EECBG Pennsylvania Keystone HELP Program Webcast (Text Version)

Below is a text version of the January 28, 2010 Financing Program Support for ARRA Recipients.

Announcer: Matthew Brown

Good afternoon, good morning depending on what part of the country you're in. This is Matthew Brown; I'd like to welcome you to another in the series of US Department of Energy sponsored webinars addressing financing issues as they relate to clean energy.

We are very pleased to have you participate and very pleased that we have Peter Krajsa and Keith Welks from Pennsylvania who are here today to address you to talk about the energy efficiency financing program. As it is currently structured that has been running very successfully in Pennsylvania for the last several years.

Before we get started I'd like to note a couple of things. First of all the attendees, all of the attendees are muted during the entire duration of the call. In addition we will be taking questions and answers at the end of this call but because you are muted the arrangement to submit your questions is that there is a chat box at the bottom right hand corner of your screen. Please feel free at anytime during the call to submit questions via that chat box and we will collect those and use those as the basis for discussion at the end of the call.

Without further ado, I'd like to introduce both Keith Welks and Peter Krajsa, they are going to give a combined presentation on the Keystone HELP Program which because of the innovative way in which it is been financed; the innovative way in which it is used different, new sources of funds and because its success in reaching large numbers of homeowners is really an exemplary program that I'm very much looking forward to hearing more about.

So we're first going to hear from Keith Welks and then from Peter Krajsa and then we'll move to questions, so Keith, take it away.

Keith Welks:

Thank you very much Matthew. Peter and I are going to, as Matthew said; share the presentation although I've generously given Peter the ____ share of it. I'm going to lead out and try and introduce the program of ___ and then Peter is going to give a lot of details about how it actually functions and the day to day basis. Matthew asked us to say a couple of words about ourselves by way of introduction. I'm the Deputy Treasurer at the Pennsylvania Treasury for Financial Operations that in this context is a somewhat misleading title; Financial Operations actually means paying the _____ _____. Investment programming of the sort that Keystone HELP represents is kind of a side ____ for me, they let me dabble in this every once in a while and so far I haven't made a big enough mistake for them to take it away from me so I get to talk about Keystone HELP and other cool things from time to time.

Peter you want to introduce yourself briefly and then we’ll start the presentation?

Peter Krajsa:

Sure I just follow Keith wherever he goes. I'm Peter Krajsa, I'm the Chairman and CEO of AFC First Financial and we administer the program for the Treasury Department and I’ll be providing additional information a little bit about what we actually do. Thanks.

Keith Welks:

Great, can we turn to the first slide please?

Next Slide: Keystone HELP ® - A Unique Public/Private Partnership for Consumer Energy Efficiency Financing

Keith Welks:

Keystone HELP is an energy efficiency loan program. It is designed to provide low interest loans to homeowners in Pennsylvania. It is not an income based program with some limitations, it is not specifically targeted to low income or middle income or high income borrowers, it is designed to make a return for treasury and I'll talk about that a little more in a moment; but to promote energy efficiency as broadly as we can.

As Matthew said we are perhaps, we have, unseemly, pride in how successful it's been so far. We started in 2006 with essentially no loans, there was a small regional pilot program that treasury learned about that Peter and AFC were involved in, we felt it had great promise so we took it from there and as you can see we've done about 4600 or so loans to homeowners over that period of time.

Pennsylvania treasury is the core capital provider for the program; AFC is the administrator, if you will, and the specialist energy lender. One of the things that we're most excited about in this program is the particular model that we follow, Peter will develop this in more detail but essentially we believe that for programs like this to succeed homeowner need to be acquainted with the benefits of energy efficiency improvements and financing that makes them affordable at the time they're making critical decisions, to us that means contractors who are likely to actually do the installation. Peter manages a huge network of qualified contractors who are authorized to offer Keystone HELP and that give us the ability to be persuasive at a time when homeowners are actually inclined to make a decision.

Our 4600 or so loans exceeded an original capital put out more than $30 million, current balance after payout is about $20 million that treasury is holding in loans that we've acquired from AFC.

Next slide please.

Next Slide: Keystone HELP Filled a Financing Need in the Home Energy Efficiency Market

Keith Welks:

How we got to this program is a little bit of a story, I'll try and give you the shortest version I can. When Bob Casey became Treasurer in 2005 he asked the staff to identify investments that would both do well and do good. Treasury in this context as in its entire context is operating essentially as a private market investor. We are constrained by statutory requirement to only make those investments that a prudent person would make, that means that we need to seek investments that generate a risk adjusted rate of return that is ____ based on market consideration. We felt that there was an opportunity to be found in energy efficiency lending.

Second bullet on this slide really seems to sum it up for us, as distinctly as we can, we thought that the returns from energy efficiency gain could be great enough to pay for a program generator return for the capital provider that would be Treasury and still make it attractive for homeowners. To us attractive for homeowners is that we can in most instances offer them a product that costs no more in monthly expenses then there are realizing in energy gains.

From our perspective we're trying to always make loans that are at worse a wash for the homeowner and over the course of the equipment actually generate positive revenue if you will.

As I said before AFC and Treasury have identified this particular model; model that AFC brought to the program making contractors really the sale persons for both the energy efficiency and the financing product. We've tried at every turn and Peter's really sort of the prophet on this and that’s with a "phet", the prophet on this for making the program simple for contractors and homeowners so that all obstacles that might sort of divert them from the path to energy efficiency choices are removed.

Next slide.

Next Slide: Built on Public and Private Partners

Keith Welks:

Obviously a basic overview of how this operates, homeowners deals with the approved contractors working from bottom up who offer the product which is to say Energy Star appliances, Energy Star certified or equivalent kind of improvement as well as a low interest rate loan product.

Peter qualified contractors and oversees the network of contractors that homeowners would call if they're interested in getting a Keystone HELP loan, contractors originate the loan, Peter acquires the loan and then sells the loan to us at Treasury where we hold them.

Now this is generally, and I emphasize generally in ____ section a market based program, that is Peter is getting the return he needs to operate a private sector business and Treasury gets a return based on market conditions that is comparable to the return we would get from other more conventional assets in this class. The one thing we did to actually make that work was to identify about $900,000 in grant opportunities from other portions of the state government that we successfully pursued. Those grants were then banked if you will where they represented a loan loss reserve against which we could, deter the effects of losses from non performing loans.

Peter will talk about the loss experience which has been quite remarkable so the loan loss reserve has been more of an insurance policy than something for which we've had to cash in insurance proceeds but nonetheless it was essential to give Treasury sufficient security about its investment to make the rate of return acceptable.

So that's the overview pretty straight forward structure.

Next slide please.

Next Slide: Leveraging External Capital

Keith Welks:

This is a bid of a discussion about the way the program has evolved, in its original several the structure that I just described was the one we pursued. Pretty much a pure market based situation, as you can see the loan terms raised up to 10 years to repay and $1,000 to $10,000 as the loan amount. After several years of quite notable success we were approached by the state's housing finance agency which was developing its own programs, slightly different program actually designed to protect homeowners from predatory home improvement salesmen and predatory lenders so the housing finance agency was about to introduce its own program to support homeowners who wanted to do repairs and renovations and they thought it was, with some encouragement from us a neat idea to make a ____ of their program; a secured loan program for energy efficiency improvements, slightly larger in scale perhaps longer in duration and therefore warranting a secured loan so we struck up a partnership with them where for those loans the housing finance agency provides the capital and issues loans through Peter's contractor network under the ____ of Keystone HELP.

Last year the state legislature in Pennsylvania made funding available to the state's environmental agency which doubles as the state’s energy office to support energy conservation loans. In a fashion similar to the housing agency BEP approached us and said you guys have a program up and running already, it's pretty much what we'd like to do; can we use some of the funding we got to buy down the rates that you guys are already charging to homeowners? That of course was entirely ____ with our goals and so we agreed and ____ a relationship with them and created a somewhat fast, what we hope is a somewhat fast ____ structure that creates progressively more attractive incentives to push people toward even more sophisticated and more effective energy conservation choices. The housing finance agency remains available for secured loans up to $35,000, we're now doing up to $15,000 loans but the basic for the program remain intact simply the interest rate structure is now being subsidized much more directly by the availability of these legislatively appropriated dollars for conservation programs.

Next slide please.

Next Slide: Low Interest Loans to Middle Market Homeowners……

Keith Welks:

As I said this is sort of targeted if you will towards the middle market which is to say that's the group that we think is most likely to be pursing these loans however not limited to low interest, low income or high income homeowners. Applicants have to be credit worthy but short of that there’s no sort of minimum income that we require before you can qualify. You'll see that this provide a little background on the program basics. The traditional rate now which is to say the basic Energy Star appliance improvement project rate is 6.99, that's several points at a minimum below what the market would provide if you could get a 10 year unsecured loan for these kinds of activities. Then you can move progressively down by doing as I said more rigorous energy conservation measures to reach an unsecured loan rate of 4.99, those are for projects that include the BPI ____ compliant Whole House audit and an implementation of sort of requisite percentage of the recommendations as part of your project and if you meet those relatively basic requirements you can qualify for a 4.99 rate on your loan.

Next slide please.

Next Slide: …And a Viable Investment for Treasury

Keith Welks:

Sort of summarizes how this is operated for Treasury and we hope Pennsylvania consumers at this point even the rates that we were offering the first several years prior to the availability of DEP funding the average coupon on all of the loans in the portfolio is roughly 8%, Treasury's return is about 5% and frankly the last year to 18 months during the throws of the economic crisis ironically this sort of little boutique program that we had to defend when we started it has been Pennsylvania's, Pennsylvania Treasury's most consistent and frankly most lucrative performer so it's sort of been the star of our portfolio, that's a star in a somewhat diminished galaxy but nonetheless the star so we're pretty pleased about that.

Although we offer 10 year terms on the loans the loan life in actually performance is closer to 5 years and although Peter I think will develop this in some more detail the loss experience has been from our perspective especially given the last 18 to 24 months spectacular, our losses to date are less than 1%.

Next slide please.

Next Slide: As Program Has Grown, Treasury is Reaching Limits of Capitalization Ability

Keith Welks:

Sort of a summary, we have sent out more than $30 million, we are currently holding about $20 million that's a mixed blessing if you will the size of that amount represents or reflects the success we've had in promoting the program and getting homeowners to see its value. On the same token Treasury again, as a prudent investor, traditionally faces portfolio diversification constraints. We really don't ordinarily want to accumulate too much of any one asset, certainly one asset class as narrowly defined as loans that we buy from AFC. So $20 million give or take starts to move the needle a little bit on the ____ level for the investment professionals that work at Treasury. So we’ve pretty much give or take reached the point where for us to continue to buy new loans from Peter we need to move the old loans in our portfolio out faster than simple pay down provides for us. So we are now pretty excited about the prospect of working with some national leaders; other states to try and develop a secondary market for these kinds of loans. We think that the emphasis and the job that we expect to see the growing interest in other states for Keystone HELP-like programs; the existence of some other programs that have been around for a while that are not precisely now ____ the Keystone HELP but certainly pushing the same direction all suggest that we should be able to get to a credible and market worthy level of production each month that would support a secondary market. Investors buying directly from Treasury or from some intermediary created to hold Pennsylvania Treasury's loans, perhaps loans from California, New York, Ohio, Wisconsin, Nebraska, what have you and create liquidity facility if you will for the capital providers so that Pennsylvania Treasury tomorrow for example could sale its $20 million portfolio and have that money to help Peter continue to make loans going forward. So we're very excited about that, I mean I think that there are a number of national players who are watching, there are a number of national players who have expressed an interest in helping and are participating, DOE certainly on that second and smaller list of folks who are actively encouraging us to find a way to make this happen so next generation for us is to continue to refine the program, Peter's gonna talk about that and to move our loans out individually helping Pennsylvania continue the program but more generically helping prime and secondary market so that others can get into the space, make loans and get their capital back.

I think the next slide is where Peter takes over, can we see that? Yep.

Peter Krajsa:

Great, thank you Keith and you can tell by Keith's presentation that he has really a deep ___ and profound grasp of this whole project and has really been an innovator in this. He called me a prophet earlier, you know I've always called him my ___ in Pennsylvania state government so we've had a great team ___ the other thing Keith kept referring to ___ Peter buys the loans, Peter makes the loans, I'm very fortunate to have a very effective team here at AFC First that if I try and do it all myself it would be a kind of a ___ event so we have a great and dedicated staff here that works on this.

Been around since 1947, it's my family’s business, we've really moved into energy efficiency lending about 10 years ago when we became one of Fannie Mae's three, currently three energy lenders approved in the country. Our focus really is on contractor driven residential energy efficiency and renewable energy financing programs for consumers.

We operate in about 20 states with about 2,000 approved contractors, work with a number of utilities such as National Grid and Duke, ___ Energy and other state and municipal partners who in addition to the Pennsylvania Keystone HELP program we created and run the Connecticut Solar Leasing program for consumers so it's kind of what we do on a day to day basis and we've expanded our capacity to be able to accommodate programs really in any state in the country with a new banking platform that we’ve developed.

We do several key points here, we. Oops, if we could move ahead, that's ok,.

Next Slide: AFC First â€" A National Leader in Energy Efficiency Lending

Peter Krajsa:

Ummm. Our focus is really providing these services, which is the contractor recruitment, the screening and training and I'll talk a little bit more about contractors in a second. But the whole load application intake and processing piece of this, the loan servicing both off and on bill is a new adventure for us but we're beginning to look into that. We pay the contractors upon completion and verify that work has been done satisfactorily and we also are getting more and more engaged in actually being able to provide the energy tracking ___and energy saving metrics that justify these programs; working with programs like PSD's (Performance System Development's) Green Energy Compass and alike.

Next slide Scott please.

Next Slide: The Facts about Financing

Peter Krajsa:

So what about financing, who's financing? Well I call it the perfect storm of energy crisis and credit crisis, really when people are talking about making energy efficient improvements in today's world or any world they're gonna ultimately finance them. About 70% of all home improvements up to $15,000 are financed in one way or another, maybe that's a credit card, maybe it's a home equity loan and when you're talking about larger loads like above $15,000, really all those loans are financed.

Most consumers are motivated by necessity when it comes to energy efficiency so I call that the reactive consumer; somebody who needs to replace their furnace when it's broken or replace their boiler and that's really is what dominates the market, despite what President Obama said about insulation being "sexy," this is truly not the first choice of most people to invest in energy efficiency. They'd rather be going to Hawaii or paying for college education so they are motivated mostly out of necessity and that market is shifting more as the emphasis goes toward this home performance and what a lot of programs would like to emphasis is the proactive improvements where you’re thinking about how you're gonna save money by doing these things to your home. I can tell you that if you live in the service area where Keith and I live our utility rates all went up 32% this January so that's sort of a motivation to become a proactive consumer of improvements.

But any of these programs I think that are successful around the country address both of the market, both the reactive and proactive, you can't just isolate on the consumer that's gonna do the full energy audit and everything. You have to really address the consumer that's also gonna be replacing his heat pump and encourage them to put in the Energy Star heat pump and not just buy the cheapest system.

Such kind of improvements are often and mostly sold and not bought and the ultimate goal is keeping it simple for the contractor and the consumer. It's really not about the number of audits that you're conducting; it's about getting the work done is energy savings.

Next slide please.

Next Slide: What Has Worked and Where the Jury is Still Out

Peter Krajsa:

So what's going on around the country? Well, the programs that have worked and where the jury is still out is that the most functional ones have been the simple state funded multi-payment contractor driven programs such as the NYSERDA program in New York, a number of other programs in some other states but Keystone HELP has been highly successful in moving units. These are programs where again the contr5actor is the point of purchase and the consumer does not have to go to their local bank to get a consumer loan and maybe the assistant manager of that bank has no idea what energy efficiency state loan program they're talking about and the contractor doesn't want to relinquish control over the customer to the bank so those things don't typically work out so for the point of purchase program those typically are the most effective.

On-bill programs are a very, very hot topic right now, you hear about it in every proposal we seem to make, track record is kind of new from a lenders perspective there's several concerns it's who's taking the delinquency? If I'm going to be relinquishing my credit portfolio over to a utility to collect it for me, I'm concerned about that and if they're willing to participate in the delinquency of the loss reserve that makes it more tenable but at the great concern for a lender in fact you know, when we get into the delinquency section of this presentation, the reason why our loss ratios are low to a large degree are because of a collection procedures and consult of collection procedures that we employ. So that's a concern but ultimately who takes the credit risk, what happens when the home is sold? There are a number of issues but it seems to be a topic that has a lot of traction around the world; around the country so we're investigating how we can integrate with that. I do, my one comment about on-bill financing is I can see as being an effective collection mechanism and that's really what it is, it's a way to pay your bill but how does it help the consumer get the loan any more readily upfront and if somebody can point that out to me then I will understand it better.

The PACE model, the real estate tax model and again a very, very innovative program that is being talked about around the country. I think it's really great but it’s also very highly localized program; difficult to rule out on a state-wide basis case you’re operating through municipalities and often times it can only address a small part of the market which is the proactive consumer so in municipalities where you're looking at maybe renewable energy or things in the localized area, it's working really well. Bottom line is you need a variety of fancy programs to address the market.

Next slide please.

Next Slide: A Successful Consumer Energy Efficiency Program….

Peter Krajsa:

So we think a successful consumer program really assists consumer in making better decisions regarding energy efficiency, it really recruits and is focused on contractors and how to utilize and in essence sale financing to help them sale more high efficiency systems or more comprehensive home energy improvements. Obviously state of the art technology to make the thing efficient and so you can interact well with your sponsor which may be the state or whomever or and with the consumer. You have to be competitive against the market driven credit card program and everything else and you have to be able to exchange that data, have to provide consumers with efficient knowledgeable and exceptional charming personal servers as I'm sure my staff does. You have to clarify that this is really special financing, it's not just hey we have a loan for you, this is really special deal that the state, the municipality, whomever has worked out for you to make this a more effective process for you and finally it has to be able to produce measureable results on energy savings and we have to be able to document those kinds of things and that's an area that we're getting more and more aggressive in.

Next slide please.

Next Slide: How Do Americans Pay to Improve Their Homes’ Energy Efficiency?

Peter Krajsa:

So how do Americans pay to improve their homes' energy efficiency?

Next slide.

Next Slide: Two Types of Energy Efficiency Customers

Peter Krajsa:

We talked about the reactive and proactive customer. The slides say it all so if you move on there, Scott.

Next Slide: REACTIVE Consumer â€" Welcome to the "Twilight Zone"

Peter Krajsa:

Reactive consumer we call the financing "Twilight Zone" and that's that amount of money that's between $3-$15,000, it's kind of too big to put in a credit card and too small to get a home equity loan, and what do you do? The consumer ends up not making the purchase because in today's economy people are very, very, very concerned about making unnecessary purchases and especially if they don't have an effective way to pay for them. This covers the vast majority of energy efficiency home improvements, that world. The customers: he doesn't want a lien on his home for that small amount, it's time sensitive and needs the work done typically right away. It's contractor driven, the contractor's in the home.

The options for many consumers have always been and still are what I call Come-on or Teaser financing, so what happens, you go into the big box store or you take the manufacturer's program and its 0% for 6 months and 32% thereafter if you don't pay it off. It's just not the appropriate way to pay for a larger capital purchase, for many people that's the only financing alternative they have because in today's world, guess what, if they have a home equity line of credit use it it's a wonderful way to do it but all of our homes depending geographically where you are at right here, are worth 20-50% less than they were 2 years ago. Banks, because of increased regulation or constraint in the home equity level, they can lend at so you have banks limiting themselves to 75% equity levels and that really restricts consumer borrowing capabilities.

The borrower still wouldn't get a longer term or lower rate than they can from a bank consumer loan. As Keith points out it's difficult to walk into your bank or credit union and borrow $7,000 unsecured, maybe they'll do it for a 2 year term or a 3 year term it's gonna be at 12 or 13 or 14%. I mean the traditional Fannie Mae energy loan currently right now is a 13% loan, but it offers a longer term of up to 10 years.

Those are some of the designations and what's the answer? The answer for any kind of sponsor program is an unsecured point of purchase simple loan product with simple product qualifications such as Energy Star where a consumer can understand and the contractor can understand that, "Hey, this is an Energy Star furnace, I'm going to be able to get this lower rate if it's installed by an approved contractor".

Next slide please.

Next Slide: Proactive Consumer-The "Thinker"

Peter Krajsa:

So for active consumer which we call the "Thinker" is let's say the person that we all would like to be I think, the person who is really thinking about their whole house improvements and getting the energy audit and maybe doing a renewable energy like geo-thermal or solar; tend to be more project driven less time sensitive, many of these things are motivated by tax credit but tax credits can only be utilized if you have the money upfront to pay for it in the first place and that's an issue for many people with larger project orientation. Again more customer thought, engagement in foresight, we talked about the limit in home equity market.

The solution for this is to find a way to tie in and establish or ____ establish ____ like the home performance model from EPA which ties in a simple energy audit or comprehensive energy audit and those recommendations and then provides a lower rate than our reactive financing program and you'll see in a second this is what we've negotiation or integrated with the ____ housing finance agency model in Pennsylvania.

Next slide.

Next Slide: Program Should Not Exclude, But Rather Incent

Peter Krajsa:

So really as I say, your program should exclude but rather not exclude, but rather incent and you don't want to, to say "gee all we want you to do is a home performance model." We've established a tier financing approach in Pennsylvania where you set this basic bar, ok you're gonna replace your system with the Energy Star rated system, that gets one low rate but if you put in a higher rated system maybe a 17 tier system, you're going to get a lower rate than that. If you go the full boat and you’re gonna get the audit and do the protocol recommendations of a whole house program you’re going to get the lowest rate. So we've been able to influence the market and force the market to change and interestingly also get contractors to embrace a greater move toward home performance and whole house and looking at the house as the system because they're able to offer greater incentives if they move in that direction.

We've seen a major shift in Pennsylvania where we've had, we have about 1600 approved contractors and most of those are typical HVAC guys, remodeling guys and the people that you would think would be installing these kinds of improvements. Well, because our programs gear toward providing lower rates if they get high levels of certification we've seen about 700 of those people go through a one day home performance 101 training class that we've provided over round the state last year to move them to the next level to expose them to home performance contracting and then we're now seeing an increased level of contractors looking to get certification, technical certification in building performance institute or ____ one of those things that can really _____ out from the market as a true home performance contractor. But they still have to no matter what they do have to buy into the use of the program and they can't be put up by complexity because they need to accommodate their customers so you can't put them through a bureaucratic and I'll put state in quotes although Keith doesn't like quotes but "state" program that makes it too cumbersome for them.

So you would also want to use simple recognized national standards such as Energy Star for equipment standards, there's no need to re-invent the wheel or create your own special standards when there already national protocols and will be interesting to see if this occurs but you've heard about this cash for _____ program, we're now known as Home Star. If this comes about they'll be a very, very nice national framework that is very similar to what we're doing in Pennsylvania that could be the basis for a lot of sustained programs.

Next slide please.

Next Slide: Keystone HELP® Addresses Both Reactive and Proactive

Peter Krajsa:

So here's the breakdown of the programs that we have we offer in Pennsylvania and you can see the top 2 are really ____ reactive home improvement and that is an unsecured loan for Energy Star rated appliances from $1 thousand to $15 thousand and when I say appliances wrong term, heating cooling, windows, doors, insulation and other qualifying improvements. There's detail beneath this but essentially if it's an Energy Star qualified item in those categories a consumer get a 6.99 loan of up to 10 years; up to $15,000 if they credit qualify and we'll go through the credit qualifications in a bit.

No points, no fees, no cost to the contractor so it's a very, very simple loan concept.

Advanced performance would be the same Energy Star rating but maybe a little bit higher level of ___ or _ _ _ _ or other type designation that didn't get a slightly lower rate. So that dominates really our market of the 4600 loans that we've done, 4200 of them have been loans in those areas.

The proactive market is one though that we're seeing an increasing pick up in. Currently we offer 2 programs and unsecured loans for a whole house approach with an audit and then a secured loan that we offer in combination with the housing finance agency. So the top 3 programs you see there are Treasury funded programs all really in the same bucket, both different interest rates, same credit criteria. The bottom loam program is through housing, Pennsylvania housing finance agency program that offers a home equity loan up to $35,000, up to 120% loan to value first, second, or third lien. It's an unbelievably attractive program that they fund through their own bond offerings and have their own experience and we're able to originate these loans for that program with lower rates because of the energy related aspect of this, so we cover both sides with this.

Where we're seeing the slow pick up really is in that third tier, the unsecured audited loan because frankly the audience and number of qualified contractors able to perform a BPI audit in Pennsylvania has been to date pretty small. When you start getting into somebody who is looking for a comprehensive approach to their house are they willing to pay $700 for an audit even if it's, you’re gonna get a $325 audit credit which was what, I don't think it mentions it, oh it does. A $325 audit credit on that proposal if they're not going to spend more than $15,000 so we're considering revising that tier right now where we may be coming out with a simplified tier that we'll talk about in a second.

Next slide please.

Next Slide: Three Levels of Contractors

Peter Krajsa:

Three levels of contractors are authorized to perform the work and again this is a contractor ____ program. The basic level is that approved contractors are contractors that apply to become a Keystone HELP approved contractor through us. Pennsylvania there has, there is a licensing procedure now which is great because we can verify that they are legitimate licensed contractors but they have to provide us with credit information and we do our due diligence on their, what I could say, financial and ethical stability, Better Business Bureau reports make sure that they are companies that will be around and have been around and can stand behind their work.

We have fired contractors from the program when we have seen inadequacy of work or sales practices we don't like, it's a very, very small level because we do a pretty good scrutiny upfront to make sure that the contractors are good companies. We aren't addressing technical qualifications that, at that point just the _____ financial __ ____ stability.

Trained contractors are this new level that we're; __ introduced this one day training. If they attended this one day home performance 101 course to become a trained contractor and that authorizes them to do work on some of the whole house programs if they're operating under the oversight of a fully certified BPI contractor which is a certified contractor, somebody who's achieved BPI certification or accreditation.

I believe that's going to become and it is becoming the real hallmark of all these programs even on this federal level the BPI certification seems like be where they're going on a national level. We've begun conducting classes here at our facility in doing BPI training, it's a pretty comprehensive 5 day health and safety training with the blower door testing and the infrared cameras and all those kinds of things and if the contractor chooses to move into that market he becomes BPI certified and then he has just elevated himself and also is going to do a better job for the consumer.

So you can see in the breakdown of contractors we have about almost 1600 approved in Pennsylvania and you can see where the break down is falling there and we are seeing and increase though, instant number of certified contractors but with on 69 certified contractors to cover the state of Pennsylvania, it's a pretty small number. I would hope that we'll start seeing this average and ___ fairly quickly as we continue to do more training.

When I mentioned there were 700 contractors that went to the training, there were 700 individuals and that represented the 360 companies.

Next slide.

Next Slide: Increasing Demand for Keystone HELP Loans

Peter Krajsa:

So here is the demand increase you seem you can see, you see that from '06 we started the program with Treasury to the end of last year and thank you for conveniently arranging this presentation right after the end of the calendar year so we can really give you up to date statistics. But you can see the number of loans has increased fairly dramatically as well as the original loan volume and this is only for the Treasury program, does not include the housing finance agency program. Made $30 million in loans, $20 million in outstanding average term of around 7 years or 85 months and the average APR or the rate is around 7.78% and you can see how that for example in '08 all we had was the 899 program and that's what dominated the market, in '09 we introduced some of these lower rates and that brought the yield down a little bit but again the demand has been you know very, very, has become a very popular selling tool for contractors and a very popular program for consumers.

Next slide.

I just want to add one more thing, we're really only constrained to a large degree by the capital availability that we have. We manage the program because we know the Treasury has the ability to fund, you know, x dollars. If there was an unlimited ____ of the money with this program we could get a lot more aggressive in terms of the marketing of it but this level is what we can sustain right now and it's been very, very sustainable and that much is always good when you sustain something that's sustainable I guess.

Next Slide: Increasing Demand for Keystone HELP Loans

Peter Krajsa:

Credit standards are pretty straight forward, they’re based off the Fannie Mae energy loan standards that have had years and years; 10-15 years of track record in terms of losses and credibility. Not to make you focus on the small slide there but fundamentally we have about a 55% approval rate on these loans. It's a minimum credit score of 640, average credit score in America is about 690 right now so this goes down to I like to try, the person who's a 690 credit score is a person who pays their bills on time and that's great. You can go up to 800 and that’s the person who has perfect credit and maybe limited not overburden with credit, you can go down to 400 which is the person who pays none of his bills. Once you get done below that 640 though you’re talking about somebody who is starting to have problems making payments, maybe over extended which is a huge problem, that's the second category here when we do credit approvals is their debt to income ratio. We go to 50% debt to income ratio on gross income, because these are small loans we're able to do that but the key point here is really looking at that so we don't over burden the consumer even if it's an energy efficiency improvement, I don't want to put a consumer in over their head with the concept that maybe that's gonna help them save energy a little bit. Those are two factors plus no bankruptcy for the last 7 years will be the three basic ____ of the underwriting of the loan program.

You see that we have an average FICO of about 730 which is well above the national average of 690 and the borrowers tend to be, regardless of income ____ or demographics, they tend to be fairly committed people who realize that this is not just like a cavalier investment, they're making investment in their home and I think that attribute goes a long way to attributing to the low delinquency rate of default rate.

Next slide please.

Next Slide: Sound Underwriting, Mission Driven Borrower and Consultative Loan Servicing Means Low Losses

Peter Krajsa:

So what does this all result in, as I mentioned the low delinquency rate you can see that currently we're servicing almost 4,000 loans. Right now at the end of December 98.62% of them were current, less than 30 days delinquent which is 1.4% delinquency. The national average on consumer lending if you go to the Fed’s website is probably 4-6%, 30 day delinquency I think. Did we notice an increase in delinquency this year? Sure we did, when you have the economy and the situation that we have we did notice and increase in bankruptcies and an increase in slow pay but certainly not to the extent that most other lenders did or most other programs did, we're very ____ with this.

Our overall losses and you can see that we’ve made $30 million in loans and have charged off $164,000 in loans since the program inception which is ½ a percent. As comparison the typical average charge off for a credit card kind of debt on an annual basis is about 3.5% on an annual basis and we've charge a .5% on an ongoing programmatic basis so again these are numbers that we watch very carefully, we I think again attribute it to 2 factors, sound underwriting upfront, dealing with quality contractors because if a consumer if forced to do an improvement they’re less likely to want to pay that back so if you’re dealing with quality contractors which have good sales practices you’re gonna end up with a happy consumer who's happy with the improvement and happy with the energy savings, it's ____ them, they'll make their payments. Again our approach historically as my dad said many, many years ago a loan well closed is half collected so we make sure that we talk to ever consumer before we close those loans. Our underwriting team does something different than maybe traditional home improvement lending. When somebody is applying for a loan to us or through the Keystone HELP through the program it's not just an automated approval, we have all the technology but we have, we talk to every consumer to make sure they understand the terms of the loan and if there's any issues or question we want to address them upfront. Secondly, we don't pay the contractor until the consumer is 100% satisfied so we have consumers sign a completion certificate, we do a verbal authorization then the consumer's paid. So again you have a happy consumer going into the transaction. Then finally we have what we would call ____ kind of collections, it's a, you're working with people to try to make sure that they're able to make their payments and work with them as you can. Last thing you want to do with an unsecured loan is make an enemy of the borrower so I think you combine those factors and you'll end up with low loss rate. But interestingly, I mean, that's patting us on the back for good operations but the Fannie Mae portfolio for energy loans is probably only a little bit higher than this in terms of delinquency loss experience so I think the nature of the energy borrower is such that it brings on a good profile of borrower.

Next slide.

Next Slide: Program Delivery

Peter Krajsa:

So you have to have a program that is delivered in a way that consumers view it as contemporary and easy to operate so it's a very web based approach where we accept applications online via the website. We actually have integrated application into the contractor's website if they so choose to market it that way. There's an application call center and toll-free numbers.

We work with a lot of what we call sponsors in the program so that utilities around Pennsylvania will link to the program as kind of a sponsor partner will provide ____ ____ and those kinds of things for their consumers. The same thing with manufacturers, distributors will hook up with a manufacturer of high efficiency heating systems and they will make that program available to their dealer network and that's the function that we do, we have sales representatives around Pennsylvania and around the country working with contractors and sponsors to develop that program. To the contractors it's a great financing program that's simple, to the consumer it's a non-bureaucratic program and that’s why they'll pursue it.

Next slide.

Next Slide: Proposed Enhancements

Peter Krajsa:

The enhancements we're talking about which I eluded to and Keith feel free to jump in if I don't define these properly, but right now we require a comprehensive energy audit which requires both BPI and ____ certification of the auditor and the ability to produce a ___ score; ___ index to get a comparative number for energy savings. It's a great product to have one done but it's expensive and kind of time consuming.

How can you get a bigger uptake in this home performance model and get people to really look at air ceiling insulation before they put their heating system in. The __ is to kind of create a basic energy audit category which is going to follow the BPI protocol, pretty, not BPI ___ just BPI only which the fundamental thing about that is the ability to go in and do the blower door test and the air ceiling and the infrared cameras and then do that first before you do anything else.

So what we're going to do is take that unsecured loan tier for the audited loan that we showed you before that has had very little uptake and replace it with this tier of loan that is going to maybe even have a much lower rate than any program we've done to date to really get consumer to look at doing this home performance but in a simple way. We're gonna maintain the larger comprehensive loan program, audit program for larger secured loans maybe with a lower rate that we work out with the housing finance agency. We're going to expand the influence of the BPI training around the state to get more contractors to embrace it cause frankly if they're gonna, if this Home Star thing comes about and they want to play in that market they're gonna have to get BPI certification anyway.

Our goal is really in design flexibility to allow consistency with any new federal programs that come out such as Home Star so that we can take Keystone HELP and make sure it aligns properly with that program.

Next slide please.

Next Slide: Keep it Simple

Peter Krajsa:

Finally, ___ ___ is really simple, when you’re designing these programs, don't get caught in red tape. All energy efficiency lending program are competing against credit cards and simplicity and most consumers and contractors will follow the path of least resistance even if it's more costly so if you’re a consumer or contractor and we can be offering you a 0% loan program with a lot of rebates but if we make it difficult for you and it’s going to be easier for you as a contractor just to get that consumer's credit card that’s the way the program’s gonna go so you have to design a program that strikes the balance of simplicity and good rates and lower rates but doesn’t over complicated the requirements for the contractor or consumer. Again the goal is getting efficiency done and not just the number of audits and you can’t over burden the contractor or the consumer. I’m over ____ that but that's why we seen the uptake I think in the program and that’s why anything we’re doing developing going forward is all been geared on this concept of simplicity.

So that being said, Matthew or Keith you have anything to add to my prophetic words.

Keith Welks:

No, that was a great job Peter, thank you.

Peter Krajsa:

So Matthew, we're ready to accept questions or should we answer these right from the Q&A?

Matthew Brown:

If you can hear me, ok, I’m sorry yes, I'll, there are some questions here and in addition there's a couple of others. One quick question was the, what happens as finds are paid back into as repayments come in on the loans? Are they recycled back into additional loans?

Keith Welks:

This is Keith Welks, no it's not technically structured as a revolving loan pool that is to say there not an amount of money that is now been permanently committed to supporting these loans. This is an investment by Treasury, we had a contractual promise to Peter with regard to hoe much money we would provide by way of capital and when that money came back to us by way of repayment we were done.

Now we obviously love the program and are looking for ways to continue to infuse more money but in terms of technical revolving loan program when money comes back it's sort of sequestered in an account and available to make new loans, that is not the structure we have.

Peter Krajsa:

____ ____ practical stand point when payments, I mean I agree with Keith, but when payments come in on a monthly basis we AFC collect those payments and remit the principal and the interest earned Treasury's portions of that back to Treasury on a monthly basis so that money is going back to Treasury but not into a pre designated pot but payments filter through us back to Treasury.

Matthew Brown:

A question, this is maybe a question for Keith. There are a number of states around the country that are looking at some kind of similar model and I think a lot of people on this call are not necessarily experienced in working with their Treasurer's office and so I guess I Would ask, do you have recommendations for the best ways to approach a state treasurer in a State Treasurer office with this kind of idea?

Keith Welks:

I can certainly offer some thoughts, the very first question is does the state treasures office have the authority to invest the states assets in a program of this sort? There are a variety of models; frankly there are probably about 50 models for how state treasurer's offices are legally constituted with regard to their investment authority. Some states have very narrowly defined investment authorities that would almost certainly not include anything that looks like this so clearly the first question is, does the state treasurer's office have the authority to do it regardless of whether it wants to or not does it have the authority? If it has the authority then the next question is, is there some interest that you can cultivate there to exercise that authority along the lines of a Keystone HELP like program?

To make that an attractive proposition for a treasurer it seems to me you need to be able to do a couple of things. One you need to figure out and meet whatever return or yield ___ the treasurer's office is going to impose at the same time that you can provide some appropriate level of security and I'll use that small less confidence if you will that the treasurer's investment will be safe because obviously treasurer's are political officials whether elected or appointed and they’re subject to easy and cheap criticism so program that have great promise but lose capital are always problematic. That's why you may recall in this description we talked about $900,000 we were able to secure at the outset as a long loss reserve. We thought that appreciation over time that basically gave us a 10% loan loss reserve; we thought that was likely to be ample so far our projections have turned out to be true. What projection, what experience that you might anticipate from a loss standpoint in approaching another treasurer is sort of a matter of some conjecture but it's obviously something you’d have to address. Lastly because I don't want to ___ this answer you need to decide whether the model, the very distinctive model that ____ brought to us which is to say a large motivated and very reliable contractor network as your distribution channel is important to you. When we were doing our homework we encountered or learned about lots of sort of ___ energy efficiency loan programs that have been started not only by treasurer's, by program agencies, by banks themselves or the years and other places around the country and in general most of those failed they had very, very little uptake of even attractive subsidized loan products and to a large extent we concluded and this is a conclusion that became firmer and firmer for us as time went on that having a bank as the place that a consumer has to go is not really a great way to do this because at the time that the consumer needs the money for a purchase, he or she may not remember that they saw an ad for the bank 6 month earlier ____ an attractive loan program. So and that's true even for a consumer who's, Peter's the thinker, the proactive ones may not make that connection for someone who's furnace goes out on the coldest day in February and wants a replacement within 48 hours to keep his or her family warm hoping that they're gonna remember and then shop around among banks to get a competitive rate on financing and then pair that up with a separate contractor doesn't seem like a very effective model for success. So if you're approaching a treasurer you need to think through what delivery channel, what delivery strategy you have to offer so that the investment in creating a program actually pays off in delivery of loans.

Matthew Brown:

Thank you Keith. I'll also share one bit of perspective. When I worked with the Colorado state treasurer to set up a very similar kind of program at the very end of this whole process we sat down and we said, I sat down with the treasurer and with her staff and the treasurer looked at her investment manager and said what do you think and ultimately she said liked the idea of doing a similar program but she broke it down into three pieces; risk, return and liquidity. The risk for this program seem like it was acceptable and especially given the loss, a loss reserve that was made available. The return was appeared decent and I think you've heard from Keith that in fact it was, it's been very good in the case of Pennsylvania. The liquidity in other words, what do they do with the loans once they are made or and is their way to accelerate the return of capital to for further investments in a similar program was weaker and I think that's one area so risk return and liquidity were two, were three areas that people looked at in particular.

There's another question, um, this is more for Peter in part dealing with alternative sources of financing for the particular individual so given the high credit scores of the participants in the Keystone HELP program 730 and above FICO scores, would it be possible they could easily get financing elsewhere and in the kind of proactive case; the audit case is there reason to believe that they wouldn't have done this work in the absence of Keystone HELP?

Peter Krajsa:

Yeah, I mean the issue is not access to credit for somebody with those kinds of credit scores it's the type of credit so if you're a quality borrower with reasonable credit and you have home equity in your home sure, use your home equity line of credit as I mentioned before though that's become a more, more restricted source of borrowing that that high credit or average credit borrower, what are their alternatives when they’re gonna borrow $10,000? Here are your alternatives, you either have the money, well guess what average American has less than $10,000 available cash to write a check for something and they're not gonna write all to pay for their heating system, even if you have a 730 credit score. So you have the ability to write a check, you put it on a credit card, but putting $8-10,000 on a credit card is a very, very large number and people don't have access to that and typically on their credit card, don't want to put it on a credit card because they know that credit cards have, while they may have an 8% rate right now that can go to 18% tomorrow depending on the terms of the credit card. Third options is you go to your bank or credit union to obtain the financing and they'll say fine we can give you a home equity line of credit or we can give you a loan or we can give you a 3 year loan and that's great but they can't give you a longer term and the rates gonna be unbearably higher because all the market rate for unsecured loans regardless of credit score is in the 12-13% range. Our borrower is the borrower that says hey this is the best financing, this is better than any financing option for me, there is not a better financing option unless they have a home equity line, it's cheaper than anything I can get so that's the special part for that borrower.

In the proactive case the issue really is for the borrower; we've done 2 things, we’ve said ok let's identify the product that says we can give the borrower who has good credit or reasonable credit, but has limited home equity a large loan that they could not get from any other source for fortunate the housing finance agency has a program that allows us to go to 120% loan to value. Well guess what there's no program in America that does I don't think right now. We're able to offer that consumer that option to put in the larger improvements at reasonable rates, those rates are 6-7-8% for a home equity, fixed rate 20 year home equity loan, tremendous thing. What if you have home equity and you're this borrower? Our rate I think right now is 3.875% for a fixed rate 20 year home equity loan if you have equity in your home. You can't get that at a bank so to answer the question the idea here is to identify programs not for people that are, I mean, that can't get credit but for people who would not make these improvements because the credit they can get is not a tenable way for them to pay for this so we’ve created programs that can address an unsecured market with lower rates and longer terms that make affordable payments and also with a secured loan program that addresses people with limited equity and if you have equity better rates if you're gonna do the whole home performance model.

Matthew Brown:

Thank you Peter. Another question is goes to some of your, the incentive rates that you’ve offered and I know you started out with 8.99% rate and then as result of legislation we're able to bring that down to a 6.99%, 5.99%, 4.99% rate. Do you think that lower rates really make a difference; do you find that people really respond ____ as an incentive to reduced interest rates?

Peter Krajsa:

____ you need to get rates below the 10% threshold on an unsecured program, this is the marketing 101 so you need that ____ rate at somewhere 9.99 to get anybody interest in anything. We did see what, we started the program at 7.99, when we went to 8.99 we did see a little bit of a push back there and we found that the rate that seems to be the most, the rate that people embrace is in that 5-6% range. You don't need to go to 0%, there's no reason to do that when a 5-6% loan maybe adequate. ___ ___ of ____ ____, ____ had a very good analogy for that, he says you know 5-6% when people fear that rate they think that's a mortgage rate so that's ok. ___ of interesting consumer perception that if you get down to that rate level you'll have more than adequate uptake and the only reason you ever want really, really make the rate much lower is if you're trying to ____ a particular tier of your product like we're considering doing with this new light audit product to really get some market transformation going on there.

Matthew Brown:

Ok, ok. Another question just in terms of roles between AFC First and the Treasurer, you talked about setting up underwriting criteria and so on, what was the process for doing that in the first place? Were these criteria that you AFC First had put together and then sought approval from the Treasury where they initially proposed through kind of a joint meeting, what was the process for getting those, getting all those details addressed?

Keith Welks:

Well, my recollection is that we looked to Peter in the first instance because we were basically making an investment in AFC, we had and he came back with what his standard underwriting was and how it operates. We had some thoughts about what I believe were sort of minor flexes or nuances in terms of making the program attractive and available to as many people as possible consistent with smart underwriting and Peter, you know, found some of those to be pretty ___ and others to be reasonable and worthwhile. Peter is that about right or am I imagining all this?

Peter Krajsa:

No, no, no, that's exactly right and the fundamental start for it though was the Fannie Mae underwriting guidelines, that's the basis to this, I mean you have again 15 years of track based on credit scores and that ratio limitation and we started with those and that's how we've been operating our programs, went to Keith again and we made tweaks but they weren't major tweaks I don't think so, that's where they came from.

Matthew Brown:

Great. OK.

Peter Krajsa:

And Matthew just, anything I've seen on this Home Star thing that those, that that level of underwriting guidelines is likely a standard that is the national, could become the national standard for these kinds of programs.

Matthew Brown:

Mmm hmm, ok. Well Peter or Keith I'll open it to either one of you if you have any closing comments and I think we'll, we will begin to close this down I had one other comment before we finish but Keith or Peter do you have any final remarks you wanted to make?

P>Peter Krajsa:

As I always do I will ____ to Keith.

Keith Welks:

I’m fine, we appreciate the opportunity to talk about it and hope it made sense to people, thank you.

Matthew Brown:

Great, well thank you very much. I'd like to bring this webinar to a close it's, having now run quite a few of these they all seem to end at almost precisely the 64 minute mark so we're about there. I would like to point out that we have 2 upcoming webinars that you should be aware of. We're right now in kind of a point where we are addressing different programs and designs in different states or local governments, we will be hearing next from on February 4th we'll be hearing about a program in Washington State, on February 11th we'll be hearing about a program and a financing program in Oregon and we look very much, we look forward very much to those webinars and also appreciate all of your questions and participation in this webinar and thanks once again to both Peter and Keith for your participation very well done. So thank you very much everybody.