Pub. 1 2010 Issue 1

www.wvbankers.org 16 T he result: unprecedented invest- ment portfolio losses; compressed earnings in the community bank- ing industry, including losses for many institutions; higher deposit insurance premiums; non performing loans and write offs not experienced since 1991 Challenges Facing Balance Sheet Management in 2010: Keep Your Eyes on Interest Rates 2008-2009: What a ride! The banking industry experienced two tumultuous years filled with unpleasant surprises as a result of the subprime crisis; the collapse of iconic Wall Street firms; and the most serious recession in four decades. strong recover will reduce the number of banks on the FDIC troubled bank list and reverse the trend in bank failures. Secondly, the current yield curve is not normal – a 25 basis point Fed funds rate is 300 basis points below the aver- age rate over the last thirty years, ergo something has to give probably in 2010. The U.S. economy bottomed in the 4th quarter of 2008 and the 1st quar- ter of 2009. In the 3rd quarter of 2009 economic activity as measured by Real GDP turned positive – recent revi- sions show a 2.6% growth rate. The data for the 4th quarter is expected to be positive with the growth rate likely exceeding 2.6%. With few exceptions, most economists expect continued growth in 2010, but the level of fore- casted growth is a concern – less than 2.5%. For the overall economy the rate of expansion will impact the trend in the unemployment rate; for the bank- ing industry the rate of expansion will determine the level of non-performing loans and number of bank failures. There is a lot at stake for everyone as we project 2010 economic expansion. The unemployment rate peaked at 10.2% in October 2009, and dropped back to 10% in November and Decem- ber. For the banking industry the most direct effect of a high unemployment rate is the impact on consumer loan portfolios, both credit card and residen- tial mortgage. Community banks have little exposure to credit card portfo- lios, but delinquencies on first and second liens on residential real estate are a concern. During 2009 the rising unemployment rate resulted in higher delinquencies among prime loans, espe- cially in areas of the Midwest. A fall in the unemployment rate in 2010 would slow foreclosures and help to stabilize the housing market. The indirect effect of a higher unemployment rate is the impact on monetary policy. A double digit unemployment rate will make it very difficult for the Fed to justify rais- ing short-term interest rates. Add to this the political pressure in an election year and we can conclude that Mr. Bernanke – 1993; and the lowest interest rate en- vironment in sixty years. The industry is hoping the worst is over especially in light of 140 bank failures in 2009. As we look to 2010 focus on the eco- nomic recovery and the yield curve. A