The Economy and Alaska Credit Unions

1. The Economy and Alaska Credit Unions Alaska Credit Union League Annual Meeting May 1, 2010 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop

2. 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.

3. Average = 0.40%

4. Lehman Brothers Collapse Bear Stearns Hedge Funds Collapse Average = 0.40%

6. Gross Domestic ProductQuarterly Changes at Annual Rates, Real Worst 2 Qtrs Since 1958 2011 2001 Recession 2008-2009 Recession Source: Commerce Dept

7. Feb 2010

8. April 2010

9. Repairing Household Finances • Three Huge Developments: • Two Related, Longer Term: • Savings Decline • Debt buildup • One More Recent • Wealth Declines • Home Values • Equity Prices

10. 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… Source: BEA.

11. Source: BEA.

12. Household Debt OutstandingTo Annual Disposable Income Sources; Federal Reserve Flow of Funds, Commerce Department

14. S&P 500 Down 50%, Up 50%. Even?

15. Consumer Confidence1980 to Present Source: Conference Board, Index 1985 = 100

16. Latest: Apr 58 24

17. Non-Farm PayrollsMonthly Changes SA Unemp Rate: 9.7% 8.4 million jobs lost since Dec. 07 to Feb 2010 Latest: Mar 2009 Source: Federal Reserve Board

18. Non-Farm PayrollsMonthly Changes SA Unemp Rate: 9.7% January: -780k Source: Federal Reserve Board

19. Unemployment Rates and Recessions (Percent of Labor Force) March 9.7% Broadest Measure: 16.9%

20. Annual Percentage Change {Core Rate: 1.2} YTD March

21. Interest Rates 1988 to 2010 Latest: April

22. Treasury Yield Curves 4 2 3 5 6 7 8 9 10 1

24. 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!!

25. 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

26. Credit Union Loan Growth (Annual % Change) March YTD, NSA Source: NCUA & CUNA Economics and Statistics

27. Credit Union Delinquency(Total Portfolio) Percent of Outstandings Source: NCUA, CUNA Economics and Statistics

28. Greater Delinquency Increases at BanksLoan Delinquency Rates Source: FDIC, NCUA & CUNA E&S.

29. Net Loan Chargeoffs(Total Portfolio) Percent of Outstandings Source: NCUA, CUNA Economics and Statistics

30. Net Charge-offs by Loan TypeAll CUs

31. Net Charge-offs by Loan TypeAlaska CUs

32. Credit Union Savings GrowthAnnual Percent Growth Percent Change March YTD, NSA Source: CUNA Economics and Statistics

33. Net Income to Average Assets Source: NCUA, CUNA Economics and Statistics

34. Net Income to Average Assets Source: NCUA, CUNA Economics and Statistics

35. Net Capital to Assets Percent Source: CUNA Economics and Statistics

37. 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.

38. 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.

39. Net Worth Ratios after 2 YearsDec 09 Ratio: 9.8%, ROAs: 2009: 40 bp, 2010: 60 bp All US Credit Unions

40. Net Worth Ratios after 2 YearsDec 09 Ratio: 8.3%, ROAs: 2009: 70 bp, 2010: 70 bp Alaska Credit Unions

41. 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.

42. 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.

43. 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

44. A Tale of Two FundsNCUSIF vs FDIC Source: CUNA Economics and Statistics

45. A Tale of Two FundsNCUSIF vs FDIC Source: CUNA Economics and Statistics

46. A Tale of Two FundsNCUSIF vs FDIC Net of Corp Stab Source: CUNA Economics and Statistics