The Economy and Alaska Credit Unions

Alaska Credit Union LeagueAnnual Meeting

May 1, 2010Bill Hampel, Chief Economist

Credit Union National Association

bhampel@cuna.coop

Economic Summary

• We’ve survived the Great Recession– Worst since the Great Depression, but not

nearly as severe.

• There have been wholesale changes in the financial system, and we’re not finished.

• A “growth” recovery began last summer. The public will notice by summer.

Rate SpreadsTED Spread: Difference between 3-Mo. LIBOR & 3-Mo. Treasury

0

1

2

3

4

5

90 92 94 96 98 00 02 04 06 08Source: Federal Reserve & British Bankers Association.

Average = 0.40%

Rate SpreadsTED Spread: Difference between 3-Mo. LIBOR & 3-Mo. Treasury

0

1

2

3

4

5

90 92 94 96 98 00 02 04 06 08 10Source: Federal Reserve & British Bankers Association.

Bear Stearns Hedge FundsCollapse

Lehman BrothersCollapse

Average = 0.40%

Rate Spreads TED Spread: Difference between 3-Mo. LIBOR & 3-Mo. Treasury

0

1

2

3

4

5

Jan-08 May Sept Jan-09 May Sep JanSource: Federal Reserve & British Bankers Association.

Gross Domestic Product Quarterly Changes at Annual Rates, Real

-8

-6

-4

-2

0

2

4

6

8

10

0

Source: Commerce Dept

2001 Recession

Worst 2 QtrsSince 1958

2008-2009 Recession

2011

Feb 2010

April 2010

Repairing Household Finances

• Three Huge Developments:–Two Related, Longer Term:

• Savings Decline• Debt buildup

–One More Recent• Wealth Declines

–Home Values–Equity Prices

Household Savings Rate(Savings as a % of Disposable Income - 3 Mo Moving Avg.)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

79 83 87 91 95 99 03 07

Source: BEA.

Feb 2019 = 3.5%

Paradox of Thrift: at the household level saving is desirable – but if all households save all at once it is devastating to the economy…

Household Savings Rate(Savings as a % of Disposable Income - 3 Mo Moving Avg.)

0%

1%

2%

3%

4%

5%

6%

07 08 09 10

Source: BEA.

Household Debt OutstandingTo Annual Disposable Income

Consumer

Mortgage

0%

20%

40%

60%

80%

100%

120%

140%

Sources; Federal Reserve Flow of Funds, Commerce Department

U.S. Home PricesS&P/Case-Shiller National Index

100104106

108109116116118

122126129

130134

138142

146153

159163

169177

183187189190188187185183

180

170

159155

150

139

129133135

136

113

90

100

110

120

130

140

150

160

170

180

190

200

00:1 00:3 01:1 01:3 02:1 02:3 03:1 03:3 04:1 04:3 05:1 05:3 06:1 06:3 07:1 07:3 08:1 08:3 9:01 9:03

0

200

400

600

800

1,000

1,200

1,400

1,600

80 81 8283 84 85 8687 88 89 9091 92 93 9495 96 97 9899 00 01 0203 04 05 0607 08 09 10

0

5 0

1 00

1 5 0

2 00

2 5 0

3 00

3 5 0

4 00

Source: BLS & CUNA E&S.

S&P 500

Down 50%, Up 50%.Even?

Consumer Confidence1980 to Present

0

20

40

60

80

100

120

140

160

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: Conference Board, Index 1985 = 100

Recent Consumer Confidence

0

25

50

75

100

Jan08

May Sept Jan09

May Sep Jan

Source: Conference Board.

Latest: Apr

24

58

Non-Farm Payrolls Monthly Changes SA

-1000

-800

-600

-400

-200

0

200

400

600

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01 '02 '03 '04 '05 '06 '07 '08 09 10

Source: Federal Reserve Board

Latest: Mar 2009

Unemp Rate: 9.7%

8.4 million jobs lost since Dec. 07 to Feb 2010

Non-Farm Payrolls Monthly Changes SA

-1000

-800

-600

-400

-200

0

200

400

600

'06 '07 '08 09 10

Source: Federal Reserve Board

Unemp Rate: 9.7%

January: -780k

0

2

4

6

8

10

12

14

80 84 88 92 96 00 04 08

0

5 0

1 00

1 5 0

2 00

2 5 0

3 00

3 5 0

4 00

Source: BLS & CUNA E&S.

Unemployment Rates and Recessions(Percent of Labor Force)

March 9.7%

Broadest Measure: 16.9%

Consumer Price Index 1970 to Present

5.6

3.33.4

8.7

12.3

6.9

4.9

6.7

9.0

12.5

8.9

3.83.84.04.44.44.7

6.1

3.12.92.72.72.53.3

1.71.6

2.63.4

1.62.4

1.9

3.43.5

2.5

4.1

-0.1

2.4

13.3

1.1

3.8

-2

0

2

4

6

8

10

12

14

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08

Annual Percentage Change

{Core Rate: 1.2}YTD March

0123456789

1011

88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Fed Funds 10-yr Treas

Latest: April

Interest Rates1988 to 2010

1 2 3 4 5 6 7 8 9 10

Treasury Yield Curves

0.0

1.0

2.0

3.0

4.0

5.0

1 2

Feb 09 Feb 10 April 10

Economic ForecastMarch 2010

5Yr Avg 2009 2010:1 2010:2 2010:3 2010:4 2010 2011

Growth rates:*Economic Growth (% chg GDP) 1.2% -2.4% 3.5% 3.5% 2.5% 2.5% 3.0% 3.0%Inflation (% chg CPI) 2.5% 2.8% 2.0% 2.5%Core Inflation (ex. food & energy) 2.1% 1.8% 1.2% 1.4% 1.6% 1.8% 1.5% 2.0%Unemployment Rate 5.9% 9.3% 9.7% 9.6% 9.4% 9.3% 9.5% 8.5-9%Fed Funds Rate 3.06% 0.16% 0.13% 0.13% 0.17% 0.50% 0.23% 1.50%10-Year Treasury Rate 4.13% 3.28% 3.72% 3.80% 4.00% 4.20% 3.93% 4.50%* Percent change, annual rateAll other numbers are averages for the period

Actual Results Quarterly Results/Forecasts Annual Forecasts

Summary:2010 Economic Outlook

• Freefall has ended• Modest growth will resume• Unemployment rate will only drift down • No near-term inflation pressures• Little change in short-term interest rates• Gradual upward pressure on long-term rates• Overall: a fragile low-growth economy• The economy could surprise!!

Credit Union Outlook Through 2010• Faster savings and asset growth

• Slower organic loan growth– But more growth than normal in recession

• Continued higher than normal loan delinquencies and losses, likely peaked

• Substantial downward pressure on net income– But, some opportunity for net interest income– Yield curve vs. asset mix (investment growth)

• Falling net worth ratios

Credit Union Loan Growth (Annual % Change)

10119

57

1

46

-6

77

11

6

8

11

32

18

25

1212

1514

8

53 3

8

16

911

9

-10

-5

0

5

10

15

20

25

30

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09Mar10F11F

U.S. Alaska

Source: NCUA & CUNA Economics and Statistics

March YTD, NSA

Credit Union Delinquency(Total Portfolio)

0.0

0.5

1.0

1.5

2.0

2.5

U.S. 2 2.1 2.2 1.9 1.8 1.8 1.7 1.6 1.3 1.1 0.9 1 1 1 0.9 0.8 0.7 0.8 0.8 0.8 0.7 0.7 0.7 0.9 1.4 1.8 1.8 1.9 1.8

Alaska 0.6 0.5 0.5 0.6 0.7 0.7 0.7 1.1 1.3 1.4

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 093/ 10

10 11

Source: NCUA, CUNA Economics and Statistics

Percent of Outstandings

Greater Delinquency Increases at BanksLoan Delinquency Rates

0.79% 0.68%

2.93%

1.37%

5.37%

1.82%

0.93%

1.40%

US Banks (90+ Day) US CUs (60+ Day)

2006200720082009

Source: FDIC, NCUA & CUNA E&S.

Net Loan Chargeoffs(Total Portfolio)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

U.S. 0.4 0.6 0.6 0.6 0.7 0.7 0.7 0.6 0.5 0.4 0.4 0.5 0.6 0.6 0.5 0.4 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.8 1.2 1.1 0.8

Alaska 0.3 0.3 0.3 0.4 0.4 0.5 0.5 0.8 0.9 1.4

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910F

11F

Source: NCUA, CUNA Economics and Statistics

Percent of Outstandings

Net Charge-offs by Loan TypeAll CUs

0.49%

0.81%1.21%

1.70%

2.83%

4.29%

0.02%0.12%

0.27%

0.18%

0.64%

1.19%

0.15%

0.46%0.65%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

Overall CreditCard

Firsts Seconds MBLs

2007 2008 2009

Net Charge-offs by Loan TypeAlaska CUs

0.76%0.91%

1.38%1.28%

2.26%

3.82%

0.88%

0.12%

0.22%

0.02%0.21%0.39%

3.30%

0.05%0.18%

0.0%0.5%1.0%1.5%

2.0%2.5%3.0%3.5%4.0%

Overall CreditCard

Firsts Seconds MBLs

2007 2008 2009

Credit Union Savings GrowthAnnual Percent Growth

11

5

16

20

14

22 22

9

7

5

9

1211

54

6 67

11

56

11

9

54 4 5

7

119

8

6

15

0

10

20

30Percent Change

Source: CUNA Economics and Statistics

March YTD, NSA

Net Income to Average Assets

110

102

94 93

102

95

106

9892

8582

64

31

15

40

60

139

8082

30

105

135

121

10497 98

92 8994

137

121

113

0

20

40

60

80

100

120

140

160

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F

Source: NCUA, CUNA Economics and Statistics

Net Income to Average Assets

110

102

94 93

102

95

106

9892

8582

64

31

15

40

60

139

8082

30

105

135

121

10497 98

92 8994

137

121

113

0

20

40

60

80

100

120

140

160

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F 11F

Source: NCUA, CUNA Economics and Statistics

Net Capital to AssetsPercent

Source: CUNA Economics and Statistics

Credit Union ForecastMarch 2010

5Yr Avg 2009 2010:1 2010:2 2010:3 2010:4 2010 2011

Growth rates:Savings growth 5.9% 10.6% 4.0% 1.3% 0.9% 1.4% 8% 6%Loan growth 6.8% 1.0% -0.5% 2.0% 1.6% 0.9% 4% 6%Asset growth 6.3% 8.8% 3.8% 1.0% 0.6% 1.1% 7% 6%Membership growth 1.4% 1.5% 0.6% 0.3% 0.3% 0.3% 1.5% 1.5%

Liquidity:Loan-to-share ratio** 79.9% 78.0% 74.6% 75.1% 75.7% 75.3% 75.3% 75.3%

Asset quality:Delinquency rate 0.94% 1.61% 2.00% 2.00% 1.90% 1.80% 1.93% 1.60%Net chargeoff rate* 0.71% 1.21% 1.20% 1.10% 1.00% 1.00% 1.08% 0.80%

EarningsReturn on average assets (ROA)** 0.49% 0.15% 0.30% 0.30% 0.50% 0.50% 0.40% 0.60%

Capital adequacy:Net worth ratio** 10.9% 9.9% 9.5% 9.5% 9.6% 9.6% 9.6% 9.6%

* End of period annualized rate**End of period ratio

See also our MCUE websiteIf you have any questions or comments send an email to srick@cuna.coop

Quarterly Results/Forecasts Annual ForecastsActual Results

Summary of effects on CUs• With but a few exceptions . . .• Credit unions are collateral damage to the

financial crisis and recession.• Negative effects were neither caused by

the CU, and are likely to be bottoming out.

• Responses by CUs should therefore be restrained.

Suggested Credit Union Response

• Within reason, let the capital cushion do its work• Avoid penalizing members with higher fees and loan

rates, and lower dividend rates just to protect net income if capital is adequate.

• Net worth more important than net income. • Rising delinquency and loan losses do NOT

necessarily require major modifications in lending policies.

• Adjust net income budgets, and monitor closely.• Tell members about share insurance.

Net Worth Ratios after 2 YearsDec 09 Ratio: 9.8%, ROAs: 2009: 40 bp, 2010: 60 bp

Growth Rates

8% 10% 12%

Dec 2010 9.5% 9.3% 9.1%

Dec 2011 9.3% 9.0% 8.7%

All US Credit Unions

Net Worth Ratios after 2 YearsDec 09 Ratio: 8.3%, ROAs: 2009: 70 bp, 2010: 70 bp

Growth Rates

8% 10% 12%

Dec 2010 8.4% 8.2% 8.1%

Dec 2011 8.4% 8.1% 7.9%

Alaska Credit Unions

A Word on the Corporate Situation• There will be significant losses in the WesCorp

and US Central portfolios over the next one to five years.

• The actual amount of those losses depends on the future course of interest rates, the economy, housing markets, and housing finance.

• Therefore, what the losses will end up being is unknown, and unknowable.

• Because it is unable to deal with this situation, GAAP is unacceptable.

• NCUA proposed rule.• The future corporate system will change

significantly to gain credit union acceptance.

The Potential Losses• $60+ billion in troubled securities

– Mostly private MBS, some others.

• Year ago, market losses would have been $20 to $25 billion, credit losses estimated between $6 and $18 billion, most likely $11 billion.

• After $5 billion in corporate capital, $6 billion assigned to share insurance fund: 1% of insured shares.

• Latest estimate of cost to share insurance fund: still around $6 billion.

Share Insurance Premiums• Corporate Stabilization:

– For now, ~15 bp a year, declines with growth– Length depends on stabilization costs– Probably 6 years, BUT UNKOWN

• Low yield on NCUSIF investments• Natural Person CU Losses

– 5 to 25 bp?– Most likely: 5bp to 10 bp for two years

• Bank Insurance Fund:– A lot larger hole to fill

A Tale of Two FundsNCUSIF vs FDIC

($0.50)

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: CUNA Economics and Statistics

A Tale of Two FundsNCUSIF vs FDIC

$1.29 $1.26 $1.24

0

$1.22

$0.36

($0.39)($0.50)

07 08 09

Source: CUNA Economics and Statistics

A Tale of Two FundsNCUSIF vs FDIC

$1.29 $1.26 $1.24

0.24

$1.22

$0.36

($0.39)($0.50)

07 08 09

Adj 09

Source: CUNA Economics and Statistics

Net ofCorp Stab