Presented by Jared Y. Cahill National Director of Alliances 877 510-5603

1. Pump Up Your Skills To Pump Up Your MarginsMichigan Credit Union LeagueExecutive SummitAugust 31, 2007 Presented by Jared Y. Cahill National Director of Alliances 877 510-5603

2. OrHow to Manage in a Challenging EnvironmentMichigan Credit Union LeagueExecutive SummitAugust 31, 2007 Presented by Jared Y. Cahill National Director of Alliances 877 510-5603

3. Agenda • Who Moved My Cheese? Coping with Change • Economic/Financial Landscape & Competition • Winning and Competing • Fee Income-The Good, the Bad and The Ugly • Operating Costs-You Can’t Pass on Inefficiencies • Lots of Literature Out There • A Great Tool to Start With 3

4. Who Moved My Cheese • A parable or an allegory. • Coping with Change. • Navigating the maze. 4

5. Economic/Financial Landscape & Competition Traditional Business Model • For Profit-the financial statement, not the philosophy • Income – Expense = Capital, Growth & Service • Net Interest Income exceeds Operating Expenses 5

6. The Maze and The Moving Cheese • Yield Curve and Rates • ROA and ROA less NII • Net Interest Income v. Operating Costs • Competition 6

7. All Credit Unions-Margins and ROA 7

8. Michigan Credit UnionsMargins, Operating Costs and ROA 8

9. Michigan Credit Unions – Non Interest Income 9

10. E-Scan • “The flattening yield curve has had negative consequences for most credit unions’ earnings and capital. Net interest margin will continue to decrease.” • “Rising interest rates will reduce loan demand.” 10

11. E-Scan • “A tight labor market could push up labor costs for some credit unions and increase their rate of job turnover.” • “Credit union bottom lines will get squeezed tighter, requiring some credit unions to reshape their asset/liability portfolios, boost non-interest revenue and invest in developing a sales and service culture that better markets and cross sells products and services.” 11

12. E-Scan • “Strong core deposit competition from banks and other non-bank financial institutions will lead to additional pressure on funding costs during this rising rate environment.” • Don’t worry so much about being taxed; worry about banks (especially the mega-banks) taking your members. 12

13. The Competition Who is your competition? Other Credit Unions? Community Banks? Mega-Banks? Wal-Mart? Internet? 13

14. The New Business Model and The Competition How all financial institutions stack up using a Net Operating Analysis A new way to analyze the changing business model. Since net interest income is less than operating costs, what are the new drivers of ROA. They are non-interest income v. operating costs and operating efficiency. 14

15. Trends in ROA & ROE Net Operating Assets (assets less securities) Non-Interest Income Non-Interest Expense Net Operating Costs Industry & Competitor Comparisons 7. FTE Efficiencies Key Points of NOA 15

16. Net Operating Costs 16

17. Return on Assets (ROA) 17

18. Operating Assets Per Full Time Equivalent 18

19. The Terrain • Margins are tight and will get tighter • Margins are market driven • Very little price elasticity • Who is your competition? • Not, “Who are your peers?” • Consolidations/Mergers drive up the ante 19

20. The Winning Strategy • Increase Non-interest income • Lower Operating Costs • Grow-New Members and Better Product Penetration • Be Competitive 20

21. Tactics • Reduce Net Operating Cost • Become Price Competitive • Meet Market Needs • Sell to and Service Members • Grow • Be Competitive 21

22. Fee Income • Is it the Credit Union Way? • Profits = Capital, Growth, Service. • Sources 22

23. Fee Income- The Good, The Bad and The Ugly • The Ugly-Profits, Member Perception • The Bad – Board, Management, Staff Objections • The Good – Increase Capital, Grow, Provide Services • Sources 23

24. Categories of Fee Income • Deposit Related Income • Loan Related Fee Income • Other Member Related Services Fee Income • Other Operating Fee Income • Non-Operating Income 24

25. Activity/Minimum Balance Fees Overdraft Privilege Fees Stop Payment Fees Transfer Fees ATM Surcharge ATM Interchange Income Other ATM Wire Transfers ACH Fees Bill Payer Fees Returned Check Fees Check Copy Money Order/Travelers Checks Monthly Maintenance Savings Bonds Deposit Related Fees 25

26. Loan Related Fees • Late Charges • Origination Fees • Credit Card Fees • Skip Payment Fees 26

27. Other Member Related Fees • Check Cashing • Bad Address Fee • Safety Deposit Box • Statement Copy 27

28. Insurance Reimbursement Check Up-charge Check Card Interchange Income Credit Card Interchange Income Loan Servicing Income Sale of Mortgages CDI, CLI and AD&D Extended Warranty GAP Insurance Investment & Insurance Services Trust & Rental Income Other Operating Income 28

29. Non-Operating Income • Investment Services • Insurance Services • Trust Services • Gain/Loss on Assets • Gain/Loss on Investments • Gain/Loss Assets in Liquidation 29

30. Observations About Current Sources • Are you a Bank or a Credit Union? • Which Fees are Acceptable and Which Are Not? • Don’t Just Raise Fees! • Do you have all the services that members are willing to pay fees for? 30

31. Increase Non-Interest Income • Fee Income – lots of sources, but half center around a share-draft account. Share Draft Penetration??????? • Product Income – e.g., CDI, CLI • Prevent profit leaks - Lower waivers and charge-offs • New products and services • Increase cross-sell income 31

32. Needs Assessment-of the credit union, membership and market New Fee Income Programs Product Profitability Value Pricing Setup and Action Plan Member relationship building strategies Product linking and integration. Methodology to Increase Fee Income 32

33. Lower Operating Costs You Can’t Pass On Inefficiencies in a Hyper Competitive Market. Operating Costs and Product Pricing Aren’t in Separate Silos. 33

34. Lower Operating Costs • Capacity has grown at 15% per year and financial institutions have grown at 8%. • Feed more members and services in to to soak up over-capacity • Improve productivity • Optimize cost of human capital • Reduce costs of new product launches • Reduce FTE expense 34

35. Process Efficiency • “… it is all about having the tools and disciplined capability to map to your processes, model them as they should be, and monitor process effectiveness. This whole focus on process is becoming much more important-not only for driving efficiency improvements, but also for driving effectiveness and agility.” Susan Landry, Managing VP, Gartner, Inc. 35

36. Complete workflow analysis Improved technology utilization Best Practices implementation Improved systems and procedures Enhanced product design and profitability Revenue potential planning programs Centralized operations and lending programs Expense control programs Staffing Studies and salary administration programs Analysis of outsourced alternative Methodology to Lower Operating Costs 36

37. Outsourcing-A New Paradigm “Our hypothesis is that financial institutions are in the middle of a transformation from being monolithic and vertically organized proprietary operations to becoming parts of a more fluid ecosystem. In other words, a financial institution does everything now for itself to serve its customers and we are…moving to a much more fluid ecosystem where you will have some financial institutions players who focus more on customer acquisition/customer servicing and the front office. These institutions will in the future acquire most of their products through an outsourcing or third-party agreement. Susan Landry, Managing VP, Gartner, Inc. 37

38. Grow • The Best Defense if a Good Offense • Add members • Increase product penetration • Become sales and service oriented instead of order taking oriented • Be mindful of the consumerization of your membership 38

39. Growth • Attract new members if your goal is overall asset growth • For most there is plenty of room to grow within their current fields of membership • Achieve product penetration among loyal members 39

40. Average Members-to-Potential Members by FOM Type Source: CUNA’s Credit Union Operating Ratios and Spreads 40

41. Be Competitive • Not just with your Peers • But, with banks and other financial institutions • Increase NII and lower operating cost to compete in the tight margin environment 41

42. Growth Options • Increase Cross-selling Efforts to Current Customers • Conduct Promotions to Attract New Customers to Existing Products & Services • Offer New Products and Services • Expand Market Area by Opening New Branches in New Geographic Area • Open New Branches in Existing Market Area • Expand Presence on the Internet • Add ATMs • Enter Joint Venture/Affiliation (e.g., insurance, real estate, broker dealer) 42

43. Home Equity Lines of Credit 2nd Mortgages other than HELOC Adjustable Rate Mortgages Non-traditional Mortgages Reverse Mortgages Electronic Bill Payment Cash Management Services Corporate/Business Credit Cards Insurance (property and casualty, health) Electronic Bill Presentment “Keep the Change” debit or credit card No-Fee ATMs Health Savings Accounts Email/wireless Banking Alerts Stored Value/Prepaid Cards Online Loan Applications Asset Management Remote Deposit Identity Theft Protection Credit Report Access Real Estate Services Higher Interest on e-Savings Accounts Products & Services 43

44. Winning - The Formula • Increase non-interest income • Reduce operating cost • Grow • Be More Competitive 44

45. Increasing NII 45

46. The New Business Model 46

47. Challenges • Financial Terrain is tough • Competition is tough • You can’t change either • You can change your credit union • Begin Now 47

48. The Over-Riding Challenge How do you implement the new business model required by the marketplace in order to survive and prosper AND STAY TRUE TO THE CREDIT UNION PHILOSOPLY???? Look to the “Movement” (Leagues/CUNA/Credit Unions) to guide management, staff and board. 48

49. A Tool to Change the Business Model Since net interest income is less than operating costs, what are the new drivers of ROA? 1. non-interest income v. operating costs 2. operating efficiency NET OPERATING ANALYSIS 49

50. Net Operating Analysis-Credit Union