Today’s Loans are tomorrow’s assets

1. Steven Houle, CFA Director, Advisory Service Today’s Loans are tomorrow’s assets

2. Overview • Credit union asset and loan trends • Yield curve and consumer market update • Balance sheet considerations • Additional metrics

3. Credit Union Industry Distribution • Seven percent of the credit unions manage seventy percent of the loans and assets Source: NCUA

4. Loan Growth • Loan growth continues to be concentrated with larger credit unions Source: NCUA

5. Loan Growth • Vehicle loans are driving growth Source: NCUA

6. Loan allocations • Allocations are predominately real estate loans Source: NCUA

7. Loan Quality • Loan quality continues to improve Source: NCUA

8. Indirect Loans Billion Indirect loans continue to increase as credit unions look for ways to increase loan volume. Source: NCUA

9. Participation Loans Billion Loan participations continue to increase as credit unions look for ways to increase loan volume. Source: NCUA

10. Market overview - Yield curve The shape of yield curve is changing in non-parallel fashion. • 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

11. Market overview - Yield curve • Shape of the future curve…. bear flattener? • Short term rates will rise faster than long term rates? • How will shape of the future curve impact asset spreads and asset allocations?

12. 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% • 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

13. Market overview - Real Estate MBA Application Index • Mortgage applications are a function of mortgage rates. • Historical comparison: • December 2009: • 30 yr FRM: 5.08% • Applications Index: 460.10 • August 2010: • 30 yr FRM: 4.43% • Applications Index: 893.80 • September 2012: • 30 yr FRM: 3.53% • Application Index: 1020.40 • August 2014: • 30 yr FRM: 4.25% • Application Index: 352.70

14. Market overview - Real Estate Refinances continue to increase homeowners seek lower mortgage rates. How will interest rates in 2015 impact these volumes?

15. Market overview - US Auto Sales Million Units SAAR of US Auto Sales • Seasonally Adjusted Annualized Selling Rate (SAAR): • August 2013: • 15.71 million units • July 2014: • 16.4 million units • August 2014: • 17.45 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

16. 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 2008. • Demand will be driven by incentives, interest rates, lease deals and the general economy.

17. Loan Yield Comparison

18. Loan Pricing and Spread Comparison • Monitor and compare pricing changes: • Change in loan rate; • Change in pricing index; and • Change in spread.

19. 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

20. Risk/Return Relationship • Evaluate earnings and risk relationship: • What asset drives the most income? • How do income profiles change with changes in rates? • How do market values change with changes in rates?

21. Considerations – Indirect autos • It is crucial to evaluate return profile given dealer fees

22. Considerations – Indirect autos • Net yield based on prepayment speed

23. Considerations – Indirect autos • Net Loan yield based on holding period

24. 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.

25. 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? Potential income opportunity

26. Considerations – Additional metrics • Outbound telemarketing for loans: • Bring business back to the credit union • Strengthen member relationship • Opportunity to understand membership better

27. Considerations – additional metrics • Evaluate marketing expense: • How much did you spend? • How much revenue did it generate? • What was your return on investment (ROI)? • Remember: • Identify your target market • Personalize your message • Make it easy to accept • Use technology

28. 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

29. Today’s Loans are Tomorrow’s Assets Questions? Steven Houle, CFADirector, Advisory Service214-703-7882shoule@catalystcorp.org