Liquidity Management. Regulatory Burden vs. Business Opportunity. Kevin C. Parks VP/Key Account Manager Federal Home Loan Bank of Topeka

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1 Liquidity Management Regulatory Burden vs. Business Opportunity Kevin C. Parks VP/Key Account Manager Federal Home Loan Bank of Topeka

2 PERSPECTIVES ON LIQUIDITY & RISK

3 The Liquidity Question? What do we have now? Is that enough and what am I comfortable with? What will we need in the future? Where will I get it? What will it cost and can I afford it? What do we need to support our strategy? How do I balance Liquidity, Margin & IRR?

4 LIQUIDITY The ability to fund assets and meet financial obligations without incurring damaging losses. LIQUIDITY RISK The inability to meet payment obligations in a timely and cost effective manner resulting from: Inability to obtain adequate funding without affecting CU s financial condition Inability to liquidate assets without significant losses Counterparty inability to pay or settle transactions because of a lack of liquidity

5 Liquidity Management Liquidity management is the process of: Monitoring cash flow and liquidity of assets to meet expected operating demands in form of share withdrawals, loan demand and operating needs; Establish and maintain appropriate liquidity cushions considering the environment and strategic goals; Anticipate, plan for and respond to emerging or unanticipated liquidity demands to minimize risk. Managing profitability and assuring viability in different economic scenarios

6 Liquidity & Funding Sources AFS Investments, Lines of Credit, Wholesale Sources, Asset Sales Contingent Liquidity Secondary Non Core Liquidity & Funding Federal Contingency Sources, Equity Cash, Cash Equivalents, Trading Securities, Normal Cash Flow from Assets & Liabilities Primary Core Liquidity & Cushion

7 Dimensions of liquidity risk: LIQUIDITY RISK CU SPECIFIC RISK Inability to meet expected and unexpected current and future cash flow and collateral needs without affecting daily operations or financial condition SYSTEMIC RISK Counterparty inability to pay or settle transactions; or inability to offset or eliminate a position because of inadequate market depth or disruption Management focus TACTICAL/ SHORT TERM Coverage of a liquidity related net outflow STRATEGIC / LONG TERM Ensuring long term funding at reasonable costs CONTINGENCY Protection in liquidity crises situations

8 CU SPECIFIC LIQUIDITY RISK DRIVERS ASSETS LIABILITIES Quality of Assets Collectability of P&I Acceptance as collateral Marketability of Assets Readily able to be sold Value/Price Quick conversion to cash Funding Diversification Concentration Exposure Cost/Duration Sensitivity Funding Volatility Predictable cash flows Stability/Reliability Equity Adequacy Access Off Balance Sheet Items Unused commitments Available lines of credit Contingent Obligations

9 Liquidity & Strategic Risk Reputation Risk Liquidity Concentration Risk Excessive Liquidity Cushion Highly liquid assets generally have lower yields/returns Deposit costs Impact on capital ratios Inefficient utilization Lower profitability and capital growth Lower overall member value and return Insufficient Liquidity Cushion Inability to seize business opportunities and market share in periods of stress when others pull back Inability to acquire assets or competitors when assets undervalued in times of stress Inability to grow

10 Example of Risk Interrelationship 4 1 Higher interest rates to keep and attract depositors Mismatch in assets & liabilities/lending to high risk borrowers CU reports reduced earnings/losses Depositors withdraw funds Replacing cheap funding with expensive funding and/or selling assets 3 Members/Media reports about credit & Interest rate difficulties Further reduction of profits or reporting of losses

11 REGULATORY EXPECTATIONS

12 Regulatory Perspective Past Regulatory Oversight Much of existing supervisory guidance dates back to 1979 when CAMELS rating system was created Examiners tended to focus more on balance sheet position more than liquidity management Liquidity measures focused on assets as the liquidity source Investments liquid loans illiquid Deposits were considered the only stable source of funding Skepticism related to other sources of funds Current Perspective Traditional funding sources still well regarded, however Diversified funding is considered a positive On balance sheet liquidity Highly liquid assets are essential Access to and use of market sources of funds Be in a position to borrow from market counterparties Access to federal liquidity providers Both liquidity position and risk management are important What if? planning is essential

13 NCUA Risk Management Requirements ASSET SIZE < $50 MILLION 1. Basic written policy REQUIREMENT $50 MILLION OR MORE (1) 1. Written liquidity policy $250 MILLION OR MORE (1) 1. Written liquidity policy 2. Contingency Funding Plan Policy must include: Board approved framework for managing liquidity List of contingent liquidity sources that can be employed under adverse circumstances In addition, CU must have: Contingency Funding Plan (CFP) that sets out strategies for addressing liquidity shortfalls in emergencies In addition, CU must: Establish access to at least one contingent federal liquidity source Discount Window CLF Conduct advance planning and test of contingent funding sources (1) Total assets exceed applicable threshold for two consecutive call reports

14 ALM Policy Components Interest Rate Risk Management Liquidity Measurement & Management Funds Management & Strategies Capital Planning Pricing and Structure Growth Strategies Investment Policy & Management

15 The Liquidity Policy Support the strategic plan/direction as well as the desired risk profile of the CU Tailored to size and complexity of CU State purpose and goals of liquidity management Define roles & responsibilities for liquidity management Set thresholds or approved limits for liquidity cushion and risk Liquidity measures, ratios, targets, forecasting Identify primary and secondary sources of operating liquidity Contingency plans and event triggers for implementation Contingency funding sources Periodic testing Periodic review and revision

16 Liquidity Measurement Tools STATIC BALANCE SHEET RATIOS Loans to Shares Borrowings & Non-member deposits/total Shares & Liabilities Cash & Short-term Investments/Total Assets Net Liquid Assets/Liabilities & Shares CONTINGENCY FUNDING PLANS Modeling & Pro Forma Cash Flows Liquidity Days/Buffer Scenario Analysis

17 CFP Guidelines Include process to forecast/assess adequacy of liquidity sources Normal & contingent needs under plausible stress events Identify specific contingency sources Backup lines of credit and when they would be used Guide for managing range of liquidity stress events Track/monitor assets immediately available for pledging/sale Cash they would provide Identify lines of authority for managing liquidity events Roles/responsibilities of crises management team Integrate CFP with Continuity of Business Planning Nature of communication among team, Board of Directors & others Identify possible liquidity events and responses CU specific or systemic market or operational circumstances Implications for short, intermediate, long term liquidity profile Management response to early warning indicators, event triggers Specify frequency plan will be tested and revised

18 Stress Testing the CFP

19 Key Questions & Issues What are your strengths and weaknesses of plan? Which funding sources do you have established? Adequate and available? Costs and benefits of various funding sources? What sources will be available as your situation deteriorates? i.e. loss of well capitalized status Strategy: Prioritize use of sources with consideration to those that will disappear as situation deteriorates

20 Federal Liquidity Sources Two backup sources of liquidity to on-balance sheet or market sources: 1. FRB Discount Window 2. Central Liquidity Facility (CLF) Terms limited to overnight up to few months CLF requires cash flow projections, justification and plan Collateral based lending facilities Funds available 1 to 10 days from request

21 TRENDS, POTENTIAL ISSUES AND STRATEGIES

22 Credit Union Liquidity Total Loans/ Total Shares Liquid Assets/Assets Total Loans/ Total Shares Liquid Assets/ Assets Avg. Liquid Assets 15.60% Source: SNL US Credit Union Aggregate

23 Funding Future Loan Growth 30.00% CU Loan, Investment & Deposit Growth 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% Loan Growth Investment Growth Deposit Growth Source: SNL US Credit Union Aggregate

24 Deposit Mix Non-member Deposits < 1 year 0% Total Deposits > 1 Year 11% 2007 Non-member Deposits < 1 year 1% Total Deposits > 1 Year 11% 2015 Total Deposits < 1 Year 33% Total Non Maturity Deposits 56% Total Deposits < 1 Year 16% Total Non Maturity Deposits 72% Source: SNL US Credit Union Aggregate

25 Deposit Volatility - Interest Rate Cycles? Historical trends for deposit prices lagging market rate increases may not prove to hold true in the future: No precedent for magnitude of Fed intervention taken Chronic weakness in global economy New liquidity rules for large banks

26 Deposit Volatility Demand? Future demand for deposits: Excess liquidity evaporating Aggressive loan growth goals Competitive deposit market Source Media/ABA Survey 43% anticipate deposit growth of 5% or more 41% anticipate deposit growth of 2-5% 86% concerned about competitive pressure for deposits Economy only expected to grow by 2.6% in 2016

27 Deposit Volatility Price Competition?

28 Member Desire Yield & Convenience? Intentionally kept deposits short Lack of significant rate differentials Desire to capture yield when it becomes available Lower levels of loyalty to financial institutions Increased rate shopping in quest for yield

29 Mobile Banking Impact

30 Loan Composition Leases Receivable/ Loans 0% All Oth Lns to Mem/ Loans 5% 2007 Credit Card Lns/ Loans Other 6% Unsecured Lns/ Loans 5% Leases Receivable/ Loans 0% All Oth Lns to Mem/ Loans 5% 2015 Credit Card Lns/ Loans 6% Other Unsecured Lns/ Loans 4% New Vehicle Lns/ Loans 16% New Vehicle Lns/ Loans 13% Tot RE Lns/ Loans 51% Used Vehicle Lns/ Loans 17% Tot RE Lns/ Loans 51% Used Vehicle Lns/ Loans 21% Source: SNL US Credit Union Aggregate

31 Growth in Longer Term RE Assets % Fixed Rate 1st Mtg >15 yrs Hybrid First Mtg >5 yrs 0.30% Fixed Rate 1st Mtg >15 yrs Hybrid First Mtg >5 yrs 0.77% 13.61% 22.79% Fixed Rate 1st Mtg=<15 yrs Hybrid First Mtg =<5 yrs 0.62% 6.29% 11.61% 27.02% Fixed Rate 1st Mtg=<15 yrs Hybrid First Mtg =<5 yrs 18.56% 8.34% 2.42% 11.97% 15.28% 5.61% Adj Rt 1st Mtg=<1yr Adj Rt 1st Mtg>1yr Fixed Rate Oth RE Adj Rate Oth RE Rev 1-4 Fam (HE Lines) 2.15% 10.69% 11.48% 20.40% 9.43% Adj Rt 1st Mtg=<1yr Adj Rt 1st Mtg>1yr Fixed Rate Oth RE Adj Rate Oth RE Rev 1-4 Fam (HE Lines) Open Ended Fxd Rate Open Ended Fxd Rate

32 Potential On-Balance Sheet Issues CU liquidity has declined past 3 years Loan growth has exceeded deposit growth past 3 years RE loan portfolio has continued to lengthen Deposit base has shifted significantly to non-maturity based products subject to increased volatility Cost of deposit transaction increased from $.48 in 1992 to $1.12 in 2015 Future growth expected to be funded by deposits in a highly competitive environment Inadequate processes for setting deposit prices with half of market following benchmarks or competitive pricing Customer deposits may leave as they pursue yield or a better mobile app

33 On-Balance Sheet Strategies Establish and maintain a targeted liquidity cushion - # days liquidity coverage Evaluate your ALM risk models and the assumptions used for non-maturing deposits Appropriately classify securities into Trading, AFS and HTM categories based on strategy/policy Evaluate your funding strategy & structure for appropriateness given the risk inherent in your B/S Use FHLB Letters of Credit to collateralize PUDs if you are eligible to accept vs. pledging securities Have a solid core funding strategy based on convenience, service & technology Do not overpay for deposits. Deposit pricing strategies should reflect the value of the relationship broad/deep vs. single use as well as the all in cost of acquisition, servicing & rate Annually review CD only clients to scrub the list and take advantage of wholesale pricing efficiencies Price CDs to the wholesale funding curve for CD only clients and add on bp s for relationship additions Consider a blended funding strategy of deposits and wholesale sources to manage volatility and margin pressures

34 Use of Wholesale Funding Growth in Borrowed Funds ($000) 50,000,000 40,000,000 30,000,000 20,000,000 10,000, Draws Against L/C Promissory and Other Notes Repurchase Transactions Subordinated Debt Subordinated Debt Incld in Net Worth Uninsured Secondary Cap Total Borrowings Source: SNL US Credit Union Aggregate

35 Three Fundamental Reasons to Use Wholesale Funding Pricing Efficiency Rate Improvement CU hesitancy to lower rates for relationship reasons Total cost of deposits acquisition & operations Improved spreads and profitability Availability Members unwilling to extend out deposit term Significant opportunity for maturities > 1 year Lower volatility than deposits Interest Rate Risk Management Maturity & interest rate alignment Availability of blended funding strategies

36 Secondary Liquidity & Funding Issues Ability to convert assets to cash without a loss Delayed funding from asset sales Impact of selling HTM investments Access to wholesale funding sources Sufficient unencumbered assets available as collateral for wholesale funding Cost of borrowings compared to other sources, i.e. brokered deposits Interest rate risk within B/S Funded short to minimize cost and maximize margin at potentially greater IRR

37 Liquidity & Funding Strategies Extend out funding to take advantage of current low rates Identify and code RE loan assets in portfolio that qualify for sale to investors Establish investor relationships that provide same day funding upon delivery Establish safekeeping arrangements that provide immediate access to collateral for borrowing Periodically test your access to funding sources Maximize borrowing capacity through strategic pledging of assets and assigned value Account for all aspects affecting net funding cost including interest accruals, interest payment frequencies, FHLB stock dividends Establish and maintain access to multiple borrowing sources and keep your membership at the FHLB

38 Non-Core Funding Another Concept Strategy: Segment balance sheet assets into retail and wholesale components Retail assets might refer to your Hold or HTM loan portfolio Wholesale assets might refer to your Held for Sale loans; indirect loan portfolios & the Investment portfolio Why? Provide basis/reasoning for categorizing liabilities as retail and wholesale Supports rationale for use of non-core alternative sources e.g. FHLB advances Fund hold loan growth with core funding Even in expected slower deposit growth periods Funding wholesale assets with wholesale funding will enable you to use all 3 non-core advantages of availability, price efficiency and IR risk management/maturity efficiency Regulators don t like use of non-core funding to fuel unwise loan growth. This approach provides rationale basis for growth strategy and funding

39 Summary Liquidity and effective liquidity management is essential to the safety and soundness of the CU Liquidity should be viewed from both a strategic and risk perspective It must be actively managed & monitored with funding plans continually evaluated and analyzed A variety of funding sources and strategies should be available to support the CU s business plan and desired risk profile You should have a vibrant non-core wholesale funding strategy to handle opportunities where price, availability and/or maturity issues are important

40 APPENDIX ADDITIONAL INFORMATION

41 FHLB System Overview

42 How the FHLB System Works

43 FHLB Liquidity Portfolio

44 FHLB Credit Risk Management

45 FHLB Mortgage Purchase Program

46 LIQUIDITY CASH FLOW WORKSHEET Date: PRIMARY LIQUIDITY: 30 Days 60 Days 90 Days 180 Days 365 Days Cash & Equivalents (Beginning Balance) Less Minimum Needed for Daily Operations Primary Liquidity Position (Beginning Balance) (A) NET CASH FLOW FROM OPERATIONS: 30 Days 60 Days 90 Days 180 Days 365 Days Cash In Flow From Deposits (new & rollover) Public Funds Potential Volatile Retail Deposits All Other Deposits Net Income Cash In Flow From Assets (Payments, Maturities & Sales) Loans Investments Other Assets Total Operating Funding Sources (B) Cash Out Flow From Deposits (maturities, WD's) Public Potential Volatile Retail Deposits All Other Deposits Cash Out Flow From Assets (Renewals, New) Growth in Total Loans Growth in Investments Growth in Other Assets Total Operating Funding Uses/Needs (C) CUMULATIVE NET GAP FROM OPERATIONS (B C) +Surplus/ Deficit NET CASH FLOW FROM FINANCING ACTIVITIES: 30 Days 60 Days 90 Days 180 Days 365 Days Secured Liabilities: New Secured Liabilities/Renewals (+) Maturities/Payoffs ( ) Unsecured Credit Brokered Deposits Renewals/New (+) Maturities/WD's ( ) Other Wholesale Deposits Renewals/New (+) Maturities/WD's ( ) Equity/Capital Dividends to Members CUMULATIVE NET GAP FROM FINANCING (D) TOTAL PRIMARY LIQUIDITY (A+B C+D) CONTINGENT/SECONDARY LIQUIDITY: 30 Days 60 Days 90 Days 180 Days 365 Days Saleable/Pledgeable Securities Saleable/Pledgeable Loans Saleable/Pledgeable Other Assets Total Saleable/Pledgeable Assets (E) Available Wholesale Funding: Secured Borrowing Capacity (FRB,CLF,FHLB) Unsecured Credit Capacity Broker Deposit Capacity Other Wholesale Deposit Capacity Total Remaining Wholesale Funding Capacity (F) TOTAL CONTINGENT/SECONDARY LIQUIDITY (E+F) TOTAL LIQUIDITY (Primary + Contingent)

47 COLLATERAL LENDING VALUE COMPARISON The following table presents the ranges of effective lending values for the blanket lien, listing and delivery methods of pledging collateral at the FHLB of Topeka, the Federal Reserve (Fed) Discount Window & Payment System Risk Collateral Margins Table effective August 3, 2015, and The Credit Union Central Liquidity Facility (Collateral Margins Table effective July 1, 2014). Collateral Type CLVs for Loans and Securities for FHLBank Topeka Fed s Discount Window & Payment System Risk Collateral Margins (Minimal Risk Rated) Central Liquidity Facility Collateral Margins BLANKET INDIVIDUALLY DEPOSITED GROUP DEPOSITED 1-4 Family Mortgage Loans (First Lien) 81% - Conventional 71% - 95% Fixed Rate 75% - Interest Only 65% - 95% Adjustable Rate 76% FHA Loans 94% < 90 Days Delinquent 90% > 90 Days Delinquent 91% - 95% 90% VA Loans 91% < 90 Days Delinquent 87% > 90 Days Delinquent 91% - 95% 90% Held For Sale Mortgages 1-4 Family Eligible FNMA, FHLMC, GNMA - 93% Not Eligible 81% Multifamily Mortgage Loan 77% 48% - 95% Fixed Rate 55% - 95% Adjustable Rate 57% -63% Other U.S. Government-guaranteed Loans 92% - USDA FSA and SBA Loans 91% - 95% 90% 1-4 Family Mortgage Loans (Second Lien, Home Equity) 68% 61% - 95% 72% CFI Collateral 58% - Ag Operating 63% Commercial Loans & Leases 67% - 95% Commercial and Industrial 51% - Equipment Loans & Leases Agricultural Real Estate 68% 67% - 95% 67% Commercial Real Estate Loans 65% 48% - 95% 57% Construction Loans 66%- Single Family Residential 52% - Multifamily and Commercial 18% - 95% 63% Real Estate Raw Land Loans NA 21% - 95% 44% Student Loans 82% 60% - 95% 83% Private Banking Loans NA 54%-95% Consumer Loans Unsecured NA 55%-95% 60% Consumer Loans & Leases (auto, boat, etc.) NA 41%-95% 76% GROUP DEPOSITED Consumer Loans Credit Card Receivables NA 76% 59% Consumer Loans Subprime CC Receivables NA 71% 54%

48 Collateral Type CLVs for Loans and Securities for FHLBank Topeka Fed s Discount Window & Payment System Risk Collateral Margins Individually Deposited (Minimal Risk Rated) Central Liquidity Facility Collateral Margins LISTING INDIVIDUALLY DEPOSITED GROUP DEPOSITED 1-4 Family Mortgage Loans (First Lien) 81% - Conventional 71% - 95% Fixed Rate 75% - Interest Only 65% - 95% Adjustable Rate 76% FHA Loans 94% < 90 Days Delinquent 90% > 90 Days Delinquent 91% - 95% 90% VA Loans 91% < 90 Days Delinquent 87% > 90 Days Delinquent 91% - 95% 90% Multifamily Mortgage Loan 77% 48% - 95% Fixed Rate 55% - 95% Adjustable Rate 57% -63% Other U.S. Government-guaranteed Loans 92% - USDA FSA and SBA Loans 91% - 95% 90% 1-4 Family Mortgage Loans (second lien, home equity) 68% 61% - 95% 72% CFI Collateral 58% - Ag Operating 63% Commercial Loans & Leases 67% - 95% Commercial and Industrial 51% - Equipment Loans & Leases Agricultural Real Estate 68% 67% - 95% 67% Commercial Real Estate Loans 65% 48% - 95% 57% Construction Loans 66%- Single Family Residential 52% - Multifamily and Commercial 18% - 95% 63% Real Estate Raw Land Loans NA 21%-95% 44% Private Banking Loans NA 54%-95% 83% Consumer Loans Unsecured NA 58%-95% Consumer Loans & Leases (auto, boat, etc.) NA 41%-95% 60% Student Loans 82% 60% - 95% 76% GROUP DEPOSITED Consumer Loans Credit Card Receivables NA 76% 59% Consumer Loans Subprime CC Receivables NA 71% 54%

49 Collateral Type CLVs for Loans and Securities for FHLBank Topeka Fed s Discount Window & Payment System Risk Collateral Margins (Minimal Risk Rated) Central Liquidity Facility Collateral Margins DELIVERY INDIVIDUALLY DEPOSITED DELIVERY Cash, Term Deposits 100% 100% 100% Term Dep 90% CDs, BA, Comml Paper -< 5 years duration U.S. Treasuries, Agency Notes and Bonds Bill, Notes and Bonds 98% - 99%- < 1 year duration Bill, Notes and Bonds 99% - < 5 years duration 97% - 98% - 1 year - 5 Year duration 90% 97% years duration 95% - > 5 year duration 95% - > 10 year duration State and Local Government Securities (Municipal Bonds) Agency MBS and Residential Mortgage Pass Through Securities Agency CMOs Private Label Pass Through and CMOs Asset Backed Securities Case-by-case 97% 97% GNMA, FNMA, FHLMC only 89% - 93% - AAA 84% - 91% - AA 98% - < 5 years duration 96% years duration 94% - > 10 year duration 98% - < 5 years duration 96% years duration 94% - > 10 year duration Pass Through and CMS 98% - < 5 years duration 96% years duration 94% - > 10 year duration CMO - AAA 90% -< 5 year duration 89% year duration 86% - 10 year duration AAA-BBB 96% - 98% -< 5 year duration 88% - 94% year duration 77% - 90% - 10 year duration 90% 90% Pass Through and CMO 90% AAA 90% - < 5 years duration 84% years duration 83% - > 10 year duration AAA-BBB 89% - 90% -< 5 year duration 86% - 90% year duration 82% - 83% - 10 year duration Collateralized Debt Obligations - AAA NA 78% - 83% 90% AAA 93% - AAA 100% Defeased AAA Commercial Mortgage Backed 95% -< 5 year duration 88% -AAA, < 100% 90% Securities 89% year duration 79% - AA, < 100% 85% - 10 year duration Other Securities 95% FDIC & NCUA guar notes 95% - 98% SBA securities 97% Student Loan ABS N/A 90% NCUA CU liq guar notes 90% Corp bonds BBB-AAA rated 90% Trust Preferred Sec 65% GSE Stock

50 Collateral Type CLVs for Loans and Securities for FHLBank Topeka Fed s Discount Window & Payment System Risk Collateral Margins (Minimal Risk Rated) Central Liquidity Facility Collateral Margins DELIVERY INDIVIDUALLY DEPOSITED GROUP DEPOSITED 1-4 Family Mortgage Loans (First Lien) 81% - Conventional Mortgages 71% - 95% Fixed Rate 75% - Interest Only 65% - 95% Adjustable Rate 76% FHA Loans 94% < 90 Days Delinquent 90% > 90 Days Delinquent 91% - 95% 90% VA Loans 91% < 90 Days Delinquent 87% > 90 Days Delinquent 91% - 95% 90% Multifamily Mortgage Loans 77% 48% - 95% Fixed Rate 55% - 95% Adjustable Rate 57% -63% Other U.S. Government-guaranteed Loans 92% - USDA FSA and SBA Loans 91% - 95% 90% 1-4 Family Mortgage Loans (Second Lien, Home Equity) 68% 61% - 95% 72% CFI Collateral 58% - Agricultural Operating 63% Commercial Loans & Leases 67% - 95% Commercial and Industrial 51% - Equipment Loans & Leases Agricultural Real Estate 68% 67% - 95% 67% Commercial Real Estate Loans 65% 48% - 95% 57% Construction Loans 66%- Single Family Residential 52% - Multifamily and Commercial 18% - 95% 63% Real Estate Raw Land Loans NA 21% - 95% 44% Private Banking Loans NA 54%-95% 83% Consumer Loans Unsecured NA 58%-95% Consumer Loans & Leases (auto, boat, etc.) NA 41%-95% 60% Student Loan Securities 82% 60% - 95% 76% GROUP DEPOSITED Consumer Loans Credit Card Receivables NA 76% 59% Consumer Loans Subprime CC Receivables NA 71% 54% Effective August 2, 2015, the Fed s will no longer provide collateral margins for Group Deposited Loans.

51 FEDERAL CONTINGENCY FUNDING SOURCES FRB Discount Window Collateral Fully Securitized Lender Lending Value Assigned to Different Classes Financial Condition considered in assigning values Listed and Delivered Eligibility Collateral Arrangements Agreements in place Examination Rating 1,2,3 Capital Status - Adequate Timing Same-day funds to qualifying FI s (subject to collateral requirements) Central Liquidity Fund Fully Securitized Lender Lending Value Assigned to Different Classes Collateral coverage ratio of 110% Membership Capital Stock Subscription Collateral Arrangements Agreements in Place Demonstrated liquidity need Detail schedule of cash flows prior 4 months and projected Creditworthiness Approve/deny request within 5 business days Funding 3 10 business days depending on requested dollar amount (subject to collateral requirements) Use/Purpose Duration/Term Rate/Cost Testing Primary: Backup/ST liquidity Enhance diversification in ST funding plans No restrictions or questions Viable take-out strategy to replace Secondary: FI s do not quality for primary Prompt return to market sources Facilitate resolution of sig financial difficulties Higher level of admin. Oversight Seasonal: Assist small FIs with sig. seasonal swings Demonstrate clear pattern of recurring swings Required to have seasonal LOC in place Emergency: Unusual and exigent circumstances BOG may authorize credit to non-depository institutions Primary: Overnight May be extended up to few weeks if eligible Seasonal: Up to 9 months, advances mature monthly Primary: 100 bp above FOMC target fed funds rate Secondary: 50 bp above Primary rate Request an overnight borrowing Unencumbered eligible collateral in place Pre-pledge all or some portion of eligible collateral CLF obtains match fund Federal Finance Bank (FFB) advance. May result in funding lag Short Term Adjustments: Temporary pending adjustment of Assets/Liab. Seasonal: Expected patterns of movement in share/deposit accounts and loans Protracted Adjustment Credits: Unusual or emergency situations of longer term nature If CU fails creditworthiness standards may qualify for emergency assistance from NCUSIF Loans up to 90 days May renew for an additional term under certain circumstances Based on facility cost plus fee for expenses Federal Finance Bank obtains rates from US Treasury Cannot conduct a test loan transaction (2) Can test transfer of funds against established wire delivery instructions (1) CLF match-funds all of its liquidity advances with loans from the Treasury s Federal Financing Bank (FFB). Under terms of this arrangement, CLF is only authorized to seek an advance from FFB when the underlying advance is for an actual liquidity need as set forth in Title III of the Federal Credit Union Act.