2012 Economic Forum Catalyst Corporate Federal Credit Union Embassy Suites , Plano, TX

1. 2012 Economic Forum Catalyst Corporate Federal Credit Union Embassy Suites , Plano, TX Tuesday, October 23, 2012 U.S. Economic Outlook & Its Impact on Financial Institutions Steven W. Rick Senior Economist Credit Union National Association PO Box 431 Madison, Wis. 53701, USA Telephone: 608-231-4285 Facsimile: 608-231-4924 E-Mail: srick@cuna.com

2. Important Factors • to Discuss

3. Important Factors • to Discuss • Economy

4. Important Factors • to Discuss • Economy • Market interest rates

5. Important Factors • to Discuss • Economy • Market interest rates • Balance Sheet & Income Statement Impacts

6. Deposit Factors: Economic uncertainty and members’ preference for liquid funds will buoy deposit growth. Large interest rate differentials between loans and savings will encourage members to pay down debt rather than save any surplus funds. Rising oil prices will reduce savings balances. Inflation rates higher than deposit rates will produce negative returns on savings deposits. Large federal deficits may lead to expectations of higher future taxes fostering additional savings growth today. The national savings rate is back to the level in the late 1990s. Falling home prices will encourage thrift. Investment Factors: Federal Reserve may raise short-term rates in late 2011 early 2012. Rising loan growth will reduce investment portfolio growth. Corporate CU reconfiguration will alter investment options. Financial institutions are sitting on record levels of excess reserves ($1 trillion) earning 0.25%. Excess liquidity is punishing CU earnings with short-term investment yields lower than deposit interest rates. Balance Sheet (% of 2010 Assets) Assets Liabilities + NW InvestmentsDeposits LoansNet Worth Loan Factors: Economic recovery and accompanying job growth will encourage borrowing in 2011. Rising consumer confidence will encourage spending. Rising stock prices will produced a “wealth effect” fostering increased consumption. Household deleveraging will fade in 2012. Low spending in 2009-2010 has created much pent-up demand for durable goods. Auto loans, credit card loans and purchase mortgage loans will be strong growth areas. The recession has created a large pool of potential borrowers with sub-prime credit scores. Rising auto sales may reduce 0% financing offers. Bills are moving through Congress to raise the member business loan lending cap from 12.25% to 27.5% of assets. Net Worth Factors: Rising net income in 2011 and 2012. Capital contributions will outpace asset growth raising net worth to asset ratios. CUs are slowing deposit and asset growth to maintain or boost capital-to-asset ratios.. BASEL III will be an impetus for Congress and NCUA for capital reform. Alternative capital (subordinated debt) is a top CU legislative priority. 2

7. Yield on Assets - Cost of Funds = NIM + Fee/Other Income - Operating Expenses - Provision for loan losses = Net Income The Federal Reserve’s QE-2 program (print money to buy bonds) will keep interest rates low until 2012. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2012 will raise yields on short-term investments. Rising short-term interest rates in 2012. Excess liquidity will allow CU deposit rates to lag increases in market rates. Ultra-low market interest rates are preventing CUs pricing their deposits below market, reducing earnings opportunities . NIM expected to rise over next few years as YOA rise faster than COFs. A flatter yield curve in 2012 will put downward pressure on NIMs by making borrowing short-term and lending long-term less lucrative. CUNA is working to delay the Fed’s implementation of the interchange fee cap rule set for July 21. (Cap the maximum fee charged per debit card transaction to 12 cents). Concerns over the effectiveness of the less than $10 billion “carve out” rule. Statutory exemption may not work as intended, but it will take a few years for small institution interchange rates to converge to large institution rates. Interchange income will drop little in 2011, but may decline 10-20% in 2012, and 50% in 2013. Changes to overdraft rules will affect fee income depending on member behavior. NCUSIF premiums expected to be zero in 2011-12 due to large build up of reserves for insurance losses and fewer CU failures. Corporate stabilization assessments expected to be 19 bps of insured shares in 2011 and 9 bps in 2012. Slowdown in branch expansion and continued cost containment efforts will lower operating expense ratios. Most CUs have sufficiently funded allowance for loan losses. Job growth will improve credit quality and lower provisions Local foreclosures will have a lingering impact on PLLs. Today 11 million homeowners are underwater. Ten percent of mortgage holders owe at least 125% of the property’s value. Home prices expected to fall 5% in 2011 and stabilize in 2012. 10% of all mortgages are at risk of foreclosure. ROA remains below its long-run average and questions remain whether this will be the “new normal”.

8. Below trend growth • Falling stimulus spending • Less inventory rebuilding • Slowing Euro-Zone • Financial crisis • Deleveraging households • Rising savings rates Page 19 Maximum Sustainable Growth Rate = 3% 7

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10. Below trend growth • Falling stimulus spending • Less inventory rebuilding • Slowing Euro-Zone • Financial crisis • Deleveraging households • Rising savings rates Maximum Sustainable Growth Rate = 3% 7

11. 2nd Quarter 2012 GDP Spending = C + I + G + X – M % of total = (70.6) (14.0) (18.5) (13.4) (-16.4) Growth rate = (1.5)(0.7)(-0.7)(5.3)(2.8) Contribution = (1.1) + (0.1) + (-0.1) + (0.7) + (-5.0) = 1.3% (1+0.013)1/4 -1 = 0.0032 = 0.32%

12. Consumer spending 2nd Quarter 2012 GDP Spending = C + I + G + X – M % of total = (70.6) (14.0) (18.5) (13.4) (-16.4) Growth rate = (1.5)(0.7)(-0.7)(5.3)(2.8) Contribution = (1.1) + (0.1) + (-0.1) + (0.7) + (-5.0) = 1.3% (1+0.013)1/4 -1 = 0.0032 = 0.32%

13. Business & Residential Investment 2nd Quarter 2012 GDP Spending = C + I + G + X – M % of total = (70.6) (14.0) (18.5) (13.4) (-16.4) Growth rate = (1.5)(0.7)(-0.7)(5.3)(2.8) Contribution = (1.1) + (0.1) + (-0.1) + (0.7) + (-5.0) = 1.3% (1+0.013)1/4 -1 = 0.0032 = 0.32%

14. Government Spending 2nd Quarter 2012 GDP Spending = C + I + G + X – M % of total = (70.6) (14.0) (18.5) (13.4) (-16.4) Growth rate = (1.5)(0.7)(-0.7)(5.3)(2.8) Contribution = (1.1) + (0.1) + (-0.1) + (0.7) + (-5.0) = 1.3% (1+0.013)1/4 -1 = 0.0032 = 0.32%

15. Exports 2nd Quarter 2012 GDP Spending = C + I + G + X – M % of total = (70.6) (14.0) (18.5) (13.4) (-16.4) Growth rate = (1.5)(0.7)(-0.7)(5.3)(2.8) Contribution = (1.1) + (0.1) + (-0.1) + (0.7) + (-5.0) = 1.3% (1+0.013)1/4 -1 = 0.0032 = 0.32%

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18. Labor market slack

19. Credit Risk (2 types) 1. Default Risk – borrowers’ willingness and ability to repay debt (unemployment rate) 2. Collateral Risk – market value decline of the asset securing the loan. (home price changes)

24. The Big News

25. The Big News Federal Reserve and QE-3

26. The Big News Federal Reserve and QE-3 Create money and then buy bonds

27. Page 37 Taxmageddon $600 Billion in Tax Increases and Spending Cuts Assuming President/Congress does not act $600 Billion = 4% of a $15.5 Trillion Economy!

28. Page 26

29. Fed will raise interest rates when:

30. Fed will raise interest rates when: • Credit demand rises

31. Fed will raise interest rates when: • Credit demand rises • Unemployment rate falls

32. Fed will raise interest rates when: • Credit demand rises • Unemployment rate falls • Inflation expectations rise

37. Corporate Resolution Cost Detail Page 40 Range = $2.2 Range = $4.3 Range = $3.3 Midpoint = $15.0 Midpoint = $13.0 Midpoint = $13.3 No changes Source: CUNA-annotated NCUA table with 2012 update added by CUNA.

38. Corporate Stabilization AssessmentsBillions of dollars • CUNA PROJECTIONS • Based on: • $3.6 billion midpoint (could be higher or lower!) • NCUA desire to finish the job sooner rather than later • Straight-line assessments in bp of insured shares ACTUALS

39. Corporate Stabilization AssessmentsBasis Points of Insured Shares • CUNA PROJECTIONS • Based on: • $3.6 billion midpoint (could be higher or lower!) • NCUA desire to finish the job sooner rather than later • Straight-line assessments in bp of insured shares ACTUALS

40. Credit Risk (2 types) 1. Default Risk – borrowers’ willingness and ability to repay debt (unemployment rate) 2. Collateral Risk – market value decline of the asset securing the loan. (home price changes)

41. Page 12 Provisions for loan Losses Equilibrium Condition Provisions = Net Charge-offs Allowance for Loan Losses Net Charge-offs

46. The Federal Reserve’s QE-3 program (print money to buy bonds) and Operation Twist will keep interest rates low until 2015. CUs are weighing the marginal risk (credit/interest rate) versus marginal return (additional YOA) of alternative assets to boost NIMs. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2015 will raise yields on short-term investments. 28

47. The Federal Reserve’s QE-3 program (print money to buy bonds)and Operation Twist will keep interest rates low until 2015. CUs are weighing the marginal risk (credit/interest rate) versus marginal return (additional YOA) of alternative assets to boost NIMs. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2015 will raise yields on short-term investments. 28

48. The Federal Reserve’s QE-3 program (print money to buy bonds) and Operation Twist will keep interest rates low until 2015. CUs are weighing the marginal risk (credit/interest rate) versus marginal return (additional YOA) of alternative assets to boost NIMs. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2015 will raise yields on short-term investments. 28

49. The Federal Reserve’s QE-3 program (print money to buy bonds) and Operation Twist will keep interest rates low until 2015. CUs are weighing the marginal risk (credit/interest rate) versus marginal return (additional YOA) of alternative assets to boost NIMs. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2015 will raise yields on short-term investments. 28

50. The Federal Reserve’s QE-3 program (print money to buy bonds) and Operation Twist will keep interest rates low until 2015. CUs are weighing the marginal risk (credit/interest rate) versus marginal return (additional YOA) of alternative assets to boost NIMs. Repricing of maturing loans will lower YOAs Rising loan growth will raise YOAs. Rising short-term interest rates in 2015 will raise yields on short-term investments. 28