Utah Credit Union AssociationVolunteers ConferenceSaturday, October 22, 2011

National and Utah Economic Outlook

Mike SchenkVice President, Economics & StatisticsCredit Union National AssociationTelephone: 608-231-4228 Facsimile: 608-231-4924E-Mail: mschenk@cuna.com

Macro EconomicsThree big goals:

Chart1

-0.27478397623.52.7

2.53857789933.52.7

-1.94163396483.52.7

4.51761657373.52.7

7.1865175323.52.7

4.13716755243.52.7

3.46465207353.52.7

3.19963279433.52.7

4.11041391533.52.7

3.57250834713.52.7

1.87646549293.52.7

-0.23296302183.52.7

3.39271945133.52.7

2.85204452893.52.7

4.07401210053.52.7

2.51435018693.52.7

3.74065524063.52.7

4.45662725383.52.7

4.35535513423.52.7

4.82615148793.52.7

4.13903557133.52.7

1.07922087473.52.7

1.81367544363.52.7

2.54112846643.52.7

3.46810798023.52.7

3.07036256043.52.7

2.65805536743.52.7

1.91303374823.52.7

-0.33657987153.52.7

-3.48581229573.52.7

3.02956949573.52.7

0.73.52.7

Series 1

Series 2

Series 3

US Economic Growth - %(Real GDP Chainweighted Source: BEA)

Sheet1

Series 1Series 2Series 3

1980-0.27478397623.52.7

19812.53857789933.52.7

1982-1.94163396483.52.7

19834.51761657373.52.7

19847.1865175323.52.7

19854.13716755243.52.7

19863.46465207353.52.7

19873.19963279433.52.7

19884.11041391533.52.7

19893.57250834713.52.7

19901.87646549293.52.7

1991-0.23296302183.52.7

19923.39271945133.52.7

19932.85204452893.52.7

19944.07401210053.52.7

19952.51435018693.52.7

19963.74065524063.52.7

19974.45662725383.52.7

19984.35535513423.52.7

19994.82615148793.52.7

20004.13903557133.52.7

20011.07922087473.52.7

20021.81367544363.52.7

20032.54112846643.52.7

20043.46810798023.52.7

20053.07036256043.52.7

20062.65805536743.52.7

20071.91303374823.52.7

2008-0.33657987153.52.7

2009-3.48581229573.52.7

20103.02956949573.52.7

2011 1st H0.73.52.7

Chart1

13.5017219073.61.52.5

10.37831255653.61.52.5

6.15835774733.61.52.5

3.15953197613.61.52.5

4.36820040013.61.52.5

3.52790250163.61.52.5

1.94392812893.61.52.5

3.57821165393.61.52.5

4.10004400763.61.52.5

4.79109420143.61.52.5

5.4192160293.61.52.5

4.21583200463.61.52.5

3.04161622323.61.52.5

2.96964891683.61.52.5

2.59560301563.61.52.5

2.80541970433.61.52.5

2.93667397433.61.52.5

2.33756307533.61.52.5

1.54700880543.61.52.5

2.19313993253.61.52.5

3.36668334173.61.52.5

2.81662875673.61.52.5

1.595670043.61.52.5

2.29799850683.61.52.5

2.66757199883.61.52.5

3.36583219373.61.52.5

3.22208639423.61.52.5

2.86691282813.61.52.5

3.81693717393.61.52.5

-0.32655751493.61.52.5

1.64605912143.61.52.5

3.83.61.52.5

Series 1

Series 2

Series 3

Series 4

Inflation - %(CPI All Urban Consumers: Source: BLS)

Sheet1

Series 1Series 2Series 3Series 4

198013.5017219073.61.52.5

198110.37831255653.61.52.5

19826.15835774733.61.52.5

19833.15953197613.61.52.5

19844.36820040013.61.52.5

19853.52790250163.61.52.5

19861.94392812893.61.52.5

19873.57821165393.61.52.5

19884.10004400763.61.52.5

19894.79109420143.61.52.5

19905.4192160293.61.52.5

19914.21583200463.61.52.5

19923.04161622323.61.52.5

19932.96964891683.61.52.5

19942.59560301563.61.52.5

19952.80541970433.61.52.5

19962.93667397433.61.52.5

19972.33756307533.61.52.5

19981.54700880543.61.52.5

19992.19313993253.61.52.5

20003.36668334173.61.52.5

20012.81662875673.61.52.5

20021.595670043.61.52.5

20032.29799850683.61.52.5

20042.66757199883.61.52.5

20053.36583219373.61.52.5

20063.22208639423.61.52.5

20072.86691282813.61.52.5

20083.81693717393.61.52.5

2009-0.32655751493.61.52.5

20101.64605912143.61.52.5

20113.83.61.52.5

To resize chart data range, drag lower right corner of range.

Market Interest Rates1960 to 2011

CUResults

Credit Union Forecast

September 2003

Actual ResultsQuarterly Results/ForecastsAnnual Forecasts

5Yr Avg20022003:12003:22003:32003:420032004

Growth rates:

Asset growth*9.3%11.6%13.5%13.9%9.9%9.2%11.6%8.9%

Credit Unions are Careful LendersTotal Loan Delinquencies as a Percent of Loans Outstanding

Source: FDIC, NCUA and CUNA Policy Analysis . Banks delinquency is 90+ day, CU delinquency is 60+day.

Chart1

0.0140.02930.05370.04870.0471

0.00930.01370.01820.01750.0163

2007

2008

2009

2010

Mar. 2011

Sheet1

Delinquency Rates2007200820092010Mar. 2011

Banks1.40%2.93%5.37%4.87%4.71%

Credit Unions0.93%1.37%1.82%1.75%1.63%

Credit Unions are Careful LendersMarch 2011 Net Loan Chargeoffs Annualized

Source: FDIC, NCUA & CUNA Policy Analysis.

Chart1

0.01820.0101

0.0430.0148

0.01450.0063

0.01140.0118

Banks

Credit Unions

Sheet1

BanksCredit Unions

Total Loans0.01820.0101

Consumer Loans0.0430.0148

Mortgage Loans0.01450.0063

Business Loans0.01140.0118

Credit Unions Served Borrowers As Other Lenders Pulled BackGrowth Since Beginning of Recession: 12/07 to 3/11

Source: FDIC, NCUA & CUNA Policy Analysis.

Chart1

-0.13030.131

-0.1470.383

-0.08320.054

Banks

Credit Unions

Sheet1

BanksCredit Unions

Real Estate Loans-13.03%13.10%

Business Loans-14.70%38.30%

Total Loans-8.32%5.40%

Credit Unions: Consumer Friendly PricingLoan Interest Rate Averages

Source: Informa Research Services. Data as of December 14, 2010.

Chart1

0.10230.1225

0.04390.0605

0.04270.0589

0.10940.1201

0.06680.069

Credit Unions

Banks

Sheet1

Credit UnionsBanks

Reward Credit Cards10.23%12.25%

4-Yr Used Auto4.39%6.05%

5-Yr New Auto4.27%5.89%

48 Month Personal10.94%12.01%

Home Equity 15 Yr6.68%6.90%

Credit Unions: Consumer Friendly PricingSavings Account Interest Rate Averages

Source: Informa Research Services. Data as of December 14, 2010.

Chart1

0.00310.0024

0.00390.0025

0.00340.0023

0.00820.0063

Credit Unions

Banks

Sheet1

Credit UnionsBanks

Personal Savings0.31%0.24%

Interest Checking0.39%0.25%

Money Market Deposit0.34%0.23%

1 Year Certificate0.82%0.63%

Credit Union Financial Benefits(2010 Estimate - Billions)

Chart1

1089

3749

1690

3512

Source: CUNA Policy Analysis.

Higher Savings Yields

$1.1

Sheet1

Column2

Higher Savings Yields$1,089.0

Lower Interest Rates on Loans$3,749.0

Fewer & Lower Fees$1,690.0

Nonmember Benefits$3,512.0

Chart1

0.0560.065

0.0810.099

0.0540.11

0.0190.031

0.0020.014

0.0340.039

0.1650.121

1995

2010

Credit Union Market Shares

Sheet1

19952010

DFI Assets0.0560.065

HH Savings0.0810.099

Res. Mort. (in DFI Portfolio)0.0540.11

Res. Mort. Originations0.0190.031

DFI Busines Loans0.0020.014

Revolving Consumer Credit0.0340.039

Non-Revolving Consumer Credit0.1650.121

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%)

Chart1

0.05610.53330.4105

0.05740.51250.4301

0.05620.49240.4514

0.05590.47280.4713

0.05660.43740.506

0.05630.37420.5695

0.05760.34610.5964

0.05780.3390.6032

0.05680.31990.6232

0.06140.31060.628

0.06380.30.6362

0.06480.28910.6461

0.06480.28910.6461

0.06060.26260.6768

0.0580.2440.698

0.0560.2260.718

0.0570.2140.729

0.0640.21760.7184

0.06490.20830.7268

Sources: FDIC, NCUA, CUNA E&S. "Banking Institutions" include commercial banks and savings & loans. "Smaller Banking institutions" are defined as all banking institutions smaller than the Largest 100.

Credit Unions

All Other Banking Institutions

Largest 100 Banking Institutions

Increasing Dominance of Multi-State Mega-Banks

Sheet1

Credit UnionsAll Other Banking InstitutionsLargest 100 Banking Institutions

925.61%53.33%41.05%

935.74%51.25%43.01%

945.62%49.24%45.14%

955.59%47.28%47.13%

965.66%43.74%50.60%

975.63%37.42%56.95%

985.76%34.61%59.64%

995.78%33.90%60.32%

005.68%31.99%62.32%

016.14%31.06%62.80%

026.38%30.00%63.62%

036.48%28.91%64.61%

046.48%28.91%64.61%

050.06060.26260.6768

060.0580.2440.698

070.0560.2260.718

080.0570.2140.729

096.40%21.76%71.84%

106.49%20.83%72.68%

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.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.

The Federal Reserves 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 YOAsRising loan growth will raise YOAs.Rising short-term interest rates in 2013 will raise yields on short-term investments.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.Most CUs have sufficiently funded allowance for loan losses.Job growth will improve credit quality and lower provisionsLocal 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 propertys 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.

CUResults

Credit Union Forecast

September, 2011

Actual ResultsQuarterly Results/ForecastsAnnual Forecasts

5Yr Avg20102011:12011:22011:32011:420112012

Growth rates:

Savings growth6.3%4.5%2.7%0.7%0.5%0.6%5%5%

Loan growth4.3%-1.5%-1.2%0.8%1.0%0.9%1%3%

Asset growth5.9%3.3%2.7%0.7%0.5%0.6%5%5%

Membership growth1.3%0.7%0.4%0.2%0.2%0.2%1.0%1.0%

Liquidity:

Loan-to-share ratio**79.5%72.2%69.5%69.5%69.9%70.0%70.0%68.7%

Asset quality:

Delinquency rate1.31%1.75%1.70%1.60%1.40%1.30%1.50%1.20%

Net chargeoff rate*0.83%1.14%1.00%0.90%0.90%0.80%0.90%0.80%

Earnings

Return on average assets (ROA)*0.40%0.39%0.73%0.79%0.70%0.70%0.73%0.75%