Asset Liability Management for CU Boards The Basics of ALM Presented by: Frank Santucci - Managing Director ALM Services

Transcription

1 Asset Liability Management for CU Boards The Basics of ALM Presented by: Frank Santucci - Managing Director ALM Services

2 Frank Santucci - Managing Director ALM Services First Empire Securities, Inc. / Balance Sheet management Services, Inc. Frank has been working with institutional investors including credit unions, banks, insurance companies and municipalities for over 33 years. Frank is the principal author of the BSMS ALM Model which has been used to measure monitor and manage interest rate risk by over 1000 institutions ranging in size from $10 Million to $8 Billion in total assets. Along with his team, they provide comprehensive ALM Analysis, ALCO and Board Education, budget and strategic planning support and consultation. Frank currently holds the Securities Industry and Financial Markets Association: Series 7 license (General Securities Registered Representative); the Series 63 license, (State Registrations) and the Series 24 license, (General Securities Principal). Frank is also an Eagle Scout in the Boy Scouts of America. First Empire Securities, Inc. is a full service institutional fixed income broker-dealer servicing customers nationwide for more than thirty-five years. Other affiliated companies include: Balance Sheet Management Services, Inc., LPC Services, Inc. and First Empire CD Management, Inc., Combined First Empire Securities, Inc. and its affiliated companies currently work with over 20% of the credit union industry. 2 2

3 3 Asset Liability Management is the process of Measuring, Monitoring and Managing four areas of balance sheet risk: Capital U=liza=on Earnings Liquidity Interest Rate Risk Please Note: This presenta1on is intended as a basic introduc1on to concepts, methodologies and terminology related to Asset Liability Management for credit unions. ALM can be a very complex process involving poten1ally thousands of inputs, assump1ons, variables and analyses. Each ins1tu1on should use procedures and processes commensurate with the complexity of their balance sheet to appropriately measure monitor and manage its unique balance sheet risk.

4 Capital Management Balance Sheet Liabilities and Capital Allocation Borrowings Checking Savings Liabilities & Capital Allocation $ Amount (,000) As % of Total Borrow ings $53, % Checking $182, % Savings $452, % Money Market $265, % CDs $221, % IRAs $78, % Other Deposits $22, % Other Liabilities $17, % Capital $153, % Total Liab and Cap $1,446, % Money Market CDs IRAs Other Deposits Other Liabilities Capital 4 4 Source for Data: NCUA FOIA Call Report Data Files

5 Capital Management Balance Sheet Asset Allocation Cash Equivalents Gov't & Agncy Notes MBSs CMO Mutual Funds CDs Other Investments Non-mortgage Loans 1st Mtg Loans Fixed 1st Mtg Loans ARM Other Mtg Fixed Other Mtg Variable Fixed Assets Other Assets Asset Allocation $ Amount (,000) As % Total Cash Equivalents $93, % Gov't & Agncy Notes $80, % MBSs $62, % CMO $40, % Mutual Funds $2, % CDs $43, % Other Investm ents $36, % Non-m ortgage Loans $512, % 1st Mtg Loans Fixed $238, % 1st Mtg Loans ARM $177, % Other Mtg Fixed $32, % Other Mtg Variable $57, % Fixed Assets $29, % Other Assets $39, % Total Assets $1,446, % 5 5 Source for Data: NCUA FOIA Call Report Data Files

6 Capital Management Deposits at credit unions in the United States are insured up to $250,000 per depositor by the National Credit Union Administration (NCUA). The NCUA maintains an insurance fund (the National Credit Union Share Insurance Fund or NCUSIF) to cover losses when a credit union fails. In addition, the US Congress as stated that NCUA deposit insurance is also backed by the full faith and credit of the United States government. Effectively stating that if the NCUA runs out of money, the US Treasury will guarantee the deposits up to the insurance limit. The NCUA also issues regulations and annually audits each credit union to ensure they are operating in a safe and sound manner. The three primary measures of an institutions financial health are the Net Worth to Asset Ratio (also known as the Capital Ratio or Leverage Ratio) Risk-based Capital Ratio Return on Average Assets Ratio 6 6

7 Capital Management NCUA Rules and Regulations Part 702: Prompt Corrective Action Net Worth to Asset Ratio Categories: > 7.00% = Well Capitalized 6.00% % = Adequately Capitalized 5.00% % = Tier 1 Under Capitalized 4.00% % = Tier 2 Under Capitalized < 3.99% = Significantly Under Capitalized In addition, to maintaining a Net Worth to Asset Ratio over 7.00%, a credit union must also ensure it has enough capital to support the riskiness of its assets. This is determined by calculating a risk weighted assets-to-total assets ratio called The Risk-based Net Worth Requirement Ratio or RBNW Requirement Ratio ). Under NCUA Rules and Regulations Part 702 a credit union s Net Worth Ratio must be above 7.00% and higher than its RBNW Requirement Ratio or the credit union will automatically be reclassified as under capitalized under the PCA Regulation. There are three asset categories that increase a credit union s RBNW Requirement Ratio: Mortgage Loans > 5-year Maturity or Repricing Investments with an Average Life Greater than Three Years Member Business Loans (Regardless of Type, Term or Reset) Any credit union that is not well capitalized (either has a net worth ratio less than 7.00% or the RBNW requirement ratio is greater than the net worth ratio) is subject to the prompt corrective actions prescribed by NCUA Rules and Regulations Part

8 Capital Management Capital Utilization: Maximum Potential Asset Growth Average Q YTD Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 1 Quarterly Grow th $138,056 $151,233 $165,669 $181,482 $198,804 $217,780 $238,567 $261,338 2 Cumulative Growth $138,056 $289,289 $454,958 $636,439 $835,243 $1,053,023 $1,291,590 $1,552,928 3 Period Ending Total Assets $1,446,368 $1,584,424 $1,735,658 $1,901,326 $2,082,808 $2,281,612 $2,499,392 $2,737,958 $2,999,297 4 Q Net Interest Incom e $10,932 $11,520 $12,164 $12,869 $13,642 $14,489 $15,416 $16,432 $17,545 5 Q Loan Loss Provision $1,695 $1,695 $1,695 $1,695 $1,695 $1,695 $1,695 $1,854 $2,031 6 Q Non-Interest Incom e $4,877 $4,877 $4,877 $4,877 $4,877 $4,877 $4,877 $4,877 $4,877 7Q G(L) OTTI+Asset Sales+Merger $23 $0 $0 $0 $0 $0 $0 $0 $0 8 Q Non-Operating Inc(Exp) $88 $88 $88 $88 $88 $88 $88 $88 $88 9 Q Non-Interest Expenses $11,020 $11,020 $11,020 $11,020 $11,020 $11,020 $11,020 $11,020 $11, Quarterly Net Incom e $3,197 $3,769 $4,413 $5,119 $5,892 $6,738 $7,666 $8,522 $9, Annualized Net Income $12,787 $15,076 $17,652 $20,475 $23,566 $26,953 $30,663 $34,090 $37, Annualized ROA 0.90% 0.99% 1.06% 1.13% 1.18% 1.24% 1.28% 1.30% 1.32% 13 Net Worth $159,346 $163,115 $167,528 $172,646 $178,538 $185,276 $192,942 $201,465 $210, Net Worth Ratio 11.02% 10.29% 9.65% 9.08% 8.57% 8.12% 7.72% 7.36% 7.03% 15 Net Worth Classification Well Well Well Well Well Well Well Well Well 16 Risk-Weighted Assets $78,404 $85,450 $93,330 $102,124 $111,919 $122,811 $134,905 $148,155 $162, RBNW Requirem ent Ratio 5.42% 5.39% 5.38% 5.37% 5.37% 5.38% 5.40% 5.41% 5.42% 18 Is the CU Com plex? No No No No No No No No No 19 Final NCUA Classification Well Well Well Well Well Well Well Well Well Over the next 24 months, the credit union could grow by as much as $1.552 Billion in total assets, and still be well capitalized at a 7.03% net worth to asset ratio. Assuming a fairly conservative margin on growth (only 1.66%), the credit union increases ROA by 42 basis points and adds $51.5 million to net worth. 8 NOTE: This is NOT forecast, expected, predicted or recommended growth. This is purely a risk tolerance calculation. Based upon the spread and asset allocation assumptions, the credit union can grow by these amounts and not be considered under-capitalized under NCUA s Prompt Corrective Action regulations. Source for Data: BSMS ALM Analysis Sample Credit Union

9 Earnings Management Credit Union Industry: Return on Average Assets 1.00% Return on Average Assets YTD (ROA) 0.80% 0.60% 0.40% 0.20% 0.00% Jun % 9 Source for Data: NCUA FOIA Call Report Data Files

10 Earnings Management There are nine components of an institution earnings: 1) Loan Income (origina1ng the right loan to the right customer at the right rate) 2) Investment Income (managing safety, liquidity, interest rate risk and yield) 3) Non-Interest Income (fees, service charges, interchange income and other non-interest income) 4) Cost-of-funds (interest expense on deposits and borrowings) 5) Non-Interest Expenses (opera1ng expenses, employee salaries and benefits, etc.)? 6) Credit Losses (loan losses, investment OTTI, FDIC and NCUA Assessments, etc.) 10? 7) Gain (or Loss) on Asset Sales (loan sales, investment sales, fixed asset sales, etc.) 8) Asset Alloca=on Allocation (geong (getting more loans out out the the door, door, not not leaving leaving excess excess liquidity liquidity in overnights) in overnights) 9) Improve Capital U=liza=on Utilization (maximizing asset growth without sacrificing safety safety and and soundness) soundness)

11 Earnings Management Quarterly Income Statement Quarterly Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 1 Quarterly Interest on Loans $10,315,529 $10,783,360 $11,047,994 $11,192,792 $11,616,923 2 Quarterly Income from Investments $1,476,421 $1,529,815 $1,560,316 $1,655,374 $1,776,819 3 Quarterly Trading Profits and Losses $4,248 $5,485 $3,687 -$11,324 $857 4 Quarterly Total Interest Income $11,796,199 $12,318,660 $12,611,997 $12,836,842 $13,394,599 5 Quarterly Dividends on Shares $1,383,564 $1,432,699 $1,609,276 $1,565,868 $1,723,738 6 Quarterly Interest on Deposits $170,050 $184,213 $194,803 $193,976 $203,059 7 Q Dividends and Interest on Shares and Deposits $1,553,614 $1,616,912 $1,804,080 $1,759,844 $1,926,798 8 Quarterly Interest on Borrowed Money $273,743 $315,301 $341,376 $357,687 $334,448 9 Quarterly Total Interest Expense $1,827,357 $1,932,213 $2,145,456 $2,117,532 $2,261, Quarterly Net Interest Income $9,968,841 $10,386,446 $10,466,541 $10,719,310 $11,133, Quarterly Provision for Loan & Lease Losses $1,481,288 $1,780,756 $1,788,289 $1,684,983 $1,704, Quarterly Fee Income $2,102,644 $2,126,943 $2,222,469 $2,097,795 $2,198, Quarterly Other Operating Income $2,371,743 $2,461,133 $2,457,307 $2,801,098 $2,656, Quarterly Gain (Loss) on Sale of Investments $50,521 $44,660 $44,621 $24,031 $5, Quarterly OTTI Expense on Investments $299 -$86 -$322 $726 -$ Quarterly Gain (Loss) on Disposition of Fixed Assets -$1,463 -$2,927 -$4,060 $1,578 $18, Quarterly Gain from Bargain Purchase (Merger) $25,804 $9,674 $26,595 $4,927 $1, Quarterly Other Non-operating Income (Expense) $56,519 $21,877 $36,014 $107,697 $67, Quarterly Total Non-Interest Income $4,605,470 $4,661,274 $4,782,624 $5,036,400 $4,946, Quarterly Employee Compensation and Benefits $5,272,480 $5,309,230 $5,478,885 $5,644,117 $5,674, Quarterly Travel and Conference Expense $107,173 $102,618 $107,068 $99,185 $116, Quarterly Office Occupancy Expense $675,675 $689,655 $700,305 $725,431 $717, Quarterly Office Operations Expense $1,899,395 $1,947,795 $1,991,944 $2,005,966 $2,065, Quarterly Educational and Promotional Expense $397,269 $405,279 $461,224 $401,962 $448, Quarterly Loan Servicing Expense $717,762 $748,411 $736,488 $756,000 $780, Quarterly Professional and Outside Services Expense $831,388 $863,538 $895,259 $873,198 $912, Quarterly Member Insurance $6,079 $3,396 $4,887 $4,539 $5, Quarterly Operating Fees (Exam and Supervisory fees) $47,609 $44,326 $45,796 $47,052 $53, Quarterly Miscellaneous Operating Expenses $367,056 $361,501 $403,781 $345,433 $363, Quarterly Total Non-Interest Expense $10,321,886 $10,475,750 $10,825,637 $10,902,885 $11,137, Quarterly Net Income (Loss) $2,764,850 $2,780,231 $2,593,943 $3,167,413 $3,226,023 Source for Data: NCUA FOIA Call Report Data Files

12 Earnings Management Quarterly Operating and Income Ratios CU Industry Quarterly Operating and Income Ratios Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 1 Quarterly Average Loan Yield 4.51% 4.59% 4.59% 4.57% 4.64% 2 Quarterly Average Investment Yield 1.54% 1.66% 1.74% 1.80% 1.92% 3 Quarterly Average Yield on Earning Assets 3.64% 3.76% 3.82% 3.81% 3.91% 4 Quarterly Average Cost of Shares and Deposits 0.54% 0.56% 0.62% 0.59% 0.63% 5 Quarterly Average Cost of Borrowings 2.31% 2.52% 2.54% 2.74% 2.61% 6 Quarterly Average Cost of Funds 0.61% 0.64% 0.70% 0.68% 0.71% 7 Quarterly Non-Interest Income to Average Assets 1.32% 1.34% 1.35% 1.39% 1.35% 8 Quarterly Net Other Op Inc.(Exp.) to Average Assets 0.02% 0.01% 0.01% 0.03% 0.02% 9 Quarterly Gain (Loss) on Sale of Assets to Avg Assets 0.02% 0.01% 0.01% 0.00% 0.01% 10 Quarterly Gain (Loss) on Merger to Avg Assets 0.01% 0.00% 0.01% 0.00% 0.00% 11 Quarterly OTTI Expense on Inv. to Average Assets 0.00% 0.00% 0.00% 0.00% 0.00% 12 Quarterly Non-Interest Expense to Average Assets 3.03% 3.05% 3.12% 3.08% 3.09% 13 Quarterly Loan Loss Provision to Average Assets 0.44% 0.52% 0.52% 0.48% 0.47% 14 Quarterly Net Interest Margin 3.08% 3.18% 3.18% 3.19% 3.25% 15 Quarterly Return on Average Assets (ROA) 0.81% 0.81% 0.75% 0.90% 0.90% 16 Quarterly Return on Average Equity (ROE) 7.74% 7.62% 7.01% 8.47% 8.50% 17 Period-Ending Loan to Asset Ratio 67.90% 69.03% 69.69% 68.82% 70.35% 18 Period-Ending Investment to Asset Ratio 27.39% 26.30% 25.45% 26.49% 24.86% 19 Period-Ending Loan to Share Ratio 80.03% 81.78% 82.85% 80.97% 83.25% 20 Period-Ending Net Worth to Assets Ratio 10.80% 10.90% 10.96% 10.89% 11.02% Source for Data: NCUA FOIA Call Report Data Files

13 Basics of Asset Liability Management Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early withdraw investment CDs Sell its investment securities Borrow Money FHLB Correspondent Bank Federal Reserve Repurchase Agreements The institution pays interest on borrowings or gives up the income on assets sold and may have a gain or loss on sale of those assets. E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. Wholesale Loans B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Leave the cash in overnight investments Buy Loans or Loan Participations Invest in Time Deposits (CDs) in other institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals. 13

14 Basics of Asset Liability Management Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. 1 Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early withdraw investment CDs Sell its investment securities Borrow Money FHLB Correspondent Bank Federal Reserve Repurchase Agreements The institution pays interest on borrowings or gives up the income on assets sold and may have a gain or loss on sale of those assets. E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. Wholesale Loans B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Leave the cash in overnight investments Buy Loans or Loan Participations Invest in Time Deposits (CDs) in other institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals. 14

15 Basics of Asset Liability Management Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. 1 A Retail Loans 2 A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early withdraw investment CDs Sell its investment securities Borrow Money FHLB Correspondent Bank Federal Reserve Repurchase Agreements The institution pays interest on borrowings or gives up the income on assets sold and may have a gain or loss on sale of those assets. E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. 15 Wholesale Loans B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Leave the cash in overnight investments Buy Loans or Loan Participations Invest in Time Deposits (CDs) in other institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals.

16 Basics of Asset Liability Management Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early withdraw investment CDs Sell its investment securities Borrow Money FHLB Correspondent Bank Federal Reserve Repurchase Agreements The institution pays interest on borrowings or gives up the income on assets sold and may have a gain or loss on sale of those assets. E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans A B Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. Wholesale Loans 2 3 B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Invest into an Overnight Account Buy Loans or Loan Participations Invest in Time Deposits (CDs) in Other Institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans. C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals.

17 Basics of Asset Liability Management 17 Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early withdraw investment CDs Sell its investment securities Borrow Money FHLB Correspondent Bank Federal Reserve Repurchase Agreements 1 The institution pays interest on borrowings or gives up the income on assets sold and may have a gain or loss on sale of those assets. E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. A B C Retail Loans 2 A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. Wholesale Loans 3 B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Invest into an Overnight Account Buy Loans or Loan Participations Invest in Time Deposits (CDs) in Other Institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans. C: If loans grow faster than than deposits (or if (or there if there are net are net deposit withdrawals) and and the the institution institution needs needs liquidity liquidity it can it cannibalize cannibalize overnight overnight and maturing and maturing investments investments to fund to loan fund growth loan growth or deposit or deposit withdrawals. withdrawals. C

18 Basics of Asset Liability Management 18 Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early Withdraw Investment CDs Sell Investment Securities Borrow Money Federal Home Loan Bank Correspondent Bank Federal Reserve Repurchase Agreements 1 The institution pays interest on borrowings or gives up the income on assets sold (and may have a gain or loss on sale of those assets). E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. D A B Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. 4 3 C Wholesale Loans 2 B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Invest into an Overnight Account Buy Loans or Loan Participations Invest in Time Deposits (CDs) in Other Institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans. C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals. C

19 Basics of Asset Liability Management 19 Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early Withdraw Investment CDs Sell Investment Securities Borrow Money Federal Home Loan Bank Correspondent Bank Federal Reserve Repurchase Agreements 1 Wholesale Funding 4 D The institution pays interest on borrowings or gives up the income on assets sold (and may have a gain or loss on sale of those assets). E: After appropriately assessing the the risk, risk, an institution an institution may also may use also wholesale use wholesale funding funding to buy wholesale to buy wholesale loans. loans. E A B C Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. Wholesale Loans 2 3 B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Invest into an Overnight Account Buy Loans or Loan Participations Invest in Time Deposits (CDs) in Other Institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The Institution earns interest on these wholesale loans. C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals. C

20 Basics of Asset Liability Management 20 Retail Funding The institution brings in deposits from its customers: Checking Accounts Savings Accounts Money Market Accounts Retirement and Health Savings Accounts Commercial Accounts Time Deposits (CDs) And pays interest on those deposits. Wholesale Funding D: If loans grow faster than deposits (or net deposit withdrawals) and the institution needs liquidity it can: Sell Loans or Loan Participations Early Withdraw Investment CDs Sell Investment Securities Borrow Money Federal Home Loan Bank Correspondent Bank Federal Reserve Repurchase Agreements 1 The institution pays interest on borrowings or gives up the income on assets sold (and may have a gain or loss on sale of those assets). E: After appropriately assessing the risk, an institution may also use wholesale funding to buy wholesale loans. D A B Retail Loans A: The institution takes those deposits and lends it to other customers: Credit Cards Lines of Credit Consumer Loans Real Estate Loans Commercial Loans The institution charges interest on those loans. 4 3 E C Wholesale Loans 2 B: If-and-when deposits grow faster than loans, the institution has excess liquidity and can: Invest into an Overnight Account Buy Loans or Loan Participations Invest in Time Deposits (CDs) in Other Institutions Invest in Securities US Treasuries and Agency Notes Asset-backed Securities Corporate and Municipal Bonds The institution earns interest on these wholesale loans. C: If loans grow faster than deposits (or if there are net deposit withdrawals) and the institution needs liquidity it can cannibalize overnight and maturing investments to fund loan growth or deposit withdrawals. C

21 Liquidity Risk Comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the institution. SOURCES OF FUNDS New Shares and Deposits Loan Principal Payments and Cashflow Investment Maturities and Cashflows Interest Income Non-interest Income Corp CU Overnights or Fed Funds Sold Sales of Securities, Loans, Other Assets Sale of Loan Participations Early Withdrawal of Investment CDs Non-member Deposits or Brokered CDs Corp CU Lines of Credit FHLB Advances Repurchase Agreements (Repo of Securities) Other Lines of Credit (Correspondent Banks) Federal Reserve Advances Central Liquidity Facility Facility USES OF FUNDS Share and Deposit Withdrawals New Loan Originations Dividends on Shares and Deposits Interest Expense on Borrowings Operating Expenses NCUSIF Deposit & Assessments Pay-off of Existing Borrowings Fixed Asset Purchases or Expenditures Investment Purchases Purchase of Loans or Loan Participations Source: FFIEC Interagency Policy Statement on Funding and Liquidity Risk Management (March 2010)

22 Liquidity Risk Forecast Cashflow Liquidity: Current Environment - Scenario # 1 Liquidity Analysis: Current 90-days 12-months 24-months 1 Forecast Loan (P+I) Cashflow $112,604,450 $467,590,601 $515,951,970 (2) 2 FFIEC Forecast Investment guidance (P+I) Cashflow and NCUA $21,739,324 $73,161,982 $56,119,224 (3) 3 Forecast Net Share Grow th $16,412,526 $65,650,104 $69,321,096 (2) 4 Forecast Rules Rollover and of Maturing Regulations Borrow ings also $13,004,856 $26,800,371 $6,042,132 (5) 5 Forecast Loan Sales $16,327,948 $67,731,351 $74,559,144 (2) require cashflow forecasting 6 Non-Interest Income $4,922,316 $19,689,264 $19,689,264 (5) to estimate future liquidity and/or identify potential 7 Forecast Cashflow In $185,011,420 $720,623,673 $741,682,830 8 Forecast Loan Originations $138,453,056 $574,328,944 $632,225,307 (2) 9 Forecast Loan and Loan Participation Purchases $5,026,265 $20,849,877 $22,951,687 (4) 10 Assumed Investment Purchases $0 $0 $0 (8) liquidity risk: 11 Forecast Net Share Withdraw als $0 $0 $0 (2) 12 Maturing Borrow ings $13,004,856 $26,800,371 $6,042,132 (5) 13 Liquidity Forecast Dividend Management and Interest Expense starts $2,238,286 $9,388,765 $10,377,947 (5) 14 Operating Expenses, NCUSIF, Other Cashflow Out $11,137,455 $45,296,819 $45,174,416 (5) with identifying sources of Contingent Liquidity: 15 Forecast Cashflow Out $169,859,918 $676,664,776 $716,771, Net Core Cashflow $15,151,502 $43,958,897 $24,911, New Borrow ings, Non-member Deposits & LPs Sold $0 $0 $0 18 Ending Balance Cash + Cash Equivalents $103,209,520 $118,361,022 $147,168,417 $172,079,758 (1) 19 Total Lines of Credit $341,769,277 $341,769,277 $341,769,277 $341,769,277 (6) 20 Less Outstanding Borrow ings $53,653,708 $53,653,708 $53,653,708 $53,653,708 (5) 21 Net Available Lines of Credit $288,115,570 $288,115,570 $288,115,570 $288,115, Securities (Net Cashflow s) at 94% Current Mkt Value $203,217,301 $188,383,590 $157,411,174 $123,486,405 (3) 23 Less Securities Pledged as Collateral $53,653,708 $53,653,708 $53,653,708 $53,653, Net Securities Available for Liquidation $149,563,593 $134,729,882 $103,757,466 $69,832,697 (3) 25 Investment CDs Net of 6 Mo. Early Withdraw al Penalty $40,623,966 $36,776,674 $24,470,102 $12,403,126 (5) 26 Net Available Non-Member Deposits $231,320,514 $233,508,851 $243,356,367 $257,159,403 (7) 27 Additional Sources of Funds $421,508,073 $405,015,408 $371,583,936 $339,395, Total Contingent Liquidity $709,623,643 $693,130,977 $659,699,505 $627,510, Total Liquidity $812,833,163 $811,491,999 $806,867,922 $799,590,554 Source: BSMS Sample Credit Union Liquidity and Funding Risk Analysis

23 Liquidity Risk Forecast Cashflow Current Environment: Liquidity Ratios Liquidity Ratios Current 90-days 12-months 24-months 30 Forecast Cashflow In as % Total Assets 12.62% 47.18% 45.87% 31 Forecast Cashflow s Out as % Total Assets 11.58% 44.30% 44.33% 32 Net Cashflow Liquidity % Total Assets 1.03% 2.88% 1.54% 33 Cash & Cash Equivalents as % of Total Assets 7.14% 8.07% 9.63% 10.64% 34 Available Lines of Credit as % Total Assets 19.92% 19.65% 18.86% 17.82% 35 Additional Sources of Funds as % Total Assets 29.14% 27.62% 24.33% 20.99% 36otal Contingent Liquidity as % of Total Assets 49.06% 47.27% 43.19% 38.81% 37 Total Liquidity as % of Total Assets 56.20% 55.35% 52.82% 49.45% Source: BSMS Sample Credit Union Liquidity and Funding Risk Analysis

24 Interest Rate Risk 24 Interest Rate Risk (IRR) is the risk to a credit union s earnings and capital from changes in interest rates. The two common methods of measuring interest rate risk are: Income Simulation (Earnings at Risk) Net Economic Value (Market Value Risk) The process of measuring and monitoring IRR involves: Modeling the current balance sheet Making assumptions about potential future member and management behavior Running a series of what-if forecasts under multiple rate-shock and interest rate scenarios using multiple sets of assumptions and then measuring monitoring and managing the various possible outcomes 17

25 Interest Rate Risk 25 Income Simulation (Earnings at Risk) Income simulation forecasts the future interest income on assets loans and investments) and interest expense (on shares, deposits and borrowings) under multiple interest rate scenarios. The forecast change in net interest income is then applied to the forecast income statement to estimate the potential earnings at risk and potential impact on return on assets, net worth and the net worth ratio. Net Economic Value (Value at Risk) Net economic value (NEV) measures the theoretical liquidation value of the credit union under multiple interest rate scenarios. NEV analysis, simply put, is the estimated fair value of all assets minus the estimated fair value of all liabilities resulting in the estimated fair value of capital. By re-calculating the NEV under multiple interest rate environments, theoretically one can estimate the value at risk of liquidating the credit union. 18

26 Interest Rate Risk Earnings at Risk Net Interest Margin Net Interest margin is a ratio that represents the spread between the yield on earning assets (interest income on loans and investments) and the cost of funding those assets (dividend and interest expense on shares, deposits and borrowings). As the general level of interest rates change, what is the impact on Net Interest Income ($) and Net Interest Margin (%)? Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Loan Yield 6.59% 6.27% 6.24% 6.08% 6.03% 5.81% 5.72% 5.48% 5.33% 5.07% 4.98% 4.80% 4.80% 4.64% 4.65% 4.56% 4.56% 4.48% 4.59% 4.59% Inv Yield 3.46% 2.77% 2.29% 2.05% 1.80% 1.69% 1.48% 1.33% 1.15% 1.08% 1.14% 1.21% 1.20% 1.22% 1.22% 1.33% 1.33% 1.54% 1.69% 1.92% Cost of Funds 2.56% 2.11% 1.76% 1.44% 1.27% 1.08% 0.99% 0.85% 0.77% 0.67% 0.65% 0.60% 0.61% 0.58% 0.59% 0.58% 0.61% 0.60% 0.67% 0.70% CU Margin 3.36% 3.30% 3.35% 3.40% 3.39% 3.32% 3.21% 3.09% 2.99% 2.91% 2.93% 2.96% 2.99% 2.98% 3.01% 3.02% 3.04% 3.08% 3.17% 3.23% 1yr Treasury 0.34% 0.48% 0.47% 0.32% 0.29% 0.19% 0.12% 0.21% 0.16% 0.15% 0.13% 0.11% 0.25% 0.28% 0.65% 0.46% 0.85% 1.23% 1.76% 2.33% 3.70% 3.50% 3.40% 2.33% 2.50% 2.00% Net Interest Margin 3.30% 3.36% 3.10% 2.90% 0.48% 0.34% 2.70% 2.91%.34%.48%.11% 0.12% 0.11% 3.08% 0.65% 0.46% 3.23% 1.50% 1.00% 0.50% 1-year CMT Treasury 2.50% 0.00% CU Margin 1yr Treasury 19 Source for Data: NCUA FOIA Call Report Data Files

27 Interest Rate Risk Earnings at Risk Net Interest Income Simulation Summary Results (Example #1) Net Interest Income Year 1 Year 2 Year 3 % Change from Flat 4.40% 5.85% 10.36% +300bps Shock $33,534 $33,580 $34,684 Flat Rate Scenario $32,121 $31,724 $31, bps Shock $31,024 $30,158 $29,036 % Change from Flat -3.42% -4.94% -7.61% +300bps Shock YEAR 1 YEAR 2 YEAR 3 Net Interest Income $33,534 $33,580 $34,684 Net Interest Margin 3.16% 3.17% 3.27% Net Income $10,627 $10,673 $11,777 Projected ROA 0.93% 0.93% 1.01% Projected Net Worth $135,230 $145,903 $157,680 Projected Net Worth Ratio 11.84% 12.66% 13.54% Flat Rate Scenario YEAR 1 YEAR 2 YEAR 3 Net Interest Income $32,121 $31,724 $31,427 Net Interest Margin 2.96% 2.90% 2.85% Net Income $9,214 $8,817 $8,520 Projected ROA 0.81% 0.77% 0.74% Projected Net Worth $133,818 $142,634 $151,154 Projected Net Worth Ratio 11.68% 12.36% 13.00% bps Shock YEAR 1 YEAR 2 YEAR 3 Net Interest Income $31,024 $30,158 $29,036 Net Interest Margin 2.93% 2.85% 2.75% Net Income $8,117 $7,250 $6,128 Projected ROA 0.71% 0.63% 0.53% Projected Net Worth $132,720 $139,971 $146,099 Projected Net Worth Ratio 11.65% 12.20% 12.67% Source for Data: BSMS ALM Analysis Sample Credit Union

28 Interest Rate Risk Earnings at Risk 1.05% 0.95% Net Interest Income Simulation Summary Results (Example) % 0.93% 0.93% 0.85% 0.75% 0.80% 0.81% 0.71% 0.77% 0.74% 0.65% 0.55% Return on Average Assets Note: Assumes zero asset growth 0.63% 0.53% 0.45% CURRENT YR 1 YR 2 YR3 +300bps Shock Flat Rate -300bps Shock In this example, the institution makes more margin and income in the rising rate environment, and margins and earnings are hurt by a low rate environment. This profile is generally referred to as asset sensitive. Source for Data: BSMS ALM Analysis Sample Credit Union

29 Interest Rate Risk Net Economic Value Net Economic Value (Summary) Sample Credit Union Book Value Value Change % Change December 31 Value Flat Rate +300bps From Flat BV From Flat BV Total Investments $59,414,736 $59,909,650 $53,120,084 -$6,789,567 +$494, % +0.83% Total Loans $131,111,207 $131,881,232 $118,820,673 -$13,060,559 +$770, % -9.90% Other Assets $9,474,056 $9,474,056 $9,474,056 $0 0.00% Total Assets $200,000,000 $201,264,938 $181,414,813 -$19,850,125 +$1,264, % 0.63% Non-maturity Deposits $126,030,472 $121,887,047 $113,527,246 -$4,143,425 -$8,359, % -6.86% Time Deposits $43,279,518 $43,782,068 $41,089,573 $42,089,573 -$1,692,495 +$502, % -3.87% Borrowings $7,796,738 $7,987,866 $7,844,489 +$191,128 -$143, % -1.79% Other Liabilities $1,568,977 $1,568,977 $1,568,977 $0 0.00% Total Deposits+Liabilities $178,675,705 $175,225,958 $164,030,285 $165,030,285 -$10,195,674 -$3,449, % -5.82% Net Economic Capital Value $21,324,295 $26,038,980 $17,384,529 $16,384,529 +$4,714,685 -$9,654, % % NEV Capital Ratio 10.66% 12.94% 9.58% 9.03% 48.64% n/a NCUA AIRES Questionnaire (Aug 2012 update) Net Econom ic Value LOW RISK ASSESSMENT MODERATE HIGH % Change +300bps Rate-shock "Market Value of Capital" <25% % > 50% After +300bps Rate-shock "NEV Capital Ratio" >6% 4--6% < 4% Source for Data: BSMS ALM Analysis Sample Credit Union

30 23 WHO IS FIRST EMPIRE?

31 For ins(tu(onal use only. The informa(on in this document has been obtained from sources we believe to be reliable, however, we do not guarantee it is accurate or complete. From (me to (me officers, employees of the firm, or the firm itself holds a posi(on in the securi(es referred herein, or acts as principal in transac(ons referred to herein. Parts of this document are based on assump(ons, which we believe to be reasonable and supportable, however, future events may influence actual performance. The projec(ons contained herein are hypothe(cal in nature, and do not reflect actual balance sheet or investment results and are not guarantees of future results. This document is not and should not be construed as an offer or solicita(on of an offer to buy or sell any security or securi(es. Securi(es have inherent risk, including credit, prepayment, extension and market risk. This informa(on is subject to change without no(ce. First Empire Holding Corp. (First Empire) is the parent company of First Empire Securi(es, Balance Sheet Management Services, LPC Services, First Empire CD Management and First Empire Asset Management, At (mes, these companies may receive compensa(on or fees from shared clients and, as a result, the companies may have conflicted interests, loyal(es and responsibili(es. First Empire Securi(es, Inc., is solely a member of FINRA/SIPC. The other First Empire companies are not members of FINRA/SIPC.