Trendwatch 2Q 2018 The Annual Report for the Industry

Trendwatch 2Q 2018 The Annual Report for the Industry Data for June 30, 2018 Call Dates: August 22 & 23, 2018

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Today s Lineup Market Update Jason Haley, Managing Director, Investment Management Group, ALM First 2Q 2018 Credit Union Trends & Key Issues Alix Patterson, Partner, Callahan & Associates Sam Taft, AVP, Analytics & Business Development, Callahan & Associates A Business Intelligence Team that Drives Results Sara Dolan, Chief Financial Officer, Michigan State University Credit Union 10

ALM FIRST MARKET UPDATE Callahan Quarterly Trendwatch August 22, 2018 Presented By: Jason Haley Managing Director, Investment Management Group

Speaker Jason Haley Managing Director, Investment Management Group 12

Economic Update U.S. dollar strength has sparked volatility in commodities and emerging markets (EM) in recent weeks Turkish financial/economic crisis roiled emerging markets in early August Metals and oil prices sharply lower on EM concerns and China, which is unusual when global growth is above trend U.S. economic data trend has slowed relative to expectations but remains consistent with solid overall growth Citi Surprise Index in negative territory for first time since October 2017 Q2 GDP growth above 4% for first time since 2014 and underlying details were supportive for current quarter growth Biggest near-term headwind for growth continues to be potential for outright trade war 13

Economic Update, cont. Fed Chair Jerome Powell will be speaking Friday morning at the annual Jackson Hole symposium (Monetary Policy in a Changing Economy) Current median FOMC forecast calls for 2 more rate hikes in 2018 and 3 hikes in 2019 Markets priced for 2018 hikes, but priced for just over 1 hike in 2019 Historic tendency for markets to underprice Fed hikes on the back end of a tightening cycle Regarding future Fed communication/decisions, market participants are more focused on Fed balance sheet reduction, future demand for bank reserves in the context of HQLA requirements, and the relationship between IOER and the Fed s target fed funds range 14

Current Market Themes Curve flattening continues to be a major theme for 2018, which is typical of a Fed tightening cycle Term premiums remain depressed amid central bank buying Interest rate volatility remains low, and spread widening has slowed in recent months, both of which have been positive for fixed-income performance (spread sectors relative to rates) 8/21/2018 5/16/2018 Change Tenor (%) (%) (bps) 3-Months 2.05 1.90 0.16 6-Months 2.23 2.08 0.15 1-Year 2.43 2.28 0.15 2-Year 2.60 2.59 0.02 5-Year 2.73 2.94-0.21 10-Year 2.85 3.10-0.25 30-Year 3.01 3.22-0.21 Curves 2yr-5yr 0.12 0.35-0.23 2yr-10yr 0.25 0.51-0.27 2yr-30yr 0.41 0.63-0.22 5yr-10yr 0.12 0.16-0.04 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5 Treasury Yield Curve 5/16/2018 8/21/2018 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y 15

Depository Performance Amid Rising Rates 2.4 KBW Bank Index 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 Price to Tangible Book Value Source: Bloomberg 16

2911 Turtle Creek Blvd. Suite 500 Dallas, Texas 75219 Phone: 800.752.4628 Fax: 214.987.1052 www.almfirst.com

Industry Overview

Loans lead annual growth rates to surpass $1 trillion As of 6/30/2018 12-mo. Growth 2Q18 12-mo. Growth 2Q17 Assets $1,441.2B 5.9% 7.6% Loans $1,013.5B 9.8% 10.8% Shares $1,223.0B 5.5% 8.1% Investments $360.0B -3.9% 1.7% Capital $162.7B 6.5% 5.7% Members 115.5M 4.4% 4.3%

Millions Member growth accelerates for the 5 th consecutive year 120 115 110 105 100 95 90 85 80 75 70 2.2% 2.9% Membership and Annual Growth Data as of 6.30.18 3.1% 3.8% 4.3% 4.4% 96.4 99.2 102.2 106.1 110.6 115.5 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 5.5% 4.5% 3.5% 2.5% 1.5% 0.5% -0.5%

Over one fifth of consumers looking to finance a car turn to credit unions 25.0% Credit Union Auto Finance Market Share Data as of 6.30.18 20.4% 20.0% 18.4% 19.0% 16.3% 16.3% 14.7% 15.0% 10.0% 5.0% 0.0% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 AutoCount Data from Experian Automotive

Billions First mortgage originations rise 2.1% year-over-year $80 $70 $60 $50 $40 $30 $20 $10 $0 7.0% First Mortgage Originations & Market Share Data as of 6.30.18 6.8% 7.5% 7.0% 8.2% 8.7% $66.4 $41.4 $61.8 $62.9 $67.5 $68.9 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Mortgage Bankers Association

Billions Revolving consumer loan balances up 9.8% annually. $70 Revolving Consumer Loan Balances and CU Market Share Data as of 6.30.18 7% $60 $50 $40 3.6% 4.2% 4.5% 4.6% 4.9% 5.2% 5.3% 5.5% 5.6% 5.8% 6% 5% 4% $30 3% $20 2% $10 $0 $33.5 $34.9 $35.8 $37.4 $40.1 $43.3 $46.1 $49.7 $53.3 $58.6 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 1% 0% Source: Federal Reserve

Member relationships continue to widen 2Q18 2Q13 Change Credit Card Real Estate Share Draft Auto 17.3% 4.4% 57.5% 20.8% 15.4% 4.4% 52.1% 16.2% +1.9% 0.0% +5.4% +4.6%

Deeper lending relationships push AMR higher $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Average Member Relationship Data as of 6.30.18 $18,150 $18,682 $17,362 $16,626 $15,585 $16,013 $9,531 $9,566 $9,721 $10,036 $10,399 $10,495 $6,054 $6,447 $6,905 $7,326 $7,751 $8,186 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Loans/Member Shares/Member

A Business Intelligence Team that Drives Results Sara Dolan, Chief Financial Officer

About Michigan State University FCU Headquartered in East Lansing, Michigan Approximately $4.1B in assets Over 259,000 members 806 employees 19 branch locations

The Challenge Acting on member data is a growing imperative for credit unions We have a particularly fluid membership, as the world s largest university-sponsored credit union Last year, student accounts represented just over 12% of new accounts we opened Students & former students represent just over 26% of total members

The Solution We created the business intelligence department in 2014 to centralize data research, analysis, and reporting. We now have four specialists, plus an intern, with their own focus areas: The team is providing targeted lists for outreach efforts. They also analyze results to identify opportunities & mitigate risks. Predictive analytics and advanced techniques for identifying potential market opportunities are in development.

How it Works

Collaboration is Key

Four Tips for BI Bliss 1. Ask so what? A chart or infographic can be beautiful, but the data must be presented in a way that the end user can make a decision. 2. Foster collaboration. BI should not operate in a silo, distribute reports, and make recommendations without discussion and input from the appropriate departments. 3. Foster transparency. Our intranet page shares information with all employees, but we also discuss various data reports in meetings throughout the organization. 4. Be curious and ask questions. Reflect on the data that is relevant to a decision and try to reduce the noise.

Join today first virtual meeting September 19 th! For more information contact: Charlotte Taft Tableau@Callahan.com https://community.tableau.com/groups/credit-unions

Savings & Borrowing

Billions Share growth slows following 3 years of acceleration $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Total Share Balances and Annual Growth Data as of 6.30.18 8.4% 6.7% 5.5% 6.1% 4.3% 3.7% $922 $953 $999 $1,073 $1,160 $1,223 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Billions 2Q net share growth falls for third consecutive year $50 Quarterly Share Change Data as of 6.30.18 $40 $30 $20 $10 $0 -$10 $8.3 $6.4 $4.8 $2.3 -$0.6 -$3.8 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18

Billions pushing net liquidity change further negative $40 Net Liquidity Change Data as of 6.30.18 * Net liquidity from shares = $ share growth - $ loan growth $30 $20 $23 $30 $30 $10 $6 $0 -$10 -$20 -$30 -$5 -$7 -$12 -$16 -$19 -$19 -$21 -$21 -$26 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18 Quarterly Annual

Highest loan-to-share ratio since year-end 2008 85.0% Loan-to-Share Ratio Data as of 6.30.18 82.9% 80.0% 75.0% 71.6% 75.4% 77.7% 79.6% 70.0% 67.4% 65.0% 60.0% 55.0% 50.0% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18

Savings accounts increase $42.1B in past year Share Composition Data as of 6.30.18 18.0% Regular Shares & Deposits Share Drafts 6.3% 38.4% MMA IRA/Keogh 21.5% Share Cert. 15.8%

Share certificates and regular shares accelerate Share Certificates IRA/Keogh MMA Share Drafts Regular Shares & Dep. Total Shares -1.0% 12-Mo. Growth in Shares Segments Data as of 6.30.18 0.8% 1.9% 4.6% 7.2% 6.9% 8.8% 6.6% 8.1% 9.7% 9.4% 14.7% 2Q18 2Q17-5% 0% 5% 10% 15% 20%

Certificates post largest gain since 1Q08 Share Certificates IRA/Keogh MMA Share Drafts Regular Shares & Dep. Total Shares -$0.8 12-Mo. Change in Share Segments Data as of 6.30.18 $0.6 $14.9 $9.1 $5.0 $16.9 $15.8 $23.0 $42.0 $37.3 2Q18 2Q17 $76.9 $87.0 -$20 $20 $60 $100

Banks start to pay their deposits Source: Credit Suisse & WSJ

Core deposits make up 75.7% of share portfolio Total Shares Outstanding Data as of 6.30.18 2Q18 38.4% 15.8% 21.5% 6.3% 18.0% 2Q13 33.9% 13.1% 23.0% 8.7% 21.3% 0% 20% 40% 60% 80% 100% Regular Shares & Dep. Share Drafts MMA IRA/KEOGH Share Certificates

Billions Total borrowings more than doubles over the past 5 years Total Borrowings and Borrowings/Assets Data as of 6.30.18 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 3.7% 3.7% 3.5% 3.7% 3.1% 2.5% $26.7 $34.8 $44.1 $47.3 $48.3 $53.9 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Total Borrowings Borrowings/Assets 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Billions Participation sales are beginning to slow, but still growing $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0-9.3% 33.8% Total Participations Sold and Annual Growth Data as of 6.30.18 50.4% 26.9% 8.2% 8.0% $1.7 $2.3 $3.4 $4.4 $4.7 $5.1 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 60% 50% 40% 30% 20% 10% 0% -10% -20%

Lending & Investments

Billions Originations creep higher; 4 th year in a row $300 $250 YTD Loan Originations and Annual Growth Data as of 6.30.18 20.3% 24.0% 18.0% $200 12.4% 9.1% 9.7% 12.0% $150 6.6% $100 $50-5.8% 6.0% 0.0% $0 $176.6 $166.4 $200.3 $218.4 $239.7 $255.5 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18-6.0%

Billions Highest 2Q loan origination on record $160.0 $140.0 $120.0 $100.0 $94.0 $92.4 Quarterly Loan Originations Data as of 6.30.18 $111.0 $118.8 $125.9 $136.9 $80.0 $60.0 $40.0 $20.0 $0.0 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

Billions 1 st mortgage originations rise while secondary market sales fall $80 $70 $60 $50 $40 YTD 1 st Mortgage Originations & Secondary Market Sales as % of 1 st Orig. Data as of 6.30.18 51.7% 32.0% 38.7% 37.6% 33.8% 30.6% 60.0% 50.0% 40.0% 30.0% $30 $20 $10 $0 $66.4 $41.4 $61.8 $62.9 $67.5 $68.9 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 20.0% 10.0% 0.0%

Billions Due to a higher percentage of ARM/Balloons $80 YTD Mortgage Originations By Type Data as of 6.30.18 $70 $60 $50 $4.8 $7.1 $6.6 $6.7 $10.9 $13.0 $7.7 $8.0 $15.5 $16.7 $40 $30 $6.5 $9.2 $20 $10 $0 $54.5 $25.7 $44.3 $43.1 $44.3 $44.2 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Fixed Balloon ARM

Billions Loans top $1T despite modest slowing $1,200 $1,000 9.8% Total Loans and Annual Growth Data as of 6.30.18 10.6% 10.5% 10.8% 9.8% 12.0% 10.0% $800 8.0% $600 $400 $200 $0 5.4% $621.3 $682.0 $754.1 $833.3 $923.2 $1,013.5 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 6.0% 4.0% 2.0% 0.0%

Billions $31B in loans added to the balance sheet in the last quarter $35 $30 Quarterly Loan Change Data as of 6.30.18 $27.8 $31.0 $25 $20 $15 $13.9 $20.8 $23.5 $24.3 $10 $5 $0 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18

New auto and 1 st mortgage drive loan growth Credit Union Loan Portfolio Data as of 6.30.18 5.8% 9.7% 1st Mortgage Other RE 13.9% 41.0% Used Auto New Auto = Credit Cards = 21.2% 8.4% Other

Auto concentration grow to over 1/3 of portfolio Total Loans Outstanding Data as of 6.30.18 2Q18 41.0% 8.4% 35.1% 5.8% 9.7% 2Q13 41.5% 11.6% 30.5% 6.4% 9.8% 0% 20% 40% 60% 80% 100% 1st Mortgage Other RE Total Auto Credit Cards Other Loans

Credit card and 1 st mortgage loan growth accelerates 1st Mtg Other RE New Auto Used Auto Credit Card Total Annual Growth in Loans Outstanding Data as of 6.30.18 5.2% 6.0% 9.1% 8.1% 10.6% 10.3% 10.0% 9.8% 10.8% 11.8% 11.9% 16.3% 2Q2018 2Q2017 0.0% 5.0% 10.0% 15.0% 20.0%

Banks face consumer lending challenges

Agencies and Fed Funds account for 77.5% of the portfolio Credit Union Investment Portfolio Data as of 6.30.18 1.5% 2.9% US Govt., Fed. Agency, and Other Securities 18.3% Corporate CUs (incl. Cash) Banks and S&Ls 2.7% 9.0% 59.2% Cash on Hand Cash at FIs 6.4% Cash Equiv. Other Inv & Insurance

Portfolios remain short Historical Investment Composition Data as of 6.30.18 2.7% 1.5% 2Q18 59.2% 6.4% 9.0% 18.3% 2.9% 2.0% 1.4% 2Q13 59.3% 6.9% 12.1% 15.4% 2.9% 2.7% 2.7% 2Q09 45.8% 28.6% 13.2% 4.2% 2.8% 0% 20% 40% 60% 80% 100% US Govt., Fed. Agency, and Other Sec. Corporate CUs (incl. Cash) Banks and S&Ls Cash on Hand Cash at FIs Cash Equiv. Other Inv & Insurance

Asset Quality

Largest annual drop in delinquency since 2015 3.50% 3.00% 3.09% Delinquency Data as of 6.30.18 2.50% 2.24% 2.00% 1.50% 1.69% 1.49% 1.23% 1.23%* 1.00% 0.50% 1.04% 0.85% 0.74% 0.75% 0.75% 0.67% 0.00% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Credit Unions Banks *As of 1Q18

Portfolio asset quality remains strong Annual Change in Delinquency Data as of 6.30.18 Total 1 st Mortgage Auto Other RE 0.67% 0.52% 0.55% 0.48% 0.08% 0.04% 0.04% 0.07% Indirect Credit Card Member Commercial 0.55% 1.15% 0.06% 0.07% 1.29% 0.18%* *Quarterly

Delinquency improves in nearly every segment 2.00% 1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 1.89% 1.36% 1.07% 0.83% 0.54% Credit Union Delinquency Ratios by Loan Type Data as of 6.30.18 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 1.28% 1.15% 0.55% 0.52% 0.48% Credit Card Auto 1st Mortgage Other RE Member Commercial

Net charge off ratio higher than banks for fourth consecutive year 0.80% 0.73% Net Charge-Off Ratio Data as of 6.30.18 0.70% 0.60% 0.50% 0.40% 0.58% 0.50% 0.49% 0.46% 0.42% 0.51% 0.45% 0.56% 0.59% 0.48% 0.48%* 0.30% 0.20% 0.10% 0.00% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Credit Unions Banks *As of 1Q18

Credit unions are well covered 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 86.2% 63.6% Coverage Ratio: Allowance for Loan Losses/Delinquent Loans Data as of 6.30.18 136.1% 104.3%* 0.0% 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Credit Unions Banks *As of 1Q18

The Bottom Line Revenue and ROA rise. Credit union capital levels remain strong.

Billions NCUSIF rebate drives other operating income growth 19.6% $40.0 $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $0.0 $3.6 $3.4 $3.7 $3.6-0.9% 1.1% Total Revenue and Annual Growth Data as of 6.30.18 7.0% $4.0 $3.6 8.0% $4.3 $3.8 8.8% $4.6 $4.1 13.2% $5.5 $4.3 $17.7 $18.4 $19.4 $21.1 $23.1 $26.2 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Interest Income Fee Income Other Operating Income YOY Growth 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0%

Investment yield jumps 38 basis points, largest gain of any yield 6.0% 5.0% 5.10% Yield Analysis Data as of 6.30.18 4.50% 4.60% 4.0% 3.0% 2.0% 1.0% 0.0% 1.92% 1.54% 1.07% 0.60% 0.70% 0.67% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Yield on Investments Cost of Funds Yield on Loans

Gap narrows with margin improvement 3.40% Net Interest Margin vs. Operating Expense Ratio Data as of 6.30.18 3.30% 3.20% 3.10% 3.00% 2.90% 2.80% 2.70% 3.10% 3.07% 3.10% 33 bps 2.77% 2.82% 2.83% 3.09% 2.88% 3.06% 2.93% 3.11% 3 bps 3.08% 2.60% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Operating Expense Ratio Net Interest Margin

Interest income gains and rebate push ROA higher YoY As of 06.30.2018 As of 06.31.2017 12-mo. Change (bps) Interest Income/Avg. Assets 3.69% 3.46% +23 Interest Expense/Avg. Assets 0.62% 0.53% +9 Net Interest Margin 3.08% 2.93% +15 Non-Interest Income/Avg. Assets 1.41% 1.33% +8 Non-Interest Expense/Avg. Assets 3.11% 3.06% +5 Provision for Loan Losses 0.48% 0.43% +5 ROA 0.90% 0.77% +13

Largest annual jump in ROA since June 2011 0.95% ROA Data as of 6.30.18 0.90% 0.90% 0.85% 0.84% 0.80% 0.81% 0.81% 0.77% 0.77% 0.75% 0.70% 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18

Billions Net worth grows 8.0% as the ratio hits 11.0% $180 Net Worth and Allowance Data as of 6.30.18 12.0% $160 $140 $120 $100 $80 10.0% $7.6 $9.3 $9.2 $8.6 $7.8 $7.1 $7.1 $7.6 $8.2 $9.3 11.0% 11.0% 10.0% 9.0% $60 8.0% $40 $20 $0 $88.6 $90.6 $96.8 $103.7 $112.3 $120.3 $129.2 $137.9 $147.7 $159.4 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18 Net Worth Allowance Net Worth Ratio 7.0% 6.0%

In-School Refinance Custom Grad Counseling igrad CollegePAYE Marketing Performance Compliance Empower the next generation of credit union members 800-541-1500 studentchoice.org/creditunions