National and Utah Economic Outlook Utah Credit Union Association Volunteers Conference Saturday, October 22, 2011 National and Utah Economic Outlook Mike Schenk Vice President, Economics & Statistics Credit Union National Association Telephone: 608-231-4228 Facsimile: 608-231-4924 E-Mail: mschenk@cuna.com

Macro Economics Three big goals:

Average = 2.7%

Average = 6.3%; 4

Average = 3.6%

Market Interest Rates 1960 to 2011

Credit Unions are Careful Lenders Total Loan Delinquencies as a Percent of Loans Outstanding Credit union delinquencies about one-third of bank total Source: FDIC, NCUA and CUNA Policy Analysis . Banks delinquency is 90+ day, CU delinquency is 60+day.

Credit Unions are Careful Lenders March 2011 Net Loan Chargeoffs – Annualized Source: FDIC, NCUA & CUNA Policy Analysis.

Credit Unions Served Borrowers As Other Lenders Pulled Back Growth Since Beginning of Recession: 12/07 to 3/11 Source: FDIC, NCUA & CUNA Policy Analysis.

Credit Unions: Consumer Friendly Pricing Loan Interest Rate Averages Source: Informa Research Services. Data as of December 14, 2010.

Credit Unions: Consumer Friendly Pricing Savings Account Interest Rate Averages Source: Informa Research Services. Data as of December 14, 2010.

Credit Union Financial Benefits (2010 Estimate - Billions)

Largest 100 Banking Institutions (1992 share = 41%; 2010 share = 73%) Smaller Banking Institutions (1992 share = 53%; 2010 share = 21%) Credit Unions (1992 share = 6%; 2010 share = 6%)

Assets Liabilities & NW CU Balance Sheet   Assets Liabilities & NW Investments (34%) Shares & Deposits (86%) ’07=5%/’08=9%/’09=30%/’10=13%/’11=9%/’12=7% ’07=5%/’08=7%/’09=10%/’10=4%/’11=5%/’12=5% Loans (62%) Net Worth (10%) ’07=7%/’08=9%/’09=1%/’10=-1%/’11=0%/’12=3% ’07=7%/’08=3%/’09=-1%/’10=5%/’11=7%/’12=8% 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. 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. Investment Factors: Federal Reserve announced that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 forcing CUs to reevaluate the duration of investments. Rising loan growth will reduce investment portfolio growth in 2012. Corporate CU reconfiguration will alter investment options. Financial institutions are sitting on record levels of excess reserves ($1.6 trillion) earning 0.25%. Excess liquidity is punishing CU earnings with short-term investment yields lower than deposit interest rates. Loan Factors: Economic recovery and accompanying job growth will encourage borrowing in 2012. Rising consumer confidence will encourage spending. Rising stock prices will produce a “wealth effect” fostering increased consumption. But volatile stock prices could eliminate any “wealth effect:”. Household s have accelerated loan payments and payoffs which is outpacing originations and reducing loan balances. But deleveraging should fade in 2012. Low spending in 2009-2011 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. Udall-Snow Small Business Lending Enhancement Act is moving in Congress to raise the business loan lending cap from 12.25% to 27.5% of assets.

CU Financial Results Mid-Year 2011 Interest Income 414 The Federal Reserve’s QE-2 program/Twist (print money to buy bonds) will keep interest rates low until 2012. 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 2013 will raise yields on short-term investments. CU Financial Results Mid-Year 2011   Interest Income 414 - Interest Expense 96 = Net Interest Income 318 + Fee/Other Income 126 - Operating Expense 316 - Loss Provisions 51 = Net Income 77 Rising short-term interest rates in 2013. Continued repricing of maturing CDs is lowering COFs. Excess liquidity will allow CU deposit rates to lag increases in market rates in 2013. Ultra-low market interest rates are preventing CUs pricing their deposits below market, reducing earnings opportunities . NIM expected to rise in 2013 as YOA rise faster than COFs. A flatter yield curve in 2012 will put downward pressure on NIMs by making ST borrowing and LT lending less lucrative. CUs are reevaluating their “GAP” strategy due to changing interst rate forecasts. The interchange fee cap rule will be implemented on October 1. This will cap the maximum fee charged per debit card transaction to 21 cents (plus an additional 2-3 cents for fraud prevention) for institutions greater than $10 billion. 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 in 2012. Changes to overdraft rules will affect fee income depending on member behavior. Recession induced financial stress has incentivized consumers to alter behavior to minimize penalty fees. 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 25 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. ROA remains below its long-run average and questions remain whether this will be the “new normal”. 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.