1. Benchmarking with a Purpose

2. Ask 50 people what is important and what should be measured. You will get 50 different answers. 2

3. Objective: Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations. 3

4. Objective is not: Detailed process metrics Detailed market analytics (narrowly focused; difficult to collect/compare) Internal policy Regulatory requirements (no universal standards; subject to interpretation) 4

5. Benchmarking must be a part of your planning process. Difficult to set a course, and monitor environment without a reference point. 5

6. Why ROA is a horrible benchmark of success… 6

7. Singular Profit Mandate 7 Maximize Return

8. Credit Union Dual Mandate 8 Maximize ROA Stay adequately capitalized Minimize ROA Provide tangible benefit to members

9. Priority #1 Should Be… 9 Credit Union Sustainability Long Term Survival/Prosperity Recurring Value for Members Job Security for Employees

10. Expense Growth Credit Losses Net Revenue Engine Balance Sheet Growth Capital Growth (ROE) Industry Dynamics Circle of Life or Spiral of Death 10

11. 11 Slow Death Expense Growth Credit Losses Net Revenue Engine Balance Sheet Growth Capital Growth (ROE)

12. 12 Sustainability Expense Growth Credit Losses Net Revenue Engine Balance Sheet Growth Capital Growth (ROE)

13. 13 Prosperity Expense Growth Credit Losses Net Revenue Engine Balance Sheet Growth Capital Growth (ROE)

14. Expense Growth Credit Losses Net Revenue Engine Balance Sheet Growth Capital Growth (ROE) Grow Capital Faster than Assets or Die! 14

15. Benchmarking requires everyone on the same sheet of music 15

16. 16 Balance Sheet Mapping (Simple Example) Assets Loans Surplus Funds Loan Loss Reserve (ALLL) Non-Earning Assets Liabilities & Equity (Net Worth) Relationship Funding Rate-Sensitive Funding Other Liabilities Equity Capital (Net Worth)

17. 17 Income Statement Mapping (Simple Example) Net Revenue Interest Income Interest/Dividend Expense Non-Interest Income Net Revenue ROATop line ROA. Operating ExpensePersonnel, Premise & Other Operating Expense Surplus before ProvisionROA after operating expense. Credit Loss ExpenseProvision for Loan Loss Expense Surplus after ProvisionROA after credit loss expense. Extraordinary ItemsUnusual income/expense and gains/losses Income TaxesAs applicable Net IncomeROA after all items.

18. 18 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy ROE Must Meet or Exceed Asset Growth Capital Growth (ROE) Sustainability Benchmarks

19. 19 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Key Benchmarks Include… Balance Growth Loans as Percentage of Assets Relationship Funding as Percentage of Assets Rate Sensitive Funding as Percentage of Assets Non-Interest Income as Percentage of Assets Offer Rate: Loans Yield: Surplus Funds Offer Rate: Relationship Funding Offer Rate: Rate Sensitive Funding

20. The battle is NOT won or lost on the income statement; it is won or lost on the balance sheet. Income statement is what has happened; Balance sheet is what is going to happen. Where do you want to go? 20

21. Establish Target Product Mix 21 Lowest Strategic Value Highest

22. Chart Current Product Mix 22

23. Identify Product Mix Gaps 23 5.6 Years Away 4.3 Years Away 5.1 Years Away Years to Target at 5% Growth Rate Years to Target at 5% Growth Rate

24. Understand Implication of Gaps 24 75 bps Improving product mix improves ROA by 75 bps

25. Establish Target Offer Rates 25 Current1.25%0.20%1.00%5.00% Target/Peer1.00%0.20%1.10%5.25% Variance0.25%0.00%(0.10%)0.25%

26. 26 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Key Benchmarks Include… Efficiency Ratio Total Expense / Activity Balance Activity Balance / FTE Activity Balance / Branch

27. Efficiency Ratio Operating Expense as a percentage of net revenue $75 Operating Expense /$100 Net Revenue =75% Efficiency = 25% Remaining to cover credit losses and provide capital growth Efficiency Ratio Ranges > 100%Failure is Imminent 90-100%Slow Death 80-90%Skating on Thin Ice 75-80%Surviving 70-75%Thriving 60-70%Highly Productive <60%Extremely Productive (or getting greedy) Efficiency Ratio Ranges > 100%Failure is Imminent 90-100%Slow Death 80-90%Skating on Thin Ice 75-80%Surviving 70-75%Thriving 60-70%Highly Productive <60%Extremely Productive (or getting greedy) 27

28. Activity Balance Loan Balance, plus Relationship Funding Balance, plus Non-Interest Income Equivalent Asset Balance (Non-Interest Income / Net Interest Margin) If net interest income was an asset, how big would it be? 28

29. Activity Balance Benchmarks Expense as Percentage of Activity Balance (expense leverage into strategic drivers) Activity Balance per Branch (branch network leverage) Activity Balance per FTE (human leverage) 29

30. Operating Expense 30

31. 31 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Key Benchmarks Include… Leading Indicators: Underwriting Leading Indicators: Post Underwriting Lagging Indicator: Net Charge-Offs Self Insurance Fund: Loan Loss Reserve

32. Asset Quality Pipeline 32

33. 33 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Key Benchmarks Include… Capital / Total Assets Risk Based Net Worth Requirement

34. 34 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Peer Groups Thoughts… Rule #1: Perfect peer does not exist (Sasquatch) Population: 10-30 Peers Span of Data 3-5 Yr History (NEVER Annualize Current Year) Asset/Branch Peer Geographic Peer Charter Peer Custom Peer Mixed Peer Tradeoffs exist; cant be best at everything.

35. 35 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Local/regional peer may be best. Industry best practice peer (indifferent to location) Local/regional peer may be best. Equivalent asset/branch peer may be best. Local/regional peer may be best.

36. 36 Growth Product Mix Interest Rates Operating Expense Credit Losses Capital Adequacy Sample Benchmarking ScorecardTopMiddleBottom Loan Growth Relationship Funding Growth Member Growth Net Revenue ROA Non-Interest Income Loans Relationship Funding Net Interest Margin Loan Yield; Offer Rate Surplus Funds Yield Relationship Funding Offer Rate Rate Sensitive Funding Cost; Offer Rate Efficiency Ratio Total Expense / Activity Balance Activity Balance / Branch Activity Balance / FTE Delinquencies Net Charge-Offs Loan Loss Reserve Capital Ratio Risk Based Net Worth Requirement

37. Member Value Assessment Member value is created when: – Product mix is stronger than peer/target – Interest rates are favorable to members (ROA drag) – Productivity is greater than peer – Credit losses are fewer than standard(s) 37

38. 38

39. 39

40. 40 0.35% Reduce member favorable pricing.

41. Benchmarking with a Purpose