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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. Economic Summary. We’ve survived the Great Recession Worst since the Great Depression, but not nearly as severe.

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the economy and alaska credit unions

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

economic summary
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.
slide3

Average =

0.40%

slide4

Lehman Brothers

Collapse

Bear Stearns

Hedge Funds

Collapse

Average =

0.40%

gross domestic product quarterly changes at annual rates real
Gross Domestic ProductQuarterly Changes at Annual Rates, Real

Worst 2 Qtrs

Since 1958

2011

2001 Recession

2008-2009 Recession

Source: Commerce Dept

repairing household finances
Repairing Household Finances
  • Three Huge Developments:
    • Two Related, Longer Term:
      • Savings Decline
      • Debt buildup
    • One More Recent
      • Wealth Declines
        • Home Values
        • Equity Prices
slide10

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.

household debt outstanding to annual disposable income
Household Debt OutstandingTo Annual Disposable Income

Sources; Federal Reserve Flow of Funds, Commerce Department

slide14

S&P 500

Down 50%,

Up 50%.

Even?

consumer confidence 1980 to present
Consumer Confidence1980 to Present

Source: Conference Board, Index 1985 = 100

non farm payrolls m onthly changes sa
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

non farm payrolls m onthly changes sa1
Non-Farm PayrollsMonthly Changes SA

Unemp Rate: 9.7%

January: -780k

Source: Federal Reserve Board

slide19

Unemployment Rates and Recessions

(Percent of Labor Force)

March 9.7%

Broadest Measure: 16.9%

slide20

Annual Percentage Change

{Core Rate: 1.2}

YTD March

slide21

Interest Rates

1988 to 2010

Latest: April

summary 2010 economic outlook
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
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
Credit Union Loan Growth (Annual % Change)

March YTD, NSA

Source: NCUA & CUNA Economics and Statistics

credit union delinquency total portfolio
Credit Union Delinquency(Total Portfolio)

Percent of Outstandings

Source: NCUA, CUNA Economics and Statistics

net loan chargeoffs total portfolio
Net Loan Chargeoffs(Total Portfolio)

Percent of Outstandings

Source: NCUA, CUNA Economics and Statistics

credit union savings growth annual percent growth
Credit Union Savings GrowthAnnual Percent Growth

Percent Change

March YTD, NSA

Source: CUNA Economics and Statistics

net income to average assets
Net Income to Average Assets

Source: NCUA, CUNA Economics and Statistics

net income to average assets1
Net Income to Average Assets

Source: NCUA, CUNA Economics and Statistics

net capital to assets
Net Capital to Assets

Percent

Source: CUNA Economics and Statistics

summary of effects on cus
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
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 years dec 09 ratio 9 8 roas 2009 40 bp 2010 60 bp
Net Worth Ratios after 2 YearsDec 09 Ratio: 9.8%, ROAs: 2009: 40 bp, 2010: 60 bp

All US Credit Unions

net worth ratios after 2 years dec 09 ratio 8 3 roas 2009 70 bp 2010 70 bp
Net Worth Ratios after 2 YearsDec 09 Ratio: 8.3%, ROAs: 2009: 70 bp, 2010: 70 bp

Alaska Credit Unions

a word on the corporate situation
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
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
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 funds ncusif vs fdic
A Tale of Two FundsNCUSIF vs FDIC

Source: CUNA Economics and Statistics

a tale of two funds ncusif vs fdic1
A Tale of Two FundsNCUSIF vs FDIC

Source: CUNA Economics and Statistics

a tale of two funds ncusif vs fdic2
A Tale of Two FundsNCUSIF vs FDIC

Net of

Corp Stab

Source: CUNA Economics and Statistics