creating and implementing lending strategies...pos for auto loans via cudl in ca, and other...

Joe Brancucci, President, CU Rate Reset, McLean, VA Keith Reynolds, SVP Lending, CEFCU, Peoria, IL

Creating and Implementing Lending Strategies

New Lending Strategies for a Changed Market

Joe Brancucci

President CU RateReset

Retired Chairperson –

CUNA Lending Council &

CUNA Councils’ Forum

joe.brancucci@ratereset.com

What Will We Discuss?

• Challenges in the marketplace

• Challenges in credit unions

• What are credit unions doing today?

1970’s – WWII & Boomers Signature Loans Some auto lending – 24-36

month terms Some home equity loans

1980’s - Boomers Debt Consolidation loans Some credit cards Bank deregulation Inflation and interest rates

very high

1990’s – Boomers & Xers Longer term consumer loans Credit cards become a product Home equity lending thrives POS for auto loans via CUDL in CA,

and other solutions in other states

2000-2007 – Boomers & Millenials Full adoption of credit models Automated underwriting systems Auto loan terms extend to 60 months Home equity lines of credit Minimal dependence on income

verification Wide spread use of loan preapprovals Origination experience greatly

improved and virtual lending prevalent

2007(8)-2013(14) The Great Recession Financial Markets Collapse Record high member

defaults Home equity disappears Auto lending slows down Home Equity loans default

escalates Credit scores suspect Historic low interest rates

Today – Millennials and Boomers Auto borrowing robust - 72 and 84

month terms more prevalent Home Equity loans see resurgence Consumers demand “click-it”

solutions Income verification necessary After loan closing still stuck in 1980’s Loan approval process still labor

intensive and mediocre experience Credit cards evolving quickly

Credit Union Lending Landscape and Generational Concentration

Challenges in the marketplace

The faces of the generations…

5 generations of consumers are members

Challenges in the marketplace Tsunami of regulations

Challenges in the marketplace

• “Wait till I can afford it”

• Traditional lenders are risk averse

• College graduates are saddled with high debt

• Boomers not prepared for retirement

• Boomers hampered by “buy it now pay later”

• The Silent Generation– income from investments inadequate

• Fintech companies “seized the moment and the money”

• Millennials have become a major consumer segment

Lingering effect of the Great Recession

Challenges in the marketplace Non-conventional lenders in the marketplace

Challenges in Credit Unions

• The products are the processes

• Product designs were new in 1980’s

• Regulators are a deterrent to innovation

• “It’s the way we always did it” mentality

• Fear of being a “disruptor” in the market place

• High cost of technology development

• Eye on where the puck was…rather than the Wayne Gretzky position – “I skate to where the puck is going to be, not to where it has been.”

Static nature of the lending experience

Not Seeing the Forest for the Trees • Auto loan terms have extended from 36-48 months to 60-84

months on average • Member’s life changes after the date the loan is funded • We refinance a lot of our loans to increase term, lower

payment or to take out some cash – more than you think! • Our preapproval process is not easy to complete • Most members have most of their loans elsewhere • POS financing for auto and home loans very dominate • Lending products are pretty ubiquitous – how can we be

different? • The member wants to be in control • Most millenniums and a lot of others “click-it” only

Recognizing Multiple Generations

What are the loan priorities of each generation?

Great Rates of course…....

Link to video https://www.youtube.com/watch?v=VBtqA96lwtk

Credit Union Loans at the Dealer ….

Link to video https://www.youtube.com/watch?v=uDP-8VWuprQ

Enhancing Credit Cards with Mobile…

Link to video https://www.youtube.com/watch?v=uDP-8VWuprQ

Auto Loan Retention Case Study

Challenge: Provide Member benefit on Auto Loans to lower payments, increase retention, and increase yields on existing loans without staff interaction necessary; minimize FAS 91 adjustments

Coastal Federal “Loan Cutter”

Coastal Federal “Loan Cutter” Number of Loans Reset 501

Percentage of offers accepted 4.1%

$ Volume Loans Reset $10m

Avg. Yield Increase 50 bps

Avg. Duration Increase 15 months

Potential Increased Earnings 22%

Pilot Launch Limited

Universe Expanded in

October

Members reduced payments by 22%.

Member satisfaction increased.

Challenge: New servicing regulations require 1st ARM adjustment notification 10 months prior to adjustment. High pre-payment speeds as a result. FAS 91 implications onerous based on trend of prepayments.

Home Loan Retention Case Study

PenFed “Mortgage Rate Reset”

Percent of Offerings Accepted 73%

Number of Loans Reset 1560

$ Volume Loans Reset $441,000,000 Back Office Cost $0

New 5 Year Fixed 60 months

Potential Increased Earnings $3,120,000+

PenFed 5/5. Member reset their own loan in 60 seconds with $0 back office cost.

PenFed ”Mortgage Rate Preset “

Challenge: Create multi-layered approach to develop an organic and community lending strategy and to control the pre-payment of the loan portfolio.

Moving to Organic Lending

Partnered with CUDL for member access to loans at the auto dealer PSCU relationship expanded to increase credit card utilization and new cards Intuovo – Marketing programs to follow-up on leads “Member Advantage” relationship benefits - the more the member does with the

credit union the more deposit account and loan benefits they earn CU Rate Reset – member in control of modifying their loan thru virtual banking Credit repair and starter loan programs Extensive preapproval programs Development of numerous internally developed virtual solutions such as GTE 3D,

Revamped OnLine Banking, Mobile, Instant issue credit and debit….

GTE Financial – Moving To Organic Lending

Through August, 2016 RESULTS

Number of Loans Reset 1435

$ Volume Loans Reset $27.2 million

Avg. Yield Increase 48 bps

Avg. Duration Increase 86 months

Potential Increased Earnings $1,411,399

Healthy growth in member loans originated at the dealers Attracting new members with an average age of 32 years old = more loans Over 90% loan to deposit ratio – sell participations which increases return

from auto loans Home equity loans beginning to increase in demand Credit starter program helping members to build credit history Rate Reset initiatives:

GTE Financial – Moving To Organic Lending

Summary Multiple generations in the market provide both challenges and opportunities

Virtual banking solutions need to be extended to all facets of the loan cycle – “if they can’t “click-it” they will not do it”

Members want to be in control

Preapproval process needs to be automated

Credit unions need to create intimacy with the member – use “trigger” programs to initialize offers

Create the ability to react to an early payoff request

Use the CUSO products in the marketplace to secure market dominance

Recognize that member’s lives change from the date the loan was originated – create options to have the loan reflect the member needs today

Create strategies and “click-it” solutions to recapture loans members have elsewhere

Any questions??????

Keith Reynolds, SVP Lending – CEFCU • CEFCU - $5.5 Billion in Assets

• 20 Branches in Central Illinois

• 4 Branches in Metro San Jose, CA

• 320,000 Members, 870 Employees

Loan Portfolio of $4B, 83% Loan-to-Share Ratio

• Delinquency .42%

• Net Charge-offs .30%

• $1.55B in Consumer Loans

CEFCU

• Will Originate $760M in Consumer Loans

• Will Risk Price $225M of those loans

Principal Objective

Achieve “sustainable” growth based on disciplined underwriting and pricing, consistent with CEFCU’s values.

Corporate Values Create Constraints • No Excessive Dealer Flats

• No Dealer Mark-ups

• No Incentive Pay

• Decentralized Lending

Strengths • Illinois Market Share/ Name Recognition

• Established Branch Network

• Management Continuity (including Branches)

Weaknesses

• Strengths do not translate to California

• Core System/Legacy Applications not nimble

Strategies Impact Market Share

Analytics to Validate/Invalidate Strategies

From the Federal Reserve Bank of New York…

From 2001 to 2006, total balances of second lien borrowing grew from under $200 billion to

$1.1 trillion.

Risk Pricing Strategy

High

Low

Auto Loans 60 Day Delinquency

Charge-Offs

12% rate bump between top tier rate and highest risk tier rate

PSL’s – 2011

• Delinquent $ Net Charge-offs similar to 710 FICO Auto Loan

• Yield 200 basis points higher

• Variable rate

Good Decisions Require

Good Information

July Year-Over-Year Consumer Loan Volume

Dropped 15%

21.7%

21.1% 21.6%

22.7%

21.8% 21.9%

22.6% 22.7%

21.3%

21.6% 21.4%

15.0%

20.0%

25.0%

30.0%

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

3Q2016

CEFCU Market Share IL 14 Counties

% of Financed Units

1,512

1,688 1,736 1,777 1,625

1,905

2,173

1,446

288 178 121 125 159

283 393

224

0

500

1,000

1,500

2,000

2,500

July 09 July 10 July 11 July 12 July 13 July 14 July 15 July 16

SANGAMON COUNTY

Total Financed CEFCU Financed

Layered Risk (Attribute Analysis)

LTV Avg Loss Comparison (650+ vs <650)

• 2014 Indirect Loans

Average of Cho Balances Column Labels

Row Labels <50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100-104 105-109 110-114 115-120 >120 Grand Total

875-900 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

850-874 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

825-849 $0 $0 $0 $0 $0 $0 $0 $0 $8 $0 $0 $0 $0 $0 $0 $0 $1

800-824 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $394 $356 $0 $16

775-799 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

750-774 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $56 $0 $86 $0 $441 $207 $36

725-749 $0 $0 $0 $0 $0 $0 $0 $2 $0 $0 $0 $0 $0 $214 $672 $0 $43

700-724 $71 $0 $0 $0 $0 $0 $16 $43 $0 $0 $0 $25 $387 $0 $352 $0 $64

675-699 $0 $0 $0 $0 $0 $41 $0 $107 $84 $0 $449 $0 $0 $168 $234 $0 $108

650-674 $0 $0 $0 $53 $0 $146 $96 $118 $155 $71 $168 $124 $324 $134 $291 $193 $152

Grand Total $3 $0 $0 $2 $0 $10 $9 $22 $25 $8 $81 $22 $119 $110 $314 $49 $44

Average of Cho Balances Column Labels

Row Labels <50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100-104 105-109 110-114 115-120 >120 Grand Total

625-649 $0 $0 $0 $0 $288 $38 $0 $34 $279 $415 $348 $689 $396 $164 $855 $293 $362

600-624 $0 $0 $0 $70 $0 $139 $334 $254 $579 $1,085 $532 $1,107 $717 $851 $1,548 $1,945 $718

575-599 $242 $477 $207 $0 $0 $303 $1,183 $947 $751 $1,081 $850 $1,506 $1,522 $2,274 $1,496 $1,067 $1,048

550-574 $0 $0 $215 $291 $587 $361 $402 $1,353 $868 $881 $1,574 $1,278 $1,388 $1,141 $3,876 $4,217 $1,073

525-549 $19 $0 $0 $697 $391 $1,760 $313 $583 $1,317 $1,332 $732 $1,267 $895 $1,918 $1,567 $0 $975

500-524 $28 $0 $56 $843 $1,184 $564 $1,480 $1,045 $1,109 $3,448 $397 $2,822 $0 $2,504 $14,901 $1,245

475-499 $0 $0 $1,592 $834 $528 $1,837 $1,623 $1,652 $1,082 $3,841 $2,525 $2,802 $0 $0 $1,645

450-474 $0 $978 $0 $0 $0 $0 $379 $1,184 $0 $1,312 $0 $0 $0 $603

425-449 $0 $0 $0 $0 $0 $4,891 $0 $7,307 $1,743

400-424 $2,948 $0 $0 $983

<350 $13 $0 $0 $527 $429 $650 $1,219 $1,047 $1,300 $1,247 $1,045 $370 $0 $0 $3,114 $842

Grand Total $27 $117 $77 $303 $356 $637 $685 $855 $828 $1,034 $835 $1,075 $869 $927 $1,401 $1,437 $832

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Co

st %

FICO Score

Auto Loan Portfolio

Collection Loan Loss

ROA on Auto Loans

12/31/2014 6/30/2016

>800 0.23% 0.60%

710-719 0.77% 1.48%

670-679 2.98% 2.86%

640-649 5.15% 5.65%

610-619 8.10% 7.76%

570-579 11.11% 11.42%

<520 10.53% 9.94%

What is the Threat?

Loan Product Convenience

OR

Delivery Channel Convenience?

From American Banker…

• Banks are among the most unlikable brands with Millennials.

• 92% of Millennials would choose a bank for digital services.

• J.D. Power Retail Banking Survey of Millennials found large banks had higher satisfaction ratings than both community banks and credit unions for the first time ever.

CEFCU Consumer Lending “Direct” Volume Today

• 46% originated through Branches

• 31% originated through Contact Center

• 23% originated through Web/Mobile

Is it economically sustainable to try to be all things to all people through all

channels? • What happens in 2020 when today’s millennials are 46% of

the workforce?

Origination Cost per Delivery Channel

3X for Branch vs. Mobile

Meet Marcus, Goldman Sach’s Online Lender for the Masses

• Goldman Sachs, which has been rolling out its first foray into banking for the little guy, is going back to its history to name its new big push: an online lender for the masses.

• Initially, Marcus will offer relatively small consumer loans, a business that Goldman has traditionally avoided.

• In a separate operation that was introduced in April, Goldman began offering online savings accounts with no minimum under the brand GS Bank.

From The New York Times, August 18, 2016

Delivery Channel Shift Goal by 2020

• 20% “Direct” Loan Volume in Branches

• 20% through Contact Center

• 60% through Mobile

Questions? Thank You!!!