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FEATURE ARTICLECREDIT UNIONS:Uniquely positioned to thrive desby Gregory Wirthmann, CFA, SVP ChieThe economy and the financial markets have undergone dramatic changeover the course of the last twelve months. Just a year ago, the economyappeared poised for future growth. In January 2007, the economy had justcompleted a 2.1 percent annualized increase in the gross domestic productand the nation experienced a 126,000 increase in jobs. This year, we arefaced with the most recent quarter having produced a paltry 0.6 percent risein gross domestic product growth and a loss of 17,000 jobs in the month ofJanuary. In fact several of the measures that the National Bureau of EconomicResearch uses in defining a recession have indicated that the country mayalready have entered one.In conjunction with the economy’s deteriorating performance hasbeen the dislocation in the credit markets. While this may have begun withmortgage related securities, it subsequently spread to other non Treasuryinstruments as well. For example, the debentures of government sponsoredenterprises (GSEs) are now trading at significantly higher yield premiumsrelative to Treasury instruments than they had this time last year. Two yearGSE issues are now trading at 73 basis points above the comparable Treasury,nearly three times their spread this time last year.Credit unions have not been immune to the deterioration in economicconditions as many have had to deal with rising delinquencies and chargeoffs.Over a dozen credit unions nationally have incurred net losses in excessof $1.0 million during 2007, and 2008 does not appear to be able to provideany relief. Creditunions in Floridaappear to have beendisproportionatelyadversely affecteddue to exceptionaldeterioration in thestate’s real estatemarket. In fact,of the 20 citiescomprising theGreg Wirthmann, CFA, SVP Chief Investment Offi cer,Southeast CorporateS&P/Case Shillerhome price index,the worst performerover the last yearhas been Miami,with Tampa not farbehind.Despite this horrendous operatingenvironment for credit unions, they remain wellpositioned to survive based on their near recordlevel of reserves. In fact, relative to other financialinstitutions, credit unions actually have fairlypristine asset quality and are well capitalized. Arecent Wall Street Journal report indicated thatcredit unions have aided those borrowers withless than stellar credit that have seen financingoptions evaporate at other institutions. Therefore,because of their still strong financial condition,credit unions currently have the opportunity tocontinue to carry out their mission of helpingpeople. Credit unions are positioned to not justsurvive but to thrive in this environment.What can credit union managers expect in thenear future? A highly likely outcome of the currenteconomic slowdown is a steeper yield curve,which generally benefits all financial institutions,including credit unions. A steepening yield curveis a common occurrence in recessionary periods,as the Federal Reserve generally pushes shortterminterest rates lower in an attempt to forestallsignificant damage to the overall economy. Asteep yield curve is generally a positive factor forcredit unions, providing the opportunity to lend(or invest) for a longer period at higher yields,while funding themselves at comparatively lowershort-term rates. While the potential value of theFederal Reserve’s current attempt to stimulate theeconomy is unclear, the benefits to a credit union’sinvestment portfolio are much more apparent.In attempting to forecast the actions of theFederal Reserve’s monetary policymakers, weexamine their behavior during the United States’last two recessions due to the fact that previousrecessions occurred under significantly differentmonetary policy regimes. Over the course of thepast two recessions, curve steepness (as measuredby the difference between the yield on the six4 FLORIDA CREDIT UNION NEWS