Economic Update and Outlook

December 2010

Michael J. SteadDirector of Capital Markets

2

Gross Domestic Product

GDP = Personal consumption + Investments + (Exports – Imports) + Government spending

Source: Bloomberg

GDP by Component

3

4

Employment - continuing claims

Source: Bloomberg

5

Employment – Total

Source: Bloomberg

6

Home Prices

Source: Bloomberg

Delinquencies as % of all Residential Loans (excl. REOs)

Source: Bloomberg

8

Consumer Confidence

Source: Bloomberg

9 Source: Bloomberg

Retail Sales (excl. Walmart)

10

Source: Bloomberg

Inflation – Still Tame

11

ISM Indices

Source: Bloomberg

12

Deleveraging Households

Source: Federal Reserve

US Consumer Credit

2150

2200

2250

2300

2350

2400

2450

2500

2550

2600

2005 2006 2007 2008 2009 YTD Aug 2010

$ bi

llion

s

13

U.S. Gross National Debt Gross

Persistent Current Account Deficit

The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Harbinger of weaker US dollar, mitigated by country “Safety &

Soundness”

15

Foreign Exchange USD/Euro

Source: Bloomberg

Country External debt Per capita US$  % of GDP Corp. Tax Rate World 56,900,000,000,000.00$ 8,422.00$ 98% 26.38% Luxembourg 1,994,000,000,000.00$ 4,028,283.00$ 3854% 29.63% Ireland 2,287,000,000,000.00$ 515,671.00$ 1004% 12.50% Netherlands 3,733,000,000,000.00$ 226,503.00$ 470% 25.50% United Kingdom 9,088,000,000,000.00$ 147,060.00$ 416% 28% Hong Kong 655,100,000,000.00$ 92,725.00$ 311% 16.50% Switzerland 1,339,000,000,000.00$ 182,899.00$ 271% 25% Belgium 1,354,000,000,000.00$ 126,188.00$ 267% 33.99% Portugal 507,000,000,000.00$ 47,632.00$ 223% 25% Austria 808,900,000,000.00$ 97,411.00$ 212% 25% Denmark 607,400,000,000.00$ 110,216.00$ 196% 25% France 5,021,000,000,000.00$ 80,209.00$ 188% 33.33% Greece 552,800,000,000.00$ 49,525.00$ 167% 23.50% Spain 2,410,000,000,000.00$ 52,588.00$ 165% 30% Sweden 669,100,000,000.00$ 72,594.00$ 165% 26.30% Germany 5,208,000,000,000.00$ 63,493.00$ 155% 29.80% Finland 364,900,000,000.00$ 68,180.00$ 153% 26% Norway 548,100,000,000.00$ 113,174.00$ 143% 28% Italy 2,328,000,000,000.00$ 39,234.00$ 101% 31.40% United States 13,450,000,000,000.00$ 43,758.00$ 94% 46.32% Australia 920,000,000,000.00$ 42,057.00$ 92% 30% Hungary 116,800,000,000.00$ 11,667.00$ 90% 19% Ukraine 104,000,000,000.00$ 2,275.00$ 90% 25% Canada 833,800,000,000.00$ 24,749.00$ 62% 23% United Arab Emirates 128,600,000,000.00$ 26,202.00$ 56% 0% Poland 201,200,000,000.00$ 5,279.00$ 47% 19% Turkey 274,000,000,000.00$ 3,884.00$ 45% 20% Japan 2,132,000,000,000.00$ 16,715.00$ 42% 40.69% Korea, South 333,600,000,000.00$ 6,842.00$ 40% 25% Argentina 108,600,000,000.00$ 2,706.00$ 35% 35% Russia 369,200,000,000.00$ 2,611.00$ 30% 20% Indonesia 150,700,000,000.00$ 651.00$ 28% 25% Mexico 177,000,000,000.00$ 1,646.00$ 20% 28% India 223,900,000,000.00$ 187.00$ 18% 33.99% Brazil 216,100,000,000.00$ 1,129.00$ 14% 34% China 347,100,000,000.00$ 260.00$ 7% 25%

This is a list of countries by external debt, the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services, where the public debt is the money or credit owed by any level of government, from central to local, and the private debt the money or credit owed by private households or private corporations based in the country under consideration.

17

Interest Rates - Short

Source: Bloomberg

18Source: Bloomberg

Interest Rates - Long

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Commodities

• Commodity and Crude prices reflect strengthening global economy Source: Bloomberg

20

Global View (Source IMF)2009 GDP (millions of USD)

The significance of Europe and

the USA

Note: China’s GDP understated; does not include $215 billion from Hong Kong AND is calculated at the official exchange rate!

Source: Wikipedia®

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Business Impact

• No meaningful turnaround in economic growth with job creation yet, however the recent releases support the expectation for avoiding a double dip, while also confirming that we are on a weak track to recovery. A return to modest economic expansion evidenced by the ISM Manufacturing and Service Indices has not negatively impacted inflation (as measured by the Fed), leaving the Fed plenty of room to maneuver. Rates will stay low for the remainder of the year, through end of 2011.

• The Fed has purchased over a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – specifically why no one in the private sector would consider a purchase. Thankfully, unlike for banks, there is no mark-to-market accounting.

• Domestic economic expansion, albeit moderate, will continue to create increased need for financing. Current low interest rates is setting the stage for interest rate risk management. Use of interest rate derivatives will expand (again). Borrowers should lock in financing at fixed rates (swap, swaption, caps etc.) as soon as possible.

• The current volatility in the FX markets courtesy of the PIIGS provides us with evidence for the need to manage FX risks. Beware of countries with large changes or continued trade imbalances. US dollar is also a haven in uncertain times, and this overrides current account concerns.

• Absorption of liquidity combined with expectations for loan growth makes access to credit paramount.

• The USA is a consumer-based economy, with Personal Consumption Expenditures that dwarf all other components of GDP. The absence of borrowing ability at the consumer level due to declines in home values has and continues to harm spending. America would benefit from promoting structural changes to reduce reliance on consumption and promote exports and a current account surplus.

• The continued Fed action of QE will keep interest rates low, and increases business confidence which should lead to an improving stock market, improved job creation and ultimately should boost spending.