Collaborating for SurvivalCollaborating for Survival

Credit Union Association of Credit Union Association of the Dakotasthe Dakotas

2012 Annual Summit2012 Annual Summit

Guy MessickGuy Messickwww.CUSOLaw.com www.CUSOLaw.com

The Function of The Function of CollaborationCollaboration

• Collaborations help credit unions Collaborations help credit unions solve the problems of survival (too solve the problems of survival (too little income and too high little income and too high expenses) expenses) by leveraging scale, by leveraging scale, expertise and efficiencies.expertise and efficiencies.

• Collaboration can help turn Collaboration can help turn problems into opportunities.problems into opportunities.

Collaboration and CUSOsCollaboration and CUSOs

• Credit unions can collaborate Credit unions can collaborate directly or through CUSOs.directly or through CUSOs.

• CUSOs offer the structure to gather CUSOs offer the structure to gather capital and govern an on-going capital and govern an on-going collaboration.collaboration.

• In some cases a CUSO is needed to In some cases a CUSO is needed to legally provide a particular service.legally provide a particular service.

Collaboration KillersCollaboration Killers

• Failure to see the urgency to collaborate…Failure to see the urgency to collaborate…no need to consider changing something no need to consider changing something that has worked for 50 years (assumes all that has worked for 50 years (assumes all industry and external factors remain industry and external factors remain unchanged).unchanged).

• Fear of the unknown…fear of getting out Fear of the unknown…fear of getting out of your comfort zone.of your comfort zone.

• Fear of losing authority or prestige… Fear of losing authority or prestige… authority within a collaboration is shared.authority within a collaboration is shared.

• Lack of expertise or resources. Lack of expertise or resources.

CUSO’s BasicsCUSO’s Basics

• A limited liability company, A limited liability company, corporation (for-profit and corporation (for-profit and cooperatives) or limited partnership cooperatives) or limited partnership in which a credit union has a in which a credit union has a investment or loaninvestment or loan

• Investment and loan limitsInvestment and loan limits– NCUA: (Part 712) Each limit is 1% of NCUA: (Part 712) Each limit is 1% of

paid-in capital and unimpaired surpluspaid-in capital and unimpaired surplus– North Dakota: (13-03-23-06) Each limit North Dakota: (13-03-23-06) Each limit

is 10% of equityis 10% of equity

CUSO BasicsCUSO Basics

• Customer base – primarily credit Customer base – primarily credit unions or members of affiliated credit unions or members of affiliated credit unionsunions

• Singly owned CUSOs, CUSOs multi-Singly owned CUSOs, CUSOs multi-owned by credit unions, multi-owned owned by credit unions, multi-owned CUSOs with some non-credit union CUSOs with some non-credit union ownersowners

• Conflict of interest rules with credit Conflict of interest rules with credit union officials union officials

CUSO Basics - Types of CUSO Basics - Types of ServicesServices

• Financial ServicesFinancial Services– Insurance Agency – Trust Services – Real Insurance Agency – Trust Services – Real

Estate Brokerage - Broker/DealerEstate Brokerage - Broker/Dealer• Operational ServicesOperational Services

– Marketing – Collections – Compliance - Marketing – Collections – Compliance - Internal Auditing – Loan Underwriting and Internal Auditing – Loan Underwriting and Servicing – Originating Mortgage, Student, Servicing – Originating Mortgage, Student, Business and Credit Card Loans – IT Business and Credit Card Loans – IT Services – Management and Personnel Services – Management and Personnel Support – Shared Branching – Disaster Support – Shared Branching – Disaster Recovery - Bulk Purchasing – Vendor Recovery - Bulk Purchasing – Vendor ManagementManagement

Point to Point

A Hub

A Network

CUSOs 1.0, 2.0 and 3.0CUSOs 1.0, 2.0 and 3.0

A new reality A new reality exists…exists…

and it really stinks.and it really stinks.

Popping the Popping the Credit Union Credit Union

Income StreamsIncome Streams

• Anemic Net Interest Margin Anemic Net Interest Margin • Anemic Investment OpportunitiesAnemic Investment Opportunities• Loss of Interchange IncomeLoss of Interchange Income• Reduction in Overdraft Fee OpportunitiesReduction in Overdraft Fee Opportunities

Net Interest MarginNet Interest Margin

Seventy plus years of Seventy plus years of living off the net interest living off the net interest

margin…margin…

……no longer works in no longer works in the 21the 21stst Century. Century.

Dramatic Increase in Operational Dramatic Increase in Operational CostsCosts

• TechnologyTechnology• ComplianceCompliance• New Financial New Financial

ServicesServices• Accounting & Accounting &

AuditingAuditing• CompensationCompensation

Strong Downward Pressures on Strong Downward Pressures on PricingPricing

• Larger Larger competitors have competitors have lower technology lower technology costs per costs per transactiontransaction

• Internet Internet competitors have a competitors have a much lower cost much lower cost structurestructure

No Risk Mantra from the No Risk Mantra from the RegulatorsRegulators

Capital Capital DrainDrain

Was that Was that guy from guy from NCUA here NCUA here again?again?

RESTORE RESTORE CAPTIALCAPTIAL

Before the economic crisis, credit Before the economic crisis, credit unions have been consolidating at a unions have been consolidating at a

rate of over 3% a yearrate of over 3% a year

Source: Callahan’s Peer to Peer Software

What is the future of an What is the future of an industry where…industry where…

• The industry is no longer able to sustain The industry is no longer able to sustain itself in the traditional business model;itself in the traditional business model;

• Competitors have overwhelming Competitors have overwhelming advantages in both the ability to raise advantages in both the ability to raise capital to fund opportunities and obtain capital to fund opportunities and obtain scale to reduce operating costs; scale to reduce operating costs;

• The industry’s customer base is limited; The industry’s customer base is limited; andand

• The industry tends to be risk averse and The industry tends to be risk averse and slow to change?slow to change?

The New RealityThe New Reality

• The financial world has changed forever. The The financial world has changed forever. The old model no longer works.old model no longer works.

• The number of credit unions is shrinking at a The number of credit unions is shrinking at a rate of about one per day.rate of about one per day.

• There is an urgency for credit unions to act There is an urgency for credit unions to act before it is too late.before it is too late.

• How should we react to all of this?How should we react to all of this?

Leave Me AloneLeave Me Alone

Just as members working Just as members working together are stronger, together are stronger, credit unions working credit unions working together are stronger.together are stronger.

NO STRUCTURAL NO STRUCTURAL CONFLICTS CONFLICTS

Owners fix user problems Owners fix user problems and users reap the and users reap the ownership benefits.ownership benefits.

The Power of Owner/UsersThe Power of Owner/Users

Path to Capital Growth and Path to Capital Growth and Sustainability Sustainability

• More income: interest & non-More income: interest & non-interestinterest

• Less operating expenses: cut & Less operating expenses: cut & scalescale

• Acquire capital: merger & Acquire capital: merger & secondary capitalsecondary capital

Collaboration StrategyCollaboration StrategyFor Capital GrowthFor Capital Growth

• More interest income – non-More interest income – non-member loans, higher risk loansmember loans, higher risk loans

• More non-interest income – CUSO More non-interest income – CUSO approved financial services and approved financial services and Incidental Power incomeIncidental Power income

• Reduce cost and increase Reduce cost and increase expertise through collaboration in expertise through collaboration in operational servicesoperational services

• Leverage outside capitalLeverage outside capital

InnovationInnovation

• Credit unions are by nature “in the Credit unions are by nature “in the box” organizations that provide basic box” organizations that provide basic lending and depository services lending and depository services within a tight regulatory framework. within a tight regulatory framework.

• By comparison, CUSOs offer a much By comparison, CUSOs offer a much more innovative and entrepreneurial more innovative and entrepreneurial environment that can put capital to environment that can put capital to use to provide scale to reduce use to provide scale to reduce expenses while increasing expertise.expenses while increasing expertise.

Does collaboration Does collaboration really work?really work?

CUSO Success StoriesCUSO Success Stories

• Open Technology SolutionsOpen Technology Solutions• Land Bound TitleLand Bound Title• CU*AnswersCU*Answers• CUSO Financial ServicesCUSO Financial Services• CU Student ChoiceCU Student Choice• CU RealtyCU Realty• Ongoing OperationsOngoing Operations• MAPS Building CUSOMAPS Building CUSO• Collection Services CUSOCollection Services CUSO• Unity XchangeUnity Xchange

If collaboration is needed for If collaboration is needed for my credit union to survive, my credit union to survive, how do we transform our how do we transform our

business model?business model?

Prepare the SoilPrepare the Soil

Prepare the Prepare the soil for soil for collaboration collaboration to take root. to take root.

Operating a credit union Operating a credit union in a collaborative in a collaborative

environmentenvironment

Credit Union Internal Staff

SharedBusiness Lending

Shared Vendor Management

Shared Compliance

Shared IT

Adopt a Collaborative Adopt a Collaborative MindsetMindset

• Is there anything you will not Is there anything you will not collaborate on (e.g., member facing collaborate on (e.g., member facing services)? A collaborative solution services)? A collaborative solution is considered for all other activity.is considered for all other activity.

• First seek an existing collaborative First seek an existing collaborative solution.solution.

• Second consider forming a Second consider forming a collaborative solution.collaborative solution.

• Third, go it alone.Third, go it alone.

Develop Credit Union Policy Develop Credit Union Policy and Staff to Support and Staff to Support

CollaborationsCollaborations

• Develop a Co-Source Policy for Develop a Co-Source Policy for operational and risk operational and risk management purposes.management purposes.

• Reorganize the management Reorganize the management structure to include a staff structure to include a staff position to implement the policy position to implement the policy (“Co-Source Manager”). (“Co-Source Manager”).

Co-Source PolicyCo-Source Policy

• Set desired benefit objectives.Set desired benefit objectives.• Prioritize the services that will Prioritize the services that will

be co-sourced.be co-sourced.• Identify the criteria for the Identify the criteria for the

selection of co-source partners.selection of co-source partners.• Establish the method of Establish the method of

establishing performance establishing performance criteria.criteria.

Co-Source PolicyCo-Source Policy

• Establish the method of measuring Establish the method of measuring and reporting on the performance of and reporting on the performance of co-sourced services.co-sourced services.

• Establish the method of curing Establish the method of curing deficiencies in the performance of co-deficiencies in the performance of co-sourced services.sourced services.

• Establish specific staff responsibilities Establish specific staff responsibilities and align their performance metrics to and align their performance metrics to promote the success of the co-sourced promote the success of the co-sourced services. services.

Finding Good PartnersFinding Good Partners

• CompatibleCompatible– GoalsGoals– StyleStyle– ResourcesResources– CommitmentCommitment– UrgencyUrgency

• TruthfulTruthful• TrustworthyTrustworthy

CUSO 3.0CUSO 3.0Building a NetworkBuilding a Network

A Peek at A Peek at the Next the Next Generation of CUSOsGeneration of CUSOs

Point to Point

A Hub

A Network

CUSOs 1.0, 2.0 and 3.0CUSOs 1.0, 2.0 and 3.0

$28 Billion of Capacity to $28 Billion of Capacity to TradeTrade

The NetworkThe Network• Collaboration as a means of operations and Collaboration as a means of operations and

not for specific servicesnot for specific services• Transparency of intellectual capital among Transparency of intellectual capital among

the credit unions - share best practicesthe credit unions - share best practices• Share excess capacity and expertise among Share excess capacity and expertise among

credit unionscredit unions• Find the best providers for the job within Find the best providers for the job within

or outside of credit unions – peer ratedor outside of credit unions – peer rated• The Network seeks out opportunity for the The Network seeks out opportunity for the

credit unions – initiative and innovation are credit unions – initiative and innovation are rewardedrewarded

Next Steps: Next Steps: The Challenge of The Challenge of

Change. Change.

Change requires you to…Change requires you to…

• Accept that a collaboration strategy is Accept that a collaboration strategy is essential to the sustainability of credit essential to the sustainability of credit unions. There must be a sense of urgency.unions. There must be a sense of urgency.

• Understand that the benefits of scale Understand that the benefits of scale require the significant revisions your require the significant revisions your business model and that will impact your business model and that will impact your employees.employees.

• Convince some staff, impose your will Convince some staff, impose your will upon others and replace the rest to make upon others and replace the rest to make the necessary changes.the necessary changes.

Change requires you to…Change requires you to…

• Give up some personal control by trusting Give up some personal control by trusting and working with others in a collaborative and working with others in a collaborative model.model.

• Not tolerate mediocrity and reward results.Not tolerate mediocrity and reward results.• Look outside the industry for ideas.Look outside the industry for ideas.• Take on the criticism associated with change.Take on the criticism associated with change.• Experiment with new solutions to old Experiment with new solutions to old

problems. problems. • Get excited about the opportunity to innovate Get excited about the opportunity to innovate

and design new business solutions.and design new business solutions.

Problems cannot be Problems cannot be solved by thinking within solved by thinking within the framework in which the framework in which

the problems were the problems were created.created.

Albert EinsteinAlbert Einstein

And the trouble is, if you And the trouble is, if you don’t risk anything, you don’t risk anything, you

risk even more.risk even more.

Erica JongErica Jong

What do we do now?What do we do now?

• Ignore all this and plan your merger Ignore all this and plan your merger strategystrategy

• Develop a collaboration mindset Develop a collaboration mindset • Network for expertise and ideasNetwork for expertise and ideas• Write down your Top 10 Problems & Write down your Top 10 Problems &

Opportunities and share them Opportunities and share them • Implement some quick successes and Implement some quick successes and

become comfortable with your become comfortable with your partnerspartners

Low Hanging FruitLow Hanging FruitOperational ServicesOperational Services

• MarketingMarketing• Collections / BankruptcyCollections / Bankruptcy• ComplianceCompliance• Internal AuditingInternal Auditing• Loan Processing and ServicingLoan Processing and Servicing• Bulk Purchasing Bulk Purchasing • Excess Staff CapacityExcess Staff Capacity• Vendor ManagementVendor Management

Low Hanging FruitLow Hanging FruitFinancial Services with Financial Services with

Third PartiesThird Parties• Title Insurance Agency Joint VentureTitle Insurance Agency Joint Venture• Investment Services Network Investment Services Network

AgreementAgreement• Property and Casualty Insurance Property and Casualty Insurance

Services Network AgreementServices Network Agreement• Real Estate BrokerageReal Estate Brokerage

Who are you having Who are you having lunch with and lunch with and

when?when?

Discuss Your Top 10Discuss Your Top 10

Problems & OpportunitiesProblems & Opportunities

Transformational times call Transformational times call for transformational changes. for transformational changes.

The risk of doing The risk of doing nothing now exceeds nothing now exceeds

the risk of change.the risk of change.

Are you all in?Are you all in?

Resources on Resources on CollaborationCollaboration

• National Association of Credit National Association of Credit Union Service Organizations Union Service Organizations www.nacuso.org – Annual Conference – Las Vegas May Annual Conference – Las Vegas May

20122012• Guy Messick – Messick & Lauer Guy Messick – Messick & Lauer

PC – PC – 610-891-9000 - 610-891-9000 - gmessick@cusolaw.com www.CUSOLaw.com