Real Teaching Moments With Our Members

The old gentleman’s eyes looked away as he sat at my dinner table and told me this story from his youth back in the 1930’s. It was going to be a perfect day. His class was going down to the lake for a class outing and picnic. Each student was to bring a sack lunch for the day. 

The boy was the son of a farmer and times were very lean in 1930’s for rural farmers. The boy gave his mother a week’s notice that he would need to take his lunch. On the day of the outing his mother handed him a sack lunch with a tomato biscuit, a country ham biscuit, and a biscuit with homemade butter and jam on it.  The boy excited about the day, kissed his mother and left for school.

The ride to the lake was enlightening for the boy as he heard everyone ask one another what they had brought for lunch. As the students headed toward the lake the boy held back and found an old stump with a hole in it. He quickly shoved his sack lunch down the stump hole and ran after his classmates.  When it was time for lunch he pretended not to hear the voice of his young teacher. She was new to the small country school and had come from the city.

The teacher called to him again and this time there was no ignoring the urgency or tone of her voice.  “Where is your lunch?” she asked when he joined the group with no lunch sack.  “I forgot it at home” he replied.  “Well then you can have my tomato sandwich” and with that statement she handed him her sandwich and then reached into her purse and pulled out a slightly crumpled sack. 

“I am going to have a biscuit” and with that she pulled out the country ham biscuit the boy’s mother had packed and started to eat it and commented to the children that she had never had a country ham biscuit before.  The boy stared at her with dismay.

The old man paused as he told the story and his voice caught for a moment. He explained then that he had been ashamed of the lunch his mother had packed as it was a poor farmer’s lunch.  That morning on the ride over to the lake he had heard that the other children were all having white bread sandwiches; which back in the 1930’s was a luxury.

The man’s eyes focused on me as he finished his story. He said, “After all these years I still remember her and how much pride I felt as she ate my mother’s biscuit." He then added, "She was a good teacher.” 

Now think of our members today. The average consumer is saddled with $6,493 in credit card debt and juggling an average of six open credit cards, according to credit health website Credit Karma’s latest data. That’s just our member’s debt on plastic. We have members who see others getting ahead but like the boy in the story stand back ashamed to speak up and ask for help. They see themselves struggling when everyone else is getting ahead. They see their homes, with a typical mortgage of around $171,665, sliding underwater in equity. They wonder how they ended up with the typical auto loan of $15,152, plus another $29,572 in student loans on an education that has not delivered all that had been promised. That’s a  grand total average of $222,800 for the average consumer.

For many credit union members the recession played fast and furious on their household finances, and left many families struggling paycheck to paycheck.  Paying a car, home, or college education in cash has become impossible for most. For many, putting the grocery bills on a credit card is the “new normal “that happens each month in order to pay the mortgage or the rent.

Each month of the “new normal” blinds the member to the dangers ahead of them. So what are the red flags we need to educate our members about to help them see the spiral of relying too heavily on credit?

As the financial experts we need to be aware of these three road signs and do our part to educate our members.  I would hope that every credit union leader reading this blog offers some type of free CBR review for their membership. If nothing else each of you should post these warning signs to your brand new Facebook page. Remember that new social media blog you have started but were not sure how to make it actionable? Well, my suggestion would be to post this on that blog and then add a line about calling the credit union to get a free consultation to look over your credit bureau.  So without further fanfare here are the teaching points we should all be educating our membership on. These points have been written so you can publish them straight to your membership

Credit Warning Signs To Post To Your Members

You’re Only Paying the Minimum. 

If you’re paying the minimum on your debts, two things could be happening: you’re using more cash toward expendable monthly purchases, or you can only afford to pay the minimum. In both cases, you aren’t prioritizing paying off your debts. Paying only the minimum might mean you’re making affordable payments month-to-month, but you could end up paying hundreds or even thousands of dollars in interest over time—you’re essentially paying the bank to maintain your debts. Reset your budget to pay more towards the minimum payments.

You’re Turning to Plastic to Pay What You Can’t Afford.

How often have you realized you’re low on cash or emptied your checking, and needed to use your credit card instead? True, one of the uses of a credit card is that it allows you to buy things you couldn’t otherwise afford. But on the flip side, should you be financing something you can’t pay for right now? Your debts accrue interest and make it even more unaffordable over time. Putting a $600 purchase on an 18% APR credit card and paying just the minimum results in $300 in interest charges over the life of the debt—that’s a 50% increase from the original debt! Your credit card is best used to pay things you can afford to pay in full every month; that’s the credit-building action that boosts your credit score and steers clear of debt.

Your Credit Score is Falling.

Relying heavily on credit isn’t just costing you money; it compromises your financial future. When lenders take a look at how much debt you are carrying and how much credit you use, it’s a sign of risk that you may mismanage or default on the credit they extend you. Plus, with debt and credit use factoring into about 30% of your credit score, a decreasing credit score is the first sign that you are in over your head. If you don’t know where you stand with your credit health, start with checking your credit score regularly for free at Credit Karma and monitor for any drops in your score. Contact your credit union and ask them to go over your credit with you.

Practical Application

Looking to add loans to your bottom line? Start a promotion educating members on the nature of credit. Offer tools like Credit Karma for online members. You should also offer a free credit review to every new membership you open. Go over the CBR with them and talk about the impact of slow pay or other items you find in the trade lines. Look for outside debt and look to refinance that debt saving the member even more money.

Some of our members are confused and ashamed of what they simply do not understand. Rather than bury those questions and ignore the problems we need to help our members by creating real teaching moments and showing them how they can move forward.   

Visit CreditKarma to learn more about online credit monitoring solutions you can offer your membership

Credit Union Culture: Cooperative or Cut Throat ?

Who is the Enemy At the Gate
In my capacity assisting credit unions with their Business Continuity planning, I have noticed a great deal of distrust among the credit union family. Many credit unions feel that their sister credit unions are their enemy.  While friendly competition should be the norm, the attitudes I detect seem to be of a much more cut throat in nature that contradicts the cooperative spirit of the movement.

While conducting training for the management team of one credit union, my suggestion of credit unions supporting each other in times of crisis was viewed as an anathema.  Sending the little old lady trying to cash her Social Security check to the main branch five miles downtown was preferable to setting up a mutual agreement with another credit union with a nearby branch to offer one teller space in the event of a crisis.

The Not So Cooperative Nature of Credit Union's 

Shouldn't “People Helping People” extend to “Credit Unions Helping Credit Unions”?  I certainly think so.  ALL credit unions should still be part of the cooperative network. Yet, too often many credit unions seem locked into “If Acme CU is bigger than me, they must be stealing membership from me!”  Though not a new development, it certainly seems to have gained momentum in recent years.  Perhaps it is an outgrowth of the community charter movement.  Perhaps it is as a result of the regulatory pressures brought on the management.  Perhaps it is fallout from the economic times.  Perhaps it is a combination of all three.

Credit Union membership shouldn’t be a zero-sum game!  Credit Unions don’t steal other credit unions members.  After all, unlike the NCUA thinking as they initially proposed their new corporate rule, real people can be a member of multiple credit unions without impunity.  People will become members depending on service, services, locations, and rates.

Credit unions should actively recruit new members from the population who don’t know the benefits of credit union membership.

We Need A "We Are the World" Moment

Credit unions should help each other out. We should embrace our common mission and unique charter and join together to help offset the enormous expenses we incur as smaller community based institutions. Mutual assistance should be le mantra de jour, not the exception.  How?  Here are a couple of simple examples to provoke some ideas:

• If one credit union’s branch is incapacitated, for whatever reason, other credit unions in the community could offer working space or teller space, especially if it were a mutual assistance agreement.  This is ideal if both use the same core systems.
• Consider supporting each other with staffing assistance.  Why pay the fees to temp agencies for temp staffing when another credit union might lend a person who’s already trained?
• Consider using staff from other credit unions to assist in facilitating Business Continuity exercises with inputs and role playing.  They could act as press, disgruntled members or members with off-the-wall questions to enhance the stress of the exercise.  They could also work as trusted agents assisting the exercise facilitator.
• What about some joint public events?—Sponsor a lunch & learn about credit unions; host balloons and ice cream event in the park for kids and young parents (potential members, right?); organize a pet parade to support the local animal shelter; provide staffing for the local public radio fund raiser.  OK, I may not be the most creative in the world, but you get the idea!

The Battle for Board Walk and Park Place

Like power hungry community titans in a real life Monopoly game some credit unions seem bent on owning all of Board Walk and Park Place and leaving only Baltic Avenue to their credit union neighbors. This credit union distrust seems especially intense where several credit unions share overlapping community charters.  Each credit union sees the same pool of potential members as “theirs" and as they seek to increase their membership they perceive themselves in competition for those members with other community based credit unions. 


This sense of competition can be a good thing.  It could force each of them to evaluate their mission, their service, and their approach to the various segments of the community.  Yes, even though they all have community charters, their potential new members are grouped into different and specific demographic segments.  Credit unions should play to their strengths, play to their best demographics, play to building a loyal following. Viewed correctly, each should find a synergy with the other credit unions that can become a growth multiplier in the membership recruiting game.

OK, so who is the enemy?  It’s certainly not the other credit unions.  It’s the banks who see us as playing on an unfair field.  It’s the banks who try to impede credit union progress (should we be looking to them for critical services?).  It’s the banks who want to make sure credit unions are taxed.  It’s the banks who won’t support the underserved.  It’s the banks who are so creative at imposing additional hidden fees. It’s the banks, with their lack of real interest in their customers’ welfare, who should drive credit union membership.

That’s where the credit unions should focus their animosity.  Not at each other!

This blog article was written by Ken Schroeder, Vice President for Business Continuity at Southeast Corporate, where he is responsible for the life cycle management of all business continuity functions. Mr. Schroeder provides consulting services to member credit unions and has been a featured speaker at numerous conferences, forums and other events. You can learn more about Ken at Ken Schroeder

CFO Corner: A Glass of Liquidity – Hold the Rocks: Your Liquidity Strategy

Everyone Is Drunk on The Spiked Kool Aid

It was a nightmare…flashing lights…loud music…empty dance floor. No, I wasn’t in some 70’s throwback bar it was actually the client party for a financial services convention. Everywhere I looked people were laughing and drinking to music that most of them had never heard before. These same industry leaders last year were wringing their hands unsure of NCUA assessments, watching their capital reserves drop before their eyes as commercial loans in sand states literally bit the dust.

Last year the only liquidity anyone was thinking about was what they could pour into their glass as they were hoping it was all a bad dream. Fast forward to today and the world is upside down as Big Banks have emerged stronger with higher assets, broader consumer bases and TARP has becoming a bad memory as quarterly profits erase past mistakes.

Credit Unions have begun to breathe again as evidenced by the record attendance at this convention. Credit union leaders are feeling better about their financial positioning and are starting to get some swagger back in their step. Watching everyone else talk about recovery even I was starting to get a smile on my own face. Then I read this great article written by Edward Lis, our CEO guest blogger, and suddenly I had to wonder why were all of us drinking the spiked Kool Aid when 12 months ago we thought the sky was falling. 

So here is the million dollar question, “Why be concerned now about liquidity when most credit unions are awash with funds resulting from a flight-to-safety fund inflows and loan portfolio outflows due to lack of loan demand?” Edward lays out some thoughts every senior management team should be considering as they prepare a liquidity strategy for the next rising-rate environment that some economists are predicting could kick off by late-2011.

The Fly in the Kool Aid

Before you waive off the article as the fly in your spiked Kool Aid consider that rising rates typically are used to manage economic recoveries. So it is likely rising rates will be accompanied by a return of flight-to-safety funds to the market and a spike in loan demand, putting many credit unions back in the tight liquidity environment of a few years back. Many credit unions have rate floors under their variable rate loans.  As rates move up, rates on these loans won’t move for a while. But your cost of funds will. The result is a compressed net interest margins or NIM.

The objective of a viable liquidity policy and strategy is to provide a framework to minimize the adverse effects of a significant and sustained liquidity crisis.  This can result from changing economic or interest rate conditions, deposit outflows, unusually strong loan demand, intense competition, an international crisis, or any other factors that can deplete the liquidity of the credit union.

In the event of a serious and sustained liquidity crisis, you might find you need to adopt various strategies. Some of these strategies are preventative and must be implemented prior to the onset of a crisis.  Other strategies are reactive and may be implemented immediately.   The strategies will differ in terms of the implementation time, costs, risks, financial implications and regulatory consequences.

  

Looking for a Glass of Liquidity – Hold the Rocks

The first place to look for sources of liquidity is within your own balance sheet. Some areas to consider are listed below.

• Loan Payments and Prepayments-a credit union may write loans with long repayment schedules, however, with that said; loan portfolios continue to be relatively short term-the turnover rate. Track and test loan payments and prepayments in all economic environments to estimate the level of cash inflow to the credit union under a variety of scenarios. As a reminder, when interest rates are falling-prepayments will increase, and when rates are rising-prepayments will slow down.

• Increasing Member Deposits-to bring about an inflow of deposit funds without cannibalizing previously deposited funds are often referred to as “disparity” or “segmentation” strategies. They are designed to identify depositors based on rate sensitivity and encourage an inflow of deposits when needed.  You should be forecasting your liquidity needs and anticipating those needs in the marketing of your deposit products.

• Selling of your Assets-mortgage loans written to conforming loan standards can normally be sold in a short period of time with one major issue to remember: Loans will be sold at their “market price”, which may be more or less than their “book value”, depending on the current level of interest rates. Other types of loans have the potential for sale as well, i.e. consumer loans

• Non-Member Deposits-non-member deposits, also referred to as brokered funds, can provide near-immediate and short-term funding.  Note these come at a high price and the funds are very rate sensitive.

• Loans from the Corporates-the corporate credit union is still the lender of first choice for a majority of credit unions. Loans fall into two major categories: A line of credit and a term loan. A Line of Credit-these come in two varieties: committed and uncommitted. A committed line, most common, the credit union pays a fee based on the size of the line and its duration. There is a contractual assurance that the funds will be available to the credit union when those funds are needed.  An uncommitted line of credit, funds may be available based on the lender’s-the corporate-ability and willingness to fund. Generally, there is no charge for an uncommitted line of credit, but the certainty of obtaining the funds when you need them could be in doubt.

• Term Loans-these involve a specific amount borrowed for a specific period of time. It may be a bullet loan with the principal due in full at maturity, or an amortizing loan similar to an installment loan. Rates can be fixed or variable.

• Federal Home Loan Bank (FHLB)-the FHLB is a quasi-government organization with the objective of supporting and providing loans to financial institutions that make first mortgage real estate loans or that purchase and hold mortgage-backed securities. These organizations offer a diverse line of lending services to qualifying credit unions. Much like the corporate system, liquidity from the FHLB involves lines of credit and/or term loans at fixed or adjustable rates often at more favorable rates than the corporates.

To borrow directly from the FHLB, a credit union must be a member. To be eligible for memberships at the New York Federal Home Loan Bank refer to

 http://www.fhlbny.com/aboutus/membership.htm.

Note: For a credit union not belonging to the FHLB, check to see if your corporate credit union has an agency relationship allowing the natural-person credit union access to FHLB resources without becoming an FHLB member.

The Central Liquidity Facility-the Central Liquidity Facility is administered by the NCUA Board.  CLF advances to natural-personal credit unions are normally limited to short-term, temporary needs. Borrowing directly from the CLF requires that the credit union apply for membership in the CLF and purchase stock. However, many corporate credit unions are appointed as CLF agents and may be able to facilitate an advance to natural-person credit unions that are not members of the CLF. For more on the CLF refer to the following link :  Http://www.ncua.gov/Resources/CreditUnionDevelopment/ResourceConnection/Files/Partners/NCUA-CLF.pdf

The blog entry you have just read was written by Edward Lis who was a former CEO and CFO of two different credit unions. If you enjoyed this article I encourage you to learn more about Edward by visiting www.edwardlis.com

Don't just read the blog become part of the blog by submitting your own article or by leaving a comment below.

Money To Burn: Three Strategies To Rethink

Nerd On The Run 

What a great memory touring Washington DC on a Segway. Yep, that sentence automatically nominates me to the Nerd Hall of Fame. There I was gliding around people and taking in the historical sights of the Capital. As I was trying to move around town and not run over people or fall on my face I could not help but notice the different ways people were taking in the sights of the capital. Some people were on tour buses, some were on rented bikes, some roller blades, and lastly some just walked from one point to the next. No matter the method people were taking in the sights and enjoying the weather in a way that fit them. 

What really struck me was that even though we were all going down similarly marked paths we were going about it in different ways with each of us expecting different things from the journey. You could literally see the difference in generations by the reaction I created as I glided past someone on the Segway. Small children pointed and said they wanted to ride. Young adults looked bored as seeing a Segway was nothing new; just a guy in a nerdy bike helmet riding a Segway. Older tourists stepped to the side and looked at me with distrust. They were visibly afraid I would suddenly lose control of the technology I was riding  and go crashing into them. Each group saw the same technology on their path as something different. Some saw amazement, some saw the normal or routine, and some saw something they simply did not trust or understand.

I think the same reaction is happening in financial services as we try to understand the sweeping changes that have enveloped our industry over the last three years. To combat consolidation in the market many credit unions are adopting technology that is supposed to help understand  the member and deliver cost efficiencies . Yet, that same technology is often sweeping in nature. So credit unions find themselves trying to navigate a path with all those same groups I almost ran over with my Segway. Like me on the Segway many credit union management teams face the same challenge of trying to create a uniform experience across age groups and delivery channels. They face the same concern that they don’t want to lose control of the technology and end up taking themselves out.

There are many different strategies out there and all of them seem to come with a complimentary white paper and free webinar on how they will revolutionize the way we serve our members. One thing I do know is that some of these strategies are the wrong strategies. I suspect that for some credit unions the key strategies they are adopting fall into a couple common themes. As you ponder these three strategies I want to share with you some research, that I believe is relevant, from the Raddon Financial Group (http://www.raddon.com). 

Tell Them We Are Not a Big Bank and They Will Come…

Yawn….they paid the money back! People have put TARP in their rearview mirror. The truth of the matter is that Big Banks went to Capital Hill, got a spanking, and then on the way out of town they grabbed all the assets, improved market share, and got a nice check for a couple billion as they walked out the door. Anyone seen a Ally Bank commercial lately? We all know they were wearing black hats at the start of the congressional hearings but when they left the building they had a new image, a new name, and a new slogan. This means that for many small community based financial institutions they are now competing with Big Banks with even more assets, with larger consumer bases which allows them to lower their cost per transaction even more. The added insult for many credit unions is that the average consumer has a very short memory or is oblivious to all the changes that have happened over the last three years. There simply is not a lot of road left on this message and strategy.

Free Checking –Leave it Free and They Will Come … Be Careful What You Ask For

Many of us are aware most Big Banks have eliminated or reduced free checking. On the other end of the spectrum most credit unions have adopted a “wait and see” strategy hoping that they will pick up deposit growth from dissatisfied bank customers. There are some basic assumptions in this strategy that credit union leaders need to validate. The chief assumption is that the growth will come from depositors you would want as members. If you break down consumers into six broad categories (Fee Driven, Credit Driven, Middle Market, Low Depositor, Middle Depositor, and Upscale) the majority of consumer movement is in on the lower end of the spectrum. Big Banks are driving away non profitable customers and credit unions are assuming that they will suddenly turn into profitable members.

Imagine a large exodus of millions of people. Each person is simply being driven out from where they were. They end up going down the path of least resistance and end up in a temporary camp. Imagine the town next to the camp being filled with kind hearted people who decide to take them in and help them back on their feet. This action is noble and it is in many ways heroic. What it is not is profitable in the short term. The towns resources are used without anyone paying additional taxes. The same thing will happen with credit unions as they become the refuge for unprofitable Big Bank customers.  Many of those that are being driven from the banks are the people who are “Fee Driven” and that segment simply is not credit worthy for the loans you will want to lend to them. So now you have low deposit, high transaction members who are credit challenged. 

I am not saying credit unions should not be the refuge for these members – we are here to serve the underserved. I am simply suggesting that the strategy has inherent challenges that need to be thought through.  Maybe you are counting on the fee income from overdraft from these members. Looking long term that source of income is squarely on the radar for the new Consumer Financial Protection Bureau who will see this income as part of their mission to make sure that markets for consumer financial products and services are fair, transparent, and competitive.

Build or Buy the Technology and They Will Come

The media loves technology and all the buzz words that come with that technology. Apps, living in the cloud, DROID, mobile, tablets, all of it just sounds cool. When you listen to that tech vendor with the great PowerPoint you almost think it is time to shutter the branch network and go virtual. Well, before you make any big budget decisions I want to provide some additional points of thought to consider. One thing to ask yourself is what do members value the most at a financial institution. The answers are as follows; Free Checking 76 %, Good Service 70 %, Convenient Branch Locations 48 %, Good Online Banking Experience  41%, NSF Fees (under 30 $) 28%, Loan Rates 18%, Deposit Rates 17 %, and Mobile Banking 12 %.

It seemed odd to see the branches ranking 3^rd on the list when it seems in the past month or so I have read numerous blog articles calling for the reduction of branches as they are becoming obsolete.  I have no doubt that members will continue to shift from branches to other delivery channels like online and mobile. That being said the biggest driver of member satisfaction other than free checking was good service. Where does the majority of that good service happen? In the branches. True, a great call center and back office staff are added bonuses but most member interaction is still face to face in the branch network.

When members were asked what would make you move your PFI the answers were; Lack of free checking 34%,Service Issues 31 %,NSF Charge (over 30$),Branch Hours/Location13 %, Deposit Rates 13 %,Online Banking 11 %,Loan Rates 10 %,Product Range 9 %,& Mobile 4 % .

What does all this mean? It suggests that it is hard to move the type of members we want to move from Big Banks. When polled 50 % of financial institution consumers said they believe they receive better service at a smaller financial institution. We also know that service continues to resonate with consumers. I believe any strategy we adopt has to also find a way to empower that teller or member service specialist in helping them feel valued in what they are trying to do for the membership. This is a hard sell. It is more fun to buy tech than it is to create incentives for great service.

So now I have poked holes in the three strategies I have heard recently. Please feel free to pass this blog article along to someone else so they too can mutter under their breath. As always this is a dialog in which I hope to generate additional ideas on how we can all compete and thrive against Big Banks. Now leave a comment so you can influence the next reader and let’s make a difference for small community financial institutions together.