CEO Workshop Report. FinancialEdge Community Credit Union. March 2015 (Data as-of ) 2015 Fiserv, Inc. or its affiliates.

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1 CEO Workshop Report FinancialEdge Community Credit Union March 2015 (Data as-of )

2 CEO Workshop Agenda March 2015 Morning (9:00 12:00) Economic & Industry Overview Preview of Growth, Earnings and Performance Achieving Quality Growth in a Rising Rate Environment The Impact of Gen Y Moving into the Financial Mainstream The Opportunity with Baby Boomers Developing a Deposit Management Strategy 12:00 1:00 LUNCH Afternoon (1:00 3:00) Responding to the Growing Threats and Challenges The Regulatory Challenge: Life After NSF New Competition and Leveraging Technology 2

3 Economic & Industry Overview State of the Economy and Financial Services Industry Preview of Growth, Earnings & Performance

4 The Great Stagnation Follows the Great Recession Real GDP Change 10% Average Growth: 3.2% 8% 6% 4% Since onset of recovery in June 2009: 2.3% 2% 0% -2% -4% Source: Bureau of Economic Analysis 4

5 The 2014 Economy in Percentiles GDP Growth Since 1947 Unemployment Since % 6.2% Housing Starts Since 1950 New Auto Sales Since M units M units Consumer Sentiment Since Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Federal Reserve Bank of St. Louis 5

6 Credit Union Industry Performance in Ranked Against Period Member Growth 93 Loan Growth 57 Deposit Growth 1 Loans to Deposits 47 Net Interest Margin 7 Efficiency Ratio 27 ROA 47 Source: NCUA 6

7 Large Bank Channel Trends 25% 20% 15% Growth: 2013 to 2014 Chase Wells B of A 22.1% 19.0% 14.9% 10% 7.8% 8.0% 5% 0% -5% -10% -15% -0.5% 0.3% -5.7% -11.0% 2.2% -2.6% 3.2% Branches ATMs Online Banking Customers Mobile Banking Customers Source: Company Annual Reports 7

8 Key Strategic Questions for How will rate increases impact: Loan growth Deposit acquisition and retention Net interest margins 2. Is the regulatory burden likely to change? 3. How is the payments space likely to evolve? 4. What should you be doing with the branch network? Divesting locations Adding new locations Modifying existing locations 8

9 Economic & Industry Overview State of the Economy and Financial Services Industry Preview of Growth, Earnings & Performance

10 Key Methodology Reminders March 2015 CEO Strategies Group Workshops: Data As-Of 12/31/2014 The primary view is member households and deposit and loan services. Total and per household earnings reflect annual figures. Margin income is allocated to both deposits and loans through a transfer pricing process. Using data from the GLs, non-interest income is allocated at the account level by product type. Operating expenses are fully allocated at the account level and rolled up to the household level. Loan losses are computed using a loss rate at the product level. 10

11 Key Methodology Reminders March 2015 CEO Strategies Group Workshops: Data As-Of 12/31/2014 Comparisons & Percentiles - in this report your credit union is compared with and ranked against the following average groups: CEO Average: the average ratios of all 316 participating credit unions in the CEO Strategies Group program. Percentile: shown in blue, reflects the ranking - from 1 to of your ratio relative to all other participants' ratio. (e.g. 100th percentile = highest/best ratio, 50th = median ratio, 1st = lowest/worst ratio.) High Performers: the average ratios of the institutions that score in the top 10% on the RFG Performance Index. (see page 5 of the CEO Strategies Group analysis and page 32 of this CEO Workshop Report) 90th Percentile: the average of the ratios at the 90th percentile for a given metric - demonstrates top performance for the particular ratio. Growth Ratios: default growth rates are year-over-year 12-month growth. Depending on your CEO Strategies Group processing cycles, your growth may be computed over a different period and annualized for comparability to the averages. The following growth rates are shown in this report: FinancialEdge Community Credit Union: 12-month growth Comparison Groups: 12-month growth (Annual view eliminates seasonality influence.) Active Households: households with any new account openings in the previous 6-month period. The volume of new account activity is another way to assess growth and member engagement. New Households: households where all accounts have been opened in the previous six months. Cross-Sold Households: existing households that opened a new account(s) in the previous six months. 11

12 Institution Overview FinancialEdge Community Credit Union - 12/31/2014 Total Assets $81,942,095 CEO Average = $1.0B Total Loans Total Deposits $54,255,542 $72,586,309 CEO Average = $669M CEO Average = $869M FinancialEdge is in the 'Less than $100 Million' asset group. Total Households 6,410 Asset Average = 7,674 Total Branches 2 Asset Average = 3 Total FTE Asset Average = 27 CEO Strategies Book Pages: 3, 7, 79,

13 How Strong Is Your Growth? How Will You Continue To Grow? FinancialEdge Community Credit Union - All Households - 12/31/2014 Key Ratio Scorecard Percentile Growth Relationship Financials Loan-to-Deposit Ratio Loan Balance Growth Deposit Balance Growth Household Growth Services per HH Loan Share of Wallet¹ Deposit Share of Wallet¹ 74.3% +5.3% +3.4% +0.9% % 29.0% ROA 0.31% 16 Reserves / Assets 10.3% Below Average < Percentile > Above Average ¹Retail Households CEO Strategies Book Pages: 7, 25, 27, 38, 55, 57, 59, 68, 69, 119,

14 What Have New Accounts Contributed to the Credit Union? FinancialEdge Community Credit Union - 12/31/2014 Below is a summary of the balance and profit contributions from new account activity in the previous six months. How did the different household types contribute to recent growth? All New Accounts Opened in the Last Six Months All HHs Total Loans¹ Sold Mtgs² Deposits Balances $14,350,282 $7,401,960 $0 $6,948,322 Profit -$4,298 $37,522 $0 -$41,820 New Accounts Opened by New vs. Existing Households New HHs Balances $1,794,605 $1,510,383 $0 $284,222 Profit $502 $9,285 $0 -$8,783 Cross-Sold HHs Balances $12,555,676 $5,891,577 $0 $6,664,100 Profit -$4,800 $28,237 $0 -$33,037 Retail HHs Balances $13,504,753 $6,784,920 $0 $6,719,833 Profit -$5,028 $30,727 $0 -$35,756 New Accounts Opened by Households in Each Business Line Indirect HHs Balances $121,229 $120,075 $0 $1,153 Profit $1,466 $1,932 $0 -$466 Comm. HHs Balances $724,300 $496,965 $0 $227,336 Profit -$736 $4,862 $0 -$5,598 ¹ Booked loans put in portfolio ²Balances shown for servicing-retained mortgages, if available. Data extracts may not always contain sold mortgage balances. CEO Strategies Book Pages: New Ratios 14

15 91.1% 87.5% 95.2% 89.8% 95.4% 84.5% 84.0% 80.3% 83.0% 74.8% 71.7% 71.5% 73.4% 70.1% 73.0% 71.9% Do You Need More Loan Growth, Deposit Growth or Balanced Growth? FinancialEdge Community Credit Union Call Report Loan-to-Deposit Ratio FinancialEdge CEO Average High Performers 42nd PERCENTILE 100.0% 90.0% 80.0% 85.0% 84.4% 77.5% 81.7% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 74.3% CEO Strategies Book Pages: 25 15

16 How Does Your Loan Growth Compare? FinancialEdge Community Credit Union - All Households - 12/31/ % 12-Month Loan Balance Growth FinancialEdge CEO Average +35.0% +34.3% +30.0% +25.0% +20.0% +15.0% +10.0% +5.0% +5.3% +10.7% +1.7% +17.1% +6.9% +5.6% +8.4% +3.5% +9.3% +15.3% +0.0% -5.0% -0.7% -1.5% -10.0% -8.0% -15.0% All Loans Auto Loans Held Mortgage Equity Loans Equity Lines Credit Card Consumer Loans Percentile CEO Strategies Book Pages: 37, 38, 45, 47 16

17 How Does Your Deposit Growth Compare? FinancialEdge Community Credit Union - All Households - 12/31/ Month Deposit Balance Growth +25.0% +20.0% FinancialEdge +21.2% CEO Average +15.0% +10.0% +11.8% +9.7% +9.5% +5.0% +3.4% +4.5% +2.6% +0.0% +0.3% -1.4% -1.7% -5.0% -3.7% -10.0% All Deposits Savings Checking MMA CD IRA -8.5% Percentile CEO Strategies Book Pages: 26, 27, 33 17

18 What Have New Households Contributed to the Credit Union? FinancialEdge Community Credit Union - All Households - 12/31/2014 In the previous six months: 204 new households joined the credit union, contributing a total of $502 in profit. 23% of these households opened a loan, with total balances of $1,510,383. 2% of new households opened an indirect auto loan. New households opened a total of $284,222 in deposit balances. FinancialEdge CEO Average 90th Percentile New Households 8.3% % of New Households That Opened Product 46% 46% 43% New HH Profit $ % 5.5% 23% 25% 11% 3% 2% 0.0% 1.3% $18 % of HH That Are New Any Loan Direct Auto Indirect Auto Checking CD Profit per New HH 15th 11th 12th 10th 47th -- 23rd CEO Strategies Book Pages: 13, 14, 15, 19 18

19 How Much of Your Members' Wallet Do You Control? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Share of Wallet* 45% FinancialEdge CEO Average High Performers 90th Percentile 40% 38.3% 35% 35.1% 33.6% 30% 29.0% 29.0% 29.6% 25% 21.7% 25.5% 20% 15% 10% 5% 0% Loans Deposits Percentile *First mortgages are excluded from the total loan share of wallet since sold balances can skew results. CEO Strategies Book Pages: 360, 361,

20 What Have Cross-Sales Contributed to the Credit Union? FinancialEdge Community Credit Union - All Households - 12/31/2014 In the previous six months: 1,035 households (16.1%) were cross-sold, contributing a total of -$4,800 in profit from new accounts. 57% of these households opened a loan, with total balances of $5,891, % of cross-sold households opened a CD account, compared to 19% for the CEO Average. Existing households' new deposit accounts have a total of $6,664,100 in balances. FinancialEdge CEO Average 90th Percentile Cross-Sold Households 17.1% 16.1% 12.5% % of Cross-Sold Households That Opened Product 57% 55% Cross-Sold HH Profit $210 22% 23% 11% 6% 22% 16% 17% 19% $37 % of HHs That Were Cross-Sold Any Loan Auto Credit Card Checking CD 85th 60th 45th 15th 43rd 65th Total Profit per Cross-Sold HH¹ 19th ¹From new and existing accounts. CEO Strategies Book Pages: 13, 16, 17, 21 20

21 22.7% 21.6% 21.2% 21.1% 21.1% 21.5% 21.0% Have You Grown Your Loan Share of Wallet? FinancialEdge Community Credit Union - Retail Households Loan Share of Wallet FinancialEdge CEO Average High Performers 34th PERCENTILE 35% 30% 25% 26.4% 29.0% 25.5% 20% 22.1% 15% 10% 5% 0% 21.7% CEO Strategies Book Pages: 360,

22 Which Loans Offer the Most Growth Potential from Existing Members? FinancialEdge Community Credit Union - Retail Households - 12/31/ % Loan Share of Wallet FinancialEdge CEO Average 90th Percentile 70% 69.3% 60% 50% 48.4% 49.1% 40% 30% 35.1% 37.0% 39.3% 28.7% 32.5% 20% 21.7% 20.6% 10% 8.1% 9.3% 0% Percentile 25.5% 47.1% 32.9% 17.7% 14.3% 17.2% All Non-Mtg Loans Auto Loans Credit Cards Equity Loans Equity Lines Consumer Loans CEO Strategies Book Pages: 360, 363,

23 32.6% 32.0% 32.3% 31.1% 32.1% 29.6% 29.4% Has Your Deposit Share of Wallet Increased? FinancialEdge Community Credit Union - Retail Households Deposit Share of Wallet FinancialEdge CEO Average High Performers 52nd PERCENTILE 40% 35% 34.4% 33.6% 30% 25% 29.5% 29.6% 20% 15% 10% 5% 0% 29.0% CEO Strategies Book Pages: 361,

24 Which Deposits Offer the Most Growth Potential from Existing Members? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Deposit Share of Wallet FinancialEdge CEO Average 90th Percentile 80% 70% 66.9% 71.7% 60% 56.9% 50% 48.2% 46.9% 40% 38.3% 39.3% 30% 29.0% 31.7% 28.4% 20% 10% 7.4% 11.1% 0% Percentile 29.6% 51.2% 38.2% 40.6% 30.7% 7.8% All Deposits Checking Savings MMA CD IRA CEO Strategies Book Pages: 361, 363,

25 How Engaged Are You In Indirect or Commercial Business? FinancialEdge Community Credit Union - 12/31/ % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Most households are considered retail households - they joined the credit union through the branch or online channel and have no business accounts. The data below demonstrates the volume of other household types at your credit union - those with indirect or business relationships. Indirect households are any households where the first account opened is an indirect loan. Commercial households are any households with at least one business deposit or loan account. 1.5% 7.1% Indirect Households % of Households by Business Line FinancialEdge CEO Average 90th Percentile 18.7% 4.1% 2.2% Commercial Households Percentile # of Households % CEO Strategies Book Pages: 8 25

26 Subprime Auto Lending: Making a Comeback? Improved subprime risk management and high profitability have redefined this segment. Loans to borrowers with tarnished credit have risen more than 130% in five years.* 1 in 4 new auto loans are for subprime borrowers. (credit scores 640)* Implications of this increasing shift to subprime may be felt two years down the road in higher losses. *Source: New York Times DealBook Research, July

27 Are We Moving Towards Higher Charge-offs? $1.16 Trillion Loans 90+ Days Delinquent % 11.3% $700 Billion 7.5% 7.3% 3.1% 3.5% 3.2% 3.1% Student Loans Credit cards Auto loans Mortgages Key Finding: Young consumers with student loan debt are less likely to have a mortgage than young consumers without student loans. This is a reversal from pre-recession patterns and an indication that student loan debt is crippling consumers. Source: Federal Reserve Bank of New York Analysis 27

28 The Rise of Indirect Lending CEO Strategies Group Average Data CEO Average: Percent of All Households That Are Indirect CEO Average Linear (CEO Average) 8.0% 7.0% Trendline moving from 5% to 6.5% of households represents a 30% increase. 7.1% 6.0% 5.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% CEO Strategies Book Pages: 8 28

29 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Billions Credit Unions Have Significantly Increased Reliance on Indirect Loans The credit union industry has drastically increased the amount of indirect loans in the last ten years. Indirect balances have grown from $45 Billion in 2004 to $108 Billion in During the same period, direct auto balance growth was much more modest, growing from $108 to $116 Billion. $250 Direct Auto Loans Indirect Loans Indirect to Total Auto 60% $200 $ % 50% 40% $ % 30% 20% $50 10% $0 0% Source: NCUA 29

30 Millions How Has Your Indirect Auto Lending Grown Compared to Direct? FinancialEdge Community Credit Union - All Households Direct Auto Balances vs. Indirect Loan and HH Volume Direct Auto Balances Indirect Auto Balances % Indirect HHs $9 4.5% $8 4.0% $7 3.5% $6 3.0% $5 2.5% $4 2.0% $3 1.5% $2 1.0% $1 0.5% $0 0.0% CEO Strategies Book Pages: 8,

31 How Does Your Direct And Indirect Auto Lending Compare? FinancialEdge Community Credit Union - All Households - 12/31/2014 Auto Loan Scorecard (Direct & Indirect) All Auto Direct Auto Indirect Auto Percentile Share of Wallet¹ 48% 55 Weighted Avg. Rate 5.15% 73 HH Penetration Balance Growth 12.3% +10.4% Service Profit / HH Total Profit / HH $102 $ HH Penetration 4.5% 33 Balance Growth -16.8% 10 Service Profit / HH $ Total Profit / HH $ Below Average < Percentile > Above Average 27 ¹Retail Households CEO Strategies Book Pages: 46, 170, 173, 175, 179,

32 The RFG Performance Index - What Are Your Strengths? FinancialEdge Community Credit Union - All Households - 12/31/2014 The RFG Performance Index benchmarks key organizational metrics against all other participants in the program. A weighting factor is assigned to the percentile for each ratio to arrive at the overall score. Institutions with a percentile of 90 or above on the RFG Performance Index are part of the High Performer comparison group. RFG Performance Index Components Percentile Household Profit - 15% ROA or Adj. ROA - 10% New HH Index - 7.5% Cross-Sold HH Index - 7.5% Operational Efficiency - 15% Deposit Margin - 7.5% Loan Margin - 7.5% Checking Non-Int Inc. / HH - 15% Deposit Balances / HH - 7.5% -$ % % 36 $11, % $ % Loan Balances / HH - 7.5% RFG PERFORMANCE INDEX - 100% 36 $16, Below Average < Percentile > Above Average CEO Strategies Book Pages: 5 32

33 Percentile Is Your Institution's RFG Performance Index Improving? FinancialEdge Community Credit Union - All Households The chart below shows your institution's trend in the RFG Performance Index. The columns plot your percentile rank (above or below the median), while the labels indicate your actual score on the RFG Performance Index. Note that the average RFG Performance Index for High Performers is in the mid-70s. That is, an index near 70 or above typically associates with a ranking in the 90th percentile or better, which defines High Performer status RFG Performance Index FinancialEdge High Performers CEO Strategies Book Pages: 5 33

34 How Do Your Components of Net Income Compare? FinancialEdge Community Credit Union - All Households - 12/31/2014 The graph shows your data and the comparisons for the factors of net income on a per household basis. How does your net income compare and what is driving your overall earnings, for better or for worse? Per Household Factors of Net Income FinancialEdge CEO Average High Performers Percentile Net Interest Income $436 $443 $ Non-Interest Income $187 $186 $ Operating Expense $587 $501 $ Loan Losses $46 $40 $36 34 Net Income -$11 $88 $ $100 $0 $100 $200 $300 $400 $500 $600 $700 CEO Strategies Book Pages: 67,

35 How Are Loans and Deposits Contributing to Profitability? FinancialEdge Community Credit Union - All Households - 12/31/2014 Average Profit per Household Total Profit Loan Profit Deposit Profit Percentile $350 $300 $250 $256 $302 $200 $187 $150 $100 $50 $75 $88 $0 ($50) ($100) ($150) ($11) ($46) ($86) ($99) FinancialEdge CEO Average High Performers CEO Strategies Book Pages:

36 CEO Average: Trend in Income per Household How Will Composition of Profit Change When Rates Rise? CEO Average: Income per Household $250 Total Profit Loan Profit Deposit Profit $200 $187 $150 $100 $100 $77 $88 $50 $0 $24 -$50 -$100 -$150 -$99 -$200 Source: CEO Strategies Group average data 36

37 How Much Does Each Loan Service Contribute to Total Profit? FinancialEdge Community Credit Union - All Households - 12/31/2014 $600,000 Total Annual Profit $500,000 $479,442 $400,000 $300,000 $288,875 $200,000 $129,467 $100,000 $76,842 $28,842 $25,529 $0 -$100,000 All Loans Auto Loans Credit Cards Consumer Loans -$60,459 Equity (Loans & Lines) 1st Mortgage (Held & Sold) Commercial Loans CEO Strategies Book Pages:

38 How Much Does Each Deposit Service Contribute to Total Profit? FinancialEdge Community Credit Union - All Households - 12/31/2014 Total Annual Profit $100,000 $44,494 $0 -$100,000 -$21,068 -$37,325 -$2,368 -$56,864 -$200,000 -$300,000 -$400,000 -$500,000 -$476,246 -$600,000 -$549,378 All Deposits Savings Checking MMA CD IRA Commercial Deposits CEO Strategies Book Pages:

39 How Much Does Each Service Contribute to Household Profit? FinancialEdge Community Credit Union - All Households - 12/31/2014 Annual Profit per Household Service Profit / HH Total Profit / HH $1,000 $800 $782 $600 $574 $469 $400 $200 $151 $147 $124 $0 -$200 $38 $42 $16 -$156 -$179 -$53 -$86 -$76 $12 -$10 -$9 -$4 -$66 -$195 -$84 -$145 -$400 All Loans Auto Loans Credit Cards Equity Loans HELOC 1st Mtg (Held & Sold) All Deposits Savings Checking MMA CD CEO Strategies Book Pages: Product Management, product profiles

40 How Many Households Are Profitable in Each Service Class? FinancialEdge Community Credit Union - All Households - 12/31/2014 Percent of HHs Using Service That Are Profitable FinancialEdge CEO Average 70% 60% 55.8% 57.0% 55.0% 58.9% 50% 47.5% 47.8% 46.6% 45.1% 40% 32.0% 35.6% 34.8% 34.2% 38.3% 33.0% 37.1% 30% 28.4% 20% 10% 0% All HH Checking HH Any Loan HH Direct Auto HH Indirect Auto HH Credit Card HH Consumer Loan HH Real Estate HH Percentile CEO Strategies Book Pages: , New Ratios 40

41 Conclusions: Earnings 2015 is likely to see continued stress on earnings among credit unions. Rising asset yields may begin to be offset by rising funding costs, especially in highly competitive markets. Expenses will continue to grow due to required technology investments. Non-interest income will see downward pressure. The end of the refi boom coupled with continued declines in NSF and OD income are the major culprits. Keys to continued earnings improvement will be: More effective loan and deposit pricing. Credit unions should be looking at relationship pricing models more intensely. Identification of new sources of non-interest income for life after NSF. Reduce member subsidization. Target a 3 to 5% improvement in the percent of households that are profitable. Identify process improvements to create efficiency gains. The most effective processes are those that engage employees in this process. 41

42 Achieving Quality Growth in a Rising Rate Environment The Impact of Gen Y Moving into the Financial Mainstream The Opportunity with Baby Boomers Developing a Deposit Management Strategy

43 The Consumer Segments All Households Nationally - RFG National Consumer Research The diagram below demonstrates how RFG's Consumer Segments are defined according to household income and the head of household's age. The statistics represent households nationally, based on RFG's National Consumer Research. The Generational Segments are overlayed across the top to demonstrate how their ages currently align with the Consumer Segments. TRADITIONALISTS GEN Y GEN X BABY BOOMERS T Age Income $125,000 or more CREDIT DRIVEN 9% of HHs Age: UPSCALE 11% of HHs Income: $165K $50,000 - $124,999 Age: 28 Income: $88K MIDDLE MARKET 17% of HHs Age: 46 Income: $80K MID INCOME DEPOSITOR 13% of HHs Age: 66 Income: $77K Less than $50,000 FEE DRIVEN 19% of HHs LOW INCOME DEPOSITOR 32% of HHs Age: 33 Income: $28K Age: 64 Income: $28K Source: RFG National Consumer Research 43

44 How Do Your Member Demographics Compare? FinancialEdge Community Credit Union - Retail Households - 12/31/ % Percent of Households by Consumer Segment¹ FinancialEdge CEO Average High Performers 30% 30% 25% 20% 22% 22% 19% 19% 20% 19% 18% 23% 19% 20% 15% 15% 10% 10.1% 10.4% 10.3% 10.3% 7.3% 6.6% 5% 0% Low Income Depositor Middle Market Middle Income Depositor Fee Driven Credit Driven Upscale Percentile ¹ Percentages represent only those households with appended age and income data. At FinancialEdge, 7% of retail households do not have appended demographic data. CEO Strategies Book Pages:

45 What Is the Generational Distribution of Your Member Households? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Percent of Households by Generational Segment FinancialEdge CEO Average High Performers 40.0% 35.0% 30.0% Households are assigned to a segment according to the head of household's birth year. 36.3% 37.2% 35.3% 25.0% 22.6% 25.2% 25.2% 25.7% 24.8% 26.0% 20.0% 15.0% 15.3% 12.7% 13.4% 10.0% 5.0% 0.0% Traditionalists Baby Boomers Gen X Gen Y Percentile CEO Strategies Book Pages: 346,

46 What Is the Income Distribution of Your Gen Y Households? FinancialEdge Community Credit Union - Retail Households - 12/31/ % % of Gen Y Households by Consumer Segment¹ FinancialEdge CEO Average High Performers National Distribution² 70.0% 67.5% 60.0% 51.8% 53.0% 54.0% 50.0% 40.0% 43.4% 43.0% 41.0% 30.0% 29.8% 20.0% 10.0% 0.0% Fee Driven (Lower Income) Credit Driven (Higher Income) Percentile ¹Will not total 100% as some Gen Y households are Middle Market or Upscale. ²RFG National Consumer Research CEO Strategies Book Pages: N/A, New Segmentation 46

47 CEO Average: The Generational Shift Change in Household Distribution Between 2009 and % 40.0% 35.0% CEO Average: Percent of Households by Generational Segment (with age range, then vs. now) % 37.2% 30.0% 25.0% 26.6% 25.2% 24.8% 20.0% 15.0% 16.3% 12.7% 15.6% 10.0% 5.0% 0.0% Age Range Age Range Age Range Age Range Traditionalists Baby Boomers Gen X Gen Y Source: CEO Strategies Group average data 47

48 18.0% 20.0% 19.8% 23.1% 22.6% 24.3% 24.4% 25.0% 24.4% 25.7% How Does Your Gen Y Household Growth Compare? FinancialEdge Community Credit Union - Retail Households Percent of Retail Households Headed by Gen Y FinancialEdge CEO Average High Performers 60th PERCENTILE 30% 26.0% 25% 24.8% 20% 17.7% 15% 15.6% 10% 5% 0% 25.7% CEO Strategies Book Pages: 346,

49 Financial Literacy Financial Literacy The Four Legs of Gen Y Strategy Home Ownership Home buying/ownership education Products suited to first-time home buyers Saving & Investing Credit Transactions Establishing good savings habits Emerging investors First-time home buyers: saving for down payment First-time borrowers Building good credit Managing student loan debt Technology and convenience Budgeting and spending management Mobile tools, Safe Balance accounts Financial Literacy Financial Literacy Financial Literacy 49

50 Overall, How Well Do You Lend to Gen Y Households? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Gen Y Lending Scorecard Loan Engagement Product Penetration Profitability Percentile Loan Share of Wallet 16.9% 28 % of New Gen Y HH with Loan 24% 33 % of Gen Y HH with Checking Only¹ 30% 68 Auto Loan Penetration 17% 39 Credit Card Penetration 27% 70 Cons. Loan Penetration 15% 86 % of Gen Y Loan HH That Are Profitable Loan Profit / HH $40 31% Total Profit / HH ($46) Below Average < Percentile > Above Average ¹Fewer single-service checking households = higher percentile. CEO Strategies Book Pages: 350, 351, 352, 375, 376,

51 Where Are Your Greatest Gen Y Lending Opportunities? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Gen Y Loan Share of Wallet FinancialEdge CEO Average 90th Percentile Percentile Estimated Non-Mtg Loan Balances at Other FIs 16.9% Total Loans* 21.5% 31.3% 28 $21,004, % Auto Loans 55.3% 24 $3,234, % 32.1% Credit Cards 31.4% 50.4% 59 $998,779 Consumer Loans 8.0% 7.0% 14.5% 70 $12,122, % 20.0% 40.0% 60.0% 80.0% 100.0% *Excludes 1st Mtg CEO Strategies Book Pages:

52 What Products Are Active Gen Y Households Opening? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 FinancialEdge CEO Average 90th Percentile % of Gen Y HHs That Are New 5.2% 8.0% 13.7% Percentile 12 % of Gen Y HHs That Have Been Cross-Sold 12.3% 18.7% Percentile 15.6% 84 70% % of New Gen Y HHs That Opened Product % of X-Sold Gen Y HHs That Opened Product 65% 70% 64% 64% 60% 50% 50% 60% 50% 40% 30% 20% 10% 0% Checking 24% 32% Any Loan 4% 16% Auto Loan 0% Credit Card 9% 10% 8% Consumer Loan 40% 30% 20% 10% 0% 28% 22% Checking Any Loan 28% 25% Auto Loan 9% 14% Credit Card 34% 23% Consumer Loan CEO Strategies Book Pages: 356, New Ratios 52

53 Financial Literacy Financial Literacy The Four Legs of Gen Y Strategy Home Ownership Home buying/ownership education Products suited to first-time home buyers Older Gen Y Saving & Investing Credit Transactions Establishing good savings habits Emerging investors First-time home buyers: saving for down payment First-time borrowers Building good credit Managing student loan debt Technology and convenience Budgeting and spending management Mobile tools, Safe Balance accounts Younger Gen Y Financial Literacy Financial Literacy Financial Literacy 53

54 Births per Year (000) Profile: Older Gen Y vs. Younger Gen Y 4,400 4,200 4,000 Older Gen Y Born in the 1980 s (GenY80) 3.7 Million Births per Year Current Age: Younger Gen Y Born in the 1990 s (GenY90) 4.0 Million Births Per Year Current Age: ,800 3,600 3,400 3,200 48% Homeowners 34% Anticipate Home in Next 5 Years 80% Own Smartphone / 56% Tablet 63% Mobile Bankers 48% Major Bank PFI Avg Deposits: $8,825 13% Homeowners 60% Anticipate Home in Next 5 Years 84% Own Smartphone / 37% Tablet 73% Mobile Bankers 52% Major Bank PFI Avg Deposits: $6,219 3,000 Home Ownership Transactions Saving & Investing Transactions Credit Transactions 54

55 What Is the Age Distribution of Your Gen Y Households? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Percent of Households in Gen Y Segments Proportion of Young v. Old Gen Y FinancialEdge CEO Average GenY90 GenY % 25.0% 25.7% 24.8% 33% 27% 20.0% 17.3% 17.4% 15.0% 10.0% 5.0% 8.4% 6.6% 67% 73% 0.0% All Gen Y ( ) GenY80 (Before 1990) GenY90 ( ) 60th 54th 76th FinancialEdge CEO Average CEO Strategies Book Pages: 346, New Segmentation 55

56 What Are the Differences Between Older and Younger Gen Y Households? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 FinancialEdge CEO Average 70% 60% 50% 40% 30% 20% 10% 25% 20% 15% 10% 5% 0% Checking Penetration HH Deposits Loan Penetration $4,000 55% 50.8% 59.5% 59.8% $3,500 50% $3,000 45% 39.4% 40% $2,500 $2,065 $1,996 35% $2,000 30% $1,500 25% $1,000 20% 63.0% 66.8% $500 15% $3,535 $2,972 $0 10% 46.1% 35.3% GenY80 GenY90 GenY80 GenY90 GenY80 GenY90 35th 26th 23rd 35th 69th 66th Auto Loan Penetration 17.0% 16.8% 19.7% 15.0% GenY80 GenY90 35% 30% 25% 20% 15% 10% 5% 0% Credit Card Penetration 28.6% 22.3% 23.5% 18.5% GenY80 GenY90 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Mortgage Penetration 7.1% 3.7% 2.9% 1.0% GenY80 GenY90 37th 69th 72nd 70th 93rd 95th CEO Strategies Book Pages: New Segmentation 56

57 Program Profile: Direct Auto Loans for First-Time Buyers Direct loans to first-time auto buyers Loans are initially priced in 5th of 6 tiers $1B CU IN THE NORTHEAST Program Features Loan automatically re-prices down by 50 basis points after each 12 months of on-time payments Rate can decrease for 3 consecutive years, but never go below best rate offered at the time If any payments are missed during the year, there is no rate decrease No literacy classes/programs required focus is on branch staff to educate members at time of application and closing Average starting rate is 8.99% Average loan amount is $8,500 57

58 How Effective Are You At Direct Auto Lending to Young Gen Y? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 At FinancialEdge, 71 younger Gen Y households have a direct auto loan, contributing $1,172 in annual profit. These households have $527,524 in total direct auto loan balances. In the last six months, young Gen Y households have opened 26 direct auto loans totaling $168,437 in balances. The weighted average rate on these new accounts is 4.86% (40th percentile). For the CEO Average, new direct auto loans to this segment have a weighted average rate of 5.45%. 21.7% Direct Auto Loan Performance with Younger Gen Y FinancialEdge CEO Average 90th Percentile $10, % 5.52% $242 $ % 13.4% $7,430 HH Penetration Balance per HH Weighted Avg. Rate $17 Service Profit per HH ($79) Total Profit per HH 66th 9th 47th 10th 11th CEO Strategies Book Pages: N/A, New Segmentation 58

59 Cards & Payments

60 Card Payments News Apple Pay Visa: launches location-based security feature Ties-in to issuing bank s mobile app Uses GPS to establish 50-mile radius of where transactions typically occur and will flag any transactions outside of this radius Travelers can use app to turn on/off the location-based services Amex: ban on steering deemed illegal Feb 2015: Walmart begins processing small transactions as PINless PIN, saving ~9 cents per trans. 60

61 $000 How Much Annual Interchange Income Do You Earn? FinancialEdge Community Credit Union - All Households - 12/31/2014 FinancialEdge CEO Average Annual Interchange Income Annual Interchange Income per Checking/Credit Card Account Average Monthly Transactions $350 $300 $250 $308,117 $90 $80 $70 $60 $66 $70 $58 $ $200 $ $150 $100 $50 $88,891 $40 $30 $20 $ $0 Debit Credit $0 Debit Credit 0.0 Debit Credit 44th 16th 64th 24th CEO Strategies Book Pages: 111, 114,

62 How Strong Is Your Credit Card Performance? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 FinancialEdge CEO Average 90th Percentile % Share of Wallet Total Credit Card Portfolio (percentile rankings) +17.0% HH Growth +3.7% Balance Growth $40 $5 Service Profit / HH Total Profit / HH New Account Activity in the Previous Six Months At FinancialEdge, 59 new credit card accounts were opened, with total balances of $52,611. Older Gen Y households opened 12 new credit card accounts with an average balance of $ % 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Gen Y Credit Card Portfolio 28.6% 23.5% GenY80 72nd Weighted Avg. Rate HH Penetration 36.4% 10.82% 10.29% 10.73%10.80% 22.3% 18.5% $1,266 GenY90 75th $2, % HH Balance $938 $1,258 Meanwhile, younger Gen Y households opened 09 new accounts with an average balance of $939. GenY80 63rd GenY90 48th GenY80 8th GenY90 37th CEO Strategies Book Pages: 45, 48, 182, 185, 366, New Segmentation 62

63 EMV Migration Are You Ready? Key Dates: October 2015 Visa Cards and MasterCard cards: All merchants, except automated fuel dispensers, will be liable for card-present counterfeit card fraud if an EMV card is presented and an EMV terminal is not made available. October 2016 ATM liability shift: If an ATM cannot accept EMV chipped cards after the deadline, the ATM acquirer will bear the cost for the counterfeit fraud. Currently, this liability falls on the card issuer. October 2016 Automated Fuel Dispenser liability shift: Extension of card-present counterfeit card liability to transactions at automated fuel dispensers. Key Stats and Projections: Payment industry projecting 575 million chip cards will be issued by the end of 2015¹ 71% of credit cards 41% of debit cards Currently 78,800 EMV chip activated merchant locations 47% of merchants projected to be ready to accept chip cards by end of 2015¹ Source: ¹The Smart Card Alliance Payments Summit, February

64 VIDEO: Final Seeks to Address Card Fraud With Disposable Card Numbers Source: 64

65 The Value of Rewards Client Data Analysis Credit Card Portfolio by Rewards Status Rewards - Redemptions 2% Rewards - No Redemptions 9% No Rewards 89% Source: CEO Strategies Group participant 65

66 The Value of Rewards Value Is in Redemption, Not Accretion $800 $700 $744 HH Profit Prior to Rewards Payout Cash Value of Rewards HH Profit After Rewards Payout $600 $559 $500 $400 $300 $200 $100 $0 $186 Rewards, Redemption $251 $251 $243 $243 $0 $0 Rewards, No Redemptions No Rewards Source: CEO Strategies Group participant 66

67 The Value of Rewards Higher Redemption Rates Equal Higher Value Number of Points Redeemed Percent of Redeemers Services per Household Profit Prior to Redemption Cash Value of Rewards Profit after Redemption Under 10K 36% 3.30 $138 $40 $98 10K to 20K 28% 3.74 $455 $125 $330 Over 20K 35% 4.00 $1,596 $383 $1,214 Has Rewards No Redemption NA 3.65 $ $251 No Rewards NA 3.44 $ $243 Source: CEO Strategies Group participant 67

68 Mobile Payments: The Apple Pay Effect Consumer Use Grows, Merchant Reach Expands In the last year, consumer use of in-store mobile payments has increased from 4% to 7%, led by Gen Y (10% to 15%). Also, mobile payments are being conducted at a wider variety of merchant types. The apparent decline in purchases at coffee shops is a function of increased purchase activity at other store types. 74% 4% Currently Use Mobile Payments Spring 2014 Spring % Where Consumers Have Made Mobile Purchase 10% 15% 4% 7% Total Gen Y Gen X 51% 14% 45% 20% 38% 35% 4% Coffee/Tea/Snacks Supermarket Department Store Convenience Store 68

69 Apple Pay Highlights 48 Banks and 42 Credit Union card issuers now supported (as-of 3/3/15) More institutions added weekly as tokenization requirements are met Card issuers battle for Apple Pay default card status Nov Wells Fargo offered $20 and $10 for first credit and debit card transaction Competitors ramp up efforts to compete MCX s CurrentC expected to roll out nationally in 2015 Google Wallet to come pre-installed on Android phones sold by AT&T, T-Mobile, and Verizon; Google is also acquiring Softcard 59% of U.S. Consumers Have Smartphone Android iphone (5S or earlier) iphone 6 Source: RFG National Consumer Research, Spring 2015 Smartphone Market Share 34% 10% 51% 6% of all U.S. consumers Percent That Have Made Mobile In-Store Purchase 7% Android 10% iphone (5S or earlier) 30% iphone 6 69

70 VIDEO: More Financial Institutions Offering Biometric Security Options Fingerprint Scanning BBVA s Simple, Amex, Discover utilizing Apple TouchID Facilitates Apple Pay purchases Face and Voice Recognition January 2015: USAA rolls out facial and voice recognition in mobile banking app, in addition to existing 4-digit PIN option Eye Vein / EyePrint ID Maps the blood vessels in the whites of the eye Digital Insight partnering with EyeVerify to integrate their EyePrint ID technology in mobile banking apps Six banks and CUs to implement in Spring, 2015 Video Source: 70

71 Conclusions: Payments Payments is undergoing a transformation, but this transformation is evolutionary, not revolutionary. Consumers will need to see clear evidence that new payment processes are preferable to existing ones before changing their behavior. Rewards see Starbucks Security see ApplePay P2P will continue to evolve especially among younger consumers. Security and fraud concerns will continue to be major concerns for consumers and financial institutions. This will drive appeal of products such as ApplePay. 71

72 Real Estate: 1 st Time Home Buyers & Equity Lending

73 First Time Home Buyers 20% Percent of consumers anticipate a home purchase within the next 5 years, split almost equally between first-time and experienced home buyers. Experienced First Time Anticipate Home Purchase Next 5 Years 41% 37% 35% 20% 51% Total Gen Y Fee Driven Credit Driven Have 20% Down 68% 49% 28% Anticipated Home Buyers Source: RFG National Consumer Research, Fall 2014 First Time Experienced 73

74 First Time Home Buyer Programs Gen Y Interest Participation Interest In A First-Time Buyer Program Feature Importance of a First-Time Buyers Program (Top Two Box Scores) Very Interested Extremely Interested Total Gen Y 70% 60% 50% 40% 30% 51% 29% 62% 36% Home/Condo buying process Creditworthiness Assessment Loan Pre-Approval 73% 73% 80% 75% 77% 83% 20% Info on Mortgage Types 70% 77% 10% 0% 22% Total 26% Gen Y Savings Program Participation 63% 74% 50% 75% 100% Source: RFG National Consumer Research, Fall

75 Big Banks: First Time Home Buyer Online Tools 75

76 How Strong Is Your Mortgage Lending with Older Gen Y? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 At FinancialEdge, 73 older Gen Y households have a mortgage loan, contributing $14,909 in annual profit. These households have $3,230,283 in total held mortgage loan balances. In the last six months, older Gen Y households have opened 9 mortgage loans with a weighted average rate of 4.31% on total held balances of $503,028. For the CEO Average, the weighted average rate on new held mortgage accounts with this segment is 4.01%. Mortgage Performance with Older Gen Y FinancialEdge CEO Average 90th Percentile 7.1% 6.3% $134, % $1,488 $1, % 2.9% $44,250 $204 $160 HH Penetration (Held & Sold Mtgs) Balance per HH (Held) Weighted Avg. Rate (Held) Service Profit per HH (Held & Sold) Total Profit per HH (Held & Sold) 93rd 3rd 10th 91st 9th CEO Strategies Book Pages: N/A, New Segmentation 76

77 Achieving Quality Growth in a Rising Rate Environment The Impact of Gen Y Moving into the Financial Mainstream The Opportunity with Baby Boomers Developing a Deposit Management Strategy

78 Retirement Status of Baby Boomers % of Baby Boomer Households 50% 45% 40% 43% 41% 35% 30% 25% 20% 15% 16% 10% 5% 0% Retired Will Retire within 5 Years Will Not Retire in Next 5 Years Source: RFG National Consumer Research, Fall

79 Percent of Retirement Income from Social Security Nearly a third of baby boomers are not - or do not anticipate being heavily reliant on social security income in retirement. At the same time, while 27% of retired baby boomers currently rely on Social Security for more than ¾ of their income, only 11% of future retirees estimate they will be as dependent on social security in their retirement. How can you help these members achieve the financial stability many anticipate having in retirement? 35% 30% 25% 20% 15% 10% 5% 0% Retired Baby Boomer Actual 30% 29% Less Than 25% (Little Reliance on SS) Source: RFG National Consumer Research, Fall % 11% 76% to 100% (Very Reliant on SS) Working Baby Boomer Estimate 10% 23% Do Not Know 79

80 Can Equity Help Baby Boomers Shed Debt Before Retirement? % of Baby Boomers by Total Loan Balances Housing ($000) 30% 25% 20% 15% 27% 20% 21% 24% $284 $204 Home Value $298 $198 $197 Home Equity $316 $274 $241 $217 10% 5% 8% $108 0% Source: RFG National Consumer Research, Fall

81 How Strong Is Your Home Equity Lending with Baby Boomers? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Home Equity Loan Scorecard - Baby Boomer Households Percentile Relationship Profitability Share of Wallet 6.0% 24 HH Penetration 1.9% 56 Avg. Balance / HH $13,701 2 Weighted Avg. Rate 7.12% 91 Service Profit / HH ($227) 4 Total Profit / HH $ Below Average < Percentile > Above Average CEO Strategies Book Pages: 354, 378, New Ratios 81

82 How Does Your Baby Boomers' HELOC Usage Compare? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 HELOC Scorecard - Baby Boomer Households Percentile Relationship Profitability Share of Wallet 9.5% 33 HH Penetration 6.1% 76 Avg. Balance / HH $12,336 4 Weighted Avg. Rate 4.24% 75 Service Profit / HH ($160) 5 Total Profit / HH ($95) Below Average < Percentile > Above Average CEO Strategies Book Pages: 354, 378, New Ratios 82

83 What Are Your Home Equity Loan Strengths and Weaknesses? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Home Equity Loan Scorecard Relationship Growth Profitability Percentile Share of Wallet 8.1% 37 HH Penetration 1.3% 56 Avg. Balance / HH $15,393 5 Balance Growth -11.1% 32 HH Growth -12.9% 20 Weighted Avg. Rate 6.95% 80 Service Profit / HH ($169) 4 Total Profit / HH $ Below Average < Percentile > Above Average CEO Strategies Book Pages: 47, 219,

84 What Are Your HELOC Strengths and Weaknesses? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 Share of Wallet 9.3% HELOC Scorecard Relationship Growth Profitability Percentile 39 HH Penetration 4.0% 78 Avg. Balance / HH $11,652 4 Utilization Ratio¹ 68.8% 86 Balance Growth -2.8% 28 HH Growth -3.2% 20 Weighted Avg. Rate 4.39% 72 Service Profit / HH ($176) 5 Total Profit / HH ($42) Below Average < Percentile > Above Average ¹5300 Data, All Households CEO Strategies Book Pages: 47, 125, 215,

85 Conclusions: The Prospects for Real Estate Lending Growth Largest generation in US history Gen Y is marching steadily towards home ownership. People typically buy their first home at age 31. Only one in five Gen Ys has reached this age. There is a dramatic shift to the purchase market away from the refi market. First-time homeowners will make up a significant portion of the purchase market over the next ten years and many will have difficulty in obtaining financing. This represents a major opportunity for credit unions. Equity lending is re-emerging in markets that have seen recovery in real estate values. 85

86 Achieving Quality Growth in a Rising Rate Environment Gen Y Moves into the Financial Mainstream The Opportunity with Baby Boomers Developing a Deposit Management Strategy

87 Dramatic Shift In Deposit Mix Since Financial Crisis Credit Union Deposit Mix 40% 35% Dec-07 34% Sep-14 35% 30% 25% 20% 27% 18% 23% 20% 15% 10% 11% 14% 9% 8% 5% 0% Checking Savings MMA CD IRA Source: NCUA Quarterly Data 87

88 How Does Your Deposit Mix Compare? FinancialEdge Community Credit Union - All Households - 12/31/2014 Deposit Mix 45% FinancialEdge CEO Average 40% 40% 35% 30% 30% 25% 20% 16% 21% 20% 19% 15% 14% 10% 5% 0% 9% 0.0% 5.6% Checking Savings Traditional MMA Tiered MMA 0.0% 5.7% High-Rate MMA 7.2% 7.3% 2.3% 2.4% CD IRA Business Deposits CEO Strategies Book Pages: 28, 98,

89 Deposits: Are We in Uncharted Territory? Category of Deposits Example Likelihood of Surge Balances Treatment True Core Balances Checking Accounts Savings Accounts Moderately High Focus on non-rate value of the credit union Premium Core Balances High Rate Checking High Rate Savings MMA Balances Very High Link to other credit union benefits to reduce disintermediation Stable CD Balances CDs that tend to rollover regardless of rate environment Moderately Low Focus on non-rate value of the credit union Hot CD Balances CDs that exhibit more sensitivity to interest rate environment High in Short- Term Categories Do you need the funding? If no, allow to walk; if yes, price at the margin 89

90 Rate Sensitivity Identifying Rate Sensitivity of Member Households Traditional Hierarchy of Household Rate Sensitivity Most Sensitive Single Service, Single Account, Special Term, High Balance Single Service, Single Account, High Balance Single Service, High Balance Multi-Service, High Balance Least Sensitive Multiple Service, Multiple CD, 6-month Term, Even Dollar Amount in Account (Sign of Dividend Checks Paid) It remains to be seen if the above predictors have as much value in the current rate environment, as more balances reside in Savings and MMA accounts rather the CDs. Other tactics to consider in a low rate environment include: Identify single service households with large balances in core accounts Identify HHs with dramatic changes in core balances (5 years ago vs. today) Review CD penalty and early withdrawal fees to mitigate run-off Review hierarchy by consumer segments Upscale and Middle Income Depositors historically have greater propensity to move funds for a higher rate 90

91 High Loan-to-Share Credit Unions Influence on Deposit Rates Cost of Funds by Loan-to-Share Quartiles 0.60% 0.56% 0.50% 0.40% 0.43% 0.41% 0.44% 0.30% 0.20% 0.10% 0.00% Bottom Quartile (Loan-to-Share) (52%) Quartile (69%) Quartile (81%) Top Quartile (96%) Source: CEO Strategies Group average data 91

92 1.57% 1.67% 1.94% 2.05% 2.00% 2.00% 1.55% 1.45% 1.03% 1.02% 0.93% 0.83% 0.53% 0.49% 0.39% 0.39% 0.32% How Well Can You Manage Your Funding Costs As Rates Rise? FinancialEdge Call Report Cost of Funds FinancialEdge CEO Average High Performers 75th PERCENTILE 3.25% 3.00% 2.75% 2.50% 3.01% 2.75% 2.25% 2.00% 1.75% 2.10% 2.04% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% 0.52% 0.32% 0.47% CEO Strategies Book Pages: 89 92

93 How Do Your Average Deposit Rates Compare? FinancialEdge Community Credit Union - All Households - 12/31/ % Weighted Average Rates on Deposits FinancialEdge CEO Average 90th Percentile 1.51% 1.40% 1.36% 1.20% 1.08% 1.14% 1.00% 0.93% 0.80% 0.70% 0.73% 0.74% 0.67% 0.60% 0.45% 0.51% 0.51% 0.40% 0.32% 0.29% 0.28% 0.32% 0.31% 0.20% 0.13% 0.15% 0.12% 0.00% 0.02% All Retail Deposits Savings Checking MMA All CDs New CDs IRA Percentile* *Lower deposit rates = higher percentile. CEO Strategies Book Pages: 229, 231, 236, 240, 256, 257,

94 Deposit Growth Strategies Objective: Grow Deposits Using Rate While Minimizing the Impact on Cost of Funds Strategy Offer New Products To Attract New Money Put High Minimum Balances on New Accounts to Discourage Cannibalization of Existing Lower Cost Deposits Tactics New High Rate Money Market Account New High Rate Savings Account New High Rate Checking Account Enhanced CD Offerings 94

95 How Many Consumers Would Move Funds to Earn Certain Rate Increases? The chart below shows depositors are willing to move funds within their existing FI for a lower rate increase than it would take to incent them to move their funds to a new financial institution. If you need deposits, how much new money will you have to attract to help offset the cost of cannibalization? Cannibalization Rate Increase New Money Rate Increase 80% 70% 60% 50% The cannibalization rate increase shows the percent of consumers that would move to a new product within their current FI to obtain the stated rate increase over their current deposit product. 56% 61% 66% 67% 55% 57% 74% 65% 40% 30% 20% 10% 0% 13% 9% 30% 21% 35% 25% 42% 0.10% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 48% The new money rate increase shows the percent of new depositors that would move funds to a new FI to obtain the stated rate increase over their current deposit product. Source: RFG National Consumer Research 95

96 Options for Liquid Account Growth Product High Rate MMA High Rate Savings High Rate Checking All products should have minimum balance requirements of $10,000 or more. When Appropriate to Offer When you do not have a high rate MMA. When you already have a high rate MMA. When you already have a high-rate MMA and high-rate savings account. This is different than Rewards Checking, whose goal is to grow primary relationships. This is a deposit growth tactic not a checking growth. 96

97 Enhanced CD Product Descriptions About Half of Consumers Consider Various Features Very or Extremely Important* Product Description Keys to Success Bump Rate CD No Penalty CD Rising or Step Rate CD Account holders have the option to increase interest rate one or more times after they purchase CD, if rates have gone up. (47%)* Account holders can withdraw all or part of their deposits at set times during the term, (e.g. every 90 days). (50%)* The rate on the CD rises at set points during the term of the CD. Ex: three Step Rate CD, a 32-month CD with interest rate that increases every 8 months. (52%)* Use non-standard term such as 11 or 23 months. Your ability to set future rates will not be affected by other deposits maturing in the same category. Keep this product very short term and financially categorize as a repricing liability like a money market account. Consumers focus on rate most in the first and last periods. Adjust rates in middle periods, to allow for good rates on the front and back ends and maintain reasonable overall APY. *Source: RFG National Consumer Research 97

98 Case Study: Direct Mail is Not Dead RFG Member Development Solution Program Profile Systematic approach to a targeted marketing campaign. Direct mail campaigns focus on consistent promotion of standard products, rather than specials or promotional offers. Can run concurrently with or phone campaigns multi-channel efforts tend to drive the most success. Repetitive offers (4 to 6 times per year), asking the right people for the business at the right times. Offers are timed to seasonal account opening trends. Mail pieces are personalized for specific segments. Can facilitate direct loan growth, line activation, service activation (e.g. bill pay, mdc), and deposit growth. Following results (next slide) captured from clients participating in Raddon s Member Development Solution. 98

99 Case Study: Direct Mail Is Not Dead Results of Targeted Marketing Campaigns Using RFG s Member Development Solution Case #1 Case #2 Case #3 Case #4 Case #5 Asset Size $1.6 Billion $1.6 Billion $316 Million $1.7 Billion $83 Million Products Auto, Checking, Mortgage, Equity, Credit Card, Consumer, Equity Activation Auto, Checking, Equity, Consumer, Mortgage, Equity Activation Auto, Equity, Mortgage, Consumer Welcome, Auto, Bill Pay, Checking, Equity, Equity Activation, Mortgage, Debit Activation, Credit Cards, Consumer Auto, Credit Card, Checking, Consumer Loan, Credit Check, Equity, Refer a Friend, Welcome, Equity Activation Mail Pieces 1.4M 810k 83K 166k 6K Campaign Period 24 months 33 months 3 Month 5 Months 1 Months Response Rate 2.24% 1.51% 1.71% 10.02% 2.19% New Accounts 30,267 12,217 1,420 16, New Balances $517,164,649 $210,775,486 $24,277,271 $50,601,235 $1,287,471 Costs $1,183,254 $578,095 $84,108 $135,873 $18,493 Profit $7,459,716 $4,745,383 $750,440 $1,626,241 $33,091 ROI 530% 721% 792% 1097% 78.9% 99

100 Conclusions: Growth For most credit unions growth focus should be organic and focused on deepening relationships with existing households. The major challenge for the industry will be capturing Gen Y. Large banks have done well with this group because of their focus on technology and convenience. Loan diversification may be increasingly important to credit unions, especially if loan growth has been concentrated in first mortgages or indirect auto lending. Credit unions have strongest perception among consumers, an advantage that needs to be exploited. Non-banks will continue to present a threat, but don t overstate their impact on the marketplace. Their value proposition is the key thing to recognize. Effective deposit retention and growth will be an emerging concern in

101 Responding to the Growing Threats And Challenges The Regulatory Challenge: Life After NSF New Competition and Leveraging Technology

102 "Life After NSF" - Could You Survive on 50% of Overdraft Income? FinancialEdge Community Credit Union - All Households Late last year, the CFPB issued, then withdrew, a proposal that would require overdrafts on prepaid debit cards to be treated as a loan advance - therefore subject to all regulations on lending. Is this a classic case of putting the camel nose under the tent? Will this open the door to treating standard debit cards and checking accounts in the same way? If the Bureau capped NSF fee income - like Durbin did on debit - could you survive you 50% of NSF income? $200 $180 $160 $140 $120 NSF/OD Income per Checking Account FinancialEdge CEO Average 93rd PERCENTILE $100 $101 $80 $60 $76 $40 $20 $0 $130 CEO Strategies Book Pages:

103 How Reliant Are You On NSF/OD Income? FinancialEdge Community Credit Union - All Households - 12/31/2014 At FinancialEdge, 23.4% of retail checking accounts have opted-in for overdraft coverage on POS and ATM transactions. Total annual income from NSF/OD is $610,375, which is 42.5% of total noninterest income. Meanwhile, total annual checking profit, net of expenses, is $32,797. FinancialEdge $25 NSF Fee CEO Average $29 NSF/OD Earnings Contribution 30.5% $130 $7 42.5% 23.4% $ % Opt-In Percentage NSF/OD Income per Account ($9) Checking Profit per Account NSF Income / Total Non-Interest Income 45th 93rd 62nd 94th CEO Strategies Book Pages: 111, 112, 231, New Ratios 103

104 Proposed Risk-Based Capital Rules Key Elements of NCUA Risk Based Capital Proposal The effective date is moved to January The definition of a complex credit union was raised to $100 million from $50 million. Simplification of risk weights utilized for investment classes. The NCUA removed the concept of examiner discretion which would have allowed the examiner to subjectively change a capital requirement. The full Allowance for Loan and Lease Losses can be used in the RBC computation. Goodwill coming from a merger can continue to be included in the RBC calculation until The risk weight for real estate loans secured by non-owner occupied 1-4 family residences was reduced. The risk weights for investments in a corporate credit union were lowered. The concentration limit risk weight trigger was raised from 25% to 50% on business loans. Concerns The trigger to be a well-capitalized credit union was lowered from 10.5% to 10.0%. Is this still too high? The concentration penalty for business loans and mortgages is still too high. For some consumer loans the risk weights actually increase, although never above CUSOs are still overly penalized. CUSOs will be critical for non-interest income, but CUSOs have an effective risk weight of essentially The mortgage servicing rights risk weight remains at

105 Diversification: Business, Investment & Insurance Services

106 What Are Your Business Lending Strengths and Weaknesses? FinancialEdge Community Credit Union - All Households - 12/31/2014 HH Penetration Avg. Balance / HH Margin Svc Profit / HH Percentile Business Real Estate Loans 0.53% 96 $84, % 74 $733 4 Business Loans, Excluding Real Estate 0.02% 9 $35, % 21 $ Below Average < Percentile > Above Average CEO Strategies Book Pages:

107 What Is the Contribution from Investment Services? FinancialEdge Community Credit Union - December 2014 Among CEO Strategies Group participants, 65% of credit unions offer Investment Services. FinancialEdge does not offer Investment Services or did not report this information. FinancialEdge CEO Average 90th Percentile 7.9% $72 $65 $ % $ % $0 $0 Investment Services HH Penetration Assets Under Management per Inv. HH ($000) Total Assets Under Management ($M) $1,529 $183 $ % $ % $0 $0 0.00% Annual Revenue from Investment Services ($000) Investment Services Net Income per Investment HH Investment Services Net Income / Assets CEO Strategies Book Pages:

108 Diversifying Income Sources: Insurance Services Strategic Considerations Like investment services, establishing insurance services at the CU is a long-term commitment. Needs to have buy-in from Senior Management Can t just dabble in it; commit or don t; anticipate ongoing marketing and promotion If not turning a profit by year 3 may not be a fit for your org. Do Your Homework Have in place multiple competitive carriers Does agency staff understand CU industry, can they handle volume? (Be prepared to expand staff if/when necessary) Invest in systems and tools that drive efficiencies (quick decisioning.) Due to thin margins, more of a volume game. Fits best with: Larger organizations Organizations that already have deep D&L relationships with members loyal audience. Works as a complement to existing CU offerings More likely to solidify existing strong relationships than it is to establish new ones Cross-Selling Legally, clear boundaries need to exist between CU and insurance agency; however, CU staff needs to be educated on how insurance is benefit to members and be able to make referrals. Be aggressive: do not wait for renewal dates have conversation whenever member is present and willing. First agency to offer cost savings usually wins. Responses need to be within hours, not days. Retention Resources should be allocated to retention efforts as well as new business. 108

109 Responding to the Growing Threats And Challenges The Regulatory Challenge: Life After NSF New Competition and Leveraging Technology

110 The Broad Reach of Disruptors Checking, Lending & Investment Services Checking/Mobile Lending (P-to-P) Investment Services In Feb 2015, partnered with BancAlliance network of 200 community banks to offer co-branded personal loans. 110

111 VIDEO: BankMobile Joins Other Neobanks in Targeting Millennials BankMobile is a division of Customers Bank, features include: Photo account opening (i.e. pic of driver s license) Mobile RDC Photo bill pay Card on/off switch Direct deposit users VIPs, get access to financial advisors Source: 111

112 VIDEO: Koho Looking to Protect Canadian Millennials From Themselves Koho is a Canadian start-up launching in 2015, claims to have 25 features in its pipeline that will appeal to Gen Y, including: Short-term cash flow projection Savings goals with automated deposits Set restrictions on card purchases Source: 112

113 What Is the Checking Profile of Your Gen Y Households? FinancialEdge Community Credit Union - Retail Households - 12/31/2014 FinancialEdge CEO Average 70% 60% 50% 40% 30% 20% 10% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Checking Penetration HH Checking Balance Service Profit / HH $1,800 $ % 59.8% $1,600 $60 $58 $1,400 $50 $1,200 $40 $1,000 $925 $30 $25 $800 $20 $600 $490 $10 $400 $0 63.0% 66.8% -$13 -$15 $200 ($10) $1,587 $924 $0 ($20) GenY80 GenY90 GenY80 GenY90 GenY80 GenY90 50th 44th 16th 13th 73rd 84th % Single Service 34.2% 27.8% 31.9% 41.1% GenY80 GenY Other Services Per HH GenY80 GenY90 $40 $20 $0 ($20) ($40) ($60) ($80) Total Profit / HH $32 -$41 -$26 -$68 GenY80 GenY90 68th 75th 67th 89th 25th 38th CEO Strategies Book Pages: New Segmentation 113

114 Case Study: Checking Campaign to Attract Young Households Warren FCU - $515M Credit Union in the Mountain Region On June 12 th, 2014, credit union launched Do-Gooders Unite campaign relying on social media & community involvement to attract new checking members in a young, college market where it had opened a branch 5 years ago. Marketing and value proposition focused less on price and more on joint effort to help the community and its people. Three goals: 1. Drive new growth and awareness of the branch 2. Position the credit union as an investor in the community 3. Empower new and existing members to embrace paying-it-forward One Town, 200 New Accounts and a $10,000 donation Credit union deposited $100 into each of the new accounts, and If 200 new members signed up for a checking account, the credit union would: Donate $10,000 to the community s local alliance to enhance, beautify and develop the downtown area. 114

115 Case Study: Checking Campaign to Attract Young Households Warren FCU - $515M Credit Union in the Mountain Region Onboarding Sent weekly to promotional sign-ups to gradually introduce these members to all that Warren FCU has to offer its members Results Reached 200 New Accounts on Sept. 30 Before September: new accounts per week September, when students returned: 130 new accts Continued to see new checking growth after campaign concluded (end of $100 bonus offer) Transactions in branch increased 34% YOY from Sept to Sept NPS surveys and engagement results far higher than usual. Member comments: The reason I recommended Warren FCU to my coworkers is the Do-Gooder account Thank you for reminding us all to pay it forward. I have recommended you to many friends and hope most have opened a new account. Campaign took only 5 weeks to launch and less than $7,000 in media cost Ran Parallel Campaign for Existing Members Could Take the Pledge to do something to help the town and receive a Do-Good Kit: Superhero cape and sunglasses, reusable grocery bag, gardening gloves, flower seeds, referral cards Entered into $1,000 drawing, with $500 going to member and $500 going to favorite charity 72% of new checkers were Gen Y. 115

116 Mobile Deposit Capture