The Economy and Credit Union Operations CUNA Sales and Service Culture Institute October 26th, 2015 • Madison, WI Mike Schenk Vice President, Economics & Statistics Credit Union National Association Telephone: 608-231-4228 Facsimile: 608-231-4924 E-Mail: mschenk@cuna.com

Economic Snapshot U.S. economy growing at a healthy rate Labor markets nearing full employment Inflation is tame & likely to stay that way Consumer balance sheets are in good shape China clearly the biggest wild card Economy grew at an annualized 3.7% pace in 2nd quarter (second estimate) 2.7% year-over-year (fastest since 2006) Added 2.9 million jobs in the past year & an average of 253,000 monthly over the past three months Unemployment rate is down nearly a full percentage point (to 5.3% in July) & the U-6 rate elevated but declining faster than the headline number.

Market’s implicit forecast on 10/23/15: 10-Yr. Treasury yield = 2.07% - 10-Yr. TIPS yield = 0.55% = Implied inflation rate = 1.52%

In past Fed moves when market expectation is 70% or higher. Unexpected move in 1994 led to sell-off in bond market.

Credit Union Trends Very strong membership growth High and increasing loan growth Low savings growth Vastly improved asset quality High earnings Tremendous variation

Very Strong Membership Growth (Source: NCUA and CUNA)

High & Increasing Loan Growth (Source: NCUA and CUNA)

Broad-Based Loan Increases (Source: NCUA and CUNA)

New Regulations Squeezing Small CUs out of the Mortgage Market (Source: NCUA and CUNA)

Difficulty in Competing in the Indirect Channel Constrains Small CU New Auto Loan Growth (Source: NCUA and CUNA)

Light Vehicle Sales (Cars + Light Trucks. Source: BEA) 18.3 Million

But CUs Consistently Outpacing Market Forecasts Mortgage Bankers Association Overall originations: 2015 = +24%; 2016 = -9% Purchase: 2015 = +26%; 2016 = +11% Refinance: 2015 = +22%; 2016 = -35% National Association of Automobile Dealers Car & light truck sales: 2015 = + 9%; 2016 = +4% But CUs Consistently Outpacing Market

Low Savings Growth (Source: NCUA and CUNA)

Three Key Risks Credit Risk – likelihood members don’t pay their loans when they promised to do so. Interest Rate Risk – likelihood earnings (or capital) changes when market interest rates change. Liquidity Risk – likelihood you won’t be able to pay creditors (i.e., depositors or others) when you need to do so.

Liquidity (Total Loans/Total Savings. Source: NCUA and CUNA)

Asset Quality: Delinquency (Percent of Total Loans Asset Quality: Delinquency (Percent of Total Loans. Source: NCUA and CUNA)

Asset Quality: Net Chargeoffs (Percent of Average Loans Asset Quality: Net Chargeoffs (Percent of Average Loans. Source: NCUA and CUNA)

Interest Rate Risk (Net Long Term Assets as a % of Total Assets) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

Interest Rate Risk (Net Long Term Assets as a % of Total Assets Interest Rate Risk (Net Long Term Assets as a % of Total Assets. Source: NCUA and CUNA) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

High Earnings (Net Income as a Percent of Average Assets High Earnings (Net Income as a Percent of Average Assets. Source: NCUA and CUNA)

First Half 2015 Credit Union Spreads All Items as a Percent of Average Assets – Annualized. Yield on Total Assets 3.83% - Dividend/interest cost of Assets 0.51% = Net Interest Margin (Gross Spread) 2.82% + Noninterest Income (Fee & Other Income) 1.36% Noninterest Expense (Operating Expense) 3.09% Loan & Lease Loss Provisions 0.29% Net Income (Return on Average Assets or ROA) 0.80%

Net Interest Margin (As a % of Total Assets. Source: NCUA and CUNA) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

Noninterest Income (As a % of Total Assets. Source: NCUA and CUNA) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

Operating Expenses (As a % of Total Assets. Source: NCUA and CUNA) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

Credit Union Credit Quality Trends (As a % of Loans Credit Union Credit Quality Trends (As a % of Loans. Source: NCUA and CUNA)

Loss Provisions (As a % of Total Assets. Source: NCUA and CUNA) Real estate loans that do not reprice, refinance or mature within 5 years; Member business loans; Investments that mature in more than 3 years; NCUSIF deposit; Land and building; Other fixed assets

Market Interest Rates & CU ROA Source: BLS.

CU Net Worth/Assets (Source: NCUA and CUNA)