BestPracticesin CreditUnionEfficiency

AWhitePaperCommissionedby CUNAsCommunityCreditUnionCommittee May2010

ReportPreparedBy: SteveWilliamsPrincipal CornerstoneAdvisors,Inc. Scottsdale,Arizona

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

CONTENTS
ANewMandateforCommunityCreditUnions............................................................................................ 1 PerformanceComparisonsforCommunityCreditUnions ........................................................................... 2 CommunityCreditUnionsTendtobeLargeronAverage ........................................................................ 2 OperatingExpensesareHigheratCommunityCreditUnions.................................................................. 2 CommunityCreditUnionsareLessEfficientthanBanks.......................................................................... 3 ExplanationsforOperatingCostDifferences............................................................................................ 4 MakingEfficiencyaTopPriority ................................................................................................................... 5 BranchDelivery ............................................................................................................................................. 6 AnalyzingYourBranchCosts..................................................................................................................... 6 OptimizingBranchPerformance............................................................................................................... 7 BackOfficeRetailOperations ................................................................................................................... 9 RemoteDelivery.......................................................................................................................................... 10 TelephoneBanking ................................................................................................................................. 12 WebandMobileBanking........................................................................................................................ 13 RetailFeeIncome........................................................................................................................................ 14 ConsumerLending ...................................................................................................................................... 14 MortgageLending ....................................................................................................................................... 15 EnterpriseRiskManagement.....................................................................................................................17 AdministrativeServices............................................................................................................................... 17 FinanceandAccounting.......................................................................................................................... 17 Marketing................................................................................................................................................ 18 HumanResources ................................................................................................................................... 18 InformationTechnology.............................................................................................................................. 18 BuildinganEfficiencyFocusedCulture ....................................................................................................... 20 Conclusion................................................................................................................................................... 21

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

ANEWMANDATEFORCOMMUNITYCREDITUNIONS
Creditunionsin2010areoperatinginanenvironmentfilledwithanxiety,guardedoptimismandpure exhaustionfromthetollsofwhatwenowcallthe"GreatRecession."Aneraofbuoyantgrowthand complacentrisktakingisnowdeadandgone.Thoseprotectingandfurtheringthecauseofthecredit unionmovementhaveatougherjobnowonethatwillrequiretenacity,creativityandgreater sophisticationinmanagingacooperativefinancialinstitution. Thisneweraforcreditunionswillbeespeciallysignificantforcommunitybasedinstitutions.Thepast decadesawahugeriseincommunitycreditunionchartersthroughouttheUnitedStates.Ascorporate mergersandrestructuresrattledthetraditionaljobmarket,creditunionsbegantoviewlocal communitiesasamoreviableavenueofgrowththanthetraditionalSEGbasedpath.Thepromisewas enticing:openupthebenefitsofnotforprofitcooperativefinancetogreaternumbersbydrastically simplifyingfieldofmembershipeligibility.CanIjoin?Ofcourseyoucan;wereopentoeveryonein thecommunity. Themassivetransitionofhundredsofinstitutionstocommunitychartercreatedaninterestingchicken andeggchallengeforthesecreditunions.Thischallengecenteredonaddingresourcesintermsof branches,marketing,staff,etc.totakeadvantageofthisnewfoundchannelofgrowth.Creditunionsdid notwanttoaddtheresourceswithoutthebusinesstosupportitbuthadlittleconfidencetheycould createthisnewbusinesswithoutaddingtheresources. AswelooknowtowardtheothersideoftheGreatRecession,communitycreditunionsaresituated withacostandefficiencyhangovermuchoftheinvestmentsmadeinthepromiseofgrowthhave notgeneratedadequatereturns.Itstimeforcommunitycreditunionstotakestockontheircost structuresamidstanew,competitiveenvironment. CUNAisproudtoofferthisvaluablewhitepapertitledBestPracticesinCreditUnionEfficiency.The paperwascommissionedbyTheCommunityCreditUnionCommittee.Inordertoexaminebest practicesinefficiency,CUNAhasaskedCornerstoneAdvisors,Inc.,aleadingconsultingfirmspecializing instrategy,operationsandtechnology,tocreatethisstudy. Wehopethisreportcanserveasausefulguideforyourcreditunionsdiligenteffortstoimprove operatingefficiencies.

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

PERFORMANCECOMPARISONSFORCOMMUNITYCREDITUNIONS
Themandateforimprovedefficienciesincommunitycreditunionsisclearlysupportedbyindustrydata. Roughly2,000ofthe8,000creditunionsnationwidehavecommunitypowers,andtherearesome noticeabledifferencesintheexpenseandrevenuestructuresoftheseinstitutions.

CommunityCreditUnionsTendtobeLargeronAverage
WhilecommunitycreditunionsmakeuponefourthofthenumberofcreditunionsinAmerica,they comprise34%orroughly$300billionintotalassets.Thetablebelowshowsafewinteresting comparisonsbetweencommunityandnoncommunitycreditunions: Numberofinstitutions Totalmembers Totalassetsofinstitutions Averagesizeofinstitution Averagenumberofemployees Source:CUNA9/30/09 CommunityCreditUnion 2,006 33.5million $305billion $152million 46.7 NonCommunityCreditUnion 5,747 57.8million $581billion $101million 25.3

OperatingExpensesareHigheratCommunityCreditUnions
Industrydataalsorevealsthesizabledisadvantagethatcommunitycreditunionshaveovernon communitycreditunionswhenitcomestooperatingexpenses.From20042008,communitycredit unionsoperatedatanaverageoperatingexpensetoassetsratioof3.68%vs.3.14%fornoncommunity creditunions.Becauseofdramaticmovementinbothexpenseandincomeduring2009duetoNCUA assessmentsandlossesfromownershipincorporatecreditunions,wehaveexcludedthesefiguresfrom thegraph.

OperatingExpenseComparison
410 390 Avg.BPtoAssets 370 350 330 310 290 270 250 Community NonCommunity 2004 354 299 2005 358 304 2006 364 314 2007 370 319 2008 391 336

Source:CUNA 2

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

This50+bpdisadvantageinoperatingexpenseisclearlyachallengeforcommunitycreditunions operatinginarazorthin,commoditybusinesslikeconsumerfinancialservices.Detailedanalysisand plansneedtobemadebycreditunionstotapthebrakesandbringdownthisratiotoamore competitivelevelinthenext35years.

CommunityCreditUnionsareLessEfficientthanBanks
Inadditiontoadisadvantagevs.creditunionpeers,communitycreditunionsalsodemonstratea disadvantagewhencomparedtocommunitybanks.Thetablebelowsummarizeskeyperformanceratios betweencommunitycreditunions,banksunder$10billionintotalassetsize(nearlyallofthese institutionsarecommunityfocused)andallbanksnationwide. OperatingExpenses/Assets NetInterestIncome NonInterestIncome EfficiencyRatio Source:CUNAandFDIC CommunityCreditUnion 3.68% 3.38% 1.40% 77% CommunityBank 3.20% 3.28% 1.09% 73% AllBanks 2.77% 2.70% 1.56% 65%

Asthetablereveals,communitycreditunionsoperateathigherexpenseratiosthancommunitybanks andallbanksnationwide.Itisimportanttonotethatcommunitycreditunionshaveaslightlyhighernet interestmarginthanbothsmallandlargebanks,andanadvantageinnoninterestincomevs. communitybanks. Comparingtheoverallefficiencyoffinancialinstitutionsissometimesbestaccomplishedwiththefinal measurementinthetableaboveknownastheefficiencyratio.Thisratioispopularwithinthebanking industryandoftenusedbystockanalyststoratetheefficiencyofapubliclytradedbank.Theformulafor theefficiencyratioisasfollows: EfficiencyRatio= a)NonInterestExpense dividedbythesumof b)NetInterestIncomeand c)NonInterestIncome Theefficiencyratioisessentiallyafigurethatrevealshowmuchoperatingexpenseisrequiredtocreate adollarinrevenue.Likeagolfscore,alowerefficiencyratioisbetter.Ascanbeseeninthetableabove, communitycreditunionsoperateata77%efficiencyratio,meaningittakes77centsofoperating expensetoearnadollarofrevenue.Meanwhilecommunitybanksonlytake73centsandallbanksonly take65cents.Settingefficiencyratiogoalsforthefutureshouldbeahighpriorityitemforcommunity creditunionmanagers.Thereareseveralhighperformingcreditunionsnationwidethathavesetlong termtargetstomovetowarda50%efficiencyratio.CornerstoneAdvisors,Inc.recommendsthatall creditunionstargetatleastaratiobelow70%andmoreoptimallysomewherebetween6065%.

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Likeallmeasurements,however,theefficiencyratiodoeshavesomeweaknesses.Somecreditunions havedecidedthattheefficiencyratioisnotappropriateforourcreditunionasitismoreofabankratio andnotagoodfitforcreditunions.Thesecreditunionsseeaconflictbetweenachievingastrong efficiencyratioandkeepingamemberdrivenpricingphilosophythatofferscompetitiveloanand dividendratesandminimalfees.Ineffect,creditunionsoftenpassthebenefitsofmemberownership onviacompetitivepricing,andthisservestohurttheoverallefficiencyratio.Forthemostpart,this debateabouttheefficiencyratiocanbestbearbitratedbyabalancedscorecardphilosophyinthecredit unionsstrategyprocess.Certainly,efficiencyisimportant,butitmustbebalancedagainstother strategicprioritiessuchasmembervalue,servicequality,riskmanagementandgrowth.

ExplanationsforOperatingCostDifferences
Oneofthenaturalquestionsthatemergesfromtheseindustryoperatingcostcomparisonsis,Whydo communitycreditunionshavehigheroperatingexpenses?Thereareseveralcommonexplanations thatinclude: BranchfacilitiesCommunitycreditunionstypicallyhavemovedtoexpandbybuildingadditional branchfacilities.Whilethismayhavehelpedtogrowdepositsanddrivefeeincomerelatedtomore checkingaccounts,itaddsexpenseinbothfacilitiesandpeopletostaffthebranch.DatafromCUNA seemstosupportthishypothesis.Asthetablebelowshows,80%oftheoperatingcostdifferences betweencommunitycreditunionsandnoncommunitycreditunionsareexplainedbythreemajorcost categoriesintheNCUA5300reporting.Itshouldbenotedthatofficeoccupancyandoperationscosts fornoncommunitycreditunionsareoftensubsidizedviaspecialarrangementswithSEGswherethe creditunionoperates,contributingsomewhattothesefacilityrelateddifferences. OfficeOccupancy OfficeOperations Compensation/Fringe TotalPeopleandOffice Source:CUNA CommunityCreditUnion 28bp 67bp 176bp 271bp NonCommunityCreditUnion 22bp 59bp 151bp 232bp

CostofMemberAcquisitionandRetentionAnothercostdifferencebetweencommunityandnon communitycreditunionscentersaroundthemarketingandsalescostsrequiredtobothacquireand retainmembers.Thetraditionalbondbetweenacreditunionmemberandhis/herSEGemployerhas historicallyresultedingreaterloyaltyandmoreefficientformsofmarketing.Forinstance,promotional messagesincompanynewslettersorcommonpracticestosignnewemployeesupforthecreditunion greatlylowerthecostofmemberacquisitionandproductsales.Acommunitycreditunionworkingto acquirenewmemberswithnoawarenessofthecreditunionmayrequiremoreexpensiveadvertising, directmarketingandevensalesincentivestodrivegrowth.Thetablebelowdemonstratesthe differenceincostforEducation/PromotionServicesbetweencommunityandnoncommunitycredit unionsfrom20042008.Onarelativebasis,communitycreditunionsspendalmost50%morethan noncommunitycreditunionsinthisarea.

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Toputthisintoarealdollarperspective,acommunitybased$500millioncreditunionwouldspend $250,000moreineducation/promotioneachyearthananoncommunitypeerofexactlythesamesize. EducationandPromotionCosts Source:CUNA CommunityCreditUnion 16bp NonCommunityCreditUnion 11bp

Thesefactorshelpexplainwhycommunitycreditunionshaveanefficiencychallengeanddisadvantage overothertypesofinstitutions.

MAKINGEFFICIENCYATOPPRIORITY
Forcommunitycreditunions,improvingprofitabilityandprotectingnetworthintheyearsaheadwill requirealaserfocusonongoingtenacityaroundefficiencyimprovement. SincethefinancialcrisisfirsthitinSeptember2008,allcreditunionshavebeguntomakeserious expensecuts.Wehaveseenreducedmarketingbudgets,canceledconferences,salaryfreezesandselect casesofemployeelayoffs.Theseeffortswillbegintodenttheoverallcostcurveforcommunitycredit unions,butgettingoperatingexpensestoalevelthatpositionscreditunionsforthenextfewdecadesof competitionwilltakemuchmore. Creditunionsthatsucceedatbendingtheiroperatingcostcurveswillacknowledgethatbeinganon profitdoesnotexcusetheorganizationfromdrivingefficiencybutrathermandatesthateverypennyof membermoneybeusedwisely.And,asopposedtomerelycountingpaperclipsandcancelinga conferencevisit,therealprogresswillcomefrommoresophisticatedanddisciplinedapproachesto efficiencymanagement. Thegreatefficientcommunitycreditunionsofthefuturewill: SethighlevelobjectivesorBHAGs(bighairyaudaciousgoals)aspartofthestrategicplanning process Utilizebenchmarkingdatatoassessefficiencyacrossallareasofthecreditunionandreport thesemeasurementsregularly Setaccountabilitiesandincentivesaroundefficiencyimprovementatalllevelsofthecredit union Establishacultureofcontinuousprocessimprovementanddrivenewefficiencieswith disciplinedprojectmanagement Leveragegrowingselfservicechannels(phone,Web,mobile,cards)todeliverfinancialservices inalesslaborintensivemannerandactivelymanagechanneldeliverycosts

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Utilizesophisticateddataminingandcontextualmarketingstrategiestolowerthecostof memberacquisition,crosssellandretention Developstrongerprofitabilityreportinginformationatthebranch,productandmemberlevel anddrivemanagementdecisionsaroundthisprofitabilityinformation.

Inthenextchaptersofthisreport,CornerstoneAdvisors,Inc.willshareselectbenchmarksandbest practicesandprovideactionableadvicetocommunitycreditunionsstartingtheirjourneytoward greaterefficiency.

BRANCHDELIVERY
Ifoneweretoinspectthepayrollrecordsandoperatingexpensesatanycommunitycreditunion,they wouldquicklydeterminethatbranchesconsumealargeportionofemployees,facilitycostsandcertain technologycosts.Branchefficiencyandprofitabilitymustbeoneofthekeystrategiesforany communitycreditunionworkingtobemoreefficient. Acrossallfinancialinstitutions(banks,savingsandloans,creditunions),therehasbeenadramatic explosionofbranchesoverthepastdecade.Inspiredbyformerleadersinretailbankinggrowthsuchas WashingtonMutual(failedandtakenoverbyJPMorganChase)andCommerceBankofNewJersey (soldatahighmultipletoTDBankinCanada),banksandcreditunionsalikesawbranchingastheir primaryengineofgrowth.Whilebestpracticeleadersmayhaveseenimpressivenumberswithnew branching,theaveragefinancialinstitutionexpressedmuchmoremixedresultsinbranchexpansion. LeadingbranchresearchfirmBancographyreportedin2008thattheaveragebankbranchbuiltin2001 hadonly$17millionindepositsby2008.Interestingly,manyofthesebrancheswereconstructedwith proformaplansandbusinesscasesthatanticipatedsomewherebetween$30and$50millionin depositsatthefiveyearmark,meaningthatalargeportionofbranchexpansionintheUnitedStatesfell belowmanagementexpectations. Unfortunately,branchdataforcreditunionssimilartotherobustinformationavailablefromthebank FDICagencyisnotavailablefromNCUAoranyothersource.However,ongoinganalysisandclient engagementsbyCornerstoneAdvisors,Inc.confirmthatthebelowexpectationsnewbranchhasbeen acommonoccurrenceincreditunionland.

AnalyzingYourBranchCosts
Oneofthefirststepscreditunionsshouldtakeincreatingbranchefficiencyistoconducta comprehensiveandtransparentreviewoftheirbranchestoday.Whilesomecreditunionshave deployedpowerfulprofitabilitysoftwaretotrackbranchperformance,mostcreditunionswillneedto carryoutamoreadhocanalysisorbuildreportsthatattempttoestimatebranchprofitabilitybased uponinformationavailable.Totheextentthatyourcreditunionsbranchaccountingcapabilitiesallow it,managementshoulddevelopclearbranchscorecardsthathighlightthecurrentsize,volumeand profitabilityofthebranchnetwork. 6

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Thesamplebranchproformaonthefollowingpageillustratesthetypeofbestpracticereportneeded formanagementtomonitorbranchprofitability: AcmeCreditUnionBranchProfitabilityReport ($000s) TotalDeposits TotalLoans InterestonLoans CostofDeposits Costs/Incomefrom InternalFundsTransfer NonInterestIncome DirectExpenses DirectProfit Contribution AllocatedExpenses NetProfitAfter Allocations ROA Thistypeofbranchprofitabilitycanbeveryhelpfulinallowingcreditunionstoisolatewhereinefficiency isoccurringintheretailsystemandtocreateactionplanswithbranchesregarding: Growingprofitablebranches Fixingbranchesthatareunprofitablebuthavestronggrowthpotential Closing/sellingbranchesthatareunprofitableanddonothavestronggrowthprospects Branch1 $111,000 $121,000 $7,200 ($4,000) ($36) $1,100 $2,100 $2,164 ($1,000) $1,164 .96% Branch2 $32,000 $27,000 $1,300 $85 $15 $345 $1,300 $455 ($400) $55 .14% Branch3 $17,000 $4,000 $980 $45 $68 $145 $1,100 $138 ($250) ($112) .66% Branch4 $6,000 $11,000 $600 ($23) ($25) $34 $950 ($364) ($275) ($639) 5.85%

Manycreditunionshaveeitherlackedtheanalysisorintestinalfortitudetoaddresslowperforming branchesinthepast.Bankstendtoclosepoorbranchesmuchfasterthancreditunions.However,the newcompetitiveenvironmentwilldemandthatcreditunionsbemoretransparentandforthrightin dealingwiththosebranchesnotmakingtheprofitabilitycut. Clearlythesedecisionsarenotblackandwhite.Otherfactorssuchasbranchconvenience,member usageofafacilityandsupportofotherproductlines(e.g.investments,mortgage)needstobe considered,butholdingonwishfullytounprofitablebranchesbecausetheyaddintangiblevalueisa certainrecipeforcreditunioninefficiency.

OptimizingBranchPerformance
Inadditiontoamoreglobalbranchprofitabilityanalysis,itisimportantforcreditunionstoemploykey staffingandperformancebenchmarkstomanagebranchproductivity.Itissafetosaythatmanycredit unionbrancheshaveexcessstafftodaywhenbothexistingandnewbusinessvolumesareconsidered. Thesebenchmarktypemetricscanalsobeusedasthebasisforformalbranchstaffingmodels.Staffing 7

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

modelsensurethatcreditunionsaremorerationalandfairinhowstaffresourcesareallocatedversus partakinginsqueakywheelsyndromeinwhichbranchesthatcomplaintheyarebusygetmorestaff. Inanalyzingbranchstaff,CornerstoneAdvisors,Inc.recommendsmetricsbeestablishedinkey functionalareassuchas: Branchmanagersandassistantbranchmanagers Branchplatformstaffthatsellandservicememberaccounts Branchtellerstaffthatservicemembertransactions

Whilebranchrolesandjobdescriptionsvarybetweendifferentcreditunions,thesefunctionaldrivers canactasgoodbenchmarkstocomparetopeers.Afewhighlightsfromtheextensivebenchmarksthat CornerstoneAdvisors,Inc.developsintheirCornerstoneReportcreditunionscorecardinclude: AverageDepositsPerBranch AverageNewAccountsPer PlatformFTE TotalExistingAccountsServiced PerPlatformFTE AverageTransactionsPerTeller PerMonth PeerMedian $57million 85 3,608 2,616 PeerHighPerformer $80.6million 126 5,140 3,495

Note:DataprovidedwithpermissionfromCornerstoneAdvisors,Inc.TheCornerstoneReport2008. Peerdataincludescreditunions$350millionandabove.HighPerformercreditunionmeasure th indicatesthe75 percentilelevelofperformance.

Creditunionslookingtoimprovetheirbranchproductivityhaveanumberofkeyprojectsandinitiatives theyshouldconsider: Newmember/newaccountprocessstreamliningOften,oneofthemoretimeconsumingand frustratingprocesseswithinthebranchisthenewmember/newaccountprocess.Systemlimitations, paperworkandtherekeyingofdatacannotonlyconsumestafftime,butalsocreateasubparmember experience.Creditunionsshouldflowcharttheircurrentopeningprocessanddevelopspecific improvementplansthatincludestreamliningdatacollection,buildingautomatedinterfacestoyournew accountssystemforactivitiessuchascheckordering,cardordering,onlinebankingandbillpay enrollment,CHEXsystemsandOFACcompliance.Inaddition,creditunionsareworkingtoprovidemore systematiconboardingprocessesfornewmemberswherebranchesareregularlycommunicating, advisingandtrackingthecrossselloftheirnewrelationships.Managementmaynotbepayingenough attentiontothiscriticalprocesswithinyourcreditunion. Improvedbackofficesupportviaimaging/intranettechnologiesContinuedincreasesinactivities concerningregulations,banksecrecyandadministrativemandateshavecreatedataxonbranch productivity.Adeeperanalysisofyourbranchactivitiesmayindicatethatpaperforms,trackinglogsand requestsforinformationfromcreditunionheadquartersareeatingawayatbranchstaffproductivity. 8

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Manycreditunionshaveaddressedthischallengebyleveragingtheirintranetanddocumentimaging systems.Theyhavebuiltautomatedworkflowsforanythingthatthefrontofficeneedstosendtothe backofficesuchasaccountmaintenancerequests,research,orcompliancereporting.Leveragingthese technologiesinthecreditunionbranchenvironmentshouldbeahighpriorityforbranchmanagersand CIOsalike. Tellerstaffingmodelsanduseofpart/peaktimestaffDatafromCornerstoneAdvisors,Inc.indicates thatthemediancreditunionusespeakorparttimestaffingfor30%ofitsbranchheadcount.These flexiblestaffingplanshaveallowedcreditunionstomaintainmemberservicewhilereducingoverall costs.Employingformalstaffingmodelsthataccountforhoursduringtheday/weekwithheavyvolume canaddmoreprecisionandcostsavingopportunitiesforthisprocess. Check21captureatbranch(tellerbackoffice)ortellerlineThebranchtellerprocessisbeingmade lesspaperintensivebydeployingbranchcapture,eitherateachtellersworkstationorattheback counterofthebranch.Theseinitiativeshaveservedtoreducebranchcouriercostsandallowcredit unionstobettermanagetheirfundsfloatprocess. MemberretentionstrategiestoreducechurnOneofthekeyareastoimprovebranchprofitabilityis improvingmemberretentionsoworkdoneinthebranchesisnotessentiallyreworktomaintainthe samesizecreditunion.Watchingchurnisespeciallyimportantforcheckingorsharedraftaccounts. Creditunionscanimproveboththeirreportingandcommunicationstrategiestokeepahighretention rateamongtheirmostactivemembers. Automateddashboardperformance/salesreportingandreferralmanagementInrecentyears,many creditunionshaveworkedtocreatemoreactivesalesandservicecultures.Bybeingmoreproactive aboutwhatthecreditunionoffers,branchescanworktoincreasemembershareofwallet.However, thebirthofsalesculturehasalsoresultedincertainsalesreportingprocessesthatcanbecumbersome andinefficient.Creditunionsshouldlooktobetterautomatehowsalesaretrackedandhowreferrals aremonitoredbetweenthebranchesandotherareassuchasmortgage,investmentandbusiness services.Thisistypicallyabrokenprocessthatneedsattention. CreativestrategiestousebranchslacktimeproductivelyWalkintomanycreditunionbranches todayanditmaylookmorelikeamuseumthanafinancialservicesbusiness.Withthegrowthof Internetandelectronicpayments,branchtransactionshavetendedtoflatten,andcertainbranchesina creditunionsnetworkmaybequiet.Inmanycases,staffneedstobeinthesebranchesforcoverage anddualcontroloperationalreasons.Therefore,managementneedstofindwaystokeepthisstaff productivewhenmembersarenotwalkingthroughthedoor.Creativefinancialinstitutionshavebegun touseoutboundcalls,loanprocessing,accountmaintenanceandcallcentercoverageaswaystoutilize branchstaffeffectivelyinamoreflexibleandvirtualenvironment.

BackOfficeRetailOperations
Inadditiontothefrontlinebranches,creditunionsneedtofocusontheefficienciesandprocessesin theirbackofficefunctions.Regulatoryrequirements,fraudandevenmergersareplacingnewstrainon 9

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

creditunionbackoffices,andmostoftheseoperationaldepartmentshavetendedtogrowinan evolutionaryandhaphazardfashiontheywerenotorganizedanddesignedwithprocessefficiencyin mind. 2010isawonderfultimeforcreditunionstotakeafreshlookattheirbackofficeoperations.Key performanceimprovementinitiativesshouldinclude: Fullimagingofdocumentswithautomatedworkflowsaroundtheircaptureandmaintenance Imagingorenterprisecontentmanagementsystemsopenupamazingnewprocessefficiency opportunitiesforcreditunions.Leadinginstitutionsareworkingtobuildpaperlessenvironmentsin whichdocumentsarecapturedelectronicallyandthenaccessed,routedandreportedthroughoutthe organizationusingautomatedworkflowsembeddedintheseimagingsystems.Forinstance,anaccount closedinthebranchescanbeautomaticallyimagedandarchivedforthebackoffice,andindexes attachedtotheseimagescanthenallowforthecredituniontoaccessthedocumentsviaasimple searchofname,SocialSecurityNumber,address,etc.inseconds. ImprovedusageofdatawarehouseandWebbaseddashboardtoolsforautomatedreportingBack officefunctionsoftenspendtimecreatingreportsformanagementorauditorsbyextracting information,typingitintospreadsheetsandformattingitintoboardbooksandotherdocuments. Leadingcreditunionshavedonecomprehensiveauditsofthereportstheyuseandhaveworkedto leveragedatawarehouseanddashboardtechnologiesintheirorganizations.Itishardwork,but automatingongoingreportscansavedaysofstafftimeeachmonth. IntegrationoffraudmanagementtoolsAnotherkeyfunctionofthebackofficeistomonitorand managepotentialfraudactivity.Inaddition,backofficefunctionshavebeenveryinvolvedinantimoney launderingandBankSecrecyAct(BSA)compliancemandates.Bestpracticecreditunionsarebeginning toleveragenewintegratedfraudandcomplianceplatformstoautomatetheseactivitiesandleverage moresophisticatedrulesforcatchingfraudorreportingsuspiciousactivityforregulatorypurposes.This isagrowingareaofexpertisethatcreditunionswillneedforthefuture. IntegratingWebbasedformsfromfrontlinewithbackendcoresystemsforworkflowpurposesAs waspreviouslymentionedinthebranchsectionofthisreport,bestpracticecreditunionshavebecome zealotsaboutusingtheirintranetstoimproveproductivity.Theyhaveautomatedprocessesandeven builtinterfacestotheircoresystemstoeliminatepaperandrekeyingofdatawheneverpossible.

REMOTEDELIVERY
Oneofthekeyopportunitiesforcreditunionsinthefutureistobetterleverageremotedeliveryservices toreducethelaborintensityoftheircoststructures.Whilethebranchwillplayanimportantrolefor mostcreditunions,thepowerofhavingmemberspumptheirowngasisclearlyevident.Asan illustration,lookattheoperatingexpensefiguresforInternetonlybankINGDirectandInternetandcall centerfocusedAlliantCreditUnionwhencomparedtocommunitycreditunions:

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

INGDirect AlliantCreditUnion 1.35% CommunityCredit Unions 3.68%

OperatingExpensesasa%of .72% AverageAssets Source:CUNAandNCUAcallreports

Somecreditunionsworrythatincreasedusageofremotechannelsversusthephysicalbranchwillresult inmembersfeelingignoredorlosingthatpersonaltouch.However,severallargefinancialindustry studieshaveshownthatactiveInternetbankingandbillpaycustomerstendtobemoresatisfiedwith theirbankingrelationshipthantheaveragecustomer.Theseremotedeliverychannelsenhancethe overallserviceexperienceformemberswith24/7availability,robustinformationandthefeelingof controlitgivesthem. Therefore,creditunionsshouldlooktotheirremotechannelsasbothanefficiencystrategyanda sourceofmemberservice/convenience.Thefirststepinattackingchannelcostsistobuildsometypeof transparentChannelDeliveryScorecardinyourorganization.Thisscorecardshouldbeusedbythe boardandmanagementtotracktheusageoftraditionalandechannelsbymembers.Ifgrowthisnot occurringinthelesscostlychannels,managementcaninvestigaterootcausesandbuild marketing/servicestrategiestoimprovepenetration.Forinstance,manycreditunionshaveasyettosee anuptickinmembersusingtheInternettoopennewaccounts.Bydiggingintousabilityandmember behaviors,thecreditunioncanworktoimprovetheusageofthischannel. AsampleChannelscorecardformatisprovidedbelow:

Acme Credit Union - Channel Delivery Scorecard

Branch Channel # of monthly transactions per teller FTE # of new accounts per platform FTE Telephone Channel # of calls to call center per month # of calls to automated voice response per month # of loans originated per call center FTE per month # of new deposit accounts per call center FTE per month Calls per call center FTE per day Internet Channel # of members enrolled in Internet banking Active Internet customers as a % of checking households # of customers enrolled in bill pay Active bill pay as a % of checking households # of e-statements viewed online # of check orders received online # of loan payments made online # of credit card payments made online # of online account transfers (internal) ATM/Debit/ACH/EFT Average transactions per ATM/month Debit cards as a % of checking accounts Average monthly transactions per debit card Current QTR. Last QTR. Same QTR. Last Year Goal

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Thesetypesofmanagementreportscanhelpensurethecreditunionisfocusingonthegrowthof cheaperandhighlyvaluedremotechannels.

TelephoneBanking
WhiletheInternetrevolutionishavingadramaticimpactonmemberdelivery,theplainoldtelephone channelcontinuestobebothapopularandpowerfulefficiencystrategyforcreditunions.Creatingnot onlyanefficientbutpersonalizedandhighserviceexperienceformembersisveryimportant.Today, bestpracticecreditunionsareachievinghigherlevelsofperformanceintheircreditunionsby: ManagingwithbalancedincentiveplansforagentsCreditunionshavedesignedscorecardsthat rewardcallcentersnotonlyforproductivitybutalsoforhighlevelsofserviceandsales/crosssell activity.Insteadofachaoticadministrativefunction,thesebestpracticecallcentershavebecometop notchvirtualbranchesformembers. ImprovedintegrationoftechnologyforeasieragentnavigationJustlikeabranchplatform environment,creditunionsneedtoauditandimprovetheprocessesneededforcallcenteragentstodo theirjobs.Fragmentedsystemsandmanualtrackingofitemscanbeextremelyfrustratingandserveto increasetheaveragemembercalltimefornoproductivereason.Creditunionsareworkingtobuild moreintegratedportalsforcallcenteragentstoconductalloftheirworkactivities. BetterleverageofskillsbasedroutingandCTI(screenpops)Twokeytechnologiesforthecallcenter thatcreditunionshavenotleveragedfullyareskillsbasedroutingandcomputertelephonyintegration orCTI.Skillsbasedroutingallowscallstogototheverybestqualifiedagentbaseduponselections membershavemadeonthephonemenu.Aloanselectioncanquicklyroutethemembertoaloan trainedandcertifiedagent.CTIallowsthecallcenteragenttoreceiveascreenpopofthemembers profileimmediatelyuponansweringthephonetoheightenthelevelofpersonalizedmemberservice. IntegratedcontactmanagementwithbranchesOneofthemostimportantprioritiesinsideacall centerisfortheagenttoknoweverythingthatisgoingonwiththememberwhentalkingtohim/her. Akeysystembeingleveragedbycreditunionsiscontactmanagementsoftware.Thissystemallowsthe credituniontorecordconversations/requestsfrommembersintoadatabasethatcanbeaccessedby anyemployeeinthecreditunion.Whenacallcenteragentanswersamembercall,theycanspeak intelligentlyaboutthestatusofmemberitemsandbemoreacquaintedwiththeirpreferencesand historywiththecreditunion. IntegrationwithWeb,emailchannelsAnothergrowingtrendamongcreditunioncallcentersisthe evolutiontotruecontactcentersthatsupportnotonlyvoicetelephone,butallemailandWebinquiries frommembers.Manycreditunioncontactcentersnowhavespecializedstaffandworkflowstohandle emails,Webinquiry(contactus)andevenlivechatactivity.Byprovidingaseamlessconnection betweenWebandlivepersonalchannels,thecontactcenterensureshighlevelsofmemberservicebut alsoensuresthatunnecessarybackandforthisavoidedinfulfillingamemberrequest.

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

WebandMobileBanking
LeveragingtheWebandgrowingmobilechannelsalsoprovidecreditunionsaroutetostronger efficiencylevels.TheWebhaslongbeentoutedasawaytoimprovememberretentionandloyalty. However,creditunionshavealsotendedtodownplaythegreatefficiencyopportunitiesthattheWeb provides.Takealookatallthememberrelatedprocessesinthecreditunion,fromtransferringmoney toacceptingloanpayments,tochanginganaddress,renewingaCDororderingchecks.Now,collectthe monthlyvolumesforthesemorememberservicetypeactivitiesandanalyzehowmanyoftheseare beingexecutedthroughyourWebchanneltoday.Whatyourcreditunionwillfindisthataminute portionofthisactivityishappeningviatheInternet.Dramaticgrowthintheusageofselfservicecan helpyourcredituniongrowwithouthavingtoaddfuturebackofficeorbranchstaff,thusimproving efficiency.Howdoesyourcreditunionknowitisextractingthisefficiencyopportunityifitisnottracking thisdatatoday? CornerstoneAdvisors,Inc.reportsthattheratioofactiveInternetuserstocheckingaccountsincredit unionsis61%withhighperformersat70%. TheWebalsoprovidescreditunionsapowerfulvehicletoimprovetheefficiencyofmarketingand crosssellingtomembers.Thinkofthedifferencebetweenacostlyradioandprintadvertisementwhen comparedtothefreespectrumavailablethroughacreditunionsownInternetchannel.Theproblem: mostcreditunionshavebarelytappedthepotentialoftheirWebchanneltoengagemembers. TobetterleveragetheInternetasamarketingvehicle,creditunionsmust: Improvematrixmarketingatthepointofloginspecificmessagescanbepresentedto membersbasedupontheirprofileandusageofproductsandserviceswithinthecreditunion Developengagingcontentlinkedtoproductsolutionsitistimetomovepastbrochureware andhelpeducatememberswithinterestingcontentandtoolstohelpthemmanagetheir financiallives PersonalizetheWebexperiencecreditunionsarebeginningtoprovidebettertoolsand informationsomemberscanseesummarysnapshotsoftheirfinanciallives

Inaddition,creditunionsarejustbeginningtotapintothepotentialoftheWebasamember acquisitionchannel.Althoughvolumesarestilllowtodaywhencomparedtotraditionalaccountopening channels,creditunionsarebeginningtoworkonstreamlined,userfriendlynew member/account/fundingcapabilities.Overtime,thisgrowthofremoteacquisitioncanalsoimprove productivityinthecreditunion.ByofferingabroadmenuofWebproductsandservices,creditunions canbegintobettermonetizetheirinvestmentinthischannel,whichsofarhasbeenusedprimarilyfor basicinformationviewingandtransactionsbythemember.

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

RETAILFEEINCOME
Whilethetopicoffeeincomefallssomewhatoutsideofanoperatingefficiencydiscussion,maintaining asolidcontributionofnoninterestincomeisclearlyoneofthegreatfuturechallengestothecredit unionbusinessmodel.Inthepastdecade,themajorityofcommunitycreditunionshavedriven increasesinbothcheckingoverdraftandcardrelated,noninterestincome.Thecurrentregulatoryand economicenvironmenthasputheadwindsintothegrowthofthesefees.First,newguidelinesbythe FederalReserveconcerningtheoptinforoverdraftsattheATMandpointofsaleareanticipatedto pinchoverdraftincomebyanywherefrom10%to35%.Overthenext12months,creditunionswill begintogetafeelforhowtheoveralloptinlevelswillshakeout.Additionally,amoreconservative consumermaynotspendasmuchthroughthedebitandcreditcardchannels,thusdrivinginterchange income.Finally,legislationhasalreadybeendraftedinCongressthatwouldcreatemorecompetitionfor interchangeratestomerchantsandthusdrivedowntheaverageinterchangemarginthataccruesto banksandcreditunions.Takentogether,thesetrendsmeanthatcreditunionsmustbecomemore disciplinedandcreativeabouttheretailproductsandpaymentsstrategies.Creditunionswillworkto balanceprovidingstrongvaluetomembersontheirpaymentsserviceswiththeneedtosomehowpay thefreightonprovidingtheconvenienceofcheckingandelectronicservices.Already,creditunionsare lookingtoproductpackagesthatpromoteactivecardusageandadoptionoflowercostdelivery methods(e.g.onlinebanking,estatements)asanewmodeltoreplacetheFreeCheckingwithfees approachthathasdominatedretailbankingforthepastdecade.Inaddition,creditunionsmaybeginto experimentwithcertainusageandbalancefeesasameansofreplacinglostoverdraftandinterchange income.

CONSUMERLENDING
WhiletheGreatRecessionhascurtailedconsumerspendingandborrowing,manycreditunionshave pushedaheadwithconsumerlendingbecauseofthecompetitivevoidopenedupfromlargebanksand otherwoundednationalfinancialplayers.Withfutureopportunitiesinmind,creditunionsareworking toreinventtheconsumerlendingprocesswithaneyetowardstrongerriskmanagement,more disciplinedpricingandgreaterautomatedefficiencies. Sofar,creditunionshavemadesolidprogressinleveragingtoolssuchasautomatedscoringandWeb basedlending.BenchmarkdatafromCornerstoneAdvisors,Inc.indicatesthefollowing: %ofloansapprovedwhereautodecisioning wasused %ofloanapplicationsoriginatedthrough theInternet Source:CornerstoneAdvisors,Inc. HighPerformingCredit Union 34.5% 24.30%

MedianCreditUnion 20% 13%

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

Goingforward,creditunionswillbelookingtoimprovetheoverallsophisticationoftheirunderwriting processes.Inthepast,toomanyinstitutionsmerelyusedasimplecreditscorebasedmatrixtoapprove loans(e.g.FICOgreaterthan640getsapproval).Thefinancialcrisishasproventhelimitsofsuchablunt andbrittleapproachtoanalyzingcreditrisk.Instead,creditunionsarenowworkingtoimproveanalytics aroundtheborrowersincome/financialsandthetransaction/collateralspecifics.Theyareminingtheir owndatamoreactivelytodeterminewherecreditriskmayemergeandwhereloansneedtobepriced atapremiumduetohighercreditrisk.Increatingthesenewprocesses,creditunionshavefoundthe needtoimprovetheiroriginationsystemsandstreamlineboththecollectionandanalysisofthisdeeper borrowerandtransactiondata. Additionally,creditunionsarebolsteringtheironlinelendingcapabilities.WhileCornerstoneAdvisors, Inc.smedianshowed13%ofconsumerlendingapplicationscomingthroughtheInternet,bestpractice institutionshavealreadyreached50%andbeyond.Whatisyourcreditunionsgoaltoday?Todrive greaterWebapplicationpenetration,creditunionsarecarefullylookingthrougheachstepintheWeb applicationprocesstoensurethatitismemberfriendly.Additionally,newaccountopeningtoolsare creatingtheabilitytoauthenticateaconsumer,enrollanewmemberandapproveanewloaninasingle Webencounter.Thismayopenupnewgrowthandefficiencyopportunitiesforcreditunionsifthe capabilityismarriedwithactiveoutsidemarketingefforts. Finally,creditunionsareworkingtodramaticallystreamlinetheoverallprocessflowforaconsumer loan.TheCornerstoneReport2008revealsthattheaveragecreditunioncloses30consumerloansper monthperfulltimeemployeeinvolvedinthelendingprocesswith43loansclosedpermonthforhigh performers.Thisbenchmarkratioincludestheallocationofbranchstafftimetakentofulfillconsumer loanapplicationsandclosings. Keyimprovementinitiativesthatcreditunionsarepursuingtoimproveconsumerlendingproductivity include: Streamliningprocesseswhiledealingwithregulationscenteredaroundopenendedlending Improvingsystemstohavebetterunderwritingtools/routinesthataccountfordebtratios,loan tovalueanddealtermsinadditiontocreditscores Movingtoelectroniccaptureofloandocumentsandsignaturesatthefrontline

Bettervisibilityofconsumerlendingbenchmarksinsideyourcreditunioncoupledwithakeenfocuson automationinyouroriginationsystemandWebchannelsarehighprioritiestoday.

MORTGAGELENDING
Inrecentyears,creditunionshaveseenagrowingnicheemergeinmortgagelending.Whilebothcredit unionmanagementandregulatorshavetakennotethatsomeofthisportfoliobasedmortgagelending canberisky(frominterestrateriskespecially),creditunionsnonethelesshaveatremendous

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

opportunitytogainmarketsharewhilemanagingthisbusinessprudently.Importantly,thefinancial crisisinAmericahasconsumersmoreawareofhowamortgageloanfitsintotheiroverallfinancialplan buildingbroadbasedfinancialrelationshipsusingthemortgageasanentrypointisagrowing opportunityforcreditunions.However,themortgagebusinessisindeedhighlycommoditized,and marginsarerazorthin.Onlycreditunionsthatmanagethecostsoforiginatingandservicingmortgage loanswillmakeanyoftheirmarketsharegainsprofitable. Keyefficiencyimprovementsthatcreditunionsarepursuinginthemortgagebusinessinclude: IncreasingthepercentageofloanapplicationsreceivedthroughtheInternetCornerstoneReport datarevealsthatthemediancredituniontook25%ofitsmortgageloanapplicationsthroughthe Internetwhilehighperformingcreditunionshavethisnumberat55%. UsingonlinedisclosuresandreviewofloandocumentsforclosingCreditunionsshouldviewtheWeb asmorethanaplacetoacceptmortgageloanapplications.InsteadtheInternetisactingasapowerful platformtoautomatetheentiremortgagelendingprocess.Keyexamplestodayincludeonline disclosuresthatborrowerscanacceptonlinewithoutneedingtobeprinted.Borrowerscanalsocheck thestatusoftheirmortgageapplicationonlineandevenreviewtheirmortgageclosingdocumentsprior tocomingtothecredituniontoexecutethemortgage.Theseprocessimprovementsareservingto reducethepaperworkandbackandforthcommunicationsbetweenthelender,borrowerandthird parties. StreamliningtheclosingtimeforamortgagerefinancetolessthantwoweeksOneofthekeydrivers ofbothmemberserviceandefficiencyinthemortgagebusinessisfastprocessturnaround.Withtheuse ofautomatedtools,onlineapplicationsandtrainedstaff,bestpracticecreditunionsareworkingtoget refinanceloansdoneinjustafewweeks.Unfortunately,duringheavyrefinancebooms,manylenders run6090daysinturnaround.Akeytocreatingafastmortgagerefinanceexperienceistheappraisal process,andbestpracticecreditunionsareusingextranetsandspecialappraiserincentivesforspeedy deliverytoaddressthiscriticalprocessneed. Increasinginterfacesbetweenloanoriginationandtitle,flood,PMI,appraisalresourcesAn importantopportunityinthemortgageoriginationprocessisthegrowingnetworkofbusinessto businessorB2Bcapabilitiesthatlinkupplayersinvolvedinthemortgageprocess.Creditunionsneedto ensurethattheirmortgagegrouphastheabilitytoelectronicallyorderitemsfromalloutsideplayers directlyfromitsoriginationsystemwithoutneedingtophone,faxoremail.Thiseliminatestherekeyof dataandpaperworkandspeedsupthemortgageprocessingprocess. LeveragingmemberinformationonmortgageapplicationforcrosssellOneofthemostinefficient processesinsideofcreditunionstodayishowtherichandvaluableinformationonmembermortgage loanapplicationsisignoredandsquandered.Bestpracticescreditunionshaverecognizedthegreat potentialofleveragingthemortgageapplicationtoexpandshareofwalletamongmembers.For instance,astandardcheckboxonamortgageapplicationindicatesaborrowerisselfemployed.Smart creditunionswillcreatereportsoftheseborrowerstocallonordirectmarketforbusinessservices. Investmentaccountinformationcanspuracallfromoneofthecreditunionstrustedinvestment

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

advisors.Inthefuture,creditunionsattemptstoofferstrongerfinancialplanningandadvisoryservices canstartwiththerichdataprovidedinamortgageapplication.

ENTERPRISERISKMANAGEMENT
Thefinancialcrisishasbroughtgreaterscrutinytothecreditunionmovementintermsofhowit identifiesandmanagesrisk.Inthepastyears,regulatorshaveaskedtoseeamoretangiblefocuson EnterpriseRiskManagementorERMintheirorganizations. DatafromCornerstoneAdvisors,Inc.indicatesthatthemediancreditunionhasaRiskManagement relatedemployee(definedasAudit,Compliance,Fraud,BSA,PhysicalandI.T.Security)forevery42 employeesintheorganization.Thismeansacreditunionwith200employeeswouldhaveaboutfive employeesintheirriskmanagementfunctions. Clearly,creditunionsshouldnotpinchpenniesonriskmanagementwhenthecostofexcessiveriskcan bedeadly.Instead,creditunionsshouldactivelytrackthecostsofmanagingrisk,bothintermsofstaff andoutsideauditandcomplianceservices. Inaddition,creditunionsneedtomakebetterusageofriskmeasurementsanddashboardswithintheir organizationsthatprovidemonitoringandearlywarningsignalsintheareaofcreditrisk,interestrate andliquidityrisk,operationalriskandreputationrisk.Forexample,akeyoperationalriskmeasuremay befraudlossesfromcheckingaccounts.CornerstoneAdvisors,Inc.indicatesthatthemediancredit unionloses$4.42dollarstofraudpercheckingaccount(bothelectronicandcheck)eachyear. MostcreditunionsmaybetoosmalltohaveadedicatedRiskManagementfunctionintheir organizations,butattheveryleasttheyshoulduseanEnterpriseRiskCommitteeandformal managementprocessestooverseeandmanagerisk.

ADMINISTRATIVESERVICES
Akeywaytomanageacreditunionsoverallefficiencyistoensurethatnonmemberfacing administrativecostsdonotbecomeexcessive.Justasproductionorientedresourceslikeloanofficers andbranchesareheldtoproductivitystandards,sotooshouldadministrativefunctionslikeFinance, HumanResourcesandMarketing.Heresaquickrundownofabenchmarkandbestpracticesinthis area.

FinanceandAccounting
CornerstoneAdvisors,Inc.foundanaccountingandfinanceFTEforevery$109millionintotalassets. Typically,acreditunioncangetmoreefficientintheaccountingfunctionasthecredituniongrows.Key prioritiesforfinanceandaccountingmanagersincludeleveragingautomatedreportinganddata

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

warehousetoolstoreducemanualreportcreation.Inaddition,manycreditunionsareusingthe intranettostreamlineprocessessuchaspurchasing,employeeexpensereimbursementandbudgeting.

Marketing
CornerstoneAdvisors,Inc.foundthatthemediancreditunionhadoneMarketingFTEforevery$180 millioninassets.Marketingdepartmentsareusingtheirowndesktoppublishingsoftwaretoreduce outsideproductioncosts,hiringinternsasinexpensiveadditionallaborandsharingcertainmarketing initiativeswithothercreditunions.Inaddition,extensivedataminingofthememberbaseisprovingto help.Marketingdepartmentslowertheircoststoacquireandretainmembers.Bestpracticemarketing departmentsactuallysegmenttheirbudgetbetweenacquisitionandretentionrelatedstrategiesand thencreatemeasurements(e.g.marketingcostperacquiredmemberandmarketingcostperexisting member)totrackperformance.

HumanResources
GreaterandgreaterdemandsarebeingplacedoncreditunionHumanResourcedepartmentsinthe areasoforganizationaldevelopment,performancemanagement,recruitingandtraining.Cornerstone Advisors,Inc.foundthatthemediancreditunionhadanHRemployeeforevery72staffmembersatthe creditunionandanFTEinthetrainingfunctionforevery88creditunionemployees.Keyefficiency improvementstrategiesbeingpursuedbyHumanResourcedepartmentsinclude: Leveragingselfserviceintranetbasedtoolsforemployeeinformation,benefitselectionsand maintenance,trainingandperformancemanagement Usingimagingsystemstoaccesscriticalinformationsuchasprospectiveemployeeresumes, reviewsandapplications Useparttimestaffvs.addingfulltimeemployeeswhentheHRdepartmentneedstogrow Regularcompetitivebiddingprocessesforhealth,retirementandpayrollservices.

Creditunionsareincreasinglyreviewingoutsourcingoptionsfortheiradministrativefunctions.Asthe Webhelpsoutsidecompaniesintegratemoreeffectivelywithcreditunions,suppliersproviding outsourcedbenefitsadministration,recruiting,facilitiesmanagement,compliance,loanreviewand marketingserviceswillbereviewedmoreoften.Aformalinhousevs.outsourcedcostanalysisshould beusedwhenthesetypesofproposalsarereceivedbythecreditunion.

INFORMATIONTECHNOLOGY
Thefinalareaforefficiencyreviewinthiswhitepaperdealswiththethirdlargestoperatingexpensein anycreditunion:informationtechnology.Nexttopeopleandfacilities,spendingoncomputersystemsis anareawhereprudentcostmanagementwillpaydividendsforcreditunions.

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

CornerstoneAdvisors,Inc.measurestechnologycostsasapercentageofthecreditunionstotalassets. Thetablebelowdetailsspendingineachoffivemajortechnologyspendingcategories: %ofAssets Median 25thPercentile .086 .061 .038 .023 .219 .140 .090 .060 .042 .025 .475 .309

CoreSystems DataCommunications ElectronicDeliverySystems Infrastructure StrategicSystems Total

75thPercentile .113 .055 .344 .155 .062 .729

Source:CornerstoneAdvisors,Inc. Itisimportanttonotethatcreditunionsspendnearlytwiceasmuchrelativetoassetsasbanks ofsimilarsize.Thereareseveralexplanationsforthisdifference: Banksareprofitfocused,sotheytendtobelessinclinedtokeeptheirtechnology currentandinvestintechnologieswithaharddollarpayoff Creditunionshavehistoricallyhadfewerbranchesthanbankssotheyhaveneededto compensatewithhigherinvestmentsinremotechannelssuchascallcenter,Internet, andATMchannels AccordingtobestpracticecomparisonsbyCornerstoneAdvisors,Inc.,creditunions havebeenfairlyloosewiththeirtechnologyexperimentsandspendingandsothey managetheiroverallI.T.spendlesseffectively

Lookingtothefuture,thereareseveralkeychangesthatcreditunionsmustenacttobetter managetheirI.T.spending: Change#1:ReviewmajorcontractstoensurecompetitivepricingManycreditunionssimply signcontractsprovidedbyvendorsandfailtonegotiatethebestpricing.Creditunionsshould competitivelybidanddriveactivecontractnegotiationsinthefollowingmajorareas: Coresystems Electronicbanking(debit,credit,ATMcardsandnetworks) Internetbankingandbillpay Item(checkprocessing) Dataandvoicecommunications

Change#2:ImproveuseoftoolsforstaffefficiencyTheI.T.stafftendstobeoneofthe busiestfunctionsintheentirecreditunion,andmaximizingtheeffectivenessofthis

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BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

departmentstimecanpaygreatdividends.Thereareseveralmaturingtoolsthatarehelping I.T.departmentssupportthecreditunionmoreeffectively: NetworkmanagementtoolsThesetoolshelpstaffmonitornetworkperformance, trafficandsecuritycentrally,andtheyalsoallowI.T.toinstallsoftwareremotely withoutvisitingbranchoffices HelpdesktoolsThesetoolsstreamlinetherequestscomingintoI.T.andprovideways tomakesimpleservicerequests(e.g.passwordreset)fullyautomated.Thesetoolsalso providevaluableinformationaboutwhatserviceissuesareoccurringwithinthe employeebase. ChangemanagementtrackingsystemsThesesystemshelpcreditreportingandaudit trailsforanychangestosystemssettingsandsoftwarereleases.Thishelpsimprovethe overalltransparencyandsecurityintheI.T.function.

Change#3:Instillastrongbusinesscaseandprojectmanagementdisciplinebeforetechnologyis purchasedWhilesomedegreeofcreativeR&DishelpfulintheI.T.function,creditunionssimplymust becomemoredisciplinedinhowandwhentheyinvesttheirtechnologydollars.I.T.Governanceisa termthatreferstohowtechnologyinitiativesareapproved,overseenandprioritizedinsidethecredit union.Eventhesmallestcreditunionshouldhavesomeformofprojectapproval,businesscase(aone pagememo)andprioritizationprocessdrivenbyseniormanagement.Theultimatesuccessfactorfor anygovernanceprocessisthatchoicesaremadeandsomeI.T.investmentrequestsreceiveaNo! answer.ConcentratingI.T.spendingandstafffocusonstrategicprioritiesisajobcreditunionexecutive managementshouldtakemoreseriously.

BUILDINGANEFFICIENCYFOCUSEDCULTURE
Thejourneyforcommunitycreditunionstowardgreaterefficiencywillnotbeeasyorcompleted quickly.Instead,creditunionleadersmustmakegreateffortstobuildaculturethatfocuseson efficiency. Again,ittakesmorethancuttingobviousexpensesliketravel,marketingandcharitabledonationsto becomeahighlyefficientcreditunion.Ittakesanenvironmentofcontinuousprocessimprovement, measurementandaccountability. Leadershopingtokickoffthisjourneytowardbestpracticeefficiencycanstartin2010by: AnalyzehowyourcreditunionsoverallefficiencycomparestopeersLookatNCUAdataand calculateyourefficiencyratiotogaugewhereyouare SetambitiousgoalsforfutureefficiencyCreatemeasurementsforexpenseratiosoneyear, threeyearsandfiveyearsfromnow 20

BestPracticesinCUEfficiencyaWhitePaperCommissionedbyCUNAsCommunityCreditUnionCommittee

BenchmarkyourorganizationTheonlywaytoconcentrateyourefficiencyeffortsinsidethe creditunionistoknowwhichfunctionsneedthegreatestfocus AssessprocessesandcreateimprovementplansInabriefperiodoftime,creditunionscan evaluatetheiroperatingprocessesandinvolveemployeesincreatingimprovementplans.While methodologiessuchasSixSigmaandMalcolmBaldrigeareexcellentapproaches,mostcredit unionscangettoimprovingthingswithoutthesetoolsorskills.Itonlytakescommonsense,a desiretolearnnewthingsandfocusfromseniormanagement. HoldmanagersaccountableforefficiencymeasurementTherearesimplytoomanypartsof thecredituniontodaywheremanagersdonothavemeasurablegoalsforefficiency.Scorecards canbeeffectivewaystoinstillafocusonmeasurementacrossalllevelsofyourcreditunion. AnalyzethecostofyourbranchnetworkThebranchingboomincommunitycreditunionshas createdmanyunderperforminglocations.Itstimetoputsomerealanalyticsaroundthisarea, includingbranchprofitabilityandstaffingmeasurements. UnderstandandmanageyourI.T.costsThisisthethirdlargestexpenseincreditunions behindstaffandfacilities.MonitoringthesecostsandcompetitivelybiddingandnegotiatingI.T. relatedcontractsforcoresystems,telecom,Internetbanking,billpay,checkprocessingand credit/debitcardsiscritical.

CONCLUSION
Communitycreditunionshaveanimportantroletoplayinthegrassrootsoffinancialservicesin America.However,thecompetitiveenvironmentafterourcountrysGreatRecessionwillbeonethat demandsgreaterstrategicfocus,disciplineandoperatingefficienciesfromtheselocalinstitutions. Allcreditunionsinterestedinlivinguptotheirfullpotentialasanotforprofitcooperativefinancial institutionneedtoensurethatefficiencyplaysamajorroleinthejourney.Leadersneedtotakethefirst stepsatimprovingtheanalyticsanddisciplinearoundefficiencymeasurementswhileinstillinganactive, accountableculturetopursueefficiencyimprovements. Thereisnotonesimplemovethatcreatescreditunionefficiency.Rather,itishundredsofdeliberate anddisciplinedstepsthatwillseparatewinnersandlosersinthenewworldoffinancialservices.

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