1. PRESENTED TO: crnrstone.comgonzobanker.com480.423.2030 PRESENTED BY: June 24, 2012 Best Practice in Credit Union Performance Terence Roche Partner Cornerstone Advisors, Inc. troche@crnrstone.com CCCU and CUES International Convention

2. 1 Best Practice in Credit Union Performance Key Components of Strategic Execution Strategic Differentiation – How are we unique and where should we invest in innovation? Competitive Positioning and Strategy Innovation – Product – Delivery – Service Experience Financial Performance – How do we drive profitability and value? Franchise Growth – Customers – Assets Margin Management Operating Efficiency – Efficiency Ratio Profitability – Customer – Product – ROA Capital Management Operational Excellence – How do we support our strategy with systems and processes? Process Efficiency Technology Integration Quality (speed, reliability, effectiveness) Risk Management – How do we balance risk/return and protect the franchise? Credit Quality IRR/Liquidity Fraud/Security Operational Member Value – How do we add value for members and make relationships profitable? Acquisition Cross-sell Satisfaction/loyalty Retention Employee Engagement – How do we drive value with human capital and knowledge? Recruitment and Development Communication and Performance Management Satisfaction and Retention

3. 2 ●There has never been a bigger needs for the traditional skills for and focus on member advocacy, risk management, and compliance ●We are going through a fundamental change in member behavior, channels, and delivery The Two Competing Forces of Strategic Execution

4. 3 Best Practice in Credit Union Performance “However beautiful the strategy, you should occasionally look at the results.” – Winston Churchill

5. 4 Best Practice in Credit Union Performance ● TIMELESS METRICS are those that: –Have been measured for many years –Have stood the test of time in terms of their value and impact –Reflect strategic goals and values that are constant in the credit union ● THE NEW METRICS are those that: –Recognize and account for changes in consumer behavior –Account for changes in the delivery of products and services –Recognize the external forces changing the credit union’s earnings model –Change over time Getting the Right Mix of Metrics

6. 5 Best Practice in Credit Union Performance ●Growing loans and improving the loan-to-share ratio is the BHAG for the next three years ●Credit unions have done a good job of reducing overhead, but… … … ●The new reality is that non-interest expense will need to continue to reduce significantly ●Fee income has been stable but has been fueled by increased payments revenue. That payments revenue will be hard to maintain. ●Credit quality is the big external unknown, although credit decisions and monitoring have improved considerably New Realities of Financial Performance CU Median CU High Performer Bank Median Bank High Performer Total OD Fees per Account $91$149$109$146 Debit Interchange Revenue per Account $47$62$53$65 Core Account Non-Interest Income $156$222$193$263

7. 6 Best Practice in Credit Union Performance Financial Performance – How the Model is Evolving 3/1212/06 5 Year Change +Net Interest margin 3.16%3.47%(.31%) +Fee and Other Income 1.40%1.47%(.07%) -Operating expense 3.64%3.86%(.22%) -Net Charge-Offs.68%.46%.22% Return on Average Assets.59%.77%(.18%) Loan-to-Share Ratio 63%81%(18%)

8. 7 Best Practice in Credit Union Performance Key Components of Strategic Execution

9. 8 Best Practice in Credit Union Performance ● Best practice credit unions: – Recognize and plan for the change in earnings mix – Focus on revenue-based metrics as their base – Mandate sustainable earnings streams ● The timeless metrics: –Net interest margin –ROA –Loan-to-share –Non-interest income ● The new metrics: –Revenue per member, with payments breakout –Payments revenue growth ●Debit income per card and trend ●Credit card income per account (margin, payments) and trend Key Financial Performance Metrics

10. 9 Best Practice in Credit Union Performance A Sample Dashboard CORPORATE INFORMATION ProfitabilityCU Q2 12Target Q2 12CU Q1 12CU Q2 12 Return on Assets (ROA).69 %.72 %.45 % Return on Equity (ROE)6.78 %7.00 %6.95 %4.63 % GrowthCU Q2 11Target Q2 11CU Q1 11CU Q2 10 Total Assets (End of Quarter)657,438,222 $ 670,000,000 $ 661,446,780 $ 702,013,444 $ Total Loans (End of Quarter464,912,335 $ 485,000,000 $ 481,334,655 $ 553,401,233 $ Total Share (End of Quarter)552,556,889 $ 575,000,000 $ 567,435,759 $ 591,554,589 $ Loans/Share84.14 %84.35 %84.83 %93.55 % Net Interest MarginCU Q2 11Target Q2 11CU Q1 11CU Q2 10 Yield on Total Loans4.45 %5.00 %4.75 %5.12 % Yield on Investment Securities2.10 %2.20 %2.34 %4.10 % Cost of Funds1.20 %1.31 %1.43 %1.67 % Net Interest Margin (%)2.91 %3.15 %3.11 %3.21 % Non Interest IncomeCU Q2 11Target Q2 11CU Q1 11CU Q2 10 Total Non Interest Income8,233,113$ 8,400,000$ 8,331,566$ 8,543,221$ Noninterest Income as a % of Total Revenue27.2 %28.0 %26.90 %28.50 % Operating EfficienciesCU Q2 11Target Q2 11CU Q1 11CU Q2 10 Efficiency Ratio74.30 %72.00 %73.40 %81.10 % Noninterest Expense /Average Assets (%)2.99 %3.00 %3.11 %3.19 % Revenue Per Employee192,811$ 200,000$ 193,460$ 194,322$ Credit Union Financial Performance Dashboard

11. 10 Best Practice in Credit Union Performance ●Costs not related to salary and benefits are roughly half of all non-interest expense and are largely fixed –Premises –Technology ●Efficiency can be tracked at the company level, but is won with specific line of business targets –Branch productivity –Loans per employee ●Efficiency is a growth story. Top performers grow accounts and relationships and do it faster than related costs. New Realities of Efficiency CU Median CU High Performer New Accounts per Branch Platform FTE 85126 Mortgages Funded per Mortgage FTE 46 Employees Supported per HR FTE 7285

12. 11 Best Practice in Credit Union Performance ● Best practice credit unions: –Plan for the reality of lower cost structure –Justify new channel, delivery investments with efficiency payoff in addition to member acquisition, satisfaction –Translate “top of the house” goals to specific line of business targets ● The timeless metrics: –Assets per employee –Non-interest expense/assets ● The new metrics: –Expense growth as a percentage of revenue growth –Specific line of business “translated goals” ●Loans originated per consumer lending employee ●New accounts per branch employee ●Deposit accounts supported per back office FTE ●Employees supported per HR employee Key Financial Performance Metrics

13. 12 Best Practice in Credit Union Performance The New Reality of Member Value – Welcome to the Post PC Era ●The smart phone will be the branch of the future, combining live voice and Web applications and deposit capture, as well as card payment swipe technology ●A true “inflection point” has arrived since the smart phone and other mobile devices will be both delivery and payments channels

14. 13 Best Practice in Credit Union Performance ●We are seeing a fast and fundamental change in member behavior and channel usage ●Many credit unions already see 25%-30% of their loan applications coming through the Internet. New deposit accounts still are under 5%, but investments are being made to grow that number ●A recent Novantas study revealed that 29% of members would prefer to use a non-branch channel to establish a new relationship with a financial institution and 47% would prefer non-branch options for additional accounts ●Most credit union sales and service metrics are aimed at branch delivery –How does a mobile banking user define relationship and service? ●Member growth focus has been replaced with core relationship growth and depth of relationships –The industry closes 4 accounts for every 5 it opens! New Realities of Member Value

15. 14 Best Practice in Credit Union Performance ● Best practice credit unions: –Think cross-channel – Think deep, not wide when analyzing relationships –Incorporate profitability with other metrics ● The timeless metrics: –Member growth –Member satisfaction –Member retention –Products and services per member ● The new metrics: –New relationships by channel –Member satisfaction and retention by channel ●Percentage of new accounts opened through new channels ●Retention of members using new channels –New core relationships ●Checking with debit card, credit card, loan –Percentage of members with a core deposit and loan relationship –Percentage of members who regularly use more than one channel Key Member Value Metrics CU Median CU High Performer Debit Card Fees per Checking Acct/Year $156$222 Active Debit Cards, % of Checking 98%122% Single Service members 23%15%

16. 15 Best Practice in Credit Union Performance How the NCUA defines risk: 1.Credit Risk – Risk of default on expected repayments of loans or investments 2.Interest Rate Risk – Risk that changes in market rates will negatively impact the income statement and balance sheet 3.Liquidity Risk – Risk of an inability to fund obligations as they come due 4.Transaction Risk – Risk of fraud or operational problems in transaction processing that results in an inability to deliver products, remain competitive, and manage information 5.Compliance Risk – Risk of violations and non-compliance with applicable laws and regulations resulting in fines, penalties, payment, or damages 6.Strategic Risk – Risk of adverse business decisions through management’s actions or inactions 7.Reputation Risk – Risk of negative public opinion or perception leading to a loss of confidence and/or severance of relationships New Realities of Risk

17. 16 Best Practice in Credit Union Performance Best Practice Credit Unions Integrate Risk Management into the Culture and Organization Risk Category Traditional Owner Key Risk Controls Credit Chief Credit Officer or Chief Lending Officer Credit Policy Underwriting Tool/Analysis Loan Approval Authorities Loan Review Process Interest Rate CFO/Treasurer ALCO Committee ALCO Modeling And Reporting Hedging Strategies Liquidity CFO/Treasurer ALCO Committee Liquidity Policy Liquidity Forecasts Standby Borrowing Capacity Transaction Business Units Policy and Procedures Audit Functions Compliance Compliance Officer Compliance Policies Business Unit Procedures and QA Compliance Audits and Testing Strategic Board and CEO Analysis and Planning Execution of Projects/Initiatives Reputation Board and CEO Customer Service Metrics Peer and Industry Comparison

18. 17 Best Practice in Credit Union Performance ● Best practice credit unions: –Manage risk at the enterprise level –Specifically assign senior level accountability by risk type –Analyze both the cost and the compliance/avoidance payoff ● The timeless metrics: –Net worth –Credit risk – delinquencies, charge-offs –Interest rate risk – 300bp up, down ● The new metrics: –Card, payments fraud ●Per card, per account –Availability and continuity risk, every channel –Reputation risk and compliance risk ●Hard to measure and high on everybody’s list Key Risk Metrics CU Median CU High Performer Reg E Losses per Credit Card $4.60$1.95 Losses per Checking Acct/Year $4.42$2.42

19. 18 Best Practice in Credit Union Performance New Realities of Employee Engagement – Gen Y Might Not be Exactly the Same as Us… … … ●Employees change jobs faster and more often ●They think as free agents ●They value the team concept and approach ●They value non-financial rewards ●They think and live virtually ●We may need to re-think the dress code

20. 19 Best Practice in Credit Union Performance ● Best practice credit unions: –Blend the right mix of meritocracy into the culture –Invest in and maintain talent, particularly in strategic areas (and outsource when appropriate) –Commit to training and development with teeth ● The timeless metrics: –Turnover –Percentage of positions filled quickly –Benefits as a % of salaries ● The new metrics: –Percentage of exempt jobs filled from within the credit union –High performer recognition vs. average or median –Training budget per employee Key Employee Engagement Metrics

21. 20 Best Practice in Credit Union Performance Summing it Up – the Leadership Mandate for 2012 Manage the new earnings model Fire up to steal market share Stay relevant on delivery and payments channels Reinvent risk management Drive efficiencies with discipline Align and energize talent Prioritize and drive accountability at all levels Manage the new earnings model Fire up to steal market share Stay relevant on delivery and payments channels Reinvent risk management Drive efficiencies with discipline Align and energize talent Prioritize and drive accountability at all levels

22. 21 GonzoBanker American Banker calls GonzoBanker a “hip and flip” email newsletter. Don’t miss out – sign up for your FREE subscription today at www.gonzobanker.com A collection of observations, ruminations, predictions and random thoughts on financial services from Cornerstone Advisors. GonzoBanker™ is a publication of Cornerstone Advisors, a Scottsdale, Arizona-based consulting firm specializing in best practices strategy, technology and process improvement for banks and credit unions. Visit our Web site at www.crnrstone.com GonzoBanker™ is a publication of Cornerstone Advisors, a Scottsdale, Arizona-based consulting firm specializing in best practices strategy, technology and process improvement for banks and credit unions. Visit our Web site at www.crnrstone.com