2012 THE YEAR FOR MEMBER BUSINESS LENDING

THE MBL VALUE PROPOSITION - WHY BOTHER?Current Financial Services Environment … Influx of deposits from Bank customers No where to invest the funds with a decent

return Reduced consumer loan demand Competitive pressure on consumer loans

has driven down yields to historic lows MOST COMPETITOR BANK RESOURCES ARE

CONSUMMED WITH MONITORING WORK OUT LOANS, SHRINKING ASSETS, AND MANAGING REGULATORS

Credit Union Portfolio Segment Credit Union Portfolio Segment TrendsTrends

-6

-3

0

3

6

9

12

15

00 01 02 03 04 05 06 07 08 09 10Aug

Total Loans RE Loans Vehicle Loans

10-Year Average Growth RatesTotal Loans = 7.8%RE Loans = 11.5%

Vehicle Loans = 5.0%

Percent

August 2009 – August 2010 GrowthTotal Loans = -1.2%

RE Loans = 0.7%Vehicle Loans = -5.9%

Source data: CUNA Economics & Statistics and CUNA Mutual Economics

Credit Union Portfolio Credit Union Portfolio Segment TrendsSegment Trends

“Growth in member business loans outpaced all other loan categories each year since 2006. Loan growth in other categories was low or negative in 2010”

Chuck Cockburn, “Pace of Small Business Growth Offers Opportunity to Credit Unions “ August, 31, 2011

Credit Union Portfolio Credit Union Portfolio Segment TrendsSegment Trends

Chuck Cockburn, “Pace of Small Business Growth Offers Opportunity to Credit Unions “ August, 31, 2011

Commercial Loan Trends

Why Bother?Current Press…

“The Growing Impact of Credit Unions on Small Business Lending”- Small Business Administration “We found that small business loans at credit unions

tended to partially offset declines in business loans at banks”

“Credit Unions’ increasing share of Small Business Loans suggest that they are increasingly important sources of SBLs as a longer run development and in response to fluctuations in SBLs at banks.”

“If credit unions can increasingly offset fluctuations in bank’s SBLs, potential small business borrowers should be made aware of this alternative source of loans.”

“Regulators might consider the extent to which credit unions could offset fluctuations in business loans at banks…”

Why Bother?!Benefits of Member Business Relationships

Higher yields - Over 5% NIM Floating rate loans re-price daily with floors

(5.5-6%) Fixed rates re-price every 3-5 years

Business Relationships Provide Low Cost of Funds Financing

Cross Sale Opportunities With Business Owners and Employees Personal accounts Home equity Investments Auto loans Student loans

Why Bother?!Benefits of Member Business Relationships

New Opportunities Become Available As Existing Relationships Grow Expanding businesses are constantly

seeking financing Term loans renewed when equipment is

replaced Exceptional Source Of Referrals Fee Income Enhances Bottom Line

Commitment fees Disbursement fees Late payment fees

Select Employee Groups

Show me the money!

Member Credit Union marginal earnings per $1MM of new business loans 5% NIM = $50,000/yr. Estimated $200K in new deposits

invested at 2% = $4,000 Estimated new personal loans of

$50,000 at 3% NIM = $1500 Annual marginal income of $55,500

What is a Member Business Loan?

• Definition of Member Business Loans• A member business loan includes any loan, line of

credit, or letter of credit (including any unfunded commitments) where the Borrower uses the proceeds for commercial purposes, corporate funding needs, and business investment property or ventures.

•  • b) The following loans are not considered member

business loans: i) A loan fully secured by a lien on a 1-4 family

dwelling that is the member’s primary residence.ii)A loan fully secured by cash.iii)Loans made to a Credit Union Service

Organization. iv)Loans to a member or associated member which,

when the member’s full relationship loan balances are totaled, are equal to or less than $50,000.

v)A loan where a federal or state agency fully insures or guarantees repayment, or provides an advance commitment to purchase the loan in full.

Source: NCUA Regulation 723

Member Business Relationships

• Business Owners- Who Are Business Owners- Who Are They?They?

• What Are They Like?What Are They Like?

Member Business Relationships

Member Business Relationships

“SMALL BUSINESSES CREATE MOST OF THE NATION’S JOBS, EMPLOY ABOUT HALF THE NATION’S PRIVATE SECTOR WORK FORCE, AND PROVIDE HALF THE NATION’S GDP.”

-2009 The Small Business Economy, A Report to the President

“Fully 99 percent of all independent enterprises in the country employ fewer than 500 people:

19.6 million Americans work for companies employing fewer than 20 workers

18.4 million work for firms employing between 20 and 99 workers

By contrast, 47.7 million Americans work for firms with 500 or more employees.”- “Small Business in the United States”, U.S. Department of State

Distinguishing Advantages for Credit Unions vs. Banks

Credit Unions Not-For-Profit Business Members Are

Owners Volunteer Board Of

Directors Income Invested Back

Into Credit Union Cannot Be Bought Or

Sold Flexible To Serve

Members Best Interests Credit Unions Work

Together Social Mission

Banks For-Profit Customers are NOT

Owners

Stock Holders On Board Income Generated Paid

Out To Stockholders & Management

Can Be Bought Or Sold Focused To Serve The

Stockholders Best Interests

Banks Compete … Not Cooperate

Stockholder Centric

Advantages Over Banks

Not serving a small elite group of shareholders – serving members

Not forcing business owners into a defined structure, but actually listening to their needs and developing the structure around that - We Care!

Consistent strategy Minimal risk of buy-out/merger We have no stock to sell and no

stockholders, rather members are owners and benefit from resources directed to their needs through better products, rapid response, lower borrowing rates, higher returns, and loan terms suited to their needs

The Harsh Reality of Business Lending – What to Avoid and How to Avoid It

Non-performing loans can have a shocking impact on earningsNon-performing loans hit you 3 times!

Loss of interest income on existing loan Loss of principal and interest on charged-off loan Loss of funds to lend or invest in new

opportunities Poor loan quality often results in additional regulatory oversight and limitations that can become industry wideReal Estate lending in not a panacea – remember the RTC?

How to Avoid Costly Mistakes ByControlling Risk

Thorough and proper underwriting is critical Diligent analysis of accurate financial records Verification of debt service capability for both

business and ownership Thorough review of management success and

ability Comprehensive identification of all risk factors Verified and realistic collateral analysis

How to Avoid Costly Mistakes ByControlling Risk

Thorough and defensible loan documentation is critical Third party guaranteed loan documentation

software LaserPro of Baker Hill

Experienced loan documentation expert for input and review

Competent and responsive law firm to review or draft documentation

Continuous training and updating to remain current with changing legal aspects and risk trends

How to Avoid Costly Mistakes ByControlling Risk

Meticulous monitoring Loan documents should include a Loan

Agreement with terms stipulating the type and frequency of items required of the Borrower

Quarterly financials Year end accountant audited financials Tax returns Collateral audits Guarantor updated financial statement and tax returns

Operating system should generate ticklers Staff dedicated to tracking and resolving

exceptions Penalties for non-compliance

How to Avoid Costly Mistakes ByControlling Risk

Work out expertise More money will be made or lost based on the

success of your work out capabilities than all the loan income accumulated

Outside counsel to review documents and advise on work out strategy

Collateral should be verified and secured Move fast and at least as fast as the Borrower Access to turn around specialists may be

needed

Distinctive Characteristics and Challenges of Business Lending

Most Credit Union Culture Is Immersed In Retail Services To Individuals Consumer Relationships

Transactional relationships High volume, low yield Resources are focused on the sale Little or no ongoing monitoring

Business Relationships Relationship oriented Low volume, high yield Need to continually monitor financial

condition

MBL Realities

• This is an investment in an entirely new delivery channel– think of it as a new branch requiring well developed marketing plan, human capital, time to develop, and commitment from all staff, especially the C.E.O.

• Business accounts are developed through contacts and professional relationships. They do not walk in on their own, and you do not want the ones that do walk in.

• Member Business Loans pose unique risks: Larger loan amounts than consumer Performance closely tied to economic cycles Fraud is easier Collateral values are weak in a liquidation

How to Find MBL Opportunities

Bull’s Eye Marketing Call on Member Business owners and seek

referrals Sort member households by deposit totals:

> $50,000 $25-50,000 $10-$25,000

Board members SEGs Vendors Friends, neighbors, and relatives

Implementation Considerations

•Regulatory Guidelines NCUA Rules and Regulations Part 723 Illinois Department of Financial Institutions

Section 190.165•Develop Loan Policy•Develop a Loan Application•Establish Underwriting Procedures•Establish Loan Approval Guidelines

Implementation Considerations

•Develop Marketing Strategies to Attract and Retain Business Relationships•Develop Loan Documentation Capabilities•Develop Commercial Deposit Capabilities•Develop Loan Participation Documents•Establish Monitoring Procedures•Develop Loan Work Out Capabilities

Solutions

Hire internally

AdvantagesControl your own destiny

DisadvantagesHigh costLack of DepthSuccession

Solutions

Outsource to a CUSO

Advantages Dramatically lower costs – about 10% of the cost

of staffing internally Increased lending capacity through CUSO

membership Diversification of portfolio risk Lower dollar exposure through participation of

loans Market expertise in a broader market of CUSO

members

Disadvantages Lack of control over management

Our MBL Results

Loan Yield 5.273% on total portfolio net of .5%

servicing feeLoan Quality

$37,957 over 30 days delinquent of .12% of total loans

$157,374 on non-accrual or .5% of portfolio Lifetime charge of total of $1.66 million or

annualized at less than 1% per annum Watch list total of $688,532 or 4,7% of portfolio

Performance Current CUSO cash position is 75% of the total

invested funds by owners after 6 years of operations

Net income has exceeded budget every year by a minimum of 2X and as high as 10X

4X ROI to owners before C/O 3.5X ROI to owners after C/O

QUESTIONS?

DAN BLEIL

SPECTRUM BUSINESS RESOURCES, LLC

4343 COMMERCE COURT

LISLE, ILLINOIS 60056

630-799-1800

WWW.SBRLLC.COM