because the core share evaluation may Emily Hollis CFA is a President CEO of First Financial partner with ALM member of the FHLB--iteconomic challenges. Further deal causing many can be laborious and takes a good all Financial Advisors LLC 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. 21 www.cubusiness.com 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 November 2014 SS EE PP TT EE M BB EE RR M 22 00 11 66 Credit Union BUSINESS C U B U S I N E S S . C O M 15 BRA NC H BUSI NES S BY SEAN O DONOVAN CHIEF MARKETING OFFICER DOXIM Case Study Conexus Credit Union Keeps Members Close Using Doxim CRM W What does a credit union do when its membership widens its services multiply and technology increasingly keeps members out the door Learn the solutions one CU implemented to keep such members engaged in spite of all the challenges getting in the way. ith the lightning-speed growth of fintech consumer services in recent years people can do their banking anywhere and at any time resulting in fewer trips to the branch. But fewer trips means fewer opportunities for branch staff to visit with their customers learn their needs and interests and recommend helpful products. Because credit unions offer services across multiple channels it s often difficult to manage interactions stay connected and gather the data needed to offer a consistent satisfying experience that keeps members engaged. That was the case for 6 billion Conexus Credit Union and its widespread membership base after a series of mergers with smaller credit unions. Fortunately a combination of the right technology planning and dedicated staff solved the problem. The Conexus Challenge Conexus Credit Union serves approximately 116 000 members with more than 900 employees in 50 widespread branches. After a series of mergers Conexus had a patchwork of different software and operating processes that left members and staff frustrated because there wasn t a seamless interface between systems and there was little consistency in procedures. Without an integrated system members often had to repeat questions or concerns to different employees who had to re-explain a product s features or how a service worked and then key in the information on multiple systems. This was a challenge antithetical to Conexus s operating philosophy of putting members first. Senior management knew it was vital to improve member interactions thus providing a better customer experience. We were united in our deep desire to make a difference in the lives of our members said Cary Ransome chief operating officer of the CU. We embraced three strategic pillars to help guide us through our journey consistent processes leadership development and a solid sales and service strategy. Project manager Matt Welykholowa knew a key component would be to centralize member information so it could be easily available and better leveraged 22 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BRANCH BUSINESS across all systems and departments. While Conexus had installed Doxim CRM a few years earlier the rapid pace of mergers had left little time for staff training or standardization of procedures company-wide. Now it was a priority. We wanted a situation where the member tells the story once and all our teams and channels wrap themselves around the member Welykholowa said. We needed to have meaningful conversations with our members and a place to document and capture those conversations. Welykholowa said the key was ensuring Conexus is fully integrated with seamless tools systems and information about members. While technology offers greater convenience through services like mobile banking personalized offers and e-statements it also leads to an increased demand for more convenience. Consumers accustomed to timesaving apps like Amazon Uber and Netflix grow impatient when their experiences fall short. The Solution To ensure service consistency and to implement effective CRM processes Conexus followed a strategic game plan. First the credit union asked Doxim to demonstrate the newest version of its CRM which included numerous enhancements. As enthusiasm built Conexus sought input from other credit unions that also used Doxim CRM and learned a critical step for ensuring a successful CRM program is to develop consistent clearly defined staff procedures. 23 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BRANCH BUSINESS Carey Ransome Jared Kalenchuk Matt Welykholowa Sean O Donovan Conexus also knew that implementing new processes throughout the credit union required gaining the support of all employees. Pulling representatives from different roles and departments Conexus built an implementation team that planned the new processes and standards needed to ensure a seamless member experience across all sales and service groups. The implementation team interviewed staff members from each branch as well as back-office operations to learn how they were using the current CRM system where they had success with it how it could be used more effectively and which new features would be beneficial. Conexus emphasized employee training for everyone on staff including senior executives and worked to ensure staff buy-in. It even created 15-minute selfservice training courses that employees could view online. Then each branch nominated a CRM champion to serve not only as a system go-to expert but also as an ambassador to encourage staff acceptance. Positive Results Thanks to its new processes Conexus employees are now highly skilled at having meaningful conversations with members. The information they collect from those interactions is captured by the CRM and has improved the member experience throughout the credit union. Members have benefited from the relaunch of Doxim s CRM as witnessed by the credit union s Net Promoter Score (based on annual member survey results) which significantly improved after staff training and relaunch. 24 C R E D I T U N I O N B U S I N E S S And they no longer face the frustration of having to explain a concern over and over again. Further using the Doxim CRM has streamlined the referral process so staff can recommend products that make a real difference in members lives. Already Conexus is seeing increases in speed and efficiency as well as improvements in member satisfaction and loyalty. The solution has worked so well that Conexus wants to share it with other credit unions a testimony to CUs cooperative roots. For Conexus the information shared with us saved so many headaches we want to pay it forward said Jared Kalenchuk member applications analyst. In that true credit union spirit we want to help others. One thing is sure The more routine banking activities become digitized and self-directed the more members will value credit unions that work to understand their needs. Conexus is proving that the right technology can help by providing the tools to deliver personalized messages how when and where they want a winning formula the credit union knows will benefit members for years to come. Sean O Donovan is chief marketing officer for Doxim a leading provider of cloud-based customer engagement solutions for credit unions banks and wealth management firms. S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CEO V ELO C ITY BY SCOTT MCCLYMONDS How to Create a High Velocity Credit Union F In a culmination of his previous articles on leadership and management systems Credit Union Business s CEO expert now rolls them all into a single integrated one the High Velocity System. See how implementing such a system at your credit union can accelerate growth return on investment and member satisfaction. union s ROA member satisfaction and employee engagement. We ll also discuss velocity reducers meaning aspects of you credit union that are not as effective as they should be and as a result are slowing your progress. At the end of the article you ll have some homework to help eliminate these diminishers. or several months I have been discussing the critical role leadership and management systems play in creating a thriving profitable and relevant credit union. I hope you have been able to consider the systems I described and have compared and contrasted them to what you use. If there is any certainty in business it is that we can all grow and improve in many ways and challenging yourself with different perspectives on leadership like those we ve discussed is a guaranteed way to grow. In this article I m going to continue my discussion of leadership systems by showing how leadership people and systems integrate into what I call the High Velocity System. This system takes everything we ve covered in the last few months and rolls it into one system designed to move your credit union forward at an accelerated pace. We ll show how embracing this system can have a profound effect upon your credit What Is Velocity Velocity is the rate at which your credit union is traveling toward your desired goals and its two elements are direction and speed. CEOs need to constantly be aware of their credit union s velocity because it determines whether or not they hit their objectives and how long it takes to achieve those objectives. 25 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CEO TAB VELOCITY Direction The direction of your credit union depends on the clarity of your long- and short-term objectives like we discussed in the 8 Pillars of Strategic Alignment. Longterm objectives can include purpose identity strategy brand promise targeted member groups and growth. Short-term direction may include objectives such as annual market share or profitability gains the ratio of interest to non-interest income and monthly loan and deposit goals. Your shorter-term direction should support your long-term objectives values and principles. The more you are able to clarify these ideas and identify the results necessary to achieve them the better your institution will be in terms of direction. The Three Components of Business Velocity We ve seen that velocity has two elements direction and speed. Within your company those two elements are accessed through leadership people and systems. Speed In addition to clear and focused direction your credit union needs to have speed in order to reach its destination as rapidly as possible. Speed without direction is a wish but when speed is added goals can be very achievable. If you have good direction but still need to improve your velocity you know you need to find some way(s) to increase your credit union s speed. Of course if you re a fast organization but don t have much direction your velocity still won t be optimal. You need both components direction and speed to create the velocity that will take you toward your goals. Through leadership you your executive team and board set clear direction. Speed comes through your people and their use of your credit union s systems. Like a high-performance car all of these components must work together with precision to produce velocity. Each separate component needs its own care and maintenance but a truly skillful CEO and leadership team focuses on making all three of them propel the car forward to its destination. The Effectiveness of Each Component Can Vary Over Time. At any given time you may need to pay more attention to one component over another. All three are in a dynamic state as leadership makes changes in direction people come and go and systems become obsolete or ineffective. Velocity Reducers Finally we come to velocity reducers parts of your credit union that are not as effective or efficient as they should be and which are holding your organization back. These diminishers occur even within the strongest healthiest credit unions. 26 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M CEO VELOCITY TAB Velocity reducers can be found in both the leadership and speed components of your company. Velocity Reducers in People Here are five velocity reducers among employees Talent Your talent needs are always changing as your credit union and members evolve from you executive team to your front-line employees to your back office support staff. A mistake I see credit unions make is not staying abreast of the industry s changing talent needs and emphasizing the functional needs of the job over cultural fit and critical thinking abilities. Buy-in is another potential velocity reducer. Once I installed a major system at a financial institution. Some employees bought in and others didn t. The resistance of those who didn t embrace the new system created a drag on the company s earnings and member service. The same occurs with management buy-in. At the same financial institution one of the retail directors objected to the reporting my team provided because it showed her in last place among her peers. The CEO said We re going to keep using the system and doing the reporting. Suddenly she bought in and her performance changed. Until that point she was slowing us down. People development or its neglect can be a velocity reducer. Long ago I realized leaders like you and I are primarily in the people development business and any outstanding manager I ve ever spoken with agrees that such development is a critical function. When you make people development part of our credit union s DNA you re upgrading your talent pool keeping people trained at high levels helping them do what they do best and maintaining high levels of motivation. That keeps innovation flowing and you need that flow to increase your velocity. Innovation. Peter Drucker said innovation was one of the two most important functions of a business along with marketing. It is the lifeblood Velocity Reducers in Leadership Three examples of velocity reducers within the leadership component are the need to change direction the need for improved communication and the need to overcome your own personal biases. Changes in direction The long-term direction of your credit union might be very clear but we all know that short-term course corrections are necessary to account for new regulations fluctuating rate environments and balance sheet issues. Failing to make communicate or adapt to these course corrections can have significant consequences for your credit union and can greatly reduce its velocity. Communication can be another velocity reducer. If employees are not moving in the same direction as management it might be that communication of your direction needs to be delivered more clearly and reinforced more frequently. Consider how you communicate your direction throughout your organization and get feedback on its effectiveness. One credit union CEO I know has in-person town council meetings at all of his locations. He understands effective communicating is critical to his success. Leadership biases are sometimes velocity reducers so we need to have people around us who will challenge our thinking. We need to be open to input from all directions and that s why it is helpful to have a diverse team of people giving you their opinions. How many times have I seen credit union CEOs be dismissive of ideas presented by leaders and employees with different functional backgrounds than them Far too often. We all have our personal biases but regardless of your background it is important to maintain a wide field of view. 27 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M CEO TAB VELOCITY of your credit union and in my experience the bulk of it has come from my employees. For example a client developed an automated series of questions designed to help the new accounts person ensure each member opened the account that was best for him or her. This significantly increased new account growth. Lack of unity can be a nasty velocity reducer. If a team or company has dissension people become discouraged and are less inclined to innovate and serve members well. That is because they are more focused on their gripes against their team members. One bad apple can certainly spoil the whole bunch by distracting an entire team or company. borrowers or high-dollar trust clients. However this client was completely unaware of another layer of incredibly profitable members right below the highest tier. Alignment is our last example of a velocity reducer on the systems side. It can refer to how well each area of your credit union is supporting your direction such as sales marketing operations IT or finance. Alignment can also mean how well your incentives to your key players align with your overall direction. Finally alignment can also describe a critical process such as one that is supposed to be good for the member but which in reality causes him or her anguish. The agonizing online billpay experience some credit unions provide is an example of this type of process. Velocity Reducers in Systems Some of the most debilitating velocity reducers on the systems side involve technology marketing and alignment. Technology is difficult because it is constantly changing and tech companies want to sell you their latest and greatest products. Buying new technology and not using it to its fullest capability is definitely a source of velocity reduction. Deferring the purchase of new technology can be another source of velocity reduction if your existing technology is not enabling your credit union to deliver the type of experience members want. Marketing can be a velocity reducer on the systems side if it is disorganized disconnected and doesn t help you build member-focused strategies. If your marketing systems aren t helping you understand your member s behaviors needs and profitability your credit union can end up underserving great members and over-serving unprofitable ones. In either case you wind up with a velocity reducer. One financial services client of mine knew their very top members who were either large commercial 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 You Must Defeat Velocity Reducers to Increase Velocity. By now you can see how velocity reducers are enemies of your credit union s velocity. We have seen how they can make your leadership people and systems much less effective. No credit union is perfect so don t panic if you ve recognized velocity reducers within your organization because you will always have them somewhere. Your job is to determine where the greatest amount of velocity reducers exist and what you need to do to alleviate them. Increasing Velocity Does Not Mean More Work. Maintaining and increasing the velocity of your credit union is a critical activity. The greater your velocity the more successful you will be and the more you will enjoy your professional and personal life. Greater velocity does not necessarily mean more pressure stress and heartburn. In fact the more focus you bring to your direction and the more you bring your people and systems into alignment with that direction the more you will find yourself achieving results faster while working the same amount or less. 22 00 11 66 C U B U S I N E S S . C O M SS EE PP TT EE M BB EE RR M CEO VELOCITY TAB When I began this series on leadership systems I mentioned that they are invisible yet very real. You have them whether you know it or not and they are either effective or not. Good leadership systems are a structured focused disciplined way to bring about your credit union s success. It takes a determined champion-like attitude to develop implement and refine such systems. Does that describe you other Do your processes delight members How do you know Now let s move to velocity reducers. How might you unlock velocity reducers in your credit union by way of Leadership 1. Creating a change in direction What change(s) if any would be beneficial 2. Changing your communication Have your team evaluate your communication and adjust accordingly. 3. Identifying your biases Your team can help you here to. Have them be frank about your blind spots. How might infusing more diversity into your decision making create higher profits Homework Toward the beginning of this article I promised you there would be homework so here we go. We ll start with having you evaluate your credit union s velocity. On a scale of 1 to 5 with 5 being highest rate each component of your enterprise on how well it contributes to your velocity. If your cumulative score is less than 9 you need to find ways to create greater velocity. Leadership How strong clear and focused is your long- and short-term direction How do you know Provide evidence. People How much speed are your people creating toward velocity Are you measuring speed How Systems How well do your systems facilitate the speed necessary to propel you toward your goals How well do your divisions support each People 1. Improving your talent pool How have your talent needs changed and what ROI can you achieve by upgrading 2. Gaining greater buy-in Having your folks fully supporting you is an awesome thing. Rate your team s current level of buy-in. How can you improve it 3. Developing people What systems do you have in place to develop people to their fullest potential How effective are they How much focus is placed on those systems 4. Creating employee innovation groups Your company s new ideas and products are walking around in the minds of your people if they are bought in to you and your company. List five ways to unleash those ideas. 5. Uniting your teams around each other and common goals People perform better when they like each other and believe in what they re doing but bad apples can demoralize a team 29 TURN ON YOUR C-LEVEL 4 CEO withTEAMBUILDER. DEPARTMENT HEADS VELOCITY U N I O N B U S II N E S S B U S N E S S www.cubusiness.com teambuilder buy C R E D I T SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M CEO TAB VELOCITY even if they are high performers. Do you have any bad apples who need to find another home Systems 1. Investing in the right technology Inventory your technology and find out what it does how well it does it and what else it can do. Compare those findings with what your people and members need and adjust accordingly. 2. Understanding your members Who are your most profitable members and how much time and money are you focusing on them Consider realigning your marketing expenditures if too much money is being spent on mass marketing and not enough on developing relationships with your highest-value members. 3. Aligning your teams and systems more closely with your direction You may be in perfect alignment all over your company but it is worth poking around to find areas of misalignment. How much effort are you making to regularly coach your direct reports to ensure they their teams and systems are as closely aligned to your goals as possible Scott McClymonds of CEO Velocity coaching and consulting specializes in helping credit unions acquire and retain profitable members. His focus on leadership systems and analytics helps credit unions stay competitive and relevant while building profitability and brand strength. Subscribers to CU BUSINESS can ask Scott questions about how getting to know their members better can generate greater returns. He can be reached at 479.263.0774 or scottm ceovelocity.com. Sco tt McClymonds an d CEO Velocity help credit unions acquire and retain profitab le mem bers. Using mem ber portfolio management and other advanced strategies CEO Velocity helps you imp rove profits while better servin g the needs of your members and communities. Do you need to stand out more from your local fin ancial services providers Wo uld you like to have deeper m ore impactful relation ships with your members Do you need more profitable members Does you r profitability need to increase Do you r have business un its or branches that need to improve performance Do you need to more effectively reach you r market Email scottm ceo velocity.com to request a free paper on how to find an d close earni ngs gaps in your credit union. I have worked with hundreds of clients on strategic marketing programs over the last 20 years and Scott McClymonds is at the top of the list. I would highly recommend Scott as a resource to anyone looking to improve their performance. - Tim Keith Partner and Chief Strategist Infusion Marketing Group 30 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M HUMA N RES O U RC ES BY ALFIO CARROCCETTO SENIOR CONSULTANT What Personality Can Tell You Why Employee Behavioral Assessments Are Hotter than Ever with Credit Unions Staff personality fits are critical to a credit union s overall success but how do you gauge an individual s unique characteristics on the basis of a resume and a few short interviews Don t let first impressions fool you. Learn how to spot fakes and properly assess behaviors early on in the hiring process. I m always intrigued when people respond to identical situations in startlingly different ways. Some don t hesitate to push back when pushed while others willingly retreat. Skeptics question everything. Believers have no doubts. Introverts extroverts rebels diplomats leaders followers opportunists and procrastinators all find their way into this world. But what happens when they all find their way into your credit union How do you manage such starkly contrasting personalities Do you really know who s who Can you spot fakers Hiring new employees and managing existing credit union personnel can be a painstakingly hit-or-miss process when you can only guess at a person s specific needs expectations traits and motivators. How can you confidently bring a new employee on board when all you have to go by is a well-polished resume a friendly interview and perhaps some very flattering testimonials from your candidate s excellent but likely also very biased references Unwittingly hiring an outwardly friendly but inwardly passive person to aggressively develop commercial business or bring in new members will almost always prove disastrous. And taking on a less-than-meticulous teller is sure to be an expensive mistake. 31 C R E D I T U N I O N B U S I N E S S SSEEPPTTEEM BBEERR M 22 00 11 66 C U B U S I N E S S . C O M Candidates may look the part sound the part and seem so accomplished you become convinced they re perfect for the job. However the frustrating reality is that some of these applicants know all too well how to play the interview game and will not hesitate to improvise stretch the truth guess charm or even flat-out lie when they must. Too often it s what you think you see that you don t get a common complaint of hiring managers is that their new employee seemed so promising at first only to then start exhibiting inappropriate behavior decreased productivity an increasing amount of ineptitude or some gut-wrenching combination of all of these Employees are risky investments. They ll either boost your bottom line or chip away at it dollar by HUMAN RESOURCES dollar day by day. A smart hiring decision scores a win and makes you feel good a bad hiring decision is a loss of both time and money. The risks of taking on the unknown go way beyond hiring. It s also impossible to successfully manage existing staff members when you have no idea what motivates them. Some employers make the costly mistake of treating everyone the same way or the way they themselves like to be treated thinking this approach not only makes life easier but also ensures consistency equity and efficiency in the workplace. Think about it though. The reality is that one size fits all never fits anyone well This style of management seldom works long term and often leads to mutual dissatisfaction frustration and sub-par performances employers see disappointing workers as slackers while unhappy employees conclude their boss is just a really bad manager. This kind of ongoing discontent in a branch typically leads to arguments terminations or resignations. Outgoing individuals are easy to spot. They re talkative and seem to promote themselves well. They re full of life usually not afraid to seem a little silly and take themselves less seriously. However these people are not necessarily aggressive or competitive so hiring one of them to sell your financial products or assume a position of authority might be the wrong move. You need to be sure they can capitalize on their infectious charm and sparkling personality by pressing hard enough to put business first meet goals and achieve objectives. Be on guard against would-be employees who seem too good to be true. Spotting Fakers Some people will do or say almost anything to get hired. They re able to present themselves as one person in the interview while their true self the one they don t want you to see is kept well hidden. For example self-confidence like beauty is sometimes only skin deep. Dig into a personality and you may find that your seemingly strong solid self-assured applicant is really just a conscientious eager-to-please accommodator who s prepared well for the interview and learned what to say how to respond where to stand and what to wear in order to impress you. Managing Different Personalities It s easier than you might think to find ways to motivate the individuals in your branch. Keep lines of communication open and be ready to adapt your managerial tactics at least to some extent when overseeing a group of people. You may normally be a hands-off manager the type who lays out some general objectives then expects staff to resolve their own dilemmas devise their own plans and think for themselves. While your independent-minded employees will embrace this approach those who want input and guidance from you will not make an effort to stay available to them. Know your own behavior appreciate the differences in the individual personalities of your staff then figure out who s who. Behavioral Assessments Institutions looking to reduce the financial losses associated with excessive turnover are aware of how vital it is to hire the right applicants and understand the behavior of their employees and they re utilizing Knowing Who s Who While it may take time to uncover a person s true work pace level of assertiveness and need for structure personality can usually be assessed more quickly. 32 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M HUMAN RESOURCES TAB behavioral assessment tools to help them do this. The goal is to find the best possible candidates for open positions and key in to the hot and cold buttons of existing staff members. The Omnia Profile a simple yet amazingly accurate behavioral assessment provides credit unions with insight into the workplace aptitudes of candidates and employees. It s fast just 10 minutes and easy no confusing questions or irrelevant multiple choice scenarios. It s based on extensive research in the prediction of behavioral characteristics through adjective checklists and psychometric analysis. It has been endorsed by the League of Southern Credit Unions (LSCU). Omnia Credit Union Targets are designed to helpcredit unions hire and keep the best. The benchmarks are derived from practical research of the industry and the specific jobs within the industry using profiles of proven top performers position competencies years of consulting data and job descriptions within our database. We have benchmarks for positions such as branch manager MSR teller teller sales loan officer loan processor and much more. By complementing a credit union s existing selection strategies the Omnia assessment provides an early glimpse into behavioral issues that may not be apparent until long after you hire someone. Branches can make more informed hiring decisions decrease turnover and increase retention to improve ROI. People who take the Omnia Profile choose words from a list of adjectives to describe themselves. The hiring manager is delivered a graphical depiction of the candidate s workplace traits. These results are a helpful way to match candidates with the job and culture which means less turnover and happier employees (i.e. higher production and more profit). Such profiling can also help develop and coach existing employees plan succession improve communication or deal with difficulties between staff members. The Omnia Profile can be administered to candidates or existing personnel online or on paper. It s important to keep in mind that the assessment is NOT 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 a test. No one can study for it and there are no right or wrong answers it s based strictly on an individual s opinions. Ratings may be assigned to candidates but this is to help managers measure an individual s overall job suitability hiring decisions should never be based exclusively on these ratings. They deliver additional information providing the basis from which to delve more deeply and ask more questions. Assessments are a valuable piece of the intricate always challenging puzzle that is the human mind. They serve as readily available reliable tools that make hiring promotion management and succession planning decisions much easier. The less information you have when making selection decisions the more of a disadvantage you have in getting it right. The once attainable objective of finding the perfect employee has been abandoned. In its place is the more modest (and unfortunately more realistic) goal of just finding someone anyone who might be considered at least a half-way suitable worker. Bringing out the best in an employee who is not your ideal and not like you is without question challenging. But if you learn how to do it you ll inevitably save time lower stress make your job easier and most importantly eliminate the financial pain of frequent employee turnover. Alfio Carroccetto senior consultant is an experienced entrepreneur and business owner. Alfio provides employee hiring and retention guidance to senior-level executives for domestic and international businesses. His scope encompasses a wide range of industries with particular emphasis on logistic sales credit unions and banking automotive staffing and health care. Alfio focuses on teaching other leaders how to hire the right people for success. SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M PAYMENTS BY TERRENCE GRIFFIN Defense in Depth Creates Stronger Wall For Cybersecurity As sophistication in cyber fraud continues to grow credit unions must ramp up their lines of defense. Defense in Depth provides multiple layers of security to attack fraud at all levels and from every direction. Read on to see how this military-inspired approach can work for your CU. A s hackers and fraudsters become more creative and determined credit unions must respond with more sophisticated and exhaustive cybersecurity defensive programs. Only in this way can they counter fraud in all of its pernicious forms. One approach is known as Defense in Depth. The idea is to defend a system against an attack using several independent methods. This model layers multiple security controls and barriers such as firewalls wireless and data leak protections and identity management that provide collaborative redundancy. If one control fails another control is there to take its place and protect the system. Thus cyber attackers are delayed and detected before they can do serious damage. The concept of Defense in Depth comes from the military and how appropriate. Having a solid defense to protect a financial institution s cyber system is to that institution on par in many ways with our military s mission to keep our nation secure. Among the more widely cited expositions of Defense in Depth are the CIS Critical Security Controls (PDF). This document provides the Center for Internet Security s 2016 formulation of 20 security layers ranging from governance to business continuity disaster recovery. The CIS-recommended controls are a set of actions for cyber defense that provide specific and actionable ways to stop today s most pervasive and dangerous 34 C R E D I T U N I O N B U S I N E S S attacks according to CIS. The controls run the gamut from inventorying authorized and unauthorized devices and software to securing configurations for hardware and software on laptops workstations and servers to continuous vulnerability assessment and remediation to secure network engineering penetration tests and Red Team exercises. CIA Triad of Information Security The SANS recommendation is not the only roster of Defense in Depth practices. There are indeed many strategies with terms that truly do harken back to the military origin on the concept. Take for instance Demilitarized Zones. No we re not talking about that 160-mile long 2.5-mile wide strip of land that divides the Korean Peninsula roughly in half. Rather a S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M PAYMENTS DMZ in computer networks is a physical or logical subnetwork that separates an internal local area network from other untrusted networks usually the Internet. However each layer in a Defense in Depth model should address the CIA Triad of Information Security Confidentiality Integrity and Availability (CIA). According to www.technopedia.com the CIA triad provides a baseline standard for evaluating and implementing information security regardless of the underlying system and or organization. The three core goals have distinct requirements and processes that are fully integrated. Confidentiality Ensures that data and or an information system are accessed by only an authorized person. User IDs and passwords access control lists (ACLs) and policy-based security are some of the methods through which confidentiality is achieved. Integrity Integrity ensures that the data can be trusted that it is edited by only authorized persons and that it remains in its original state when at rest. Data encryption and hashing algorithms are key processes in providing this type of integrity. Availability Data and information systems are always available when required. Hardware maintenance software patching upgrading and network optimization ensure availability. The CIA Triad is a useful model that can guide a credit union s governance and security policies. It can also help a CU successfully protect data privacy and accuracy as well as system uptime. Defense in Depth controls offer a means of building and maintaining a security framework with the ability to manage risk. But it is an implementation process that is anything but a sprint. It s a journey that will continue for as long as the business exists. The technologies involved require a staff to maintain and facilitate a consistent and repeatable approach to security controls. The technology will change but the processes will largely remain the same. Terrence Griffin is chief information officer of CO-OP Financial Services a financial technology provider to credit unions based in Rancho Cucamonga Calif. (www.co-opfs.org). He can be reached at terrence. griffin co-opfs.org or (866) 812-2872. 35 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BUSI NES S L ENDING BY MURRAY HALPERIN Getting Ready for NCUA s New Member Business Lending Rules Personal Guarantees Supervision Managing Concentrations As NCUA prepares for the release of further guidance on the matter of commercial lending now is a good time for credit unions to review their MBL policies and procedures. This first in a two-part series offers compliance advice regarding personal guarantees supervisory expectations and commercial real estate management. Introduction Part 1 of Biz Lending & Insurance Center Inc. s (BLIC s) Getting Ready for NCUA s New Member Business Rules will focus on Removal of the Personal Guarantee Requirement Supervision Managing Commercial Real Estate Concentrations BLIC will produce Part 2 and beyond when NCUA provides additional guidance for the new regulations. In the overall scheme of lending products in the credit union industry member business lending (MBL Part 723 of NCUA Regulations) may still be considered a youngster. The NCUA Board distributed its first regulation governing MBLs in 1987. Since then it has made a number of revisions and amendments to incorporate provisions including section 107A of the Federal Credit Union Act (FCU Act). This section was enacted into law in 1998. Biz Lending & Insurance Center Inc. was incorporated after NCUA significantly amended section 723 in 2003. BLIC was formed for the specific purpose of working in conjunction with credit unions and their CUSOs to help find quality commercial loans and to assist the credit union in managing risk. Section 723 prescribed the exact guidelines that every credit union had to follow if it wanted to participate in a product that up until then was mostly serviced by the banking industry insurance companies and the finance industry. The word prescribed in this paragraph becomes an operative word in the new guidelines and in this white paper. Section 723 as written had many hurdles to overcome with regard to competitiveness and we TURN ON YOUR LENDING DEPARTMENT withTEAMBUILDER. 4 LENDING SOLUTIONS www.cubusiness.com teambuilder buy 36 2 0 1 6 C U B U S I N E S S . C O M C R E D I T U N I O N B U S I N E S S S E P T E M B E R Section 723 prescribed the exact guidelines that every Credit Union had to follow if they wanted to participate in a product that up until then was mostly serviced by the banking BUSINESS LENDING industry insurance companies and finance industry. The word prescribed in this paragraph becomes an operative word in the new guidelines and in this white paper. Section 723 as written had many hurdles to overcome with regards to competitiveness and we believe limited most Credit Unions on the type of Commercial Loans and Collateral they could attract. Despite these hurdles the Credit Union Industry as usual believe it limited most credit unions on the type of after the large downturn in business between 2007 and found its market and way into MBL s and even 2009 large downturn in business commercial loans and collateral they could attract. after thethe industry has created a sound base of loans. between 2007-2009 has created a sound base of loans. According to NCUA that base of Despite these hurdles the credit union industry as According to NCUA that base of loans has grown to loans has grown to 56 billion as of September 2015. billion as of September 2015. 56 usual found its market and way into MBLs. And even % of Credit Unions that offer Business Loans Credit Unions with total assets Below 100 million Between 100 and 500 million Greater than 500 million Total Throughout Industry Source NCUA final rule publication 2004 13% 53% 72% 19% 2015 21% 77% 94% 36% 2 Change Creating Opportunity BLIC believes that the changes to the rules NCUA has adopted are positive and timely and that they will help the credit unions continue to develop as commercial lenders. The regulators have indicated that further guidance will be released to help the industry adjust from the current prescriptive regulations to a principles-based regulatory approach. While NCUA is developing the additional guidance it seems to be a good time for all credit unions that offer MBLs and ones looking to get into the business to review all of their CU policies procedures and regulations and compare them to both their own goals and the new NCUA proposal. Hopefully this white paper will create some ideas and provide condensed information that will be helpful. To support the Administration s opinion this requirement went into effect 60 days after publication in the Federal Register of the final rule. Consequently as of this writing this provision to not require personal guarantees is active with the remainder of the provisions delayed until January 1 2017. Most of the MBL loans credit unions book are to small business owners or investors where there is a good chance the personal finances of the owner(s) are intertwined with the finances of their business(es). It is also a good bet that this type of clientele will continue to seek out credit unions for future opportunities. Personal guarantees are vital and should always be required using this simple example. Recently an attorney client of ours referred a loan to us in Jacksonville Florida. The opportunity was a very active strip center with a national company as the anchor tenant. The owner(s) of this strip center were looking for a 3 million loan to remodel upgrade and install new roofs and a fa ade. The estimated value of the property was 8 million and there were 0 encumbrances. This group had owned the property for more than 10 years. Sounds like a slam-dunk doesn t it Well not really The ownership structure was a tic 37 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M Where to Begin Personal Guarantees NCUA has correctly determined that personal guarantees should not be required on loan opportunities that make sense to grant without one. In fact we believe that it was overwhelmingly viewed by the industry as a detriment to competitiveness to require a personal guarantee on all opportunities as a prescriptive requirement. BUSINESS LENDING tenant in common. None of the owners had more than 10 percent ownership they were not willing to sign a 100 percent joint and several guarantee was in place. They were looking for a fast turnaround and did not want to wait for a credit union to take the time to try to figure out how to do the deal. They quickly got a local bank to provide the capital to remodel their strip center. There are a number of other examples that could be used to demonstrate how this new rule will at least allow a credit union the opportunity to quickly offer a term sheet without needing a waiver. If your credit union has experienced loan requests that could not move forward because of the guarantee structure then consider doing the following to comply with NCUA. 1. Adjust the MBL loan policy removing the personal guarantee requirement. Make sure principles-based alternatives are composed and are part of the CU s guidelines. 2. Remember that NCUA will be using a principlesbased approach to lending instead of the prescriptive rules. Have an exact understanding of what that means for your underwriting guidelines (either internal or CUSO) the responsibility of the Credit Committee Board of Directors and staff involved with the loan process your annual review responsibility onsite visits to the property etc. All of the features of the credit union s MBL approach should be overhauled and updated to the new understanding. 3. Be prepared for audits. These are strong words that NCUA has decided to use to get its point across. The Administration has indicated its focus will be on the effectiveness of the risk management process and the aggregate risk profile of the credit union s loan portfolio. According to NCUA credit unions will demonstrate responsible risk management and comprehensive due diligence. Each credit union is expected to embrace these overarching principles in administering underwriting and servicing commercial loans. Auditing will be a huge hurdle for the regulators. It is difficult to change an approach and effectively manage the audit process. When the industry began offering MBL it was a much easier process because of the relatively few credit unions that offered member business loans. Now there are thousands of CUs that offer MBL all of which are making the switch at the same time. NCUA has indicated that before the rule goes into effect it will issue clear supervisory guidance to examiners that will be shared with the industry. The Administration has also indicated that the standards will be closely aligned with those in place by federal banking agencies. So we looked at some of the philosophy used by federal bank agencies. In our opinion tying down the regulatory aspect of the new rules with the credit union industry s operational functions for originating screening underwriting booking servicing and ongoing risk WE CAN HELP YOU Supervision In our opinion because the final rules will provide greater flexibility and individual autonomy the industry can expect a meaningful shift in regulatory approach and supervisory expectations will adapt accordingly. 38 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BUSINESS LENDING monitoring is one of the keys to a very successful member business lending commercial program. We have copied below the table of contents from the Office of the Comptroller of the Currency Commercial Real Estate Lending August 2013 and ask you a simple question. TRY SOMETHING NEW TODAY Is your credit union ready to review its principled approach to the regulators for each MBL commercial loan it books Risks Associated with Commercial Real Estate (CRE) Lending Credit Risk Interest Rate Risk Liquidity Risk Operational Risk Compliance Risk Strategic Risk Reputation Risk Risk Rating CRE Loans Analyzing Repayment Capacity of the Borrower Evaluating Guarantees Assessing Collateral Values Other Considerations Classification of CRE Loans Loan Review Loan Workouts and Restructures Allowance for Loan and Lease Losses Foreclosure And finally is the credit union ready for the audit Examination Procedures Scope Quantity of Risk Quality of Risk Management Conclusions Internal Control Questionnaire Verification Procedures This handbook has more than 126 pages of explanation covering each of these topics. Are the CU s Internal Risk Management Processes Ready for Scrutiny Risk Management Real Estate Lending Standards Acquisition Development and Construction Lending Income-Producing Real Estate Lending Analysis of Borrower s and Guarantor s Financial Condition Loans Secured by Owner-Occupied Properties File Documentation Appraisals and Evaluations CRE Concentrations of Credit Environmental Risk Management Is there an acknowledged risk rating system in place at the credit union Does everyone on the Credit Committee know the system 39 C R E D I T U N I O N B U S I N E S S Managing Commercial Real Estate Concentrations Identifying institutions that have not effectively managed commercial real estate concentrations is one of the main functions of the regulator. This is where the banking industry has gotten into trouble multiple times in the past. The cycle seems to be the same. Business is good lenders are actively granting loans and then the economy starts to slow while the industry does not adapt quickly enough. Here is some background about what led to these issues. Background According to History of the Eighties--Lessons for the Future the high number of bank and savings institution failures during the 1980s and early 1990s can be attributed primarily to overinvestment in CRE loans. Weak underwriting standards and portfolio management techniques during this time contributed to a significant oversupply of CRE properties that weakened the entire CRE market leaving borrowers 2 0 1 6 C U B U S I N E S S . C O M S E P T E M B E R BUSINESS LENDING unable to repay their loans and collateral that provided far less support than originally thought. Other factors that contributed to the CRE losses included Lack of market information Highly leveraged transactions Relatively low borrowing costs and the easy availability of credit Government policy including income tax benefits Long gestation periods that allowed supply-anddemand dynamics to change before a project s completion Non-recourse lending and legal structures that shielded project sponsors from risk Out-of-area lending including the purchase of loan participations from out-of-area lenders An unregulated real estate appraisal industry that often used inflated assumptions and relied on inexperienced appraisers Today many lenders directors and senior officers have not experienced a CRE downturn in their careers. They may never have learned the lessons of the 1980s or may view them as distant history that can t happen again. Industry and regulatory changes that arose from the tumult of the 1980s remain intact and are intended to prevent a reoccurrence of the ill-conceived practices of the past. For example the appraisal industry is now regulated and appraisal quality is far superior to what TURN ON YOUR it was in the 1980s. Banks and thrifts must now follow federal appraisal regulations and regulators require banks to establish an effective real estate appraisal and evaluation program to ensure independence and improve quality. Source Joint Guidance on Concentrations in Commercial Real Estate Lending Sound Risk Management Practices (CRE guidance) in December 2006 BLIC believes that each credit union should be ready to provide answers to the auditors regarding all of the bullet points above. Just add the words Does the credit union before each first word of the bullet points. Large concentrations in certain collaterals can become a huge danger and should be closely monitored. The medallion market is a perfect example in the credit union industry. For years they were thought to be as good as well gold. Then this thing called Uber starts to gain notoriety and all of a sudden in a six-month period Uber has one billion riders worldwide The result is many credit unions have severe problems with capitalization. Another example is rehabilitation lending for old one- to four-unit apartment mixed-use buildings in the Northeast. For some credit unions this market makes up the greater part of their portfolio. And yes it is hard to imagine getting hurt with this type of collateral. But the old saying is never say never and sound portfolio risk management practices would indicate that some of these lenders might look to diversify. TECH STAFF withTEAMBUILDER. 4 TECHNICALLY SUPPORT LOCAL BUSINESS SPEAKING U N I O N www.cubusiness.com teambuilder buy 40 C R E D I T B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BUSINESS LENDING Communication must occur between lending and Communication risk management functions. must occur between lending and risk management functions. Source FDIC Source FDIC Credit Unions especially active MBL Commercial lenders must demonstrate that their Credit unions especially active Group is effectively units etc. to allowits lenders the type ofreporting and Credit Risk Management MBL commercial communication to for more enhanced lenders must demonstrate that their and the lenders should be in constant communication about loans to place in the portfolio Credit Risk analysis. what is going on in the market with the collateral they currently can be the books. on mainframe Information have on captured Management Group is effectively communicating to systems or other systems including the use of simple its lenders the type of loans to place in the portfolio. In addition the lenders should be in constant spreadsheets but should be retained in a form that can The FDIC indicated that communication about what is going on in the market be readily accessed for analysis purposes. MIS reports may include with the collateral they currently have on the books. system (MIS) that provides sufficient information to The bank should have a management information measure monitor and control CRE concentration risk. This includes meaningful information on CRE (to CRE loan segmentations determine The FDIC indicated that... portfolio characteristics relevant to the institution s lending strategy underwriting standards and risk diversification within a portfolio) The bank should have a management to expand the level of information captured to specifically include tolerances. Many institutions will want information underwriting provides sufficient information Established concentration limits (for system (MIS) that characteristics such as LTVs debt service coverage levels speculative versus presold units CRE in etc. to allow for more enhanced reporting and analysis. aggregate as well as by subcategory) to measure monitor and control CRE concentration Information can be captured on mainframeon CRE other Concentration reports by property type systems or systems risk. This includes meaningful information --including the use of simple spreadsheets--but should be retained in a form that can be readily accessed Presold (considered lowest risk but purchaser portfolio characteristics relevant to the institution s for analysis purposes. MIS reports may include deposit amounts should be considered) lending strategy underwriting standards and risk CRE loan segmentations (to determine diversification within a portfolio) Speculative (no sales tolerances. Many Established concentration limits (for CRE in aggregate as well as by subcategory) contract or prelease institutions will want to expand the agreement exists) level of information capturedreports by property type Concentration to specifically include Presold (considered lowest LTVs debt Portfolio should be considered) underwriting characteristics such as risk but purchaser deposit amounts or borrower aging (age of CRE inventory Speculative (no sales contract or prelease agreement exists) service coverage Portfolio orspeculative versus presold levels borrower aging (age of CRE inventory by by portfolio or borrower) portfolio or borrower) 8 C R E D I T U N I O N B U S I N E S S 41 S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BUSINESS LENDING Aggregate by market (CRE inventory broken down by market or submarket) Aggregate by price range (CRE inventory broken down by price range) Borrower concentration reports including guidance line (informal uncommitted) limits Loan underwriting exception reports (CRE loans requiring loan policy exception approvals) Number and volume of exceptions by nature justification and trends Performance of exception loans compared with loans underwritten within guidelines Supervisory LTV exception reports Typical loan production and performance reports by type region officer etc. Many banks fail to collect the data necessary to produce the reports listed above. They may have separate legacy systems that do not aggregate data efficiently if at all. In addition many banks do not have the resources to search hard copy files and backfill data into their systems. Management first needs to identify the drivers that will affect segmentation at origination and then capture those data fields on the system. These drivers could be LTV rate type (fixed versus floating) debt coverage ratios or large tenants that could create concentrations when aggregated. These ideas might be some heads-up notifications that could be expected from NCUA. BLIC is just speculating about where NCUA is going. Nevertheless these situations have caused the bank regulators trouble in the past. Interestingly this last quote is from a publication release in December 2006 right before the big recession. Almost all of the items mentioned in the Joint Guidance on Concentrations in Commercial Real Estate Lending Sound Risk Management Practices (CRE guidance) in December 2006 became a contributing factor to the huge correction in the commercial real estate market. SCHEDULE NOW Murray Halperin is the founder and President of Biz Lending & Insurance Center Inc. (BLIC) and brings 37 years of experience to the credit union industry. His background includes 15 years at the Chicago Mercantile Exchange in the commodity brokerage business as EVP of a publicly traded firm and another 22 years working with the credit union industry in program origination and sales of auto and business lending services programs. He has been instrumental in the development of business service CUSOs and MBL departments at credit unions. Murray s primary role at BLIC is to develop credit union relationships nationwide that funnel commercial real estate and member business loan opportunities into the BLIC credit union network. Stayed tuned for Part 2 BLIC was organized in 2004 for the specific purpose of assisting credit unions with processing and originating quality commercial real estate and business loans. The company s goal is to make the origination process for commercial real estate and business loans smooth and easy for the CU underwriter and business owner. 42 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M THEY SAY... TIME is We give you more of both. Cummins Allison branch automation technologies have helped thousands of FIs become more ef cient. Our reliable cash coin check and ATM solutions move low-value deposit and cash handling transactions away from your tellers reducing operating costs and improving staff performance. Your branches are more productive and pro table and your customers get a better experience. Simple yet effective branch automation technologies from Cummins Allison add to your bottom line and allow your staff to focus on what matters most more meaningful engagement with customers. MONEY. cumminsallison.com automation GET MORE AT M ember BUS I NES S LEN DING BY CORINNE KALSKY REGIONAL VICE PRESIDENT CREDIT UNIONS NCINO INC. CECL Is Coming Is Your Credit Union Prepared The way your credit union calculates its Allowance for Loan and Lease Losses is about to be shaken up. Are you ready for the impact the new FASB Accounting Standards Update will have on your CU This article will poise you to handle the current expected credit losses methodology that will stem from that update. Why the Change Most experts agree that the old incurred loss model for predicting credit losses is flawed. It is based on a determination of probable losses that relies largely on past history and outdated information. The recent financial crisis brought the inadequacies of this methodology starkly to light as past history offered highly inaccurate predictive capabilities during the deteriorating economic conditions of the dramatic real estate market collapse of the mid-2000s. At many institutions this scenario resulted in credit losses that quickly devoured loan reserves and then some. According to FASB Chair Russell G. Golden The new standard addresses concerns from a wide range of our stakeholders including financial statement preparers and users that the existing incurred loss approach provides insufficient information about an organization s expected credit losses. The new CECL model replaces the incurred loss approach with a forward-looking methodology requiring financial institutions to analyze a longer time horizon covering potential losses over the entire life of the loan. F ollowing years of research proposals and industry commentary dating back to 2008 the Financial Accounting Standards Board (FASB) has released its final Accounting Standards Update (ASU) which addresses the accounting for credit losses. Released on June 16 2016 this new standard introduces the current expected credit losses (CECL) methodology and will significantly impact how credit unions and other financial institutions calculate their Allowance for Loan and Lease Losses (ALLL) in the future. Yet there is no need for credit unions to panic. Non-SEC filers including credit unions have until the fiscal year beginning after December 15 2020 to implement the new standard. Public business entities that file with the SEC must implement in the fiscal year beginning after December 15 2019. All institutions may select early adoption starting with fiscal years that begin after December 15 2018. 2020 may seem far off but credit unions should start preparing now for implementation. The new rule will require banking institutions to collect different and more robust loan portfolio data than they have in the past. It will also mandate that they adjust the methods they employ to determine expected credit losses a key factor in the loan loss reserve calculation. What Your Credit Union Needs to Do Now The National Credit Union Administration (NCUA) along with the other major financial institution regulators released a joint statement on the new 44 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M CU BUSINESS accounting standard on June 17 2016 which may be found here https www.ncua.gov newsroom Documents interagency-joint-statement-accountingstandard-financial-instruments-06-17-16.pdf. The statement offers some broad guidance that conveniently serves as a prudent six-step roadmap to help credit unions prepare now for CECL implementation 1. Familiarize yourself with the new accounting standard. As with the release of any new accounting standard or regulation it is vital to both read the document in its entirety as well as consult with your trusted accounting and legal experts. The FASB s Accounting Standards Update No. 2016-13 Financial Instruments Credit Losses may be downloaded here http www.fasb.org jsp FASB Document_C Docume ntPage cid 1176168232528&acceptedDisclaim er true. 2. Discuss implementation of CECL with your board of directors credit union peers external auditors and NCUA or state regulator. The agencies advise financial institutions to extensively research how best to implement the new accounting standard in a manner appropriate to the institution s size and the nature scope and risk of their lending ... activities. In other words the more diverse risky and complex your credit union s loan portfolio the more time you should spend on researching and developing your methodology in line with the new standard. 3. Review existing ALLL and credit risk management practices. In an ideal scenario some of your current methodology and procedures can be used or simply modified to support the new standard. In fact according to the joint agency statement the agencies expect that smaller and less complex institutions will be able to adjust their existing allowance methods to meet the requirements of the new accounting standard without the use of costly and complex 45 C R E D I T U N I O N B U S I N E S S models. Notwithstanding the agencies stated objective it is recommended that you take the time to review all current practices today to give your institution time to make any necessary adjustments and to test their efficacy well before the implementation date. 4. Identify your data and technology needs. This step is critical. With the replacement of the incurred loss model by the new CECL standard the expectation is that credit loss analysis should be based on more quantitative versus qualitative factors. For this reason institutions must have ready access to granular data down to the individual loan level. Additionally credit unions will now be required to predict loan losses over a longer time horizon based on the expected life of the specific pool of loans analyzed. Will your current technology be able to handle the new data requirements This is a question that needs to be answered now because you need to leave ample time for collecting and analyzing several years worth of loan loss data and then for testing this data against whatever credit loan loss model you ultimately select for your ALLL methodology. 5. Determine how and when to begin collecting additional data. How you gather and analyze the new data points is also important. If you are using a simple Excel spreadsheet to track loan losses today it may not provide sufficient horsepower to support the more robust requirements of the CECL standard. The specific analysis model you choose will be up to your credit union s particular risk profile and needs but depending on the diversity and complexity of your portfolio you may end up utilizing more than one model to analyze various pools of loans. Be sure that your technology can handle these various functions from data gathering directly from your core to performing the necessary calculations and storing them over multiple time periods for future analysis and modeling. 2 0 1 6 C U B U S I N E S S . C O M S E P T E M B E R CU TABBUSINESS 6. Plan now for potential impacts on capital reserves. For credit unions the question of capital impacts is particularly sticky coming on the heels of NCUA s release of the risk-based capital (RBC) final rule. With an RBC effective date of January 1 2019 and with CECL implementation arriving soon after it is important for credit unions finance accounting compliance and lending functions to work together in lockstep to ensure that all potential impacts are fully considered and mitigated. NCUA and its sister agencies have promised to release further supervisory guidance on CECL with a particular focus on the needs of smaller and less complex institutions during the implementation period. Credit union industry advocates including CUNA and NAFCU have pressured NCUA to release such guidance quickly in recognition that it will take most credit unions significant time and effort to ramp up and prepare for implementation of the CECL standard. In the meantime don t wait on further guidance before you start preparing for CECL. The next four years will go by very quickly. Corinne Kalsky is regional vice president of credit unions for nCino the worldwide leader in cloud banking. 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. The 1 Solution for Member Business Lending ncino.com 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M DIGI TA L BANK ING BY JEREMIAH LOTZ VP DIGITAL PAYMENTS AND EXPERIENCE PSCU Measuring Your Members Position on the Digital Transformation Spectrum C At which end of the digital banking spectrum does your credit union reside the pull side or the push side The answer to this question as well as these key insights to determine your members in-branch and digital behavior will aid in your CU s digital transformation. redit unions seeking to develop or enhance their current digital banking offerings need to have a firm understanding of both where they are on the digital banking spectrum and where their members generally lie on the digital transformation spectrum. The reality could be quite different from where the credit union is currently positioned. At one end of the digital banking spectrum sit financial institutions that are product-centric. This group sees digital as a channel to enable access to products and services its members offer. For this group digital banking is a pull play where capabilities the credit union has created or enabled are made available for members to use if they so choose. There is no real desire to engage in the digital sense so this end of the spectrum is all about access. At the other end of the digital banking spectrum are the credit unions that are member-centric. They see digital as a combination of information (what they know about the member) location (where the member is right now) context (the likely reason the member is contacting the financial institution) and action (what the financial institution can make available to resolve a specific member s need or want). These credit unions make their products available within their other offerings such as car loans within auto-buying apps. For this group digital banking is a push play where capabilities are made available within the members normal life. There is a real desire to engage beyond the bounds of traditional banking. We should note however that as of the end of 2015 there are very few credit unions (or banks) at this end of the spectrum. In a recent survey we asked several key questions to help credit unions gain useful insights about their members in-branch and digital online behavior. 47 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M DIGITAL BANKING 1. When selecting a new credit union do you care about how close you are to a branch We measured the specific answers Yes I do the majority of banking in branch Yes I m sure I ll use it occasionally and No if I need one I m willing to find it. The black line represents the leading edge of the digital community. These are the people who are primarily interested in a digital banking environment as compared to those who are primarily interested in a physical one. Currently the leading edge is set at approximately 45 to 50 years of age. Prior to this age a branch is used occasionally (at best). After this age the branch becomes significantly more important to the member base. 2. Assuming you could do any banking transaction through any channel select the most important outlet you feel your credit union offers. Again these results show a significant change at the same age bracket when comparing web mobile and branch. The change starts to happen when the consumer is 35 to 44 years old and is really important when he or she is 45 to 50 years of age which is where we have placed the leading edge on this graph. 48 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M cuso A community joined together for a common purpose. PSCU 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. A W AR DED BY NAC US O pscu.com 844.367.7728 DIGITAL BANKING 3. Would you like to see your credit union partnering with local businesses so that those businesses integrate offers for you within the CU s website The significant shift when people hit around 40 years old is still there. If someone is younger than that approximate age they are more likely to want to have integrated offers from financial institutions with local businesses. After that age the likelihood for that offer being attractive drops significantly. 4. If your credit union was rethinking its online and mobile products to be more like non-banking products which experience would you prefer most As one might expect there was a broad range of choices for younger generations moving to essentially one choice as people aged. Importantly for the youngest of those surveyed only 30 to 40 percent feel they want to keep their banking how it is. Google was the most popular choice of the younger people. Selecting Apple as a model was interesting because approximately 10 percent of people chose that option regardless of age group. Uber was 50 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M DIGITAL BANKING TAB an insignificant choice indicating that people think banking is much more complicated than ride-sharing. That tendency is not surprising but it does pour cold water on the idea that fintech companies can Uberize the banking model. But yet again the leading edge is around 40 years of age. If your average member age is around 30 you also need to act now because you are considerably behind the game. But don t throw all your eggs in one basket. Remember that a quarter of young people still think they will use a branch occasionally. The key here is to use the digital information you should be recording (information location context and action) and implement it within the branch context. But how much change do you need to make The amount you need to change depends on your current position in both demographics and digital readiness your strategy for servicing those consumers and the length of time you have to act. Even if you think you don t need to do much at the moment you are about to (or at least need to plan to) undertake a transformation exercise to change your entire organization and that will take a long time regardless of size. PSCU Can Help PSCU s digital payments and product development teams can help credit unions create a digital services roadmap that aligns the strategic objectives of the credit union with the needs of its members. Contact Jeremiah Lotz VP Digital Payments and Experience at jlotz pscu.com to learn more. Resolving the Gap Along the Digital Transformation Spectrum What is the next step If your average member age is 50 or older and your strategy is to gain a younger demographic then you have five to 10 years in which to have completed your digital transformation depending on how much you want to move your average age. This is because that leading edge of digital thinkers is getting older all the time. Therefore the time gap is compressed from both ends. If your average member age is around 40 you need to begin a digital transformation project now because you need to keep up with those 40 year olds as they age. You might even consider cannibalizing some of the efforts and resources you are spending in your physical channels since they will be less valuable (when compared with digital channels) as the population ages. 51 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 SS EE PP TT EE M BB EE RR M 22 00 11 66 C U B U S I N E S S . C O M BUSI NES S TRENDS BY LARRY MIDDLEMAN PRESIDENT CEO OF CU BUSINESS GROUP Diversifying Your Business Services Program Pays Off in Many Ways If your credit union is like most CUs you re part of a commercial lending evolution. Gone are the days when commercial real estate lending was the main name of the game. Diversification is what it s all about nowadays. These tips and strategies will help you spread your business lending wings. A ccording to a recent CU Business Group poll credit unions engaging in business lending are turning the corner in expanding and diversifying their business services programs. This is a positive trend for the industry as well as for small businesses. At CU Business Group s 2016 National Conference in Portland Oregon the 150 attendees were asked What is your credit union s 1 growth strategy for business services (Fig. 1). Of those responding 54 percent stated that growing commercial real estate (CRE) lending remains a major focus. Although this is still over half the credit unions it represents a sea of change in the mindset of credit unions that are engaged in business lending. Roughly a decade ago an estimated 80 percent to 90 percent of these credit unions were solely focused on CRE lending. The recent poll also shows that credit unions are now placing more emphasis on offering loans for business operations (commercial and industrial or C&I) at 19 percent and on establishing full-service deposit relationships (growing core deposits) at 15 percent. Another 12 percent of respondents are primarily focused on purchasing participation loans to achieve growth objectives. The fact that almost half of credit unions surveyed now recognize the tremendous opportunity for growth outside CRE illustrates that there is a greater appetite 52 C R E D I T U N I O N B U S I N E S S to diversify commercial lending and expand deposit programs. Adopt a Diversification Strategy The results of the poll are refreshing but not entirely surprising. Credit unions have been lending to the small business market for many years and they ve been doing it well. Credit unions stack up quite favorably against their banking competitors in many areas including loan quality as indicated by historically lower delinquency and charge-off rates as well as trust and customer satisfaction ratings. Credit unions are becoming more sophisticated in business lending operations with many willing to hire experienced commercial lenders and invest in better loan operating systems and infrastructure. S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M BUSINESS TRENDS With this solid foundation built on CRE lending many credit unions are now ready to take the next step of expanding into other types of business-purpose loans including C&I. I think that s just a natural extension of what credit unions do says conference attendee Scott Humphreys vice president of business lending at Amplify Credit Union ( 804 million in assets out of Austin Texas). Scott Humphreys Historically credit unions have done commercial real estate and that s not a big surprise to anyone. But I want to work with businesses and see them thrive. I think that s where credit unions have a niche. They can get out on Main Street and work with businesses to help their community grow. This doesn t mean that real estate lending will disappear from credit union business loan portfolios. On the contrary CRE will continue to play an important role in a diversified portfolio. Commercial and investment real estate deals have been the low-hanging fruit for credit unions just getting started in business services and they have served an important role in balance sheet management. Real estate mortgages can add large dollars to a loan portfolio very quickly improving loan-to-share ratios and net interest income simultaneously. At the same time it is encouraging to see that credit unions are now recognizing the importance of diversification toward a more holistic business services strategy. Another important reason for credit unions to consider adding business operating loans into the portfolio is the MBL cap. With C&I loans you can do a lot of 50 000 loans without impacting your cap at all Humphreys says. 53 C R E D I T U N I O N B U S I N E S S Then add in the SBA 7a program to the mix and you can do 200 000 loans all day and it never touches your cap. Small Business Administration (SBA) lending is an important piece of Amplify s successful cap management strategy. The credit union has ramped up its program over the past few years and is now recognized as one of the top SBA lenders in the Austin area among not only credit unions but banks as well. Through this strategy Amplify is not only helping small businesses right in its community but also diversifying its loan portfolio and staying under its business lending cap. Now that is a winning combination. One common question CU Business Group receives from credit union clients is whether NCUA s recent and substantial changes to the MBL rule will impact individual credit unions overall business services strategy. And our response is that it s unlikely it will. The regulations do affect certain aspects of the lending process and they offer hard-fought flexibility in areas such as loan-to-value limits and personal guarantees. Credit unions now have the ability to customize terms based on their own risk parameters and the unique merits of a specific transaction. The regulatory changes don t have much bearing on decisions related to overall strategy portfolio mix or product set. In conversations with NCUA officials they fully admit that the new rule doesn t change anything in terms of business lending standards and best practices. It simply offers credit unions the ability to set their own parameters in accordance with their specific markets and tolerance for risk. This represents a sharp detour from the previous one-size-fits-all approach. Take a Member-Centric View of the Relationship The recent CU Business Group poll also highlighted another important trend credit unions gradual move away from offering business loan products on S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M TAB BUSINESS TRENDS only a transactional basis and toward developing a truly member-centric view of the entire business relationship. This trend also matches what is happening within the credit union industry as a whole. According to recent data from Callahan & Associates as of the second quarter of 2016 core deposits rose a robust 8.5 percent as total deposits increased by 7.5 percent. In fact over the past 10 years credit union core deposits doubled from 381 billion to 780 billion despite a period of historically low interest rates. This tendency demonstrates the confidence and loyalty that the nation s 106 million credit union members maintain in their cooperative financial institutions. Moreover credit union members aren t just socking their funds away to gather dust. Core deposits are by definition transactional accounts share draft checking money markets and share savings accounts. Of these account types checking accounts continue to grow as a percentage of the mix reaching a record high 55.5 percent in 2016 an increase of 7 percent over 2015 according to Callahan & Associates. What this data clearly illustrates is that credit unions have a huge opportunity to build relationships with their members not just on the consumer side but also with small businesses. Growing core business deposits is part of our mission as a community credit union says another conference attendee Teresa Freborg director of business services at Northwest Teresa Freborg Community Credit Union ( 1.1 billion in assets out of Eugene Oregon). It is a result of wanting to deepen our relationships with our business borrowers. We see the value in working holistically 54 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 with a business instead of just on a loan transaction. Credit unions like Northwest Community recognize the value of developing a core deposit strategy and building it into the overall business services product suite. CU Business Group advises credit union clients to offer a full-service business services program one that includes not only CRE loans but also working capital lines of credit credit cards operating checking accounts and cash management products. Chris Smith of Interra Credit Union shares how the CU built a robust and successful program based largely on a core deposit strategy with attendees at CU Business Group s National Conference in Portland last month. At CUBG s Portland National Conference one of the featured speakers Chris Smith of Interra Credit Union ( 862 million in assets out of Goshen Indiana) shared how Interra managed to build a robust and successful program based largely on a core deposit strategy. As Interra grew its business services program over time on a foundation of strong infrastructure experience better IT systems and a willingness to hire and expand the credit union was well-positioned to develop and launch 22 00 11 66 C U B U S I N E S S . C O M SS EE PP TT EE M BB EE RR M BUSINESS TRENDS It s not an easy road to success but credit unions are making headway and becoming more competitive in the full range of business services every day. To further test the direction of the industry CU Business Group will conduct an identical poll at its upcoming East Coast National Conference to be held September 19 21 2016 in Reston Virginia. Established in 2002 CU Business Group LLC provides a wide array of business lending deposit and consulting services to credit unions nationwide. CU Business Group provides products and technical expertise to credit unions with advanced business programs as well as all the basics for those just starting out. Based in Portland Oregon with offices in the West Southwest and Eastern U.S. CU Business Group has a staff of 40 professionals and is the largest business services CUSO in the industry serving more than 530 credit unions in 46 states. For more information visit www. cubg.org. Larry Middleman bio here an entire business deposit product suite to meet all of the members needs. As the recent poll demonstrates one in six business lending credit unions plan to adopt a similar strategy. Core deposits checking and savings accounts have the lowest cost of funds and are most resistant to fluctuations in interest rates Freborg says. They are also least likely to turn over. If a credit union is growing loans [it also has] to grow deposits. Core deposits for businesses can yield higher balances quickly and the more deposits we hold the more we can lend back to the community. 55 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M L ENDING SOLU TIO NS BY LORRIE WOHLFEIL When A-Paper Loans Go Bad There s almost nothing more frustrating than that perfect A-paper loan that goes belly-up 6 months after approval. I think we ve all had that happen more than once. But what if there was a way to predict which of those seemingly good loans would go bad While there s no perfect system out there at Lending Solutions Consulting we believe there are some telltale signs of trouble in most of these cases. Over the next few months we ll be examining a number of examples of these types of loans and featuring them in this column to see if we can identify some patterns A-Paper creditGo Bad recognize red flags When to help Loans unions ahead of time. T There s almost nothing more frustrating than that perfect A-paper loan that goes belly-up 6 months o start off here s a snapshot of a portfolio What do all these loans have in common First with an after approval. I think we ve all had that happen more than once. But what if there was a way to analysis we performed for one of our average age of 26 they are relatively young. While not predict which of those seemingly good loans would go bad While there s no perfect system out there clients. (Note All of onsulting we were sent a are some telltale signs of age is relevant when it pairs at Lending Solutions C these loans believe there red flag in and of itself trouble in most of to us Over the next few A business that up with umber of e factors of t are prevalent these cases. because they weremonths we ll be examining a nthese otherxamples thathese types of here went south in a very his c time period and loans and featuring them in tshortolumn to see if we can dentify some patterns to help credit unions i High secured debt ratio left the credit union baffled) of time. High loan-to-value (all over 100% ltv) recognize red flags ahead To start off here s a snapshot of a portfolio analysis we performed the score f our clients. (Note All of 5 cases for one o is not valid these loans were sent to us because they were A business that went south in a very short time period HYLS dropped the scores on average of 21% and left the credit union baffled) Name Loan A Loan B Loan C Loan D Loan E Average C R E D I T High relative credit scores but in 3 out of the Age 21 25 24 36 25 26 Sec. D R 80% 66% 57% 84% 64% 70% LTV 112% 111% 102% 123% 121% 114% 56 Score 721 Invalid 704 Invalid 724 Invalid 725 690 713 HYLS 526 500 601 638 566 566 Drop Rate 27% 29% 17% 12% 18% 21% Score Code Trend N A N A N A 4 4 going down 4 4 - C O M S E P T C What do aU these Noans U ave Nn common First with aE M verage a2 0 of 6 6 they are rU B U S I young. . ll N I O l B h S I i E S S n a B E R ge 1 2 elatively N E S S While not a red flag in and of itself age is relevant when it pairs up with these other factors that are LENDING SOLUTIONS Let s take a closer look at the factors mentioned above. The first two items secured debt ratio and high ltv are pretty self-explanatory. And again any one of these factors by themselves do not mean a loan is going to go bad. But when you start to have multiple factors present you can see some common themes develop. Valid Credit Score When we talk about a score not being valid we believe a credit report needs to needs to have 3 things for the score to be legitimate 1. Minimum of 4 trade lines 2. At least 2 years of credit activity 3. Minimum of 5 000 in total credit limits Obviously the credit bureaus will still issue a score without these 3 things but we believe that the applicant cannot be considered a true A paper without fulfilling the above requirements. We often refer to these types of non-valid A papers as thin A paper files. HYLS HYLS (High Yield Lending Strategy) is LSCI s proprietary underwriting guide that looks at 27 additional factors not shown in a traditional credit score. By simply asking a series of questions about a member s finances HYLS has been proven to more accurately reflect the individual s ability to repay. By design the Guide is easy to use providing instant feedback on loans allowing lenders to build more loans with more confidence. As you can see HYLS dropped all of these scores by an average of 21%. Findings Here were the major findings that we identified in our portfolio analysis for the credit union 1. They are getting killed on non-valid credit scores where the A is giving false confidence. The dealer knows what he s doing and hopes they only look at the score. 60% were invalid scores. 2. HYLS lowered all the scores. The average decline was 21% although some dropped nearly 30% indicating real risk. This equates to a 700 score dropping to a 490. 3. The non-performing examples have a trend of LTV s being far too high. The average LTV was 114%. This cannot be successful given the age and lack of meaningful credit. 4. The secured debt ratios in most cases were far too high. The average secured debt ratio was 70%. This is not sustainable once the thrill of the new car wears off and a big payment is left. 5. Where the score is at today is far less relevant than where it s headed. The non-performing FICO scores averaged 713. This means the risk versus reward is not measuring up. Their average yield on these loans would have been 3-4%. Given the average LTV of 114% and how quickly they under-performed the credit union most likely is facing large deficiency balances with no offset of good yield. 6. There was no real skin in the game (i.e. cash on any of these deals). Score Trend Credit unions are losing a lot of money on seemingly good loans where the score is still high (low A high B ) but trending down. How do we know a score is trending down It starts by taking a look at the 4 codes situated just below the score on the credit bureau. When certain codes pair up with each other on a high paper credit unions can identify applicants that are trending down. We will be taking a deeper dive into this topic in a future article. 57 C R E D I T U N I O N B U S I N E S S S E P T E M B E R 2 0 1 6 C U B U S I N E S S . C O M LENDING SOLUTIONS 7. The quality of the loan application is not strong. There are questions of employment very short job times unclear residencies relationships between signers etc. 8. On the two valid scores 100% of the codes following the FICO score trended down. 9. Debt ratio does not always prove to be a good measure of vehicle repayment. How many cars one person can be responsible for does. This should be questioned. 8. Implement a secured debt ratio guideline in your policy. This is extremely important going forward. To refresh A A B up to 75% C D E and first time buyers up to 50%. Note Your A members were not truly A and we would not designate them as such. We ll be continuing this series over the next few months where we ll show example loan applications and dig deeper into the trend analysis and other key factors for determining which good loans will go bad. Hopefully this has got you wondering what trends are occurring at your credit union and what to avoid going forward. You don t have to settle for losses When the time is taken learning from past mistakes can help prevent future mistakes. Just to get you thinking... how good does a 712 score look if you can see into the past and knew six months ago it was an 800 score. But that s all the space we have for now so until next time happy lending Lorrie began her career at LSCI in August of 1995. As a business analyst Lorrie is primarily in charge of the Portfolio Analysis program an external audit dedicated to helping credit unions make stronger loan decisions and seek sales opportunities. Lorrie also works hand in hand with our on-site consultants and has also 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) and personally trained many of the loan underwriters at LSI. Lorrie also spent 4 years as an on-site consultant for LSI. During that time she not only educated credit unions on lending but also trained their staff to make superior lending decisions. Lorrie graduated from the University of Kansas with a degree in Business Communications. 2 0 1 6 C U B U S I N E S S . C O M Recommendations Provided to the Credit Union 1. Have LSCI in for training to go over these loans. (Shameless plug). 2. Turn on HYLS. It will cost you 1.25 per application and we believe would have saved the credit union thousands on just these six loans. We can teach your staff how to input the data quickly. 3. Start using Direction of Score on every loan. Our experience is that very few people sit on B or low A street. The trend is the key. This costs nothing but can save thousands. This is LSCI s training tool that will be discussed in future articles. Most lenders are not trained to understand the score what the placement of the 4 codes mean in relation to the current score and how much is too much. 4. Don t continue to allow incomplete applications from dealers. Request exact start and end dates on the job histories going back 4 years at a minimum. Explore other living designations and what low rent payments really mean. This information is most likely false misrepresented and not sustainable. 5. Add valid score criteria to your policy. 6. Revisit first time buyer indirect non-member criteria and profitability. 7. Be wary of accepting co-signers that don t live together. We don t suggest this particularly on indirect non-members. 58 C R E D I T U N I O N B U S I N E S S S E P T E M B E R