Southern California Emerging CU’s Collaborative Credit Union Key Concepts • Emerging CU Definition- Small to Mid-size by most standards, <$150 MM in assets, but progressive. • Collaboration Is Key – Emerging CU’s understand the need for and have a strong desire to collaborate on projects and issues that bring economies of scale, innovation and bottom line results. Collaborators are action takers, not talkers! • Participators – Collaborators understand that they need participators (non bought-in-collaborators) in order to grow their businesses services and products to reach the scale required to achieve significant financial gains and bottom line impact. • Local, Regional, National – Collaborators are organized at a local level, increasing to achieve regional reach and power, with an eventual aim at building national CU owned programs. 1
Why Emerging CU’s? • Emerging CU’s have drive and ambition- and most important, are most like real CU’s • Emerging CU’s are willing to innovate to survive and thrive – They don’t want to face the alternative • Emerging CU’s “need resources” – ones they don’t have • Emerging CU’s “have resources” – ones others don’t have • Emerging CU’s typically don’t carry a false sense of who they are – Less Ego and a bit humbler about who they are • Emerging CU’s sense if not fully understand that current CU model is broken – Something needs to change and no one else is coming to the rescue 2
Trends Number of Credit Unions Decreasing The Trend Is Not Positive For CU’s! Source: CU DATA COM Who’s Working to Stop This? ? ? 3
CU Distribution Change By Assets 2003 -2007 Total Credit Unions > $450 Million 9488 “ 03” 261 8801 “ 05” 311 8268 “ 07” 348 $100 - $450 Million 884 902 904 $50 - $100 Million $10 -$50 Million 785 769 2933 2766 2, 582 $2 -$10 Million <$2 Million 2847 1, 778 2, 537 1, 520 2, 292 1, 373 85% of all credit unions have total assets under $100 million 76% of all credit unions have total assets under $50 million 44% of all credit unions have total assets under $10 million Source: CUData. com 100+ CU’s are over $Billion+ in assets The assumption seems to be that most smaller, emerging CU’s will end up consolidated anyway, so why bother? Not a direct or targeted thought, but no one has time to save them! They need to save themselves. 4
HERE”S THE REAL ISSUE AUTO LOAN MARKET SHARE TREND – CU’s ARE LOSING THIS GAME! Q. What do we offer once the Auto Loan market is gone? Source: CU DATA COM/CUDL 5
Market Place News Indirect Loan Losses Not Hurting CUDL's Biz August 05, 2008 By Heather Anderson RANCHO CUCAMONGA, Calif. — CUDL President & CEO Tony Boutelle he’s noticed some credit unions have curtailed their indirect lending programs lately, offering the service only to existing members in an attempt to control increasing delinquencies and loan losses. However, it hasn’t hurt CUDL’s business any. “Ironically, our business is actually quite good, ” Boutelle said. “We’ve experienced record revenue the last few months, not because things are all that good out there, but rather because we have a few things happening. ” Traditional funding sources like captives and banks have dried up for dealers, and they’re now reaching out to credit unions, he said. And just a few years ago, as many as 25% of car purchases used home equity for funding, which has also dried up. When credit unions tap the general public for loans, they take on the same level of risk that banks do, Boutelle said. It can be managed, but only if the credit union cranks up its core competencies in key areas. “I think credit unions have a better opportunity to make loans at dealerships than before, but it does require higher skill set, ” Boutelle said. “Credit unions must have tools on the back end, collections and servicing especially, to make sure they’re able to handle the loan. ” 6
Trends Return on Average Assets Decreasing Sources: CU DATA COM/CUNA Economic Forecasts 7
8 Fin. Svs. Industry, Especially CU’s, Are Clearly At An Inflection Point • Changing Business Model – Requires New Approaches GROWTH • New Types of Competition – Check Cashers, Etc • Low Penetration, Perceived Value – Products commodities • Industry Consolidation – The big are getting bigger • Slow Growth - Membership, Loan, and Shares Coupled with Aging Membership TIME 8
A NEW COOPERATIVE MODEL A NETWORK DRIVEN BY EMERGING CU’s Entirely owned by Credit Unions and their affiliates! Perhaps, a concept whose time has come! Pooled Resources Pooled Risks Pooled Rewards Strength in Numbers Strength in Brand Lots of Opportunity! Promotes Innovation! 9
CU Collaborative SUCCESS MODEL? Does The Number Of CU’s In a Collaborative Translate To Success? Top 5 CU Collaboratives By Number of Owners, Revenue and Revenue Ranking 1. CO-OP Financial Services, 1, 161 CU Owners, $144, 000 Revenue, #2 Revenue Ranking 2. PSCU Financial Services, 530 CU Owners, $511, 000 Revenue, #1 Revenue Ranking 3. Credit Union 24 incorporated, 285 CU Owners, (Did not Make Top 25), no Revenue Ranking 4. The Members Group, 200 CU Owners, $31, 000 Revenue, #7 Revenue Ranking 5. Financial Services Cooperative, 120 CU Owners, $8, 700, 000, #14 Revenue Ranking 10
What Are The Collaborative Opportunities? Short List: Anything – Not Everything (Related to our industry Core Products/Services) ü Business Development - New Members Tax Preparation Services Indirect Lending CUSO’s Check Cashing Centers Loan Center – Indirect/Direct Centralized Marketing - Outsource Marketing, Creative, Printing, Advertising, PR Market Research Provider ATM Provider Consulting Services - All Prof. Svs. IE – Legal, Compliance, Strategy, etc. . . Auto Dealerships - New, Used, all Brands Insurance Company - Personal and Commcl. All Lines Data Processing - Unified single system Full Service Mortgage Company Real Estate, Title Ins. , Etc. National MBL CUSO Collection and Asset Recovery Services Wholesale/Repossession Services ü And More. . . ü ü ü ü 11
12 Why Emerging CU’s Need CULE? Why Now? CULE Fills A Major Need for Emerging CU’s • ECU’s Don’t Need Another Lending Platform. . . • ECU’s Need A Different Approach To Lending! • ECU’s Need The Process(es) To Be Right! • ECU’s Need Something Easy to Implement • ECU’s Need Something We Know • ECU’s Need Something Cost Effective Driven By CU INDUSTRY TRENDS 12
A Long, Long Time Ago…In a Galaxy Far, Far Away… Let’s imagine that the Genesis of this “New CU Business” is the result of the significant decline over the last several years in virtually every CU’s organic automobile loan portfolio’s while continuing to see an increase in the number of Charge-offs, coupled with an increase in the average auto related charge-off deficiency balances. The setting of this fantasy scenario is in a galaxy that is at the end of an era when Auto Loans were once the bread and butter loans for CU’s! As far fetched as it sounds, this Universe of CU’s struggles because they cannot compete with automobile dealers at the point of sale. This “New CU Business” and those leading the charge against the “Dark Force” changes all of this! 13
14 Technology Is The Key • They needed technology that allows Credit Unions to safely recapture existing member loans from the Indirect marketplace hoping that existing member business would be the majority of new loan business • They needed it designed to serve and provide significant benefits to all CU’s regardless of size, location or field of membership • They wanted technology to drive Automated Member. Match, capturing existing member loans (and potential member loans) that now go directly to other lenders, assuring that no one in the system could steal another’s loan • It was important to integrate with Dealerships automated loan application interface technology (Route. One) to increase automobile loan application capture rates and flow, and ultimately loan volume • They knew the importance of developing a new and powerful customized proprietary automated loan underwriting as the heart of the decisioning engine • And Ideally (if not idealistically) the system and its users would promote needed collaboration in an industry with a fractured business model • And they needed a system that could be owned and operated by the Users of the system so that later, no one could take it away or directly compete! 14
The Question is…Can a Collaborative CUSO help? The Answers Are Obvious (Do you really think you can fight off and win against the Evil Empire all on your own? ) 15
CULE– What Are The Differences? It Had To Be Different What You’ll Have Your Disposal 1. Route One Loan Application Interface 2. Structure and Concept 3. Member. Match 4. Next-in-line 5. Automated Loan Decisioning 6. Multi Level of Products and Services (Choice) 7. Quality Control Operations 8. The Business Model and Opportunities For Your Collaborative 16
2. STRUCTURE CULE Is For Credit Unions. Only Credit Unions! • Builds Local, Regional and National Recognition • Each Operating Group (local, regional) can operate separately, yet stay connected and create scale and efficiency • Provides clout in existing marketplaces and entrée to new markets – reputation … • Opportunity for ongoing development and customization of your CU version of the software • Ideally, eventually all Operating Groups collaborate as one entity – ATM CO-OP Model 17
2. STRUCTURE Own The Market- Protected Territories - Collaborate Rather Than Compete • Own a “protected” geographic territory for your operation • No other CU can serve Multiple CU’s in that market with the CULE Brand • All other CU’s in that market must collaborate to join, or go it alone • Territories will grow in value over time – You own it so you can sell it. • Eventually, local providers become regional, and regional becomes national • No other program offers market or territory protection! 18
2. STRUCTURE CU’s Can Actually Own A Piece of The Software That Drives Their System • Exclusive Territory owners will have guaranteed options (after 36 months to 60 months) to individually purchase a percentage interest in the CULE Software Version • Ownership of the software further solidifies CU ownership and independence and keeps revenue in the movement • Drives overall development, encourages National Level collaboration • No one out there offers Ownership in their software! 19
3. Member. Match • Matching Members to the right Credit Union based on actual membership is the main idea, the heart and soul of the CULE system, and the direct advantage of the system. We’ve built an automated process to sort loan applications coming through our loan decisioning software system in order to capture and assign specific loans to specific Credit Unions based solely on Membership. Who else promises your members? • DIRECT loans - You Get Your Member’s Loans. Approved “Member” loans really are DIRECT loans [How the system knows? Based on Information you upload to the “Member. Match” , the database automatically searches for and recognizes your members assuring that you get an opportunity at acquiring each of your actual member’s loans. ] • New (Potential) Member Opportunities. – Our Next-in-Line process - A comprehensive and sophisticated algorithmic process built into the system assigns the correct “next-in-line” lender to the application. – Every CU gets their turn at approving multiple matched existing as well as 20 potential new members.
4. Next-In-Line Everyone Gets their fair share! The system automatically tracks the Time/Date Stamp of each decisioning transaction and knows which Lender is Next-in-Line for each future decisioning transaction. All of this transparent to Members and Dealers. Current Members (LA, LC, LE) Potential Members (LB, LD, LF, LG, LH, LJ) Open Enrollee (LI, LK) Non-CU Lender 21
Standard Decision Criteria For USED Vehicles: Credit Score 690 -720 NON-GLOBAL ATTRIBUTES Solution 1 Criteria Actual Data Received MAXIMUM MODEL YEAR >=2002 2004 MAXIMUM MILEAGE <=80, 000 MAXIMUM LTV ALLOWED S 1 RESULT SOLUTION 2 Criteria S 2 RESULT Pass >=2002 Pass 40, 000 Pass <=80, 000 Pass <=125% 105% Pass <=125% Pass FICO (MINIMUM) 690 N/A Pass 690 Pass FICO (MAXIMUM) 720 718 Pass 720 Pass APPROVAL AMOUNT (MINIMUM) $7, 500 N/A Pass $7, 500 Pass APPROVAL AMOUNT (MAXIMUM) $25, 000 $25, 200 FAIL $30, 000 Pass MAXIMUM TERM <=72 Months 60 Mo. Pass <=72 Months Pass MINIMUM MONTHLY GROSS INCOME =>$2, 000 $4, 300 Pass =>$4, 000 Pass MINIMUM LENGTH OF PRESENT EMPLOYER =>24 Mos. 60 Mo. Pass =>24 Mo. Pass MINIMUM PERCENT DOWN-PAYMENT OF PURCHASE PRICE >=0% N/A Pass >=0% Pass UNSECURED TRADE LINES (COUNT) >=2 4 Pass =<12% Pass 5. Step 3 CU Attribute(s) Matrix 1 UNSECURED HIGH CREDIT $AMOUNT >=$2000 $10, 500 Pass >=$5, 000 Pass 1 UNSECURED HIGH CREDIT PYMT HISTORY >=24 Mo. 36 Mo. Pass >= 30 Mo. Pass SECURED TRADE LINES (COUNT) >=1 3 Pass >=1 Pass 1 SECURED HIGH CREDIT $AMOUNT >=$15, 000 $350, 000 Pass >=$15, 000 Pass 1 SECURED HIGH CREDIT PYMT HISTORY $AMOUNT >=24 Months 42 Mo. Pass >=24 Mo. <=50% 52% FAIL <=55% Pass MAXIMUM PROJECTED MONTHLY PAYMENT TO GROSS INCOME >=15% 8% Pass >=15% Pass Multi Solution 2 (3, 4, 5? ) How Many Do You Want? Pass MAXIMUM DEBT TO INCOME RATIO ALLOWED Iterative Decisions Infinite! 22
6. The Product(s) Multiple Choices • FULL SERVICE PROCESSING and VALIDATION – The Front and Back end support and processing of Each Approved Loan. Full verification, validation and packaging of the file prior to funding. Fully approved and signed off by each lender prior to funding. And Automatic ACH-Funding on every loan. Lender receives the funded package for booking on their system! And yes, we’ll talk Core System integration. Lenders pay on funded loans only! • MODIFIED SERVICE PROCESSING and VALIDATION– Most of the Full Service process with less emphasis on certain aspects of the file quality (I. e. Copy of Drivers License is not perfect), but you as the Lender are OK with this and agree to follow-up and follow-through after funding. Lenders pay on 23 funded loans only!
6. The Product(s) Multiple Choices FULL SERVICE PROCESSING and VALIDATION CU’s Create and staff an operational Collaborative CUSO • • YOU OWN IT You Pay as little as $12 per decision and charge from $200 - $225+ per funded loan to the Collaborative Participants for Full Processing – Owners of the Collaborative generally get a discount price. Includes all software and hosting All Operations, processing, validation, and costs including dealer rep and Route One fees are borne by the Collaborative CUSO. CU’s Pay Credit Report fees, but only when full decisioning takes place. Or, Alternative is to contract directly with Lendgistics for 24 processing services and pay $225 per funded loan.
6. The Product(s) Multiple Choices MODIFIED SERVICE PROCESSING & VALIDATION Complete packaging and processing with most loan packages requiring immediate follow-up by each CU • • You Own IT You Pay as little as $12 per decision and charge from $125$150 per funded loan to the Collaborative Participants for Modified Processing – Owners of the Collaborative generally get a discount price. Includes all software and hosting All Operations, processing, validation, and costs including dealer rep and Route One fees are borne by the Collaborative CUSO Or, Alternative is to contract directly with Lendgistics for processing services and pay $150 per funded loan. 25
26 7. Quality Control Front To Back The Front and Back Office - Processing and Operations Front Office - One consolidated and consistent source to Manage Dealers and to secure and process the loan packages! Back Office - Provide complete Quality Control and verification processes validating every loan package to each lender’s Pre-approved underwriting standards and criteria Loan File/Package Validation and Reviews – What we have been providing Call confirmation with every applicant/member Employment Verification Phone Call Collect/Acquire proper verification of Income (only if stip’d through lenders guideline) Validate References – Minimum 2 per loan package Electronically check for valid DL for borrower Validate Signatures/Variances – Borrowers and Dealers Verify That Dealers Own The Title On Each Approved Vehicle Make certain all standard stip’s and/or any modifications that took place during the validation process have been approved by the Lender prior to funding Lenders still review and approve every key aspect of each loan prior to funding. Electronic/Scanned Files for each Funded Loan Package are retained for future reference QC Objective and Philosophy The Deal that Is Paid For, Is, The Deal! 26
27 8. Ownership, Exclusivity and Income Be an Owner - Form a Collaborative Local/Regional Group and Own the Market and a Protected Territory as well as a future stake in the software! - Requires the ability and desire to collaborate and be part owner in a CUSO to serve yourself and other CU’s in your defined market area - Requires start-up capital to purchase a territory and to staff and fund operations (Most CU’s clearly have Capital to invest in a CUSO) - Requires a commitment to be in, and stay in the lending business - Only Territory Owners will be provided an “Option” to purchase shares of and have ownership in the Software in the future No Brainer - Be an end user, customer, participant - Does not require an investment in research, staffing, operations, or maintaining a “System” - You don’t have to buy, rent, or maintain software or hardware. No up front or ongoing IT Cost or maintenance fees! - No initial or ongoing marketing costs - No Dealer or Field Reps or extra internal staff to hire or retain - No Per Loan application fees from application sources (I. e. Dealer. Track) - Pay-as-you-go based only on funded or decisioned loans 27 - You do pay for Credit Reports, but only when you actually decision
CULE- What’s It Worth? • How much does it cost you now to capture your member (and potential member) loans? Studies suggest that the actual cost of fully marketing and underwriting auto loans is in the range of $300 -$350 per loan. More $ PER LOAN if using Pre-approved data! • What is the cost of losing a member loan? On a 60 month loan (duration of 30 months) average loan amount of $18, 000 at an average rate of 8. 5%, the financial institution would earn over $2, 700 in interest. $3, 800 if the loan goes closer to full term. How often would you pay $405 ($225 Full Processing + $180 - 1% Dealer Participation) to make $2, 700? • What would it cost to individually develop and manage a program of this scale? At minimum you would spend $750, 000 to develop the software plus the cost of staffing and maintaining daily operations with Marketing/Sales, underwriting, funding and management staff. $1. 5 to $2 Million the first year! • And, how much pull will one CU have in the market? The power of aggregating multiple CU’s working through a CUSO if (when) there are problems with any particular dealer is powerful. If the dealer is not cooperating or misbehaving they risk losing all lenders Vs Just one! What is the Cost of Not Being In the Market? Not serving existing members? What is the value of capturing just one member per month? 1 Loan Per month Capture = $1, 200, $2, 400 and $3, 600 monthly (12, 24, 36) 5 Loan Per month Capture = $5, 700, $12, 000, $18, 800 monthly (12, 24, 36) 28
8. Ownership, Exclusivity and Income The Business Case - Projections • Depending on the Operating Model you choose as a CUSO, Income goes from a gain of $7, 500 or a loss of ($35, 000) the first 12 months, to annual net income of $175, 000 by the end of year three. . . To a cumulative gain of $780 K at the end of year five. • At end of year 5 - 30+ CU’s, 380 dealers, funding less than $1 mm per mo. Per CU avg. , generating $200, 000+ gross revenue per month. $200 K-$400 K annually. Plus, each CU has significantly increased and maintained their overall loan portfolio (Approx $1 mm of new fundings per month) • In addition to each CU Owners increased Loan Income! 29
SMART GUY? “this year all the answers are different”. From This Point Forward. . 30
Ultimately You Decide Walt Agius Managing Partner Lendsys, LLC - Lendgistics, LLC and CU Lending Edge 213 -999 -0432 31
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