Georgia Credit Union Affiliates Annual Meeting May 8_ 2004_1_ by fanzhongqing

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									CUNA Marketing & Business Development Conference
Gaylord Opryland Resort & Convention Center
Nashville, TN
Monday, 10:30-11:45 am, March 17, 2008




           Marketing,
     Business Development
        & the Economy:
   What it Really Means to You



                    Steven W. Rick
                    Senior Economist
          Credit Union National Association
                      PO Box 431
               Madison, Wis. 53701, USA
   Telephone: 608-231-4285 Facsimile: 608-231-4924
                E-Mail: srick@cuna.com
               Recent Economic Trends
1.    Two fears hang over the U.S. economy, wrenching recession
      and spiraling inflation
2.    The deleveraging and reckoning process has begun
3.    The Federal Reserve is easing monetary policy to liquefy the
      banking system and monetize the recession
4.    The subprime credit crisis is spreading to many credit
      markets
5.    The housing market is in a severe meltdown
6.    Falling home prices will restrain consumer spending
7.    A weaker dollar and strong overseas growth will keep export
      growth strong. The global trade imbalance correction has
      begun
8.    Rising energy prices has created a negative real income
      effect for consumers
9.    The government has passed a questionable stimulus plan
10.   Households have a near zero savings rate
11.   Capital funds now flow from poor to rich countries


             Long-term Economic Trends
1.    China’s entry into the global economy will have profound
      effects on inflation, wages, and interest rates for the next 50
      years.
2.    World economy is becoming less dependent on U.S.
      economy
3.    Massive U.S. current account deficits => question of
      America’s foreign borrowing sustainability
4.    Massive U.S budget deficits
5.    Worldwide savings and investment patterns must shift
      towards a healthier balance


                                    1
                   CU Balance Sheet
                           (% of Assets)
 Assets                                       Liabilities + NW
 Cash (1%)                                    Deposits (84%)
                                                    Share Draft (10%)
 Investments (25%)                                  Regular Share (23%)
                     06    07     08                MMA (15%) 06 07                     08

                                                                    5.1 6.1
 Loans (70%)        -2.4   5.4
                                                    CDs (29%)
 Consumer (30%)                                     IRAs (8%)        06   07                 08
 Mortgage (36%)                                                       5.0     35.0

 Business (4%) 06          07     08
                                              Borrowings (4%)
                     8.5   7.5

                                                                      06     07         08

                                                                      9.0    7.1

 Building (4.6%)                              Net Worth (11.4%)

            06     07      08          06      07      08            06     07          08

            5.52   5.89                2.35    2.78                 3.17    3.10


               YOA                -       COF = NIM                                06         07    08

                                          + Fee/Other Inc.                       1.29

                                                                                   06
                                                                                             1.36

                                                                                              07    08

                                           - Operating Exp.                      3.33        3.38
                                                                                   06         07    08
                                           - PLL                                 0.31        0.43

                                          = Net Income
                                                                     06      07          08

                                                                    0.82    0.64




*Required    ROA = Growth Rate x Capital Ratio
(dependent variable)             (choice variable)                (current)
                                              2
                                       Savings Distribution
                                        U.S. Credit Unions
60



50




40



30



20




10



 0
       89   90    91    92        93        94    95    96   97   98   99     00    01    02        03        04    05    06    07


                                        Regular Shares                 Certificates                           Share Drafts
     Source: CUNA & NCUA.               MMAs                           IRAs




                                             Loan Distribution
                                             U.S. Credit Unions
        50%                                                                                                                50%



        40%                                                                                                                40%



        30%                                                                                                                30%



        20%                                                                                                                20%



        10%                                                                                                                10%



         0%                                                                                                                0%
                 91    92    93        94    95    96   97   98   99   00   01     02    03    04        05    06    07


                                                  Credit Card/Unsecured                   Auto Loans
      Source: CUNA & NCUA.
                                                  HELOC/2nd Mortgage                      1st Mortgage

                                                                   3
               Net Interest Margin vs Operating
    Basis Points  Expense to Average Assets
425
                                         408
                       398                     397
                             394                                        393
400              392
                                   389
                                                     386   385
                                                                  391
                                                                              381
                                                                                          377
                                                                                    371
375                                                                                                   361
                                                                                                358


350                                                                                                         338
                                                                                                                  331
                                                                                          339                                 321   338
325                                                                     329   331   332
                                                                                                335                     316
                                                                                                                        331   333
                                                                                                                                    310
                                                                  323                                 325
                       319   319                           317                                              319   320
                                   314
300              307                     306         305
                                               301


275
                 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
                                                             NIM                          Operating Expense


                                               Net Interest Margin
                                                           1981-2007
                540
                520
                                                                  The Credit Union Challenge:
                500
                                                                 Maintaining Net Interest Margins
                480
                460
 Basis Points




                440
                420
                400
                380
                360
                340
                320
                300
                      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

                                                                               NIM

                                                                         4
         Existing Home Market
                (state of disequilibrium)
Median Home Price
($ thousands)
              •Low pent up demand       •  foreclosed houses
              •Fewer investors          •Expected lower future
              •Tighter underwriting     home prices
              •Higher interest rates
              •Expected lower future           S06
              home prices                                S08
$222
Sticky prices in SR =>  Inventory
           (overhang)
                                        Market
                                       Correction



$211                                       Market
              Market clears                bottom           D06
              in the long run

                                            D08


                                 6,100 6,510         # of Houses
                                                     (thousands)
  Demand Side                     Supply Side
  •Emerging countries'            •Nearing “Peak Oil” (2007-2014)
    economic growth               •Geopolitical supply disruptions
  •Depreciating dollar            •Technological innovation
  •Oil as an investment           •Fewer new big discoveries
  •State-subsidized gas           • ¾ controlled by inefficient
  •Falling substitute prices         state-owned oil companies
                                  •Inventory-disciplined OPEC


$ Price
                        Oil Market
Of Oil                   (Daily Volume)

                                       S07
                                                 S08
                                                     Demand
 $100                                             growing faster
                                                   than supply

  $55

                                                         D08

                                           D07

                          83          85         Barrels of oil
                                                    (Millions)
                                  6
                  Economic Growth
                                Point
1.   The U.S. economy is able to absorb many shocks (falling stock
     prices, accounting scandals, rising energy prices, wars, terrorist
     attacks) and continue to grow
2.   Productivity growth reflects strong economic fundamentals
3.   Falling dollar will increase in net exports.
4.   The supply side tax cuts in June 2003 (lower marginal income tax
     rates, and lower dividend and capital gains tax rates-15%,) are
     stimulating work and investment
5.   Profits per unit of GDP was the highest in 4 decades because of
     recent restructuring and cost saving initiatives.
6.   Firms have a lot of cash but will only invest if expectations of
     economic growth are robust

                          Counter Point
1.   The U.S. economy will be in recession for the 1st half of 2008,
     maybe longer depending on the effectiveness of the stimulus plan
2.   Growth will be below long-term sustainable (potential) rates for an
     extended time due to slowing housing and manufacturing.
3.   State and local governments face lower sales and property tax
     revenues which will constrain spending.
4.   Weak housing construction will shave 0.5% off GDP growth
5.   Falling home prices will decrease home equity borrowing and
     consumer spending.
6.   A weak auto market will encourage production cuts
7.   High consumer spending and low savings is unsustainable
8.   The trade deficit forms one of the biggest downside risks to the
     economy, reaching 6.6% of GDP or $873 billion. Therefore the
     U.S. economy is highly dependent on inflows of foreign savings.
     Foreigners may reduce lending to U.S.
9.   Recent low interest rates => misallocation of capital towards
     housing => lower economic growth.




                                     7
                                   Annual % Change in U.S. Economic Output
                                                   (Real GDP - Chainweighted 2000$)

5%
                                                                                        4.4%
                                                                                               4.3%
                                                                  4.0%                                4.1%
                                                                                                                                           3.9%
4%                  3.8%
                                                                                                             3.7%
                                                                                3.6%
                            3.4%
                                                                                                                                                         3.3%
                                                                                                                                                  3.2%
      3.1%                                         3.1%
             2.9%
3%                                                                       2.7%
                                                                                                                                                                2.8%
                                                           2.7%
                                                                                                                                  2.5%



2%                                 1.8%
                                                                                                                           1.6%



1%                                                                                                                  0.8%




0%

                                           -0.5%

-1%
       86     87    88       89     90      91      92      93    94      95    96      97     98     99     00      01    02       03     04      05     06      07


 Source: Department of Commerce.




                            Quarterly % Change in U.S. Economic Output
                                                   (Real GDP - Chainweighted 2000$)
 9%

                                                                            7.5%

 7%
            6.3%


                                                                                                                            4.8%                           4.9%
 5%                                                                                                                 4.5%
                                                                                                                                                        3.8%
                                                                         3.4%             3.6%
                                                                                       3.5%
                                                                                   3.0%         3.1%
                                             2.7%                               2.7%                2.8%
 3%                                                 2.4%                                     2.5%                                 2.4%
                    2.1%                         2.2%                                                                                       2.1%
                                          1.6%
                              1.2%                                1.2%                                                 1.2%              1.1%
      1.0%
 1%                                                                                                                                               0.6%          0.6%
                                                             0.2%


      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
-1%           -0.5% -0.5%

                                   -1.4%


-3%

 Source: Department of Commerce.


                                                                                       8
            Housing Construction &
             the New Home Market

                             Point
1.   Some regional and local real estate markets may see price
     increases around the rate of inflation
2.   Housing construction was recently at record levels.
3.   Potential home buyers should bargain hard. Sellers are
     reluctant to drop prices because they still expect prices to
     rise.
4.   Potential home sellers should cut prices now to avoid riding
     the market to the bottom.

                      Counter Point
1    The drivers of housing demand will remain weak in 2008.
2    It will take big price cuts and a long time to clear the new
     home inventory of 9 months supply
3    Credit is becoming tighter for marginal borrowers as
     regulators force lenders to tighten lending standards.
4    A greater share of mortgage loans are going bad.
5    The housing market is overbuilt
6    The fall in housing demand has had a direct effect on
     economic growth by reducing residential construction
     activity
7    The fall in housing demand has had an indirect effect on
     economic growth by reducing home prices and household
     wealth and therefore consumer spending.
8    Lower housing construction will reduce construction
     employment and prices for building materials, appliances
     and home furnishings.
                                Total Housing Starts & Single Family Building Permits
                                                    (seasonally adjusted annual rate)
                    2300

                    2100

                    1900
    Thousands




                    1700

                    1500

                    1300

                    1100
                                                                                                Permits
                     900

                     700
                           95      96    97     98     99    00        01        02        03        04        05        06        07

    Source: Census Bureau, http://www.census.gov/const/www/newresconstindex.html



                                              New Home Sales (annual rate)
                                                    & Inventories
                    1400                                                                                                                650
                    1300                                                                                                                600

                    1200                                                                                                                550
        Thousands




                                                                                                                                              Thousands
                    1100                                                                                                                500

                    1000                                                                                                                450

                     900                                                                                                                400

                     800                                                                                                                350

                     700                                                                                                                300

                     600                                                                                                                250

                     500                                                                                                                200
                           95      96   97     98     99    00    01        02        03        04        05        06        07

                                             Sales (LHS)                     Inventories (RHS)
Source: Census Bureau, http://www.census.gov/const/www/newressalesindex.html
                                                                        10
                      The Housing Bubble Has Popped
                                (Nominal Annual Home Price Increases)

  16%
                   14.0%
  14%          13.5%
                                                                                                                  13.0%

  12%                  11.1%
                                                                                                              10.0%
  10%
           8.4%
        7.9%                                                                                     7.9%      8.0%
                                                      7.4%                                          7.6%
   8%                      7.2%
                                                               6.7%
                                                            6.4%                                       6.6%
                                                         6.2%                                6.0%
                                                5.8%
   6%                          5.0%                                                       5.1%
                                                                                4.7%   4.9%
                                          4.3%
                                       4.1%
   4%                                                               3.1%            3.2%
                                                                          2.4%
                                                                       2.3%
                                                                             1.8%
   2%                              1.5%
                                                                 1.0%

   0%

  -2%
                                                                                                                      -2.0%

  -4%                                                                                                                     -3.3%


  -6%
         75 76 77 78 79 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
  Source: National Association of Realators.




                                          The Housing Cycle
                      (Inflation-Adjusted Annual Home Price Increases)


15%




                                                                                                                  9.5%
10%


              6.5%                                                                                            6.5%
                                                                                                           6.1%
                                                  5.5%                                              5.7%
                  4.7%
 5%                                                                                             4.3%   4.2%
                                                                                          3.5%
                                                                                             3.3%
          3.1%                                                                         2.9%
                                               2.6%
       1.4%
                                                          2.0%
                                                       1.7% 2.0%               2.0%
                                      0.9%
                                         0.1%                         0.1%
 0%
                                                                      -0.1%
        75 76 77 78 79 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
                                                              -0.4%
                                                          -0.8% -0.8%
                     -1.4%

                                  -2.8%

-5%                          -4.2%                                                                                    -4.5%
                         -4.8%                                  -5.0%


                                                                                                                          -7.6%

-10%
                                                             Real Home Prices                       Inflation
 Source: National Association of Realators.
                                                                      11
                           Income Ratios
                       (Financial Capabilities)                  3-Dimensional
                                                                 Mortgage Loan
                                                                 Underwriting
                                       65%


                Total Debt
               Gross Income
                                       36%                    Loan Approval
                                                                Zone 2005




                                      35%

           Housing Expense
            Gross Income
                                      28%

                                                                           Loan-to-Value
                                              Loan Approval
                                                Zone 2007
                                                                               Ratios
                                                                         (Physical Security)




                                                                 80%      100%


                              670


                        620



                 580


         500


     Credit Scores
(Credit Characteristics)
                 Retail and Oil Markets

                                Point
1.   Gains in productivity => rising incomes => consumer spending
     growth
2.   High oil prices have had little impact on core inflation
3.   High oil prices will encourage new supplies of conventional and
     non-conventional fuels in the long-run which will reduce oil prices.
4.   The tax rebate in May will stimulate 2nd quarter spending




                          Counter Point
1    Retail sales are growing below its long-term trend of 5.5%,
     indicating weakening consumer spending.
2    All drivers of consumer spending are weak or weakening.
     Declining jobs, falling wealth, lower borrowing, record financial
     obligations.
3    A negative wealth effect will lower spending growth in 2008.
4    Consumer spending faces many constraints: high debt burden, low
     savings levels, lack of pent-up demand, high energy prices, rising
     interest rates, and falling home prices
5    Falling home prices => decline in HELOC => lower spending
6    Rising interest rates => increase debt servicing => lower spending
7    U.S. households cannot maintain their profligate spending patterns.
8    The debt laden consumer will reduce consumption spending and
     increase savings
9    High energy prices are reducing cash for other purchases.
10   Limited excess capacity, low oil investment, strong demand and
     OPEC production limits with keep oil prices relatively high for the
     next 2 years




                                    13
                                        Retail Sales (excluding autos)
                                                    (year over year % change)
12

11

10
 9

 8
 7

 6
 5
 4
 3

 2
 1

 0
     1996                   1997      1998       1999      2000      2001       2002      2003      2004      2005       2006      2007      2008



                                                   Oil Price per Barrel
                                             (West Texas Intermediate Crude)
                    110

                    100

                    90

                    80
 Price per barrel




                    70

                    60

                    50

                    40

                    30

                    20

                    10

                     0
                          70 71 72 73 74 75 76 77 78 79 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

                                                                       Recession                   Nominal                  Real

                                                                                  14
                    Employment

                           Point
1.   Labor demand remains strong in the education, health care,
     leisure/hospitality and loan servings sectors.
2.   Wage pressures will ebb in 2008 as productivity growth picks
     up. This will reduce inflationary pressures from the labor
     market.
3.   The unemployment rate is below the “natural unemployment”
     rate of 5 percent, according to the smaller sample size
     Household Survey.
4.   Goods-producing jobs are being substituted with service-
     producing employment.

                    Counter Point
1.   The housing downturn and credit market turmoil has pushed
     employment and ultimately economic growth into negative
     territory.
2.   Discouraged workers are leaving the labor force.
3.   Initial unemployment insurance claims are rising.
4.   Monthly payroll employment growth is below the long term
     trend, according to the Establishment Survey.
5.   Businesses are reducing labor costs by using technology to
     increase productivity and offshore outsourcing.
6.   The unemployment rate increased 0.6% in 9 months which
     historically led to a recession in less than 3 months.
7.   Job growth in 2008 will not keep pace with labor force
     growth, increasing the unemployment rate.
8.   The unemployment rate falls as job gains top 150,000 a
     month, which is the average monthly increase in the
     workforce.

                                 15
                                                       US Payroll Employment
                                                           Monthly Changes SA
                 600
                 500
                 400
                 300
 Thousands




                 200
                 100

                         0
               -100

               -200
               -300
                         Jan-99        Jan-00     Jan-01   Jan-02      Jan-03        Jan-04   Jan-05   Jan-06    Jan-07   Jan-08



                                                  Unemployment Rate
                         11

                         10

                             9

                             8
                                                    Cyclical Unemployment
                             7
             (Percent)




                             6

                             5
                                     Full Employment 5%
                             4

                             3
                                            Frictional Unemployment
                             2
                                                Structural Unemployment
                             1

                             0
                                 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


Source: Department of Labor.                                        Recession                             U.S.


                                                                                16
                                  Inflation
                                       Point
1    The Core CPI rose 2.5% from a year ago, within the Federal Reserves
     proverbial comfort zone of 1.5%-2.5%, indicating moderating underlying
     inflation.
2    Goods inflation is flat while service inflation (medical) is rising.
3    A slowing economy and slower increases in housing costs will lower
     price pressures and core inflation in 2008.
4    Contracting housing and manufacturing sectors will produce below-
     potential growth and a reduction in inflationary pressures.
5    Forces restraining prices are efficient big box retailers, intense global
     competition and tepid wage growth.
6    Core inflation stabilizing around 2% should dampen inflation
     expectations in 2007

                                 Counter Point
1    Rising oil prices are the main upside risk for inflation and a slowing
     economy (stagflation)
2    Food and energy prices rose 5% and 20% respectively over the last year,
     which is responsible for the gap between headline and core inflation
3    Core PCE inflation (1.9%) is in the Federal Reserve’s price stability
     comfort zone (1%-2%).
4    High inflation can become permanent if workers and businesses inflation
     expectations become unmoored and embedded in wages and prices
5    The Fed is losing inflation fighting credibility leading to higher inflation
     expectations
6    Large swings in energy prices have increased volatility in overall
     inflation, amid a general decline in the underlying rate of inflation.
7    The CPI grew 4.4 over a year ago due to a weaker dollar and higher food
     and energy prices
8    Tight product and labor markets in 2007 => higher inflation => lower $
     => rising interest rates
9    Inflation depends on the level of output relative to potential output (i.e..
     output gap)
10   1-yr inflation expectations are rising
     (Inflation expectations = Treasury nominal rate – TIPS real rate)
8    10-yr inflation expectations are rising
     (Inflation expectations = Treasury nominal rate – TIPS real rate)



                                            17
                                                      Consumer Price Index
 Annual Percentage Change
                                                        1970 to Present
14
                                                 13.3
                      12.3                           12.5

12


10
                                                9.0        8.9
                    8.7

 8
                               6.9        6.7
                                                                                                     6.1
 6 5.6
                                 4.9                                                           4.7
                                                                                         4.44.4                                                                                                   4.4
                                                                                                                                                                                            4.1
                                                                 3.83.8 4.0
 4        3.3 3.4                                                             3.8
                                                                                                           3.1 2.9                 3.3                   3.4                3.3 3.5
                                                                                                                      2.72.7 2.5                   2.6                                2.5
                                                                                                                                                                  2.4
                                                                                                                                         1.7 1.6                      1.9
                                                                                                                                                               1.6
 2
                                                                                    1.1

 0
     70      72           74         76         78    80         82      84         86      88       90          92      94        96       98           00       02        04        06          08




                                                        Inflation (CPI)
                                                  (year over year % growth)
 5%
 4%
 3%
 2%
 1%
 0%
            95             96              97         98            99          00           01             02           03          04             05             06            07               08

                    Headline
                    Core (excludes food and energy)
                                                                                                 18
                                 CU Loan Growth
Monthly Growth
                                   Trendcycle
1.5%                                                                                             1.5%



1.2%                                                                                             1.2%



0.9%                                                                                             0.9%



0.6%                                                                                             0.6%



0.3%                                                                                             0.3%



0.0%                                                                                             0.0%
       91   92   93   94   95   96   97   98   99   00   01   02   03   04   05   06   07   08


Source : CUNA's E&S



                                CU Savings Growth
Monthly Growth
                                   Trendcycle
1.5%                                                                                             1.5%



1.2%                                                                                             1.2%



0.9%                                                                                             0.9%



0.6%                                                                                             0.6%



0.3%                                                                                             0.3%



0.0%                                                                                             0.0%
       91   92   93   94   95   96   97   98   99   00   01   02   03   04   05   06   07   08


Source : CUNA's E&S

                                                    19
                          CU Loan Seasonal Factors
0.7%

0.6%

0.5%                                                0.47%
                                                                       0.43%
0.4%
                                            0.33%
                                                              0.27%
0.3%
                                   0.22%
0.2%

0.1%                                                                                                       0.04%
                                                                                0.02%
0.0%
         Jan      Feb      Mar      Apr     May     June       July     Aug     Sept      Oct      Nov      Dec
-0.1%                                                                                    -0.07%

-0.2%
                          -0.23%                                                                  -0.23%
-0.3%

-0.4%

-0.5%

-0.6%
        -0.60%
-0.7%            -0.66%

-0.8%

  Source: CUNA & NCUA.




                    CU Savings Seasonal Factors
 1.4%
                          1.29%
 1.3%
 1.2%
 1.1%
 1.0%
 0.9%
 0.8%
                 0.68%
 0.7%
 0.6%
 0.5%
 0.4%
 0.3%
 0.2%                                       0.13%
 0.1%                                                                                    0.03%
 0.0%
-0.1%     Jan
        -0.05%    Feb      Mar      Apr     May     June       July     Aug     Sept      Oct      Nov      Dec
                                   -0.10%
-0.2%
-0.3%                                                                           -0.22%                     -0.23%
                                                              -0.26%                              -0.28%
                                                    -0.29%
-0.4%
-0.5%
-0.6%
-0.7%
                                                                       -0.70%
-0.8%

  Source: CUNA & NCUA.

                                                         20
                    Regular Share Seasonal Factors
 3.0%


 2.5%                       2.35%



 2.0%


 1.5%
                    1.13%

 1.0%

                                              0.44%   0.39%
 0.5%


 0.0%
         Jan        Feb     Mar       Apr     May     June         July     Aug      Sept
                                                                                    -0.13%    Oct      Nov      Dec
        -0.30%                                                                                        -0.28%
-0.5%
                                                                                             -0.48%
                                                                                                               -0.58%
                                     -0.70%
-1.0%
                                                                -1.02%     -1.05%

-1.5%


-2.0%

  Source: CUNA & NCUA.




                            Regular Savings Account
Monthly Growth
                                  Trendcycle
2.0%


1.5%


1.0%


0.5%


0.0%
        92     93     94    95      96   97    98     99      00      01    02      03   04     05     06      07     08

-0.5%


-1.0%


-1.5%


 Source : CUNA's E&S
                                                           21
                  Money Market Seasonal Factors
1.5%
                                            1.28%



                          0.91%


                  0.63%

0.5%
                                                              0.27%




        -0.02%
          Jan     Feb      Mar      Apr     May     June          July     Aug     Sept       Oct     Nov      Dec
                                                                                            -0.07%

                                                                                                              -0.26%
                                                                                   -0.30%            -0.31%
                                                    -0.38%
-0.5%                                                                     -0.45%




                                   -1.35%
-1.5%

  Source: CUNA & NCUA.




                           Money Market Account
Monthly Growth
                                Trendcycle
3.0%

                             Speculative
2.5%
                          Demand for Money
2.0%


1.5%


1.0%


0.5%


0.0%
        92   93     94    95      96   97    98     99       00      01    02      03     04   05     06      07     08
-0.5%


-1.0%


 Source : CUNA's E&S

                                                         22
                 Share Certificate Seasonal Factors
 1.0%


 0.8%
         0.69%                                                                                  0.70%


 0.6%


 0.4%

                    0.18%
 0.2%
                                                                  0.10%
                                      0.06%                                                               0.07%

 0.0%
         Jan        Feb      Mar      Apr      May      June          July     Aug
                                                                              -0.04%   Sept        Oct    Nov      Dec
                                                                                       -0.09%
-0.2%
                            -0.19%
                                                        -0.23%

-0.4%
                                                                                                                  -0.46%
-0.6%                                          -0.57%


-0.8%


-1.0%

  Source: CUNA & NCUA.




                                     Certificate Account
Monthly Growth
                                         Trendcycle
5.0%


4.0%


3.0%


2.0%


1.0%


0.0%
        92     93     94    95       96   97     98     99       00      01    02      03     04     05    06     07     08
-1.0%


-2.0%


-3.0%


 Source : CUNA's E&S

                                                             23
               Credit Card Loan Seasonal Factors
 5.0%
                                                                                                                  4.37%


 4.0%


 3.0%


 2.0%

                                                                             1.07%
 1.0%                                                                                                     0.82%
                                                          0.63%
                                                                    0.44%
                                       0.08%      0.16%

 0.0%
                                                                                               -0.04%
         Jan         Feb      Mar      Apr        May     June      July     Aug     Sept          Oct    Nov     Dec

                                                                                     -0.66%
-1.0%


                             -1.67%
-2.0%

                    -2.36%
        -2.69%
-3.0%

  Source: CUNA & NCUA.




                                  CU Credit Card Loan
Monthly Growth
                                      Trendcycle
1.8%

1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%
        92     93     94     95       96     97     98    99      00    01    02     03       04     05    06     07      08
-0.2%

-0.4%


 Source : CUNA's E&S
                                                               24
           Home Equity Loan Seasonal Factors
 1.0%
 0.9%
 0.8%                                                                         0.73%
 0.7%                                                                                           0.61%
 0.6%                                  0.53%                         0.55%

 0.5%
 0.4%
 0.3%
 0.2%                                                      0.14%

 0.1%
 0.0%
-0.1%    Jan         Feb      Mar      Apr        May      June      July     Aug     Sept          Oct     Nov      Dec
        -0.11%
-0.2%
-0.3%               -0.28%                        -0.29%                                                            -0.29%
-0.4%
                                                                                                           -0.41%
-0.5%                                                                                 -0.46%
-0.6%
-0.7%
-0.8%
-0.9%
-1.0%                        -0.97%


  Source: CUNA & NCUA.




                              CU Home Equity Loan
Monthly Growth
                                  Trendcycle
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
 0.2%
 0.0%
-0.2% 92       93     94     95       96     97     98     99      00    01    02     03       04     05     06     07       08
-0.4%
-0.6%
-0.8%
-1.0%
-1.2%


 Source : CUNA's E&S

                                                                25
                   1st Mortgage Seasonal Factors
 0.5%

                                                        0.39%
 0.4%

                                                0.28%
 0.3%

                                                                                                                   0.20%
 0.2%                                                                                 0.17%


 0.1%                                0.06%


 0.0%
         -0.01%
           Jan     Feb      Mar          Apr    May     June         July     Aug     Sept         Oct     Nov     Dec
                           -0.03%
-0.1%

                                                                                               -0.16%
-0.2%
                                                                  -0.20%
                                                                                                          -0.25%
-0.3%                                                                        -0.27%



-0.4%             -0.37%



-0.5%

  Source: CUNA & NCUA.




                                    CU First Mortgage
Monthly Growth
                                       Trendcycle
1.8%

1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%
        92   93    94      95       96     97    98     99      00      01    02      03      04     05     06     07      08


Source : CUNA's E&S

                                                             26
                 New Auto Loan Seasonal Factors
 1.0%
                                                                              0.88%
 0.9%
 0.8%
 0.7%
                                                           0.57%
 0.6%                                              0.54%
                                                                                                0.49%
 0.5%
 0.4%
 0.3%                                                                0.22%
 0.2%
 0.1%
 0.0%
-0.1%    Jan         Feb      Mar       Apr        May     June      July     Aug      Sept
                                                                                      -0.05%        Oct     Nov      Dec
-0.2%                                  -0.13%

-0.3%
-0.4%                        -0.33%

-0.5%                                                                                                      -0.45%
                                                                                                                    -0.52%
-0.6%
-0.7%               -0.68%
-0.8%   -0.74%

-0.9%
-1.0%

  Source: CUNA & NCUA.




                                      CU New Auto Loan
Monthly Growth
                                         Trendcycle
2.4%
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2% 92       93     94     95       96      97     98    99      00    01    02     03       04     05     06     07       08
-0.4%
-0.6%


 Source : CUNA's E&S
                                                                27
                  Used Auto Loan Seasonal Factors
 1.0%
 0.9%
 0.8%
 0.7%
                                                          0.60%
 0.6%                                             0.52%
 0.5%
                              0.38%
 0.4%
                                                                    0.25%    0.27%
 0.3%
                                       0.17%
 0.2%
                                                                                     0.10%
 0.1%
 0.0%
-0.1%     Jan         Feb     Mar      Apr        May     June      July     Aug     Sept         Oct     Nov      Dec
                                                                                              -0.08%
-0.2%
-0.3%
-0.4%
                     -0.40%
-0.5%
-0.6%                                                                                                    -0.55%
-0.7%                                                                                                             -0.63%

-0.8%
-0.9%
         -0.89%
-1.0%

  Source: CUNA & NCUA.




                                    CU Used Auto Loan
Monthly Growth
                                       Trendcycle
2.2%

2.0%

1.8%

1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%
        92      93     94     95      96     97     98    99      00    01    02     03      04     05     06     07       08
-0.2%


 Source : CUNA's E&S

                                                               28
Economic Environment
• Overall Economy
   – Fragile economy in face of liquidity crunch.
   – Unprecedented real estate deflation, will create a
      wealth effect on consumer spending.
   – Strength from business investment spending and
      foreign demand.
   – Recession a rising possibility, but a very difficult
      call.
   – Housing and autos will be weak.
• Interest Rates
   – Modest Fed Funds rate cut(s) likely in second half,
      yield curve still flat.
   – If a recession, rates will fall by more, with a
      steepening yield curve.

Credit Union Environment
• Savings growth relatively stronger than loan growth,
  compared to last few years.
• Relative shift from core to interest sensitive deposits.
• Changes in consumer auto buying behavior, but
  pressure from dealer incentive financing.
• Economic distress for some members.
• Growth opportunities in unsecured loans.
• Continued margin pressures.
• Some investments may need to be written down.
• Greater economic pressures on smaller CUs.
• Continued wealth transfers.
Top 14 Credit Union Responses
1. Find ways to productively deploy capital.
    1. Faster growth, more attractive pricing.
    2. Modest risk increases.
    3. New services and outreach.
2. New world of margin management, 1% no longer
   sacrosanct.
3. Expense control even more important.
4. Seek non-fee, non-interest income.
5. Segmentation in deposits. (CD specials)
6. BUT, flat yield curve won’t be permanent.
7. Align auto loan marketing to current car buying habits.
8. Tighter lending at other lenders provides an opportunity
   for credit unions.
9. Improve business planning: consider demographics, new
   products and services, membership growth.
10.Differentiate ourselves in how we treat borrowers,
   especially ones who might be victims of predatory
   lenders.
11.Consider earlier trip wires for loss mitigation and default
   workarounds.
12.Build investment ladder, consider extending maturities in
   face of falling rates.
13.Conduct member research to improve member
   satisfaction.
14.Consider aggressive loan recapture programs
                CUNA’s Economic and Credit Union
                      2008 & 2009 Forecast
ECONOMIC FORECAST
•   Economic growth will slow to 0.9% in 2008, well below the long-term sustainable trend growth
    rate of 3.5%. The U.S. economy will tip into recession in the first half of 2008. Falling home prices
    and credit market turmoil will reduce consumer spending and aggregate output. Aggressive fiscal
    and monetary stimulus will jump start the struggling economy in the third and forth quarters.
•   Core inflation will decline to 1.8% over the next two years. Stable energy prices and a slowing
    economy will reduce headline inflation to 2% over the next two years. Core inflation (excluding food
    and energy prices) will gradually decline as below potential economic growth reduce wage and price
    pressures.
•   The unemployment rate will climb to 5.8% by year-end 2008. The consumer induced recession
    will lead to a weak labor market over the next two years. Job growth will not keep pace with the
    increase in the labor force, pushing the unemployment rate to over 6% by 2009.
•   The fed funds interest rate target will fall to 2% by May 2008. The Federal Reserve will lower
    their fed funds interest rate target by 50 basis points at the March 18 and April 30 rate-setting
    meetings. Once the labor market shows signs of recovery, the Fed will quickly raise interest rates to
    keep inflation expectations anchored.
•   The 10-year Treasury interest rate will increase modestly in 2008 and 2009. A slowing economy
    will keep long-term interest rates below 5% for the next 2 years. The quantity of foreign capital
    channeled into the U.S. Treasury market is the big question moving into 2008. If Asian and Middle
    eastern central banks switch their foreign exchanges reserves to higher yielding assets, the drop in the
    supply of capital will put upward pressure on long-term interest rates.
•   The Treasury yield curve will steepen in 2008. Money market interest rates should fall to the 2%
    range in 2008, while longer-term capital market interest rates should rise over 4%. This should make
    the business of borrowing short term and lending long term much more lucrative relative to the past
    few years.
CREDIT UNION FORECAST
•   Credit union saving growth will rise to 10% in 2008. A recession, falling home prices and a tax
    rebate to 135 million Americans will double the credit union savings growth rate in 2008 relative to
    2007. Expect a massive savings inflow in May and June as the Treasury Department begins sending
    out tax rebate checks.
•   Credit union loan growth will slow to 5% in 2008, the lowest pace since 1998. A slowing economy,
    falling consumer confidence, tighter underwriting standards and low pent-up consumer demand will
    reduce members’ demand for loans.
•   Credit quality will deteriorate in 2008. Falling home prices and the continuing mortgage credit
    crisis will spillover into the auto, credit card, student and business lending sectors. Delinquency rates
    will rise to 1.35% in 2008, up from 1% in 2007. The largest increase will be concentrated in areas
    with the biggest housing price corrections. Moreover, lower loan growth, loan seasoning and a
    weaker economy will increase net loan charge-offs and provisions for loan loss.
•   Credit union return on assets will fall to 0.53% in 2008. Deteriorating credit quality and slower
    loan growth will reduce credit union ROA to the lowest level since 1980 when they earned 0.26%. A
    steepening yield curve in 2008, however, should remove some downward pressure on credit union
    net interest margins.
•   Capital-to-asset ratios will decline to 11% in 2008. Capital contributions will not keep pace with
    asset growth, lowering net worth ratios.
                                                         31
Economic Forecast
February 2008


                                         Actual Results   Quarterly Results/Forecasts                  Annual Forecasts
                                        5Yr Avg 2007 2008:1 2008:2       2008:3    2008:4               2008     2009

Growth rates:
*Economic Growth (% chg GDP)              2.9%       2.2%    -0.5%        -0.5%      2.5%       2.0%       0.9%    2.5%
Inflation (% chg CPI)                     3.1%       4.1%                                                  2.0%    2.0%
Core Inflation (ex. food & energy)        2.1%       2.4%    2.2%          2.0%      1.5%       1.5%       1.8%    1.8%
Unemployment Rate                         5.2%       4.6%    5.2%          5.4%      5.6%       5.8%       5.5%    6.0%
Fed Funds Rate                           3.14%      5.02%   3.25%         2.17%     2.00%      2.00%       2.4%   2.50%
10-Year Treasury Rate                    4.40%      4.63%   3.80%         4.00%     4.10%      4.20%      4.03%   4.40%
* Percent change, annual rate
All other numbers are averages for the period




   Credit Union Forecast
   February 2008


                                            Actual Results           Quarterly Results/Forecasts            Annual Forecasts
                                           5Yr Avg 2007         2008:1   2008:2     2008:3    2008:4         2008     2009

   Growth rates:
   Savings growth                                5.1%    4.8%     4.6%       2.2%       1.4%       1.8%      10.0%     9.0%
   Loan growth                                   9.4%    7.6%    -0.3%       2.3%       1.9%       1.1%       5.0%     6.0%
   Asset growth                                  7.1%    6.1%     4.3%       1.9%       1.1%       1.7%       9.0%     8.1%
   Membership growth                             2.5%    1.7%     0.6%       0.8%       0.4%       0.2%       2.0%     2.0%

   Liquidity:
   Loan-to-share ratio**                        75.2%   84.6%   80.6%       80.7%     81.1%       80.6%      80.6%    78.3%

   Asset quality:
   Delinquency rate                             0.74%   1.00%   1.20%       1.40%     1.40%       1.40%      1.35%    1.30%
   Net chargeoff rate*                          0.52%   0.48%   0.80%       0.80%     0.70%       0.70%      0.75%    0.65%

   Earnings
   Return on average assets (ROA)**0.88%                0.65%   0.45%       0.45%     0.60%       0.60%      0.53%    0.70%

   Capital adequacy:
   Net worth ratio**                            11.2%   11.5%   11.1%       11.0%     11.1%       11.0%      11.0%    10.9%

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

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



                                                                     32
System Challenges


1) Competition



2) Consolidation



3) Banker attacks/taxation



4) Service to modest means



5) Charter changes/conversions

								
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