Working with Credit Unions to Establish Derivative Hedging Programs

1. Working with Credit Unions to Establish Derivative Hedging Programs Steven Houle, CFA Director, Advisory Services

2. Proposed Rule The Proposed Rule • allows credit unions to engage in limited derivative transaction for the purposed of mitigating interest rate risk • applies to all federal credit unions (FCUs) and federally insured state chartered credit unions (FISCUs) • requires eligible credit unions to apply to NCUA or in the case of a FISCU, NCUA and the applicable state supervisory authority

3. Levels of Authority Level I • lower permissible transactions limits • more streamlined application process • less restrictive requirements with respect to experience, personnel and systems • lower application fee – starting at $25,000 Level II • higher permissible transactions limits up to a ceiling • onsite evaluation • higher regulatory requirements • necessary personnel and systems in place before application • higher application fee – between $75,000 and $125,000

4. Permissible Transactions The proposed rule allows credit union to engage in a limited amount of “plain vanilla” derivative transactions which include: • Interest Rate Caps • Interest Rate Swaps • pay-fixed/receive-floating • pay-floating/receive-fixed

5. Eligibility Interest Rate Risk Mitigation • rather than demonstrate material IRR exposure, a CU must present a comprehensive risk management strategy, and articulate how the inclusion of interest rate derivatives will compliment existing risk mitigation tools CAMEL Requirements • most recent CAMEL code assigned by NCUA of 1,2, or 3 • management component rating of 1 or 2 Asset Threshold • NCUA is proposing an asset threshold of $250 million or higher

6. Proposed Requirements

7. External Service Providers • NCUA believes ESP can play a vital roll in the success of a derivative program but an overreliance can lead to additional risks • the proposed rule prohibits CUs from using ESP that are principals or agents to derivative transactions involving the CU • the proposed rule classifies a number of activities into two categories of permissible use: Support and Conduct

8. External Service Provider Support • A CU is required to conduct the function in this category • ESP can provide assistance and input Conduct • a CU may contract an ESP to conduct a function or activity • a CU is responsible for managing an ESP’s work quality • a CU must have full understanding of ESP’s activities • a CU is not required to maintain in-house capacity for the function or activity

9. External Service Providers

10. Catalyst Strategic Solutions • Catalyst Strategic Solutions will be an External Service Provider to assist credit unions with their derivative hedging program • Assistance will range from education and training to supporting and conducting required functions and activities • Pricing will be comprehensive or A la carte

11. Comments and Questions Steven Houle, CFA Director, Advisory Services 800-442-6427 214-703-7882 shoule@catalystcorp.org

12. Loan Participations for Credit Unions Jeff Hamilton, CFA Vice President, Member Credit

13. Agenda The “Rules of the Game” • NCUA • FASB 166 Catalyst Agent Loan Participation Program • Overview • How the Program Works

14. “Rules of the Game” - NCUA • Purchasing CU must be empowered to make loan (comply with regulatory requirements) • Originating lender retains an interest in participated loan(s) for life of the loan 10% for FCUs 5% for FISCUs • Borrower is a member of one of the participating credit unions • Waiver provisions • Written loan participation policy(Limits) • Written loan participation agreement

15. “Rules of the Game” - NCUA Loan Participation Policy • Single originator limit: Greater of 100% of NW or $5 Mln • Single borrower limit: 15% of NW • Concentration limits by loan type as a % of NW • May participate in loans that CU does not originate • May have different underwriting standards for LPs • “establish prudent underwriting standards for loan participations” • “conduct appropriatedue diligence before purchasing a participation”

16. “Rules of the Game” - NCUA Loan Participation Agreement • Properly authorized, executed and retained in office. • Seller retain interest in participated loans throughout. 10% for FCUs 5% for FISCUs • Identify each participated loan, location and custodian. • Enumerate servicing responsibilities for the loans. • Requirements forreporting and participant access to information. • Provisions for participants to replace the servicer.

17. “Rules of the Game” – FASB 166 Participating Interest • A pro rata ownership interest in a financial asset. • All cash flows are divided proportionately among participants based on % ownership. • The rights of each participant have the same priority. • No party has the right to pledge or exchange the entire financial asset unless all agree.

18. “Rules of the Game” – FASB 166 Conditions for “Sale Treatment” • The transferred financial assets have been isolated from the assets of the transferor. • Each transferee has the right to pledge or exchange the assets. • The transferor does not maintain effective control over the transferred financial assets. • No provisions for recourse • Cleanup calls permitted

19. Catalyst Agent LP Program Overview A comprehensive program that provides the framework and infrastructure for credit unions to buy and sell loan participations. • Secure online platform for hosting and managing due diligence and documents - TranZact • Straightforward “standardized” process • Detailed step-by-step guides • Model Templates and Forms • Loan Participation Agreement • Outline for Participation Policy • Due diligence checklist • Pricing assistance • Marketing, Document Management and Settlement

20. Catalyst Agent LP Program

21. Catalyst Agent LP Program • Discuss Needs and Objectives • Loan Types • Amount, Timing, etc. • Review Catalyst Services, Resources and Fees • Seller Guide • LP Policy Outline • Data Requirements • Contract for Services • Set up Access to Loan Participation Functions in TranZact • Review the Information Provided • Upload to TranZact: • Loan Data File in Required Format • Loan Performance History: Delinquencies, Chargeoffs, & Recoveries • Underwriting Guidelines • Loan Participation Policy (if available) • Executed Contract for Services

22. Catalyst Agent LP Program • Discuss Results of Catalyst’s analysis of the Loan Data and Define Participation Terms. • Loan Pool Profile, Stratifications, exceptions and adjustments • Participation Structure: • Recourse or Non-Recourse • CU Servicing Fee Retained • Clean-up Call Provision • Cutoff and Payment Cycle • Catalyst Services and Fees • LP Agreement - (Buyer/Seller) • Preliminary Timeline for Sale and Settlement • Agreement to Proceed • Schedule on-site Visit (if necessary)

23. Catalyst Agent LP Program • Upload Due Diligence Information: • Lending Policies, Procedures, Underwriting Guidelines • Servicing and Collection Policies and Procedures • Charge-off, Foreclosure, Repo and Recovery Policies and Procedures • Modification and Extension Policies (if applicable) • Credit Scoring Model/Bureau (e.g. Experian, FICO) • Systems info: Lending, Servicing • Staff Info., Designated Contact Person • Complete Loan Files • Catalyst will prepare marketing materials: • Term Sheets • Loan Pool Profiles and Summaries

24. Catalyst Agent LP Program • Grant Access to TranZact for Buyers • Due Diligence Timeframe • Seller Contact for Buyer Inquiries • Submit “Purchase Commitment Form” by Close of Due Diligence Period • Compile Purchaser Listing With Amounts and Allocations • Seller Approval & Proceed • Post “Public” Information on Website • Calls, e-mails and Contacts with Interested Members • Calls with Interested Non-Members • Prospective Buyers Complete and Submit “Confidentiality Agreement and Indication of Interest Form” • Provide Frequent Status Updates

25. Catalyst Agent LP Program • Submit Loan Data File in Required Format • Verify That the Data File Balances • Prepare Allocations and Confirm Payment Amount • Prepare Monthly Statement for Buyers • Upload Statements and Data File to TranZact for Buyers • Verify Funds Availability • On Payment Date: Debit Seller for Payment Amount and Credit Buyers with Their Allocation • Prepare Contracts and Addendums for Buyers to Execute • Buyers Execute Agreements • Seller Execute Agreements • Distribute Fully Executed Agreements • On Settlement Date: Debit Buyers for Purchase Amounts and Credit Seller with Proceeds

26. In Summary

27. Comments and Questions Jeff Hamilton, CFA Vice President, Member Credit 800-442-5763 214-703-7870 jhhamilton@catalystcorp.org