Trendwatch 4Q The Annual Report for the Industry. Data for December 31, Call Date: February 14, Sponsored by:

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1 Trendwatch 4Q 2018 The Annual Report for the Industry Data for December 31, 2018 Call Date: February 14, 2019

2 Welcome! When you join the event, you should automatically be connected to the audio broadcast with your computer. To listen by phone, please dial , then input the access code To help you follow along with TrendWatch, earlier today we sent the presentation slides for the event to the address you used to register for TrendWatch. We will also send you a copy of slides after the event.

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7 In-School Refinance Custom Grad Counseling Edmit FutureFuel Marketing Performance Compliance Empowering the next generation of members for life-long success studentchoice.org/creditunions

8 Today s Lineup Market Update Jason Haley, Managing Director, Investment Management Group, ALM First 2018 Credit Union Trends & A Decade of Credit Union Momentum Jay Johnson, Partner, Callahan & Associates Sam Taft, AVP, Analytics & Business Development, Callahan & Associates Finding Your True North Jane Dobbs, President & Chief Executive Officer, Canyon State 9

9 ALM FIRST MARKET UPDATE Callahan Quarterly Trendwatch February 14, 2019 Presented By: Jason Haley Managing Director, Investment Management Group

10 SPEAKER Jason Haley Managing Director, Investment Management Group

11 Economic Update The tone in financial markets has been much more positive in 2019 relative to Q Less hawkish Fed policy Solid economic data trend (slower pace, but still positive) More optimistic outlook on U.S./China resolution Recent reports suggest U.S. & Chinese officials are closer to achieving a trade truce in the coming weeks Greatest hurdle at this point appears to be enforcement measures if China fails to honor terms of the agreement Both sides appear more motivated at this point Economic struggles from China s perspective White House focus on 2020 elections and maintaining positive economic momentum Business sentiment surveys were weaker in January, likely due to government shutdown January jobs report was better than expected 12

12 Fed Update After appearing more hawkish at the Dec. FOMC meeting, Fed leaders voiced a more dovish tone throughout January The word patience was used by several FOMC participants with regard to future policy actions leading up to the Jan. meeting Jan. 30 FOMC official statement (new text highlighted): In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate Perhaps more importantly, the Jan. meeting included a more dovish shift in balance sheet normalization than expected Powell suggested the Fed could end reinvestment tapering sooner than expected & leave more reserves in the banking system In a separate press release, the Fed also suggested the use of asset purchases as a future policy tool 13

13 Fed Funds: FOMC Forecast vs. Market Pricing 14

14 Current Market Themes Treasury yields have fallen sharply since mid-november, particularly in the belly of the curve; curve slope is flatter Rate volatility was at the end of 2018, but markets have been much calmer to start 2019 Spread widening in 2018 contributed to the worst year postcrisis for fixed income; bonds have bounced back in 2019 on tighter spreads & lower rate volatility 2/11/ /15/2018 Change Tenor (%) (%) (bps) 3-Months Months Year Year Year Year Year Curves 2yr-5yr yr-10yr yr-30yr yr-10yr Treasury Yield Curve 11/15/2018 2/11/2019 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y 15

15 Questions?

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17 2018 Credit Union Results Membership growth continues to accelerate Loan originations and balances reach new highs Loan-to-share tops 85% Earnings and capital rise

18 Balance sheet growth slows in 2018, but membership growth continues to accelerate As of 12/31/ mo. Growth mo. Growth 2017 Assets $1,472.5B 5.5% 6.6% Loans $1,056.8B 9.2% 10.0% Shares $1,236.2B 5.3% 6.0% Investments $350.9B -4.0% -1.7% Capital $170.4B 7.8% 7.8% Members 117.8M 4.5% 4.1% Source: Callahan s Peer-to-Peer Analytics

19 Lending Credit unions originate over $500 billion in loans to members in 2018 Loan portfolio tops $1 trillion Loan quality remains strong with lowest delinquency since 2006

20 Credit unions originate over $500 Billion in loans to members in 2018, an all-time high $600 YTD Loan Originations and Annual Growth Data as of % Billions $500 $400 $300 $ % 6.2% 1.0% 15.9% 12.3% 5.3% 5.8% 20.0% 15.0% 10.0% 5.0% 0.0% $100 $0 $253.8 $351.0 $354.4 $410.7 $461.3 $485.6 $ % -10.0% Source: Callahan s Peer-to-Peer Analytics

21 Loans outstanding to members rose $88.8 billion in the last year, surpassing $1 trillion $1,200 $1,000 Total Loans and Annual Growth Data as of % 10.5% 10.5% 10.0% 9.2% 12.0% 10.0% Billions $800 $ % 7.9% 8.0% 6.0% $ % $ % $0 $574.7 $653.1 $720.8 $796.5 $879.8 $967.9 $1, % Source: Callahan s Peer-to-Peer Analytics

22 CUs with assets below $100M posted a higher loan growth rate in 2018 versus % Loan Growth by Asset Class Data as of % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 9.7% 7.0% 6.4% 1.9% 10.2% 9.1% 8.3% 5.8% -2.0% Credit Unions < $100M Credit Unions $500M-$1B Credit Unions $100M-$500M Credit Unions >$1B Source: Callahan s Peer-to-Peer Analytics

23 Loan growth remains strong but slows across product lines 1st Mtg Other RE New Auto Used Auto Credit Card Total Annual Growth in Loans Outstanding Data as of % 6.9% 7.6% 9.3% 10.1% 9.3% 10.1% 9.1% 9.2% 10.0% % 13.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Source: Callahan s Peer-to-Peer Analytics

24 Auto loans are a larger component of the portfolio as home equity balances fell post-recession Total Loans Outstanding Data as of % 8.5% 20.9% 14.1% 5.9% 9.7% 49.4% 35% % 17.1% 16.6% 14.4% 5.8% 9.3% 53.9% 31% 0% 20% 40% 60% 80% 100% 1st Mortgage Other RE Used Auto New Auto Credit Cards Other Loans Source: Callahan s Peer-to-Peer Analytics

25 Delinquency improves to lowest rate since 2006 Annual Change in Delinquency Data as of Total 1 st Mortgage Auto Other RE 0.71% 0.55% 0.66% 0.52% 0.10% 0.07% 0.02% 0.04% Indirect Credit Card Member Commercial 0.68% 1.35% 0.03% 0.14% 0.59% 1.36% Source: Callahan s Peer-to-Peer Analytics

26 Savings Shares top $1.2 trillion as growth slows Certificate balances are fastest rising in 2018 Loan-to-share ratio hits new high

27 Share growth slows for second consecutive year $1,400 $1,200 $1,000 Billions $800 $600 $400 $200 $0 6.1% 3.6% Total Share Balances and Annual Growth Data as of % 6.8% 7.6% 6.0% 5.3% $692 $922 $963 $1,029 $1,107 $1,174 $1, % 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Callahan s Peer-to-Peer Analytics

28 Certificates are the only share product to post accelerating growth versus Mo. Growth in Shares Segments Data as of Share Certificates IRA/Keogh MMA Share Drafts Regular Shares & Dep. Total Shares -0.1% -0.6% 1.0% 6.1% 4.0% 5.5% 5.3% 6.9% 5.3% 6.0% 9.8% 12.4% -5% 0% 5% 10% 15% Source: Callahan s Peer-to-Peer Analytics

29 Regular shares and share draft balances account for over half of member shares at year-end 2018 Total Shares Outstanding Data as of % 15.7% 21.4% 6.3% 19.5% 52.8% % 10.8% 18.9% 9.5% 33.2% 38.4% 0% 20% 40% 60% 80% 100% Regular Shares & Dep. Share Drafts MMA IRA/KEOGH Share Certificates Source: Callahan s Peer-to-Peer Analytics

30 Loan-to-share ratio hits record high 90.0% 85.0% 80.0% 75.0% 70.0% 83.1% 76.1% 71.8% Loan-to-Share Ratio Data as of % 68.0% 70.8% 74.8% 77.4% 79.5% 82.5% 85.5% 65.0% 60.0% 55.0% 50.0% Source: Callahan s Peer-to-Peer Analytics

31 10 Years Ago

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33 Investments have shifted away from corporate credit unions over the past decade Historical Investment Composition Data as of % 1.2% % 5.8% 8.4% 17.5% 3.0% 3.6% 3.1% % 26.8% 13.0% 4.1% 1.8% 0% 20% 40% 60% 80% 100% US Govt., Fed. Agency, and Other Sec. Corporate CUs (incl. Cash) Banks and S&Ls Cash on Hand Cash at FIs Cash Equiv. Other Inv & Insurance Source: Callahan s Peer-to-Peer Analytics

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35 In 2009, banks posted the biggest decline in loan balances in 67 years Wall Street Journal, February 24, 2010

36 Credit unions continued to lend to members as the credit crunch hit $300 $250 Annual loan originations for all US Credit Unions as of December 31 $271.9 $255.6 $253.8 $262.4 $250.8 $200 Billions $150 $100 $50 $ Source: Callahan s Peer to Peer Software

37 Credit union real estate loan modifications helped over 50,000 members stay in their homes Data as of December 31, 2010 for all U.S. Credit Unions Source: Callahan s Peer to Peer Software

38 : Consumers Move to Credit Unions

39 Credit union membership increases 31% this past decade Millions % 1.5% 0.6% Membership and Annual Growth Data as of % 2.2% 2.5% 3.1% 3.4% 4.1% 4.1% 4.5% % 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Callahan s Peer-to-Peer Analytics

40 Credit union employment increases 29% in 10 years 350 Full-Time Equivalents and Annual Growth Data as of % 3.9% 4.0% 4.2% 4.5% % 3.2% 2.7% 2.7% 3.5% 2.5% Thousands % 0.4% 1.5% 0.5% % % -1.5% Source: Callahan s Peer-to-Peer Analytics

41 More consumers choose to use a credit union as their primary financial institution Millions % 46.8% 48.1% Share Draft Accounts and Share Draft Penetration Data as of % 51.4% 52.6% 53.9% 55.1% 56.1% 57.2% 57.6% % 58.0% 56.0% 54.0% 52.0% 50.0% 48.0% 46.0% 44.0% 42.0% Source: Callahan s Peer-to-Peer Analytics

42 Members are expanding relationships with their credit union Penetration Rates Data as of Credit Card Real Estate Share Draft Auto % 4.5% 57.6% 21.2% % 4.9% 45.9% 17.1% Change +3.3% -0.4% +11.7% +4.1% Source: Callahan s Peer-to-Peer Analytics

43 Average member balances have risen over 36% in past 10 years $20,000 $18,000 $16,000 $14,000 $12,000 $13,777 $14,403 $14,563 Average Member Relationship Data as of $14,852 $15,319 $15,713 $16,249 $16,992 $17,723 $18,312 $18,775 $10,000 $8,000 $6,000 $7,665 $8,345 $8,660 $8,985 $9,330 $9,425 $9,534 $9,836 $10,150 $10,328 $10,396 $4,000 $2,000 $0 $6,112 $6,058 $5,903 $5,867 $5,989 $6,288 $6,715 $7,156 $7,573 $7,984 $8, Loans/Member Shares/Member Source: Callahan s Peer-to-Peer Analytics

44 Credit unions share of revolving consumer loans reached a new high of 6% in 2018 Billions $70 $60 $50 $40 $30 3.3% Revolving Consumer Loan Balances and CU Market Share Data as of % 4.3% 4.5% 4.6% 5.1% 5.3% 5.4% 5.5% 5.7% 6.0% 7% 6% 5% 4% 3% $20 $10 $0 $33.4 $35.4 $36.3 $37.9 $38.9 $43.4 $46.8 $49.4 $53.1 $58.4 $ % 1% 0% Source: Federal Reserve

45 Credit union first mortgage market share has more than tripled since 2007 Billions $160 $140 $120 $100 $80 $60 $40 $20 $0 2.6% 4.7% 4.8% 5.0% First Mortgage Originations & Market Share Data as of % 6.0% 6.5% 7.5% 7.5% 7.0% 8.2% 8.3% $60.1 $70.5 $95.0 $84.5 $82.5 $124.1 $120.5 $94.4 $125.8 $143.3 $140.8 $ % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Callahan s Peer-to-Peer Analytics Mortgage Bankers Association

46 Auto lending market share has trended up since 2011, topping 20% in % Credit Union Auto Finance Market Share Data as of % 15.0% 16.1% 20.5% 10.0% 5.0% 0.0% Auto Source: Callahan s Peer-to-Peer Analytics AutoCount Data from Experian Automotive

47 Led by lending, credit unions have grown at a faster rate than banks over the last 10 years Credit Union Growth Bank Growth 2008*-2018* Multiplier Assets 78.8% 30.2% 2.6x Loans 83.9% 24.4% 3.4x Shares 78.8% 70.6% 1.1x Net Worth 89.8% 71.0% 1.3x Source: Callahan s Peer-to-Peer Analytics Source: FDIC *As of 3Q Source: Callahan s Peer-to-Peer Analytics

48 Finding Your True North Jane Dobbs, CEO Canyon State Credit Union

49 About Canyon State Credit Union Headquartered in Phoenix, AZ Approximately $193M in assets Over 18,000 members 55 employees 6 branch locations

50 What is True North? An organizational concept that pushes a credit union to map out its strategic focus and prevents teams from drifting off course. A strategic statement that describes an ideal condition the credit union is striving to achieve and serves as a compass that guides how the team will get there.

51 Common Signs It s Time for an Assessment Declining membership Member service, loan growth, and employee or vendor performance issues A disorganized reporting structure Silos Outdated technology Lack of community involvement Lack of goals Action: Assess your people, processes, profitability, and potential to help identify solutions and start resolving some of these common problems.

52 Example Assessment Questions Ask everyone at the credit union the same questions to get a fair assessment, open the door to deeper conversations and identify root causes of issues. Here are four examples: How is your department organized? Are processes automated or manual? What types of reports do you need? What s missing? How does your area impact the member?

53 Questions Register here for Callahan s webinar with Canyon State Credit Union on Feb. 21 st.

54 The Bottom Line Revenue posts 5 th consecutive annual increase Net interest margin increases as rates rise Net worth reaches 11.3% at year-end

55 Driven by lending, total revenue has increased for five consecutive years Billions $80 $70 $60 $50 $40 $30 $20 $10 $0 $7.0 $7.2 $7.5 $ % -1.6% Total Revenue and Annual Growth Data as of % $8.0 $ % $8.9 $ % $9.5 $ % $10.8 $8.9 $35.8 $37.4 $39.7 $43.1 $48.0 $ % 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Interest Income Fee Income Other Operating Income YOY Growth Source: Callahan s Peer-to-Peer Analytics

56 Cost of funds increase matches increase in loan yield 6.0% Yield Analysis Data as of % 5.02% 4.57% 4.71% 4.0% 3.0% 2.0% 1.0% 1.13% 1.66% 2.04% 0.64% 0.78% 0.0% 0.67% Yield on Investments Cost of Funds Yield on Loans Source: Callahan s Peer-to-Peer Analytics

57 Year-end gap between the net interest margin and the operating expense ratio shrinks to 2 basis points 3.40% Net Interest Margin vs. Operating Expense Ratio Data as of % 3.20% 3.10% 3.00% 2.90% 2.80% 2.70% 3.17% 2.82% 35 bps 3.12% 3.13% 2.86% 2.87% 3.11% 3.10% 2.90% 3.01% 3.15% 2 bps 3.13% 2.60% Operating Expense Ratio Net Interest Margin Source: Callahan s Peer-to-Peer Analytics

58 ROA up 14 basis points from previous year-end 1.00% 0.90% ROA Data as of % 0.80% 0.78% 0.80% 0.75% 0.77% 0.78% 0.70% 0.60% 0.50% Source: Callahan s Peer-to-Peer Analytics

59 Net worth ratio reaches 11.3% at year-end 2018 Billions $200 $180 $160 $140 $120 $100 $80 $ % $6.3 $8.9 Net Worth and Allowance Data as of $9.6 $9.0 $8.2 $7.4 $7.0 $7.4 $7.9 $ % $ % 11.0% 10.0% 9.0% 8.0% $40 $20 $0 $87.7 $88.9 $93.3 $99.7 $108.0 $115.9 $124.6 $133.2 $142.7 $153.0 $ Net Worth Allowance Net Worth Ratio 7.0% 6.0% Source: Callahan s Peer-to-Peer Analytics

60 2018 Recap Financial results are strong across the board Membership growth continues to fuel relationship opportunities Credit unions are well positioned to respond to market opportunities and changing economic conditions

61 The Year Ahead Managing liquidity is a focus at many credit unions Continued investment in people, processes and systems Credit union success will be driven, as always, by listening and responding to members!

62 In-School Refinance Custom Grad Counseling Edmit FutureFuel Marketing Performance Compliance Empowering the next generation of members for life-long success studentchoice.org/creditunions

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