mfcu strategic plan 2017-2021 | published march 30, 2017 ... · mfcu strategic plan 2017-2021 |...

MFCU Strategic Plan 2017-2021 | Published March 30, 2017 | missoulfcu.org/strategic-plan

STRATEGIC PLAN Executive Summary

Missoula Federal Credit Union | page 1

ORGANIZATION OF THE STRATEGIC PLAN

Our Approach

Our approach to strategic planning begins with an honest assessment of the challenges facing Missoula Federal Credit

Union (MFCU). We then proceed to analyze various strategic alternatives available to the credit union to overcome

those challenges. We select one of the alternatives as our chosen strategy, discuss the rationale for doing so, and

explain what it means for the credit union. Next, we describe a coherent, mutually reinforcing set of actions that we will

pursue in order to implement the strategy. And, finally, we outline a high level 5-year financial plan that will serve as

both guide and long-term target. In other words, the strategy itself is just one piece of a 4-part Strategic Plan.1 Each of

these 4 parts is discussed in the 4 chapters that follow. Each chapter is summarized here, in this Executive Summary.

Chapter 1: Challenges

In Chapter 1 we describe the critical challenges facing the credit union. MFCU, like any financial institution, faces many

complex and inter-related challenges. To develop effective strategy, we need to simplify this complex reality and

identify certain aspects of the situation as being the most important ones. We focus in on 4 challenges and we argue

that our strategy needs to confront all of these challenges taken together.

The first is scale. MFCU is a mid-sized credit union. Yet the industry as a whole is moving rapidly toward

larger scale in order to take advantage of the benefits that size brings to financial services providers.

The second is local competition. MFCU faces extremely intense local competition from both banks and credit

unions.

The third is demographic. Montana’s population is aging, making it increasingly imperative that the brand,

products and services are capable of attracting and retaining the younger populations that all financial service

providers are fighting to win over.

The fourth is remote fintech competition. In addition to the local competition we also face a growing threat

from remote fintech operators.

Chapter 2: Strategy

In Chapter 2 we describe our strategy and the rationale for selecting it. This is the kernel of the Strategic Plan. If there is

a single place to look for the answer to the question “what is the credit union’s strategy?”… it is here. In a nutshell, we

are pivoting to a values-based strategy. While we are committed to economic efficiency and product innovation, we

will seek to differentiate our brand and member experience based on shared core values. Our members, and consumers

1 This general approach to Strategic Planning is well described by Richard Rumelt in his 2011 book Good Strategy / Bad Strategy.



in general, increasingly want to do business with organizations that share their core values. Money is power, and where

one does his or her banking can become an important expression of his or her values. Engaged employees increasingly

want to work for organizations that share their core values. When a person gets up and goes to work in the morning,

s/he delivers higher levels of productivity and loyalty if s/he feels a common sense of purpose with the organization s/he

works for.

We aim to be best on the question of values-alignment. Competitive on price. Competitive on product. Best on shared

core values. We will stand out as different in a world where financial institutions are often seen as too complex, too

removed from the real economy, and too focused on short-term profit maximization to pay attention to the social,

economic and environmental consequences of their actions.

Our mission is to be a force for good in banking, in the communities we serve, and in the lives of our members. That is

why we exist as an organization. We will execute on that mission by celebrating and rigorously adhering to 4 core

values:

• Together We Own - What we do is rooted in cooperative ownership.

o We believe in cooperating to make banking a force for good. o We are committed to making sound business decisions that are in the interests of our member shareholders. o We steward resources toward long-term sustainability rather than short-term gain.

• Together We Empower - What we do is rooted in ensuring that everyone touched by our work is better

equipped for tomorrow than they were yesterday.

o We believe in empowering our team and our members with access to information, education and decision-making.

o We believe in the power of transparency and simplicity. o We are committed to solving problems and creating opportunities.

• Together We Include - What we do is rooted in being inclusive, not exclusive.

o We believe in inclusion. We seek to include all walks of life in our work. o We welcome diversity and recognize it as critical to our performance.

• Together We Matter - What we do is all about making a difference in the world.

o We believe in delivering impact by acting as a catalyst for positive social, economic and environmental change. o We are committed to allocating resources and transforming our balance sheet to seed this social, economic and

environmental change. o We expect our members and the communites we serve to hold us accountable for making change. We will

measure our impact.

By living our values, we will redefine the role financial institutions play in building thriving, sustainable communities.

That is our vision. That is where we are heading.

Chapter 3: Strategic Action Areas

In Chapter 3 the project work is identified. We outline a set of complementary activities that will be coordinated with

one another to successfully implement the strategy. We describe these activities under four separate “Strategic Action

Areas.” The first and second are concerned with market expansion. The third and fourth focus on the pivot to values-

based banking.



• The first Strategic Action Area is concerned with expanding the market. We have concluded that MFCU must seek to extend its Field of Membership (FOM) in order to break free of market size constraints, continue the drive toward scale, and bring the benefits of credit union membership to a broader audience.

• The second Strategic Action Area is concerned with aligning business operations to support a larger market. A number of things need to change and adapt in preparation for serving a larger market. Our aim is to work intensively on these things in 2017 and 2018 so that we are ready to operate in new markets by 2019.

• The third Strategic Action Area is concerned with aligning internal culture, brand and marketing to support the pivot to values-based banking. While this is a strategic pivot that builds closely on existing MFCU culture and history, it does bring with it the need to proactively evolve culture, brand and marketing to drive the pivot forward and to ensure consistency with the strategy.

• The fourth Strategic Action Area is concerned with aligning business operations and the balance sheet to support the pivot to values-based banking. This will be a long-term, transitional process. We will move slowly and deliberately to ensure that we understand the risks and rewards associated with the operational and balance sheet changes we pursue. But we will move. We will change. And these changes will make resource use progressively more supportive of and consistent with our core values.

Chapter 4: Five Year Financial Plan

Finally, in Chapter 4, we lay out a set of 5-year financial projections. These financial projections are envisioned as a very

high level summary vision of the financial position we would like to see the credit union arrive at 5 years from now, at

the end of 2021. We do not expect to hit every target on all the timelines represented in the Financial Plan. Annual

budgets and actual performance will surely deviate from the Plan. But we will use this 5-year Plan to guide us forward,

discipline our spending, and help us to track progress against long-term financial goals. We aim to continue asset

growth at approximately 7%, and to manage toward annual ROAs in the range of 69 basis points to 77 basis points. A

continuing emphasis on improving our effectiveness as a community lender remains the center-piece of our Financial

Plan. We aim to grow credit union net worth to approximately 10% by the end of the 5-year period, in 2021.

0.69% 0.72% 0.76% 0.76% 0.77%

9.60% 9.70% 9.90% 10.00% 10.10%

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

6,000

2017 2018 2019 2020 2021

$ (THOUSANDS)ROA, Net Income and Net Worth

Net Income Return on Assets Net Worth Ratio

STRATEGIC PLAN Chapter 1: Challenges


THE CHALLENGES FACING MISSOULA FEDERAL CREDIT UNION

Good strategy begins with a diagnosis of the most critical challenges facing MFCU. Our strategy must provide a clear

and creative response to these challenges. In a separate document, “The Challenges Facing Missoula Federal Credit

Union,” we identify 4 challenges as critical and we describe them in considerable detail. Here we summarize those 4

challenges.

Challenge #1 – The importance of scale

Economies of scale are increasingly important in the financial services industry. Rapid consolidation has been taking

place among both banks and credit unions for more than 3 decades. Small banks and credit unions are merging into

larger banks and credit unions. Larger banks and credit unions are becoming larger still. The fact is that these larger

institutions are succeeding at:

• Managing higher rates of client and membership growth;

• Generating higher ROAs; and,

• Operating more efficiently at lower operating expense ratios.

Although challenging trade-offs come with scale - such as standardization across markets and lower levels of

responsiveness to local market conditions - larger credit unions enjoy significant advantages. These advantages

translate to member benefits, such as:

• Operating efficiencies leading to higher offer rates on deposits and lower offer rates on loans;

• Larger scale leading to an ability to acquire higher levels of technology (most importantly, data security, business intelligence, and consumer facing remote delivery channels); and

• Larger scale allowing increases in lending limits to compete in the commercial loan market.

While MFCU has enjoyed solid growth in recent years, we remain a mid-sized credit union, roughly $475 million at the

time of writing. It is almost certain that the credit union will soon bump into limitations on its ability to win additional

market share and continue the drive to efficient scale. MFCU presently serves a membership of approximately 47,000

people. Measured against the total population in our current Field of Membership, our operating market, that is just

greater than 25% of the total population. This presents an enormous challenge to continued growth and defense of our

competitive position in the local market.

Challenge #2 – Increasingly intense local competition

A 25% market share would be difficult to improve upon even in an uncrowded market. MFCU, however, operates in a

very crowded market. Nationally, there is approximately one bank or credit union branch available to every 3,000

people. In our market the number is closer to 2,000. In other words, the population per bank or credit union branch

metric is about 30% lower in our FOM than it is nationally. In addition to the number of branches available to

consumers, the number of individual financial institutions also matters in measuring the intensity of local competition.

There are approximately 11,500 independent banks and credit unions operating in the US. That translates to about one

financial institution for every 28,000 people in the US. If that level of competition carried over into our local market,

there would be 6 or 7 financial institutions. In fact, there are 18.



Moreover, 3 of those 18 financial institutions,

Stockman Bank, Parkside Credit Union and

Horizon Credit Union, are new entrants to the

market. These new entrants are adding

branches, recruiting talent and expanding the

range of options available to local consumers.

The market expansion strategies and resource

commitments that are implied by new entrants

put enormous pressure on their management

teams to win new market share. This leads to

aggressive marketing, pricing and underwriting.

Furthermore, all of our most important prior

competition - First Interstate Bank, First Security

Bank, Opportunity Bank, Farmers Bank, Trail West

Bank, Wells Fargo and US Bank, plus the new entrants mentioned above – enjoy significantly larger markets than does

MFCU. They are able to take advantage of more opportunities and to spread risks over larger markets than can MFCU.

Not only, then, does the size of our local market challenge our ability to continue the drive to scale, so too does the

intensity of competition in the local market make that challenge larger than it would be elsewhere.

Challenge #3 – Demographic trends

Montana’s population is aging. This is partly a result of the relatively large population of baby-boomers moving up the

age distribution. But it is also a function of net migration. A relatively large number of Montana youth emigrate out of

state to find higher paying employment, while a relatively large number of retiring people migrate into the state seeking

the good life in the mountains and

wide open spaces. The state is

projected to see the median and

average age climb by about 5 years

across the next 20 years or so.

This presents MFCU with a third

critical challenge. With Montana

population growth rates expected to

remain well under 1% per year for

the coming 20 years and with the

population age distribution pushing

upward, we can expect intense

financial institution competition to

acquire younger customers or

members and to retain them

through the most profitable years of

the life cycle. Our strategy needs to

speak to this younger demographic.

There are approximately

11,500 independent banks

and credit unions operating

in the US. That translates

to about one financial

institution for every 28,000

people in the US. If that

level of competition carried

over into our local market,

there would be 6 or 7

financial institutions. In

fact, there are 18.



Challenge #4 – “Fintech” competition

The last decade has seen extraordinary growth in the start-up Fintech industry as well as the entry of large, established

technology firms into the consumer payments space. While much of the Fintech industry is still quite small, the

competitive threat is growing. Goldman Sachs, for example, has concluded that Fintech start-ups are expected to siphon

$11 billion in profits away from traditional financial institutions in the immediate future. In ascending order of

importance in terms of the challenges posed to MFCU, Fintech can be broken up into four categories:

• Personal financial management tools (Acorns, Digit, and Mint)

• Payments services (PayPal, Apple Pay, Google Wallet)

• Deposit products (Ally Bank and Simple)

• Lending products (Lending Club, Prosper, Quicken Loans, OnDeck and Kabbage)

Regardless of what strategic pathway a credit union chooses today it cannot ignore the importance of developing

remote delivery channels. Since roughly 2010, more people, particularly young consumers, have been using their

smartphones to check their balances, transfer funds and make payments. The Federal Reserve found that 39% percent

of mobile phone owners used their smartphones for mobile banking in 2014, a rise from 33% in 2013 and 29% in 2012.

While both price and core values influence the spending and loyalty decisions of young consumers, these young

consumers will not ignore technological factors such as ease of use, simplicity and convenience when making those

decisions. We will not be able to compete if we are not good at mobile delivery.

Turning Toward Strategy

Taking these 4 critical challenges together, it becomes clear that our strategy must do 4 things. It must:

1. Enable the credit union to unlock growth constraints and continue the drive toward larger scale;

2. Differentiate the credit union meaningfully from the many bank and credit union competitors it faces;

3. Attract and retain younger generations; and,

4. Articulate a value proposition that confronts increasingly available remote Fintech offerings.

MFCU’s Board of Directors and Executive Team considered 5 distinct strategies, or strategic pathways, as alternative

approaches to confront the critical challenges described above.2 The alternative approaches are described in

considerable detail in a presentation called “Strategic Pathways.” Here we summarize.

• Community-Based – This alternative argued in favor of remaining highly local and about place, putting the

emphasis on Missoula Federal Credit Union. In other words, focus on doing essentially what we do today,

but doing it better and better with each passing year. Focus just on being a great place-based, community

credit union. This pathway was not selected as the best way forward for the following reasons:

o While compelling in that it would be true to our roots, a strictly community-based alternative does

not differentiate the credit union sufficiently from the competition. Local and community-oriented

are precisely the arguments that our local competition build their value propositions around.

o Due to the large market share enjoyed by MFCU and the intensity of the local competition, the

strictly community-based alternative presents a large amount of risk to our long-term financial

2 We also discussed but did not seriously consider a pure “Technology-Based” approach as one of the strategic pathways available to MFCU. This was a conscious decision. While not impossible it is very difficult to see MFCU moving away from its branch infrastructure and labor force toward a more complete commitment to remote delivery channels, including the R&D, coding and programming human resources that technology-based success would require. This would not play to our existing strengths.

https://www.acorns.com/

https://digit.co/

https://www.mint.com/

https://www.paypal.com/home

http://www.apple.com/apple-pay/

https://www.google.com/wallet/

https://www.ally.com/

https://www.simple.com/

https://www.lendingclub.com/

https://www.prosper.com/

http://www.quickenloans.com/

https://www.ondeck.com/small-business-loans-online/

https://www.kabbage.com/



health. The local market is not large enough to sustain continuing growth rates in the 7%-10%

range.

o While potentially compelling to younger generations in its contrariness (little focus on growth), the

limited economic potential would put future, higher cost technological development at risk.

• University-Based – This alternative envisioned the pursuit of deeper integration with the Montana

University System (MUS). Focus would be put on expanding the FOM strategically along these lines,

broadening the geographic base and deepening the credit union’s brand relationship with the university

system. This pathway was not selected as the best way forward for the following reasons:

o While attractive in that it would entail a deep partnership with one of the state’s most important

institutions, the diversity of colleges and universities within the MUS, both in terms of brand and

culture, would present big obstacles to success.

o The evidence from around the country suggests that even credit unions which have had prior

success building on a state university partnership are presently migrating away from these

strategies. This is partly due the changing nature of member acquisition (fewer students choosing

their FI on campus) and partly due to these credit unions seeking to increase opportunities off

campus and embedded in the larger communities they serve.

o Linking the credit union’s well-being to the (political and economic) cycles of another institution

introduces considerable risk.

• Upstream Merger – This alternative argued in favor of seeking a strategic merger into a larger credit union.

The central idea here is that maximum value would be delivered to members by driving as rapidly as

possible toward scale. The drive toward economies of scale would, in theory, increase efficiency and

enhance our ability to compete on the basis of price faster than would any of the other pathways. This

pathway was not selected as the best way forward for the following reasons:

o While our members absolutely do want and deserve competitive prices, they want more than just

that. Pursuing upstream merger just for the sake of greater economies of scale was judged to be

insufficient cause.

o Upstream merger also implies an enormous amount of governance risk. That is, a significant

amount of autonomy is given up by members of the credit union as their voice in the democratic

process is diluted within a larger membership base. This, of course, happens over time with organic

growth. But it happens all at once, dramatically, in an upstream merger.

o Directors concluded that their first responsibility is to articulate a compelling mission and vision, and

to craft and manage the strategy that will best serve that mission and vision. Upstream merger

should be entertained if, and only if, our strategy is then found to be consistent with that of a

strategic merger partner. Upstream merger, in itself, was judged to be too superficial a strategy at

this stage.

• Downstream Mergers – In this alternative, a merger strategy is pursued, but in the reverse direction. That

is, MFCU might position itself as the continuing credit union in a series of mergers with smaller credit

unions. In this way, scale is achieved faster than in the case of organic growth, but not as rapidly as in the

case of an upstream merger. Autonomy, however, is more fully maintained by the existing board of

directors and current members. This pathway was not selected as the best way forward for the following

reasons:



o It was concluded that the pursuit of downstream mergers just for the sake of scale was not sufficient

justification. Merger integration and core system conversions are extremely disruptive to members

and staff.

o As in the case of upstream merger, directors concluded that their first

responsibility is to articulate a compelling mission and vision, and

to craft and manage a strategy that will best serve that mission

and vision. Downstream mergers might then be pursued if, and

only if, our strategy is found to be consistent with that of

potential merger partners. Downstream mergers, in themselves,

would not make for compelling strategy at this stage. But

downstream mergers with credit unions that believe in a values-

based strategy could be quite powerful.

• Values-Based – This alternative argued in favor of developing a strategy in line with the values-based

banking movement. That is, seek to differentiate the credit union by building a brand that is recognized as a

force for good in the banking and credit union industries. This would imply recognizing that we operate in a

low margin business which is increasingly dominated by similar products and pricing and to search for ways

to express the deeper meaning of those products and prices. This would imply going beyond community-

oriented philanthropy to develop business practices, products and services, and a balance sheet that

demonstrates “triple bottom line” impact.

The values-based strategy was selected as the best way forward for MFCU. In the next chapter,

“Strategy,” we explain the reasons for this and what the values-based strategy really means.

STRATEGIC PLAN Chapter 2: Strategy


STRATEGY AS GUIDING POLICY

In Chapter 1 we described the challenges facing MFCU and we outlined a range of strategic pathways available to the

credit union. Here, in Chapter 2, we describe the overall approach that we have selected as the best way forward. This

is the strategy we will employ to confront the critical challenges we face. This is the kernel of the overall Strategic Plan -

the Plan’s guiding policy. The guiding policy provides the guard rails to keep us on the pathway, pursuing a clear and

consistent strategic response to the challenges we face.

What is our strategy?

Our strategy is to surface core values to become the leading edge of our value proposition to members. These core

values will not simply provide a screen to help us avoid activities that are contrary to our beliefs. More importantly, they

will start to define how we organize our business practices, where we allocate resources and

balance sheet impact, and what stories we tell to our members to help them understand

values alignment. Values will not just discourage certain activities, values will also

encourage us forward in pursuit of new opportunities and impact.

This is a values-based strategy.3 It will stand out as different in a world where financial

institutions are often seen as too complex, too removed from the real economy, and too

focused on short-term profit maximization to pay attention to the social, economic and

environmental consequences of their actions. It will take its strength from the fact that

financial institutions play a critically important intermediating role between savers and

borrowers and that, increasingly, these savers and borrowers care about the impact of their

money. It will engage both members and employees more deeply in the life of the credit union.

We recognize that we must always be competitive on price and on product relevance, including the delivery of financial

services through remote mobile channels. Our members both demand and deserve that discipline. But we may not

always be the best in the market on those axes. Scale drives price competitiveness and we are a long way away from

the largest in the market. Technology drives product competitiveness and we are a people and places organization.

Where we will aim to be best is on the question of values-alignment. What does it mean that we will pursue a values-

based strategy? It means that we will seek to build our value proposition around shared core values. Our members, and

consumers in general, increasingly want to do business with organizations that share their core beliefs. Engaged

employees increasingly want to work for organizations that share their core beliefs.

We aim to be best on the question of values-alignment. Competitive on price. Competitive of product. Best on shared

core values. We operate in an industry that is increasingly characterized by similar commodities and thin margins. We

aim to find ways to express the deeper meaning of those products and prices. We aim to go beyond community-

oriented philanthropy to develop business practices, products and services, and a balance sheet that demonstrates

“triple bottom line” impact.

3 A good description of the values-based banking movement is located in UNEP’s “Values Based Banking: Bringing the Voice of the Citizen into Finance. August 2015.



Why is a values-based strategy the best way forward?

All of the strategic pathways considered - community-based, university-based, upstream merger, downstream mergers,

and values-based - had strengths. The values-based approach was selected as the strategic approach with the greatest

potential for success. Five reasons stand out.

• First, the values-based strategy implies anchoring on credit union roots and an existing competitive advantage

enjoyed by MFCU. MFCU, like most credit unions, was born out of a recognition that through not-for-profit,

cooperative organization working class people could come together to improve their own lives as well as the

lives of the communities in which they lived and worked. A values-based strategy can be seen as an extension of

this organizing act. By pooling resources, our members aim to improve not just their own lives, but also the lives

of other members and the communities in which they live and work. It is also the case that MFCU is already

recognized as a financial institution and brand that is trusted to encourage positive social, economic and

environmental change. A values-based strategy builds on this existing competitive advantage.

• Second, consumers are increasingly interested in doing business with businesses that share their core values.

A recent Brookings Institution report found that “millennials overwhelmingly responded with increased trust

(91%) and loyalty (89%), as well as a stronger likelihood to buy from those companies that supported solutions

to specific social issues.”4 Many businesses are waking up to this trend. According to the American Sustainable

Business Council there are now over 200,000 business and 325,000 business executives who identify themselves

as being driven by a mission to create a more sustainable society.5 There are more than 2,000 B Corps operating

globally.6

• Third, people are increasingly interested in working for businesses that share their core values. Millennials

now represent roughly 50% of the global workforce. According to the Deloitte Millennial Survey, this employee

cohort wants more than a paycheck - they want a strong sense of social purpose.7 It is also the case that a

strong sense of social purpose in the work place leads to more engaged employees who deliver higher

productivity, better customer service, and lower turn-over rates.8 The values-based approach presents us with a

powerful opportunity to recruit and retain the very best talent to serve our members in the years to come. It

brings more meaning to the work day, offers more opportunity to our team to connect, emotionally, with the

consequences of their work.

• Fourth, the values-based strategy affords MFCU a very good opportunity for differentiation. We operate in a

market that is saturated by financial institutions, both banks and credit unions. Almost all of these competitors

make a brand case that is about local ownership and community engagement. Our intention is to make local

ownership and community engagement the lowest common denominator. The question we want consumers to

ask is “we know you are local, and we see you are engaged in the community, both of which are fantastic, but

do you share core values with me or not?”

• Finally, fifth, the values-based strategy does not foreclose the possibility of pursuing merger opportunities,

whether upstream or downstream, in the future. Scale is important. Organic growth is a relatively slow way to

build scale. To the extent that we are able to perfect the values-based strategy and build scale by finding like-

minded strategic merger partners we will lift both our impact and efficiency in important ways.

4 Michael Hais & Morley Winograd, How Millennials Could Upend Wall Street and Corporate America, The Brookings Institution, May 2014. 5 American Sustainable Business Council, Overview, http://asbcouncil.org/about-us 6 See the B Corp website for more information https://www.bcorporation.net/ 7 Deloitte, The Deloitte Millennial Survey 2016: Winning Over the Next Generation of Leaders, 2016. 8 Kevin Kruse, Why Employee Engagement? (These 28 Research Studies Prove the Benefits. Forbes, September 2012.

http://asbcouncil.org/about-us

https://www.bcorporation.net/



Mission, values and vision

What, then, are our core values? Why do we exist as an organization and where are we headed? The decision to pursue

a strategy based on core values encouraged us to revisit and refine the credit union’s statements of mission, values and

vision. We pursued this during the latter half of 2016, leading with a series of Board and Executive Team exchanges with

other values-based banks and credit unions, transitioning into 2 months of employee survey work and focus groups, and

then completing the project in a series of special Board meetings. The results are concise, compelling and presented

below. See also Exhibit A for a marketing version.

What is our Mission?

To be a force for good in banking, in the communities we serve, and in the lives of our members.

What are our Values?

1. Together We Own - What we do is rooted in cooperative ownership. o We believe in cooperating to make banking a force for good. o We are committed to making sound business decisions that are in the interests of our member shareholders. o We steward resources toward long-term sustainability rather than short-term gain.

2. Together We Empower - What we do is rooted in ensuring that everyone touched by our work is better

equipped for tomorrow than they were yesterday. o We believe in empowering our team and our members with access to information, education and decision-making. o We believe in the power of transparency and simplicity. o We are committed to solving problems and creating opportunities.

3. Together We Include - What we do is rooted in being inclusive, not exclusive. o We believe in inclusion. We seek to include all walks of life in our work. o We welcome diversity and recognize it as critical to our performance.

4. Together We Matter - What we do is all about making a difference in the world.

o We believe in delivering impact by acting as a catalyst for positive social, economic and environmental change. o We are committed to allocating resources and transforming our balance sheet to seed this social, economic and

environmental change. o We expect our members and the communites we serve to hold us accountable for making change. We will

measure our impact.

What is our Vision?

By living our values, we will redefine the role financial institutions play in building thriving, sustainable communities.

STRATEGIC PLAN Chapter 3: Strategic Action Areas


DESIGNING THE ACTIONS TO BE TAKEN

In this chapter, we outline a coherent set of actions that we will pursue to implement the strategy. Here we provide the

answer to the question: what will we do to begin the pivot to values-based banking? These are all things that lie outside

of the normal day-to-day of providing member service, balancing, originating and servicing loans, etc. They are activities

that come on top of that work. We have grouped these activities into 4 key Strategic Action Areas. They are not

presented in order of importance. They are complementary. The first two are concerned with market expansion. The

third and fourth focus more on the pivot to values-based banking. The 4 Strategic Action Areas are:

1. Expand the Market

2. Align Business Operations to Support a Larger Market

3. Align Internal Culture, Brand and Marketing to support the Pivot to Values-Based Banking

4. Align Business Operations and Balance Sheet to Support the Pivot to Values-Based Banking

Each Strategic Action Area includes a number of tasks that need to be accomplished and an approximate timeline

against which we intend to act. This chapter can be considered our Strategic Operating Plan. This essentially creates a

third key strategic governance tool for our Board of Directors. It allows our Board to monitor credit union progress on

both financial and strategic axes. That is, our overall progress will be monitored by our Board on three levels:

• A high level 5-year Financial Plan – monitored annually

• A middle level 3-year Strategic Operating Plan – monitored quarterly

• A granular 1-year Operating Budget – monitored monthly

A word about our organizational structure

Our management structure is organized around front of house (member-facing & production-oriented), back of house

(post-transaction & employee-facing systems and support), and middle of house (brand & technology) responsibilities.

Front of House Middle of House

Back of House

Consumer

/ Personal

Home

Ownership

Business

Relationships

Brand & Technology

Credit

Administration

Accounting

& Finance

Human

Resources

A large part of our success in the values-based banking strategy will depend on our efforts in the member-facing and

production-oriented parts of our structure, in particular, in the three business lines - Consumer/Personal,

Homeownership, and Business Relationships – as well as in the marketing efforts organized by the Brand & Technology

team. That is not to say that other “back of house” functional lines, like HR, Finance and Credit Administration, don’t

have an important role to play. They certainly do. But it is especially important that we are able to keep the production

lines, the places we have clear sales and services goals, on track with and supporting the pivot to values-based banking.

In other words, our strategy and our production goals must stay connected. To this end, beginning in Q4 2017, each of

these areas will be responsible for drafting a brief (5 pages maximum) strategy statement for the coming year. The

strategy statement will highlight challenges, outline production goals, and discuss the activities and resources that will

be put toward achieving production goals while furthering the pivot toward values-based banking. These will be key

supporting pieces operating in between our 1-year Operating Budgets and our 3-year Strategic Operating Plans. The

standard outline for these annual Business Line Strategy Statements is presented in Exhibit B.



Strategic Action Area #1

Expand the Market

Strategic Action Area #1 is designed to ensure that MFCU does not bump into upper limits on its growth potential due to

a limited extent of market. These activities are designed to address the critical challenge of scale described in Chapter 1

above. Given the small size of MFCU’s current Field of Membership (FOM), the market share of population that MFCU

currently enjoys, and the growing intensity of local bank and credit union competition, it is strategically imperative that

the credit union expand its current FOM. In seeking to expand the FOM, our current operational focus will remain

Montana (that is, we will not seek to cross state boundaries with our current operations). But we may pursue

partnerships and asset acquisition strategies that reach outside of Montana.

The National Credit Union Administration will review and decide our FOM expansion

application. Here we assume an affirmative decision. That affirmative decision will

force us to visit the question of whether or not the credit union’s current name,

Missoula Federal Credit Union, will support or impede our success within a larger

FOM. We will engage outside consultancy and key stakeholders - including

employees, members and potential allies in the larger FOM - to design and execute

the process for deciding whether to pursue new naming and what that name (or

names) should be.

With a new, larger FOM in hand, along with the well-defined strategy described in these pages, we will enter an

important moment to explore strategic merger options throughout the state. This activity could potentially also inform

decisions around naming. Strategic mergers, while complicated and disruptive, might provide more rapid avenues

toward scale economies. However, they would only be pursued with clear agreements on economic benefits to

members as well as high degree of mission, strategy and culture fit between the two organizations.

Expand the Market

2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FOM Expansion – Complete, submit and negotiate approval

Naming – Design, launch and execute process for go-forward naming

Re-naming (if needed) – Signage, websites, stationary and core systems as necessary to accommodate new naming

Strategic Mergers – Explore strategic merger options with other MT CUs

New Branches – As alternative to merger, analyze and decide next branch location

Enter New Market – Either by merger or new branching

As an alternative to strategic merger, we will also explore the possibility of developing new branch infrastructure in new

markets. This research will largely take place in 2018. Whether by way of strategic merger or the organic development

of new facilities, our goal is to be operational in at least one new market in the year 2019.




Align Business Operations to Support an Expanded Market

We have a considerable amount of work to do to prepare the credit union to operate successfully in a larger market.

Strategic Action Area #2 is designed to address that challenge. One critical issue is improving responsibilities and

consistency around operational problem resolution, process documentation, and best practice changes. Currently this is

dispersed and poorly attended to. We will create a new role, Director of Operations, and aim to have made significant

progress around process documentation by YE 2018. This will ensure that expansion into new markets will not be

burdened by a lack of clarity around critical business processes. Assuming that this will be an internal hire, we must also

make provision to back fill a Branch Manager position.

Two of the largest challenges that we face in aligning our internal business operations to support a larger market are a

forced bill pay conversion in 2017 and the need to pursue a new core system, probably in late 2018. The bill pay

conversion is forced on us as the current technology will sunset. The current core, D+H’s UltraData system, is growing

less able to meet operational needs as D+H prioritizes other systems within its portfolio. This is a large project with

significant, long-term implications for credit union success. In the short-term, it will demand considerable staff time and

resources. In the medium-term, it will be disruptive to staff and members (notably, during conversion). In the long-

term, it will have material effects on our cost structure, ability to execute on strategy and overall competitiveness. Key

selection criteria include:

• Viability to serve current and future technology needs, especially with respect to resources committed to R&D, Service Level Support, attention to software development lifecycle and staying current on new technologies;

• Pricing and cost-benefit analysis of hosted servers versus in-house servers;

• Expansion capabilities for mergers or conversions with other CUs;

• Integration to other 3rd party applications (e.g., CUBUS, MortgageBot, SageWorks, FICS, etc.);

• Ability to configure products and services to support values-based impact lending and measurement; and,

• Report management and delivery.

Align Business Operations to Support an Expanded Market 2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Director of Operations – New hire

Branch Manager – New hire

Process Documentation – All critical CU processes given consistent documentation

Bill Pay Conversion – Plan and execute by July 2017

Core System Choice – Launch search and decide on new core

Core Conversion Planning – Allow 15 months of conversion planning, training and communications

Core Conversion – Execute and be through conversion before market expansion

Remote Delivery – Complete functioning channels for account opening, key product additions, and loan application, funding and servicing



We will plan and execute the bill pay conversion during the first two quarters of 2017. Our goal is to launch and

complete the search for a new core during Q1 and Q2 of 2017. That will allow approximately 15 months for conversion

planning, training and members communications to precede a Q4 2018 core conversion. We will then be well-

positioned to enter new markets, whether by way of strategic merger or new branch development in 2019.

Expansion to serve a larger market, especially in the context of the growing remote Fintech competition that was

described in Chapter 1, requires that MFCU is also focused on further developing remote delivery channels. Remote

delivery technologies – primarily, online, mobile and call center - allow members to perform most transactions away

from branch infrastructure. Broadly speaking, these remote delivery technologies fall into the

following categories:

• Ability to establish membership and open accounts remotely;

• Ability to deposit funds and withdraw funds remotely;

• Ability to add sub-accounts and additional products and services remotely; and,

• Ability to apply for loans and receive approvals and funding remotely. See Exhibit C for a table summarizing current remote services availability and providing some additional detail on our goals for filling out the gaps. Timelines could change depending on the decision regarding conversion to a new core and what that means for inter-system compatibility.


Align Internal Culture, Brand and Marketing to Support the Pivot to Values-Based Banking

While Strategic Action Areas #1and #2 will be informed by the strategic pivot to values-based banking, they are areas of

work that would be necessary even without the strategic pivot. They are more about growth than values. On the

contrary, Strategic Action Areas #3 and #4 are entirely driven by the strategic pivot to values-based banking. In a sense,

these are the main levers of the pivot to new strategy.

This Strategic Action Area has an internal element – the internal culture. And it has an external element – the

marketing strategy. These two things come together in what we call our brand – the way our team and our marketing

efforts inform consumers about why and how our unique value proposition is best suited to serve them. They need to

evolve in synch with one another.

The pivot to values-based banking builds on our history and represents an authentic evolution of the credit union value

proposition. The new emphasis on values will be feathered in over the course of 3 – 5 years. It will not appear all at

once as a radical change in direction. Even so, the pivot is significant. It comes with important implications for internal

culture and ways of working, marketing messages that go to market, and, ultimately, the brand. The key implications of

the pivot are:

1. Creative - Creative and marketing messages will need to evolve to place greater, explicit emphasis on core

organizational values. We need to rethink and refine verbal brand platform and messaging and to evolve visual

identity systems to reflect a values-based market positioning. We must prove – through our team, our

marketing, and our execution – that these shared values make MFCU products and services more attractive than

competitive products that may even have superior pricing and/or other features. For the values-driven position

and differentiation effort to succeed, careful, disciplined thought must be given to making clear links between

MFCU values, the member, and the product or service in question.



2. Culture - The culture will be changed by this effort. Internally, some transformation of culture and ways of

working will take place in order to ensure all employees are fully engaged in what values-based banking really

means. Part of this will take place through internal education, engagement and empowerment of employees.

Internal communications around the changing creative and messaging described in (1) above will need to be

stepped up to ensure consistent understanding and delivery of the story that is being told.

Another part of this will need to be executed through changes to ways of working together – standing meetings,

rituals of recognition, recruiting, performance planning, assessment and professional development, even

evolving KPI systems. Ultimately, employees will need to “live the brand” and demonstrate the values both

internally and externally. This will become a major responsibility of supervisors throughout the credit union, not

just of the HR and Brand teams.

3. Target Market - MFCU’s target market is evolving. In line with the strategic pivot it should be thought of as

being comprised of individuals, households, small businesses and community based organizations that share a

core set of values with the credit union. While we are committed to delivering competitive pricing and

products, we primarily aim to deliver a differentiated experience for those who seek to bank with financial

institution that aligns with their values. We also need to recognize that changes must come with operating

across a larger geographic market. This will challenge not just brand consistency, but also current marketing

spend. Marketing spend, and media strategies in general, will need to shift emphasis to accommodate building,

growing and defending the values-based position in an expanding marketplace.

At the same time, we will need to be sensitive to our history and the value that our existing membership brings

to the credit union. Many of these members did not join the credit union on the basis of core values alignment.

They are still owners of the cooperative. We must recognize that this is an evolutionary process, not

revolutionary. We must communicate clearly and lead. And we must listen and stay open to critical feedback.

4. Stories and Measurement - Story-telling about our business operations and impact becomes critically important

in a values-based strategy. Therefore, so too does measurement and goal setting around both of these things.

The success of the strategy depends on our ability to measure social, economic, and environmental impacts that

MFCU delivers and to then share those stories with members and the communities served. MFCU must develop

these metrics, implement simple and consistent reporting, and learn to market this material effectively.

5. Marketing, BI and CRM - Marketing efforts must place renewed focus on engaging more deeply with members

to increase depth of relationships to drive improved lifetime member value. It will be essential to engage with

members about the strategic pivot. In a value-based strategy we will need to think about more than

appropriate product or service targeting. We will need to connect credit union members to the impact of our

activities and adherence to core values. This will change member-facing communications in terms of messaging

and member experience. It can be made to feel like “reinforcing who we already are,” but is an important

opportunity to engage in a conversation with members about shared values. Business Intelligence and CRM

become even more important than they were before, as do all member touch points, such as social media,

statements and notices, events, visibility in the community, email blasts, eNewsletter, etc. All of this must

become increasingly values-consistent.




Align Business Operations and Balance Sheet to Support Pivot to Values-Based Banking

Strategic Action Area #1 is primarily about growth. The actions described are directed at overcoming the challenges

faced by scale and size of market. Strategic Action Area #2 is primarily about ensuring that internal business operations

are in good shape to support activities in a larger market. Strategic Action Area #3 takes aim at transitioning internal

culture, brand and marketing to support the pivot to values-based banking. Strategic Action Area #4, the activities for

which are described in this section, is all about transitioning business operations and our balance sheet to align more

closely with core organizational values. This can be thought of as a key credibility component of the strategy. In other

words, pivoting internal culture, brand and marketing without pursuing operational and balance sheet consistency

would be superficial at best. Sooner or later we would erode credibility.

Here it is important to recognize two things. First, aligning internal business operations and the credit union’s balance

sheet to support the pivot to values-based banking is a long-term project. We recognize both the importance of the

purely economic element of our fiduciary responsibility to members along with the importance of values alignment.

This will be an evolutionary, not a revolutionary process. We aim to make meaningful, incremental gains every year.

And to deliver solid financial performance along the way. Second, we know we will not get everything right. The

combination of cooperative ownership, a values-based pivot, and transparency will open the credit union up to more

Align Internal Culture, Brand and Marketing to Support the Pivot TO Values-Based Banking

2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Creative Refresh – Decide the creative campaign that will start the strategic pivot

Launch Creative Refresh – Roll out new creative

Annual Supervisor Training Begins – On strategy and employee mission and values workbook.

Introduce Employee Mission & Values Workbook – Describes strategy and aids performance planning and appraisal

Annual Shareholder Meeting –Introduce and reinforce values in and around annual shareholder meetings

Animated Strategy Video – Roll out with annual meeting. Internal and external audiences.

eNewsletter – Launch a quarterly eNewsletter targeting members and outside stakeholders

Engagement Measurement Program – Develop and implement tool to track staff engagement in the strategy

BI and CRM Plan – Executive Team to review and approve a new BI and CRM plan

Social Media Plan - Executive Team to review and approve a new social media plan

Marketing Plan – Marketing plan approved by Executive Team annually in concert with budget and business line plans



thorough scrutiny and challenging conversations about the consistency between words and actions. We will stay open

to this criticism. We will welcome it. We will be open and honest about the fact that this is a learning process.

Internal Business Operations

Strategic Action Area #4 is a 2-part component of the plan. Part 1 addresses the need to align internal business

operations with the pivot toward values-based banking. It is reasonably straightforward to define our core

organizational values. But it will be very challenging to objectively measure the extent to which our internal business

operations align with those core values, to set goals for improving alignment, and, in turn, to transparently share these

things with our membership and the communities we serve. It may also become important to compare our

performance to that of competing banks and credit unions.

To deal with this difficulty, we will take advantage of the assessment and scoring tools already developed by the B Corp

community.9 B Corps are for-profit companies certified by the nonprofit B Lab. Today, there is a growing community of

more than 2,000 Certified B Corps operating globally. Collectively, B Corps lead a growing global movement of people

using business as “a force for good.” B Corp certification follows on the successful assessment of the degree to which

the business in question meets standards of social and environmental performance, accountability, and transparency.

While the federal, not-for-profit charter currently prevents US credit unions from becoming certified as B Corps, the

assessment tool is still relevant and available. The assessment is consistent with MFCU values. We will not find another

tool available that is as well-developed or recognizable. Summarizing, the four key areas covered by the assessment

questions include:

9 Two publications will be helpful to readers. The first is Ryan Honeymoon’s Improving Social and Environmental Sustainability: A Credit Union Assessment and Comparison, published by Filene. The second, also by Ryan Honeymoon is called The B Corp Handbook: How to Use Business as a Force for Good, published by Berrett-Koehler Publishers in 2014.

Governance

Mission and engagement Governance structure

Transparency

Workers

Compensation and wages Benefits

Training and education Job Flexibility and corporate culture

Management and worker communication

Community

Suppliers and distributors Local involvement

Diversity Job creation

Civic engagement and giving

Environment

Land Office Plant

Outputs

https://www.bcorporation.net/



Starting in Q4 of 2017 MFCU will complete the assessment and score itself using the B Corp assessment tool. The score

will be reported to the Board of Directors. Board and Executive Team will then set projects and goals for improvement

to take place during the subsequent year.

Align Internal Business Operations with Pivot to Values-Based Banking

2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

B Corp Assessment – Complete the assessment based on YE 2016 data to establish the staring score

Re-Assess – Set projects and goals for scoring improvement


Balance Sheet

Part 2 of Strategic Action Area #4 addresses the need to align the credit union’s balance sheet with the pivot toward

values-based banking. MFCU is approaching a balance sheet of half a billion dollars. The balance sheet is primarily

funded by member deposits and cooperatively owned equity. Assets take the form of loans, investments, cash and fixed

assets. Assets are where we put our members’ money to work. This is where we have the greatest potential to deliver

impact. It is also where we have the greatest potential to differentiate ourselves from the local competition. To the

extent that we can begin to demonstrate the impact that member deposits make in the communities we serve our value

proposition will become stronger and more tangible.

Here it is important to recognize that the current balance sheet of MFCU exhibits a relatively low loan to asset ratio.

Driving the loan to asset ratio upward has been a central strategic objective of MFCU for three years prior to this

Strategic Plan, and it remains a central strategic objective going forward. While the low deployment pinches profitability

it also opens some opportunities to switch toward a more values-based balance sheet. In the long-term this will be

achieved by organic loan growth. In the short- and medium-term it could be achieved by a more aggressive effort to

acquire loan participations, purchase whole loans, and/or retain conforming mortgages. The search for the optimal

balance among these three approaches to achieving more rapid loan growth will be the subject of regular analysis and

reporting from management to our board of directors.

Traditionally, we measure the balance sheet in terms of economic value, profitability by type of asset class, interest rate

risk, concentration risk, liquidity risk, leverage, etc. The pivot to values-based banking asks us to measure our balance

sheet along other, new axes as well.

• Where do our assets reside geographically?

• To what extent do our assets further credit union values?

• When those assets do further credit union values, how do we weight their impact?

• How do we methodically, safely, and responsibly increase the proportion of our balance sheet that is furthering

credit union values and delivering meaningful impact?

In many ways, this is where the rubber hits the road with respect to our strategy. We not only want to ensure that our

lending and investment activity does no harm, we also want to those activities to be a force for good, delivering the

kinds of positive social, environmental and economic change that are a part of our credit union values. This is much

http://b-lab.force.com/bcorp/PrintImpactAssessment?id=a03C000000OCntvIAD



easier said than done. It will take time and great care. Step one is determining how we will measure impact on the

balance sheet. Step two is about setting goals for steady, responsible balance sheet transformation. Step three is about

regular measurement of our progress and transparency around results. These will all be challenging steps.

Fortunately, we have allies in the values-based banking movement that have taken these steps before us. To begin this

work we will rely heavily on the Global Alliance for Banking on Values (GABV) and some of its member banks and credit

unions. GABV - an independent network of banks and credit unions using finance to deliver sustainable economic, social

and environmental development - has developed a scorecard to measure banking impact. Unlike the B Corp Assessment

described above, it is primarily focused on balance sheet impact. It is designed as the world’s first banking solution for

qualitatively and quantitatively measuring the economic, social and environmental impact of banks, with a focus on

those that operate according to GABV’s Principles of Sustainable Banking. These principles are consistent with MFCU

core values. There are three key measurement concepts underlying the GABV Scorecard:

• Money at Risk Exposures - To a large degree the value that a bank delivers is determined by its management of

money at risk exposures.

• Real Economy vs. Financial Economy - A key differentiating factor among banks is relative exposure to the real

economy and the financial economy.

• Triple Bottom Line - Further differentiation can be seen by exposure to individuals and enterprises delivering

social empowerment, environmental regeneration and economic resiliency.

Bank and credit union members of GABV have used and adapted the GABV scorecard to meet the specific needs of their

institutions. We will work with these partners to study the GABV scorecard and institutional adaptations with the goal

of agreeing to the methodology in Q4 2017, and then measuring our YE balance sheet and setting performance goals for

each subsequent year starting in Q1 2018. As with internal business operations, balance sheet impact metrics will be

reported to the Board of Directors annually. Board and Executive Team will then set projects and goals for improvement

to take place during the subsequent year.

Given MFCU’s current organizational structure and the day-to-day demands already

in place, we will be challenged to dedicate existing resources to exploring new

impact markets, designing products and services to meet the needs of those

markets, and developing the network relationships necessary to build brand and

pipeline in those markets. To overcome this challenge, we will create and hire into a

new position tentatively called Director of Impact Market Development. This will

not be a lending position and it will not be a supervisory position. It will be a

position dedicated to research and analysis of potential new impact markets,

product and service development to serve these markets, and networking and

business development activities to fulfill them.

http://www.gabv.org/

http://www.gabv.org/about-us/our-principles



Align Balance Sheet with Pivot to Values-Based Banking 2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Balance Sheet Impact Measurement – Study competing approaches

Impact Measurement Proposal – Board approval of methodology



Hire Director of Impact Market Development

R & D Green Building Impact – Report out to board and start building internal capacity and external networks

New Markets R & D Activity – Report out to board on range of possible next impact steps: e.g., Tribal Impact, Veterans Impact, Women Owned Business Impact, Cooperative Business Impact, Sustainable Agriculture Impact … etc.

STRATEGIC PLAN Chapter 4: Five Year Financial Plan


A 5-YEAR FINANCIAL PLAN SUPPORTS OUR STRATEGY

We aim to continue asset growth at approximately 7%, and to manage toward annual ROAs in the range of 69 basis

points to 77 basis points. A continuing emphasis on improving our effectiveness as a community lender remains the

center-piece of our Financial Plan. In this way, we aim to grow credit union net worth to approximately 10% by the end

of the 5-year period, in 2021.

These financial projections are envisioned as a very high level summary vision of the financial position we would like to

see the credit union arrive at 5 years from now, at the end of 2021. We do not expect to hit every target in the plan on

the timelines elaborated here. In fact, as mentioned in Chapter 4, the financial plan has the longest time horizon of the

3-strategic planning and management tools we will use during the plan period. To repeat, there is:

• This high level 5-year Financial Plan – monitored annually

• A middle level 3-year Strategic Operating Plan – monitored quarterly

• A granular 1-year Operating Budget – monitored monthly

The 5-year Financial Plan sets up some important long-term targets for improving on the economic strength of the credit

union. It should be seen as an anchor against which adjustments to our 1-year Operating Budgets and 3-year Strategic

Operating Plans should be considered. To the extent that we pick up anchor and drift from the targets and trends

outlined in the 5-year Financial Plan we may arrive at a different destination.

The Financial Plan is presented in three parts, each with numeric tables and narratives describing assumptions:

• Liabilities, Interest Expense and Net Worth Projections

• Asset and Interest Income Projections

• Non-Interest Income and Expense Projections

0.69% 0.72% 0.76% 0.76% 0.77%

9.60% 9.70% 9.90% 10.00% 10.10%

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

6,000

2017 2018 2019 2020 2021

$ (THOUSANDS) ROA, Net Income & Net Worth




Liabilities, Interest Expense & Net Worth Projections 2017 2018 2019 2020 2021

Share Drafts

132,402 142,994 154,434 166,789 180,132

Regular Shares

202,490 218,689 236,184 255,079 275,486

Relationship Shares

334,892 361,684 390,618 421,868 455,617

% Assets

67.8% 68.6% 69.4% 70.2% 70.9%

Average Balance

322,489 348,288 376,151 406,243 438,742

Expense (30/360)

179 228 284 347 419

Cost of Funds

0.06% 0.07% 0.08% 0.09% 0.10%

Money Markets, HSAs

53,265 54,330 55,416 56,525 57,655

Certificates & IRAs

41,277 42,102 42,944 43,803 44,679

Borrowings, Brokered

7,821 7,821 7,821 7,821 7,821

Rate Sensitive Funds

102,363 104,253 106,182 108,149 110,156

% Assets

20.7% 19.8% 18.9% 18.0% 17.1%

Average Balance

101,436 103,308 105,218 107,166 109,153

Expense (30/360)

1,159 1,241 1,458 1,753 2,058

Cost of Funds

1.14% 1.20% 1.39% 1.64% 1.89%

Total Funding

437,255 465,937 496,800 530,017 565,773

Average Balance

423,925 451,596 481,369 513,409 547,895

Expense

1,338 1,469 1,742 2,100 2,477

Cost of Funds

0.32% 0.33% 0.36% 0.41% 0.45%

Other Liabilities

9,253 9,871 10,538 11,256 12,030

% Assets

1.9% 1.9% 1.9% 1.9% 1.9%

Net Worth

47,622 51,310 55,459 59,896 64,714

Net Worth Ratio

9.6% 9.7% 9.9% 10.0% 10.1%

Total Liabilities & Equity

494,130 527,117 562,798 601,169 642,517



Key Assumptions - Liabilities, Interest Expense & Equity Projections

Relationship Shares – Like many financial institutions, the credit union has been experience a very significant change in the composition of its funding as rate sensitive funding, especially term certificates, run off and are replaced by relationship shares, namely checking and saving accounts. Our projections assume that this trend will continue through the plan period, but that it will slow. Relationship shares are projected to increase as a proportion of total assets from about 68% in 2017 to 71% in 2021. Both saving and checking balances are projected to grow at approximately 8% per year, very much in line with our recent experience where the growth rate has been almost 10% averaged across the last three years. Cost of Relationship Shares – In general, we make the simplifying assumption that interest rates in the macroeconomy remain unchanged during the 5-year period in question. However, to add an element of conservatism into the financial projection we assume that the cost of relationship shares will increase from 0.06% to 0.10% during the plan period. This gives us some modest room to create economic incentives aimed at retaining relationship shares should we need to rethink and restructure account offerings. Rate Sensitive Funds – We also project increasing balances in MMAs, Term Certificates and IRAs at an average rate of 2% per year. This is somewhat at odds with recent history, especially in the case of Term Certificates, although the rate of decline in rate sensitive balances has slowed markedly in the last year. Here, however, we are suggesting a conscious decision to begin to take action to ensure that we hold some minimal level of rate sensitive funding. Cost of Rate Sensitive Funding – Accordingly, we assume that the cost of funds for rate sensitive funding will climb across the plan period from 1.14% in 2017 to 1.89% in 2021. Total Cost of Funds – The above assumptions drive total cost of funds upward across the plan period from 0.32% in 2017 to 0.45% in 2021. In the context of an overall assumption of rates unchanged in the macroeconomy, and declining loan and surplus funds yields on the asset side of the balance sheet, this conservative assumption about the cost of credit union liabilities gives us some room to maneuver to retain funding and continue balance sheet expansion. Asset Growth – The asset growth resulting from these funding assumptions is approximately 7% per year, consistent with recent experience. Net Worth Growth – The asset composition and asset yield assumptions, taken along with additional assumptions about loss rates, allowance levels, non-interest income and non-interest expenses that are described below, all result in net worth growth that modestly exceeds asset growth, pushing the net worth ratio upward from 9.6% in 2017 to 10.1% in 2021.

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2017 2018 2019 2020 2021

$ (THOUSANDS) Liabilities & Net Worth

Relationship Shares Rate Sensitive Funds Other Liabilities

Net Worth Cost of Funding



Asset & Interest Income Projections 2017 2018 2019 2020 2021

R/E First

38,892 51,849 65,094 78,657 92,568

R/E Second

15,448 16,993 18,693 20,562 22,618

Total R/E

54,340 68,842 83,787 99,219 115,186

% Loans

25.2% 27.1% 28.5% 29.5% 30.3%

New Vehicle

11,405 12,317 13,302 14,367 15,516

Used Vehicle

47,626 51,436 55,551 59,995 64,795

Total Vehicle

59,031 63,753 68,854 74,362 80,311

% Loans

27.4% 25.1% 23.4% 22.1% 21.1%

Total Visa & Unsecured

35,212 38,733 42,606 46,867 51,553

% Loans

16.4% 15.3% 14.5% 14.0% 13.6%

Total MBL & Other Loans

66,743 82,356 98,537 115,343 132,837

% Loans

31.0% 32.5% 33.5% 34.3% 35.0%

Total Gross Loans

215,326 253,684 293,784 335,790 379,887

% Assets

43.6% 48.1% 52.2% 55.9% 59.1%

Average Balance

196,941 234,505 273,734 314,787 357,839

Income (30/360)

10,796 12,851 14,771 16,602 18,530

Loan Yield

5.48% 5.48% 5.40% 5.27% 5.18%

Loan Loss Reserve

4,612 5,194 5,738 6,241 6,701

Multiple of Net Charge-Offs

4.88x 4.58x 4.37x 4.15x 3.94x

% Loans

2.14% 2.05% 1.95% 1.86% 1.76%

Surplus Funds Balance

248,166 237,556 227,226 217,178 207,401

Undivided Earnings

2,999 6,687 10,807 15,219 20,004

Total Surplus Funds

251,165 244,243 238,033 232,397 227,405

% Assets

50.8% 46.3% 42.3% 38.7% 35.4%

Average Balance

254,938 247,670 241,092 235,163 229,836

Income (30/360)

4,428 4,144 3,913 3,699 3,562

Surplus Funds Yield

1.74% 1.67% 1.62% 1.57% 1.55%

Non-Earning Assets

32,251 34,384 36,719 39,223 41,927

% Assets

6.5% 6.5% 6.5% 6.5% 6.5%

Total Assets

494,130 527,117 562,798 601,169 642,517



Key Assumptions - Asset & Interest Income Projections:

Loan Balance Growth – During the 2014 – 2016 period the credit union averaged approximately 12% annual growth in outstanding loan balances. We make three key assumptions about the growth of outstanding loan balances during the 2017 – 2021 period.

• The first is that growth from originations in all main categories, with the exception of new and used vehicles, will average 10% per year, a slightly more conservative positon than we have realized recently.

• The second is that growth from originations in the new and used vehicle categories will average 8% per year, a significantly more conservative position than we have realized recently.

• The third is that we will participate more actively in whole loan purchase and participation markets during the 2017-2021 period than we have in recent years. Our focus from 2014-2016 has been on internal change to reignite the credit union’s organic loan origination engines. We have done a good job in that area. Yet the loan to asset ratio is only just barely inching upward. In order to drive that ratio upward more rapidly and to generate the earnings that will be necessary to support expansion we are setting a target of $20 million per year in whole loan purchases or participations (that is, totaling $100 million across 5 years). To the extent that originations in new markets in the newly expanded FOM are able to off-set this purchase and participation target the $100 million may decrease.

Here it is important to reiterate that the current balance sheet of MFCU exhibits a relatively low loan to asset ratio.

Driving the loan to asset ratio upward has been a central strategic objective of MFCU for three years prior to this

Strategic Plan, and it remains a central strategic objective going forward. While the low deployment pinches profitability

it also opens some opportunities to switch toward a more values-based balance sheet. In the long-term this will be

achieved by organic loan growth. In the short- and medium-term it could be achieved by a more aggressive effort to

acquire loan participations, purchase whole loans, and/or retain conforming mortgages. The search for the optimal

balance among these three approaches to achieving more rapid loan growth will be the subject of regular analysis and

reporting from management to our board of directors.

Loan Yield – In general, we make the simplifying assumption that interest rates in the macroeconomy remain unchanged during the 5-year period in question. Our projections for offer rates and yields in the R/E Second, New Vehicle, Used Vehicle, Credit Cards and Unsecured loans remain constant through the loan period. However, in the R/E First (Held) and MBL/Other categories, where we expect to add participations and purchase activity to augment our organic originations we project declining offer rates and yields. The total yield on the loan portfolio declines during the plan period from 5.48% to 5.14%.

Loan Type Loan Yields 2017 2018 2019 2020 2021

R/E First (Held) 3.67% 3.60% 3.55% 3.50% 3.45%

R/E Second 5.47% 5.47% 5.47% 5.47% 5.47%

New Vehicle 4.41% 4.41% 4.41% 4.41% 4.41%

Used Vehicle 4.25% 4.25% 4.25% 4.25% 4.25%

Credit Cards & Unsecured 9.33% 9.33% 9.33% 9.33% 9.33%

MBL & Other 5.23% 5.20% 5.15% 5.10% 5.05%



Loan Loss Reserve – The credit union’s allowance for loan losses is presently about 2.24% percent of outstanding loan balances (January 2017). The coverage ratio (size of allowance relative to all loans 60 days past due and greater) is nearly 164%. Calculated on a 24-month run, the net charge off to average loans ratio is 0.41%. By all standard measures MFCU enjoys a well-funded allowance for loan loss reserve. In developing 5-year financial projections, 2017-2021, we make the assumption that we will run net charge off to average loans at a ratio of 0.45%. We then allow the total allowance balance to shrink back relative to total loans from the current 2.24% to 1.76% at the end of the plan period. Surplus Funds Balance – Resulting from our assumptions about asset growth, loan originations, and loan purchases and participations, it is expected that surplus funds balances will decline across the plan period from approximately 60% today to about 36% at the end of 2021. We make the conservative assumption that surplus funds yield will decline during the period from 1.74% in 2017 to 1.55% in 2021. This is consistent with our rates unchanged assumption in that it captures the likelihood of higher yield securities running off and funds being reinvested into lower yield alternatives. Non-Earning Assets – We make the conservative assumption that non-earning assets, the largest part of which is fixed assets, remain flat at 6.5% during the plan period. That allows for non-earning assets to expand by almost $10 million over the 5-year plan period. We do not plan large scale branch expansion during the period, primarily because we do not envision the need to mobilize significant new streams of deposits. We will, however, need to invest in core technology to continue to improve remote delivery channels and we will likely invest in modest branch facilities and/or lease-hold improvements to house new staff in new markets. The constant ratio of non-earning assets to total assets, which allow an increase of almost $10 million across the plan period, allows for these investments. As do assumptions about operating spend, discussed below.

3.00%

3.10%

3.20%

3.30%

3.40%

3.50%

3.60%

3.70%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2017 2018 2019 2020 2021

$ (THOUSANDS) Asset Composition & Yield

Loans Loan Loss Reserve Surplus Non-Earning Assets Asset Yield



Non-Interest Income & Expense Projections 2017 2018 2019 2020 2021

Net Interest Income

13,886 15,526 16,942 18,200 19,615

% Assets

2.90% 3.04% 3.11% 3.13% 3.15%

Fee Income

1,880 1,889 1,898 1,908 1,918

Other Operating Income

5,323 5,473 5,628 5,786 5,949

Non-Interest Income

7,203 7,362 7,526 7,694 7,867

% Assets

1.50% 1.44% 1.38% 1.32% 1.26%

Net Revenue

21,089 22,888 24,468 25,895 27,482

% Assets

4.40% 4.48% 4.49% 4.45% 4.42%

Personnel Expense

8,297 8,754 9,538 10,060 10,613

Non-Personnel Expense

7,805 8,615 8,787 9,245 9,726

Total Operating Expense

16,103 17,369 18,325 19,305 20,339

Efficiency Ratio

76.4% 75.9% 74.9% 74.6% 74.0%

Net Charge-Offs

886 1,055 1,232 1,417 1,610

% Avg Loans

0.45% 0.45% 0.45% 0.45% 0.45%

Provision Expense: Net Chg-Offs

886 1,055 1,232 1,417 1,610

Provision Expense: Loan Growth

624 582 543 503 461

Provision for Loan Loss Expense

1,510 1,637 1,775 1,920 2,071

Operating Net Income

3,476 3,882 4,368 4,670 5,072

Philanthropy (5% of Net Income)

174 194 218 234 254

Net Income

3,302 3,688 4,150 4,437 4,818

Return on Assets

0.69% 0.72% 0.76% 0.76% 0.77%



Key Assumptions - Income and Expense Projections

Net interest Income – The assumptions that drive net interest income are described in the two preceding sections. Changing asset composition and our assumptions about asset growth and asset yields combined with changing liabilities compositions and our assumptions about funding growth and cost of funds result in a steadily improving net interest margin. NIM has improved from 2.34% in 2014 to 2.75% in 2015 to 2.84% in 2016. We project that improvement will continue, increasing from 2.90% in 2017 to 3.15% in 2021. Non-Interest Income – The credit union has experienced average annual growth rates of approximately 2.4% in the non-interest income categories, Fee Income and Other Operating Income, during the most recent 3-year period. We make two independent assumptions about the growth rates of these two non-interest income streams. First, we assume that Fee Income will grow at a constant rate of 0.50%. This is a conservative assumption that captures overall growth (membership growth is approximately 4%) and our intention of limiting and possibly even reducing fee income derived from overdraft fees. Second, we assume that Other Operating Income will increase at a constant rate of approximately 2.8%. This captures non-interest income growth in a couple of key areas where we are investing and driving revenue,

notably interchange income and mortgage servicing income. Taken together, the assumptions about growth rates in Fee Income and Other Operating Income result in total non-interest income growth of 2.2% per year in the 2017-2021 period, just lower than the most recent 3-year experience. This also results in the conservative assumption that non-interest income as a proposition of total assets declines across the plan period from 1.50% in 2017 to 1.26% in 2021.

Personnel Expenses – Total employee compensation has increased at an average rate of approximately 3% during the most recent 3-year period, 2014-2016. Our projections for the plan period, 2017-2021 allow for a higher rate of increase in personnel expenses. The projected increases average 5.5% except for 2019 at 8.9%, which is larger in order to put new staff into new markets. Our working assumption is that this FOM expansion proposal will be approved in the first half of 2017. We will take time in 2017 and 2018 to put expansion pieces into place within the credit union: all staff cultural immersion around new strategy, naming of the credit union, larger market marketing practices, supporting technology, etc. We will also use that time period to explore whether there are strategic merger partners in Montana that would be interested in pursuing a combination. Depending on the outcome of those conversations, we will be ready to deploy new staff into one new market in the year 2019. It is unlikely that we will need to mobilize significant amounts of new deposits. Our plan will be a limited office facility, with leasehold improvements, and at least two lenders joining our Real Estate and MBL teams but operating from the new market. Thus, in addition to the constant rate of personnel expense increases of 5.5% per year, we budget new spending of $300K in 2019, which later years continue and build on at the normal rate of 5.5%.

2.90%

2.95%

3.00%

3.05%

3.10%

3.15%

3.20%

0

5,000

10,000

15,000

20,000

25,000

30,000

2017 2018 2019 2020 2021

$ (THOUSANDS)

Income & Margin

Net Interest Income Fee Income

Other Operating Income Net Interest Margin



Non-Personnel Expenses – Total non-personnel operating expenses have increased at an average rate of approximately 4.8% during the most recent 3-year period, 2014-2016. Our projections for the plan period, 2017-2021, allow for a higher rate of increase in non-personnel operating expenses. The projected increases are 5.2%, except for 2018 at 10.3% and 2019 at 2.1%. The reason for the large jump upward in 2018 is to allow for the possibility of renaming following approval of this FOM expansion proposal ($200K) and to allow for technology enhancements which could include a core system conversion to support expansion ($200K). These are treated as one-time expenditures. In addition, we assume that we will add incremental new technology spending (to allow for possibility of new core) of $150K per year in years 2019 – 2021, with all other non-personnel operating expenses running at a rate of increase of 2.1%, 5.2% and 5.2% respectively. Provision for Loans Losses – The credit union’s allowance for loan losses is about 2.24% percent of outstanding loan balances at the start of the plan period. The coverage ratio (size of allowance relative to all loans 60 days past due and greater) is nearly 164%. Calculated on a 24-month run, the net charge off to average loans ratio is 0.41%. By all standard measures MFCU enjoys a well-funded allowance for loan loss reserve. We make the conservative assumption that we will run net charge off to average loans at a ratio of 0.45%. We then allow the total allowance balance to shrink back relative to total loans from the current 2.24% to 1.74% at the end of the plan period. These assumptions drive a provision for loan losses expense that increases approximately 8.2% per year during the plan period, 2017-2021. The size of the allowance at the end of the period remains 3.94 times the size of expected annual net loan losses in 2021. Philanthropy – MFCU has a long history of community philanthropy. Our intention is to continue and to expand that tradition as we grow and expand our market reach. Our financial projections set the size of that intention at 5% of net operating income each year, increasing from $174K in 2017 to $254K in 2021. This will be an important component of impact, relationship building and brand development in new markets. Return on Assets – The credit union has enjoyed a steadily increasing operating ROA (netting out non-operating gains), rising from 33 basis points in 2014 to 64 basis points in 2015 to 73 basis points in 2016. The assumptions and net income results described above drive the ROA projections from 69 basis points in 2017 to 77 basis points in 2021.

72%

73%

74%

75%

76%

77%

0

5,000

10,000

15,000

20,000

25,000

2017 2018 2019 2020 2021

$ (THOUSANDS) Expenses & Efficiency

Personnel Expense Non-Personnel Expense

Provision Philanthropy

Efficiency Ratio

0.69% 0.72% 0.76% 0.76% 0.77%

9.60% 9.70% 9.90% 10.00% 10.10%

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

6,000

2017 2018 2019 2020 2021

$ (THOUSANDS)ROA, Net Income & Net Worth




PLAN END

STRATEGIC PLAN Exhibits


A. MISSION, VALUES AND VISION



B. BUSINESS LINE STRATEGY ALIGNMENT

Annual Business Line Strategy Statement Outline Consumer / Personal Homeownership Business

Relationships Brand & Technology

Production & Growth

• What are this business line’s loan origination and outstanding balance goals?

• What are this business line’s deposit mobilization goals?

Plan to support the business lines

Strategy • What are the main challenges faced by this business line?

• How will this business line confront those challenges while furthering overall MFCU strategic goals of pivoting to values-based banking?

• How will we measure success?


Operations • What new or enhanced personnel capabilities are needed to execute of production, growth and strategy?

• What new or changed infrastructure, systems or technology are needed?

• What new or changed product, policy or procedures are needed?




C. REMOTE SERVICES AVAILABILITY

Remote Financial Services Availability Account to Account Transfers Now

Mobile Check Deposits Now

Peer to Peer Transfers Now

Business Multi User Authentication Now

Bill Pay Now

Enhanced Account Alerts Now

Multifactor Authentication Now

Consumer Loan Applications Now

Secure File Transfers (SFTP Services) Now

Stop Payments Now

Check Orders Now

Direct Deposit Now

Home Loan Applications Now

Secure Message Services Now

Card ordering and management Now

Telephone Banking Now

Student Loan Applications Now

Indirect Auto Dealer Applications Now

SMS Text Communication Limited Availability

Digital and Online Signatures Limited Availability

Online Chat Now

Business ACH 3rd Quarter 2017

Business Payroll 3rd Quarter 2017

Enhanced Business Loan Applications 4th Quarter 2017

Auto Decisioning for Consumer Loans 1st Quarter 2018

Card Management Tools 2nd Quarter 2018

Online Account Opening 3rd Quarter 2018

mfcu strategic plan 2017-2021 | published march 30, 2017 ... · mfcu strategic plan 2017-2021 |...

Documents