william blair - spec fin 2014

Please refer to important disclosures on pages 104 and 105. Analyst certifi cation is on page 104.William Blair & Company, L.L.C. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the fi rm may have a confl ict of interest that could affect the objec-tivity of this report. Investors should consider this report as a single factor in making an investment decision.

Equity ResearchFinancial Services and Technology | Financial Technology | Specialty Finance| Business Development Companies

Financial Technology and Specialty FinanceSector Update and 2014 Outlook

We believe the global economy is stable and steady with some modest accelera-tion in several markets. The global economy will likely be slightly stronger in 2014 than it was in 2013, in our view.

The secular growth opportunity in global electronic payments has not declined in the least, in our view. We still believe that about 85% of global retail payment transactions use cash and checks, in line with three years ago, despite double-digit secular growth. Faster-growing emerging-market economies (i.e., Latin America, Asia, Africa, and Eastern Europe), which are predominantly cash-based, put upward pressure on the electronic payments opportunity.

International growth of electronic payments will continue to materially exceed growth in the United States. Companies poised to bene it from the international growth of payments should show strong inancial results despite the uncertain eco-nomic environment. Asia, Latin America, the Middle East, and Africa all have substan-tial long-term electronic payment growth opportunities, in our view.

Technological innovation is a key driver to growth of inancial services. Innova-tion in the payments space continues to accelerate. Mobile payments; tablet comput-ers, such as iPads; prepaid cards; mobile wallets; the Internet; and online lending are all examples of game-changers in the inancial services sector.

Consumer-directed healthcare secular trend appears to be gaining momentum. We believe the growth of consumer-directed healthcare is the single best way to control the growth of healthcare costs. We believe the Affordable Care Act has accel-erated the trend. Private healthcare exchanges appear poised for substantial growth.

Regulatory pressures continue to build for the inancial technology sector. We believe most companies will navigate the environment, but costs continue to rise.

Financial technology continues to outperform the market; valuation continues to expand. After 30% growth in 2012, the William Blair Financial Technology Index rose 44% in calendar 2013, versus the S&P 500 growth of 13% in 2012 and 30% in 2013. The William Blair Financial Technology index trades at about 12 times on an EV-to-EBITDA basis, 29% above year-ago-levels.

Companies with high barriers to entry, long-term secular growth, international exposure, and visible operating leverage should remain core holdings.

Robert P. Napoli Brian D. Hogan Cristopher D. Kennedy, CFA+1 312 364 8496 +1 312 364 5256 +1 312 364 [email protected] [email protected] [email protected]

January 14 , 2014Industry Report (14-009)

Financial Technology

Alliance Data Systems Corporation (ADS) Outperform, Core GrowthAmerican Express Company (AXP) Outperform, Established GrowthCapital One Financial Corporation (COF) Market Perform, Core GrowthCardtronics, Inc. (CATM) Outperform, Core GrowthDiscover Financial Services (DFS) Outperform, Core GrowthEVERTEC, Inc. (EVTC) Outperform, Core GrowthFinancial Engines, Inc. (FNGN) Outperform, Aggressive GrowthGreen Dot Corporation (GDOT) Market Perform, Aggressive GrowthMasterCard Incorporated (MA) Outperform, Established GrowthMoneyGram International, Inc. (MGI) Outperform, Aggressive GrowthPerformant Financial Corp. (PFMT) Outperform, Aggressive Growth QIWI plc. (QIWI) Outperform, Aggressive GrowthVisa Inc. (V) Outperform, Established GrowthWageWorks, Inc. (WAGE) Outperform, Core GrowthThe Western Union Company (WU) Market Perform, Established GrowthWEX Inc. (WEX) Outperform, Core Growth

Specialty Finance

CAI International, Inc. (CAP) Outperform, Core GrowthDFC Global Corp. (DLLR) Market Perform, Aggressive GrowthEncore Capital Group (ECPG) Outperform, Core GrowthIndependence Realty Trust, Inc. (IRT) Outperform, Core GrowthMarlin Business Services Corp. (MRLN) Outperform, Core GrowthPortfolio Recovery Associates, Inc. (PRAA) Outperform, Established Growth

Business Development Companies

Garrison Capital Inc. (GARS) Outperform, Core GrowthHarvest Capital Credit Corp. (HCAP) Outperform, Core GrowthMonroe Capital Corp. (MRCC) Outperform, Core Growth

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William Blair & Company, L.L.C.

ContentsSummary ............................................................................................................................3

2014 Top Picks...................................................................................................................6

Runners-up ........................................................................................................................9

Attractive Long-Term Investments ..................................................................................10

Yield Stocks ......................................................................................................................11

Consumer Trends ............................................................................................................13

Commercial Trends .........................................................................................................36

Mortgage/Housing Trends ..............................................................................................58

Payments and Remittance Trends ..................................................................................74

Stock-Price Performance and Valuation .........................................................................92

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SummaryIn 2013, the William Blair Financial Technology Index rose 43.7%, while the William Blair Specialty Finance Index rose 46.9% (versus 29.6% for the S&P 500). This performance is on the heels of the William Blair Financial Technology Index rising 30.3% in 2012 and the William Blair Specialty Finance Index rising 30.6% in 2012 (versus 13.4% for the S&P 500).

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Exhibit 1William Blair Financial Technology Index Versus S&P 500

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Exhibit 2William Blair Specialty Finance Index Versus S&P 500

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We believe that despite strong stock price performance, valuations remain reasonable; however, we expect modest multiple expansion from current levels. On an EV-to-EBITDA basis, valuation for the William Blair Financial Technology Index expanded 29% in 2013, to 12.0 times; interestingly, valuations have expanded by 7 points (or 147%) from their bottom in November 2008. We believe the relatively strong business models and secular tailwinds suggest the group could trade at a 12- to 14-times multiple over time.

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Exhibit 3William Blair Financial Technology Index

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A Few Interesting ChartsThe 178 exhibits in this report highlight the various macro trends that we monitor and histori-cal valuations. Below we focus on a few of the more interesting exhibits that might represent an in lection point.

• The U.S. population continues to rely heavily on the government payments (exhibits 21 and 22, on pages 21 and 22). As of third quarter 2013 (the most recently available data), about 17% of personal income comes from government social bene it programs (e.g., Medicaid, Medicare, unemployment insurance, Social Security, and veteran’s bene its); this compares with 13.99% exiting 2006 and the long-term average of 10.4% (since 1947). Further, social bene it payouts have exceeded employer and employee contributions by about 1.5 times since 2009 (versus the long-term average of 1.08 times). In the September quarter, for instance, the government paid $2.4 billion in social programs but collected only $1.6 billion from employers and employees for the programs.

• The U.S. jobs market continues to gradually improve. For most of 2013, weekly initial unemployment claims have been below 350,000, on a four-week rolling average basis, a level that we view as “healthy.” Weekly jobless claims—which we view as a more important indicator than the monthly employment report—are down about 50% from their March 2009 highs. Initial jobless claims, on a four-week average basis, have ranged from 305,000 to 369,000 in 2013 (exhibit 23, on page 23).

• Consumer deleveraging appears to be bottoming; consumers have plenty of “dry powder” that will drive spending if con idence returns (exhibits 13, on page 17, and 37, on page 30). Revolving credit outstanding was at $823.4 billion, which remains 18% ($182 billion) below the recent December 2008 peak. Further, consumers’ inancial obligation ratio (household debt payments to disposable income) was 15.36% in the September 2013 quarter; this compares with the most recent peak of 18.10% in December 2007 and the average of 16.6% since 1980.

• Credit quality continues to be near record low levels (exhibit 72, on page 49). According to the Federal Reserve, 0.97% of all business loans were delinquent in the September 2013 quarter, which compares with the recent peak of 4.36% in the September 2009 quarter and the historical average of 2.98% since 1985. Similarly, charge-offs totaled 0.23% in the September 2013 quarter, which compares with the recent peak of 2.52% exiting 2009 and the historical

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average of 0.90% since 1985. We believe recent trends will prove unsustainable over the long term but could linger longer than most expect, due to the improving economy, the tighter lend-ing environment, and the overall deleverage in the market.

• The U.S. housing market is the key to a much-more-robust economy and shows steady signs of improvement; however, higher interest rates appear to have pressured afford-ability (exhibits 94, on page 60, and 115, on page 71). Residential investment as a percentage of U.S. GDP represented 3.2% in the September 2013 quarter and compares with the recent bottom of 2.4% in 2010, the recent peak of 6.7% in 2005, and the historical average of 4.6% since 1929. Housing affordability, as de ined by the National Association of Realtors, is 23% below its recent peak, reached in January 2013, but remains 12% above its long-term average. According to the National Association of Realtors, the index “measures whether a typical family could qualify for a mortgage loan on a typical home” and is based on the combination of median home price, median family income, and average mortgage interest rates.

• Consumer-directed healthcare continues to gain share as employers ind solutions to contain healthcare costs (exhibits 148 and 149, on pages 90 and 91). Healthcare represents 17.7% of the United States gross domestic product (GDP), which compares with 9% in 1980 and the global average of 9.3%, according to the Organisation for Economic Co-operation and Development. Only about 20% of employees in the United States are covered by high-deductible health (versus 4% in 2006), according to the Kaiser Family Foundation. In addition to tax bene its, employers have incentives to increase their participation in these programs, because consumer-directed bene its reduce total cost of coverage by about 18% per employee (versus PPO and HMO plans), according to Mercer. We believe 2014 could represent an in lection point for the healthcare exchange market.

Key risks include government budget de icits broadly, global currency risks, in lation, interest rate volatility, geopolitical events, and disruptive terrorist events.

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2014 Top PicksOur top picks for 2014 include Outperform-rated Visa, MasterCard, and Discover Financial Services. We believe our top picks have high risk-adjusted returns (i.e., below-average risk of experiencing a sharp decline and above-average long-term opportunity to materially outperform the market). We outline our rationale for each of the companies below.

Visa Inc.

Rationale

• Visa is well positioned to continue capitalizing on the electronic payments secular growth trend. Roughly 85% of payment transactions globally are cash and check (versus roughly 45% in the United States). For perspective, electronic payment transactions accounted for about 15% of the U.S. market in 1990, according to The Nilson Report. Secular growth of electronic payments is expected to be 10% to 12%, on average, globally over the next several years, which compares with personal consumption expenditure growth of about 7%. The drivers behind the secular shift from paper to plastic include convenience, security, and enhanced services and rewards for the consumer, as well as lower cash-handling expenses for the retailer.

• Management estimates that it has roughly 22% share of personal consumption expenditure (PCE) in its developed markets (excluding Europe) up from 19% in 2009, and only 9% share of PCE in its emerging markets, up from 6% in 2009.

• Visa’s global network represents substantial barriers to entry, and disintermediation appears unlikely, in our view. There are substantial barriers to entry as incumbents have massive scale and global reach, as well as leading security and data management skills, information intelli-gence, brand recognition, and trust. We believe the cost of building a global payments network would even prevent the largest technology, inancial, or wireless companies from seriously considering such an endeavor.

• Visa enjoys high incremental margins, which contribute to its attractive margin pro ile (61.5% in iscal 2013, ending September) and strong free cash low, positioning the company to invest in growth initiatives (e.g., prepaid, mobile, e-commerce, international, and person to person).

• Amid the backdrop of strong secular tailwinds, we believe iscal 2014 guidance could prove conservative. Fiscal 2014 guidance calls for low-double-digit constant-currency revenue growth and mid- to high-teens adjusted EPS growth. Guidance is based on a “tepid” economic recovery. We expect long-term sustainable EPS growth of at least 15% due to the secular tailwinds, mod-est margin expansion, and capital redeployment.

• Visa has a strong balance sheet and generates strong cash low. The company had about $7 bil-lion of cash and investments and no debt on its balance sheet as of September 30, 2013. Visa should generate nearly $5 billion of free cash low in iscal 2014 and is authorized to repurchase more than $5.2 billion of stock.

Valuation

• On a calendar-year basis, Visa trades at about 24 times our 2014 EPS estimate and 21 times our 2015 EPS estimate, yet we anticipate 19% EPS growth in 2014 and 16% growth in 2015. The stock trades at under a 1.2 PEG ratio, which is attractive relative to the broader market.

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• Similarly, on an EV-to-EBITDA basis, Visa trades at about 14 times for calendar 2014 and 12 times for 2015, yet we anticipate 12%-13% EBITDA growth.

Key Risks

• Global economic growth remains an important driver of revenue growth for Visa. During the prior recession, Visa revenue growth rose 9% year-over-year in calendar 2009 (versus 18% in calendar 2008).

• Legal and regulatory risks remain.

MasterCard Incorporated

Rationale

• Similar to Visa, MasterCard is well positioned to continue capitalizing on the electronic pay-ments secular growth trend (see thesis above).

• Also similar to Visa, MasterCard’s global network represents substantial barriers to entry, and disintermediation appears unlikely, in our view. We believe there are substantial barriers to entry as incumbents have massive scale and global reach, leading security and data management skills, information intelligence, brand recognition, and trust. We believe the cost of building a global payments network would even prevent the largest technology, inancial, or wireless companies from seriously considering such an endeavor. For perspective, MasterCard-branded cards accounted for about $3 trillion of total purchase volume over the last 12 months.

• High incremental margins should drive MasterCard’s operating margin expansion over time. The network effect allows for incremental margins in the 90% range, in our opinion. However, we believe the company will heavily invest in prepaid, mobile, e-commerce, international, person to person, and other initiatives, allowing for a more gradual increase in operating margins from the current level of just about 56%.

• Amid the backdrop of strong secular tailwinds, guidance could prove conservative. On a constant-currency basis and excluding future acquisitions, guidance for 2013-2015 calls for net revenue to increase at an 11%-14% compound annual rate, operating margins to remain above 50%, and EPS growth of at least a 20% compound annual rate. We believe capital allocation and share buybacks will play a larger role in EPS growth in the coming years as operating margins remain elevated.

• MasterCard has a solid balance sheet and produces strong cash low. It exited the September 2013 quarter with $3.4 billion of cash and equivalents and $2.6 billion of investment securities, and it should generate more than $3 billion of free cash low in 2014.

Valuation

• MasterCard trades at about 27 times our 2014 EPS estimate and 23 times our 2015 EPS estimate, yet we anticipate 18%-20% EPS growth in the coming years. MasterCard trades at under a 1.2 PEG ratio, which is attractive relative to the broader market.

• Similarly, on an EV-to-EBITDA basis, the stock trades at about 16 times 2014 and 13 times 2015; yet we anticipate over 15%-16% EBITDA growth in coming years.

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Key Risks

• Global economic growth remains an important driver of revenue growth for MasterCard. Dur-ing the prior recession, its revenue increased 2% year-over-year in 2009 (versus 23% growth in 2008).

• Legal and regulatory risks remain.

Discover Financial Services

Rationale

• Discover continues to expand and enhance its direct banking strategy, which along with its network, uniquely positions it among its peers, in our opinion. We believe the company is well positioned to continue to bene it from the secular growth of electronic payments, both consumer and commercial.

• Discover is taking market share in credit card lending and ills a signi icant void left by the banks with its personal loan offering as well as student lending. Discover’s credit card lending portfolio (80% of total loans) was up 4.0% in the third quarter, comfortably above the industry growth rate of 0.2%. We forecast Discover to continue taking market share, and we forecast 4% growth in both 2014 and 2015. Discover is one of only a few lenders underwriting private student loans today. We believe Discover is well positioned to increase its market share in stu-dent lending (13% of total loans). The personal consumer lending business (6% of total loans) is growing rapidly, as Discover is taking advantage of the market dislocation and signi icant market opportunity, which we estimate at roughly $400 billion.

• Credit quality trends remain strong, exhibiting improving trends despite seasonal headwinds, relatively strong loan portfolio growth, and credit metrics already at record-low levels. While further material improvement is unlikely, we expect credit losses to remain below average for an extended period. We expect Discover’s loss provisioning over the next year to be primarily attributed to loan growth. At this point, we believe our loss rate forecast of 2.1% in 2014 could be conservative.

• Network partnerships provide material long-term upside potential. Discover’s closed-loop network gives it unique long-term value, in our opinion. We believe the barriers to building a closed-loop payments network are substantial. Discover has built its unique franchise over decades. We believe its network is underused, but management appears active in seeking ways to increase the volume on its network, forming partnerships with a host of marquee companies looking to build or enhance their payments businesses. While we believe the partnerships have signi icant potential, it will likely take several years to be meaningful, if successful.

• International network expansion represents a long-term opportunity for Discover, though likely not material in the near term. Discover is using the Diners Club brand and building out the interoperability of its network to establish an international presence. The network interoper-ability allows a Discover-branded card to be accepted anywhere Diners Club is accepted.

• Discover is signi icantly overcapitalized, generates strong cash lows, and is aggressively re-turning capital to shareholders. Return on equity is a little more than 20%, versus loan growth of about 5%; this compares with management’s long-term average target of 15%. Discover’s tier-1 common ratio stood at 14.7%, up from 13.9% a year earlier and despite a 5% reduction in the share count. We forecast Discover to return 80% of capital generated in 2014 and 2015 via dividends and share repurchases.

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Valuation

• Discover shares trade at about 12 times our 2014 EPS estimate, compared with about 15 times for a broad group of regional banks. Discover generates higher return on equity, has a higher long-term earnings growth rate, and has substantial excess capital. Discover is more credit sensitive and regional banks bene it more from rising interest rates, but over the long term, we believe Discover’s valuation gap with that group will narrow materially. In addition, the stock trades in line with Capital One despite generating higher return on equity and a more visible growth outlook. We also believe Discover’s valuation gap to American Express, which trades at about 16 times our 2014 EPS estimate, is also too wide.

Key Risks

• The banking industry, which includes credit card lending, is under increased regulatory scrutiny.

• Economic cyclicality could drive greater-than-expected volatility in earnings. A weak economy would lead to consumer spending and could also lead to higher-than-expected credit costs.

• Compression of interchange fees, driven by regulatory intervention and/or competition, could adversely affect operating results.

Runners-upBelow we highlight other stocks in our universe that were on our runners-up list:

American Express Company (Outperform)American Express is valued at a market multiple and has good business momentum; we believe it is likely to trade at a premium to the market. Wells Fargo and U.S. Bank will issue the American Express cards; we believe these new relationships highlight the power of the brand.

CAI International, Inc. (Outperform)CAI was a disappointing stock in 2013, up only 3% in 2013. Relative valuation has plummeted versus its peers, despite in-line fundamental performance. We believe this is due to smaller market cap and the lack of a capital return plan. CAI’s shares are valued at about 7 times our 2014 EPS estimate versus the peer average of 11.3 times. Its price-to-book value of about 1.3 times compares with the peer average of about 2.4 times. If global growth accelerates slightly in 2014, we believe estimates could start to move up and that the stock price could have 50% upside.

DFC Global Corp. (Market Perform)DFC is the worst performer in our universe in 2013, down 47% year-to-date. The underperformance is due to severe regulatory changes in the U.K. market. DFC’s Canadian and U.S. segments are driving solid performance and justify the current valuation. We believe U.K. regulation will drive out many competitors and that it is a likely survivor and should drive reasonable returns in that market. If this happens, we believe there is upside potential of 50% to 100%.

EVERTEC, Inc. (Outperform)Evertec is a Latin American payments and inancial technology company. The stock has been es-sentially lat at around $20 since its initial public offering. Shares are valued at about 15 times our 2014 EPS estimate while its peers trade at 15-20 times. Cash lows are strong with 50% EBITDA margins and a 10% tax rate. Currently, 85% of business is generated in Puerto Rico, but the big growth opportunity is outside Puerto Rico.

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MoneyGram International, Inc. (Outperform)The stock remains inexpensive at about 6 times our 2014 EBITDA estimate, despite 50% stock price appreciation in 2013. MoneyGram has reported 12 consecutive quarters of double-digit transaction growth; in the most recent quarter, it had 14% transaction growth and 13% revenue growth, all organic. We expect double-digit transaction growth for the next few years.

Performant Financial Corporation (Outperform)Performant was another 2013 underperformer, with the stock up only 5%. Management has ex-ecuted well, but it has been faced with continued uncertainty and indecision by the Centers for Medicare and Medicaid Services (CMS) with regard to its Medicare RAC business, which is about 25% of revenue. Shares are valued at about 8 times our 2014 EBITDA estimate. We believe there is 50% upside potential if a favorable resolution on the Medicare RAC is attained.

Attractive Long-Term InvestmentsBelow we list other stocks in our coverage universe that we believe are compelling long-term invest-ments. Most of these stocks were up signi icantly more than the William Blair proprietary inancial technology and the specialty inance indices as well as the market as a whole.

Alliance Data Systems Corporation (Outperform)We believe ADS brings a unique proposition to the market by marrying digital marketing skills with credit and loyalty products; as a result, ADS is in the sweet spot of the trend toward enabling commerce through technology. We believe management’s long-term targets and our estimates are conservative. Management targets revenues to grow organically at the rate of three to four times gross domestic product, which should drive about 10% EBITDA growth and 15% EPS growth. Shares trade at about 21 times our 2014 economic EPS estimate and 19 times our 2015 estimate.

Debt Collectors: Portfolio Recovery Associates, Inc. (Outperform) and Encore Capital Group, Inc. (Outperform)Both stocks are up roughly 50% in 2013, following similar moves in 2012. Valuations are still rea-sonable, in our opinion, but regulatory headwinds and debt supply questions add some near-term noise. Industry consolidation in the United States has accelerated, and both Portfolio Recovery and Encore are clear winners over the long term, in our opinion. In addition, we believe global opportu-nities—especially in the United Kingdom and Europe broadly—add to long-term growth potential.

Financial Engines, Inc. (Outperform)Financial Engines has expanded its total addressable market substantially with the addition of IRA and Income+ products over the past couple years. In our opinion, the third quarter 2013 was the company’s best quarter ever, as it added a record $85 billion of assets under contract (AUC), bringing the total AUC to $752 billion, up 34% year-over-year, and EBITDA rose 50%. The shares are valued at about 11 times our 2014 revenue estimate and 3.2% of AUM.

QIWI plc (Outperform)QIWI is a Moscow-based payments company that is up about 200% since its May 3, 2013, initial public offering. The company has strong momentum and has exceeded expectations by a wide margin each quarter since the IPO. Valuation is at about 28 times 2015 EPS and about 21 times EBITDA.

WageWorks, Inc. (Outperform)WageWorks is one of the best plays in the trend toward consumer-directed healthcare bene its, in our opinion. We also believe it is a great play on the growth of private exchanges, based on its exclusive relationship with Towers Watson’s active exchange. Bene its from the exchange

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relationship, potential acquisitions, and the likely bene its from positive adjustments to the use-it-or-lose-it rule are not included in our estimates and are likely to affect 2015 and later years much more than 2014.

WEX Inc. (Outperform)WEX was one of our top picks for 2013. The company reported strong reacceleration in its online travel payments business in the September quarter and steady results in its core fuel card business. Perhaps most importantly, it announced an acquisition of the Exxon private-label card program in Europe (marketed under the Esso brand) that doubles the total addressable market for the fuel card business. However, the deal will not close until late 2014 and will be dilutive to 2014 and irst half 2015 earnings. We hope this will lead to other deals with major oil companies in Europe and Asia. Shares are valued at about 18 times our 2014 and 16 times our 2015 EPS estimates.

Green Dot Corporation (Market Perform)Despite an onslaught of new competition, Green Dot’s core business appears to be more resilient than our (and management’s) initial expectations. Shares remain relatively inexpensive at about 6 times 2014 EV-to-adjusted-EBITDA and 17 times EPS; the company had $245 million of net un-encumbered cash and investments (or $5.39 per share) on the balance sheet exiting September. Green Dot’s ive-year contract with Wal-Mart (65% of Green Dot’s revenues) expires in May 2015.

Cardtronics, Inc. (Outperform)We believe Cardtronics has a unique franchise and that the company has several levers that will drive long-term growth, including both secular and macro (e.g., increased circulation of cash, growth in ATM transactions, growth of prepaid, and shrinkage of bank branches) and internal initiatives (e.g., addition of new revenue streams, geographic growth, and cost initiatives). We are encouraged by the Cardpoint acquisition, which will provide scale in the United Kingdom and serve as a platform for Germany. We note that Cardtronics’ contract with 7-Eleven (27% of 2012 revenues) expires in July 2017.

The Western Union Company (Market Perform)We remain attracted to the $550 billion global remittance market, which should grow 8%-9% in the coming years, and we have been encouraged by accelerating transaction growth at Western Union. Yet the company has been plagued by operational challenges, and 2014 is expected to be another year of transition as regulatory costs are expected to increase $60 million to $110 million. While this will be painful over the short term, we believe the tightening regulatory environment could improve the competitive and pricing environment for the largest companies. Western Union maintains a solid global brand and generates strong free cash low.

Yield StocksFor investors in search of yield, we believe the three business development companies (BDCs) on our coverage list are attractive alternatives to high-yield bonds and that they are attractive relative to the broader BDC sector as a whole. We view Monroe Capital as the most compelling of the three BDCs that we cover, given its current valuation and market position. The lending to lower-middle-market companies (roughly $10 million to $100 million in revenue and $2 million to $20 million in EBITDA) offers signi icant opportunities, considering the relatively high amount of loan maturities over the next several years and the level of competition, in our view.

In addition, we ind apartment real estate investment trust (REIT) Independence Realty Trust at-tractive, given its focus on secondary markets, its relationship with RAIT Financial Trust, and its compelling valuation.

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Monroe Capital Corporation (Outperform)Monroe is an externally managed BDC that provides customized inancing solutions primarily to lower-middle-market companies in the United States. Monroe Capital’s inancing solutions consist primarily of senior, unitranche, and junior secured debt. We believe its current valuation, substan-tial market opportunity, management team’s proven track record, and differentiated sourcing and origination platform make the shares an attractive investment. Monroe’s book value as of September 30 was $14.01. We believe shares should trade at a slight premium to book value, especially once Monroe gets its SBIC license, which we view as likely sometime in the irst half of 2014. Monroe’s annualized dividend of $1.36 equates to a yield of about 11%, versus its primary peer group of about 9.0%.

Garrison Capital Inc. (Outperform)Garrison is an externally managed BDC that provides customized inancing solutions primarily to lower-middle-market companies in the United States. Garrison’s inancing solutions consist primarily of irst- and second-lien senior secured, unitranche, and subordinated debt. First-lien senior secured loans accounted for 91% of Garrison’s $412 million portfolio as of September 30. We are con ident in the stability of Garrison’s dividend and believe that an eventual increase is likely —once Garrison gets the SBIC license. The dividend yield of 9.8% compares favorably with high-yield bond funds, which return about 6.5%, and with its primary peer group average of about 9.0%. Garrison’s book value as of September 30 was $15.11. We believe shares should trade at a slight premium to book value. We appreciate management’s long-term focus and discipline.

Harvest Capital Credit Corporation (Outperform)Harvest is an externally managed BDC that provides customized inancing solutions, primarily to the lower-middle market in the United States. Harvest’s inancing solutions consist primarily of se-cured subordinated (junior) debt, senior secured debt, unitranche, and, to a lesser extent, minority equity investments. Secured junior loans accounted for 55% of Harvest’s $49 million portfolio as of September 30, while senior secured debt accounted for 39%. By focusing on the lower-middle market and secured junior debt, Harvest generates asset yields in the mid- to upper teens, which should allow the company to generate a return on equity (ROE) of more than 11% once the portfolio is fully ramped up. Harvest’s current annualized dividend of $1.35 per share equates to an 8.9% yield, generally in line with the peer group. Harvest’s book value as of September 30, was $14.79. We believe shares should trade at a slight premium to book value.

Independence Reality Trust, Inc. (Outperform)IRT is an externally managed multifamily apartment REIT that aims to generate attractive risk-adjusted returns with an emphasis on distributions and capital appreciation. The company is focused on owning, operating, and acquiring apartment properties with stable occupancy rates and resident bases that are located in relatively developed submarkets. We believe Independence should bene it from the current economic, market, and demographic environment trends. IRT has a strong pipeline with over $100 million worth of properties at various stages of due diligence and underwriting, which, if closed in its entirety, would nearly double IRT’s portfolio. IRT’s shares trade at a 7.5% dividend yield relative to its peer group range of 3% to 5%. IRT’s dividend is considered return of capital for tax purposes versus the more common treatment as ordinary income.

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Consumer TrendsConsumer credit improvement is near an end but will likely remain better than average for an extended period. According to the Federal Reserve, credit card charge-offs improved 43 basis points quarter-over-quarter in third quarter 2012, to 3.19%—the lowest level since irst quarter 2006, which was positively affected by the October 2005 bankruptcy law change. Delinquencies, which precede charge-offs, increased 6 basis points from the second-quarter record-low level of 2.47%. Since 1987, consumer credit cycles averaged about three years, with the shortest cycle 1.75 years and the longest cycle 4.5 years. Positive credit cycles have ranged from 2.25 to 4.0 years. Although further improvement in the credit metrics is likely near an end, we believe credit qual-ity could remain better than average for an extended period because of tighter lending standards, consumer deleveraging, and the improvement in initial jobless claims.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

1Q85

1Q86

1Q87

1Q88

1Q89

1Q90

1Q91

1Q92

1Q23

1Q94

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

(%)

Exhibit 4Consumer Loan Charge-off Rates, NSA

Credit Cards Total

Oct. '05 Bankruptcy Law Change

3.5 yrs 3.0 yrs 2.25 yrs 3.25 yrs 2.5 yrs 1.75 yrs 4.0 yrs 4.5 yrs

As of end of 3Q13

Sources: Federal Reserve and William Blair & Company, L.L.C.

3.0+ yrs

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1Q85

1Q86

1Q87

1Q88

1Q89

1Q90

1Q91

1Q92

1Q23

1Q94

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

(%)

Exhibit 5Consumer Loan Delinquency Rates, NSA

Credit Cards Total


As of end of 3Q13

14 Robert P. Napoli +1 312 364 8496


Bond spreads are at their lowest levels since late 2007. As global economic growth sputtered, corporate bond spreads sharply widened in the second half of 2008 and peaked in December 2008. As the global economic outlook improved, spreads narrowed from their highs to slightly better than their long-term averages. Because of increased global economic uncertainty stemming primarily from the European sovereign debt woes, bond spreads widened again in late 2011, but not nearly to the same extent as in 2008. Spreads have generally narrowed since then. As of mid-December 2013, the AAA bond spread was about 25 basis points below its long-term average and the high-yield bond spread was 180 basis points below its long-term average, likely because investors are searching for yield in the current low-rate environment.

0

500

1000

1500

2000

2500

Jan-

97Au

g-97

Mar

-98

Oct

-98

May

-99

Dec

-99

Jul-0

0Fe

b-01

Sep-

01Ap

r-02

Nov

-02

Jun-

03Ja

n-04

Aug-

04M

ar-0

5O

ct-0

5M

ay-0

6D

ec-0

6Ju

l-07

Feb-

08Se

p-08

Apr-0

9N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Oct

-12

May

-13

Dec

-13

Basi

s Po

ints

Exhibit 6Option-Adjusted Spread Trends of the Merrill Lynch AAA, BBB, and

High-Yield Corporate Bond IndicesDaily From 1/3/1997 Through 12/19/2013

AAA BBB High-Yield

Sources: Bloomberg and William Blair & Company, L.L.C.

0

500

1,000

1,500

2,000

2,500

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12

Bas

is P

oint

s

Exhibit 7Option Adjusted Spread Trends of the Merrill Lynch AAA, BBB, and

High Yield Corporate Bond IndicesWeekly Since 1997 Through 12/19/2013

AAA BBB High Yield


15 Robert P. Napoli +1 312 364 8496


LIBOR rates are generally in line with their historical relationships with the federal funds target rate. LIBOR rates increased slightly in the second half of 2011 but have generally and modestly trended downward since. The LIBOR rates and respective spreads to Treasuries remain well below their October 2008 highs. Historically, one-month LIBOR (0.16% as of December 20) has closely tracked the federal funds target rate, which is 0.00%-0.25%. At December 20, the TED spread (three-month LIBOR less three-month Treasury) has been below its long-term historical median since September 2012.

-1.0

0.0

1.0

2.0

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4.0

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7.0

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7/1/

088/

19/0

810

/7/0

811

/25/

081/

13/0

93/

3/09

4/21

/09

6/11

/09

7/30

/09

9/17

/09

11/5

/09

12/2

4/09

2/11

/10

4/1/

105/

20/1

07/

8/10

8/26

/10

10/1

4/10

12/2

/10

1/20

/11

3/10

/11

4/28

/11

6/16

/11

8/4/

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12/1

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/27/

1112

/15/

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2/12

3/22

/12

5/10

/12

6/28

/12

8/16

/12

10/4

/12

11/2

2/12

1/10

/13

2/28

/13

4/16

/13

6/6/

137/

25/1

39/

12/1

310

/31/

1312

/19/

13

%

Exhibit 8Daily Interest Rates/Yields, July 1, 2008, to Present

LIBOR Overnight LIBOR 1 Month

LIBOR 3 Month LIBOR 1 Year

2-Year Swap U.S. Treasury 3 Month


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

1/1/

024/

12/0

27/

24/0

211

/4/0

22/

13/0

35/

27/0

39/

5/03

12/1

7/03

3/29

/04

7/8/

0410

/19/

041/

28/0

55/

11/0

58/

22/0

512

/1/0

53/

14/0

66/

23/0

610

/4/0

61/

15/0

74/

26/0

78/

7/07

11/1

6/07

2/27

/08

6/9/

089/

18/0

812

/30/

084/

10/0

97/

24/0

911

/4/0

92/

15/1

05/

27/1

09/

7/10

12/1

7/10

3/30

/11

7/11

/11

10/6

/11

1/17

/12

4/27

/12

8/8/

1211

/19/

122/

28/1

36/

11/1

39/

20/1

3

Exhibit 9Federal Funds Rate and LIBOR 1-Month Rate

LIBOR 1 MonthFed Funds Rate


16 Robert P. Napoli +1 312 364 8496


-100

0

100

200

300

400

500

Jan-

00Ap

r-00

Aug-

00D

ec-0

0Ap

r-01

Aug-

01D

ec-0

1Ap

r-02

Jul-0

2N

ov-0

2M

ar-0

3Ju

l-03

Nov

-03

Mar

-04

Jul-0

4N

ov-0

4Fe

b-05

Jun-

05O

ct-0

5Fe

b-06

Jun-

06O

ct-0

6Fe

b-07

May

-07

Sep-

07Ja

n-08

May

-08

Sep-

08Ja

n-09

May

-09

Sep-

09D

ec-0

9Ap

r-10

Aug-

10D

ec-1

0Ap

r-11

Aug-

11N

ov-1

1M

ar-1

2Ju

l-12

Nov

-12

Mar

-13

Jul-1

3O

ct-1

3

Basi

s Po

ints

Exhibit 10TED Spread, 2000 to Present

Ted Spread basis Average

Median


Corporate pro its as a percentage of U.S. GDP remain steady near recent relative highs and comparable to pre-downturn levels. Corporate pretax pro its were 13.5% of GDP in third quar-ter 2013, generally lat with the prior six quarters. The historical average contribution is 9.6%. Corporate pro its as a percentage of GDP troughed at 6.2% in fourth quarter 2008 and rebounded about as quickly as they fell.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

194

7-I

194

9-I

195

1-I

195

3-I

195

5-I

195

7-I

195

9-I

196

1-I

196

3-I

196

5-I

196

7-I

196

9-I

197

1-I

197

3-I

197

5-I

197

7-I

197

9-I

198

1-I

198

3-I

198

5-I

198

7-I

198

9-I

199

1-I

199

3-I

199

5-I

199

7-I

199

9-I

200

1-I

200

3-I

200

5-I

200

7-I

200

9-I

201

1-I

2013

-I

Exhibit 11Pretax Corporate Profits as % of GDP

Pretax Corporate Profits Average

Sources: U.S. Bureau of Economic Analysis and William Blair & Company, L.L.C.

17 Robert P. Napoli +1 312 364 8496


Consumer credit, excluding mortgages, has exhibited 35 consecutive months of year-over-year growth as of October 2013, and is at a record high of $3.1 trillion. The growth comes despite relatively tight lending standards and consumer deleveraging, which in addition to high charge-off rates, led to the 22-month decline in total consumer credit that ended in December 2010. Total non-mortgage consumer credit grew 6.3% year-over-year and 5% sequentially on an annualized basis, to $3.1 trillion in October 2013. Revolving credit grew 4% sequentially (annualized) and 1.1% year-over-year. It is down 18% from its December 2008 peak of $1.01 trillion, to $0.82 trillion. We expect revolving credit to exhibit modest growth (1%-3%) in 2014. Nonrevolving debt (primarily auto and student loans) grew 8.4% year-over-year and 5.3% sequentially (annualized), to $2.23 trillion in October. Mortgage debt outstanding totaled $9.37 trillion as of the end of third quarter 2013, down 0.8% year-over-year. Mortgage debt accounts for about 75% of total consumer credit outstanding.

-20%

-10%

0%

10%

20%

30%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Mill

ions

Exhibit 12Consumer Credit Outstanding excluding Mortgages (NSA)

Since January 1979

Total Consumer CreditYear-Over-Year Change


-20%

-10%

0%

10%

20%

30%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Mill

ions

Exhibit 13Revolving Credit Outstanding (NSA) Since January 1979

Revolving


18 Robert P. Napoli +1 312 364 8496


-10%

-5%

0%

5%

10%

15%

20%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Mill

ions

Exhibit 14Nonrevolving Credit Outstanding (NSA) Since January 1979

Nonrevolving


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1990

1993

1996

1999

2Q01

1Q02

4Q02

3Q03

2Q04

1Q05

4Q05

3Q06

2Q07

1Q08

4Q08

3Q09

2Q10

1Q11

4Q11

3Q12

2Q13

$ B

illio

ns

Exhibit 15Total Outstanding U.S. Consumer Debt (S.A.)

Mortgages

Nonrevolving Debt

Revolving Debt


19 Robert P. Napoli +1 312 364 8496


U.S. consumer bankruptcy ilings have been down year-over-year for 35 consecutive months.We view this as an indicator of improving consumer health. Filings were down year-over-year in October 2010 for the irst time since 2006, an easy comparison year because of the October 2005 bankruptcy law change. November 2013 consumer bankruptcies of 70,966 were down 14% year-over-year. The improvement comes despite the relatively high unemployment rate and is being driven by a rapidly deleveraging consumer and improvement in jobless claims, in our view. Before the bankruptcy law change in October 2005, monthly ilings generally ranged from about 125,000 to 150,000.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Oct

-05

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

n-07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Exhibit 16Monthly U.S. Nonbusiness Bankruptcies Since October 2005

Sources: Bloomberg, National Bankruptcy Research Center, and William Blair & Company, L.L.C.

Bankruptcy Law Change of October 2005Filings totaled 645,575 for the month

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Dec

-06

Mar

-07

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Exhibit 17U.S. Nonbusiness Bankruptcies

Year-Over-Year Change Since Dec. 2006


20 Robert P. Napoli +1 312 364 8496


0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

Apr-9

9O

ct-9

9Ap

r-00

Oct

-00

Apr-0

1O

ct-0

1Ap

r-02

Oct

-02

Apr-0

3O

ct-0

3Ap

r-04

Oct

-04

Apr-0

5O

ct-0

5Ap

r-06

Oct

-06

Apr-0

7O

ct-0

7Ap

r-08

Oct

-08

Apr-0

9O

ct-0

9Ap

r-10

Oct

-10

Apr-1

1O

ct-1

1Ap

r-12

Oct

-12

Apr-1

3O

ct-1

3

Exhibit 18Monthly U.S. Nonbusiness Bankruptcies Since April 1999


Bankruptcy law change of October 2005filings totaled 645,575 for the month

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Apr-0

0Se

p-00

Feb-

01Ju

l-01

Dec

-01

May

-02

Oct

-02

Mar

-03

Aug-

03Ja

n-04

Jun-

04N

ov-0

4Ap

r-05

Sep-

05Fe

b-06

Jul-0

6D

ec-0

6M

ay-0

7O

ct-0

7M

ar-0

8Au

g-08

Jan-

09Ju

n-09

Nov

-09

Apr-1

0Se

p-10

Feb-

11Ju

l-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug-

13

Exhibit 19U.S. Nonbusiness Bankruptcies

Year-Over-Year Change Since April 2000


21 Robert P. Napoli +1 312 364 8496


U.S. public debt has spiked as the private sector deleverages. The national debt of the United States stood at $17.2 trillion as of December 26, 2013, up from $16.4 trillion at the end of 2012 and $9.0 trillion at the end of 2007. Public debt totaled 103% of average quarterly GDP as of December 26, 2013, which is encouragingly down from 105% at the end of 2012 but well above the 2007 level of 64% as well as its recent relative high of 67% in 1995 and 1996. The all-time high of 121% of GDP occurred in 1946.

0%

20%

40%

60%

80%

100%

120%

140%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Publ

ic D

ebt %

of G

DP

Tota

l Pub

lic D

ebt (

$ Bi

llions

)

Exhibit 20Public Debt

Public Debt Public Debt % GDP

Sources: U.S. Treasury and William Blair & Company, L.L.C.

2013 Public Debt as of December 26

The increase in the public debt outstanding has been partly driven by greater use of the federal government’s safety nets and social welfare programs during the economic downturn, as well as from rising healthcare costs (i.e., Medicare and Medicaid bene its). Government sources in personal income stood at 17.0% of the total in third quarter 2013, up from 14.2% at the end of 2007.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1Q19

47

1Q19

52

1Q19

57

1Q19

62

1Q19

67

1Q19

72

1Q19

77

1Q19

82

1Q19

87

1Q19

92

1Q19

97

1Q20

02

1Q20

07

1Q20

12

Exhibit 21Personal Income Received From Government Payments

MedicareMedicaidOtherUnemployment InsuranceVeterans' BenefitsSocial Security

Sources: Bureau of Economic Analysis and William Blair & Company, L.L.C.

22 Robert P. Napoli +1 312 364 8496


The government’s social insurance de icit has ballooned. The government ran a relatively balanced social insurance budget until 2000. Driven by a retiring baby boomer population, rising healthcare costs, and high unemployment, the social insurance de icit has ballooned to record levels. The recent but relatively modest improvement is likely due to an improving employment environ-ment. Higher taxes and lower healthcare reimbursement rates are likely future consequences.

-$1,000

-$800

-$600

-$400

-$200

$0

$2001Q

1947

1Q19

491Q

1951

1Q19

531Q

1955

1Q19

571Q

1959

1Q19

611Q

1963

1Q19

651Q

1967

1Q19

691Q

1971

1Q19

731Q

1975

1Q19

771Q

1979

1Q19

811Q

1983

1Q19

851Q

1987

1Q19

891Q

1991

1Q19

931Q

1995

1Q19

971Q

1999

1Q20

011Q

2003

1Q20

051Q

2007

1Q20

091Q

2011

1Q20

13

Exhibit 22Government Social Insurance Contributions Less Payouts

($ in billions)


Employer and employee social insurance contributions less governtment transfer receipts (Social Security, Medicaid, Medicare, unemployment insurance, veterans' benefits, and other)

23 Robert P. Napoli +1 312 364 8496


On a rolling-four-week average basis, weekly initial jobless claims have been below 350,000—a level that we view as healthy—for most of 2013. Weekly jobless claims, which we view as a more-important indicator than the monthly employment report, are down about 50% from their March 2009 highs. Initial jobless claims, on a four-week average basis, have ranged from 305,000 to 369,000 in 2013. The most recent four-week average of 357,000 is slightly above the 300,000-350,000 range we consider healthy. We are encouraged by the generally improving directional trend. However, we believe a negative signal would be sent if the number of claims were to increase materially from current levels. Our analysis shows that consumer credit trends, particularly credit card credit trends, have a higher correlation with initial jobless claims than the overall unemployment rate.

100

200

300

400

500

600

700

800

Jan-

67

Jan-

69

Jan-

71

Jan-

73

Jan-

75

Jan-

77

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Thou

sand

s

Exhibit 23Initial Unemployment Claims (SA)

Four-Week Average Since 1967

Sources: U.S. Department of Labor and William Blair & Company, L.L.C.

Through 1/2/2014 release

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-

68Ja

n-70

Jan-

72Ja

n-74

Jan-

76Ja

n-78

Jan-

80Ja

n-82

Jan-

84Ja

n-86

Jan-

88Ja

n-90

Jan-

92Ja

n-94

Jan-

96Ja

n-98

Jan-

00Ja

n-02

Jan-

04Ja

n-06

Jan-

08Ja

n-10

Jan-

12

Exhibit 24Initial Unemployment Claims (SA)

Year-Over-Year Percentage Change in Four-Week Average



24 Robert P. Napoli +1 312 364 8496


Continuing jobless claims have declined sharply from the peak but remain slightly above healthy levels, in our view. Based on historical unemployment claim patterns and current initial jobless claim levels, we expect continuing claims to continue to modestly improve in 2014. We view healthy levels at about 2.5 million. The four-week average as of December 21 was 2.9 million.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000Ja

n-67

Jan-

69Ja

n-71

Jan-

73Ja

n-75

Jan-

77Ja

n-79

Jan-

81Ja

n-83

Jan-

85Ja

n-87

Jan-

89Ja

n-91

Jan-

93Ja

n-95

Jan-

97Ja

n-99

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09Ja

n-11

Jan-

13

Thou

sand

sExhibit 25

Continuing Unemployment Claims (SA)Four-Week Average Since 1967



-60%-40%-20%

0%20%40%60%80%

100%120%140%

Jan-

68Ja

n-70

Jan-

72Ja

n-74

Jan-

76Ja

n-78

Jan-

80Ja

n-82

Jan-

84Ja

n-86

Jan-

88Ja

n-90

Jan-

92Ja

n-94

Jan-

96Ja

n-98

Jan-

00Ja

n-02

Jan-

04Ja

n-06

Jan-

08Ja

n-10

Jan-

12

Exhibit 26Continuing Unemployment Claims (SA)

Year-Over-Year Percentage Change in Four-Week Average



25 Robert P. Napoli +1 312 364 8496


Monthly unemployment rate is on the decline but remains well above healthy levels. The unemployment rate improved 30 basis points in November, to 7.0%, as the increase in the num-ber of people employed more than offset the increase in the size of the workforce. The November unemployment rate is the lowest it has been since November 2008. The Federal Reserve’s unem-ployment rate forecast, as of December 18, is 7.0%-7.1% for fourth quarter 2013, 6.3%-6.6% for fourth quarter 2014, 5.8%-6.1% for fourth quarter 2015, and 5.3%-5.8% for 2016, which compare with its September forecast of 7.1%-7.3% for 2013, 6.4%-6.8% for 2014, 5.9%-6.2% for 2015, and 5.4%-5.9% for 2016.

3%

4%

5%

6%

7%

8%

9%

10%

11%

Jan-

75

Jan-

77

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

13

Exhibit 27Historical Unemployment Rate (%)

Sources: Bureau of Labor Statistics amd William Blair & Company, L.L.C.

The number of job openings continues to improve. According to the U.S. Department of Labor, there were 3.9 million job openings as of October 2013 (according to the latest available data), up 7.7% year-over-year and comfortably above the July 2009 low of 2.2 million.

-50%-40%-30%-20%-10%0%10%20%30%40%50%

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-

01A

ug-0

1M

ar-0

2O

ct-0

2M

ay-0

3D

ec-0

3Ju

l-04

Feb-

05S

ep-0

5A

pr-0

6N

ov-0

6Ju

n-07

Jan-

08A

ug-0

8M

ar-0

9O

ct-0

9M

ay-1

0D

ec-1

0Ju

l-11

Feb-

12S

ep-1

2A

pr-1

3

Thou

sand

s

Exhibit 28Job Openings

Job OpeningsYear-Over-Year Change

Sources: Bureau of Labor Statistics and William Blair & Company, L.L.C.

26 Robert P. Napoli +1 312 364 8496


The U.S. civilian workforce has been relatively lat over the past year and is modestly above pre-recession levels. The number of people employed declined sharply from September 2008 to January 2010 when it resumed modest growth.

130,000

135,000

140,000

145,000

150,000

155,000

160,000

Jan-

01Ju

n-01

Nov

-01

Apr-0

2Se

p-02

Feb-

03Ju

l-03

Dec

-03

May

-04

Oct

-04

Mar

-05

Aug-

05Ja

n-06

Jun-

06N

ov-0

6Ap

r-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

ay-0

9O

ct-0

9M

ar-1

0Au

g-10

Jan-

11Ju

n-11

Nov

-11

Apr-1

2Se

p-12

Feb-

13Ju

l-13

Exhibit 29Civilian Labor Force and Employed, 2001 to Present

Civilian Labor Force


The percentage of the population in the labor force has trended sharply down since early 2009, which we partly attribute to the baby boomers starting to reach retirement coupled with the economic recession. The decline in the workforce is helping drive improvement in the unemployment rate.

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

89.0%

90.0%

91.0%

92.0%

93.0%

94.0%

95.0%

96.0%

97.0%

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

% o

f Pop

ulat

ion

in L

abor

For

ce

% o

f Lab

or F

orce

Em

ploy

ed

Exhibit 30Employment Ratio, 1976 to Present

% of Labor Force Employed

% of Population in Labor Force


27 Robert P. Napoli +1 312 364 8496


Part-time employment for economic reasons is trending lower but remains high based on historical levels. We believe the relatively high level of part-time employment is indicative of people’s willingness and need to work but their inability to ind full-time employment given the current economic environment as well as businesses’ higher costs for full-time labor relative to part-time labor (e.g., healthcare costs).

3,0003,5004,0004,5005,0005,5006,0006,5007,0007,5008,0008,5009,0009,500

10,000

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Part-

Tim

e fo

r Eco

nom

ic R

easo

nsExhibit 31

Part-Time Employment for Economic Reasons, 2001 to Present


The median number of weeks a person is unemployed has started to exhibit modest improvement but remains quite high, which we attribute to the lack of job openings and the extension of unem-ployment insurance bene its to a record-high 99 weeks, although the maximum varies by state. On December 28, Congress failed to garner enough votes to keep the unemployment insurance bene it extension and will revert back to the 26-week maximum.

0

5

10

15

20

25

30

35

40

45

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Exhibit 32Weeks Unemployed

Average Median


28 Robert P. Napoli +1 312 364 8496


Increase in temporary help employment has been relatively steady since mid-2011. We view temporary help employment as a leading indicator of overall employment, and ultimately, economic growth. Encouragingly, temporary help employment has increased month-over-month in 48 of the past 53 months. The correlation between temporary help employment and nonfarm payrolls on a three-month-lag basis is nearly 0.8.

-6%-5%-4%-3%-2%-1%0%1%2%3%4%

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

%C

hang

e


Exhibit 33Employment in Temporary Help Services (SA)

Month-Over-Month Percentage Change

-140-120-100

-80-60-40-20

020406080

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Thou

sand

s

Exhibit 34Employment in Temporary Help Services (SA)

Month-Over-Month Change


29 Robert P. Napoli +1 312 364 8496


The personal savings rate of 4.8% in October is just below the 5.0% monthly average of the past years and compares with the long-term average (since January 1959) of 8.4%. We believe a sustained personal savings rate in the 6%-8% range is best for the long-term health of the U.S. consumer and economy.

0

2

4

6

8

10

12

14

16

18Ja

n-59

Jan-

61Ja

n-63

Jan-

65Ja

n-67

Jan-

69Ja

n-71

Jan-

73Ja

n-75

Jan-

77Ja

n-79

Jan-

81Ja

n-83

Jan-

85Ja

n-87

Jan-

89Ja

n-91

Jan-

93Ja

n-95

Jan-

97Ja

n-99

Jan-

01Ja

n-03

Jan-

05Ja

n-07

Jan-

09Ja

n-11

Jan-

13

Exhibit 35Savings as a Percentage of Disposable Income

Monthly (January 1959 to October 2013)

Sources: Bureau of Economic Analysis, Bloomberg, and William Blair & Company, L.L.C.

Average Since 1959 = 8.4%Average Since 1990 = 5.5%

-5

0

5

10

15

20

25

30

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Exhibit 36Savings as a Percentage of Disposable Income Annually (1929-2012)


Average since 1929: 7.4%Average of past 20 years: 4.0%

30 Robert P. Napoli +1 312 364 8496


Consumer leverage is at its lowest level since the early 1980s and appears to be leveling off. The consumer debt services burden and inancial obligation ratios have declined sharply from their record highs prior to the recession, driven by record-low interest rates, defaults, and higher savings rates. The consumer debt service burden ratio has fallen from its record high of 13.2% in fourth quarter 2007 to 9.9% in third quarter 2013, the lowest on record dating back to 1980. The inancial obligations ratio has fallen from its record high of 18.1% in fourth quarter 2007 to 15.4% in third quarter 2013. We expect the ratios to stabilize around current levels, which we view as healthy.

910111213141516171819

1Q80

1Q81

1Q82

1Q83

1Q84

1Q85

1Q86

1Q87

1Q88

1Q89

1Q90

1Q91

1Q92

1Q93

1Q94

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

(%)

Exhibit 37Consumer Debt Services and Financial Obligations Ratios

Debt Service Ratio Financial Obligations Ratio


Retail sales growth has been relatively stable since mid-2012 and is slightly below the long-term average. Retail sales grew 4.7% year-over-year and 8.2% month-over-month annualized in November 2013. The long-term average year-over-year growth rate is 6.46%. The December 2008 decline of 11.5% was the sharpest fall since the U.S. Department of Commerce began tracking the data in 1968.

-15%

-10%

-5%

0%

5%

10%

15%

20%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Jan-68

Jan-71

Jan-74

Jan-77

Jan-80

Jan-83

Jan-86

Jan-89

Jan-92

Jan-95

Jan-98

Jan-01

Jan-04

Jan-07

Jan-10

Jan-13

(Billi

ons)

Exhibit 38Retail Sales (SA) and Year-Over-Year Change

Retail Sales Year-Over-Year Change

Sources: U.S .Dept. of Commerce and William Blair & Company, L.L.C.

31 Robert P. Napoli +1 312 364 8496


E-commerce market share continues to grow. U.S. third quarter 2013 e-commerce sales grew 17.5% year-over-year, according to the U.S. Census Bureau. This compares with 4.7% in overall U.S. retail sales. As a percentage of overall U.S. retail sales, e-commerce market share was 5.9%, up from 5.2% a year prior.

$27,388$34,093

$44,354$56,775$72,100

$90,528

$111,935$134,567

$140,158$142,604

$165,770

$192,911

$224,280

$193,378

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

9m E

nded

9/30

/13

Exhibit 39U.S. E-Commerce Growth and Percentage of Total Retail Sales

($ in millions)

E-commerce Sales (L-Axis)

% of Total Retail Sales (R-Axis)

E-commerce Year-Over-Year Growth(R-Axis)

Sources: U.S. Census and William Blair & Company, L.L.C.

32 Robert P. Napoli +1 312 364 8496


The November reading of the Discover U.S. Spending Survey Index improved from October on better spending intentions despite a continued relatively dismal economic sentiment. The economic outlook of consumers had plummeted with the temporary government shutdown and has yet to recover. Spending intentions have increased the past couple of months but have been relatively stable over the past year.

60

65

70

75

80

85

90

95

100

105

May

-07

Jul-0

7Se

p-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-

08N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Inde

x V

alue

s (5

/07

=10

0)Exhibit 40

Discover U.S. Consumer Spending Monitor

Index

Spending

Economy

Sources: Discover Financial Services and William Blair & Company, L.L.C.

U.S. bank revolving credit (home equity) outstanding has been declining since June 2009. Home equity loans could continue to cause headaches for lenders for a couple more years.

-20%

-10%

0%

10%

20%

30%

40%

50%

$0

$100

$200

$300

$400

$500

$600

$700

Jan-

88Ja

n-89

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Billio

ns

Exhibit 41U.S. Banks' Revolving Credit (Home Equity)

Home Equity Revolving Credit

Year-Over-Year Change

Sources: Federal Reserve and William Blair & Company, L.L.C..

33 Robert P. Napoli +1 312 364 8496


The Manheim Used Vehicle Value Index shows used vehicle values have moderated from their 2011 record highs but continue to be relatively strong. The November 2013 Manheim Used Vehicle Value Index declined 0.2% but was up 0.1% from the prior month. We believe the relative strength of the index over the past several years has been indicative of the supply/demand imbal-ance of used vehicles, which is the result of several factors, such as consumers trading down and consumers holding onto their cars longer. The index is an excellent approximation of the trends in used-car values and recovery rates on repossessed vehicles, as it represents actual prices of used cars sold at auctions across the United States. Higher used-car values drive better recovery rates in an auto inance business.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

90

95

100

105

110

115

120

125

130

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Inde

x

Exhibit 42Manheim Used Vehicle Value Index

Index Year-Over-Year Change

Sources: Manheim Consulting and William Blair & Company, L.L.C.

Index Value (Jan '95 = 100)

34 Robert P. Napoli +1 312 364 8496


Essentially all credit card issuers’ master trusts that we track had generally stable credit trends and early signs of accelerating loan growth in November. Delinquency rates (30-plus days) appear to be stabilizing at record lows. The industry charge-off rate is near a record low, but material further improvement is unlikely. Based on the delinquency rate trend, we believe the charge-off rate is likely to remain near the current level into mid-2014 and likely to remain below the long-term average for an extended period. Payment rates have leveled off slightly below record-high levels. The increase in payment rates to record highs has been driven by the deleveraging consumer and a modestly improving economic environment. The net interest margin signi icantly increased off its low in late 2008, primarily because of the sharp decline in the base rate and issuers re-pricing; however, increased competition caused yields to come down, bringing the net interest margin down somewhat from its record high, although it remains comfortably above prerecession levels. Most issuers are increasingly using deposit funding to fund their card portfolios; thus, we are not surprised by the decline in the trust receivables outstanding for the group. Due to the decline in securitization activity, some trust metrics, such as receivable growth, are not re lective of the broader industry. Revolving credit as reported by the Federal Reserve was up 1.1% year-over-year in October 2013, the latest igure available.

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan-

01Ju

n-01

Nov

-01

Apr-0

2Se

p-02

Feb-

03Ju

l-03

Dec

-03

May

-04

Oct

-04

Mar

-05

Aug-

05Ja

n-06

Jun-

06N

ov-0

6Ap

r-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

ay-0

9O

ct-0

9M

ar-1

0Au

g-10

Jan-

11Ju

n-11

Nov

-11

Apr-1

2Se

p-12

Feb-

13Ju

l-13

Exhibit 43U.S. Credit Card Three-Month Average Excess Spread (%)

Sources: Company reports, Bloomberg, and William Blair & Company, L.L.C.

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0

Dec

-00

Jun-

01D

ec-0

1Ju

n-02

Dec

-02

Jun-

03D

ec-0

3Ju

n-04

Dec

-04

Jun-

05D

ec-0

5Ju

n-06

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13

Exhibit 44U.S. Credit Card Net Charge-off Rate (%)


35 Robert P. Napoli +1 312 364 8496


14.0

16.0

18.0

20.0

22.0

24.0

26.0

Dec

-00

Jun-

01D

ec-0

1Ju

n-02

Dec

-02

Jun-

03D

ec-0

3Ju

n-04

Dec

-04

Jun-

05D

ec-0

5Ju

n-06

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13

Exhibit 45U.S. Credit Card Three-Month Average Payment Rate (%)


10.0

12.0

14.0

16.0

18.0

20.0

22.0

Dec

-00

Jun-

01D

ec-0

1Ju

n-02

Dec

-02

Jun-

03D

ec-0

3Ju

n-04

Dec

-04

Jun-

05D

ec-0

5Ju

n-06

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13

Exhibit 46U.S. Credit Card Three-Month Average Net Interest Margin (%)


2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Dec

-00

Jun-

01D

ec-0

1Ju

n-02

Dec

-02

Jun-

03D

ec-0

3Ju

n-04

Dec

-04

Jun-

05D

ec-0

5Ju

n-06

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13

Exhibit 47U.S. Credit Card Total 30-Day-Plus Delinquencies (%)


36 Robert P. Napoli +1 312 364 8496


Commercial TrendsGrowth of U.S. exports and imports of goods is showing signs of accelerating growth after waning the past several years on dif icult comps and global growth concerns in key markets, such as Europe. The weakness in the U.S. dollar in early 2008 drove signi icant growth in U.S. ex-ports of goods; however, this trend rapidly reversed course in the second half of 2008 as the global economy slumped. As the global economy outlook improved and the U.S. dollar weakened, U.S. exports spiked at the beginning of 2009. With gradually more dif icult comparisons and heightened global growth uncertainty, the growth rate of exports and imports has faded. An acceleration in the global economy is key to an acceleration in U.S. export and import growth.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

199

0-I

199

0-IV

199

1-III

199

2-II

199

3-I

199

3-IV

199

4-III

199

5-II

199

6-I

199

6-IV

199

7-III

199

8-II

199

9-I

199

9-IV

200

0-III

200

1-II

200

2-I

200

2-IV

200

3-III

200

4-II

200

5-I

200

5-IV

200

6-III

200

7-II

200

8-I

200

8-IV

200

9-III

201

0-II

201

1-I

201

1-IV

201

2-III

201

3-II

Exhibit 48Year-Over-Year Percentage Change of U.S. Exports and Imports of Goods

Exports Imports

Sources: U.S. Department of Commerce, Bureau of Economic Analysis, and William Blair & Company, L.L.C.

37 Robert P. Napoli +1 312 364 8496


The U.S. dollar has depreciated versus most other major currencies over the past several months. The U.S. dollar signi icantly appreciated off its mid-2008 lows as it became the primary currency of choice during the global economic slowdown. As the early indications of stabilization appeared in the global economy in March 2009, the U.S. dollar began to depreciate. The U.S. dollar sharply appreciated versus the euro and British pound over sovereign debt concerns in irst half 2010 but began to depreciate once the concerns subsided. With renewed European sovereign debt concerns and its potential contagion effects on global economic growth starting in mid-2011, the U.S. dollar has once again become a primary currency of choice and appreciated against most other major currencies through 2012. Since mid-2012, the exchange rate movements against the U.S. dollar have been a mixed bag.

0.300.450.600.750.901.051.201.351.501.651.801.952.10

Mar

-05

Jun-

05S

ep-0

5D

ec-0

5M

ar-0

6Ju

n-06

Sep

-06

Dec

-06

Mar

-07

Jun-

07S

ep-0

7D

ec-0

7M

ar-0

8Ju

n-08

Sep

-08

Dec

-08

Mar

-09

Jun-

09S

ep-0

9D

ec-0

9M

ar-1

0Ju

n-10

Sep

-10

Dec

-10

Mar

-11

Jun-

11S

ep-1

1D

ec-1

1M

ar-1

2Ju

n-12

Sep

-12

Dec

-12

Mar

-13

Jun-

13S

ep-1

3

Exhibit 49Foreign Exchange Rates (Foreign Currency Unit Versus U.S. Dollar)

CADYEN x 100

EURO

Yuan (RMB) x 10

GBP


Peso x 10

BRZ Real

AUD

As of December 20, 2013

Weekly traf ic for most carload types of major U.S. railroads has exhibited slow and steady improvement since its May 2009 trough. We believe U.S. railroad traf ic has historically been a decent indicator of the strength of the U.S. economy, given the wide variety and large volume of products transported via rail. Railroad traf ic for carloads of most products, as reported by the As-sociation of American Railroads, is up low-single digits year-over-year through mid-December. Rail traf ic has returned to pre-downturn levels for most carload types, and some carload types, such as chemicals, petroleum, and containers, are at record levels.

On a cumulative year-to-date basis through December 14, total rail traf ic was up 1.7%, as measured by total carloads and intermodal units originated. Total carloads were down 0.6%, while intermodal units were up 4.6%. Coal, which accounts for 21% of total carloads and intermodal units combined, is the primary driver of the year-over-year decline in carloads originated as it is down 4.4% year-over-year. Excluding coal, rail traf ic is up 3.5% year-over-year. Coal has been weak in 2013 because of the abnormally warm winter weather early in the year, which reduced demand; the relative cost of natural gas, which is a substitute for coal; a decline in export demand; and the current federal government administration policies.

38 Robert P. Napoli +1 312 364 8496


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

GDP Carloads

Sources: Association of American Railroads, Bloomberg, and William Blair & Company, L.L.C.

Exhibit 50Year-Over-Year Growth of GDP Versus Total Rail Carloads and Intermodel Units

2012 YTD 2013 YTD % chgCarloads Originated 3Q12 2Q13 3Q13Coal 1,558,810 1,417,208 1,511,817 6.7% -3.0% 5,821,428 5,562,557 -4.4%Chemicals/Petroleum Products 523,635 570,870 552,646 -3.2% 5.5% 1,995,195 2,165,264 8.5%Motor Vehicles & Equipment 189,247 220,907 198,362 -10.2% 4.8% 782,144 821,656 5.1%Total Carloads Originated 3,716,542 3,647,026 3,724,268 2.1% 0.2% 14,178,362 14,089,007 -0.6%

Intermodal Units Originated 3,150,778 3,185,405 3,277,326 2.9% 4.0% 11,860,632 12,403,723 4.6%

Total Carloads & Intermodal Originated 6,867,320 6,832,431 7,001,594 2.5% 2.0% 26,038,994 26,492,730 1.7%Sources: Association of American Railroads, Bloomberg, and William Blair & Company, L.L.C.

Exhibit 51Rail Traffic of Major U.S. Railroads

Q/Q Chg

Y/Y Chg Cumulative Thru 12/13/13

39 Robert P. N

apoli +1 312 364 8496

William

Blair & Com

pany, L.L.C.

Rail Traffic of Major U.S. RailroadsExhibit 52

120

140

160

180

200

220

240

260

280

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52Tota

l Int

erm

odal

Uni

tsTh

ousa

nds

Week

Total Intermodal Units

2007 2008 2009 2010 2011 2012 2013

Through Week Ending 12/13/13

Sources: AAR, Bloomberg, and William Blair & Company, L.L.C.

180

200

220

240

260

280

300

320

340

360

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Tota

l Car

load

sTh

ousa

nds

Week

Total Carloads Originated

2007 2008 2009 2010 2011 2012 2013



300

350

400

450

500

550

600

650

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Tota

l Car

load

sTh

ousa

nds

Week

Total Carloads + Intermodal

2007 2008 2009 2010 2011 2012 2013



20

25

30

35

40

45

50

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Tota

l Car

load

sTh

ousa

nds

Week

Chemical/Petroleum Carloads

2007 2008 2009 2010 2011 2012 2013



80

90

100

110

120

130

140

150

160

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Tota

l Car

load

sTh

ousa

nds

Week

Coal

2007 2008 2009 2010 2011 2012 2013



200

250

300

350

400

450

500

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Tota

l Car

load

sTh

ousa

nds

Week

Total Carloads + Intermodal ex Coal

2007 2008 2009 2010 2011 2012 2013



40 Robert P. Napoli +1 312 364 8496


Capacity utilization is approaching its long-term average after nearly six years of being below average. The manufacturing industrial capacity utilization index stood at 78.97% in November 2013, up 75 basis points from the prior month and 111 basis points from a year earlier. It stood 70 basis points below the long-term average of 79.67%. From the beginning of 2008, the index dropped more than 12 percentage points in 18 months, bottoming at 66.81% in June 2009. The decline and the subsequent sharp rebound are evident in the rail traf ic volume trends. A capacity utilization rate above the long-term average has historically coincided with a strong U.S. economy.

67 69 71 73 75 77 79 81 83 85 87

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

(%)

Exhibit 53Industrial Capacity Utilization

Sources: The Federal Reserve and William Blair & Company, L.L.C.

Through November 2013

The railcar manufacturing backlog is quite high, while orders and deliveries are relatively normal compared with historical averages. We would typically view the increase in the backlog as an indication of economic strength, as it indicates overall demand; however, the idle rate of the industry railcar leet remains well above “normal” levels. Thus, we believe the increase has been car-type speci ic and/or was driven by leet replacement. Some carload types (i.e., tank cars for petroleum use) are seeing record shipments, while others remain below pre-downturn levels.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1Q88

1Q90

1Q92

1Q94

1Q96

1Q98

1Q00

1Q02

1Q04

1Q06

1Q08

1Q10

1Q12

Exhibit 54Railcar Manufacturing Statistics

Sources: Railway Supply Institute, company reports, and William Blair & Company, L.L.C.

Backlogs

Orders

Deliveries

Through 3Q13

Note: Deliveries includes cancelations

41 Robert P. Napoli +1 312 364 8496


The railcar idle rate of the industry leet remains well above “normal” levels. As of December, 1, 282,394 (18.3%) of the roughly 1.5 million industry railcar leet were idle, according to the American Association of Railroads (AAR). The AAR has historically viewed a normal idle run-rate as 2%-3%. It would take about 57 months to reach the normal idle rate if about 4,160 (current average rate) cars were to be either removed from the leet or returned to service every month. We attribute most of the recent increase in the idle rate to the slump in demand for coal (21% of total carloads and intermodal traf ic), which is carried in open-hopper cars.

0

100,000

200,000

300,000

400,000

500,000

600,000

0%

5%

10%

15%

20%

25%

30%

35%

Mar

-09

May

-09

Jul-0

9Se

p-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Exhibit 55Railcars in Storage in North America

Cars in Storage

% of Total Fleet

Healthy Level

Sources: AAR and William Blair & Company, L.L.C.

-35,000

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Exhibit 56Number of Railcars In/(Out) of Storage in North America

Sources: AAR and William Blair & Company, L.L.C.

42 Robert P. Napoli +1 312 364 8496


The price of scrap steel (currently $361 per metric ton) has been relatively steady for the past year at about $350. The price of scrap steel plummeted in September 2008, dropping roughly 80% from record-high levels. The price quickly rebounded, driven by strong foreign demand. The change in the price of scrap steel has historically coincided well with the economic outlook and demand.

-100%

-50%

0%

50%

100%

150%

200%

0

100

200

300

400

500

600

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

$ P

er M

etric

Ton

neExhibit 57

Price of U.S. Scrap Steel With Year-Over-Year Change

Scrap Steel Year-Over-Year Change


Great Lakes cargo volume is up 0.5% year-over-year on a cumulative year-to-date basis through November and is still 14% below pre-downturn levels. Shipments of raw materials used in steel production and other capacities plummeted in late 2008 and in 2009 because of the lack of demand. Volumes grew sharply in 2010. Volume in 2013 is closely tracking the volumes reported in 2010, 2011, and 2012.

-

2

4

6

8

10

12

14

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Net

Ton

s (M

illion

s)

Exhibit 58U.S.-Flag Great Lakes Carrier Total Volume

200520062007200820092010201120122013

Sources: Lake Carriers' Association and William Blair & Company, L.L.C.

43 Robert P. Napoli +1 312 364 8496


Global containership idle rate has begun to increase over the past several months as a result of seasonality, soft demand, and relatively strong deliveries of new containerships. As of early December 2013, the idle rate stood at 3.9%, down from the 5.0% experienced a year earlier. The all-time high was 11.7% in early December 2009. A lower idle rate generally coincides with a stronger global economy but overbuilding of containerships has made analysis much more dif icult.

0%

2%

4%

6%

8%

10%

12%

Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13

Exhibit 59Idle Rate of the Global Containership Fleet, November 2008-Present

Sources: AXS-Alphaliner, Clarkson's Research, and William Blair & Company, L.L.C.

Prior all-time high was about 5% in 1986Previous-cycle high was 3.2% in March 2002

Containership leet capacity forecast to grow faster than container trade growth. According to AXS-Alphaliner, the global containership leet capacity is expected to grow 6% in 2013, while container trade is forecast to grow about 4%.

Fleet as of:Containership Size Ships TEU Ships TEU Ships TEU Ships TEU Ships TEU Ships TEU

10,000-18,000 118 1,425,640 162 2,066,495 197 2,557,523 255 3,341,104 315 4,257,857 322 4,348,8577,500-9,999 TEU 290 2,555,320 326 2,825,749 377 3,285,605 427 3,741,036 484 4,253,410 502 4,416,3005,100-7,499 TEU 463 2,840,841 475 2,915,449 489 3,010,253 514 3,161,585 523 3,218,895 523 3,218,8954,000-5,099 TEU 701 3,167,294 739 3,339,269 761 3,444,024 786 3,563,390 796 3,611,590 797 3,616,5473,000-3,999 TEU 323 1,101,941 296 1,012,646 265 914,150 286 991,291 298 1,036,791 299 1,039,8912,000-2,999 TEU 712 1,811,511 677 1,723,561 667 1,696,725 684 1,738,174 709 1,796,155 717 1,815,5351,500-1,999 TEU 596 1,011,825 576 979,325 568 968,200 593 1,011,904 604 1,031,272 610 1,041,7521,000-1,499 TEU 699 822,994 702 823,031 681 796,983 694 810,974 706 824,532 706 824,532

500-999 TEU 809 599,199 785 583,145 765 570,721 772 576,325 773 576,931 773 576,931100-499 TEU 246 78,636 226 72,659 218 69,512 218 69,512 218 69,512 218 69,512

Total 4,957 15,415,201 4,964 16,341,329 4,988 17,313,696 5,229 19,005,295 5,426 20,676,945 5,467 20,968,752year-over-year growth 6.0% 6.0% 9.8% 8.8% 1.4%

Total after Exp. Scrap/Slip 4,957 15,415,201 4,964 16,341,329 4,981 17,285,957 5,077 18,552,556 5,192 20,059,206 5,133 20,101,013

year-over-year growth 7.9% 6.0% 5.8% 7.3% 8.1% 0.2%Sources: AXS-Alphaliner and William Blair & Company, L.L.C.

Exhibit 60Containership Fleet Projections

31-Dec-2015 31-Dec-201631-Dec-2011 31-Dec-2012 31-Dec-2013 31-Dec-2014 (as of December 1, 2013, assuming no deletions since that date other than those planned)

44 Robert P. Napoli +1 312 364 8496


China manufacturing index has encouragingly exhibited an expansion reading (i.e., above 50) for the past 15 months, though barely, despite slowing growth GDP. China’s GDP growth accelerated slightly in the most recent quarter. The index stood at 51.0 in December. An index read-ing of 50 is the boundary level for expansion versus contraction.

35

40

45

50

55

60

65Ja

n-05

May

-05

Sep

-05

Jan-

06M

ay-0

6S

ep-0

6Ja

n-07

May

-07

Sep

-07

Jan-

08M

ay-0

8S

ep-0

8Ja

n-09

May

-09

Sep

-09

Jan-

10M

ay-1

0S

ep-1

0Ja

n-11

May

-11

Sep

-11

Jan-

12M

ay-1

2S

ep-1

2Ja

n-13

May

-13

Sep

-13

Exhibit 61China Manufacturing PMI

Sources: CFLP & Li & Fung Research Center

Note: An index value above 50 indicates expansion whereas an index value below 50 indicates contraction

Through December 2013

Global containerized trade growth has accelerated the past several months. Through Novem-ber on a year-to-date basis, containerized trade at 8 of the world’s top 25 busiest container ports is up 1.5%, up from 0.2% in June. Excluding Hong Kong data (Hong Kong port traf ic was adversely affected by a lengthy port strike early in 2013), year-to-date port traf ic through November was up 2.7% versus 1.9% through June. Container trade growth has been about 9%, on average, over the past 30 years and 8% over the past 10 years. Industry trade associations forecast container traf ic to be up about 4%-6% in 2013 and 2014.

6

7

8

9

10

11

12

13


TEU

s in

Mill

ions

Exhibit 62Monthly Container Handlings at 8 of World's Top 25 Busiest

Container Ports

2006 2007 2008 2009 2010 2011 2012 2013


45 Robert P. Napoli +1 312 364 8496


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-07 Jul-07Jan-08 Jul-08Jan-09 Jul-09Jan-10 Jul-10Jan-11 Jul-11Jan-12 Jul-12Jan-13 Jul-13

Exhibit 63Year-Over-Year Change of Cumulative Year-to-Date Container

Handlings at 8 of World's Top 25 Busiest Container Ports


-25%-20%-15%-10%

-5%0%5%

10%15%20%25%

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

Apr-1

2Ju

l-12

Oct

-12

Jan-

13Ap

r-13

Jul-1

3O

ct-1

3

Exhibit 64Year-Over-Year Change of Monthly Container Handlings at 8 of

World's Top 25 Busiest Container Ports


46 Robert P. Napoli +1 312 364 8496


Asia accounts for 55% of global container trade volume. China container trade volume makes up the largest portion of total global container trade at 29%, followed closely by the rest of Asia at 26%. North America makes up just 8%, according to Clarkson Research, an industry trade group.

North America8%

Northern Europe11%

Mediterranean6%

China29%

Asia excluding China26%

Other20%

Exhibit 65Total Expected Trade Volume by Region for 2013

Sources: Clarkson Research and William Blair & Company, L.L.C.

Throughput growth at Chinese ports has moderated but remains comfortably above the rest of the world. Container throughput at Chinese ports is up 7.4% year-over-year on a cumulative year-to-date basis through November, down from 8.1% growth in June. China throughput has more than doubled over the past seven years—evidence of globalization, in our opinion.

4

6

8

10

12

14

16

18


TEU

s in

Mill

ions

Exhibit 66China Port Handlings in TEUs

2005 2006 2007 2008 2009


47 Robert P. Napoli +1 312 364 8496


-20%

-10%

0%

10%

20%

30%

40%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13


Exhibit 67Year-Over-Year Change in Cumulative Year-to-Date Container Traffic at Chinese Ports

-20%

-10%

0%

10%

20%

30%

40%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Exhibit 68Year-Over-Year Change In Monthly Container Traffic at Chinese Ports


48 Robert P. Napoli +1 312 364 8496


Container trade forecasts are about 1.7 times global GDP growth estimates, slightly less than the 2-times historical relationship but generally in line with the past several years. As of October 2013, the International Monetary Fund projected global GDP to grow 2.9 % in 2013, 3.6% in 2013, and 4.1% in 2015; it forecasts global trade to grow 2.9% in 2013, 4.9% in 2014, and 6.1% in 2015. Clarkson Research forecasts container trade to grow 4.7% in 2013, 6.2% in 2014, and 7.2% in 2015.

-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13E'14E'15E

Exhibit 69Annual Growth Comparison: World Trade Volume Versus

Container Liftings Versus World Real GDP

Container Liftings Total Trade VolumeWorld Real GDP

Sources: International Monetary Fund, Clarkson Research, Drewry, and William Blair & Company, L.L.C.

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

100

200

300

400

500

600

700

800

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14E

Year-Over-Year G

rowth

TEU

s in

Mill

ions

Exhibit 70Global Total Port Handling

LiftingsYear-Over-Year Growth

Sources: Clarkson Research, Drewry, and William Blair & Company, L.L.C.

Commercial and industrial loans outstanding increased 0.2% sequentially and 7.8% year-over-year, to $1.59 trillion in November. Commercial and industrial loans outstanding peaked at $1.60 trillion in October 2008 before declining 25% over 21 months to a $1.20 trillion trough in July 2010. We believe the essentially nonexistent credit markets that characterized late 2008 forced banks to hold more commercial loans on their balance sheet versus securitizing them, thus distorting the growth statistics of the last cycle. Historically, the commercial and industrial loan volume has been a useful indicator of economic growth, in our opinion. Growth of commercial and industrial loans

49 Robert P. Napoli +1 312 364 8496


has moderated over the past year but is in line with the long-term historical average. According to the Federal Reserve Bank Opinion Survey data, banks have loosened credit standards in 15 of the past 16 quarters and demand has increased in 11 of the past 16 quarters.

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

$400

$200,400

$400,400

$600,400

$800,400

$1,000,400

$1,200,400

$1,400,400

$1,600,400

$1,800,400

Jan-

85Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09Ja

n-10

Jan-

11Ja

n-12

Jan-

13

Billio

ns

Exhibit 71Commercial and Industrial Loan Volume, NSA

C&I Loans Year-Over-Year Change


Commercial and industrial loan credit quality is approaching historical lows. As of third quarter 2013, the commercial and industrial loan delinquency rate was 0.98% and the charge-off rate was 0.26%, which compare with the 27-year averages of 2.98% and 0.90%. Given the record-low delin-quency rate and near record-low charge-off rate trends, we do not expect any further material improve-ment; however, it is likely that credit quality would remain better than average for an extended period.

0

1

2

3

4

5

6

7

Q1

1985

Q1

1986

Q1

1987

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

(%)

Exhibit 72NSA Commercial Banks

Commercial and Industrial Delinquencies and Charge-Offs

Delinquencies Charge-Offs


50 Robert P. Napoli +1 312 364 8496


Commercial real estate lending returned to growth in fourth quarter 2012 after 13 quarters of shrinkage, and the growth has accelerated the past two quarters. Commercial real estate loans outstanding totaled $1.37 trillion at the end of the third quarter, up 3.8% year-over-year but comfortably below the $1.62 trillion peak in fourth quarter 2008. Commercial real estate credit quality has been improving from its irst quarter 2010 peak and is comfortably below the long-term average. We expect credit trends to modestly improve.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,8001Q

851Q

861Q

871Q

881Q

891Q

901Q

911Q

921Q

931Q

941Q

951Q

961Q

971Q

981Q

991Q

001Q

011Q

021Q

031Q

041Q

051Q

061Q

071Q

081Q

091Q

101Q

111Q

121Q

13

Bill

ions

Exhibit 73Commercial Real Estate Loans, NSA

CRE Loans Year-Over-Year Change


-2

0

2

4

6

8

10

12

14

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

(%)

Exhibit 74NSA Commercial Banks

Commercial Real Estate Delinquencies and Charge-Offs

Charge-Offs Delinquencies


51 Robert P. Napoli +1 312 364 8496


The NCREIF Property Index, which measures total investment returns in the U.S. commercial real estate industry, turned positive in irst quarter 2010 after six consecutive quarterly declines. The index has been positive for 15 consecutive quarters; the past 14 have been above the long-term average of 2.2%. The third-quarter index reading was 2.48%.

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

1Q84

1Q85

1Q86

1Q87

1Q88

1Q89

1Q90

1Q91

1Q92

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1Q95

1Q96

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1Q00

1Q01

1Q02

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1Q10

1Q11

1Q12

1Q13

1Q08

1Q09

1Q10

1Q11

Exhibit 75NCREIF Property Index Historical Returns

Average: 2.0%

Sources: National Council of Real Estate Investment Fiduciaries and William Blair & Company, L.L.C.

According to the most recent Federal Reserve Bank Opinion Survey, banks have slightly loosened credit standards and demand has increased for commercial and industrial loans. Given the turmoil in the credit markets and the slowdown in the U.S. economy, banks dramatically tightened lending standards from 2007 through 2009; however, in 15 of the 16 quarters since, more of the banks surveyed by the Federal Reserve have slightly loosened credit standards than tightened them. Demand continues to be volatile. The most recent survey, which was completed in early October, indicated a net 1% of the banks surveyed said demand picked up in the quarter, which compares with 15% in the prior quarter. In our opinion, lending standards were a little lax in 2006 and most of 2007, and tighter credit standards were necessary. We believe economic growth is dependent on access to capital; thus, we are encouraged by the slight loosening of standards and improved demand.

-80%

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0%

20%

40%

60%

80%

100%

4Q91

4Q92

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49Q

5

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4Q06

4Q07

4Q08

4Q09

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4Q11

Exhibit 76Bank Opinion Survey: 4Q91-4Q13

Tightening Credit StandardsDemand for C&I Loans

Correlation: (0.69)R squared: 0.48


52 Robert P. Napoli +1 312 364 8496


The NFIB Small Business Optimism Index has seen moderate, albeit volatile, improvement since the beginning of 2009 but remains below pre-downturn levels. We believe small busi-nesses provide good insight into the economic environment, due to their breadth and sheer number.

80

85

90

95

100

105

110

Jan-

02

Jun-

02

Nov

-02

Apr-0

3

Sep-

03

Feb-

04

Jul-0

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Dec

-04

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-05

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-05

Mar

-06

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8

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9

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-10

Oct

-10

Mar

-11

Aug-

11

Jan-

12

Jun-

12

Nov

-12

Apr-1

3

Sep-

13

Exhibit 77NFIB Small Business Optimism Index

Sources: NFIB and William Blair & Company, L.L.C.

Average: 95.6

Over $1 trillion of capital that has been raised by private equity over the last eight years has yet to be put to work, including $400 billion for buyouts. We believe specialty lenders should bene it from this overhang, as many times private equity relies on other lenders to ill out the capital structure of their investments.

$173

$212

$128

$172

$79$94

$59

$86 $77$66

$84$68 $77

$95

$62

$92$82

$94$83

$114

$83

$141

$87

$0

$50

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$150

$200

$250

1Q08

2Q08

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1Q11

2Q11

3Q11

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1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

Exhibit 78Global Private Equity Fundraising

($ in billions)

1 2 3 4 1 2 3 4 1 2 3 4 1

Sources: Preqin and William Blair & Company, L.L.C.

53 Robert P. Napoli +1 312 364 8496


$798

$1,001$1,067 $1,061

$988 $1,006$943

$1,074

$0

$200

$400

$600

$800

$1,000

$1,200

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Exhibit 79Private-Equity Dry Powder

($ in billions)


$0

$200

$400

$600

$800

$1,000

$1,200

2006 2007 2008 2009 2010 2011 2012 2013

Exhibit 80Private-Equity Dry Powder by Fund Type

($ in billions)

Buyout

Distressed PrivateEquityGrowth

Mezzanine

Real Estate

Venture Capital

Other


According to data from Standard & Poor’s, there will be more than $170 billion of middle-market debt maturities over the next six years, most of which will need to be re inanced. Because of tight lending standards, increased bank regulations on risk asset holdings, and bank failures, we believe specialty lenders should experience increased investment opportunities.

$3

$11

$23

$50

$28

$45

$13

$1$0

$10

$20

$30

$40

$50

$60

2012 2013 2014 2015 2016 2017 2018 2019

Exhibit 81Maturities of Middle-Market Loans

(dollars in billions)

Sources: S&P Levered Commentary Data and William Blair & Company, L.L.C.

54 Robert P. Napoli +1 312 364 8496


LBO purchase multiples are down from their prerecession highs. Middle-market purchase multiples have been increasing over the past several years but still compare favorably to the average LBO multiple of the entire market.

6.3x 6.1x 6.5x7.1x 7.4x

8.2x 8.6x9.8x 9.5x

7.9x8.5x

9.1x 8.9x 8.5x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

Exhibit 82LBO Purchase Multiples

Sources: Standard & Poor's and William Blair & Company, L.L.C.

7.8x 7.6x8.2x

7.2x

5.8x

7.2x 7.5x7.2x

7.7x 8.0x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

2005 2006 2007 2008 2009 2010 2011 2012 1Q13 2Q13

Exhibit 83Middle-Market Average EV-to-EBITDA Transaction Multiples

Note: Transactions between $10M-$250M and <15x; excludes technology, media, and telecomSources: Quarton Partners and William Blair & Company, L.L.C.

55 Robert P. Napoli +1 312 364 8496


Business investment spending was 12.2% of GDP during third quarter 2013, just above the long-term average of 11.9%. Much of the growth since the downturn can be attributed to investment in equipment. Business investment as a percentage of GDP troughed at 10.9% in irst quarter 2010, the lowest contribution since 1963.

0.0%

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18.0%

194

7-I

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9-III

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9-III

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2-I

Exhibit 84Business Investment as a Percentage of GDP

Nonresidential Structures

Equipment Intellectual property products


Equipment leasing and inance data trends have exhibited generally stable trends over the past several months. Although volatile by month, new business volume growth has decelerated, primarily due to economic and political uncertainty as well as tough comps, in our opinion. Although up signi icantly from its recession low, new business volume is generally in line with pre-downturn levels. Approval rates have declined slightly over the past several months, likely due to higher de-mand, as credit quality remains near best-ever levels. Delinquencies have increased slightly off the record low while charge-offs remain at record lows.

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100%

$0

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Jan-

05M

ay-0

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ay-0

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ay-0

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ay-0

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ay-0

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ay-1

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ay-1

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ay-1

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p-12

Jan-

13M

ay-1

3Se

p-13

Year-Over-Year C

hange

New

Bus

ines

s V

olum

e (B

illio

ns)

Exhibit 85Equipment Leasing and Finance Industry New Business Volume

New Business Volume Year-Over-Year Change

Sources: ELFA and William Blair & Company, L.L.C.

56 Robert P. Napoli +1 312 364 8496


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

55%

60%

65%

70%

75%

80%

85%

90%

95%

Jan-

05M

ay-0

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Jan-

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ay-0

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ay-0

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ay-0

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ay-0

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ay-1

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ay-1

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p-11

Jan-

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ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Year-Over-Year C

hange

App

rove

d R

atio

Exhibit 86Equipment Leasing and Finance Industry Credit Approvals

as a Percentage of All Decisions

Credit Approvals as a % of All Decisions Year-Over-Year Change


-100%

-50%

0%

50%

100%

150%

200%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

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ay-0

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09M

ay-0

9Se

p-09

Jan-

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ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

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ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Year-Over-Year C

hange

Cha

rge-

offs

Exhibit 87Equipment Leasing and Finance Industry Charge-offs

as Percentage of Net Receivables

Charge offs as a % of Net Receivables Year-Over-Year Change


0%

1%

2%

3%

4%

5%

6%

Jan-

05

May

-05

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05

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06

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-06

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-12

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12

Jan-

13

May

-13

Sep-

13

Exhibit 88Equipment Leasing and Finance Industry Delinquencies

as Percentage of ReceivablesTotal > 30 days31-60 days61-90 daysOver 90 days


57 Robert P. Napoli +1 312 364 8496


The national average price per gallon of gasoline was down 7.9% from the prior quarter and 5.6% year-over-year, to $3.29, in the fourth quarter. As of December 30, the price of a gallon of gasoline was $3.33. Lower gas prices increase consumers’ discretionary spending abilities, which should help bolster the economy.

-60%

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-20%

0%

20%

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80%

$0.00

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$4.50

1/3/

055/

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9/3/

051/

3/06

5/3/

069/

3/06

1/3/

075/

3/07

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089/

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095/

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091/

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109/

3/10

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115/

3/11

9/3/

111/

3/12

5/3/

129/

3/12

1/3/

135/

3/13

9/3/

131/

3/14

$ P

er G

allo

nExhibit 89

Weekly U.S. Retail Gasoline Prices

Gasoline Price Year-Over-Year Change

Sources: Energy Information Administration, the U.S. Department of Energy, and William Blair & Company, L.L.C.

58 Robert P. Napoli +1 312 364 8496


Mortgage/Housing TrendsMortgage originations are forecast to continue to decline in 2014 and 2015 as a result of the waning re inance boom that coincided with record-low mortgage rates. Mortgage rates are now more than 100 basis points above the all-time low set at the end of 2012. On the heels of about 16% growth in 2012 and 2013, we expect purchase originations to grow about 13% in 2014 and 11% in 2015, driven by still relatively low mortgage rates, a better economic environment and outlook, and stable to rising home prices. We forecast the decline in re inance activity to more than offset the growth in purchase originations. Following a roughly 24% decrease in re inance originations in 2013, we forecast a 55% decline in 2014 and a 35% decline in 2015. We forecast mortgage debt outstanding to exhibit slight growth in 2014 due to rising home prices.

1,048

2,030

2,483

3,812

2,7733,027

2,726

2,306

1,509

1,971

1,5931,477

2,0951,826

1,301 1,210

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E2015E

(Bill

ions

)

Exhibit 90Annual Originations With Purchase and Refinance Breakout

Refinance Purchase

Sources: Bloomberg, Mortgage Bankers Association, Fannie Mae, Freddie Mac, and William Blair & Company, L.L.C.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E

$ (B

illion

s)

Exhibit 91Mortgage Debt Outstanding

Sources: Fannie Mae and William Blair & Company, L.L.C.

59 Robert P. Napoli +1 312 364 8496


0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E2014E

Exhibit 92Mortgage Originations/Debt Outstanding Ratio

Sources: Bloomberg, Mortgage Bankers Association, Fannie Mae, and William Blair & Company, L.L.C.

Credit trends at the government-sponsored entities continue to slowly moderate from their highs of early 2010 but are still about 200 basis points above pre-downturn levels.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Dec

-03

Mar

-04

Jun-

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p-04

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-04

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-05

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p-05

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p-11

Dec

-11

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-12

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p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Exhibit 93Fannie Mae and Freddie Mac Total Single-Family Delinquencies

90-Plus-Days Delinquent

Fannie MaeFreddie Mac

Note: FRE excludes mortgage loans underlying structured transactionsSources: Fannie Mae and Freddie Mac Monthly Data and William Blair & Company, L.L.C.

60 Robert P. Napoli +1 312 364 8496


The National Association of Realtors’ home affordability index has declined sharply from the record highs in early 2012, partly due to investor (rather than individual homeowner) de-mand but also due to the relatively low-mortgage-rate environment, depressed home values, and an improved economic environment. The index remains above pre-housing-bubble levels.

90

100

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10

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10

Feb-

11

Aug-

11

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12

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12

Feb-

13

Aug-

13

Exhibit 94Housing Affordability Index

Sources: National Association of Realtors and William Blair & Company, L.L.C.

Total home sales have bounced off the bottom but are still below pre-downturn levels. Total home sales were lat year-over-year at 5.36 million in November on a seasonally adjusted basis.

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,0006,5007,0007,5008,0008,5009,000

-50%

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-10%

0%

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Mar

-68

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-70

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Num

ber o

f Hom

es in

Tho

usan

ds

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-Ove

r-Ye

ar G

row

th

Exhibit 95Total (New- and Existing-) Home Sales (SA) and Year-Over-Year Growth

Year-Over-YearTotal Home Sales

Sources: National Association of Realtors, U.S. Census Bureau, U.S. Department of Housing & Urban Development, and William Blair & Company, L.L.C.

61 Robert P. Napoli +1 312 364 8496


Total home sales are running slightly below trend. Exhibit 96 shows actual total home sales versus expected total home sales (based on the historical average of home sales per number of households). Dating to 1968, the seasonally adjusted home sales per number of households per-centage has averaged 4.73%. We then used this 4.73% historical average to construct a trend line of expected sales for each month since 1968.

1,000

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Mar

-68

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ep-7

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ec-7

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ar-7

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n-74

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79S

ep-8

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ar-8

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n-84

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89S

ep-9

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n-94

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ep-0

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ec-0

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ar-0

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n-04

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09S

ep-1

0D

ec-1

1M

ar-1

3

Num

ber o

f Hom

e S

ales

Total Homes Sales

Trend Line Based on Historical Average of Home Sales Per Household

Exhibit 96Total (New and Existing) Home Sales Versus Trend Line of Home Sales


62 Robert P. Napoli +1 312 364 8496


Existing-home sales were down 1.2% year-over-year, to a seasonally adjusted 4.90 million in November. On a month-over-month basis, existing-home sales were down 4.3% in November.

1,000

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es in

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usan

ds

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r-Ye

ar G

row

th

Exhibit 97Existing-Home Sales (SA) and Year-Over-Year Growth

Year-Over-YearNumber of Existing Homes Sold


Existing-home inventory, seasonally adjusted, totaled 2.09 million units, or a 5.1-month sup-ply, in November, which is slightly below the pre-housing-bubble levels.

0

500,000

1,000,000

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-00

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ar-0

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ar-0

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ar-0

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ar-0

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ar-1

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p-13

Uni

ts

Exhibit 98Inventory of Unsold Existing Homes

Sources: National Association of Realtors and Bloomberg, seasonally adjusted

63 Robert P. Napoli +1 312 364 8496


- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

10.0 11.0 12.0 13.0

Mar

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ar-1

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p-11

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-12

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12M

ar-1

3Se

p-13

Mon

ths

Exhibit 99Existing-Home Months' Supply

Sources: National Association of Realtors and Bloomberg, seasonally adjusted

The median existing-home price grew 9% year-over-year but was down 1% from the prior month in November, to $196,200.

$130,000

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p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Exhibit 100Median Monthly Existing-Home Price

Year-Over-Year Growth Median Price

Sources: National Association of Realtors and William Blair & Company, L.L.C.

64 Robert P. Napoli +1 312 364 8496


New-home sales totaled a seasonally adjusted 464,000 in November, down 2% from the prior month but up 17% year-over-year.

2003004005006007008009001,0001,1001,2001,3001,4001,500

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Mar

-68

Mar

-70

Mar

-72

Mar

-74

Mar

-76

Mar

-78

Mar

-80

Mar

-82

Mar

-84

Mar

-86

Mar

-88

Mar

-90

Mar

-92

Mar

-94

Mar

-96

Mar

-98

Mar

-00

Mar

-02

Mar

-04

Mar

-06

Mar

-08

Mar

-10

Mar

-12

Num

ber o

f Hom

es in

Tho

usan

ds

Year

-Ove

r-Ye

ar G

row

th

Exhibit 101New-Home Sales (SA) and Year-Over-Year Growth

Year-Over-YearNumber of New Homes Sold


New-home inventory stood at 167,000 in November, representing a 4.3-month supply.

050,000

100,000150,000200,000250,000300,000350,000400,000450,000500,000550,000600,000650,000

Mar

-00

Sep-

00M

ar-0

1Se

p-01

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Uni

ts

Exhibit 102Inventory of Unsold New Homes

Sources: U.S. Census Bureau, U.S. Department of Housing & Urban Development, and William Blair & Company, L.L.C.

65 Robert P. Napoli +1 312 364 8496


0123456789

1011121314

Mar

-00

Sep-

00

Mar

-01

Sep-

01

Mar

-02

Sep-

02

Mar

-03

Sep-

03

Mar

-04

Sep-

04

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mon

ths

Exhibit 103New-Home Months' Supply

Sources: U.S. Census Bureau, U.S. Department of Housing & Urban Development, and William Blair & Company, L.L.C.

The median new-home price was up 17% year-over-year in November, to $270,900.

$150,000$160,000$170,000$180,000$190,000$200,000$210,000$220,000$230,000$240,000$250,000$260,000$270,000$280,000$290,000

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Mar

-00

Sep-

00M

ar-0

1Se

p-01

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Exhibit 104Median Monthly New-Home Price

Year-Over-Year Growth

Sources: U.S. Department of Commerce, National Association of Home Builders, and William Blair & Company, L.L.C.

66 Robert P. Napoli +1 312 364 8496


Single-family housing permits were at a 641,000 annual rate in November, up 3% from the previous month and up 12% year-over-year.

200300400500600700800900

1,0001,1001,2001,3001,4001,5001,6001,7001,8001,900

Feb-

60Au

g-61

Feb-

63Au

g-64

Feb-

66Au

g-67

Feb-

69Au

g-70

Feb-

72Au

g-73

Feb-

75Au

g-76

Feb-

78Au

g-79

Feb-

81Au

g-82

Feb-

84Au

g-85

Feb-

87Au

g-88

Feb-

90Au

g-91

Feb-

93Au

g-94

Feb-

96Au

g-97

Feb-

99Au

g-00

Feb-

02Au

g-03

Feb-

05Au

g-06

Feb-

08Au

g-09

Feb-

11

Sin

gle-

Fam

ily H

ousi

ng P

erm

its

Exhibit 105Single-Family Housing Permits

Seasonally Adjusted Annualized Rate

Sources: U.S. Census Bureau, U.S. Department of Housing and Urban Development, and William Blair & Company, L.L.C.

Single-family housing starts were at a 727,000 rate in November, up 21% over the previous month and 26% year-over-year.

200300400500600700800900

1,0001,1001,2001,3001,4001,5001,6001,7001,8001,9002,000

Feb-

60Au

g-61

Feb-

63Au

g-64

Feb-

66Au

g-67

Feb-

69Au

g-70

Feb-

72Au

g-73

Feb-

75Au

g-76

Feb-

78Au

g-79

Feb-

81Au

g-82

Feb-

84Au

g-85

Feb-

87Au

g-88

Feb-

90Au

g-91

Feb-

93Au

g-94

Feb-

96Au

g-97

Feb-

99Au

g-00

Feb-

02Au

g-03

Feb-

05Au

g-06

Feb-

08Au

g-09

Feb-

11Au

g-12

Sin

gle-

Fam

ily H

ousi

ng S

tarts

Exhibit 106Single-Family Housing Starts



67 Robert P. Napoli +1 312 364 8496


Total housing permits (single and multifamily) were at a seasonally adjusted annual rate of 1,017 million in November, down 2% over the prior month but up 9% year-over-year.

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Feb-

60Au

g-61

Feb-

63Au

g-64

Feb-

66Au

g-67

Feb-

69Au

g-70

Feb-

72Au

g-73

Feb-

75Au

g-76

Feb-

78Au

g-79

Feb-

81Au

g-82

Feb-

84Au

g-85

Feb-

87Au

g-88

Feb-

90Au

g-91

Feb-

93Au

g-94

Feb-

96Au

g-97

Feb-

99Au

g-00

Feb-

02Au

g-03

Feb-

05Au

g-06

Feb-

08Au

g-09

Feb-

11Au

g-12

Tota

l Hou

sing

Per

mits

Exhibit 107Total Housing Permits



Total housing starts were at a seasonally adjusted annual rate of 1,091 million in November, up 23% from the prior month and 30% year-over-year.

300500700900

1,1001,3001,5001,7001,9002,1002,3002,500

Feb-

60Au

g-61

Feb-

63Au

g-64

Feb-

66Au

g-67

Feb-

69Au

g-70

Feb-

72Au

g-73

Feb-

75Au

g-76

Feb-

78Au

g-79

Feb-

81Au

g-82

Feb-

84Au

g-85

Feb-

87Au

g-88

Feb-

90Au

g-91

Feb-

93Au

g-94

Feb-

96Au

g-97

Feb-

99Au

g-00

Feb-

02Au

g-03

Feb-

05Au

g-06

Feb-

08Au

g-09

Feb-

11

Tota

l Hou

sing

Sta

rts

Exhibit 108Total Housing Starts



68 Robert P. Napoli +1 312 364 8496


Homebuilder con idence is on the rebound but remains slightly below pre-downturn levels. The NAHB/Wells Fargo Housing Market Index, which is a survey of homebuilder con idence, im-proved 11 points (23%) from December 2012, to 58, in December 2013; however, it remains well below pre-downturn levels.

0

10

20

30

40

50

60

70

80

90

-100%

-50%

0%

50%

100%

150%

200%

Jan-

86Ja

n-87

Jan-

88Ja

n-89

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Exhibit 109NAHB Housing Market Index Versus Year-Over-Year Growth

Year-Over-Year ChangeHousing Market Index

Sources: Builders' Economic Council Monthly Surveys, NAHB Economics Department, and William Blair &Company, L.L.C.

Residential investment as a percentage of GDP has increased off the bottom but remains below post-WWII cyclical troughs. Residential investment was 3.15% of GDP in third quarter 2013, well below the historical average (since 1929) of 4.55%.

0%

1%

2%

3%

4%

5%

6%

7%

8%

1929

1935

1941

194

7-I

194

8-III

195

0-I

195

1-III

195

3-I

195

4-III

195

6-I

195

7-III

195

9-I

196

0-III

196

2-I

196

3-III

196

5-I

196

6-III

196

8-I

196

9-III

197

1-I

197

2-III

197

4-I

197

5-III

197

7-I

197

8-III

198

0-I

198

1-III

198

3-I

198

4-III

198

6-I

198

7-III

198

9-I

199

0-III

199

2-I

199

3-III

199

5-I

199

6-III

199

8-I

199

9-III

200

1-I

200

2-III

200

4-I

200

5-III

200

7-I

200

8-III

201

0-I

2011

-III

2013

-I

Per

cent

age

of G

DP

Exhibit 110Residential Investment as Percentage of GDP

Sources: U.S. Department of Commerce, Bureau of Economic Analysis, and William Blair & Company, L.L.C.

69 Robert P. Napoli +1 312 364 8496


Homeowner vacancy rates are down from the peak but remain above the long-term average. The homeowner vacancy rate was 1.9% in third quarter 2013, down from an all-time high of 2.9% in 2008; it compares with the long-term average of 1.6%.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1Q65

1Q67

1Q69

1Q71

1Q73

1Q75

1Q77

1Q79

1Q81

1Q83

1Q85

1Q87

1Q89

1Q91

1Q93

1Q95

1Q97

1Q99

1Q01

1Q03

1Q05

1Q07

1Q09

1Q11

1Q13

Hom

eow

ner V

acan

cy R

ate

Exhibit 111Homeowner Vacancy Rates

Sources: U.S. Census Bureau and William Blair & Company, L.L.C.

Rental vacancy rates have quickly declined from the third quarter 2009 peak and are 90 basis points above the long-term average of 7.4%.

0%

2%

4%

6%

8%

10%

12%

4Q66

4Q68

4Q70

4Q72

4Q74

4Q76

4Q78

4Q80

4Q82

4Q84

4Q86

4Q88

4Q90

4Q92

4Q94

4Q96

4Q98

4Q00

4Q02

4Q04

4Q06

4Q08

4Q10

4Q12

Ren

tal V

acan

cy R

ate

Exhibit 112Rental Vacancy Rates


70 Robert P. Napoli +1 312 364 8496


The homeownership rate, which stood at 65.3% at the end of third quarter 2013, is up slightly from its recent low of 65.0%, and compares with levels experienced in the mid-1990s.

62%

63%

64%

65%

66%

67%

68%

69%

70%

Dec

-70

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Dec

-12

Exhibit 113Homeownership Rates for the United States


The average national monthly mortgage payment has returned to being more than the national average rent price. The monthly mortgage payment was less than rent prices for seven consecutive quarters until interest rates jumped in mid-2013. We assume a conventional 30-year mortgage with 20% down to compare mortgage payments and rental rates as provided by the U.S. Census Bureau. For the total monthly mortgage payment, we assume 200 basis points for insurance and taxes. We do not account for the interest expense tax deductibility in our calculations.

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1Q88

4Q88

3Q89

2Q90

1Q91

4Q91

3Q92

2Q93

1Q94

4Q94

3Q95

2Q96

1Q97

4Q97

3Q98

2Q99

1Q00

4Q00

3Q01

2Q02

1Q03

4Q03

3Q04

2Q05

1Q06

4Q06

3Q07

2Q08

1Q09

4Q09

3Q10

2Q11

1Q12

4Q12

3Q13

Exhibit 114Owning Versus Renting: Monthly Payment Comparison

Monthly Mortgage PaymentNational Rent PriceTotal Monthly (Mortgage, Insurance, Taxes) Payment

Sources: Natioanal Association of Homebuilders, Freddie Mac, National Association of Realtors, U.S. Census Bureau, and William Blair & Company, L.L.C.

Mortgage re inancing applications have dropped signi icantly since mid-2013, as the 10-year Treasury and mortgage rates jumped more than 100 basis points in response to the Federal Reserve suggesting it was going to start reducing its bond-buying program. Home purchase applica-tions have been relatively lat since October 2011 but have also trended slightly lower since mid-2013.

71 Robert P. Napoli +1 312 364 8496


0

100

200

300

400

500

600

700

800

900

1,000

1,100

5/8/

09

8/7/

09

11/6

/09

2/5/

10

5/7/

10

8/6/

10

11/5

/10

2/4/

11

5/6/

11

8/12

/11

11/1

1/11

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/12

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/12

11/9

/12

2/8/

13

5/10

/13

8/9/

13

11/8

/13

Mar

ket I

ndex

Exhibit 115Weekly Mortgage Application Index

Application Index

4-Week Moving Average

Sources: Mortgage Bankers Association of America and William Blair & Company, L.L.C.

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%5.5%

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,0006,500

4/24

/09

7/24

/09

10/2

3/09

1/22

/10

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/10

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/10

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/11

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/11

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/12

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/12

7/27

/12

10/2

6/12

1/25

/13

4/26

/13

7/26

/13

10/2

5/13

10-Y

ear R

ate

Ref

inan

ce In

dex

Exhibit 116Weekly Refinance Application Index and 10-Year Treasury

Weekly Refinance Application Index

10-Year Treasury Yield

Sources: Mortgage Bankers Association of America and William Blair & Company, L.L.C.

0

50

100

150

200

250

300

350

5/8/

09

8/7/

09

11/6

/09

2/5/

10

5/7/

10

8/6/

10

11/5

/10

2/4/

11

5/6/

11

8/12

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11/1

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/12

8/10

/12

11/9

/12

2/8/

13

5/10

/13

8/9/

13

11/8

/13

Pur

chas

e In

dex

Exhibit 117Weekly Purchase Application Index

Weekly Application Purchase Index

4-Week Moving Average

Sources: Federal Reserve Data and Mortgage Bankers Association of America and William Blair & Company, L.L.C.

72 Robert P. Napoli +1 312 364 8496


Mortgage delinquency rates continue to improve after peaking in irst quarter 2010, accord-ing to the Mortgage Bankers Association delinquency survey. Foreclosures remain more than four times greater than the long-term average.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

4Q90

4Q91

4Q92

4Q93

4Q94

4Q95

4Q96

4Q97

4Q98

4Q99

4Q00

4Q01

4Q02

4Q03

4Q04

4Q05

4Q06

4Q07

4Q08

4Q09

4Q10

4Q11

4Q12

Une

mpl

oym

ent R

ate

Fore

clos

ure

Rat

e

% of Loans in ForeclosureUnemployment Rate

Sources: Mortgage Bankers Association, Bloomberg, and William Blair & Company, L.L.C.

Exhibit 118Percentage of Loans in Foreclosure Process Versus Unemployment Rate

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

4Q90

4Q91

4Q92

4Q93

4Q94

4Q95

4Q96

4Q97

4Q98

4Q99

4Q00

4Q01

4Q02

4Q03

4Q04

4Q05

4Q06

4Q07

4Q08

4Q09

4Q10

4Q11

4Q12

Une

mpl

oym

ent R

ate

Del

inqu

ency

Rat

e

Exhibit 119Percentage of Loans Delinquent Versus Unemployment Rate

% of Loans Delinquent Unemployment Rate

Sources: Mortgage Bankers Association, Bloomberg, and William Blair & Company, L.L.C.

73 Robert P. Napoli +1 312 364 8496


The average 30-year ixed conforming mortgage rate spiked in mid-2013 in response to the Federal Reserve commentary on tapering its bond buying program. The 30-year- ixed conforming mortgage hit a record low of 3.3% in November 2012, which compares with 4.48% on December 27, 2013.

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

4/7/

018/

7/01

12/7

/01

4/7/

028/

7/02

12/7

/02

4/7/

038/

7/03

12/7

/03

4/7/

048/

7/04

12/7

/04

4/7/

058/

7/05

12/7

/05

4/7/

068/

7/06

12/7

/06

4/7/

078/

7/07

12/7

/07

4/7/

088/

7/08

12/7

/08

4/7/

098/

7/09

12/7

/09

4/7/

108/

7/10

12/7

/10

4/7/

118/

7/11

12/7

/11

4/7/

128/

7/12

12/7

/12

4/7/

138/

7/13

12/7

/13

Spr

ead

Exhibit 12030-Year Fixed Mortgage Rate Long-Term Trend

Sources: Freddie Mac and William Blair & Company, L.L.C.

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4/7/

008/

7/00

12/7

/00

4/7/

018/

7/01

12/7

/01

4/7/

028/

7/02

12/7

/02

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038/

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/03

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048/

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12/7

/04

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058/

7/05

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/05

4/7/

068/

7/06

12/7

/06

4/7/

078/

7/07

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/07

4/7/

088/

7/08

12/7

/08

4/7/

098/

7/09

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/09

4/7/

108/

7/10

12/7

/10

4/7/

118/

7/11

12/7

/11

4/7/

128/

7/12

12/7

/12

4/7/

138/

7/13

12/7

/13

Spr

ead

Exhibit 12130-Year Fixed Mortgage Rate Spread Over 10-Year Treasury Yield

Sources: Freddie Mac and William Blair & Company, L.L.C.

74 Robert P. Napoli +1 312 364 8496


Payments and Remittance TrendsWe continue to believe that the payments industry remains an attractive long-term secular growth story. Roughly 85% of global payment transactions are cash and check; however, electronic pay-ments represent roughly 60% of the U.S. market (up from roughly 15% in 1990), according to the Nilson Report. We believe the level of electronic payment adoption internationally is about 20 years behind the United States.

As such, secular growth of electronic payments is expected to be 9% to 11%, on average, globally over the next several years, driven by 5% of PCE growth and secular electronic payment growth of 4%-6%. The drivers behind the secular shift from paper to plastic include convenience, security, enhanced services, and rewards for the consumer and lower cash-handling expenses for the retailer. In addition, secular tailwinds continue to be supported by increased adoption of electronic forms of payment by governments (e.g., bene it programs and tax refunds) and by growth of e-commerce.

Exhibit 122 provides a global view of the aforementioned secular trends in terms of PCE. Cards are expected to account for 43% of global PCE in 2016 (versus an estimated 33% in 2011), which equates to a 10% compounded annual growth rate, according to MasterCard. Exhibit 123 provides a snapshot of the competitive landscape of global payment networks. Collectively, Visa Inc. (exclud-ing volume from Visa Europe) and MasterCard touch roughly 24% of the $42 trillion of global PCE. Interestingly, China UnionPay overtook American Express as the third-largest issuer of credit in 2012 as it grew its credit business 57% in 2011 and 52% in 2012.

Paper$17.6

Paper$19.2 Paper

$20.7Paper$21.8 Paper

$22.0Paper$21.7

EFT$3.2

EFT$3.9 EFT

$5.2 EFT$6.3 EFT

$8.0 EFT$8.5

Cards$6.2

Cards$6.9 Cards

$11.1Cards$13.9 Cards,

$20.0Cards$22.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2010 2011 2015E 2016E

Shar

e of

Glo

bal P

CE

Exhibit 122Personal Consumption Expenditures (PCE), Select Years

($ in trillions)

Sources: MasterCard and William Blair & Company, L.L.C.

$27T $30T $37T $42T $50T $53T

75 Robert P. Napoli +1 312 364 8496


Total Total Total TotalVolume Volume Transactions Transactions

$ Billions $ Billions in Billions in Billions2011 2012 2011 2012 2011 2012

CreditVisa Brand* $2,926 $3,209 9.7% 32.2 35.2 9.5% 870 884 1.6%MasterCard $1,894 $2,120 11.9% 20.9 23.1 10.6% 686 721 5.2%China UnionPay $673 $1,022 51.8% 3.4 4.9 42.7% 285 331 16.1%American Express $814 $888 9.1% 5.5 5.9 8.5% 97 102 5.1%JCB $162 $186 14.4% 1.4 1.6 12.8% 76 79 4.3%Diners Club $29 $28 -2.5% 0.2 0.2 -3.9% 6 6 -2.9%Credit Card Total $6,499 $7,454 14.7% 63.6 71.0 11.6% 2,020 2,123 5.1%

Debit and PrepaidVisa $5,193 $5,577 7.4% 74.5 77.0 3.4% 1,469 1,608 9.4%China UnionPay $2,125 $2,756 29.7% 5.3 6.8 29.6% 2,665 3,203 20.2%MasterCard $1,267 $1,527 20.5% 19.4 23.2 19.3% 360 436 21.1%Total Debit and Prepaid $8,584 $9,859 14.9% 99.2 107.0 7.9% 4,494 5,247 16.7%

Total Credit, Debit, and Prepaid $15,083 $17,313 14.8% 162.7 178.0 9.3% 6,514 7,370 13.1%*Includes Visa Europe, which accounted for about 27% of the brand's total volume

Sources: The Nilson Report and William Blair & Company, L.L.C.

Exhibit 123Sizing Up the Global Payments Networks (General-Purpose Cards)

Year-Over-Year

Change

Year-Over-Year

Change

Number of Cards in Millions,

Number of Cards in Millions,

Year-Over-Year

Change

76 Robert P. Napoli +1 312 364 8496


Exhibits 124 and 125 depict the shift toward electronic forms of payment in the United States, which are directionally representative of the long-term global opportunity, in our opinion; we believe the United States is about 20 years ahead of the rest of the world. For perspective, in 2011 electronic payments represented roughly 69% of U.S. consumer payment dollar volume in the United States (up from 53% in 2006) and represented 60% of transactions (up from 47% in 2006), according to the Nilson Report.

0%10%20%30%40%50%60%70%80%90%

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Exhibit 124U.S. Paper Versus Card Payments Transaction Market Share

Paper

Electronic Card

Source: The Nilson Report, Carpinteria, CA

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Exhibit 125U.S. Card Transaction Market Share

(Card Transactions: Percentage of Total Consumer Payments Transactions)

Credit Card Debit Card Prepaid Card

Source: The Nilson Report, Carpinteria, CA

Exhibit 126 outlines expected purchase transaction growth by geographic region through 2016, according to the Nilson Report. We note that Asia-Paci ic, Latin America, and Middle East/Africa are forecast to be the three fastest-growing regions and are expected to grow at a compounded annual rate of 14%-15% through 2016. Still, the United States remains the largest country, representing about 47% of global transactions in 2011; it is expected to represent 43% of transactions in 2016.

77 Robert P. Napoli +1 312 364 8496


Exhibit 127 provides a snapshot of market share by purchase volume by region for 2010-2011, ac-cording to the Nilson Report. With the exception of Europe (due to Visa Europe) and China (due to domestic provider China UnionPay), Visa has a dominant share of every major geographic region.

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Latin America United States Canada Europe Asia-Pacific Middle EastAfrica

Exhibit 126Purchase Transactions, 2011-2016E

(in billions)

2011 2016E

CAGR 15% 8% 6% 9% 15% 14%

Sources: The Nilson Report and William Blair & Company, L.L.C.

2010 Share 2011 Share Y/Y Chg 2010 Share 2011 Share Y/Y ChgVisa $1,863.5 57.2% $2,040.0 56.7% 9.5% China UnionPay $1,617.6 51.3% $2,358.4 56.9% 45.8%MasterCard $812.1 24.9% $901.0 25.1% 10.9% Visa $900.4 28.6% $1,026.5 24.8% 14.0%American Express $476.3 14.6% $540.1 15.0% 13.4% MasterCard $411.5 13.1% $506.2 12.2% 23.0%Discover $106.0 3.3% $114.2 3.2% 7.7% JCB $140.4 4.5% $158.5 3.8% 12.9%Total $3,257.9 100.0% $3,595.3 100.0% 10.4% American Express $74.0 2.3% $87.5 2.1% 18.3%

Diners $9.0 0.3% $9.8 0.2% 9.0%Total $3,153.0 100.0% $4,147.0 100.0% 31.5%

2010 Share 2011 Share Y/Y Chg 2010 Share 2011 Share Y/Y ChgVisa $199.5 40.2% $214.7 40.3% 7.6% Visa $90.0 59.8% $109.2 58.4% 21.4%Interac $171.9 34.6% $181.2 34.0% 5.4% MasterCard $51.4 34.2% $67.8 36.2% 31.8%MasterCard $98.8 19.9% $108.1 20.3% 9.4% American Express $7.6 5.1% $8.6 4.6% 12.6%American Express $26.4 5.3% $29.1 5.5% 10.1% Diners $1.5 1.0% $1.5 0.8% 4.9%Total $496.7 100.0% $533.1 100.0% 7.3% Total $150.5 100.0% $187.1 100.0% 24.4%

2010 Share 2011 Share Y/Y Chg 2010 Share 2011 Share Y/Y ChgVisa Brand* $1,488.0 67.9% $1,639.8 67.4% 10.2% Visa $277.5 61.9% $346.0 61.9% 24.7%MasterCard $602.3 27.5% $683.7 28.1% 13.5% MasterCard $128.9 28.8% $164.0 29.3% 27.2%American Express $92.2 4.2% $99.8 4.1% 8.2% American Express $36.7 8.2% $43.2 7.7% 17.7%Diners $9.9 0.5% $10.6 0.4% 6.6% Diners $5.2 1.2% $5.8 1.0% 12.3%Total $2,192.5 100.0% $2,433.8 100.0% 11.0% Total $448.3 100.0% $559.1 100.0% 24.7%

*Includes Visa Europe and Visa Inc.Sources: The Nilson Report and William Blair & Company, L.L.C.

Europe Purchase Volume Latin America Purchase Volume

Exhibit 127General-Purpose Cards Market Share by Region

($ in billions)U.S. Purchase Volume Asia-Pacific Purchase Volume

Canada Purchase Volume Middle East/Africa Purchase Volume

78 Robert P. Napoli +1 312 364 8496


Exhibit 128 depicts traditional point-of-sale global terminal growth, which has grown at a 12% com-pounded annual rate since 1999, according to the Nilson Report. Global growth has been driven by 22% compounded annual growth in Asia, 19% growth in Middle East/Africa, 17% growth in Latin America, 9% growth in Europe, 2% growth in the United States, and 1% growth in Canada. Due to limited infrastructure, in 2012, 41% of terminal shipments went to Asia, 22% went to Europe, and 18% went to Latin America.

In addition to traditional POS terminals, we believe technology (e.g., mobile devices, mobile point-of-sale terminals, and e-commerce) accelerates the secular shift toward electronic payments. As outlined in exhibit 129, smartphones are expected to reach 1.7 billion units by 2017, representing a 31% CAGR since 2008, according to IDC. Visa estimates that the number of mobile payment ac-ceptance points could approach 38 million by 2018 (versus 9 million in 2013).

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5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

1999 2005 2006 2007 2008 2009 2010 2011 2012

Exhibit 128Point-of-Sale Terminal Shipments

Sources: Nilson Report and William Blair & Company, L.L.C.

0200400600800

1,0001,2001,4001,6001,8002,000

Exhibit 129Global Smartphone Shipments

(in millions)

Sources: IDC and William Blair & Company, L.L.C.

79 Robert P. Napoli +1 312 364 8496


E-commerce remains a key driver of the secular tailwinds toward electronic forms of payment, in our view. In the United States, e-commerce sales have increased at a 19% compounded annual rate since 2000 yet represent less than 6% of retail sales, according to the U.S. Census Bureau. This rate of growth compares with overall PCE growth of 4% and retail sales growth of 3%. More recently, MasterCard Advisors estimated that holiday retail sales (November 1 through December 24) rose 2.3% year-over-year, while online sales rose 13%. We believe e-commerce will continue to take share and will drive growth of electronic payments.

$27,388$34,093

$44,354$56,775$72,100

$90,528

$111,935$134,567

$140,158$142,604

$165,770

$192,911

$224,280

$193,378

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9m E

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Exhibit 130U.S. E-commerce Growth and Percentage of Total Retail Sales

($ in millions)

E-commerce Sales (L-Axis)

% of Total Retail Sales (R-Axis)

E-commerce Year-Over-Year Growth (R-Axis)

Sources: U.S. Census and William Blair & Company, L.L.C.

80 Robert P. Napoli +1 312 364 8496


Despite emerging technologies and electronic forms of communication, card issuers continue to use direct mail solicitations as a tool to expand their customer base. After posting 103% growth in 2010 and 44% growth in 2011, the number of card solicitations fell 42% year-over-year in 2012, to 2.35 billion. In the March 2013 quarter, solicitations fell an additional 4% year-over-year, to a 2.4 billion annualized rate. Interestingly, the number of solicitations remains 60% below the 2005 peak of 6.06 billion. For perspective, solicitations bottomed in 2009 at 1.39 billion offers, according to Bloomberg.

Not surprisingly, response rates trended modestly upward as solicitations decreased (exhibit 131). While online offers might skew traditional solicitations, we continue to believe that a rebound in solicitations should drive volume and loan growth for the networks and issuers over time.

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Exhibit 131Direct Mail Solicitation Volume and Response Rate

Direct Mail Solicitation Volume Response Rate


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Exhibit 132Household Penetration and Number of Offers Received

Household Penetration Number of Offers Received


81 Robert P. Napoli +1 312 364 8496


Exhibits 133 through 136 depict the types of offers provided by card companies. The average APR spread (APR versus 3-month LIBOR) materially expanded beginning in 2008 and has averaged 12.4 points (versus 7.9 points from 2003 until 2007). The percentage of offers with rewards has tapered, averaging 76% since 2010 (when the Durbin Amendment was passed); this compares with the 84% average in 2009-2010.

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Exhibit 133Mean "Go-To" APR on Credit Cards Versus 3-Month LIBOR

Avg APR 3-Month LIBOR Spread


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Exhibit 134Share of Credit Offers With Rewards


82 Robert P. Napoli +1 312 364 8496


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Exhibit 135Share of Credit Offers With Intro Purchase APR


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Exhibit 136Share of Credit Offers With Balance Transfer APR


83 Robert P. Napoli +1 312 364 8496


We believe exhibit 137 might partly explain Visa’s outperformance in the U.S. credit card business relative to MasterCard. Despite representing 44% of the credit card volume in the United States, Visa accounted for nearly 60% of total industry solicitations in the March 2013 quarter; this com-pares with MasterCard representing 24% of credit card volume but only 15% of total solicitations. In 2012, Visa averaged 53% of total offers versus 21% for MasterCard.

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Exhibit 137Market Share of Offers

Share of Offers for Visa Share of Offers for MasterCardShare of Offers for American Express Share of Offers for Discover


84 Robert P. Napoli +1 312 364 8496


Card lines have remained relatively stable in recent years but remain 30% below the recent 2008 peak. Credit lines have remained stagnant at about $3.8 trillion since the end of 2010, accord-ing to Bloomberg. Not surprisingly, as credit lines were reduced, credit line utilization rates spiked in 2008. Utilization rates have been relatively consistent in recent years at about 18% (versus the long-term average of 16.7%); for perspective, utilization bottomed at 14.3% in 2007.

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Exhibit 138Credit Card Loans Versus Lines

(dollars in trillions)

FDIC Industry Credit Card Loans FDIC Industry Credit Card Lines


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Exhibit 139Credit Card Line Utilization Rate


85 Robert P. Napoli +1 312 364 8496


More recent consumer spending trends remain solid, in our view. Exhibit 140 depicts the monthly transaction growth at First Data, which is one of the world’s largest payment processors and merchant acquirers. According to the First Data SpendTrend report, transaction growth on credit cards averaged 7.2% on a year-to-date basis through October 2013, versus 5.7% over the same period in 2012. We attribute the improving growth to the improving labor market, improv-ing consumer balance sheets, and general market stability. Interesting transaction growth for debit cards has moderated, which we largely attribute to the anniversary of the Durbin Amendment (made effective April 2012). Signature debit transaction growth averaged 4.3% year-to-date through October 2013 (versus 6.0% for the comparable period in 2012), while PIN debit growth averaged 5.9% (versus 8.9%).

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Figure 140First Data SpendTrend Year-Over-Year Transaction Growth

Credit Signature Debt PIN Debit Total Card

Sources: First Data and William Blair & Company, L.L.C.

86 Robert P. Napoli +1 312 364 8496


Total worldwide international revenue passenger miles, a measure of air traf ic, remain solid. We believe international air travel trends serve as a useful gauge for cross-border card spending trends. Global traf ic has increased roughly 5% calendar year to date through October 2013 and remains in line with the historical average, since 2003, according to the International Air Traf ic As-sociation. On a year-to-date basis, the fastest-growing regions are Latin America (8.6% growth) and Africa (7.4% growth), while North America is the slowest-growing region at 2.5% year-over-year.

The World Tourism Organization expects global tourism arrivals to grow about 5% in 2013. For perspective, in 2012 the number of international tourists rose 4% year-over-year, to 1,035 million (versus 5% in 2011), and total international tourist receipts rose 4%, to an estimated $1.075 tril-lion (versus 11% growth in 2011).

Visa and MasterCard report cross-border revenues, which represent a small portion of transac-tions but about 25% of gross revenues, and are largely driven by international travel. In addition, American Express generates 10% of revenues from airline volume.

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Worldwide

Sources: International Air Traffic Association, Bloomberg, William Blair & Company, L.L.C.

Exhibit 141Global Air Travel Year-Over-Year Change

2005 to Present

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Sources: International Air Traffic Association, Bloomberg, William Blair & Company, L.L.C.

Exhibit 142Americas Air Travel Year-Over-Year Change

2005 to Present

87 Robert P. Napoli +1 312 364 8496


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Sources: International Air Traffic Association, Bloomberg, and William Blair & Company, L.L.C.

Exhibit 143International Air Travel: 2005 to Present

$678$743

$857$939

$850$928

$1,030$1,0757.2%

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Exhibit 144Tourism Receipts Versus Tourism Arrivals Year-Over-Year Change

International Tourism Receipts Y/Y Change International Tourism Arrivals

Sources: UNWTO and William Blair & Company, L.L.C.

88 Robert P. Napoli +1 312 364 8496


While macro uncertainties linger, we believe fundamental trends for the money transfer industry continue to improve moderately. The World Bank estimates that global remittances will reach $707 billion by 2016; this assumes 9% compounded annual growth and compares with 7% com-pounded annual growth since 2010.

As outlined in exhibit 146 the countries with the largest amount of remittance in lows are India ($63 billion), China ($62 billion), Mexico ($24 billion), the Philippines ($23 billion), and France ($16 billion). Conversely as outlined in exhibit 147, the largest countries for out lows are the United States ($52 billion), Saudi Arabia ($27 billion), Switzerland ($22 billion), and Russia ($19 billion).

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016EDeveloping Countries $323 $303 $334 $374 $390 $414 $449 $491 $540 East Asia and Pacific 84 79 95 107 108 116 127 139 154 Europe and Central Asia 40 32 32 37 38 42 46 51 56 Latin America and Caribbean 63 55 56 59 60 61 67 75 84 Middle East and North Africa 36 34 41 43 48 50 52 55 58 South Asia 72 75 82 97 107 114 123 133 146 Sub-Saharan Africa 29 28 29 30 30 32 35 38 42

World $446 $418 $454 $506 $519 $549 $594 $646 $707

Year-Over-Year ChangeDeveloping Countries 16.5% -6.3% 10.2% 11.9% 4.3% 6.3% 8.6% 9.3% 9.9% East Asia and Pacific 18.8% -6.0% 20.1% 12.4% 1.0% 7.4% 9.5% 10.2% 10.5% Europe and Central Asia 17.2% -20.1% -0.9% 17.6% 1.6% 10.8% 10.3% 11.2% 11.6% Latin America and Caribbean 2.2% -12.0% 1.1% 6.1% 0.9% 2.5% 10.5% 11.1% 11.6% Middle East and North Africa 12.0% -6.5% 19.4% 6.3% 10.8% 3.6% 4.9% 5.4% 5.6% South Asia 32.6% 4.6% 9.4% 18.4% 9.7% 6.8% 7.7% 8.5% 9.4% Sub-Saharan Africa 15.7% -1.8% 4.1% 4.5% -0.4% 6.2% 8.6% 9.2% 9.5%

World 16.1% -6.3% 8.7% 11.5% 2.5% 5.8% 8.2% 8.8% 9.4%

Sources: World Bank and William Blair & Company, L.L.C.

Exhibit 145Outlook for Remittance Flows to Developing Countries

($ in billions)

89 Robert P. Napoli +1 312 364 8496


$71

$60

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Exhibit 146Top 15 Countries for Migrant Remittance Inflows (2013E Data)

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$32 $29 $28

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$0

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Exhibit 147Top 15 Countries for Migrant Remittance Outflows, 2012 Data

($ in millions)


90 Robert P. Napoli +1 312 364 8496


We believe consumer-directed healthcare could serve as a solution to rising healthcare costs in the United States. As outlined in exhibit 148, as a percentage of gross domestic product (GDP), health-care represents 17.7% (up from 9% in 1980) in the United States, which compares with the global average of 9.3%, according to the Organisation for Economic Co-operation and Development. The next highest is the Netherlands at 11.9%, followed by France at 11.6%; Estonia is the lowest at 5.9%.

We believe high-deductible health plans (HDHP) with savings options represent a reasonable proxy of the emerging trend toward consumer-directed healthcare. In addition to tax bene its, employers have incentives to increase participation in these programs because consumer-directed healthcare reduces the total cost of coverage by about 18% per employee (versus PPO and HMO plans), accord-ing to Mercer. Studies suggest HDHPs might in luence consumer behavior and lifestyle choices, as the end-user is more connected with healthcare costs.

These plans also help reduce the complexity that is generally associated with managed care plans and increase lexibility for employees, in our view. Despite these bene its, only about 20% of em-ployees (versus roughly 5% in 2007) in the United States are covered by such plans, according to the Kaiser Family Foundation; see exhibit 149.

Exhibit 148Total Expenditure on Healthcare as Percentage of GDP

Sources: OECD Health Data and William Blair & Company, L.L.C.

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DenmarkFinlandIcelandNorwaySweden

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91 Robert P. Napoli +1 312 364 8496


73%46%

27%10%8%7%

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1%1%1%1%1%1%

16%21%

31%28%

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14%

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46%52%

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9%

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

198819931996199920002001200220032004200520062007200820092010201120122013

Exhibit 149Percentage of Covered Employees Enrolled by Plan Type

Conventional HMO PPO POS HDHP / SO

Sources: Kaiser Family Foundation, HRET, KMPG, HIAA, and William Blair & Company, L.L.C.

92 Robert P. Napoli +1 312 364 8496


Stock-Price Performance and ValuationStock-price performance has been relatively strong for our coverage list and the inancial technology sector. Sixteen of the 25 stocks under our research coverage outperformed the S&P 500 in 2013 with average price up 53% (versus 28% for the market). WageWorks and QIWI (IPO in May 2013) were the best performers, up 241% and 227%, respectively, while DFC Global and Monroe Capital were the worst-performing names under our coverage, falling 42% and 19%, respectively.

More broadly, the William Blair Financial Technology Index, which is composed of more than 50 stocks, rose 44% in 2013 (versus 30% growth in 2012). The William Blair Specialty Finance Index, which is composed of more than 60 stocks, rose 47% in 2013 (versus 31% in 2012).

12/31/2013Rating Price 2010 2011 2012 1Q:13 2Q:13 3Q:13 4Q13 2013

Consumer FinanceCapital One Financial COF MP 76.61$ 11.0% -0.6% 37.0% -5.1% 14.3% 9.4% 11.4% 32.2%DFC Global Corp. DLLR MP 11.45$ 21.1% -5.4% 2.5% -10.1% -17.0% -20.4% 4.2% -38.2%Encore Capital Group ECPG OP 50.26$ 34.8% -9.3% 44.0% -1.7% 10.0% 38.2% 9.8% 64.1%Portfolio Recovery Associates PRAA OP 52.84$ 67.7% -10.2% 58.3% 18.8% 21.0% 17.0% -11.8% 48.3%

Fintech - Payment Networks:Visa V OP 222.68$ -19.5% 44.3% 49.3% 12.0% 7.6% 4.6% 16.5% 46.9%MasterCard MA OP 835.46$ -12.5% 66.4% 31.8% 10.1% 6.2% 17.1% 24.2% 70.1%Discover Financial Services DFS OP 55.95$ 26.0% 29.5% 60.6% 16.3% 6.2% 6.1% 10.7% 45.1%American Express AXP OP 90.73$ 5.9% 9.9% 21.9% 17.4% 10.8% 1.0% 20.1% 57.8%WEX WXS OP 99.03$ 44.4% 18.0% 38.9% 4.2% -2.3% 14.4% 12.9% 31.4%

Fintech - Payments:Green Dot GDOT MP 25.15$ -45.0% -60.9% 37.0% 19.4% 32.0% -4.5% 106.1%Alliance Data Systems ADS OP 262.93$ 10.0% 46.2% 39.4% 11.8% 11.8% 16.8% 24.3% 81.6%Cardtronics CATM OP 43.45$ 60.0% 52.9% -12.3% 15.7% 0.5% 34.5% 17.1% 83.0%EVERTEC EVTC OP 24.66$ 9.9% 1.1% 11.0% 23.3%Qiwi QIWI OP 55.97$ 36.5% 34.7% 79.0% 229.2%

Fintech - Other:Financial Engines FNGN OP 69.48$ 12.6% 24.2% 30.6% 25.9% 30.4% 16.9% 150.5%WageWorks WAGE OP 59.44$ 97.8% 40.6% 37.6% 46.4% 17.8% 233.9%Performant PFMT OP 10.30$ 12.2% 21.6% -5.6% -6.0% -5.5% 2.0%

Money TransferWestern Union WU MP 17.25$ -1.5% -1.7% -25.5% 10.5% 13.8% 9.1% -7.6% 26.7%Moneygram MGI OP 20.78$ -5.9% -18.1% -25.1% 36.2% 25.1% -13.6% 6.1% 56.4%

Commercial FinanceMarlin Business Services MRLN OP 24.97$ 59.5% 0.4% 58.0% 15.6% -1.8% 9.6% 0.0% 24.5%CAI CAP OP 23.57$ 117.1% -21.1% 42.0% 31.3% -18.2% -1.3% 1.3% 7.4%Independence Realty Trust IRT OP 8.34$ 1.1% -1.9%

BDCsMonroe Capital MRCC OP 12.24$ 1.4% -0.4% -13.3% -5.8% -17.5%Garrison Capital GARS OP 13.88$ 0.9% 1.9% -4.2% -6.1% -7.5%Harvest Capital HCAP OP 15.02$ 0.6% -0.5% 0.0% 0.1%

S&P500 SP50 1,848$ 12.8% 0.0% 13.4% 10.0% 2.4% 4.7% 9.9% 29.6%IPO at $20.00; shares began trading on April 17, 2013 IPO at $15.00; shares began trading on October 25, 2012

IPO at $17.00; shares began trading on May 3, 2013 IPO at $15.00; shares began trading on March 27, 2013

IPO at $9.00; shares began trading on May 10, 2012 IPO at $15.00; shares began trading on May 6, 2013

IPO at $9.00; shares began trading on August 10, 2012 IPO at $8.50; shares began trading on August 13, 2013


Exhibit 150Stock Price Performance

Stock Price Performance

93 Robert P. Napoli +1 312 364 8496


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Exhibit 151William Blair Financial Technology Index Versus S&P 500

Fin TechS&P 500



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Exhibit 152William Blair Specialty Finance Index Versus S&P 500

Specialty Finance

S&P 500



94 Robert P. Napoli +1 312 364 8496


The combination of strong earnings growth and multiple expansion drove stock price performance in 2013. For example, the EV-to-EBITDA multiple for the inancial technology index expanded 29% in 2013 and is up seven points, to 12 times, since valuations bottomed in November 2008. We be-lieve the relatively strong business models and secular tailwinds suggest the group could trade at a 12- to 14-times multiple over time. Exhibit 154 highlights valuation multiples for our companies under coverage.

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Exhibit 153William Blair Financial Technology Index

EV-to-NTM-EBITDA


For the remainder of this report, we examine the current and historical valuation metrics for com-panies under coverage. Valuations have expanded but appear fairly attractive compared with the historical averages.

95 Robert P. N

apoli +1 312 364 8496

William

Blair & Com

pany, L.L.C.

Price ($MM) Price/ DivRating 12/31/2013 Mkt Cap Tang BV Yield 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E 2012 2013E 2014E 2015E

Fintech - Payment Networks:Visa V OP $222.68 $144,965 38.04x 0.7% $6.65 $7.82 $9.30 $10.77 33.5x 28.5x 23.9x 20.7x 21.1x 17.2x 14.5x 12.4x 23% 18% 19% 16%MasterCard MA OP $835.46 $101,926 19.78x 0.1% $22.04 $26.21 $31.31 $37.00 37.9x 31.9x 26.7x 22.6x 23.7x 19.5x 16.1x 13.4x 18% 19% 19% 18%American Express AXP OP $90.73 $98,079 6.24x 1.0% $4.41 $4.90 $5.40 $5.97 20.6x 18.5x 16.8x 15.2x 8% 11% 10% 11%Alliance Data Systems ADS OP $262.93 $15,381 -8.52x 0.0% $10.08 $11.35 $12.46 $13.50 26.1x 23.2x 21.1x 19.5x 21.6x 19.1x 18.1x 17.5x 32% 13% 10% 8%Discover Financial Services DFS OP $55.95 $27,080 2.67x 1.3% $4.50 $4.88 $4.80 $5.06 12.4x 11.5x 11.7x 11.1x 9% 8% -2% 5%Capital One Financial COF MP $76.61 $45,284 1.75x 1.6% $6.16 $7.04 $6.60 $7.10 12.4x 10.9x 11.6x 10.8x -9% 14% -6% 8%

Fintech - Payments:WEX WEX OP $99.03 $3,870 -25.55x 0.0% $4.06 $4.54 $5.07 $5.69 24.4x 21.8x 19.5x 17.4x 14.1x 12.8x 11.2x 10.0x 12% 12% 12% 12%Green Dot GDOT MP $25.15 $1,117 3.51x 0.0% $1.42 $1.24 $1.45 $1.68 17.7x 20.3x 17.3x 15.0x 7.1x 6.9x 5.8x 4.6x -9% -13% 17% 16%Cardtronics CATM OP $43.45 $1,942 -8.10x 0.0% $1.61 $1.91 $2.23 $2.54 27.0x 22.7x 19.5x 17.1x 12.0x 10.9x 9.4x 8.4x 18% 19% 17% 14%EVERTEC EVTC OP $24.66 $2,039 -3.21x 1.6% $1.46 $1.67 $1.89 16.9x 14.8x 13.0x 15.0x 13.2x 11.5x 14% 13%QIWI QIWI OP $56.00 $2,912 154.56x 2.1% $0.75 $1.08 $1.36 $1.71 74.7x 51.9x 41.2x 32.7x 50.1x 35.4x 27.0x 21.2x 44% 26% 26%

Fintech - Other:Financial Engines FNGN OP $69.48 $3,662 11.84x 0.3% $0.50 $0.77 $0.96 $1.16 139.0x 90.2x 72.4x 59.9x 59.3x 42.4x 34.5x 28.4x 32% 54% 25% 21%WageWorks WAGE OP $59.44 $2,083 138.88x 0.0% $0.58 $0.73 $0.87 $1.02 102.5x 81.4x 68.3x 58.3x 45.0x 38.7x 33.1x 28.7x 61% 26% 19% 17%Performant Financial Corp. PFMT OP $10.30 $511 -10.22x 0.0% $0.64 $0.81 $0.72 $1.00 16.1x 12.7x 14.3x 10.3x 8.8x 6.7x 7.1x 5.2x 16% 27% -11% 39%

Money TransferWestern Union WU MP $17.25 $9,591 -3.08x 2.9% $1.69 $1.42 $1.44 $1.67 10.2x 12.1x 12.0x 10.3x 7.9x 8.4x 7.7x 6.6x 8% -16% 1% 16%Moneygram MGI OP $20.78 $1,496 -2.54x 0.0% $1.05 $1.29 $1.47 $1.67 19.8x 16.1x 14.1x 12.4x 7.4x 6.9x 6.2x 5.5x 28% 23% 14% 14%

Consumer FinanceDFC Global Corp. DLLR MP $11.45 $466 -1.04x 0.0% $2.18 $1.03 $1.25 5.3x 11.1x 9.2x 5.0x 2.0x 5.4x 12% -53% 21% 26%Encore Capital Group ECPG OP $50.26 $1,366 23.35x 0.0% $3.22 $3.65 $4.40 $5.10 15.6x 13.8x 11.4x 9.9x 12.2x 14.6x 9.6x 8.7x 36% 13% 21% 16%Portfolio Recovery Associates PRAA OP $52.84 $2,677 3.78x 0.0% $2.46 $3.41 $3.81 $4.20 21.5x 15.5x 13.9x 12.6x 12.9x 9.5x 8.1x 7.3x 26% 39% 12% 10%

Commercial FinanceMarlin Business Services MRLN OP $25.20 $316 1.97x 1.7% $0.91 $1.36 $1.73 $2.21 27.7x 18.5x 14.6x 11.4x 90% 49% 27% 28%CAI International CAP OP $23.57 $533 1.34x 0.0% $3.18 $2.81 $3.09 $3.47 7.4x 8.4x 7.6x 6.8x 9.4x 9.0x 8.7x 8.4x 25% -12% 10% 12%

BDCs/REITsMonroe Capital MRCC OP $12.20 $122 0.87x 11.1% $0.15 $1.17 $1.41 $1.42 10.4x 8.7x 8.6x 698% 21% 1%Garrison Capital GARS OP $13.88 $233 0.92x 10.1% $1.29 $1.41 $1.50 10.8x 9.8x 9.3x 63% 9% 6%Harvest Capital HCAP OP $15.02 $92 1.02x 9.3% $1.54 $1.16 $1.52 $1.66 12.9x 9.9x 9.0x -25% 31% 9%Independence Realty Trust IRT OP $8.34 $85 1.12x 7.7% $0.71 $0.74 $0.98 $1.01 11.3x 8.5x 8.3x 19.0x 32.5x 14.8x 14.4x 4% 32% 3%Sources: FactSet and William Blair & Company, L.L.C.

Exhibit 154Financial Technology, Specialty Finance Valuation Table

William Blair EPS Estimates P/E EV/EBITDA Earnings Growth

96 Robert P. Napoli +1 312 364 8496


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Exhibit 155Historical Valuation: CAI (CAP)

P/E (L-Axis) Price to Book (R-Axis)


Avg 7.6x

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Exhibit 156Historical Valuation: Portfolio Recovery (PRAA)



Average 12.4x

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Exhibit 157Historical Valuation: Encore Capital Group (ECPG)



Average 9.0x

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97 Robert P. Napoli +1 312 364 8496


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Exhibit 158Historical Valuation: DFC Global (DLLR)

P/E (L-Axis)

EV to EBITDA (R-Axis)


Average 4.5x

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Exhibit 159Historical Valuation: MoneyGram (MGI)

P/E (L-Axis)


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8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 160Historical Valuation: Western Union (WU)

P/E (L-Axis)



Avgerage 8.2x

Avgerage12.1x

98 Robert P. Napoli +1 312 364 8496


6.849871

0.0x1.0x2.0x3.0x4.0x5.0x6.0x7.0x8.0x9.0x

0.0x2.0x4.0x6.0x8.0x

10.0x12.0x14.0x16.0x18.0x

9/17

/12

10/0

2/12

10/1

7/12

11/0

5/12

11/2

0/12

12/0

6/12

12/2

1/12

1/09

/13

1/25

/13

2/11

/13

2/27

/13

3/14

/13

4/01

/13

4/16

/13

5/01

/13

5/16

/13

6/03

/13

6/18

/13

7/03

/13

7/19

/13

8/05

/13

8/20

/13

9/05

/13

9/20

/13

10/0

7/13

10/2

2/13

11/0

6/13

11/2

1/13

12/0

9/13

12/2

4/13

Exhibit 161Historical Valuation: Performant Financial (PFMT)

P/E (L-Axis)



Average 13.5x

Average 6.8x

0.0x

10.0x

20.0x

30.0x

40.0x

50.0x

60.0x

70.0x

80.0x

5/07

/10

5/26

/10

6/15

/10

7/02

/10

7/22

/10

8/10

/10

8/27

/10

9/16

/10

10/0

5/10

10/2

2/10

11/1

0/10

11/3

0/10

12/1

7/10

1/06

/11

1/26

/11

2/14

/11

3/04

/11

3/23

/11

4/11

/11

4/29

/11

5/18

/11

6/07

/11

6/24

/11

7/14

/11

8/02

/11

8/19

/11

9/08

/11

9/27

/11

10/1

4/11

11/0

2/11

Exhibit 162Historical Valuation: WageWorks (WAGE)

P/E (L-Axis)


Average 40.8x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

0.0x

10.0x

20.0x

30.0x

40.0x

50.0x

60.0x

70.0x

80.0x

5/07

/10

6/22

/10

8/05

/10

9/20

/10

11/0

2/10

12/1

6/10

2/01

/11

3/17

/11

5/02

/11

6/15

/11

7/29

/11

9/13

/11

10/2

6/11

12/0

9/11

1/26

/12

3/12

/12

4/25

/12

6/08

/12

7/24

/12

9/06

/12

10/1

9/12

12/0

6/12

1/23

/13

3/08

/13

4/23

/13

6/06

/13

7/22

/13

9/04

/13

10/1

7/13

12/0

2/13

Exhibit 163Historical Valuation: Financial Engines (FNGN)

P/E (L-Axis)



Average 49x

99 Robert P. Napoli +1 312 364 8496


-2.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

6/11

/13

6/18

/13

6/25

/13

7/02

/13

7/10

/13

7/17

/13

7/24

/13

7/31

/13

8/07

/13

8/14

/13

8/21

/13

8/28

/13

9/05

/13

9/12

/13

9/19

/13

9/26

/13

10/0

3/13

10/1

0/13

10/1

7/13

10/2

4/13

10/3

1/13

11/0

7/13

11/1

4/13

11/2

1/13

11/2

9/13

12/0

6/13

12/1

3/13

12/2

0/13

Exhibit 164Historical Valuation: QIWI (QIWI)

P/E (L-Axis)



Average 24.7x

Average 6.8x

10.0x

10.5x

11.0x

11.5x

12.0x

12.5x

13.0x

13.5x

14.0x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

5/20

/13

5/28

/13

6/04

/13

6/11

/13

6/18

/13

6/25

/13

7/02

/13

7/10

/13

7/17

/13

7/24

/13

7/31

/13

8/07

/13

8/14

/13

8/21

/13

8/28

/13

9/05

/13

9/12

/13

9/19

/13

9/26

/13

10/0

3/13

10/1

0/13

10/1

7/13

10/2

4/13

10/3

1/13

11/0

7/13

11/1

4/13

11/2

1/13

11/2

9/13

12/0

6/13

12/1

3/13

12/2

0/13

Exhibit 165Historical Valuation: Evertec (EVTC)

P/E (L-Axis)



Average 13.7x

Average 12.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 166Historical Valuation: Cardtronics (CATM)

P/E (L-Axis)



Average 14.7x

100 Robert P. Napoli +1 312 364 8496


0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

0.0x5.0x

10.0x15.0x20.0x25.0x30.0x35.0x40.0x45.0x

9/20

/10

10/2

8/10

12/0

8/10

1/19

/11

3/01

/11

4/08

/11

5/19

/11

6/29

/11

8/09

/11

9/19

/11

10/2

7/11

12/0

7/11

1/19

/12

2/29

/12

4/10

/12

5/18

/12

6/28

/12

8/08

/12

9/18

/12

10/2

6/12

12/1

0/12

1/22

/13

3/04

/13

4/12

/13

5/22

/13

7/02

/13

8/12

/13

9/20

/13

10/3

0/13

12/1

0/13

Exhibit 167Historical Valuation: Green Dot (GDOT)

P/E (L-Axis)



Average 6.9x

Average 18.6x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 168Historical Valuation: WEX (WEX)

P/E (L-Axis)



Average 7.7x

Average 13.6x

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 169Historical Valuation: Capital One Financial (COF)

P/E (L-Axis)Price to Book (R-Axis)


Average 0.7x

Average 10.3x

101 Robert P. Napoli +1 312 364 8496


0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 170Historical Valuation: Discover Financial Services (DFS)

P/E (L-Axis)

Price to Book (R-Axis)


Average 1.4x

Average11.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 171Historical Valuation: American Express (AXP)

P/E (L-Axis)Price to Book (R-Axis)


Avgerage13.9x

Average 3.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

0.0x5.0x

10.0x15.0x20.0x25.0x30.0x35.0x40.0x45.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 172Historical Valuation: Visa (V)

P/E (L-Axis)EV to EBITDA (R-Axis)


Average 19.6x

Average 11.1x

102 Robert P. Napoli +1 312 364 8496


0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 173Historical Valuation: Alliance Data Systems (ADS)

P/E (L-Axis)



Average 12.4x

Average 7.3x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

12/2

6/07

3/11

/08

5/22

/08

8/05

/08

10/1

6/08

12/3

0/08

3/16

/09

5/28

/09

8/10

/09

10/2

1/09

1/05

/10

3/19

/10

6/02

/10

8/13

/10

10/2

6/10

1/07

/11

3/23

/11

6/06

/11

8/17

/11

10/2

8/11

1/12

/12

3/27

/12

6/08

/12

8/21

/12

11/0

5/12

1/18

/13

4/04

/13

6/17

/13

8/28

/13

11/0

8/13

Exhibit 174Historical Valuation: MasterCard (MA)

P/E (L-Axis)



Average 10.2x

Avgerage 18.4x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

6%

7%

8%

9%

10%

11%

12%

10/2

5/12

11/2

5/12

12/2

5/12

1/25

/13

2/25

/13

3/25

/13

4/25

/13

5/25

/13

6/25

/13

7/25

/13

8/25

/13

9/25

/13

10/2

5/13

11/2

5/13

12/2

5/13

Pric

e/B

ook

Div

iden

d Yi

eld

Exhibit 175Historical Valuation: Monroe Capital (MRCC)

Dividend Yield

P/B

Sources: Company reports, FactSet, and William Blair & Company, L.L.C.

103 Robert P. Napoli +1 312 364 8496


0.5

0.6

0.7

0.8

0.9

1.0

1.1

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

3/27

/13

4/10

/13

4/24

/13

5/8/

135/

22/1

36/

5/13

6/19

/13

7/3/

137/

17/1

37/

31/1

38/

14/1

38/

28/1

39/

11/1

39/

25/1

310

/9/1

310

/23/

1311

/6/1

311

/20/

1312

/4/1

312

/18/

131/

1/14

Pric

e to

Boo

k

Div

iden

d Yi

eld

Exhibit 176Historical Valuation: Garrison Capital (GARS)

Dividend Yield

P/B


0.5

0.6

0.7

0.8

0.9

1.0

1.1

8.0%

8.2%

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

9.6%

5/3/

13

5/17

/13

5/31

/13

6/14

/13

6/28

/13

7/12

/13

7/26

/13

8/9/

13

8/23

/13

9/6/

13

9/20

/13

10/4

/13

10/1

8/13

11/1

/13

11/1

5/13

11/2

9/13

12/1

3/13

12/2

7/13

Pric

e to

Boo

k

Div

iden

d Yi

eld

Exhibit 177Historical Valuation: Harvest Capital (HCAP)

Dividend Yield

P/B


6.8%

7.0%

7.2%

7.4%

7.6%

7.8%

8.0%

8.2%

8/13

/13

8/20

/13

8/27

/13

9/3/

139/

10/1

39/

17/1

39/

24/1

310

/1/1

310

/8/1

310

/15/

1310

/22/

1310

/29/

1311

/5/1

311

/12/

1311

/19/

1311

/26/

1312

/3/1

312

/10/

1312

/17/

1312

/24/

1312

/31/

131/

7/14

Div

iden

d Yi

eld

Exhibit 178Historical Valuation: Independence Realty Trust (IRT)


104 Robert P. Napoli +1 312 364 8496


IMPORTANT DISCLOSURESAdditional information is available upon request.

This report is available in electronic form to registered users via R*Docs™ at www.rdocs.com or www.williamblair.com.

Please contact us at +1 800 621 0687 or consult williamblair.com/Research-and-Insights/Equity-Research/Coverage.aspx for all disclosures.

Robert Napoli attests that 1) all of the views expressed in this research report accurately re lect his personal views about any and all of the securities and companies covered by this report, and 2) no part of his compensation was, is, or will be related, directly or indirectly, to the speci ic recommenda-tions or views expressed by him in this report. We seek to update our research as appropriate, but various regulations may prohibit us from doing so. Other than certain periodical industry reports, the majority of reports are published at irregular intervals as deemed appropriate by the analyst.

DJIA: 16,437.05S&P 500: 1,842.37NASDAQ: 4,174.66

The prices of the common stock of other public companies mentioned in this report follow:

Exxon Mobil Corporation $100.52Mercer International Inc. $9.80RAIT Financial Trust $8.87Towers Watson & Co. (Outperform) $128.08Wal-Mart Stores, Inc. (Market Perform) $78.04Wells Fargo & Co mpany $45.94

Current Ratings Distribution (as of 12/31/13)Coverage Universe Percent Inv. Banking Relationships* PercentOutperform (Buy) 63% Outperform (Buy) 16%Market Perform (Hold) 33% Market Perform (Hold) 3%Underperform (Sell) 1% Underperform (Sell) 0%

* Percentage of companies in each rating category that are investment banking clients, de ined as companies for which William Blair has received compensation for investment banking services within the past 12 months.

The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the irm’s departments, including asset management, corporate inance, institutional sales, and retail brokerage; irm pro itability; and competitive factors.

OTHER IMPORTANT DISCLOSURESStock ratings, price targets, and valuation methodologies: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings and price targets (where used) re lect the expected per-formance of the stock relative to the broader market (generally the S&P 500, unless otherwise indicated) over the next 12 months. The assessment of expected performance is a function of near-, intermediate-, and long-term company fundamentals, industry outlook, con idence in earnings estimates, valuation (and our valuation methodology), and other factors. Outperform (O) – stock expected to outperform the broader market over the next 12 months; Market Perform (M) – stock expected to perform approxi-mately in line with the broader market over the next 12 months; Underperform (U) – stock expected to

105 Robert P. Napoli +1 312 364 8496


underperform the broader market over the next 12 months; not rated (NR) – the stock is not currently rated. The valuation methodologies used to determine price targets (where used) include (but are not limited to) price-to-earnings multiple (P/E), relative P/E (compared with the relevant market), P/E-to-growth-rate (PEG) ratio, market capitalization/revenue multiple, enterprise value/EBITDA ratio, discounted cash low, and others.

Company Pro ile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company pro ile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (manage-ment strength and track record, market leadership, distinctive capabilities); 2) inancial pro ile (earnings growth rate/consistency, cash low generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, con idence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair uni-verse; Aggressive Growth (A) – Fundamental risk is higher relative to the broader William Blair universe.

The ratings, price targets (where used), valuation methodologies, and company pro ile assessments re lect the opinion of the individual analyst and are subject to change at any time.

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CONSUMER

Sharon Zackfia, CFA, Partner +1 312 364 5386Group Head–ConsumerApparel and Accessories, Leisure, Restaurants

Jon Andersen, CFA, Partner +1 312 364 8697Consumer Products

Daniel Hofkin +1 312 364 8965Hardlines, Specialty Retail

Mark Miller, CFA, Partner +1 312 364 8498E-commerce, Broad Assortment and Hardlines, Health and Beauty

Amy Noblin +1 415 248 2874Apparel and Accessories

FINANCIAL SERVICES AND TECHNOLOGY

Adam Klauber, CFA +1 312 364 8232Co-Group Head–Financial Services and TechnologyInsurance Brokers, Property & Casualty Insurance

Robert Napoli, Partner +1 312 364 8496Co-Group Head–Financial Services and TechnologyBusiness Development Companies, Financial Technology, Specialty Finance

Christopher Shutler, CFA +1 312 364 8197Asset Management, Financial Technology

GLOBAL INDUSTRIAL INFRASTRUCTURE

Nick Heymann +1 212 237 2740Co-Group Head–Global Industrial InfrastructureMulti-industry

Larry De Maria, CFA +1 212 237 2753Co-Group Head–Global Industrial InfrastructureCapital Goods

Nate Brochmann, CFA +1 312 364 5385Commercial Services, Logistics/Transportation

Brian Drab, CFA +1 312 364 8280Filtration and Water Management, Industrial Technology

Chase Jacobson +1 212 237 2748Engineered Equipment, Engineering and Construction

Ryan Merkel, CFA +1 312 364 8603Commercial Services, Industrial Distribution

GLOBAL SERVICES

Brandon Dobell, Partner +1 312 364 8773Group Head–Global ServicesEnergy Services, Information Services, Marketing Services, Real Estate Services and Technology

Timo Connor, CFA +1 312 364 8441Education Services and Technology

Timothy McHugh, CFA, Partner +1 312 364 8229Consulting, HR Technology, Information Services, Staffing

HEALTHCARE

Ben Andrew, Partner +1 312 364 8828Group Head–HealthcareMedical Devices

Ryan Daniels, CFA, Partner +1 312 364 8418Healthcare Information Technology, Healthcare Services

Margaret Kaczor +1 312 364 8608Medical Devices

John Kreger, Partner +1 312 364 8597Distribution, Outsourcing, Pharmacy Benefit Management

Tim Lugo +1 415 248 2870Therapeutics

Amanda Murphy, CFA +1 312 364 8951Diagnostic Services, Life Sciences, Pharmacy Benefit Management

Matthew O’Brien +1 312 364 8582Medical Devices

John Sonnier, Partner +1 312 364 8224Biotechnology

Brian Weinstein, CFA +1 312 364 8170Diagnostic Products

Y. Katherine Xu, Ph.D. +1 212 237 2758Biotechnology

TECHNOLOGY, MEDIA, AND COMMUNICATIONS

Jason Ader, CFA, Partner +1 617 235 7519Co-Group Head–Technology, Media, and CommunicationsHardware and Software Infrastructure

Bhavan Suri, Partner +1 312 364 5341Co-Group Head–Technology, Media, and CommunicationsIT and Business Process Services, Software, Software as a Service

Rahul Bhangare +1 312 364 5066IT and Business Process Services

Jim Breen, CFA +1 617 235 7513Internet Infrastructure and Communication Services

Anil Doradla +1 312 364 8016Semiconductors and Wireless

Justin Furby, CFA +1 312 364 8201Software as a Service

Jonathan Ho +1 312 364 8276Cybersecurity, Security Technology

Dmitry Netis +1 212 237 2714Communications Equipment

Ralph Schackart III, CFA, Partner +1 312 364 8753Digital Media, Internet

EDITORIAL

Steve Goldsmith, Head Editor +1 312 364 8540Maria Erdmann +1 312 364 8925Beth Pekol Porto +1 312 364 8924Kelsey Swanekamp +1 312 364 8174Lisa Zurcher +44 20 7868 4549

Equity Research DirectoryJohn F. O’Toole, Partner Manager and Director of Research +1 312 364 8612

Kyle Harris, CFA, Partner Operations Manager +1 312 364 8230

william blair - spec fin 2014

Documents

growth of consumer

substantial growth

growth of inancial services

longterm secular growth

secular growth opportunity

growth of healthcare

doubledigit secular

global electronic payments