TODAY S LOANS ARE TOMORROWS ASSETS OVERVIEW. Financial Management Seminar October 6, Credit union asset and loan trends

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1 Steven Houle, CFA Director, Advisory Service TODAY S LOANS ARE TOMORROWS ASSETS Catalyst Strategic Solutions Financial Management Seminar Creating Tomorrow OVERVIEW Credit union asset and loan trends Yield curve and consumer market update Balance sheet considerations Additional metrics

2 CREDIT UNION INDUSTRY DISTRIBUTION Seven percent of the credit unions manage seventy percent of the loans and assets 35.0% 30.0% % of Credit Union 80.0% 70.0% % of Assets % of Loans 25.0% 60.0% 20.0% 15.0% 50.0% 40.0% 30.0% 10.0% 20.0% 5.0% 10.0% 0.0% $500mm+ $100 to 500 mm 0.0% $500mm+ $100 to 500 mm Source: NCUA LOAN GROWTH Loan growth continues to be concentrated with larger credit unions % 6.00% 4.00% 8.00% 8.91% 4.55% 1.14% 1.20% % Loan Growth 65.0% 60.0% 55.0% 64.7% 61.7% 59.4% 60.7% 61.1% 58.4% Loan / Assets 2014 All CUs $500mm+ $100 to $500mm Loan Growth 8.9% 14.1% 0.7% 9.6% 4.9% 10.5% 13.7% Loan/Assets 61.1% 63.2% 59.5% 52.8% 48.4% 46.9% 45.5% Source: NCUA

3 LOAN GROWTH Vehicle loans are driving growth 25.0% 20.0% 15.0% 10.0% 5.0% 20.5% 13.0% 22.8% 32.2% 20.0% 15.0% 10.0% 5.0% 2.7% 6.5% 14.4% 14.1% 0.0% Since % 2014 Unsecured Real Estate Vehicle Other Unsecured Real Estate Vehicle Other 2014 Growth All CUs $500mm+ $100 to $500mm Unsecured 2.7% 7.4% 5.7% 11.3% 10.8% 17.1% 17.6% Real Estate 6.5% 10.7% 3.1% 12.1% 7.3% 17.9% 7.6% Vehicles 14.4% 22.0% 2.6% 7.1% 1.6% 7.2% 11.9% Other 14.1% 20.5% 8.2% 4.8% 0.4% 4.3% 18.7% Source: NCUA LOAN ALLOCATIONS Allocations are predominately real estate loans % 5% 11% 32% 6% 11% 54% 53% Unsecured Real Estate Vehicle Other Unsecured Real Estate Vehicle Other 2014 Allocations All CUs $500mm+ $100 to $500mm Unsecured / Loans 11% 11% 10% 12% 14% 21% 27% Real Estate / Loans 52% 54% 49% 43% 36% 12% 4% Vehicles / Loans 32% 30% 34% 37% 42% 57% 56% Other / Loans 56 5% 7% 8% 8% 10% 13% Yield on Avg Loans 4.82% 4.68% 4.95% 5.34% 5.68% 6.47% 7.40% Source: NCUA

4 LOAN QUALITY Loan quality continues to improve 1.50% 0.50% 1.76% 1.60% 1.21% 1.13% 1.16% 1.01% 0.91% 0.85% 0.49% % 3.00% 2.50% 1.50% 0.50% 3.05% 2.89% 2.51% 1.89% 1.58% 1.34% Del Net C/Os Combined 2014 All CUs $500mm+ $100 to $500mm Delinquent Loans / Average Loans Net Charge Offs / Average Loans 0.85% 0.79% 0.92% 1.06% 1.26% 1.93% 3.51% 0.49% 0.50% 0.46% 0.45% 0.47% 0.55% 0.56% Combined Total 1.34% 1.29% 1.38% 1.51% 1.73% 2.48% 4.07% Source: NCUA INDIRECT LOANS Billion $120 Indirect loans continue to increase as credit unions look for ways to increase loan volume. $100 $80 $60 $22.0 $24.9 $25.2 $26.1 $23.7 $19.3 $20.7 $26.0 $28.1 $40 $20 $42.7 $44.6 $45.0 $48.3 $52.2 $ Point of Sale Outsourced Lending $20.9 $20.6 $51.3 $57.5 $66.8 $ All CUs $500mm+ $100 to $500mm % of Indirect Loans Outstanding / Total Loans Source: NCUA 15.2% 16.6% 14.3% 8.8% 3.9% 0.8% 0%

5 PARTICIPATION LOANS Loan participations continue to increase as credit unions look for ways to increase loan volume. Billion $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $7.4 $8.4 $9.7 $11.1 $12.3 $12.4 $ Total Participation Loans Outstanding $13.1 $13.8 $15.7 $ All Cus $500mm+ $100 to $500mm % of Participation Loans Outstanding / Total Loans % of Participation Loans Purchased YTD / Total Loans granted YTD Source: NCUA 2.6% 2.7% 2.7% 2.2% 1.5% 0.6% 0.6% 1.9% 2.0% 2.0% 1.7% 0.6% 0.2% 0.2% MARKET OVERVIEW YIELD CURVE The shape of yield curve is changing in non parallel fashion. 3.50% 3.00% From December 2013 to September 2014, the curve has flattened. 2 yr UST is up 18 bps 10 yr UST is down 38 bps 2 yr to 10 yr UST has tightened 56 bps to 205 bsp 2.50% 1.50% 0.50% 2 YR 3 YR 5 YR 7 YR 10 YR 9/12/ /31/ /31/2012

6 MARKET OVERVIEW YIELD CURVE Shape of the future curve. bear flattener? Short term rates will rise faster than long term rates? 3.50% 3.00% 2.50% How will shape of the future curve impact asset spreads and asset allocations? 1.50% 0.50% 2 YR 3 YR 5 YR 7 YR 10 YR Future? 9/12/ /31/ /31/2012 MARKET OVERVIEW REAL ESTATE Mortgage rates continue to hover close to their historical lows. Average monthly rate in August: 30 yr FRM: 4.25% 15 yr FRM: 3.48% 10 yr UST: 2.42% 6.00% 5.00% 4.00% 3.00% Spread to 10 yr UST: December 2009: 30 yr FRM: 135 bps 15 yr FRM: 98 bps December 2011: 30 yr FRM: 210 bps 15 yr FRM: 140 bps August 2014: 30 yr FRM: 180 bps 15 yr FRM: 106 bps 12/31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/ /31/2011 2/29/2012 4/30/2012 6/30/2012 8/31/ /31/ /31/2012 2/28/2013 4/30/2013 6/30/2013 8/31/ /31/ /31/2013 2/28/2014 4/30/2014 6/30/2014 8/31/ YR FRM 15 YR FRM 10 YR YST

7 MARKET OVERVIEW REAL ESTATE Mortgage applications are a function of mortgage rates. 1,200 1,000 MBA Application Index Historical comparison: December 2009: 30 yr FRM: 5.08% Applications Index: August 2010: 30 yr FRM: 4.43% Applications Index: September 2012: 30 yr FRM: 3.53% Application Index: August 2014: 30 yr FRM: 4.25% Application Index: /31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/ /31/2011 2/29/2012 4/30/2012 6/30/2012 8/31/ /31/ /31/2012 2/28/2013 4/30/2013 6/30/2013 8/31/ /31/ /31/2013 2/28/2014 4/30/2014 6/30/2014 8/31/2014 Mortgage Applications MARKET OVERVIEW REAL ESTATE Refinances continue to increase homeowners seek lower mortgage rates. How will interest rates in 2015 impact these volumes? 90% 80% 70% 60% 50% 40% 30% 20% 10% Refi as a % of Total Applications 0% 12/31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/ /31/2011 2/29/2012 4/30/2012 6/30/2012 8/31/ /31/ /31/2012 2/28/2013 4/30/2013 6/30/2013 8/31/ /31/ /31/2013 2/28/2014 4/30/2014 6/30/2014 8/31/2014 Refi as a % of Total Applications

8 MARKET OVERVIEW US AUTO SALES Seasonally Adjusted Annualized Selling Rate (SAAR): Million Units SAAR of US Auto Sales August 2013: million units July 2014: 16.4 million units August 2014: million units August 2014 Breakdown Domestic Cars: 6.12 mil units Import Cars: 2.11 mil units Domestic Light Trucks: 7.75 mil units Import Light Trucks: 1.47 mil units /31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/ /31/2011 2/29/2012 4/30/2012 6/30/2012 8/31/ /31/ /31/2012 2/28/2013 4/30/2013 6/30/2013 8/31/ /31/ /31/2013 2/28/2014 4/30/2014 6/30/2014 8/31/2014 US Auto Sales MARKET OVERVIEW US AUTO SALES Vehicle loans in 2015: The new vehicle market seems to have shifted from the need buyers to the more volatile want buyers. Incentives are up 5 to 10 percent. For example, Honda Accord incentives were on average $2,013 per vehicle, 3 x what they were last year. The average new car loan is 66 months. A third are for 72 months or more, up from 18 percent in Demand will be driven by incentives, interest rates, lease deals and the general economy.

9 LOAN YIELD COMPARISON 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% Y FRM Vehicle 2yr PAC 1 Yr Agy O/N LOAN PRICING AND SPREAD COMPARISON Monitor and compare pricing changes: Change in loan rate; Change in pricing index; and Change in spread. Loan Type Avg Loan Rate Jan 2014 Avg Loan Rate Sep 2014 YTD Chg 48 month vehicle loan 0.99% 1.25% +26 bps 60 month vehicle loan 1.25% 1.25% 0 bps 15 year FRM 3.55% 3.26% 29 bps 30 year FRM 4.53% 4.12% 41 bps UST Rates Jan 2014 (2yr & 10 yr) UST Rates Sep 2014 (2 yr & 10 yr) Nominal Change 0.38% 0.58% +20 bps 0.38% 0.58% +20 bps 3.04% 2.61% 43 bps 3.04% 2.61% 43 bps Spread Change +6 bps 20 bps +14 bps +2 bps

10 CONSIDERATIONS BALANCE SHEET Evaluate current and projected balance sheet profiles: Allocations and concentration risk loans to assets loans to shares loan allocations as a percentage of net worth Liquidity profile short term funding ratio liquidity cash flow projections Earnings and interest rate risks loan yield and quality Impact on net interest income simulation and net economic value analysis RISK/RETURN RELATIONSHIP Evaluate earnings and risk relationship: What asset drives the t income? How do income profiles change with changes in rates? How do market values change with changes in rates? Base Case Net Interest Income Market Value Asset Book Value Base Case Income % of Base Case +300 bps Income % of +300 bps Inc Base Case MV +300 bps MV Chg +300 bps MV % Chg Investment $21,378 $ % $ % $21,487 $1, % Vehicle Loans $5,974 $ % $ % $6,225 $ % Real EstateLoans $20,985 $ % $1, % $20,949 $2, %.. Total Asset $56,316 $1, % $2, % $56,603 $3, %

11 CONSIDERATIONS INDIRECT AUTOS It is crucial to evaluate return profile given dealer fees Loan & Fees Loan Amount $20, Weighted Average Maturity 60 months Buy Rate 1.90% Fee Paid % of Loan Fee Paid $ per Loan $ Return Profile Yield Return 0.32% Average Life 1.91 years Prepayment Speed (CPR) 18.0% Total cost to the credit union $ CONSIDERATIONS INDIRECT AUTOS Net yield based on prepayment speed 0.50% 0.50% 1.50% 2.50% 3.00% 3.50% 0% 10% 20% 30% 40% 50% 60% 70% 80% Net Loan Yield Based on Prepayment Speed Net Loan Yield Based on Prepayment Speed CPR Avg Life (yrs) Net Yield 0% % 10% % 20% % 30% % 40% % 50% % 60% % 70% % 80% %

12 CONSIDERATIONS INDIRECT AUTOS Net Loan yield based on holding period 3.00% 4.00% 5.00% Net Loan Yield Based on Prepayment Speed 12 6 Net Loan Yield Based on Prepayment Speed Holding Balance Net Yield Period 6 $18, % 12 $16, % 18 $14, % 24 $12, % 30 $10, % 36 $8, % 42 $6, % 48 $4, % 54 $2, % % CONSIDERATIONS LOAN PARTICIPATIONS When considering loan participations, remember to evaluate: Composition of loans; Potential credit risk, interest rate risk and liquidity risk; and Price and performance. Performance Matrix Based on Price, Prepayments and Losses Price: $ Projected NCOs: 16 bps 0 CPR 10 CPR 15 CPR 20 CPR Buyer no loss 2.54% 2.36% 2.27% 2.18% Buyer 1 x ann loss 2.38% 2.20% 2.11% 2.02% Buyer 1.5 x ann loss 2.30% 2.12% 2.03% 1.94% Buyer 2 x ann loss 2.22% 2.04% 1.95% 1.86%

13 CONSIDERATIONS ADDITIONAL METRICS Evaluate membership loan share: What percentage of your membership have loans at the credit union and/or at another financial institution? What is the lost revenue? Why are they financing their loans elsewhere? Membership Loan Distribution (100 member credit union) ABC Credit Union At other FI % of members with Loans 37% 28% Number of members Avg loan balance $22,500 $29,750 Avg loan rate 3.85% 4.55% Avg annual loan income $ $1, Potential income opportunity Cumulative annual loan income $32, $37,901.5 CONSIDERATIONS ADDITIONAL METRICS Outbound telemarketing for loans: Bring business back to the credit union Strengthen member relationship Opportunity to understand membership better Outbound Telemarketing ABC Credit Union Number of credit reports pulled 2,000 Meet telemarketing criteria 25% Leads % of leads converted to loans 125 Average loan balance $16,000 Average loan yield 3.25% Cumulative annualized income $65,000

14 CONSIDERATIONS ADDITIONAL METRICS Evaluate marketing expense: How much did you spend? How much revenue did it generate? What was your return on investment (ROI)? Marketing Return on Investment (ROI) Promotion A Promotion B Marketing Expense $25,000 $65,000 Revenue $22,000 $85,000 Net Revenue $3,000 $20,000 Remember: Identify your target market Personalize your message Make it easy to accept Use technology ROI 12% +31% CLOSING COMMENTS Understand your member behavior and needs Stay current with changing market conditions Understand balance sheet capacity and restrictions Evaluate effectiveness of current and future endeavors

15 Today s Loans are Tomorrow s Assets QUESTIONS? Steven Houle, CFA Director, Advisory Service shoule@catalystcorp.org Catalyst Strategic Solutions Financial Management Seminar Creating Tomorrow