Steven Houle, CFA, FRM, VP Advisory Services BALANCE SHEET POSITIONING BASED ON THE ECONOMY AND CREDIT UNION TRENDS

Key Global Economic Issues 2016Accelerating Success Conference - Connect to the Future “Too Slow for Too Long” Tag line used in the International Monetary Fund’s April 2016 World Economic Outlook

Key Global Economic Issues 2016Accelerating Success Conference - Connect to the Future China’s economic transition Falling commodity prices Emerging market recessions Lack of policy space HeadwindsTailwinds Accommodative monetary policy Lower oil prices Growth in advanced economies

U.S. GDP 2016Accelerating Success Conference - Connect to the Future Real GDP in 2015 increased at the same rate as in Fourth quarter growth was 1.4% compared to 2.0% in the third quarter. As of its March 2016 meeting, the Fed projects real GDP to be between 2.0 and 2.2% between 2016 and 2018.

U.S. Unemployment Rate 2016Accelerating Success Conference - Connect to the Future The labor market continues to tighten and the Fed projects the unemployment rate to be 4.7% by year-end. March’s unemployment rate increased to 5.0% from 4.9% in January and February because more people entered the labor force. Initial jobless claims have stayed below 300,000 for 59 straight weeks.

U.S. Inflation 2016Accelerating Success Conference - Connect to the Future Inflation continues to run below the Fed’s target. The Fed is hoping stabilization in energy prices will boost overall energy prices and eventually filter through to core inflation. The Fed would like to be more convinced inflation will stick before raising rates again. Core* Consumer Price IndexMarch Month over Month0.1% Year over Year2.2% Core* Personal Consumption ExpendituresFebFed Target Month over Month0.1% Year over Year1.7%2.0% *Excludes food and energy

U.S. Home Sales 2016Accelerating Success Conference - Connect to the Future Sales continue to show positive momentum since the bottom in Choppiness in sales may be related to the economy losing some steam and volatility in the equity market. Low mortgage rates will provide an accommodative environment, but rising prices will make affordability an issue. Million Units

Housing Occupancy by Age 2016Accelerating Success Conference - Connect to the Future Greatest area of real estate lending opportunities are with members between 45 and 54 years of age. Do you see opportunities for members between 25 and 35 years of age who are likely first-time buyers? Are you offering reverse mortgage loans to members between 55 and 75 years of age?

U.S. Auto Sales 2016Accelerating Success Conference - Connect to the Future Sales are still strong, but have declined from their peak levels in late Talk is not about lower sales, but increasing delinquencies. According to the Fitch, delinquencies 90 days or greater hit a 20-year high in February. Million Units

U.S. Auto Loan Stats 2016Accelerating Success Conference - Connect to the Future According to Experian, 10.7% of all new car loans went to subprime borrowers as of fourth quarter 2015, compared to 10.08% in Average credit scores for new loans are about 711, a decrease from their peak of 736 in Wells Fargo estimates that the default rate rose to 12.3% in January, the highest level since 2010, from 11.3% in December. J.D. Power & Associates shows in the most recent quarter, loans of 72 months or longer accounted for more than 33% of sales and 31.3% of all car owners owe more than their cars are worth. This is referred to as being underwater or having negative equity.

Vehicle Loans – Negative Equity 60-month Example A member who finances a $35,000 vehicle at 0% for 60 months is in a negative equity position for approximately 34 months. 84-month Example A member who finances a $35,000 vehicle at 0% for 84 months is in a negative equity position for approximately 41 months. 2016Accelerating Success Conference - Connect to the Future

Fed’s Dot Plot 2016Accelerating Success Conference - Connect to the Future The Fed increased fed funds (FF) to 0.50% in December, which was the first increase in nine years. The Fed’s median projections for year-end FF continue to decline, but are still higher than the market’s expectations as implied by FF futures.

U.S. Treasury Curve 2016Accelerating Success Conference - Connect to the Future Treasury curve has flattened since year-end and is shifting in a non-parallel fashion. The spread between the 2- year and 10-year has tightened 19 bps since the end of December What will the shape of the yield curve be in 2016 and how will it impact deposit and loan rates?

Interest Rates 2016Accelerating Success Conference - Connect to the Future Janet Yellen reiterated in March that interest rates will be raised at a cautious pace and Fed Fund Futures imply the next hike to be sometime between September and December.

Credit Union Trends 2016Accelerating Success Conference - Connect to the Future

Assets & Net Worth 2016Accelerating Success Conference - Connect to the Future Net worth growth has been approximately 7% for the last five years. Asset growth has been increasing since The industry’s net worth ratio has been increasing the last five years due to strong earnings and managed asset growth. Source: NCUA

Loan Growth 2016Accelerating Success Conference - Connect to the Future Year-end growth numbers continue to finish higher than mid-year projections should be the same. Loan growth has been increasing for five consecutive years. The industry’s loans- to-assets ratio was 66% at the end of 2015 — the highest level since Source: NCUA

Loan Growth 2016Accelerating Success Conference - Connect to the Future Real estate and vehicle loans increased 9% and 14% respectively in On a dollar basis, both increased by approximately $32 billion. As of end-of-year, credit unions held close to 10% of the outstanding consumer credit. This is a 2% increase over the percentage in Source: NCUA/Federal Reserve

Loan Allocations 2016Accelerating Success Conference - Connect to the Future Real estate allocations are 50% of the total loan portfolio, followed by vehicle loans at 33%. $86 billion in fixed rate first mortgage loans were granted in 2015, which is a 46% increase over Foreclosed real estate loans were down 20% in 2015 compared to Source: NCUA

Loan Quality 2016Accelerating Success Conference - Connect to the Future Loan quality continues to improve and trend lower. Has underwriting tightened too much? Source: NCUA

Shares 2016Accelerating Success Conference - Connect to the Future Share growth continues to be in non-term accounts. Term certificates increased for the first time in seven years, but account for only 19% of total shares and deposits. In 2009 this figure was 30%. Source: NCUA

Additional Funding 2016Accelerating Success Conference - Connect to the Future Credit unions have utilized lower-cost alternatives to replace the run-off in term certificates. Source: NCUA Billions

Liquidity Trends 2016Accelerating Success Conference - Connect to the Future With tighter liquidity profiles, credit unions are actively selling loans and investments. Loan participations outstanding are currently $24 billion, an 85% increase since Source: NCUA

Credit Union Net Margin 2016Accelerating Success Conference - Connect to the Future Loan Yield5.76%5.42%5.01%4.79%4.64% Inv Yield1.61%1.27%1.13%1.24% Asset Yield4.32%4.10%3.88%3.79%3.78% Cost of Funds-0.93%-0.73%-0.59%-0.54%-0.52% Gross Spread3.39%3.37%3.29%3.25%3.26% Provisions-0.50%-0.36%-0.26%-0.28%-0.35% Net Margins2.89%3.01%3.03%2.97%2.91% The increasing loans-to-assets ratio has helped maintain the industry’s asset yield as more assets have been reallocated from lower yielding investments to higher yielding loans. Has cost of funds hit a floor at 50 bps? A low provision expense has helped increase the industry’s net margin. Source: NCUA

ROA 2016Accelerating Success Conference - Connect to the Future Net Margin2.89%3.01%3.03%2.97%2.91% Non-Int Inc1.30%1.43%1.38%1.31%1.32% Non-Int Exp-3.32%-3.51%-3.57%-3.48%-3.49% Net Op Exp2.02%2.08%2.19%2.17% ROA0.87%0.93%0.84%0.80%0.74% Net operating expense has increased since 2011 as non- interest expense has increased. The industry’s earnings profile is strong, but will continue to face downward pressure with a flat yield curve. Source: NCUA

Industry Forecast 2016Accelerating Success Conference - Connect to the Future Strong earnings and modest asset growth should push the industry’s net worth ratio to 11% in Loan growth should be 10% in 2016, as strong demand for vehicle and real estate loans continues. This will push the industry’s loan-to-asset ratio close to 67% by the end of Loan portfolio yields will face downward pressure in 2016 as new loan rates continue to be below the average portfolio yield. Cost-of-funds will remain inline with current levels as credit unions will likely delay any increase to their non-term share rates for at least the first 100 basis point increase in Fed Funds.

Strategic Considerations 2016Accelerating Success Conference - Connect to the Future

Capital Management 2016Accelerating Success Conference - Connect to the Future Asset growth should be a function of earnings and desired capital profiles. A credit union with an ROA of 0.95% can increase assets by 7% to 13% and maintain a net worth ratio between 8.8% and 9.3%.

Capital Allocations for Risk Taking 2016Accelerating Success Conference - Connect to the Future ABC CU ProfileCapital AllocationAdjusted ABC CU Profile Assets$787mmInterest Rate Risk$22mmAssets$787mm Capital$72mmCredit Risk$5mmCapital$43mm Capital Ratio9.15%Liquidity Risk$1mmCapital Ratio5.5% Well CapitalizedOperational Risk$1mmUnder Capitalized ($29mm) Assess the impact of your risk profiles on your capital ratio

NCUA’s Risk-Based Capital Rule 2016Accelerating Success Conference - Connect to the Future Final rule was issued in October 2015 and becomes effective January 1, 2019 Applies to credit unions with total assets of $100 million or greater Replaces current methodology used to calculate risk-based net worth Is comparable to methodologies applied to other depository institutions worldwide Broadens definition of capital used in the numerator Risk weights applied in the denominator primarily account for credit and concentration risk, but not for interest rate risk

Loan Optimizations 2016Accelerating Success Conference - Connect to the Future Real Estate (41%) Net yield: 4.71% Vehicle (46%) Net yield: 4.68% Unsecured (13%) Net yield: 10.52% Optimal Portfolio Current Loan Portfolio Net yield: 5.44% Net interest income: $14.3mm

Loan Optimization 2016Accelerating Success Conference - Connect to the Future Loan Optimization Demand Current Allocations Performance Limits Risk Appetite Resources Capital Factors to consider: 1.What types of loans are your members seeking? 2.What’s your current loan mix? 3.How are your current loans performing? 4.What are your current limits? 5.What’s your appetite for risk (IRR/Losses)? 6.Are staffing and expertise available? 7.What’s your current capital level?

Loan Optimization 2016 Accelerating Success Conference - Connect to the Future Real Estate (41%) Net yield: 4.71% Vehicle (46%) Net yield: 4.68% Unsecured (13%) Net yield: 10.52% Optimal Portfolio Current Loan Portfolio Constrained BUT Optimal Real Estate (53%) Net yield: 4.71% Vehicle (30%) Net yield: 4.68% Unsecured (17%) Net yield: 10.52% Net yield: 5.44% Net interest income: $14.3mm Net yield: 5.69% Net interest income: $14.9mm $600k income increase

Monitor your Vehicle Portfolio 2016Accelerating Success Conference - Connect to the Future With robust vehicle sales projected for the next few years, be sure to monitor and set limits for: loan terms, especially ones greater than 60 mo; loan-to-values; FICO distributions; and fees paid to dealers.

Investment Break-Even Analysis 2 YR Bullet3 YR Bullet5 YR Bullet Year 10.86%1.06%1.44% Year 20.86%1.06%1.44% Year 3?1.06%1.44% Year 4??1.44% Year 5??1.44% 7.20%* In two years, the required rate of return for the remaining three years must be 5.48%. Therefore, a three-year bullet needs to increase 77 basis points from 1.06% to 1.83%. In three years, the required rate of return for the remaining two years must be 4.02%. Therefore, a two-year bullet needs to increase 115 basis points from 0.86% to 2.01%. *Cumulative Return. Yields based on 4/21/2016 levels Accelerating Success Conference – Connect to the Future

Steven Houle, CFA, FRM, VP Advisory Services Questions 2016Accelerating Success Conference - Connect to the Future