1. 2016 Multi-Family Forecast One Banker’s Perspective Tom Traficanti Executive Vice President Chief Credit Officer Heritage Bank of Nevada tomt@heritagebanknevada.com Only “surviving” locally-owned community bank. Now with 7 branches in northern Nevada! All loans are made to local residents and local properties.

2. Interest rates 2009 – Fed begins unprecedented experiment in monetary policy – the experiment is still in progress 2015 – Europe, Japan and other central banks continue quantitative easing YIELD CURVE SHOWS INTEREST RATES TO STAY LOW (YIELD CURVE 2/11/16)

3. How low can interest rates go? Negative interest rates in Europe and Japan. From ZIRP to NIRP (Zero Interest Rate Policy to Negative Interest Rate Policy ) Are negative interest rates coming to bank near you?

4. Forecast of Interest Rates in U.S. Fed wants to “normalize” short term rates and be proactive Credit markets signal no more rate increases in 2016 FED SEES ECONOMY ON PATH TO “FULL EMPLOYMENT”...AND SERVICE INFLATION APPROACHING 3%

5. National Economy is growing slowly (that’s not necessarily bad for Nevada) Labor moves west and slower growth reduces likelihood of interest rate increase Dismal prospects for Midwest and commodity dependent states

6. Housing Trends – Pent up demand and demographics ripe for more households MILLENNIAL AND RETIREES SEEK BETTER HOUSING ALTERNATIVES IMPROVED ECONOMY AND CONFIDENCE LEADS TO MORE HOUSEHOLD FORMATION

7. Local Economy Employment and Housing growth rates look like 2006 Is it another housing bubble or is it sustainable? LOCAL EMPLOYMENT – JOB CREATION HAS COME FROM EXISTING EMPLOYERS – LEISURE, HOSPITALITY, HEALTH CARE AND CONSTRUCTION HOUSING MARKET – DEMAND EXCEEDS SUPPLY LOCAL “MOVE UP” BUYERS FINALLY HAVE EQUITY IN CURRENT HOME

8. Local growth forecast called “explosive” Population growth 65,000 by 2019 (16,000 per year) 6,000+ New Households per Year MOST OF GROWTH TO DATE HAS BEEN “HISTORIC EMPLOYMENT” EPIC (ECONOMIC PLANNING INDICATOR COMMITTEE) COMPLETED 2 VOLUME, 183 PAGE REGIONAL GROWTH STUDY.

9. Wages and affordability Real wage gains primarily to top 30% and educated Existing home prices near maximum for median family income CONSTRAINTS ARE EVEN LOWER WHEN STUDENT LOAN, AUTO LOAN AND OTHER CONSUMER DEBT ARE CONSIDERED

10. Mortgage Loans – Rates drop below 4% Still hard to get for less than “A” qualifiers Subprime is gone and mortgage regulation increases – More households renting

11. Supply of new homes constrained Builders still limit spec construction – credit for A&D loans limited Little inventory of available lots and new homes Cost of finished SFR lots exceed $80,000 - Majority of new homes exceed $300,000

12. Forecast: Demand for homes will continue to exceed supply New home production not likely to exceed 2,000 units per year

13. Multifamily Rents and (No)Vacancy Overall apartment rents increase 9% in 2015 Overall vacancy remains below 3% “Affordable” rents increase to over $700/Mo (23% increase in last 2 years)

14. Supply of new apartments Construction cost exceeding $100,000 per unit New apartment rents starting at $1,200 Possible 6,591 new units but only 3,500 likely to be completed by the end of 2017

15. Multifamily and CRE Valuation Local developers and local bankers struggle with new valuation model for northern Nevada Out of state Investors are changing their perception of Reno and face bleak investment alternatives, especially in major metro markets (bay area) RENO HAS HISTORICALLY FOLLOWED A “TERTIARY” MARKET CAP RATE

16. Forecast 2016-2017  Shortage of housing units will continue.  Rental rates increase will continue to increase, but increases will moderate slightly due to affordability.  Vacancy will remain extremely low.  Values will continue to increase at a high pace, due to higher projected NOI, further decline cap rates and strong investor demand for multifamily in northern Nevada.  Increase in households consolidating into existing housing units, due to affordability.  Availability of loans for apartments will continue to improve  Short term interest rates will increase slightly (.25-.5%), if at all  Longer term interest rates will stay flat and remain relatively low for term financing WATCH  National economy continues to weaken and enters or nears a recession.  Labor and other operating costs increase substantially for local businesses, resulting in contraction of current employment.  Cost of housing and lack of infrastructure (roads, schools) become significant growth deterrent.