the road ahead for credit unions

©2011 Open Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open Solutions Inc. www.raddon.com | 800.827.3500

Slide 1

The Road Ahead for Credit Unions A Review of Challenges/Opportunities Credit Unions May Face in the Current Environment

Bill HandelVice President of Research

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Slide 2

The RFG Solution

RFG helps financial institutions gain a competitive advantage and improve performance with sustainable and measurable results through:1. Research and Analysis

2. BI/CRM/MCIF Software

3. Data Solutions

4. Consulting

Understanding the needs of the

member

Understanding the competencies of the organization

Aligning products, systems, people, and processes

Marketing, sales, and management

tools


Slide 3

How Do Our Clients Work with Us?

StrategyStrategy

Results Results


Slide 4

Industry & Economic Overview


Slide 5

Third Consecutive Year of Historically Low Housing Starts

Housing Starts

0.0

0.5

1.0

1.5

2.0

2.5

1960 1970 1980 1990 2000 2010

(Mill

ions

)

Low home sales since 2005 have resulted in very low levels of housing starts in the US. Expect these levels to remain low for the next several years.


Slide 6

Vehicle Sales Lowest Since Early 1990s

02

46

810

1214

1618

20

1980 1985 1990 1995 2000 2005 2010

Mill

ions

of U

nit S

ales

2011 projection2011 projection

Vehicle sales have expanded since 2009, but are still far below levels seen in the mid 2000s.

Source: Bureau of Economic Analysis


Slide 7

Household Debt Levels Are DecliningBut Still Historically High

Debt per US Household ($000)

$0$20$40$60$80

$100$120$140

1960 1970 1980 1990 2000 2010

Residential Mtg Debt Other Consumer Debt

Source: Federal Reserve

Debt levels per household expanded in the 1980s and 1990s, but this growth accelerated in the 2000s, leading to our current deleveraging.


Slide 8

Conclusion

The economic environment is likely to continue to present challenges for the next several years.

Housing typically leads most recoveries – but not this one.

Consumers do not feel that the recession has ended, despite the proclamation of most economists.

• This may be a self-fulfilling prophecy.

Major issue for credit unions will be continued weak loan demand.

Second issue: consumers will continue to seek a trusted financial advisor.


Slide 9

The Importance of Managed Growth


Slide 10

Key Growth Questions

Can the credit union afford to grow any faster than the rate of loan growth?

How important are membership and household growth goals? How important is the profitability?

Is the Board and Senior Management ok with shrinking deposits/assets if you can’t find loan volume?

How can the credit union effectively control or manage growth in the current environment?


Slide 11

Anticipated Loan Usage Has Declined

% Who Anticipate Opening a Loan in the Next Year

42%

29%

39%

20%

25%

30%

35%

40%

45%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Raddon Financial Group, National Consumer Research

RFG research shows that consumers have been looking to reduce their debt for many years; the most recent financial crisis has forced the issue.


Slide 12

Eastern Total

Total Households -- Jun-11 39,721

Total Households -- Dec-10 43,681

Net Change in Households (14)

Gross New Households 1,789

Lost Households 1,654

Retained Households 39,538

Eastern % of Households¹ Comparisons - % of Total HouseholdsRetention Percentages Jun-10 Dec-10 Jun-11 Percentile Peer Group Asset Size

Region Average

National Average

High Performers

Retained % 97.1% 96.8% 96.3% 60 95.5% 95.7% 96.3% 95.2% 95.6%Lost % 2.9% 3.2% 3.7% 60 4.5% 4.3% 3.7% 4.8% 4.4%Gross New % 4.1% 4.6% 4.1% 50 4.7% 4.2% 4.1% 4.2% 4.4%Net New % 2.0% 3.7% -0.6% 54 0.8% 0.5% -0.6% -0.3% 0.6%

¹ This analysis can only be computed if the Credit Union processed six months previous. Distortions may result from acquisition or merger activity; in such cases results will not be shown.

HOUSEHOLD RETENTION

95.5%

96.3%

4.5%

3.7%

80.0% 84.0% 88.0% 92.0% 96.0% 100.0%

Peer Group

Jun-11

Retained % Lost %

10

Are you retaining the right members?

Overall member retention matters less. Retaining the right members matters more.


Slide 13

4.1% of households at Eastern are new to the credit union in the last six months.12.7% of the households at the credit union are Cross-Sold HHs. These are households that opened an account with the credit union in the last six months, but had an existing relationship prior to that period.

New Cross-Sold Household RatioEastern Household Ratio¹ Including CDs² Excluding CDs³Jun-11 4.1% 12.7% 7.9%

Percentile 50 53 50Dec-10 4.3% 13.2% 8.6%Jun-10 4.0% 13.7% 8.3%Comparisons - Jun-11Peer Group 4.7% 12.2% 8.3%Asset Size 4.3% 12.4% 8.1%Region Average 4.1% 12.7% 7.9%National Average 4.2% 12.6% 8.3%High Performers 4.6% 14.5% 9.8%¹ Households in which all accounts with the credit union have been opened in the last six months

² Households in which some accounts with the credit union were opened in the last six months, but some were opened more than six months ago

³ Cross-sold percentage excluding CDs and IRAs, which often are renewals

NEW AND CROSS-SOLD HOUSEHOLDS

4.0% 4.3% 4.1%

13.7% 13.2% 12.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jun-10 Dec-10 Jun-11

New HHs Cross-Sold HHs

The higher this percentage, the more effective the credit union is in cross-selling to its existing member base.

4.1% of households at Eastern are new to the credit union in the last six months.

12.7% of the households at the credit union are Cross-Sold HHs. These are households that opened an account with the credit union in the last six months, but had an existing relationship prior to that period.

13

Tools that improve cross-selling, via direct mail, the internet, the front line, or the call center, have increased enormously in importance. Cross-sales should be a organization-wide metric.

Tools that improve cross-selling, via direct mail, the internet, the front line, or the call center, have increased enormously in importance. Cross-sales should be a organization-wide metric.


Slide 14

Eastern (Balances in $M) Comparisons - 12 Month Growth Rate

Retail HHs $442.8 $405.9 $356.6 -2.6% -0.6% 55 +0.2% -1.4% +0.8%Indirect HHs $36.6 $38.1 $39.1 +4.8% -3.4% 57 -5.3% -9.5% -0.9%Commercial HHs $38.8 $42.6 $46.7 +16.4% +22.1% 61 +12.6% +14.0% +13.0%Total $495.0 $455.5 $420.7 -0.9% +0.8% 59 +1.1% -1.3% +0.7%¹ Business line totals from account data; overall total from 5300 data

High PerformersJun-10

Total Loans¹Peer Group

LOAN GROWTH BY BUSINESS LINE

National Average

12 Month Growth Percentile

6 Month GrowthDec-10 Jun-11

As of June 2011, Eastern had $420.7 million in total loan balances.

For Retail HHs, the growth rate of loan balances annualized over the past 12 Months at Eastern is -0.6%.

For Indirect HHs, the growth rate of loan balances annualized over the past 12 Months at Eastern is -3.4%.

For Commercial HHs, the growth rate of loan balances annualized over the past 12 Months at Eastern is +22.1%.

-0.6%-3.4%

+22.1%

+0.2%

-5.3%

+12.6%

-10.0%

-5.0%

+0.0%

+5.0%

+10.0%

+15.0%

+20.0%

+25.0%

Retail HHs Indirect HHs Commercial HHs

Gro

wth

Rate

Total Loans¹ Peer Group

38

The recent growth in loans has been experienced in the commercial (small business) sector.

The indirect category has also seen growth for many credit unions, but price is the driving factor.

The recent growth in loans has been experienced in the commercial (small business) sector.

The indirect category has also seen growth for many credit unions, but price is the driving factor.


Slide 15

Eastern All Retail Credit Consumer Unsecured Commercial6 Month Growth Loans Auto Real Estate Cards Loans LOC LoansBalances -2.4% -2.1% -2.6% -1.4% +2.2% -5.8% +25.7%

Percentile 54 55 51 46 60 56 58Households -0.3% -2.9% -2.9% +5.8% -0.9% +1.0% +19.6%

Percentile 55 53 53 52 57 56 61Accounts -0.1% -2.9% -2.9% +8.6% +0.2% +1.1% +22.1%

Percentile 55 53 54 52 57 56 60Account Retention 89.2% 82.8% 91.5% 96.5% 75.6% 92.5% 92.0%

Percentile 57 57 52 61 57 55 60

Peer GroupBalances -0.1% -4.3% +2.0% -4.9% -2.3% -0.6% +6.6%Households +2.4% -3.7% +2.5% +1.4% -3.7% +2.9% +14.0%Accounts +1.4% -3.9% +3.8% +0.4% -3.4% +2.9% +10.1%Account Retention 88.6% 81.9% 91.2% 95.2% 73.2% 93.6% 85.5%Asset SizeBalances -0.9% -4.4% +0.4% -3.4% -3.5% -1.2% +11.8%Households +1.2% -3.6% +1.8% +1.8% -4.7% +1.2% +18.3%Accounts +0.1% -3.8% +2.5% +0.8% -4.7% +0.8% +16.2%Account Retention 88.9% 82.3% 91.6% 95.3% 74.5% 93.5% 87.8%Region AverageBalances -2.4% -2.1% -2.6% -1.4% +2.2% -5.8% +25.7%Households -0.3% -2.9% -2.9% +5.8% -0.9% +1.0% +19.6%Accounts -0.1% -2.9% -2.9% +8.6% +0.2% +1.1% +22.1%Account Retention 89.2% 82.8% 91.5% 96.5% 75.6% 92.5% 92.0%National AverageBalances -3.0% -4.5% -2.6% -0.7% -1.8% -6.3% +13.8%Households -0.9% -4.1% -1.8% +4.9% -1.8% +0.0% +11.4%Accounts -1.3% -4.2% -1.8% +5.5% -1.6% -0.1% +12.9%Account Retention 87.7% 81.5% 90.8% 95.5% 73.5% 93.0% 88.1%High PerformersBalances -1.1% -2.2% -0.1% +6.0% +1.0% -12.0% +15.3%Households +2.2% -1.4% +0.5% +4.2% +0.9% -2.3% +15.8%Accounts +3.0% -1.7% +0.3% +7.9% +0.4% -2.9% +14.6%Account Retention 89.1% 82.1% 91.8% 95.8% 73.0% 94.8% 89.2%

SIX MONTH LOAN GROWTH SUMMARY

40


Slide 16

LOAN FUNDING PROFILE

Jun-11Loan Loan Approval Funded Funding Unfunded

Eastern Applications Approvals % Approvals % Percentile ApprovalsFirst Mortgage 574 298 64% 282 76% 52 17HELOC and Home Equity 600 396 66% 329 84% 51 62Direct Auto 4,026 2,409 62% 1,871 75% 54 503Credit Card 2,002 1,299 63% 1,171 88% 56 119Other Consumer Loan 3,956 2,229 55% 2,127 88% 59 96

Annual Total 10,452 6,210 60% 5,413 87% 54 796Per Month 872 518 452 67

The graph and table on this page highlight, by product type, both the volume of approved loans as well as the percent of approvals funded.

Giving consideration to both the funding percentage as well as the volume of unfunded approved loans helps reveal where the organization should focus its improvement efforts.

For instance, a low funding percentage for a given product type may suggest funding processes in that area are inefficient. However, if application volume for this product is low, it may be more critical to allocate resources and improve processes in other product areas that show a high number of unfunded approvals.

298396

2,409

1,299

2,22976%

84%

75%

88% 88%

0

500

1,000

1,500

2,000

2,500

3,000

1st Mtg Home Equity Direct Auto Credit Card Consumer

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

# of Approved Loans % Funded

51

The often-forgotten growth opportunity: unfunded loan approvals.

What programs have been put in place to track and follow-up on unfunded loan approvals. These potential loans could result in significant growth for the institution.

The often-forgotten growth opportunity: unfunded loan approvals.

What programs have been put in place to track and follow-up on unfunded loan approvals. These potential loans could result in significant growth for the institution.


Slide 17

LOAN FUNDING UPLIFT

Impact of Funding the Following Percent of Unfunded Approvals:10% 25% 50% 75% 100%

1st Mortgage# to Fund 2 5 9 13 17

Potential Loan Dollars $298,485 $746,211 $1,343,180 $1,940,149 $2,537,118Estimated Uplift $4,630 $11,575 $20,835 $30,095 $39,355

HELOC & Home Equity# to Fund 7 16 31 47 62

Potential Loan Dollars $254,331 $581,327 $1,126,322 $1,707,649 $2,252,643Estimated Uplift $5,779 $13,210 $25,595 $38,805 $51,189

Direct Auto Loan# to Fund 51 126 252 378 503

Potential Loan Dollars $517,031 $1,277,370 $2,554,740 $3,832,110 $5,099,342Estimated Uplift $15,045 $37,170 $74,339 $111,509 $148,383

Credit Card# to Fund 12 30 60 90 120

Potential Loan Dollars $30,119 $75,298 $150,596 $225,895 $301,193Estimated Uplift $2,467 $6,167 $12,335 $18,502 $24,670

Consumer Loan# to Fund 10 24 48 72 96

Potential Loan Dollars $63,156 $151,574 $303,148 $454,721 $606,295Estimated Uplift $2,222 $5,334 $10,667 $16,001 $21,335

Annual Total# to Fund 82 201 400 600 798

Potential Loan Dollars $1,163,121 $2,831,780 $5,477,986 $8,160,524 $10,796,591Estimated Uplift $30,144 $73,456 $143,771 $214,912 $284,932

* Uplift is calculated using the institution's contribution margin for the respective products. If the institution's contribution margin is

negative, the national average is used instead.

Eastern

The table to the left demonstrates the earnings opportunity and potential loan dollars gained by funding additional approved loans.

The "100%" column represents the total opportunity by funding all unfunded approved loans.

Refer to the "# to Fund" rows to identify levels of improvement that are reasonable and attainable for each product type.

52

How much loan business are you leaving on the table?

This data show the projected loan dollars and financial impact of loans that are approved but unfunded.


Slide 18

The fundamental issue:

In a low-growth environment, loan growth is dependent on increasing

wallet share


Slide 20

Estimated Loan Share of Wallet

Eastern1st

MortgageHELOC

Equity Loan

Auto Loan

Credit Card

Consumer Loan

Unsecured LOC

Total Loans¹

Jun-11 4.3% 18.6% 26.1% 34.6% 31.4% 16.2% 13.6% 24.8%Percentile 49 58 66 41 57 58 50 59

Dec-10 4.4% 18.3% 24.3% 35.2% 31.5% 15.1% 16.0% 24.1%Jun-10Comparison - Jun-11Peer Group 4.8% 15.9% 15.3% 38.0% 27.6% 11.3% 11.0% 20.8%Asset Size 4.9% 16.9% 17.3% 37.9% 31.2% 12.7% 12.7% 22.1%Region Average 4.3% 18.6% 26.1% 34.6% 31.4% 16.2% 13.6% 24.8%National Average 4.4% 15.6% 16.5% 40.0% 28.9% 13.9% 13.0% 22.1%High Performers 6.2% 18.4% 20.9% 45.0% 34.3% 15.0% 12.9% 26.4%¹Excluding 1st Mortgage and Unsecured Lines

ESTIMATED LOAN SHARE OF WALLET BY PRODUCTEastern Region - All Retail Households

4.3%

18.6%26.1%

34.6% 31.4%

16.2% 13.6%

4.4%

15.6% 16.5%

40.0%

28.9%

13.9% 13.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1st Mortgage HELOC Equity Loan Auto Loan Credit Card Consumer Loan Unsecured LOC

Eastern National Average

366

Where are your loan strengths and weaknesses by product type. Auto loans tend to be the strongest, and yet the typical institution still gets only 40% of the membership’s auto loan balances.

Where are your loan strengths and weaknesses by product type. Auto loans tend to be the strongest, and yet the typical institution still gets only 40% of the membership’s auto loan balances.


Slide 21

Estimated Loan Share of Wallet¹

EasternFee

DrivenCredit Driven

Middle Market

Low Income Depositor

Mid. Income Depositor Upscale

Jun-11 23.1% 16.8% 24.9% 37.6% 28.0% 22.7%Percentile 56 54 60 58 62 62

Dec-10 20.6% 16.5% 24.9% 38.7% 27.3% 23.3%Jun-10Comparisons - Jun-11Peer Group 19.1% 14.2% 20.4% 33.7% 23.3% 18.6%Asset Size 20.9% 15.4% 21.8% 34.5% 24.7% 20.3%Region Average 23.1% 16.8% 24.9% 37.6% 28.0% 22.7%National Average 21.3% 15.9% 21.7% 34.2% 24.1% 19.5%High Performers 25.1% 18.7% 26.4% 39.7% 28.3% 23.9%¹ Excluding 1st Mortgages and Unsecured Lines

ESTIMATED LOAN SHARE OF WALLET BY CONSUMER SEGMENTEastern Region - Retail Households

23.1%16.8%

24.9%

37.6%

28.0%22.7%21.3%

15.9%21.7%

34.2%

24.1%19.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Fee Driven Credit Driven Middle Market Low IncomeDepositor

Mid. IncomeDepositor

Upscale

Eastern National Average

367

Share of loan wallet tends to be lowest among the credit driven households, which is the high income Gen Y segment. The industry is losing the loan relationships of the younger segments.

Share of loan wallet tends to be lowest among the credit driven households, which is the high income Gen Y segment. The industry is losing the loan relationships of the younger segments.


Slide 22

ESTIMATED SHARE OF WALLET BY BRANCHEastern Region - Retail Households

Loan Deposit TotalShare of Share of Share of

Branch Wallet Wallet WalletRatio 16.5% 30.2% 26.3%

Percentile 30 62 54Ratio 20.3% 44.3% 38.1%








Percentile 13 31 22Ratio

Percentile Ratio

Percentile Ratio

Percentile Ratio 17.4% 35.1% 30.3%

Percentile 23 81 70Shading for those ratios with percentile at or above 65.

Eastern - Total

E - Pac 12

F - SEC

A - ACC

B - Big 12

C - Big East

D - Big Ten

G - Sun Belt

H - WAC

I - Unassigned

414

Which branches are doing the best in terms of share of wallet?

Which branches are doing the best in terms of share of wallet?


Slide 23

Even in this current environment…

SOME CREDIT UNIONS ARE FINDING WAYS TO GROW LOANS

A Few Examples…


Slide 24

Product Offering: Promoting rate rather than type (refinance – boat – auto –

card payoff) Starting at 1.99% (secured), 3.99% (unsecured) variable

rates for tier 1 borrowers Up to 72 month term, Max 1% rate increase per year New loans only, automatic payment required (from anywhere) Not applicable for real estate or business loans No minimum amount for 60 month term, $20k minimum for 72

month term $25 off origination fee if member was around prior to Oct 15th

2010 Online origination fee $69, other origination $99

$160 Million Community CU in Central Region

Results: 2.60% Average Loan Yield $12,700 Average Balance 40% increase in loan volume year over year Break-even balance: $4500 at 1.99%, $1,900 at 3.99%

Case Study: Innovative Loan Product

As shown at RFG’s Winter 2011 CEO

Strategies Workshops, a relevant example of

utilizing product design to achieve growth


Slide 25

Case Study: Member Development SolutionAsking the Right People for the Business

Balance Growth $49,764,077

Total Interest Income $1,296,657

Total Cost $162,846

Profit $685,879

Response Rate0.98%

ROI321%

•HOW?HOW? Targeted Marketing Campaign Targeted Marketing Campaign (RFG’s Member Development Solution)(RFG’s Member Development Solution)

• Who?Who? Using RFG research, targeted members most likely to respond Using RFG research, targeted members most likely to respond to the offerto the offer

• When?When? Timed offers according to seasonal account opening trends Timed offers according to seasonal account opening trends based on RFG researchbased on RFG research

Results after 9 months…Results after 9 months…

$800 Million Credit Union in economically depressed area Conducted 34 separate campaigns for Auto, Equity, Checking, and Mortgages

over course of 9 months (191k pieces mailed) No Promotional Offers – repetitive offers asking the members for the business

1,869 New Accounts

(78% were Loans)


Slide 26

Case Study: Outbound Sales Program

Outbound call center consists of 7 full-time and 1 part-time employee (including a manager and one processor)

• Dedicated to consumer loan recapture activities• Hire lenders with 2-3 years of experience who are charismatic and possess great

phone skills

Pull credit reports on 2,000 individuals per month• New members, new loans, new joint account holders• Part-time employee sifts through reports and prioritizes leads• Looks for FICO scores over 680, resulting in 400 leads per month

Outbound callers typically achieve contact with 150 of the 400 leads• Convert 100 loans to the CU per month• Average loan balance of $19,000

Resulting Annual Net Contribution from program = $400,000

$2.8 Billion Credit Union in Western Region


Slide 27

Case Study: Successful Loan Generation Matrix Program

In late 2005, a $217 Million Midwestern credit union with three branches in rural markets began a long-term direct marketing program that continues today.

Now in its sixth year, the loan generation matrix program – an automated, database-driven series of campaigns targeting members with a high-potential for specific loan products – has produced:

2,721 new loans from direct sales over five years of campaigns $41.3 million in new loan balances in direct sales over five years of campaigns $182 million in new loan and deposit balances gained from product sales other than those featured during the campaign periods (indirect sales)

The average ROI for the entire program was 934.9%.


Slide 28

Response rates during the years also demonstrated success.

Direct response rates averaged 20.5% per year over five years of campaigns. Indirect response rates averaged 50.8% per year during the same period.

Case Study: Successful Loan Generation Matrix Program(Continued...)


Slide 29

The Impact of Re-Regulation


Slide 30

Critical Issues

What threats do we anticipate to non-interest income?• Consumer Financial Protection Bureau

• Threats to interchange (debit cards, credit cards?)

Can we continue to maintain the same reliance upon non-interest income in our operating models?

Can we continue to support free checking?


Slide 31

EasternJun-11 $151 $2 $73 $18 $53 $5

Percentile 39 46 42 53 40 51Dec-10 $152 $2 $76 $18 $49 $8Jun-10 $149 $4 $74 $16 $49 $6Comparatives - Jun-11Peer Group $173 $5 $79 $17 $65 $7Asset Size $164 $5 $76 $16 $61 $6Region Average $151 $2 $73 $18 $53 $5National Average $176 $5 $86 $16 $62 $6High Performers $171 $3 $85 $13 $64 $5¹Includes only consumer checking accounts

²Includes fee income from overdraft privilege programs (if applicable)

CHECK ING ACCOUNT FEE INCOME

Fees Per Checking Account Per Year

Other FeesATM IncomeNSF / OD

Fees²Minimum Balance

Debit Card IncomeTotal Fees¹

$79

$73

$94

$78

Peer Group

Eastern

NSF Income All Other Fee Income

Total checking account fee income is equal to $151 per checking account per year at Eastern. NSF income generates $73 of the total amount of fee income.

111

National trends for credit unions: declining NSF offset by increase in debit card income. Total income is flat to down.

NSF Debit Card Total

2003 $51 $30 $113

2008 $101 $50 $180

2011 $86 $62 $176


Slide 32

For the credit union, annual debit card income is $69 per card. For the Peer Group, debit card income is $70.

+10% Activation

EasternDebit Card

Penetration¹Debit Card Activation²

Monthly Transactions

Percent Signature4 Percent PIN6

Avg Trans. Amount

Annual Income³

Jun-11 86% 76% 15.7 66% 34% $37 $69Percentile 55 45 38 59 43 58 40

Dec-10 84% 76% 15.3 66% 34% $35 $64Jun-10 82% 76% 15.0 66% 34% $37 $61Comparatives - Jun-11Peer Group 86% 79% 18.3 62% 38% $36 $70Asset Size 84% 79% 17.5 63% 37% $36 $69Region Average 86% 76% 15.7 66% 34% $37 $69National Average 84% 80% 16.7 64% 36% $37 $70High Performers 82% 82% 17.7 60% 40% $36 $741 Percent of checking accounts with a debit card. 3 Debit card interchange income plus any other debit card fees.2 Percent of debit cards that are active within the last 90 days. 4 Percent of transactions that are signature-based as reported by the credit union.

5 Percent of transactions that are PIN-based as reported by the credit union.

DEBIT CARD USAGE

Per Debit Card

With financial regulation poised to alter the interchange arena, optimizing the debit card channel will be critical to minimizing any potential loss of revenue.

Increasing the number of active users and/or incenting card holders to increase their debit usage are two primary ways of generating additional revenue, while higher activation also reduces the sunk cost of dormant cardholders.

The graph to the right displays the potential revenue uplift by achieving the following: a 10% increase in activation and/or one (1) additional transaction per cardholder per month.

In total nominal dollars, the potential annual uplift at Eastern is:

• One (1) Additional Monthly Trans. per Card:

• Increase Activation by 10%*:

• Do Both:

* If activation is currently 90% or higher, the uplift is calculated assuming 100% activation is achieved.

$82,382

$223,213

$316,407

$1,700,755

$223,213

$82,382

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Annual Income

Current +10% Activation +1 Trans/Mo.

114


Slide 33

Per Credit Card Account

EasternJun-11 25% $2,866 32.8% 6.2 $73 $0 $11 $85

Percentile 59 60 50 57 58 86 49 56Dec-10 25% $2,977 33.5% 6.8 $75 $1 $13 $88Jun-10 25% $3,002 31.4% 4.7 $74 $1 $15 $88Comparisons - Jun-11Peer Group 21% $2,519 33.7% 4.8 $68 $0 $12 $80Asset Size 24% $2,744 33.6% 5.4 $74 $0 $12 $86Region Average 25% $2,866 32.8% 6.2 $73 $0 $11 $85National Average 23% $2,594 33.7% 5.3 $68 $0 $11 $80High Performers 26% $2,844 34.7% 5.4 $76 $0 $12 $88¹ Percent of households with a credit card.

² Annual credit card interchange income from purchase transactions.

Annual FeesInterchange

Income²Credit Card

Penetration¹Late Fees/ Over Limit

Annual Income

CREDIT CARD USAGE

Utilization Ratio

Monthly Transactions

Average Balance

As with debit cards, increased penetration and higher transaction volume in credit cards can help offset a portion of lost revenue resulting from the CARD Act and any other potential regulatory changes.

The graph to the right displays the potential revenue uplift by achieving the following: a 10% increase in penetration and/or one (1) additional transaction per cardholder per month.

In total nominal dollars, the potential annual uplift at Eastern is:

• One (1) Additional Monthly Trans. per Card:

• Increase Penetration by 10%:

• Do Both:

$163,401

$203,632

$395,556

$1,375,083

$203,632

$163,401

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

Annual Income

Current + 10% Penetration +1 Trans/Mo.

115


Slide 34

INVESTMENT SERVICES

Per Investment MemberEastern Offer? ($000) Members Households Assets Revenue Expense Net IncomeJun-11 -- $86,009 1,556 4.3% $63,276 $303 $136 $167

Percentile 56 53 55 55 51 52 54Dec-10 -- $90,361 1,576 3.9% $61,246 $265 $134 $132Jun-10 -- $84,068 1,636 3.9% $55,287 $264 $131 $133Comparisons - Jun-11Peer Group 74% $66,824 1,279 2.6% $55,275 $485 $117 $368Asset Size 70% $75,942 1,264 2.8% $64,978 $469 $133 $336Region Average 51% $86,009 1,556 4.3% $63,276 $303 $136 $167National Average 59% $83,371 1,730 3.5% $57,266 $2,707 $1,965 $741High Performers 77% $137,822 2,362 5.7% $62,081 $389 $223 $166Data for this page was supplied by the institution through our online supplemental research questions.

# ofTotal Assets Under Mgmt % of

As the baby boomer generation approaches retirement and/or transfers wealth to younger generations, investment services represent a significant opportunity for credit unions as a means of generating non-member fee revenue and broadening member relationships.

At Eastern, 4.3% of households utilize investment services, with an average of $63,276 assets under management.

Total Annualized Contribution from Investment Services

$557,226$514,479

$612,846

-$190,760 -$213,445-$269,166

$195,066 $179,958

$283,909

-$400,000-$300,000

-$200,000-$100,000

$0$100,000

$200,000$300,000$400,000$500,000

$600,000$700,000


Revenue Expense Net Income

116


Slide 35

Regulatory ChangesReg E

• Opt-in success rates vary, many were fairly successful in opting in frequent overdrafters

• Ongoing campaign – new accounts

Reg II• Projected to decrease interchange income by 30-40%• <$10B – expect to be impacted in 2-3 years

Consumer Financial Protection Bureau• The wildcard – the impact could dwarf that of Reg E

and Reg II


Slide 36

What We Might Expect From the CFPB

“Reasonable and proportional” overdraft fees

Caps on ATM surcharges

Limits on credit card annual fees

Maximum daily overdraft charge

Waiver on de minimus overdraft charges

Increased disclosure requirements on all accounts


Slide 37

The Emergence of Debit Fees

Testing a $3 monthly debit card activity fee for debit card use beginning in October 2011

Oregon, New Mexico, Georgia, Washington, Nevada Applies to customers that make at least one purchase

during the billing cycle $3 usage fee is waived for “some checking accounts”

Began testing a $3/month debit card fee on basic checking accounts in Green Bay, WI in February

Implementing a $5 debit card activity fee; ATM transactions not charged

Has drawn the ire of Senator Durbin


Slide 38

Non-interest Income Recovery

$5 monthly debit card fee• Everyday Checking (base checking)• Only applied during a statement cycle when a

signature, PIN, or reoccurring transaction is initiated

$4 monthly debit card activity fee• Regions LifeGreen Checking (base checking)

• Fee charged only if the card is used for purchases

Statements Regarding Debit Card Fees• “Every bank around I think will ultimately end up with

some type of fee.”• “We are in the decision phase.”• Currently charge $0.30 per POS PIN transaction


Slide 39

Consumer Response to Debit Fees

Don’t Use Debit Cards, 31%

Willing to Pay Monthly /

Annual or Per Use Fee, 6%

Would Switch Providers or

Stop Using Card, 63%

In response to recent regulatory requirements regarding debit cards, some financial institutions may incorporate fees for the continued use of their debit card. Which of the following changes would be acceptable for your future debit card use?

Source: RFG National Consumer Research, Fall 2011


Slide 40

If Free Checking Is Your Choice…Question:

If you decide to continue to offer free checking, how should you leverage this decision?

Answer:1. Set strict cross-sell metrics for the organization and measure at the branch

level. – Focus on reducing the percent of checking accounts that are “single-

service.”2. Implement formalized Onboarding Program to enhance cross-sales after

onset of new relationship.3. Target “high opportunity” non-members within three miles of branches

with direct mail.4. Implement technologies that assist in the frontline cross selling process.5. Aggressively push cost savings tactics such as e-statements.


Slide 41

Improving Member Profitability


Slide 42

Key Issues for Member Profitability

What is the profitability impact of two more years of historically low interest rates as suggested by the Fed?

What should be our policy on member subsidization?• Short-term v. Long-term

• To what extent?

What factors should be examined in establishing a deposit pricing strategy?


Slide 43

3.00%

3.20%

3.40%

3.60%

3.80%

4.00%

4.20%

4.40%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net

In

tere

st M

arg

ins

Bank NIM Credit Union NIM

Industry Net Interest Margin ErosionMargins have declined for financial institutions over the past 15 years. This decline has occurred in both high and low rate environments. Banks – particularly the largest banks – are dramatically reversing this trend.

Margins have declined for financial institutions over the past 15 years. This decline has occurred in both high and low rate environments. Banks – particularly the largest banks – are dramatically reversing this trend.

Source: FDIC


Slide 44

The Big Four Dramatically Reduce the Cost of Funds

Cost of Funds Dec-08 Dec-09 Dec-10 Jun-11

2.06% 0.74% 0.51% 0.58%

2.23% 1.03% 0.63% 0.48%

2.70% 1.41% 1.08% 1.06%

1.58% 0.55% 0.51% 0.42%

Credit Union Avg 1.94% 1.39% 0.97% 0.74%**

CUs >$100M 2.45% 1.76% 1.21% 0.95%**

**CU data as-of Mar-11


Slide 45

Base Savings Rates

$1,000 in a Chase Savings account will earn the customer 10 cents/yr in interest!

Rates as-of August, 2011


Slide 46

At Eastern, the Earning Asset Yield (loans and investments) is 4.47% and the Cost of Funds (deposits and borrowings) is 0.95%. This results in a Net Interest Margin of 3.52%, compared to the Peer Group Average of 3.52%.

Jun-10 Dec-10 Jun-11 Jun-10 Dec-10 Jun-11 Jun-10 Dec-10 Jun-11Eastern 4.86% 4.83% 4.47% 1.30% 1.21% 0.95% 3.57% 3.63% 3.52%

Percentile 46 48 49 48 48 46 44 47 46Peer Group 4.97% 4.87% 4.54% 1.37% 1.29% 1.02% 3.60% 3.58% 3.52%Asset Size 4.90% 4.80% 4.43% 1.35% 1.26% 0.97% 3.56% 3.54% 3.46%Region Average 4.86% 4.83% 4.47% 1.30% 1.21% 0.95% 3.57% 3.63% 3.52%National Average 4.96% 4.89% 4.53% 1.25% 1.17% 0.90% 3.70% 3.72% 3.63%High Performers 5.00% 4.93% 4.68% 1.43% 1.26% 1.00% 3.57% 3.68% 3.69%

NET INTEREST MARGINS

Earning Asset Yield Cost of Funds Net Interest Margin

3.57%

3.63%

3.52%

3.60%

3.58%

3.52%

3.46%

3.48%

3.50%

3.52%

3.54%

3.56%

3.58%

3.60%

3.62%

3.64%


Net In

tere

st M

arg

in

Eastern Peer Group

The chart illustrates the trend in net interest margins and compares your institution with the Peer Group Average.

The Net Interest Margin is the difference between the Earning Asset Yield and the Cost of Funds, which are both shown in the table below.

At Eastern, the Earning Asset Yield (loans and investments) is 4.47% and the Cost of Funds (deposits and borrowings) is 0.95%. This results in a Net Interest Margin of 3.52%, compared to the Peer Group Average of 3.52%.

89


Slide 47

Deposit Management Strategy:What is the Loyalty and Rate Sensitivity of the Base?

Loya

lty

Deposit Rate Sensitivity

Rate-Sensitive Loyalists:13% of Members

Rate-Sensitive Non-Loyalists:

41% of Members

Non-Sensitive Loyalists:7% of Members

Non-Sensitive Non-Loyalists:

39% of Members


Slide 48

Deposit Management Matrix

1. What is your current need for deposits?

Attrition Mode• The credit union is below “sweet spot” for loans to

deposits• Willing to shed deposits

Maintenance Mode• Maintaining but not aggressively seeking new deposits

Acquisition Mode• Actively trying to bring in more deposits based on high

loan to share


Slide 49

The Future is Near:Is Your Technology

Ready?


Slide 50

Technology Critical Issues

How critical are new emerging front-line technologies such as Mobile RDC, Person-to-Person Payments, and Alternative Payments?

How is the role of the branch changing?

What back-office technologies can be deployed to improve the productivity and functionality of your traditional channels?


Slide 51

Efficiency Ratio Tends to Be Driven By Revenue

$472 $474 $472 $472

$836$761

$590 $554

$0$100$200$300$400$500$600$700$800$900

Top Quartile Second Quartile Third Quartile Bottom Quartile

Expense per HH Revenue per HH

Efficiency Ratio

57% 63% 81% 86%


Slide 52

Historical Trend in Operating Expense

Operating Expense per Household

$204$287

$149

1995 2010

Inflation-Adjusted Operating Expense

Inflation-Adjusted Operating Expense

Incremental Increase in Operating Expense

Adjusting for inflation, credit union operating expenses per household have risen by 52% from 1995.


Slide 53

Jun-10 Dec-10 Jun-11 Jun-10 Dec-10 Jun-11Eastern 73.3% 72.6% 74.5% 80.8% 81.6% 83.6%

Percentile 47 43 44 47 41 44Peer Group 70.0% 68.8% 71.1% 78.5% 74.3% 78.2%Asset Size 68.8% 67.6% 70.5% 78.1% 74.0% 76.0%Region Average 73.3% 72.6% 74.5% 80.8% 81.6% 83.6%National Average 71.8% 70.2% 72.4% 80.0% 77.4% 79.0%High Performers 60.3% 58.8% 59.3% 63.1% 60.0% 61.7%¹ The Efficiency Ratio is Total Non-Interest Expense divided by Total Adjusted Operating Income.

² Member Efficiency Ratio is Non-Interest Expense divided by Adjusted Operating Income for Deposits and Loans ONLY.

Member Efficiency Ratio²Efficiency Ratio¹

TRENDS IN THE EFFICIENCY RATIOLower Efficiency Ratios Are Better

73.3%72.6%

74.5%

80.8%81.6%

83.6%

66.0%

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%


Efficiency Ratio¹ Member Efficiency Ratio²

The Efficiency Ratio measures the percentage of income to cover non-interest expense. Lower Efficiency Ratios indicate greater efficiency.

In the current economic and regulatory environment, improving efficiency will be critical to sustained success for the organization.

Most important will be the efficiencies generated at the member level through the core deposit and loan operations. A focus on relationship development to drive household profitability will be fundamental to improving the Member Efficiency Ratio.

Refer to the A-E Profit Segments in the Segmentation section of this analysis to gauge the current percent of profitable households at the Credit Union and develop strategies to move 'D' and 'E' households into a profitable relationship with your institution.

71


Slide 54

Eastern generates $714 in Total Revenue per Household. This compares to the Peer Group at $669.Annualized deposit and loan revenue per member household was $618 for this same period at Eastern. This compares with the Peer Group average of $606.

Jun-10 Dec-10 Jun-11 Jun-10 Dec-10 Jun-11Eastern $680 $694 $714 $594 $605 $618

Percentile 53 52 54 52 49 51Peer Group $658 $646 $669 $597 $602 $606Asset Size $706 $706 $712 $627 $640 $644Region Average $680 $694 $714 $594 $605 $618National Average $670 $687 $686 $598 $617 $614High Performers $871 $929 $906 $789 $876 $843¹ Total credit union net interest income plus non-interest income divided by total households.

² Net interest income plus non-interest income from deposit and loan products divided by total households.

Deposit & Loan Revenue / Household²Total Revenue / Household¹

REVENUE GENERATION

$680 $694 $714

$594 $605 $618

$0

$100

$200

$300

$400

$500

$600

$700

$800


Total Revenue / Household¹ Deposit & Loan Revenue / Household²

Eastern generates $714 in Total Revenue per Household. This compares to the Peer Group at $669.

Efficiency can be improved either through revenue generation or expense control. This page examines revenue generation.

This page displays the trends in revenue generation. Revenue is expressed in Total as well as by Deposit and Loan only.

Annualized deposit and loan revenue per member household was $618 for this same period at Eastern. This compares with the Peer Group average of $606.

73


Slide 55

Annualized deposit and loan expense per member household was $511 at Eastern. This compares with the Peer Group average of $466.

Jun-10 Dec-10 Jun-11 Jun-10 Dec-10 Jun-11Eastern $489 $498 $532 $471 $484 $511

Percentile 45 45 43 48 46 45Peer Group $456 $444 $473 $456 $441 $466Asset Size $478 $472 $495 $475 $466 $479Region Average $489 $498 $532 $471 $484 $511National Average $468 $473 $489 $459 $461 $473High Performers $495 $518 $527 $482 $511 $509¹ Total expense is total credit union expense divided by total households

² Deposit and Loan Expense are expenses assigned to deposit and loans divided by total households

OPERATING EXPENSE CONTROL

Total Expense / Household¹ Deposit & Loan Expense / Household²

$489$498

$532

$471

$484

$511

$440

$450

$460

$470

$480

$490

$500

$510

$520

$530

$540


Total Expense / Household¹ Deposit & Loan Expense / Household²

Efficiency can also be improved by controlling expenses.

This page displays the trends of Total Expense as well as Deposit and Loan Expense.

Annualized deposit and loan expense per member household was $511 at Eastern. This compares with the Peer Group average of $466.

74


Slide 56

ONLINE BANK ING USAGE

Penetration Monthly TransactionsOnline Online Bill Pay

Accounts: Bill Pay Access: E-Statements: Trans. Trans.

EasternTo Total

HouseholdsTo Checking Households

To Online Accounts

Active Bill Pay¹

To Total Households

To Checking Households

Per Online Account

Per Bill Pay Account

Jun-11 60.4% 25.8% 27.3% 73.6% 34.3% 60.7% 4.0 4.7Percentile 50 47 51 53 46 45 53 53

Dec-10 55.2% 22.8% 25.0% 75.3% 28.5% 52.8% 3.9 3.2Jun-10 54.2% 25.3% 27.6% 74.7% 26.8% 49.9% 3.8 4.0Comparisons - Jun-11Peer Group 60.7% 28.7% 27.9% 72.6% 44.2% 79.1% 7.6 3.6Asset Size 60.5% 30.2% 29.1% 73.2% 44.4% 81.0% 5.6 3.8Region Average 60.4% 25.8% 27.3% 73.6% 34.3% 60.7% 4.0 4.7National Average 59.9% 27.4% 27.7% 73.4% 38.7% 69.4% 4.3 3.9High Performers 63.7% 25.6% 24.4% 75.9% 43.4% 72.5% 3.8 4.4¹ Ratio of active bill-pay users (past 90 days) to total accounts with access to bill-pay services.

At Eastern, 60.4% of all households have access to online banking. Among checking households with online access, 25.8% are setup for Bill Pay, with 73.6% actively utilizing this service.

E-statement penetration at Eastern is 34.3% of all households. Converting as many households as possible to e-statements is an effective method for reducing costs.

Penetration

26%

60%

34%29%

61%

44%

0%

10%

20%

30%

40%

50%

60%

70%

Bill Pay / Checking HH Online / Total HH E-Statements / Total HH

Eastern Peer Group

400

Big difference between these two ratios indicates an opportunity to increase e-statement penetration and reduce costs.

Big difference between these two ratios indicates an opportunity to increase e-statement penetration and reduce costs.


Slide 57

Will Mobile Banking Follow the Same Trend as Online Banking?

Source: RFG National Consumer Research

61%

8%

11%7%0%

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Online Banking Mobile Banking

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

??

Online Banking usage grew from 8% to 61% between 2000 an 2010. Mobile Banking is currently at 11% usage; will it increase at the same rate as Online?


Slide 58

Likelihood to Use Remote Deposit Capture

1% 2%7% 9%4%

5%8%16%

21%

26%

3%

8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Traditionalist Baby Boomer Gen X Gen Y

Extremely Likely Very Likely Somewhat Likely

Source: RFG’s Spring 2011 National Consumer Research

Gen Y is more likely to use Remote Deposit Capture, with 43% expressing at least being somewhat likely to utilize the service.

Gen Y is more likely to use Remote Deposit Capture, with 43% expressing at least being somewhat likely to utilize the service.


Slide 59

P to P PaymentsType Example Details

Sender just needs recipient’s email address or mobile phone # Recipient needs PayPal account Sender just needs recipient’s email address Recipient required to create Chase log-in and enter their financial institution routing # and account #

Open Network

Bank-owned joint venture Customers at these banks can send money to other customers using only recipient’s email address or mobile phone # Recipient must be “in-network"; plan is to expand/include other banks & "endpoints."

Sender needs to know email address and last 4 digits of recipient’s account number

Closed Network clearXChange

Open Network QuickPay

Partner with PayPal


Slide 60

Current P2P Usage by Generation

13%

29%

16%

23%

Currently Use P2P

Traditionalist Baby Boomer Gen X Gen Y


One in every three Gen Y consumers conducts Person-to-Person payments. Does Gen Y need a “Checking” account?

One in every three Gen Y consumers conducts Person-to-Person payments. Does Gen Y need a “Checking” account?


Slide 61

Provider Details "Google Wallet" app: requires NFC reader at merchant location and NFC equipped phone

Currently only works with "PayPass" eligible Citi Mastercards and Sprint Nexus S 4G phone; goal is to create "open commerce ecosystem"

August 2011, Google purchased Motorola Mobility. Google now has role in online payments, mobile OS/applications, and mobile handset development

Merchant incentive – retailers can put loyalty cards & coupons in the "wallet"

• Partners include Walgreens, Subway, Toys R Us, RadioShack, Macy’s, Duane Reade

"Tap to Pay" Smartphone Technology

With Reg II, 30% to 40% of debit card interchange income is at risk. With Alternative Payment systems, 100% of the revenue is at risk if the debit card transaction is replaced completely (if still funded by financial institution, transaction becomes ACH).

With Reg II, 30% to 40% of debit card interchange income is at risk. With Alternative Payment systems, 100% of the revenue is at risk if the debit card transaction is replaced completely (if still funded by financial institution, transaction becomes ACH).

Alternative Payments


Slide 62

Gen Y Still Uses the Branch

79%

71%

60%

75%

10%

20%

0%

30%

60%

90%

Lobby/Drive-Up Online Banking Mobile Banking

Total Gen Y



Slide 63

Branch Issues Branch rationalization is critical in this environment

• Can your branches be justified by the volume of business from existing members as well as potential new members

The process of serving the member can be improved through new technologies. Which of these are you doing?• Branch design and layout

• Virtual teller kiosks

• Virtual member service

• Automating teller functions to reduce administrative functions (i.e. balancing)

The industry is moving towards a self service environment• How will you upgrade the skills of your staff?


Slide 72

Four Critical Issues

1. Logical Growth - Build share of wallet to drive growth and organizational efficiency

2. Diversification – and define checking account strategy for the new environment

3. Improve member profitability through effective pricing – COF is key

4. Make appropriate investments in technology


Slide 73

QUESTIONS?QUESTIONS?

To unmute your line, hit *7 on your phoneTo mute your line, hit *6 on your phone

You may also type a question using the Question and Answer tool provided through the Web conferencing system.

QUESTIONS?QUESTIONS?

To unmute your line, hit *7 on your phoneTo mute your line, hit *6 on your phone

You may also type a question using the Question and Answer tool provided through the Web conferencing system.


Slide 74

Evaluation

Shortly an email will be sent with a copy of today’s presentation slides and a link to the recording.

Please take a moment to fill out our evaluation.

Evaluation

Shortly an email will be sent with a copy of today’s presentation slides and a link to the recording.

Please take a moment to fill out our evaluation.


Slide 75

Contact Information

Thank You

► Need ideas, recommendations or solutions to improve marketing results? Contact RFG for our unique blend of industry expertise, strategic analyses, objective intelligence and MCIF solutions.

► www.raddon.com

► www.theraddonreport.com

Bill HandelVice President, Research & Development

Raddon Financial Group701 East 22nd Street, Suite 400Lombard, IL 60148

Office: 800.827.3500 [email protected]

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