Credit Modeling, CECL, Concentration Risk, and Capital Stress Testing

Transcription

1 Credit Modeling, CECL, Concentration Risk, and Capital Stress Testing Presented by Wilary Winn Douglas Winn, President Brenda Lidke, Director Frank Wilary, Principal Matt Erickson, Director September 26,

2 Topics Covered Concentration risk analysis Credit risk Interest rate risk Liquidity risk Capital stress testing Pooling Quantifying impact of potential adverse economic environments Determining capital to put at risk Risk-based pricing and real return analyses 2

3 Concentration Risk Policy Example Policy % Account Type of Net Worth First Mortgage Loans <=400% Home Equity Loans <=300% Auto Loans <=350% Member Business Loans <=175% Credit Cards <=75% Personal Loans <=75% Weaknesses? 3

4 Concentration Risk Concentration Risk Policy Best Practices Example Policy % Account Type of Net Worth First Mortgage Loans: Prime <=325% Near Prime <=60% Sub Prime <=15% Total First Mortgage Loans <=400% Home Equity Loans: Prime <=250% Near Prime <=40% Sub Prime <=10% Total Home Equity Loans <=300% Indirect Auto Loans Prime <=130% Near Prime <=50% Sub Prime <=20% Total Indirect Vehicle Loans <=200% 4

5 Concentration Risk Concentration Risk Definition A risk concentration is any single exposure or group of exposures with the potential to produce losses large enough (relative to capital, total assets, or overall risk level) to threaten a financial institution s health or ability to maintain its core operations. 5

6 Concentration Risk NCUA Supervisory Letter Credit union officials and management have a fiduciary responsibility to identify, measure, monitor, and control concentration risk Too much reliance on any single product or service increases the potential for adverse consequences from event risk Concentration risk must be managed in conjunction with credit, interest rate and liquidity risks 6

7 Concentration Risk NCUA Supervisory Letter Concentrations that exceed 100 percent of net worth must be monitored carefully, and the board of directors should document an adequate rationale for undertaking that level of risk The larger the concentration level, the more robust and advanced the analysis and risk management techniques should be 7

8 Concentration Risk Concentration Risk & CU Membership Due to membership requirements, WW Risk Management notes that it is not uncommon to see geographic concentrations in credit union loan portfolios Additionally, the loan portfolio may be subject to the same risk factor with an employer-based field of membership. 8

9 Concentration Risk Concentration Risk OCC Concentration risk management also encompasses the management of pools of exposures, whose collective performance has the potential to affect the financial institution negatively even if each individual transaction within a pool is soundly underwritten. When exposures in a pool are sensitive to the same economic, financial, or business development, that sensitivity, if triggered, may cause the sum of the transactions to perform as if it were a single, large, exposure. 9

10 Concentration Risk Concentration Risk OCC When financial institutions set higher concentration limits for broadly defined pools especially where those limits are more than 100 percent of capital the OCC expects appropriate sub-limits for material groups of segmented exposures. Stress testing is an effective tool to quantify the risk impact on pools of loans from different scenarios. 10

11 Concentration Risk Concentration Risk Example Melrose Credit Union Loans Secured by Taxi Medallions Total loan portfolio just over $2 billion Loans secured by taxi medallions - $1.6 billion (78%) Delinquent and TDR taxi loans - $400 million Delinquent taxi loans at January, $32,000 Price of taxi medallions has dropped from $1.1 million to $600k (competition from Uber and Lyft) Montauk Credit Union seized by regulators due to its credit exposure to loans secured by taxi medallions 11

12 Concentration Risk Excessive concentrations may lead to: Credit risk Interest rate risk Liquidity risk WW Risk Management believes credit risk becomes the most critical risk to manage acknowledging that all risks need to be controlled (including operational risk and reputation risk). 12

13 Credit Risk & Interest Rate Risk by Account Type Account Type Credit Risk Interest Rate Risk Loans: Fixed Rate First Mortgage Loans X high Variable Rate First Mortgage Loans X low Fixed Rate Home Equity Second Loans X medium Indirect Fixed Rate Auto Loans X medium Investments: U.S. Government X Agency MBS X Private Label CMO X X Agency Callable, Step-up X 13

14 Interest Rate Risk by Security Type 5.00% 0.00% 5.00% Percentage Price Change From Base Case Base % 15.00% 20.00% Agency Call/Step Agency Bullet MBS Fixed CMO Agency Fixed 25.00% 30.00% 35.00% Significant interest rate risk for callable investments 14

15 Let s assume ABC credit union is located in Los Angeles, CA and the membership consists of educators that live in Los Angeles, CA. Although there is no evidence that any of these events are likely to occur, here are some potential what if scenarios that impact concentration risk analysis: Real estate prices collapse in Los Angeles County Excessive funding cuts for Los Angeles schools and colleges Substantial increase in southern California s unemployment rate 15

16 Capital Stress Testing Credit Concentration Risk Capital Stress Testing for Credit Through the last economic cycle markets experienced both an increase in unemployment and a decrease in housing values Both macroeconomic indicators are highly correlated to loan performance To stress modeling inputs we utilized the combined effect Adjust default assumptions for changes in unemployment Adjust real estate severity assumptions for changes in housing values Unemployment and HPI are stressed at mid and max For stress testing the adjustments to modeling inputs are made instantaneously 16

17 Capital Stress Testing Credit Max Unemployment 14.00% 12.00% Mid 10.00% 8.00% Los Angeles, CA Current 6.00% 4.00% 2.00% 0.00% 17

18 Predictive Inputs Quantifying the relationship between unemployment and defaults: Perform regression analysis to determine best fit trend line including beta and R-squared Perform roll rate analysis to determine estimated default rates for any given unemployment rate Utilize changes between scenarios to determine default factors 18

19 Capital Stress Testing Credit Performance Through Last 10 Year Economic Cycle Unemployment Rates Estimated Default Rates Estimated Default Factors Market Loan Category Current Mid Point Max Current Mid Point Max Base Midpoint Max National First Mortgage 4.80% 7.50% 10.20% 0.55% 1.24% 1.92% 100% 225% 350% California First Mortgage 5.70% 9.15% 12.60% 0.32% 1.42% 2.52% 100% 449% 799% Los Angeles, CA First Mortgage 5.70% 9.15% 12.60% 0.39% 1.55% 2.71% 100% 397% 694% National Other RE 4.80% 7.50% 10.20% 0.56% 0.98% 1.41% 100% 175% 251% California Other RE 5.70% 9.15% 12.60% 0.38% 0.89% 1.40% 100% 236% 373% Los Angeles, CA Other RE 5.70% 9.15% 12.60% 0.45% 1.02% 1.59% 100% 226% 351% National Credit Card 4.80% 7.50% 10.20% 1.17% 1.44% 1.71% 100% 123% 146% California Credit Card 5.70% 9.15% 12.60% 1.04% 1.55% 2.06% 100% 149% 198% Los Angeles, CA Credit Card 5.70% 9.15% 12.60% 1.12% 1.57% 2.03% 100% 141% 182% National Other Consumer 4.80% 7.50% 10.20% 1.17% 1.38% 1.58% 100% 117% 135% California Other Consumer 5.70% 9.15% 12.60% 0.95% 1.36% 1.77% 100% 143% 186% Los Angeles, CA Other Consumer 5.70% 9.15% 12.60% 1.07% 1.40% 1.74% 100% 132% 163% 19

20 Capital Stress Testing Credit Max Home Price Index Mid Min Los Angeles, CA 20

21 Capital Stress Testing Credit Performance Through Last 10 Year Economic Cycle Peak to Trough HPI Depreciation for Stress Current Mid Mid Market HPI Max Point Min Base Point Max National % 10.70% 21.41% California % 23.32% 46.64% Los Angeles, CA % 20.37% 40.74% 21

22 Capital Stress Testing Credit Credit Losses $ Base Mid Stress Max Stress Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % 22 Decrease in NW Ratio Loan Category Balance New Vehicle Direct 50,000, , % 0.01% 113, % 0.01% 125, % 0.01% Used Vehicle Direct 50,000, , % 0.03% 405, % 0.03% 457, % 0.04% New Vehicle Indirect 75,000, , % 0.04% 561, % 0.04% 615, % 0.05% Used Vehicle Indirect 75,000,000 1,008, % 0.08% 1,158, % 0.09% 1,291, % 0.10% Total Vehicles 250,000,000 1,955, % 0.17% 2,239, % 0.18% 2,490, % 0.20% Fixed Rate Mortgage 300,000,000 1,835, % 0.15% 5,457, % 0.44% 9,161, % 0.73% ARM 150,000, , % 0.04% 1,656, % 0.13% 5,352, % 0.43% Home Equity 50,000, , % 0.02% 599, % 0.05% 1,287, % 0.10% HELOC 50,000, , % 0.01% 212, % 0.02% 551, % 0.04% Total Real Estate 550,000,000 2,735, % 0.23% 7,925, % 0.63% 16,352, % 1.31% Credit Card 100,000,000 3,046, % 0.24% 3,516, % 0.28% 4,030, % 0.32% Member Business Loans 50,000, , % 0.03% 642, % 0.05% 839, % 0.07% Other Consumer 50,000,000 1,031, % 0.08% 1,212, % 0.10% 1,391, % 0.11% Total Loans 1,000,000,000 9,176, % 0.73% 15,537, % 1.24% 25,105, % 2.01% Current Net Worth Ratio 9.00% 9.00% 9.00% Adjusted Net Worth Ratio (add back existing ALLL) 9.60% 9.60% 9.60% Net Worth Ratio After Credit Losses 8.87% 8.36% 7.59% Change in Net Worth to Account for Losses 0.13% 0.64% 1.41%

23 Pooling Characteristics In evaluating financial assets on a collective (pool) basis, an entity should aggregate financial assets on the basis of similar risk characteristics, which may include any one or a combination of the following (the following list is not intended to be all inclusive): a. Internal or external (third-party) credit score or credit ratings b. Risk ratings or classification c. Financial asset type d. Collateral type e. Size f. Effective interest rate g. Term h. Geographical location i. Industry of the borrower j. Vintage k. Historical or expected credit loss patterns l. Reasonable and supportable forecast periods. 23

24 Capital Stress Testing Credit Concentration Risk Stress Testing Used Vehicle Indirect FICO Cohort Characteristics Base Mid Stress Max Stress Base Mid Stress Max Stress FICO Balance Conc. % 30+ DQ % 60+ DQ % CDR% CDR% CDR% CECL Loss % CECL Loss % CECL Loss % ,772, % 0.00% 0.00% 0.04% 0.04% 0.04% 0.02% 0.02% 0.02% ,435, % 0.00% 0.00% 0.10% 0.11% 0.12% 0.04% 0.04% 0.05% ,455, % 0.00% 0.00% 0.12% 0.13% 0.14% 0.06% 0.07% 0.08% ,737, % 0.29% 0.08% 0.35% 0.38% 0.41% 0.19% 0.22% 0.25% ,597, % 0.55% 0.12% 0.58% 0.63% 0.68% 0.32% 0.37% 0.41% ,397, % 0.72% 0.20% 0.88% 0.95% 1.03% 0.50% 0.57% 0.64% ,190, % 1.42% 0.54% 1.55% 1.69% 1.82% 0.88% 1.01% 1.12% ,502, % 2.15% 0.87% 2.62% 2.85% 3.07% 1.45% 1.67% 1.87% ,977, % 12.91% 2.98% 12.84% 13.95% 15.05% 7.12% 8.10% 9.05% under 500 1,147, % 37.07% 13.82% 30.64% 33.27% 35.90% 15.76% 17.98% 20.07% unknown 787, % 2.10% 0.88% 1.90% 2.07% 2.23% 0.87% 1.01% 1.13% Total 75,000, % 2.50% 0.70% 2.47% 2.69% 2.90% 1.35% 1.54% 1.72% 24

25 Creating Concentration Sub-Limits by Risk Tier on Consumer Loans FICO Credit Tier Risk Tier 775+ A1 Prime A2 Prime A3 Prime B Prime C Near Prime D Near Prime E Near Prime F Sub Prime F Sub Prime under 500 F Sub Prime 25

26 Creating Concentration Sub-limits by Risk Tier on Real Estate Loans Categorized Risk Level FICO/LTV under 500 under 50% Low Low Low Low Low Low Low Low Low Low 50% 75% Low Low Low Low Low Low Medium Medium Medium Medium 75% 100% Low Low Low Low Medium Medium Medium High High High 100% 120% Medium Medium Medium Medium Medium High High High High High 120% 150% High High High High High High High High High High over 150% High High High High High High High High High High 26

27 Capital Stress Testing Credit Base Loan Category Current Balance Concentration % of Net Worth Proposed Limit Balance at Proposed Limit Credit Losses $ Credit Losses % Decrease in NW Ratio Example #1 Current Concentration Used Vehicle Indirect 75,000, % 66.67% 75,000,000 1,008, % 0.08% Prime 37,841, % 33.64% 37,841,433 24, % 0.002% Near Prime 23,881, % 21.23% 23,881,117 82, % 0.007% Subprime 13,277, % 11.80% 13,277, , % 0.072% Example #2 Prime Focused Lending Used Vehicle Indirect 75,000, % % 112,500, , % 0.05% Prime 37,841, % 80.00% 90,000,000 58, % 0.005% Near Prime 23,881, % 15.00% 16,875,000 58, % 0.005% Subprime 13,277, % 5.00% 5,625, , % 0.031% Example #3 Non Credit Selective Lending Used Vehicle Indirect 75,000, % % 112,500,000 2,701, % 0.22% Prime 37,841, % 33.33% 37,500,000 24, % 0.002% Near Prime 23,881, % 33.33% 37,500, , % 0.010% Subprime 13,277, % 33.33% 37,500,000 2,546, % 0.204% 27

28 Determining Potential Concentration Sub-limit Current Balance Current Concentration % of Net Worth 28 Proposed Limit Balance at Proposed Limit Loan Growth within Limit Loan Category New Vehicle Direct 50,000, % 65.00% 73,125,000 23,125,000 Prime 41,268, % 50.00% 56,250,000 14,981,223 Near Prime 6,735, % 10.00% 11,250,000 4,514,491 Subprime 1,995, % 5.00% 5,625,000 3,629,286 Used Vehicle Direct 50,000, % 65.00% 73,125,000 23,125,000 Prime 31,567, % 35.00% 39,375,000 7,807,295 Near Prime 12,085, % 20.00% 22,500,000 10,414,700 Subprime 6,346, % 10.00% 11,250,000 4,903,005 New Vehicle Indirect 75,000, % 85.00% 95,625,000 20,625,000 Prime 52,787, % 60.00% 67,500,000 14,712,125 Near Prime 15,259, % 15.00% 16,875,000 1,615,536 Subprime 6,952, % 10.00% 11,250,000 4,297,339 Used Vehicle Indirect 75,000, % 85.00% 95,625,000 20,625,000 Prime 37,841, % 45.00% 50,625,000 12,783,567 Near Prime 23,881, % 30.00% 33,750,000 9,868,883 Subprime 13,277, % 10.00% 11,250,000 (2,027,450)

29 Capital Stress Testing Credit Balance at Proposed Limit Credit Losses $ Base Mid Stress Max Stress Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % 29 Decrease in NW Ratio Loan Category New Vehicle Direct 73,125, , % 0.02% 310, % 0.02% 342, % 0.03% Used Vehicle Direct 73,125, , % 0.05% 716, % 0.06% 808, % 0.06% New Vehicle Indirect 95,625, , % 0.06% 877, % 0.07% 960, % 0.08% Used Vehicle Indirect 95,625, , % 0.07% 1,052, % 0.08% 1,177, % 0.09% Total Vehicles 337,500,000 2,581, % 0.22% 2,957, % 0.24% 3,289, % 0.26% Fixed Rate Mortgage 345,000,000 2,110, % 0.17% 6,276, % 0.50% 10,535, % 0.84% ARM 172,500, , % 0.04% 1,904, % 0.15% 6,155, % 0.49% Home Equity 57,500, , % 0.03% 688, % 0.06% 1,480, % 0.12% HELOC 57,500, , % 0.01% 244, % 0.02% 633, % 0.05% Total Real Estate 632,500,000 3,145, % 0.27% 9,114, % 0.73% 18,805, % 1.50% Credit Card 115,000,000 3,503, % 0.28% 4,044, % 0.32% 4,635, % 0.37% Member Business Loans 57,500, , % 0.04% 739, % 0.06% 964, % 0.08% Other Consumer 57,500,000 1,186, % 0.09% 1,394, % 0.11% 1,600, % 0.13% Total Loans 1,200,000,000 10,885, % 0.87% 18,249, % 1.46% 29,296, % 2.34% Net Worth Ratio After Credit Losses 8.73% 8.14% 7.26% Net Worth Ratio Target 7.50% 7.50% 7.50% Net Worth Ratio Cushion 1.23% 0.64% 0.24% Pass/Fail Pass Pass Fail

30 Capital Stress Testing Credit Balance at Proposed Limit Credit Losses $ Base Mid Stress Max Stress Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % Decrease in NW Ratio Credit Losses $ Credit Losses % 30 Decrease in NW Ratio Loan Category New Vehicle Direct 73,125, , % 0.02% 310, % 0.02% 342, % 0.03% Used Vehicle Direct 73,125, , % 0.05% 716, % 0.06% 808, % 0.06% New Vehicle Indirect 95,625, , % 0.06% 877, % 0.07% 960, % 0.08% Used Vehicle Indirect 95,625, , % 0.07% 1,052, % 0.08% 1,177, % 0.09% Total Vehicles 337,500,000 2,581, % 0.22% 2,957, % 0.24% 3,289, % 0.26% Fixed Rate Mortgage 285,000,000 1,743, % 0.14% 5,184, % 0.41% 8,703, % 0.70% ARM 142,500, , % 0.04% 1,573, % 0.13% 5,085, % 0.41% Home Equity 50,000, , % 0.02% 599, % 0.05% 1,287, % 0.10% HELOC 50,000, , % 0.01% 212, % 0.02% 551, % 0.04% Total Real Estate 527,500,000 2,619, % 0.22% 7,569, % 0.61% 15,627, % 1.25% Credit Card 115,000,000 3,503, % 0.28% 4,044, % 0.32% 4,635, % 0.37% Member Business Loans 57,500, , % 0.04% 739, % 0.06% 964, % 0.08% Other Consumer 57,500,000 1,186, % 0.09% 1,394, % 0.11% 1,600, % 0.13% Total Loans 1,095,000,000 10,359, % 0.83% 16,705, % 1.34% 26,117, % 2.09% Net Worth Ratio After Credit Losses 8.77% 8.26% 7.51% Net Worth Ratio Target 7.50% 7.50% 7.50% Net Worth Ratio Cushion 1.27% 0.76% 0.01% Pass/Fail Pass Pass Pass

31 Analyzing Concentration Risk Benefits of Stress Testing Credit Exposure Stress testing can determine lifetime credit losses in adverse economic environments Results can quantify credit exposure in concentration policy limits by testing thresholds at fully lent out balances Leads to a dynamic process to set concentration risk sublimits that can be integrated into organizational strategy Can show interrelated risks when incorporated into ALM (concentration, credit, interest rate, and liquidity risk) Add even further value when integrated into risk-based pricing and real return analysis 31

32 Used Vehicle Indirect Pricing Matrix Vehicle Loan Category < 550 Used Vehicle Indirect 24 Month 2.49% 2.99% 3.99% 5.49% 7.49% 11.49% 13.49% Used Vehicle Indirect 36 Month 2.49% 2.99% 4.49% 5.99% 7.99% 11.99% 13.99% Used Vehicle Indirect 48 Month 2.99% 3.49% 4.99% 6.49% 8.49% 12.49% 14.49% Used Vehicle Indirect 60 Month 3.49% 3.99% 5.49% 6.99% 8.99% 12.99% 14.99% Used Vehicle Indirect 72 Month 3.99% 4.49% 5.99% 7.99% 9.99% 13.99% 15.99% Used Vehicle Indirect 84 Month 4.49% 4.99% 6.49% 8.99% 10.99% 14.99% 16.99% 32

33 Determined by calculating the internal rate of return of the cash flows received over the life of a loan. The analysis incorporates: Current pricing matrix by FICO and term Average loan balance by term Indirect dealer fees Probability of delinquency and default for FICO and term cohorts Lost interest on delinquent loans Ultimate credit losses based on modeled default and severity rates 33

34 Estimated Real Return Base Economic Environment Vehicle Loan Category < 550 Used Vehicle Indirect 24 Month 1.98% 2.35% 3.27% 3.08% 3.89% 3.39% 0.89% Used Vehicle Indirect 36 Month 1.98% 2.30% 3.70% 3.49% 4.39% 3.74% 1.21% Used Vehicle Indirect 48 Month 2.47% 2.74% 4.13% 3.90% 4.89% 4.09% 1.53% Used Vehicle Indirect 60 Month 2.97% 3.18% 4.39% 4.53% 4.50% 4.01% 1.51% Used Vehicle Indirect 72 Month 3.45% 3.51% 4.27% 5.09% 3.62% 3.73% 2.34% Used Vehicle Indirect 84 Month 3.94% 3.84% 4.14% 5.19% 3.73% 4.04% 3.35% Estimated Real Return Max Stress Economic Environment Vehicle Loan Category < 550 Used Vehicle Indirect 24 Month 1.97% 2.24% 3.10% 1.64% 1.57% 2.31% 8.19% Used Vehicle Indirect 36 Month 1.96% 2.15% 3.47% 1.99% 2.07% 2.07% 8.00% Used Vehicle Indirect 48 Month 2.45% 2.55% 3.85% 2.33% 2.57% 1.84% 7.82% Used Vehicle Indirect 60 Month 2.95% 2.94% 3.94% 3.06% 1.51% 2.36% 8.23% Used Vehicle Indirect 72 Month 3.42% 3.15% 3.35% 3.28% 0.79% 3.59% 7.52% Used Vehicle Indirect 84 Month 3.90% 3.35% 2.75% 2.72% 1.34% 3.80% 6.51% 34

35 Capital Stress Testing IRR WW Risk Management Recommendations for IRR Stress Testing Determine exposure with EVE simulation on the entire balance sheet Measure exposure against a capitalization target Increase market interest rates +300 basis points Measure exposures under various non-maturity share durations For credit unions, 30 year fixed rate mortgages typically represent the loan asset class with the highest interest rate risk exposure. On the investment side, callable step-up Agency securities typically represent the investment type with the highest IRR exposure. 35

36 Capital Stress Testing IRR Base +300 % of Net Worth Fair Value $ Fair Value % Fair Value $ Fair Value % Asset / Liability Category Book Balance Cash and Equivalents 75,000, % 74,999, % 74,999, % Securities 150,000, % 150,975, % 139,080, % Vehicle Loans 250,000, % 247,367, % 236,427, % First Mortgage Loans 450,000, % 441,843, % 385,743, % Home Equity Loans 50,000, % 50,086, % 46,209, % HELOC 50,000, % 49,527, % 49,397, % Credit Card 100,000, % 96,571, % 92,113, % MBLs 50,000, % 48,945, % 45,725, % Other Consumer 50,000, % 48,292, % 45,825, % Other Assets 25,000, % 26,333, % 26,333, % Total Assets 1,250,000, % 1,234,942, % 1,141,854, % Non Maturity Deposits 750,000, % 728,625, % 684,075, % Share Certificates 325,000, % 327,610, % 314,362, % Other Borrowings 37,500, % 37,478, % 37,366, % Other Liabilities 25,000, % 25,000, % 25,000, % Total Liabilities 1,137,500, % 1,118,714, % 1,060,803, % Economic Value of Equity 112,500, % 116,227, % 81,050, % Economic Value of Equity Ratio 9.41% 7.10% Net Worth Ratio Target 7.50% 7.50% Net Worth Ratio Cushion 1.91% 0.40% Pass/Fail 36 Pass Fail

37 Capital Stress Testing IRR % of Net Worth Fair Value $ Base +300 Fair Value % Fair Value $ Fair Value % Asset / Liability Category Book Balance Cash and Equivalents 75,000, % 74,999, % 74,999, % Securities 150,000, % 150,975, % 139,080, % Vehicle Loans 250,000, % 247,367, % 236,427, % First Mortgage Loans 450,000, % 441,843, % 385,743, % Home Equity Loans 50,000, % 50,086, % 46,209, % HELOC 50,000, % 49,527, % 49,397, % Credit Card 100,000, % 96,571, % 92,113, % MBLs 50,000, % 48,945, % 45,725, % Other Consumer 50,000, % 48,292, % 45,825, % Other Assets 25,000, % 26,333, % 26,333, % Total Assets 1,250,000, % 1,234,942, % 1,141,854, % Non Maturity Deposits 750,000, % 742,500, % 720,000, % Share Certificates 325,000, % 327,610, % 314,362, % Other Borrowings 37,500, % 37,478, % 37,366, % Other Liabilities 25,000, % 25,000, % 25,000, % Total Liabilities 1,137,500, % 1,132,589, % 1,096,728, % Economic Value of Equity 112,500, % 102,352, % 45,125, % Economic Value of Equity Ratio 8.29% 3.95% Net Worth Ratio Target 7.50% 7.50% Net Worth Ratio Cushion 0.79% 3.55% Pass/Fail 37 Pass Fail

38 NCUA NEV Supervisory Test Announced June 16, 2016 Four risk classifications: low, moderate, high and extreme Non-maturity shares valued using a 1% premium in the base case and a 4% premium in the +300 basis point shock Risk Classification Post Shock NEV Ratio NEV Sensitivity (from Base) Extreme < 2% > 85% High 2% - 4% 65% - 85% Moderate 4% - 7% 40% - 65% Low >7% < 40% 38

39 Capital Stress Testing Liquidity WW Risk Management Recommendations for Liquidity Stress Testing Be creative in determining what if scenarios Determine surge balances Sell assets in an adverse market to cover surge runoff Loss on sale negatively impacts capital With respect to borrowings, have a well thought out contingency funding plan and test it periodically. 39

40 Capital Stress Testing Liquidity Surge Balance Graph 16% Surge Actual vs Projected Balances 1,200,000,000 1,000,000, ,000, ,000,000 Ending Balance Projected Balance 400,000, ,000,000 7/1/2005 3/1/ /1/2006 7/1/2007 3/1/ /1/2008 7/1/2009 3/1/ /1/2010 7/1/2011 3/1/ /1/2012 7/1/2013 3/1/ /1/2014 7/1/2015 3/1/

41 Capital Stress Testing Liquidity Sale of Investments in Adverse Environment to cover Surge Deposit Runoff Sale of Investments Base FV +100 FV +200 FV +300 FV FV Price Change from Base (2.16) (4.95) (7.93) Loss on Sale of $120 MM (2,592,000) (5,940,000) (9,516,000) Net Worth Impact -0.21% -0.48% -0.76% 41

42 Session Summary Measure interest rate risk and credit risk on an integrated basis Stress credit losses under adverse economic scenarios to best determine: Capital to put at risk in pursuit of return Concentration risk thresholds Risk-based pricing strategies Loan portfolio mix optimization 42

43 Services and Contact Information Asset Liability Management, Capital Stress Testing, Concentration Risk Analyses, and CECL Matt Erickson Mergers and Acquisitions, ASC , Goodwill Impairment Testing, and TDRs: Brenda Lidke Servicing Rights and Mortgage Banking Derivatives: Eric Nokken Non-agency MBS: Amin Mohomed 43

44 Contact Information Wilary Winn LLC First National Bank Building 332 Minnesota Street, Suite 1750 Saint Paul, MN