The Economy: A Long Road Ahead Presented by Terrin GriffithsCalifornia and Nevada Credit Union LeaguesSanta Clara Chapter MeetingJanuary 13, 2009

2008: A Historic YearPrelude to the CrisisMarch: Bear Stearns collapsesSpring & Summer: Financial firms hunt for new capitalAugust: IndyMac seized by FDICThe Credit CrisisFannie Mae and Freddie Mac in conservatorshipLehman bankruptMerrill Lynch acquired by Bank of AmericaAIG nationalizedGoldman Sachs, Morgan Stanley, American Express, and GMAC became bank holding companiesWashington Mutual merged into JPMorganWachovia acquired by Wells Fargo$700 billion Treasury bailout proposal (TARP) implementedGovernments resorted to nationalization, guarantees, bank bailouts, and interest rate cutsFed lent directly to companies through purchase of commercial paperDow Jones Industrial Average traded at 7,449 on November 21stFed interest rate target officially cut to a range of 0% to 0.25%$17.4 billion Treasury loan commitment secured by GM and Chrysler

And, at the start of 2009Housing market deflationSubstantial job lossConsumer distressFinancial market turbulenceGovernment bailouts and stimulus with unknown consequencesInflationary pressures abating, but this isnt translating into increased spending

U.S. Economic GrowthOn a downward trendSource: Federal Reserve Bank of St. Louis, *Forecast

Sources of GrowthSource: Bureau of Economic Analysis

Personal Income Growth*projectedSource: Bureau of Economic Analysis

Nonfarm PayrollsThree month moving averageSource: Bureau of Labor Statistics

Why is the jobs report unsettling?2.6 million jobs were lost in 2008Employment fell by 1.9 million over the last four months of 2008Average workweek fell to 33.3 hours, indicating more months of substantial payroll cuts.The number of involuntary part-time workers has risen by 3.4 million over the past 12 months, reaching a total of 8 million.While the official unemployment rate is 7.2%, counting the marginally attached and underemployed as unemployed results in a rate of 13.5%.

In California, many sectors are hemorrhagingSource: Employment Development Department

While the growth sectors are showing signs of weaknessSource: Employment Development Department

Californias unemployment rate is on the rise.Source: Bureau of Labor Statistics

San Jose MSA is sharing in the pain.Source: Beacon EconomicsSeasonally Adjusted

Many sectors are shedding jobsSource: Employment Development Department

While a mighty few are growingSource: Employment Development Department

Consumer ConfidenceDecember 2008 = 38Source: Conference Board

Retail Sales downshiftSlowing since mid-2006Source: Federal Reserve Bank of St. Louis

California New Vehicle RegistrationsSource: California New Car Dealers Association

Chart1

-0.112

-0.06

-0.186

-0.18

-0.191

Year-to-Year % Change, by Quarter

Sheet1

2007Q3-11.2%

Q4-6%

2008Q1-19%

Q2-18%

Q3-19%

Sheet1

Year-to-Year % Change, by Quarter

Sheet2

Sheet3

Chart2

-0.127

-0.193

-0.209

Year-to-Date % Change 2008 (as of Sept) vs. 2007

Sheet1

2007Q3-11.2%U.S.-12.7%

Q4-6%California-19.3%

2008Q1-19%Northern California-20.9%

Q2-18%

Q3-19%

Sheet1

Year-to-Year % Change, by Quarter

Sheet2

Year-to-Date % Change 2008 (as of Sept) vs. 2007

Sheet3

Consumer price pressures are easingSource: Bureau of Labor Statistics

Crude oil prices have receded*adjusted by CPI (1982-1984=100, SA)Source: Bureau of Labor Statistics and Federal Reserve Bank of St. Louis

U.S. Households are more indebtedSource: Federal Reserve Flow of Funds, Bureau of Economic Analysis, CUNA

Personal saving as a percent of disposable personal incomeSource: Federal Reserve Bank of St. Louis

Housing Market

Housing Sales may have stabilized?Source: California Association of Realtors

Local Market VariationsSource: California Association of Realtors

Single-Family Home Prices Fallin San Jose MSABased on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.Source: OFHEO

Are Homeowners Keeping Up?Percentage of California home mortgages that are past due.Source: Mortgage Bankers Association

Difficulties are MountingPercentage of California home mortgages that are in foreclosure.Source: Mortgage Bankers Association

Source: May 2007 Housing Monthly, Ivy Zelman, Credit Suisse, data as of December 2006.

Where does this leave us?Housing will struggle.Investment spending will continue to be cautious.Consumers are in retreat.This is a global recession, which is hurting exports.But, it is encouraging a return to saving.All of the above translate into more job loss! As fewer jobs are created, spending power is drying up. Faced with declining business, employers are further trimming payrollscompleting the cycle!The stimulus should help, but timing is critical.

Economic Outlook for 2009Economy should remain anemic given housing and the credit markets.There is no sector positioned to provide a boostthe hope is that none of the other sectors get worse and housing finally finds its bottom.Unemployment will rise due to additional job cuts and a lack of payroll growth.Consumer spending will contract further and will not be the driver it once was as saving becomes a priority.Housing starts should bottom in 2009, but normalcy will not return for some time due to the recession, financing, and availability of foreclosure properties.Likely that the government will continue to expand its efforts to help homeowners.Economic recovery possible in 2010, but it will be accompanied by below-trend growth and elevated unemployment rates.

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; CUEG; National Association of Realtors; Mortgage Bankers Association; National Association for Business Economists; UCLA Anderson Forecast; U.S. Census Bureau.

National Economic Forecast200720082009Real GDP (% change, annual average)2.2%-0.5%-0.3%Mortgage - 30-year Fixed Rate (%)6.3%6.0%5.6%Unemployment Rate (%)4.6%5.8%8.0%CPI (% change)2.9%3.9%0.6%Interest Rate (Federal Funds Rate)(%)5.0%2.0%0.5%Housing Starts (thousands)1,355930720New Single Family Home Sales (thousands)776497393Existing Home Sales (thousands)5,6524,9585,161Median Existing Home Price ($)$218,900$200,700$196,900Light Vehicle Sales (millions)16.113.312.0

And in CaliforniaIncome and employment will further deteriorate as the housing market bottoms.A stronger pullback in consumer spending will adversely impact job growth within many regions of the state.Payroll employment growth will be relatively flat over the next two years with the manufacturing, finance, retail, and housing labor markets enduring the greatest blows.Unemployment will approach but not exceed 10% and will remain elevated throughout 2010.Export activity will ease ahead as the global economy softens; import volume could pick up in 2009. Home price declines will persist into 2009 as areas cope with distressed sales and a hesitant marketplace.The states economy should begin to strengthen in 2010.

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; California Association of Realtors; California Department of Finance; National Association of Realtors; UCLA Anderson Forecast; University of the Pacific Forecast; U.S. Census Bureau.

And in the San Jose MSAThe labor market will contract in 2009 with manufacturing, construction, and the information sectors shedding jobs.Job growth will be absent in 2010. Unemployment will peak in late 2009 but remain above 8% through 2010.Venture capital should continue to flow, provided that financial markets stop imploding.Housing starts will be flat in 2009 with 2010 looking more promising.

Credit unions can expectTight margins, deteriorating credit quality, lower lending volumes, and increased competition, particularly for deposits, to be with us for some time.Loan growth to remain weak into 2009.Consumer loans and other real estate loans to be dominant sources of delinquency and charge-offs.Mortgage demand to be steady as consumers re-enter the marketplace into 2009 and turn to their credit unions.Automobile loan demand to remain weak into 2010.Delinquencies to accelerate in 2009 while charge-offs level off.To have members with tarnished credit seeking products to address and rebuild so develop these products now.

What are credit unions to do?Avoid raising fees and loan rates to generate net income; shore up in other areas.Rising delinquency and loan losses do not necessarily require adjusting lending policies.These are taxing times for members so let the capital do its job.Continually communicate your commitment to your members to them.Tremendous opportunity to gain market share, but lack of earnings will make growth difficult.

CUResults

Credit Union Forecast

December 2008

Actual ResultsQuarterly Results/ForecastsAnnual Forecasts

5Yr Avg20072008:12008:22008:32008:420082009

Growth rates:

Savings growth5.1%5.1%5.0%1.3%-1.2%0.5%6%10%

Loan growth9.4%6.5%0.4%2.6%3.7%1.6%8%6%

Asset growth7.1%6.0%4.5%1.3%-0.1%0.5%6%10%

Membership growth2.5%1.7%1.1%1.0%0.8%0.2%3%2%

Liquidity:

Loan-to-share ratio**75.2%83.4%79.7%80.8%84.8%85.7%85.7%82.6%

Asset quality:

Delinquency rate0.74%0.93%0.96%0.97%1.03%1.20%1.04%1.50%

Net chargeoff rate*0.52%0.48%0.66%0.74%0.75%0.75%0.73%1.00%

Earnings

Return on average assets (ROA)**0.88%0.65%0.60%0.43%0.34%0.35%0.43%0.50%

Questions?