the economy and alaska credit unions alaska credit union league annual meeting may 1, 2010 bill...
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The Economy and Alaska Credit Unions
Alaska Credit Union LeagueAnnual Meeting
May 1, 2010Bill Hampel, Chief Economist
Credit Union National Association
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 [email protected]
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