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Presents

Presents. STATE OF THE INDUSTRY AND THE ECONOMY’S IMPACT ON MEMBER BEHAVIOR BRIAN TURNER DIRECTOR, CHIEF STRATEGIST. E CONOMIC G ROWTH AND GDP. GROWTH TREND IS SLOWING E CONOMIC G ROWTH : C ONSUMER S PENDING G OVERNMENT S PENDING B USINESS I NVESTMENT

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Presents

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  1. Presents STATE OF THE INDUSTRY AND THE ECONOMY’S IMPACT ON MEMBER BEHAVIOR BRIAN TURNER DIRECTOR, CHIEF STRATEGIST

  2. ECONOMIC GROWTHAND GDP GROWTH TREND IS SLOWING ECONOMIC GROWTH: • CONSUMER SPENDING • GOVERNMENT SPENDING • BUSINESS INVESTMENT FACTORS FROM CONSUMERS: • EMPLOYMENT • CONSUMER SPENDING • HOUSEHOLD WEALTH +2.2% +1.8% +1.7% COMPARE TO INFLATION RATE OF 1.7%

  3. EMPLOYMENT OVERVIEW EMPLOYMENT SECTOR REMAINS WEAK EMPLOYMENT RATE: …… 7.8% / 8.3% / 10.4% UNDEREMPLOYMENT RATE: ……………………… 14.7%

  4. HOUSING SECTOR U.S. +1.2% YoY CHANGE IN AVG HOME PRICES U.S. HOME VALUES ARE RISING OR AT LEAST IMPROVING +3.1% +3.2% +6.4% +0.9% +0.4% +4.8% -0.9% +5.4% -2.6% +0.4% -1.0% +2.2% +16.6% +0.8% -9.9% +3.7% +5.3%

  5. HOUSING SECTOR MORTGAGE APPLICATIONS (000s) TOTAL APPLICATIONS (000s) PERCENTAGE REFINANCING MORTGAGE REFIS ARE DRIVING APPS • HIGHER PCT OF REFIS • LOWER VOLUME OF TOTAL APPLICATIONS 6yr Avg - REFI 20yr Avg - REFI DEC 2006 JAN 2008 JAN 2009 AUG 2010

  6. HOUSING SECTOR PURCHASE REFI MORTGAGE REFIS ARE DRIVING APPS • DROP IN PURCHASE APPs • LOWER VOLUME OF TOTAL APPS APPLICATIONS (MM) 9yr Avg - REFI 2003 2005 2007 2009 2011 2012 REFI-to-PURCHASE MULTIPLE AVG 30YR FRM RATE REFI-to-PURCHASE RATIO (1 = 50/50) 2003 2005 2007 2009 2011 2012

  7. MARKET EFFECT ON BEHAVIOR RETAIL SALES MEMBERS DEFER SPENDING 2010 2011 2012 JOB SECURITY CONSUMER CREDIT HOME VALUES STOCK MARKET 2012

  8. MARKET EFFECT ON BEHAVIOR MEMBERS DEFER SPENDING JOB SECURITY HOME VALUES STOCK MARKET

  9. IMPACT ON INTEREST RATES DEC 2009 YIELD CURVE FLATTER AND MARKET SPREADS TIGHTER 2010 2011 2012 SLOPE OF THE YIELD CURVE 3mo to 2yr +47 +23 +14 2yr to 5yr +142 +59 +37 5yr to 10yr +128 +105 +103 MARGINAL SPREADS 30yr FRM +152 +207 +177 60mo Vehicle +256 +319 +284 3yr MBS +134 +129 +85 DEC 2010 DEC 2011 OCTOBER 2012

  10. IMPACT ON LOAN RATES LOANS TOTAL NOMINALSPREAD Dec 10 Dec 11 Oct 12 CHANGE CHANGECHANGE VEHICLE LOANS…… 60-mo New Auto 4.31% 3.54% 3.14% (0.40)% (0.06)% (0.34)% 48-mo Used Auto 4.45 3.66 3.24 (0.42) (0.01) (0.41) REAL ESTATE LOANS……. 5yr Home Equity 5.68% 5.32% 5.04% (0.28)% (0.06)% (0.22)% 15yr FRM 4.47 3.56 3.04 (0.52) (0.32) (0.30) 30yr FRM 5.10 4.14 3.61 (0.53) (0.25) (0.28)

  11. IMPACT ON SHARE RATES SHARES TOTAL NOMINALSPREAD Dec 10 Dec 11 Oct 12 CHANGE CHANGECHANGE NON-TERM…… Share Drafts 0.21% 0.17% 0.12% (0.05)% 0.00% +0.05% Regular Savings 0.28 0.25 0.20 (0.05) 0.00 +0.05 Money Market 0.45 0.31 0.24 (0.07) 0.00 +0.07 TERM……. 3mos 0.42% 0.28% 0.23% (0.05)% +0.08% +0.13% 12mos 0.87 0.61 0.48 (0.13) +0.05 +0.18 24mos 1.24 0.91 0.73 (0.18) (0.01) +0.17 36mos 1.60 1.22 0.98 (0.24) (0.06) +0.18

  12. IMPACTON RELATIVE VALUE WHOLE LOANS STILL HAVE VALUE (EVEN IN THIS LOW RATE ENVIRONMENT) • MARGINAL SPREADS MAY ABSORB RISK • LOWER CREDIT RISK MAY ABSORB RISK 2005 2006 2007 2008 2009 2010 2011 2012 30YR FRM 5YR VEHICLE 2YR MBS 1YR AGY O/N CASH

  13. IMPACTON INTEREST RATES SHORT-TERM RATES LONG-TERM RATES FED HAS TELEGRAPHED THEIR INTENTIONS KEEP OVERNIGHT RATE AT CURRENT LEVEL UNTIL MID-2015 “OPERATION TWIST” WILL TRY TO KEEP LONG-TERM RATES IN LINE HOW? ….WHY? …. AND WHAT WILL BE THE EFFECT? FED TO BUY $40B IN MBS, PER MONTH TO KEEP RATES DOWN UNTIL EMPLOYMENT SECTOR IMPROVES AND SPENDING BEHAVIOR RETURNS LITTLE MOVEMENT IN ST-RATES, VOLATILITY IN LT-RATES VOLATILITY IN MARGINAL LOAN AND INVESTMENT SPREADS

  14. CONSUMER BEHAVIOR WHAT CONSUMERS CONSIDER MIDDLE CLASS: HAVE A SECURE JOB……………………………………86% OWN A HOME……………………………………………..45% HAVE A COLLEGE EDUCATION………………………..37% HAVE FINANCIAL INVESTMENTS……………………..28% CONSUMERS’ TECHNOLOGY: U.S. ADULTS WHO HAVE MOBILE CONNECTION…..50% THOSE WHO HAVE SMARTPHONES………………44% THOSE WHO HAVE TABLETS………………………..22% THOSE WHO DON’T WHO PLAN ON GETTING…...23% SMARTPHONE/TABLET USERS WHO GET NEWS WEEKLY FROM DEVICES……………………………..…64% MEMBERS’ VIEW OF THE WORLD Source: Pew Survey

  15. CONSUMER BEHAVIOR CONSUMERS’ FINANCIAL PROFILE: AVG HOUSEHOLD INCOME……………………. $50,964 MEDIAN NET WORTH……………....................... $77,300 AVG CONSUMER DEBT …………..................... $16,046 PCT OF TOTAL DEBT DELINQUENT………….. 9.3% AVG CREDIT CARD DEBT................................... $15,587 PCT OF HHOLDS WITH CC BALANCE..............46.7% AVG AGE OF VEHICLE ON ROAD….................. 11.8 years old AVG AUTO LOAN BALANCE O/S………………. $11,546 AVG STUDENT LOAN BALANCE……………….. $23,300 HHOLDS WITH STUDENT DEBT……………….. 19% PCT STUDENT DEBT DELINQUENT…………… 10% MEMBERS’ VIEW OF THE WORLD Source: Federal Reserve, Bank Track, Creditcards.com, FHFA

  16. CONSUMER BEHAVIOR AND USE OF CUSERVICES MEMBERS’ USE OF CREDIT UNION SERVICES Source: CUNA Member Survey

  17. CONSUMER BEHAVIOR AND USE OF CUSERVICES NEARLY 70% OF NONMEMBERS, AGES 18 TO 25, ARE“NOT AT ALL FAMILIAR” WITH CREDIT UNIONS…… WITHIN CURRENT CREDIT UNION MEMBER HOUSEHOLDS, THEREARE20-MILLIONNONMEMBERSYOUNGERTHAN 18…… CURRENTLY, THE AVERAGE AGEOF ALL CREDIT UNION MEMBERSIS ……. 47 MEMBERS’ USE OF CREDIT UNION SERVICES Source: CUNA Member Survey

  18. SNAPSHOT OF CUNETWORK US CREDIT UNIONS SECOND QUARTER 2012 - US CREDIT UNIONS Source: NCUA

  19. GROWTH AND CAPITALIZATION ASSET GROWTH KEEPING UP WITH EQUITY GROWTH 3YR GROWTH – US CREDIT UNIONS …….UP FROM: 9.8% • STRATEGIC OBJECTIVE: • MANAGED GROWTH TO KEEP WELL-CAPITALIZED PROFILE • CORRELATE GROWTH STRATEGIES WITH INCOME’S CONTRIBUTION TO CAPITAL Source: NCUA

  20. LOAN PORTFOLIO PERFORMANCE LOAN GROWTH TURNING (BUT FOR HOW LONG?) 201020112012 • STRATEGIC OBJECTIVE: • MODERATE GROWTH IN 2013 • RELATIVE VALUE POINTS TO CORE LOANS • CAPACITY FOR REALLOCATION OF REAL ESTATE Source: NCUA

  21. LOAN PORTFOLIO PERFORMANCE LOAN QUALITY CREATES VALUE LOAN QUALITY DELINQUENCIES: PCT PCT RATE DEL PORT UNSECURED 0.91% 5% 11% CONSUMER 0.82 27 34 REAL ESTATE 1.50 68 55 TOTAL 1.20% - - - - Indirect 0.67% 7% 13% Source: NCUA

  22. SHARES AND DEPOSITS 201020112012 SHARE GROWTH REMAINS STRONG • STRATEGIC OBJECTIVE: • STEADY GROWTH IN 2013 • CURRENT ALLOCATON ENHANCES COST OF FUNDS • RETAIN SHORT-TERM FUNDING DURATION • MANAGED GROWTH TO RETAIN “WELL-CAPITALIZED” PROFILE Source: NCUA

  23. LIQUIDITY AND INVESTMENTS LIQUIDITY PROFILES HAVE NEVER BEEN STRONGER +$38-billion NET OPERATING CASH FLOW QUARTERLY FROM 2005 - 2012 - $7.0-billion ANNUAL GROWTH: 2009 ............. + $65.1-bil 2010 ………….. + $41.5-bil 2011 ………….. + $34.2-bil 2012 ………….. + $42.0-bil* *Projected Annualized Source: NCUA “Change in Total Shares versus Change in Total Loans”

  24. LIQUIDITY AND INVESTMENTS DIFFERENCES IN GROWTHAND COMPLEXITY GROWTH RATES - 2012 CURRENT ALLOCATION - 2012 • STRATEGIC • OBJECTIVE: • FOCUS ON RELATIVE VALUE AND CASH FLOW DIVERSITY • MAINTAIN PROPER DISCIPLINE • DO NOT COMPROMISE PRINCIPLES Source: NCUA *Pct of Cash and Investments **Pct of Investment Securities and CDs

  25. IMPACT ON EARNINGS ALLOCATIONS ALLOCATIONS DRIVE EARNINGS • STRATEGIC • OBJECTIVE: • LOAN QUALITY WILL HELP OFFSET LOWER MARGINAL YIELDS • COST OF FUNDS WILL STABILIZE • SLIGHTLY HIGHER NET OPERATING COSTS EARNINGS Source: NCUA

  26. RISK TO EARNINGS ASSESS REAL EXPOSURE TO NET INTEREST MARGIN ADVERSE IMPACT ON EARNINGS • MOST HAVE LESS ADVERSE EXPOSURE TO RISING RATES THAT WHAT IS CONTENDED • MOST HAVE GREATER ADVERSE EXPOSURE TO STATIC RATE ENVIRONMENT THAN OTHER CLIMATES • Stronger Economy Sparks Rate Increases – Increases Loan Demand • Expanded Loan Growth Layers on Current Portfolio – Lessens Exposure • Liquidity Profiles Lessens Upward Pressure on COF and Rate Sensitivity • STRATEGIC OBJECTIVE: • CURRENT CLIMATE MAXIMIZES NEV METRICS • BE CAUTIOUS WHEN USING METRICS AS A STRATEGIC GAUGE • MAKE PRACTICAL ASSESSMENT OF RISK AGAINST CURRENT RELATIVE VALUE • Stronger Economy Sparks Rate Increases – Increases Loan Demand • Expanded Loan Growth Layers on Current Portfolio – Lessens Exposure • Liquidity Profiles Lessens Upward Pressure on COF and Rate Sensitivity

  27. MORE ABOUT RELATIVE VALUE BREAK-EVEN ANALYSIS – 5Yr HORIZON IF WE INVESTED WE WOULD OVER THE WE WOULD HAVE TO EARN THE FOLLOWING TO B/E TODAY IN A EARN FOR NEXT 30Yr FRM 15Yr FRM Auto 4Yr Invmt 1Yr Agy Bullet 0.22% 1yr 4yrs 4.20% 3.36% 3.87% 1.73% 2yr Agy Call 0.35 2yrs 3yrs 5.43 4.32 5.00 2.35 3yr Agy MBS 1.20 3yrs 2yrs 6.70 5.03 6.05 1.80 4yr Agy MBS 1.35 4yrs 1yr 11.60 8.25 10.30 - - 5yr Auto 3.14 2.5yrs 2.5yrs 3.66% 2.32% - - - - 15yr FRM 2.73 5.0yrs - - - - - - - - - - 30yr FRM 3.40 5.0yrs - - - - - - - - - - EXAMPLE: If we invested in a 3-year MBS at 1.20%, after three years, we would have to earn 6.70% for two years in order to break-even against today’s 30yr FRM QUESTION: Will we be Lending or Investing at 6.70% in three years?

  28. MORE ABOUT RELATIVE VALUE BREAK-EVEN ANALYSIS – 5Yr HORIZON IF WE INVESTED WE WOULD OVER THE WE WOULD HAVE TO EARN THE FOLLOWING TO B/E TODAY IN A EARN FOR NEXT 30Yr FRM 15Yr FRM Auto 4Yr Invmt 1Yr Agy Bullet 0.22% 1yr 4yrs 4.20% 3.36% 3.87% 1.73% 2yr Agy Call 0.35 2yrs 3yrs 5.43 4.32 5.00 2.35 3yr Agy MBS 1.20 3yrs 2yrs 6.70 5.03 6.05 1.80 4yr Agy MBS 1.35 4yrs 1yr 11.60 8.25 10.30 - - 5yr Auto 3.14 2.5yrs 2.5yrs 3.66% 2.32% - - - - 15yr FRM 2.73 5.0yrs - - - - - - - - - - 30yr FRM 3.40 5.0yrs - - - - - - - - - - EXAMPLE: If we invested in a 3-year MBS at 1.20%, after three years, we would have to earn 6.70% for two years in order to break-even against today’s 30yr FRM QUESTION: Will we be Lending or Investing at 6.70% in three years?

  29. SUMMARY • MODERATE GROWTH AND VOLATILE RATE ENVIRONMENT • 2.2 TO 2.4 PERCENT US GROWTH, IMPACTED BY INFLATION • SLIGHT INCREASEIN ANNUALIZED CONSUMER SPENDING • “FLASH MARKET” EFFECTS • MODERATE GROWTHIN LOAN DEMAND – REFIs and AUTOs • STEADY UPWARD TREND IN SHARE GROWTH • CONTINUED CREATIONOF NET OPERATING CASH • LITTLE MOVEMENTIN ST RATES, VOLATILITYIN LT RATES • SHIFTS IN LOAN AND INVESTMENT SPREADS

  30. SUMMARY • CRITICAL CHALLENGES AHEAD AND CONSIDERATIONS • MEMBER DEMAND’S IMPACTON MANAGING ASSET ALLOCATION • RELIANCEON INV PORT REVENUES TO REPLICATE INCOME STREAMS • LOAN PORTFOLIO QUALITY AND ALLOCATION OF FUNDING • Considerations- • DOES GROWTH STRATEGY PRODUCE CORRESPONDING INCOMEASTO SUPPORTA “WELL-CAPITALIZED” INSTITUTION…… • THINKMARGINAL SPREADRATHER THANMARGINAL YIELD….. • ISTHEPERCEIVED RISK ASSOCIATEDWITH FUTURE EARNINGS LESS THANTHEACTUAL IMPACTON SHORT-TERM EARNINGS…….

  31. COMMENTS AND QUESTIONS BRIAN TURNER DIRECTOR, CHIEF STRATEGIST 800.442.6427 214.703.7881 bturner@catalystcorp.org

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