Charles N. McQueen

McQueen Financial & CU*A

• Strategic Partner for Asset Liability Management

• Current Interest Rate Environment

• Industry Analysis

• Interest Rate Risk (IRR) Mitigation

• Investing Cash

• Sample McQueen Financial ALM Report

2

McQueen Financial & CU*A

• Strategic Partner for Asset Liability Management

• McQueen Financial Provides:

– Completed report

– Analyses of the report

– Review the report with you (conference call or in person)

– Recommendations to improve your ALM position

– Recommendations on leveraging your CU*A system

3

McQueen Financial & CU*A

• CU*A Provides

– Click to send data

– Schedule data transfer

– Custom reports for McQueen Financial

– CU*A user reports to look at historical yields vs. historical rates (in process)

4

McQueen Financial Advisors

• Economic Outlook

5

Economy

• The outlook, despite the monthly ups and downs, reflects improving conditions real GDP growth of 2.9% in 2010 and about 3.0% in 2011

• The second half of 2010 demonstrated consistent growth. Corporate profits, global growth and accommodating monetary policy are all pluses

• The recovery is still constrained by a number of structural factors, but the healing process is clearly underway

• Unfortunately the recovery, while on firmer footing, still faces risks:

• threat of inflationary pressures/asset bubbles

• private and public sector deleveraging

• international events that are wide-ranging

6

Real GDP Quarterly Growth Q1

2004 – Q4 2010

Source: BEA. Gross Domestic Product. March 25, 2011.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Rea

l G

DP

q/q

Ch

an

ge

Economic Recovery is Gaining Strength and Growth May Exceed 3% in 2011

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

S&

P 5

00

Dail

y C

los

e

S&P 500 Daily IndexJanuary 4, 2010 – April 6, 2011

Source: Yahoo Finance. April 7, 2011.

1,335

1,132

1,225

2010 12%

2011 6% YTD

Although Recent Global Shocks Have Impacted the Equity Markets, Some Clear Signs of Acceleration

are Visible

Industrial Production IndexJanuary 2007 – February 2011

85

87

89

91

93

95

97

99

101

Ind

us

tria

l P

rod

ucti

on

Industrial Production Has Rebounded 12% Since the 2009 Bottom, a Signal That the Sector is Healing

• Recovery has been slower than all post-war cycles due to structural imbalances; not a surprise in retrospect

• Recovery is proving to be more durable than many feared– numerous external shocks over the last 18 months

• Households are still in the process of deleveraging and rebuilding balance sheets– the process will take time

• Against this back-drop, consumers are continuing to display higher levels of price-sensitivity

• Imbalances in some sectors were more severe than previously assumed–housing and commercial real estate

• The public sector is just now entering the deleveraging phase and the process will likely accelerate over the next five years

Key Observations Two Years Into the Recovery

Cumulative Change in GDP and Employment from Start of Recession(latest one and the three previous)

If the economy adds 150,000 jobs/month, the labor market will break even in April 2015*

-9%

-4%

1%

6%

11%

16%

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Months after each recession's start

GDPJuly 1981 -November 1982

July 1990 - March 1991

March 2001 -November 2001

Latest Recession

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Months after each recession's start

Jobs GrowthJuly 1981 -November 1982

July 1990 - March 1991

March 2001 -November 2001

Latest Recession

The U.S. Economy Lost 7.5 Million Jobs During the Latest Recession and in 2010 Added Only 909,000

Cumulative Change in Employment by Sector (in months after the start of the latest recession)

LS. April 2011.

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

0 3 6 9 12 15 18 21 24 27 30 33 36 39

Months after latest recession's start

Education

Health Care

Finance & Insurance

Retail

Transportation

Information

Manufacturing

Construction

Manufacturing and Construction Sectors are Far from Returning to Pre-recession Employment

Cumulative Change in GDP and Personal Consumer Expenditures from Start of Recession(latest one and the three previous)

-9%

-4%

1%

6%

11%

16%

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Months after each recession's start

GDP

July 1981 -November 1982

July 1990 - March 1991

March 2001 -November 2001

Latest Recession

-5%

0%

5%

10%

15%

20%

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48

Months after each recession's start

Consumer Spending

July 1981 -November 1982

July 1990 - March 1991

March 2001 -November 2001

Latest Recession

Latest Recession Hurt Consumer Spending More Than Any Other Downturn in Recent History, But it is Coming Back

Total U.S. Debt vs. Real GDP Q11952 – Q4 2010

$0

$5

$10

$15

$20

$25

$30

$35

Tri

llio

ns

Total U.S. Debt GDP

U.S. Debt is Nearly Triple GDP

Total U.S. Government Debt vs. Real GDP Q1

1952 – Q4 2010

$0

$2

$4

$6

$8

$10

$12

$14

Tri

llio

ns

Total U.S. Government Debt GDP

Public Sector Debt is Reaching a Tipping Point

0

100

200

300

400

500

600

700

800

900

1,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

E

20

12

E

20

13

E

20

14

E

20

15

E

20

16

E

Fe

de

ral G

ove

rnm

en

t H

um

an

Re

so

urc

e

Ou

tla

ys

by F

un

cti

on

(in

$ B

illi

on

s)

Social Security

Medicare

Health

Income Security

Education, Training, Employment, and Social Services

Veterans Benefits and Services

Federal Government Human Resources Outlays by Sub-function (in $ Billions)FY 1990 – 2016

% Change 2000 to 2010

73%

145%

129%

139%

131%

138%

Spending on Some Major Groups Has Accelerated in Recent Years – Social Security, Health, Medicare, and Income Security

Yield Curves

17

Historical Yields

18

Last Two Rate Cycles

19

Current Fed Funds Projections

20

Last Two Rate Cycles

212011 | 2012 | 2013 | 2014

Over 2 Years

Net Loans and Leases to Deposits(Domestic and Foreign)

2001-2010

22

Real Estate Loan Growth Rates2001-2010

23

Quarterly Net Interest Margins, Annualized2006-2010

24

Quarterly Cost of Funding Earning Assets2004-2010

25

IRR Mitigation

• How to mitigate IRR and live in today's interest rate environment

– Liability structure

– Asset structure

– Investment portfolio structure

26

IRR Mitigation

• Liability Structure

– Portfolio mix

– Add fixed term deposits (CD’s)

– More Non-Interest bearing deposits

…..What is your Credit Union marketing?

– FHLB Advances

27

IRR Mitigation

• Asset Structure

– Loan types and pricing

– Grow short duration loans

– Sale vs. portfolio loans

• Why keep fixed mortgages

• Keep 5/1 & 7/1 Arms

28

Investment Portfolio

• Do not bet on rates

– Manage your portfolio to the best duration for your needs

– Invest cash:

• Low earning

• May skew IRR position

When interest rates rise cash will be utilized, and mitigate the benefit for your IRR position.

29

Investment Portfolio

• How to invest cash?– Limit duration extension securities

• Step up bonds (most ALM reports can not handle)

• 30 year mortgage pass through

• Long maturity callable securities

– Add non duration extending• Bullet agency bonds

• CD’s

• Taxable municipal

• US Treasury Bonds

30

Investment Portfolio

• What to buy?– Limit concentration in any asset type

• FNMA

• FHLMC

• Cash– Plenty

– Use the positive sloped yield curve

– 6 times the yield if invested

– Can mask IRR situations

– Do not buy, if you do not understand

31

ALM

• Review of McQueen Financial Advisors, Inc. ALM report

32

33

34

35

36

37

38

39

40

41

42

43

Questions?

• Thank you for your time and commitment.

Charles N. McQueen

McQueen Financial Advisors, Inc.

248-548-8400

www.m-f-a.com

44