Author: Chip Filson

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Lessons From the Field: Sharing the Good and Bad

Managers’ monthly reports to staff are an important way of communicating both successes and short comings.

This April report includes a fraud effort recounted in detail.  The learnings prevented a second theft. The CEO  then characterizes the $125,000 loss as a tuition payment.

We processed a wire transfer request for a member on Friday, March 24 for $125,000 and unfortunately incurred a fraud loss.  The caller impersonated the member, knowing the answers to all out-of-wallet questions asked (e.g., name, address, account number, mother’s maiden name, etc.), and also knew the account’s code word and year that the account was opened.  The phone number was spoofed, making it appear to be the member’s phone number. 

The caller changed the contact information of the account, then called again to request the wire transfer.  Another wire request from that account was made on Monday, March 27 and the call was appropriately escalated by front line associates.  After determining that identity theft occurred, the account was locked down, law enforcement was contacted, the member was contacted, and appropriate affidavits of forgery forms were executed. 

Our fidelity bond which would typically cover insured perils such as this will not cover this loss because we didn’t place a verification call to the old number on file.  This step is required by the bond company and is documented in our wire procedure for all accounts with contact information changes within the past 30 days.  The wire transfer procedure was amended and training was being enhanced as appropriate. 

As is typical, losses such as this are thought of as tuition payments, making everyone on the team smarter as we move forward.

Everyone in the organization needs to be aware of this fraud threat. On April 25 the same fraudster called into the lending call center.  He had enough data (name, address, account number, last four of social, etc.) to convince the first associate he talked to that he was a legit member.  He then used social engineering techniques to obtain various other pieces of account information.  He accessed online banking and changed some contact information; he again requested a wire transfer. 

The fraud attempt was caught so no additional loss was incurred.  But we still have to deal with reputation risk with our member and establish a brand new account, which can be time consuming. 

Net Promoter Scores:  Both 10’s and 0’s Shared

Many credit unions rely on the net promoter score processes  to monitor operational performance in real time.

Often just the overall score, usually in the mid 80’s, is shared with staff and the overall trend.  Sometimes a compliment will be added to the update.

This credit union CEO believes both high and low scores can inform and lead to better service.  He shares the verbatim comments.  Here are a few examples from the 248 remarks submitted by members during the month:

  10. When I had my debit card number stolen my savings & checking accts were cleaned out, you all took care of me. I was very upset! I had all my money back in 2 days. I’ve always been a fan of credit unions instead of banks.

 10. The customer service was excellent and Palisha was amazing. She answered all of my questions and made sure I was comfortable with everything. She broke everything down for me and was very communicative.

 10. Gave me loans when my own CU turned me down.

And areas for improvement:

 8. Online banking is not user friendly, when I contact the branch no one is helpful. I set up a credit card payment years ago and want to increase the amount and no one seems to be able to help me. I bank at a few other institutions as well and I never have the same issues.

  0. Make it so the app is usable to pay car payments without having to have a bank account- sign in to car account. Same with website. Such a chore to make car payments.

 0. because I live in Tennessee now. Open a branch in Knoxville.

4. Work with me on my credit or a loan to build credit I have always paid loans off and now my income is more annually.

Transparency and effective leadership are interdependent.  Staff feels part of a team when occasional shortfalls, or even errors, are transformed into  lessons from which all benefit.

 

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Credit Union Learnings from the Costs of Regulatory Mismanagement

With this morning’s announcement of First Republic Bank’s failure and subsequent sale to JP Morgan, the total cost to the FDIC of the three recent bank failures is approaching $35 billion.

The banks will pay for these losses through greater FDIC insurance premiums.  That additional  bank expense will be passed on to their customers.   There is no government tax money being used.

I believe there are important initial  lessons from these current failures for credit unions:

  1. Regulatory mismanagement is extremely costly. The institutions and their customers will pay for these shortcomings.
  2. The initial response will always be to issue more regulation-in this case both capital and liquidity requirements.
  3. The problem is  “bureaucracy,” not individuals with responsibility in the agencies.
  4. All of the explanations offered below have been part of NCUA’s own playbook in the past.

The question for credit unions Is whether NCUA is exempt from the internal bank regulatory shortcomings described below?   Or is it that the problems have yet to surface?

Regulatory Self-examinations

Before today’s announcement of this third failure, last week the FDIC, FED and GAO had issued preliminary postmortems of why SVB and Signature banks had failed.  The headline summaries of these reports signaled the “self-criticism”  of the agency’s performance.

However before turning the spotlight on themselves, the reports pointed directly at the banks’ management, from the Wall Street Journal’s account: 

The Federal Reserve report — commissioned on March 13 by Michael Barr, vice chair of supervision at the Fed — argued that SVB failed on March 10 because of “a textbook case of mismanagement by a bank,” and said its senior leadership “failed to manage basic interest rate and liquidity risk.” 

The FDIC report — authored by chief risk officer Marshall Gentry -– offered similar criticisms about the management of Signature Bank, which was seized by regulators on March 12. The FDIC said that Signature Bank failed to prioritize good government practices and often ignored FDIC advisory recommendations prior to its sudden collapse. 

“The root cause of Signature Bank’s failure was poor management,” the report said. “[Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk-management practices and controls appropriate for the size, complexity and risk profile of the institution.”

The obvious political and accountability question is why weren’t the regulators up to the task of effective oversight of these “basic risk”management failures.   The reports then become more self-focused as reported in the Journal:

“Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” Fed regulators said, adding that “when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”

The two federal regulators also pointed the finger at themselves for failing to adequately supervise both institutions, and emphasized that new guardrails must be put in place to stave off another regional banking catastrophe. Both agencies said they missed weakness in both banks prior to their collapses, with the FDIC blaming a lack of staff to conduct targeted reviews of Signature.

The Federal Reserve’s Mea Culpa

Michael Barr, the Fed’s vice chair for supervision, issued a 114 page analysis.  Here are some of his summary findings in his short introduction:

Our first area of focus will be to improve the speed, force, and agility of supervision. As the report shows, in part because of the Federal Reserve’s tailoring framework and the stance of supervisory policy, supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough. 

Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues. As a further example, limits on capital distributions or incentive compensation could be appropriate and effective in some cases.

We need to develop a culture that empowers supervisors to act in the face of uncertainty. . .

Last, we need to guard against complacency. More than a decade of banking system stability and strong performance by banks of all sizes may have led bankers to be overconfident and supervisors to be too accepting. Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences.

Oversight of incentives for bank managers should also be improved. SVB’s senior management responded to the incentives approved by the board of directors; they were not compensated to manage the bank’s risk, and they did not do so effectively. We should consider setting tougher minimum standards for incentive compensation programs and ensure banks comply with the standards we already have. . .

This report is a self-assessment, a critical part of prudent risk management, and what we ask the banks we supervise to do when they have a weakness. It is essential for strengthening our own supervision and regulation.

The Journal’s analysis of  Barr’s report: “Of the four top takeaways about the events leading to SVB’s collapse, three are tied to perceived shortcomings with the Fed’s banking oversight. The report focuses on errors by the agency but not on individuals’ responsibility.

The Fed also pinned some blame on its own bureaucratic structure. Authority for overseeing banks is parceled out to the Fed’s regional bank branches, but in practice, the central hub in Washington provides extensive input and must approve some enforcement actions.”

“Self-assessments-A Critical Part of Risk Management”

Over two years ago, one of NCUA’s board members requested a “look back” on the NCUA’s analysis and response to the corporate resolution.  A response was promised.  Nothing has been done, at least publicly.

Regulatory failures are costly.   Is the credit union system and its oversight subject to similar the bureaucratic shortfalls as the FDIC, Federal Reserve and OCC?

To retain, or recover, confidence in its own analysis, the Fed’s report includes details of its examiners’ findings, board presentations and other verbatim accounts of its oversight.  Transparency is the first step in accountability and trust.  That is certainly a model NCUA could emulate.

 

 

 

 

 

 

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A Weekend With Gershwin and Broadway

Dress rehearsal today.  Concert on Saturday afternoon.

Selections from State Fair, Desert Song, Oklahoma, Carousel, and a Gershwin medley.

Another op’in, another show.

(https://youtu.be/M_VqNggkIIU)

My favorite  is the title song from Oklahoma.  A perfect way to inspire your day.

(https://www.youtube.com/watch?v=ZbrnXl2gO_k)

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A High School Senior on Money Management

The MD/DC CU Foundation’s annual scholarship contest submissions were up 38% in 2023.  They give first hand insight into how this coming generation thinks about their money management challenges.

Leigh Philibosian, Director of the Foundation said 146 videos, 55 essays and 19 photos were submitted.  Each is a unique insight into the habits and thoughts of over 200  high school and college bound students.

An especially  candid and insightful one-minute video about money management and peer pressure is from the high school senior’s entry below.

This is a member the credit union community should prize!

(https://www.youtube.com/watch?v=NkhzPmg1Y8I)

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University Student Entrepreneurs Win–but Credit Union Charter Still Distant After Six Years

The current generation of students is attracted to business and social startups.  Many major universities now offer competitions encouraging students to design and launch new business and non-profit ideas.

These efforts are so widespread that there are now multiple rankings of the leading programs at colleges and universities across the country.  Here is one showing the top 20 competitions.

One of the leading forums is at  George Washington University, here in DC.  The results of its annual New Venture Competition were just announced.

In their 2023 contest, 417 participants spread across 161 teams participated. Judges awarded $357,200 in prizes, including $163,000 in cash to the winners.

Twelve finalists received a minimum of $5,000, across four tracks: Business Goods and Services, Social Innovation, Consumer Goods and Services and Healthcare and Life Sciences Tracks.

Participants represented nine of the 10 GW schools resulting in a diverse range of innovative startup solutions.

GW President Mark S. Wrighton commented on the outcome: “If this is an indication of the next generation of problem solvers, then we are all in good hands. It is extraordinarily impressive to hear about the diverse set of new businesses.” 

The full profile of all winners in all five tracks and their ideas can be seen in this listing.

A Credit Union Winner

In April 2018 three GW freshman from  different academic schools devoted much of their first year in college to this competition.  They reached the finals and were awarded $10,000 to continue implementing their project.

Their new venture proposal was to charter a credit union for the GW students and community.  I recorded their five minute “pitch” on my iPhone from the audience.

Their words provide the promise that every credit union offers including the need and importance of financial literacy, member ownership and direction, online delivery, better rates, and strengthening the community with a firm “run by students for students.”  Their slides are in the background on stage.

https://www.youtube.com/watch?v=s_xCpDe9a3U

(https://www.youtube.com/watch?v=s_xCpDe9a3U)

What Happened?

Dozens of students volunteered their time to complete the charter application, the group raised over $100,000 in donated capital and recruited an experienced advisory board of credit union professionals and GW faculty.

NCUA has twice rejected hundreds of pages for the  charter applications.  The agency has requested updated market surveys, revised financials, and numerous other shortcomings, all the while hinting that more capital would be desirable.

Meanwhile the three freshman who devoted a significant part of their college career to this effort have graduated; however two still serve on the advisory board.  New student volunteers have persevered to carry on the founders’ original concepts.

NCUA has not assisted but rather stalled this six- year effort.

This status occurs despite the words in the February 28 presentation by NCUA’s Vice Chairman, Kyle Hauptman at this year’s CUNA’s GAC conference:

Our society isn’t the best at getting people to save and invest. This is where credit unions come in, with financial literacy and savings programs that improve their members’ financial wellness.

Financial wellness can save relationships. Financial wellness is a great product that we only buy if we value it more than all the cool ways to spend money. Credit unions help people achieve financial wellness. . . Financial issues can be a dry topic, but it’s not about the money itself – it’s about living your best life.

My three personal priorities for my term are:

  • Revamping the de novo chartering process. . .

I’ve good news on all three fronts.

On the issue of de novos, we’ve revamped and streamlined the chartering process. We will be rolling out a provisional credit union charter that fixes the chicken & egg problem, whereby a potential credit union wants to get its initial capital from a CDFI but can’t get that capital until we’ve issued them a charter. Still, we wouldn’t issue the charter until that credit union has the capital.

I’m proud of these improvements – I think it’s a part of facilitating true financial inclusion. I love seeing announcements about new charters. . .

Except this streamline chartering process does not exist. When asked about this “improvement” and the “provisional credit union charter”, there is no response.   That effort, like credit union chartering, is stillborn.

Instead of supporting the next generation’s startup energy and goals to serve their community via coops, the NCUA is teaching potential supporters about the age-old witticism, “I’m from the government and here to help you.”

Apparently even board members cannot accomplish their priorities.  How can de novo credit unions overcome the bureaucratic obstacles that even NCUA’s leadership is unable to move forward?

New credit unions are an endangered species.  The future of the coop system is at risk.  Not because the billion dollar segment which manages 75% of assets will disappear.

Rather it is because this generation of student entrepreneurs is unable to overcome government impediments.  The result is that  these motivated, creative individuals will find their opportunities for the benefits presented in the “pitch” above through other creative organizations.  I suspect they will be called FinTechs.

 

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A Prophetic Voice

Last week I asked if credit unions today needed a prophet’s wisdom.   I was motivated by one of C-Span programs which presents recordings of historical speeches by leaders at important moments in American history.

Hearing the original voices of leaders summoning their listeners to action still inspires today. The experience is both fruitful and edifying.

The reason is that the truths contained within these appeals transcend time. They are not merely words that endure in time, they are words that are beyond time.   Their underlying truths do not change with circumstance, nor are they changed by it.

The actions called forth do not merely meet the challenge at a moment in  time; they are the standard by which time itself is tested.

The paradox is that the timeless is always timely. If it is timeless and, if it’s always true, it is always relevant.

The Context for Chairman Callahan’s 1984 GAC Address

The 1980-1982 economic crisis was over.  Interest rates and inflation were in back to single digits.  Deregulation was well underway.  Credit union growth and financial performance led all financial institutions.

The NCUA’s DC bureaucracy had been reorganized to reduce central office roles and put the six regional directors in positions of administrative leadership.   The CLF had been capitalized in partnership with the corporate network so that every credit union had access.

There was a common commitment by the cooperative system to support expanding credit unions services to all Americans through new charters and increased FOM options on the 50th anniversary of the Federal Credit Union Act.

But there was one institutional innovation still needed to solidify an independent and sound cooperative system.  This was the primary topic of Chairman Callahan’s 1984 GAC presentation.

He called on credit unions to “Finish the Job.”  Here is a recording of that request which which is 12 minutes following CUNA President, Joe Cugini’s brief introduction.

https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2

(https://www.youtube.com/watch?v=1UcXPyUMtic&list=PLfsu0zcct30-jB6oqaROWiXhaJ6xTBuLd&index=2)

The call was answered. Today the NCUSIF is still the example of insurance that has stood the test of time.

 

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What Would a “Prophet” Say to Credit Unions Today?

What were credit unions organized to do and to be?

Answering that never-ending question can be expressed as a vision or mission statement.  Sometimes the answer is a labelled a “calling.”  How does a coop know if it is fulfilling its destiny?

The Prophet’s Role

“The work of prophets is to warn, to warn people of the inevitable consequences of their foolish or immoral actions. It will be the end of the world as you know it, the prophets say, unless you rethink your current assumptions, values, and priorities, unless you become ready to change your way of life. Usually, the people don’t listen. “  (Adapted from Brian McLaren, “Weeping and Lamentation”)

April is Earth Month.  Tomorrow is EarthDay. One of the most well known prophets of our planet’s future is profiled in this documentary.

(https://youtu.be/Mwk10YGPFiM)

Prophets warn us, but many times few listen; when the inevitable consequences come, that is how a movement can be reborn.  Or else absorbed into the status quo.

Is there anyone with this gift in your credit union?  In the movement?   How would we recognize them?  Or are they just seen as trouble-makers?

 

 

 

 

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American Pastimes:  Baseball and Credit Unions

The culture of credit unions-locally founded, community centered, volunteer led by committed fans-mirrors  the passion for baseball across America.

Recently I published the story of Day Air Credit Union’s support for the Dayton Dragons minor league franchise.  The team has the longest running consecutive sellouts of any professional sports team in America.

Credit unions are involved in the sport across the country.  From sponsorships of local Little Leagues to  university teams to minor league affiliations up to PenFed’s  support for the Washington Nationals, baseball and credit unions are natural allies.

Recently a baseball player at Springfield High (Illinois) where I graduated decades ago, wrote his thoughts on baseball’s lessons for life for the student newspaper, The Senator.  The author, Seth Impson, seems an excellent player based on his self description.

His thoughts about the sport show why baseball is often called The Game of Life.

Anyone who knows me knows I live for the game of baseball. There’s nothing better than the smell of pine tar and the sound of a ball hitting the bat. Nothing better than feeling the wind in your face as you round third base. Nothing better than dirt and dust flying everywhere as you slide into home. But it is more than just a game; baseball has taught me a lot about life.

  1. If it’s close, swing the bat.

Too many times in life fear keeps us from trying something new or different. We let opportunities pass us by because we’re afraid we might fail. Then later we wish we would have gone for it. In baseball, if a pitch is close, you have to take a chance and swing. It’s the same way in life– it’s better to give something your best shot and risk failure than to stand there looking while the perfect opportunity flies by.

  1. You’re only as good as the guys behind you.

I had a lot of success pitching last year. I struck out 79 guys, walked 17 and only gave up 54 hits. But I threw 65 innings. I faced 264 batters. Do the math- the guys on the field behind me made plays and got 114 guys out. Over 100 times, a batter hit the pitch I threw to him and someone else on my team made a play. Only 16 of those 264 players scored runs against us. Without those guys on the field with me, my season would not have been anything special. In life, surround yourself with people who have your back and will make those plays when you most need them.

  1. Practice makes better.

No, that’s not a mistake. I didn’t mean to say “practice makes perfect.” The fact is it doesn’t. No one can ever be perfect. There is always room for improvement. But if you put in the work, you will get better. Work each and every day to come further than you were the day before and bettering yourself. The goal of life is to make yourself a better person than you were the day before, baseball is the same way.  You will see growth.

  1. Don’t let them see you sweat.

There are moments in a baseball game where you find yourself under intense pressure. When your team is down by one with a runner on third and two outs and you’re up to bat. When you are on the mound about to face the best hitter in the conference. Whatever it is, you can’t let the other guys know you’re stressed. You can’t let someone else get in your head. Take a deep breath and focus on the task you need to accomplish.

  1. Failure builds character.

Baseball is a game of failure. In the MLB, a batting average of .300 or higher is considered good. That means a player gets a hit 3 out of every 10 tries. That also means 7 out of 10 times, that player gets out. On Tuesday I flew out, struck out and walked. I didn’t get a single hit. But the next day I hit two triples and a homerun.

In baseball, you will fail. Life is the same way. You just can’t let failure stop you from getting up and trying again, because the next day things might go your way and you’ll find yourself right where you want to be. This builds persistence and in every tough, successful person there are characteristics that sets them apart. Baseball brings out these certain things, builds them up and creates strong character. 

 

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Money Management and the Voices of Gen Z

Each year the Credit Union Foundation of Maryland and DC sponsors a contest to distribute $12,000 in scholarships for college and trade school bound students.

There are three categories of awards:  ten $1,000 essay-based scholarships, one $1,000 video-based scholarship, and/or one $1,000 photo-based scholarship.

The topics for each category this year are:

This year’s essay topic: “In life, things can happen fast.  “More than two-thirds of people in America are not financially healthy. How would you define financial health? Describe how your credit union has helped you understand how to manage your money.”

This year’s video topic: “To be financially literate, or financially healthy, is to know how to manage your money. Show one lesson you’ve learned from your credit union about managing your money.”

Photographers are asked to capture an original photograph that represents the credit union core value of “Cooperation”

The contest is marketed through the League’s member credit unions.   The Foundation provides lobby posters, newsletter articles and access to all applications.   The result:  hundreds of submissions in all three categories received by April 15.

The Judging Begins

Now the fun begins. The foundation seeks over a hundred volunteers to review the submissions.  I signed up.  I was sent 19 one-minute videos and 10 essays to review and score.   The foundation provides a scoring model for the evaluations.  The progress is tracked automatically in a spread sheet for each volunteer reviewer.

A Generation’s View of Financial Health

I started with the 19 one-minute videos and reviewed all in a single sitting.   Some were applicants sharing their personal stories.  Others were more elaborate creations with one offering a “film” on the topic.  Some acted out short skits.  Several used animations to create their message.

What all had communicated was common sense money management suggestions or experiences.  The submissions showed clear financial maturity.  Following are three different approaches to the topic.

The first uses animation to communicate the lessons from a first-year college student.

(https://www.youtube.com/shorts/svZv-szOgCo)

A second video took a different tack and discussed just one topic: should a young person buy crypto or not?

(https://www.youtube.com/watch?v=_mrsj5AsZjI)

Another example by a high school student demonstrates the benefits of financial courses helping younger people understand the basics of money management.  The word she uses for the result is empowerment.

(https://www.youtube.com/watch?v=gYkoreEXmHY)

The Power of  Gen Z’s Financial Minute

While my sample of videos is a small portion of the hundreds submitted, these brief summaries show an awareness of financial skills that are well grounded.  These minute videos are literate, smart and often creative messages on the basics of financial life.

The Foundation’s contest is much more impactful than just the $12,000 distributed to the winners.   It provides hundred of personal snapshots of this generation’s awareness of financial responsibility.

These submissions rarely mentioned credit unions, but all of the applicants would have learned about the opportunity via a credit union.

For the hundreds of students continuing their post high school education, the volunteers reading the applications and the credit unions promoting the contest, this is a special cooperative effort.   It highlights the Foundation’s mission of financial self-sufficiency.

The student, volunteer and institutional contributions meld into a financial quilt of financial learnings from the upcoming generation of credit union members.

My only thought: Can more credit unions individually or collectively create this learning opportunity.  Perhaps the MD/DC Foundation might  share their software and infrastructure that makes this seem so effortless.

I certainly learned much.  It  creates confidence in this new generation’s understanding of financial responsibility.

 

 

 

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Spring’s Abundance & Credit Union Bouquets

Cherry tree

Cupid keeps watch over his beauty.

Azalea

Cherokee Dogwood

Tulips

Plox with pansies, carnation and daffodils.

Redbud flowers growing on tree trunk.

Easter Lilly transplanted after church.

Spring Flowers from Government

On Monday April 10  U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced over $1.73 billion in grants to 603 Community Development Financial Institutions (CDFIs) across the country.

CDFI Equitable Recovery Program (CDFI ERP) grants are intended to strengthen the ability of CDFIs to help low- and moderate-income communities recover from the COVID-19 pandemic and invest in long-term prosperity.

The release said 203 credit unions received $590.3 million in awards.  Peoples Advantage FCU in Petersburg, VA and four Puerto Rican Cooperativas were  each awarded $6,197,097, the largest single amount to a credit union.

Also getting in on springtime action the NCUA on April 5, announced it would take applications in five categories to award a total of $3.5 million from its Community Development Revolving Loan Fund (CDRLF).  Amounts will range from $5,000 for training to $50,000 “Underserved Outreach and MDI Capacity Building.”