Credit Union Industry Update:Where Are We and What’s Next?

By Daniel Penrod

California and Nevada Credit Union Leagues

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So, What is Going On?• A fall to remember

– Heard on the street “What’s the difference between a pigeon and a mortgage banker? A pigeon can still make a deposit on a Ferrari.”

– Recession was already fully underway even if many economists and politicians remained in deep denial

• NBER Announced in Dec of ’08 the recession started in Dec of ‘07

• What went wrong?– The big three imbalances: housing, finance, and the consumer– The good news: The big imbalances are settling out– The bad news: we still have healing to do– The better news: California is going to come out of this downturn

in good shape

The Economy

Recession! Depression?

Recession

A widespread decline in the GDP and employment and trade lasting from six months to a year

A long-term economic state characterized by unemployment and low prices and low levels of trade and investment

Depression

Definitions

What’s the Difference?

A recession is when your neighbor loses their job…a depression is when YOU lose your job.

Source: Federal Reserve Bank of St. Louis, *Forecast

U.S. Economic GrowthOn a downward trend

Changes in Household Net Worth(in 2008 dollars)

Source: BLS, Federal Reserve Flow of Funds

Retail Sales Plummet

Downshifting since mid-2006

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Consumers = 70% of Economic Activity!Source: Federal Reserve Bank of St. Louis

Personal Savings Rate

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Unemployment

Types of Unemployment

• Cyclical unemployment– rises during economic downturns and falls when the economy

improves

• Frictional unemployment– involves people in the midst of transiting between jobs,

searching for new ones

• Structural unemployment– involves a mismatch between the sufficiently skilled workers

looking for jobs and the vacancies available

Unemployment – California

11.0%

8.9%

0%

2%

4%

6%

8%

10%

12%

1980 1984 1988 1992 1996 2000 2004 2008

California U.S.

California Fun Facts• Over the first half of 2008, the state lost an average of

23,000 jobs a month compared to 54,000 jobs a month over the later half.

• The number of unemployed Californians increased by an average 44,000 persons a month in 2008; 2009 has averaged 172,000 per month.

• 58% of California’s existing home sales in February had been foreclosed on. A year ago it was 33%.

• But, housing is less of a drag – now it is the consumer.• The state’s spending, tax, and loan package to close the

anticipated $41 billion budget gap is expected to fall short by $8 billon.

Unemployment - Nevada

10.6%

8.9%

0%

2%

4%

6%

8%

10%

12%

1980 1984 1988 1992 1996 2000 2004 2008

Nevada U.S.

Housing Market

Falling interest rates allowed housing to skip the 2001 – 2002 recession, and they will temper the 2008 recession.

Rates 2000 - Current

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%5.50%6.00%6.50%7.00%7.50%8.00%8.50%9.00%

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30 yr FRM

1/1 ARM

Fed Funds Rate

Case Schiller Index(Seasonally Adjusted)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Composite-10Composite-20CA-Los AngelesCA-San DiegoCA-San Francisco

Are Homeowners Keeping Up?Percentage of California home mortgages that are past due.

Difficulties are MountingPercentage of California home mortgages that are in foreclosure.

Source: Mortgage Bankers Association

Are Modifications the Answer?“44% of borrowers who obtained traditional loan modifications in Q4 07 defaulted within 8 months” - American Banker, 11/24/08

Current Period Year Ago

Unsold Inventory Index (months)

6.7 16.6

Median Time on Market (days)

49.9 70.8

First-Time Buyer Housing Affordability Index

59% 33%

California’s Housing Market at a Glance

Source: California Association of Realtors

Credit Union Financials

Regulatory Update

Corporate Stabilization ProgramA recap of what’s taken place as of May 2009:

• January: NCUA gave $1 billion capital note to U.S. Central and guarantee uninsured shares at participating corporate credit unions. – The costs: 51% of NCUSIF Deposit and 30bp premium of insured

shares.

• Late May: Due to NCUA’s estimate of credit losses and OTTI charges, NCUA exhausted U.S. Central’s paid-in capital and 23% of their membership capital. Credit union PIC and MCA in WesCorp were both exhausted due to the expected losses.

• March 29th: NCUA placed U.S. Central and WesCorp into conservatorship believing estimated losses were greater than their total capital. – Result: 51% impairment revised to 69%, bringing the total assessment

to 99% of insured shares.

Helping Families Save Their Homes Act (S. 896)

• Corporate Credit Union Stabilization Fund– Spread out 69% impairment over 7-year period (10-15bp per

year) • Extends payment period for the 0.30 percent premium to

8 years. Extended share insurance increase ($250,000) to

December 31, 2013. Increased borrowing limit of NCUSIF to $6 billion, with

temporary increases permitted of up to $30 billion until December 31, 2010.

Federal Legislation• S. 896, the Helping Families Save Their Homes Act

– No “cramdown” provision…yet!• H.R. 627, the Credit Cardholders’ Bill of Rights

– Restrictions ability to change terms or increase rates on credit cards with existing balances.

– requires enhanced consumer disclosures.– places limits on marketing and issuing credit cards to consumers

under age 21.• Interchange fees (H.R. 627)

– Did not include provisions affecting changes to regulations on interchange fees (big win for CUs)

• Consolidation of regulators– Obama intends to recommend Congress create a single

regulator to oversee the entire banking sector. (Not NCUA…yet).

Banks’ Stress Test

Going Forward

Where does this leave us?

• Housing will struggle, particularly the upper end.• Mortgage relief programs have proven ineffective.• Investment spending will continue to be cautious.• Consumers are in retreat.• This is a global recession, which is hurting CA trade.• But, it is encouraging a return to saving.• All of the above inhibit job creation! As fewer jobs are

created, spending power dries up. • Employers are further trimming payrolls.

How do we get out of this?

• The housing market must stabilize.• Big Problem: a lack of confidence and trust.• Lenders will have to be willing to finance

purchases.• Fiscal policy to boost spending in the interim will

help.• Growth coming out of the recession will be

shallow…no big bounce.• It will take time.

Economic Outlook for 2009

• Economy should remain anemic–no quick rebound insight.

• No sector is positioned to provide a boost.• The deeper the job cuts, the worse the outlook.• Consumer spending down as saving has become

a priority…for now.• Housing should stabilize in late 2009, but the

recession and foreclosures will hamper growth.• Tempered economic recovery possible in 2010.

California in 2009

• Government employment slowdown is coming. • Unemployment may reach 13%+ and remain

elevated throughout 2010.• Income and consumer spending will continue to

slow, and take longer to recover.• Home price declines will persist through 2009.• 2010 should be better, though it might not “feel”

like it.

What are credit unions to do?

• Rising delinquency and loan losses do not require adjusting lending policies; normal practices will probably result in more rejections.

• Members are taxed financially so let the capital do its job, within reason.

• Continually communicate to your members your commitment to them and your financial strength.

• Huge opportunity to gain market share; but low earnings and capital could make growth difficult.

Questions?