utah and national cu economic update 2014 ulcu annual meeting and convention march 14 th , 2014 •...

Utah and National CU Economic Update2014 ULCU Annual Meeting and ConventionMarch 14th, 2014 • Salt Lake City, Utah

Mike SchenkVice President, Economics & Statistics

Credit Union National AssociationTelephone: 608-231-4228 Facsimile: 608-231-4924

E-Mail: mschenk@cuna.com

U.S. EconomyGetting Better? Or Worse?

Economic Overview

• Inching toward key goals

• Persistent & maddening weakness

• But some good signs

• With key implications for credit unions

Chained $2009, % Change Q/Q at SAAR. Source: BEA.

2007 2008 2009 2010 2011 2012 2013

Annual GrowthLong-Run Average Growth

Subpar Growth: U.S. Real GDP

Chained $2009, % Change Q/Q at SAAR. Source: BEA.

'08 '08 '08 '08 '09 '09 '09 '09 '10 '10 '10 '10 '11 '11 '11 '11 '12 '12 '12 '12 '13 '13 '13 '13

2.8 2.8

Economy Gaining Steam? U.S. Real GDP

10.09.8

9.18.3

7.96.6

4.94.0

U.S. Unemployment RateSource: BLS.

"Headline" Fed Policy Threshold (6.5%) Utah

Declining Jobless Rate

Utah Unemployment Rate(By County. Source: BLS. December 2013.)

• Statewide = 4.0% (Dec.)• Fourth-lowest rate in US• Year-ago = 4.9%• 22 of 29 Counties below 5%• High: 8.4% (Dec ‘09/Jan ‘10)

Lowest:Cache 2.8%Duchesne 2.8%Summit 2.9%Uintah 2.9%

Highest:Grand 10.6%Garfield 14.1%Wayne 15.8%

Unemployment Rate TrendsSource: BLS. Not Seasonally Adjusted.

Dec. 2012 (%)

Dec. 2013 (%)

One-Year Change (%)

U.S. 7.8 6.7 -1.1Utah 4.9 4.0 -0.9

Logan, UT-ID 3.9 2.8 -1.1Ogden-Clearfield, UT 5.4 3.8 -1.6Provo-Orem, UT 4.9 3.5 -1.4Salt Lake City, UT 4.9 3.5 -1.4St. George, UT 6.6 4.3 -2.3

113200

Changes in U.S. Nonfarm EmploymentSource: BLS

Change Assumed Fed Target…

Improving Jobs Picture

State Employment TrendsSource: BLS. Not Seasonally Adjusted.

Dec. 2012 (000)

Dec. 2013 (000)

One-Year Change (000)

Utah 1,279 1301.6 22.5

Logan, UT-ID 55.7 55.6 -0.1Ogden-Clearfield, UT 202.3 206.2 3.9Provo-Orem, UT 198.7 207.3 8.6Salt Lake City, UT 49.5 51.3 1.8St. George, UT 664.3 674.2 9.9

Broad-Based Improvement• YOY unemployment rate decreases in 39

states

• YOY unemployment rate decreases in ~80% of the nation’s 372 MSAs

• Nearly all key business sectors showing employment gains

Broad-Based Employment GainsSource: BLS. In thousands. % of Total

EmploymentJan. ’14 Change

YOY Change

Mining & logging 1% 7 36Construction 4% 48 179Manufacturing 9% 21 93Retail & wholesale trade 15% 1 412Transportation & utilities 4% 10 49Information 2% 0 6Financial activities 6% -2 65Professional & business svs. 14% 36 656Education & health services 15% -6 306Leisure, hospitality & other svs. 14% 28 459Government 16% -29 -53Total 100% 114 2,208

U.S. EmploymentSource: BLS. (Data in Millions)

• Average monthly increase over past six months = 178,000.

• Back to pre- recession levels by June 2014?

Now Down 850,000 Jobs

4.1 4.

-2.0 -1

.5 -1.4

2.1 2.3

1.2 1.

1.1 1.

4 1.7 2.

1 2.6 3.

1 3.5 3.5 3.6 3.7 3.8

1.4 1.

7 1.9 2.

1.1 1.

4 1.8 2.

9 1.2 1.

U.S. Inflation Rate (%)Source: BLS.

CPI-Headline

CPI-Core

Fed Policy Trigger

Tame Inflation

U.S. “U-6” Unemployment Rate (%)Source: BLS

2011 2012 2013 2014 2015

-0.9% -1.0%

Austerity’s Drag on Growth

< 30% 30-60% 60-90% 90%+

2.8 2.8

3.1 3.2

Real GDP Growth Rates by Debt/GDP Ratio(Source: Herndon/Ash/Pollin. UMass Amerst Work-

ing Paper 322)Reinhart/Rogoff Herndon

High Debt Loads and Growth

82.178.1

08 09 10 11 12 13 14

Consumer ConfidenceSource: Conference Board

Aug. '11:Debt Ceiling

Dec. '12:Fiscal Cliff

Mar. '13:Sequester

Lehman/AIG

Equity markets bottom out

Recovery Act

Debt Limit & Confidence

No Inflation in Sight

3 4 5 6 7 8 9 10 11 12 13-2

Inflation Expectations: 2003-2012(Source: Federal Reserve)

Inflation Expectations TIPS (10-Yr) 10-yr Treas

Obvious Pent-up Demand• The average age of consumer durable goods -- long-lasting items such

as furniture, appliances and computers -- is at a 49-year high according to data from the Bureau of Economic Analysis dating to 1925.

• Among things Americans are keeping for the longest time: furniture and furnishings (including clocks, lamps, and floor/window coverings) and home and garden tools like lawnmowers and snow-blowers.

• Cars and luggage were the only two of 17 categories the BEA tracks that saw a decrease in average age in 2012 – though age of cars remains near all-time high.

Replacement Cycle Boom Should Boost Economic Growth!

Strong Car Sales(Cars + Light Trucks. Source: BEA)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

12.312.9

15.0 14.7 15.1 15.115.5

16.917.3 17.1 16.8 16.6 16.9 16.9

16.516.1

-11.0%

-11.6%

-12.7%

-13.4%

-12.6%

-13.2% -15.6%

-17.0%

-16.3%

-15.9%

-16.7%

-17.0%

-15.9%

-15.2%

-14.8%

-13.4%

-12.0%

-11.2%

Home Prices vs. December 2007(Source: FHFA All Transactions Index)

~2/3 ownership

Every $ gain = $0.08 increase in spending over following two years

Housing’s Obvious Rebound

YOY = +4.8%4th Qtr. = +0.9%

State Home Price TrendsSource: FHFA. All Transactions Index.

2013 4th Quarter Change

Full Year 2013

ChangeChange vs.

12/07Utah 1.0% 8.1% -11.0%

Logan, UT-ID -1.8% 0.6% -4.8%Ogden-Clearfield, UT 1.0% 5.9% -8.9%Provo-Orem, UT 1.5% 10.0% -13.7%Salt Lake City, UT 1.2% 9.4% -9.5%St. George, UT 2.0% 9.5% -26.3%

Strong Housing Metrics• Relatively strong sales:

• New Sales = 429,830 (strongest since 2008). Full-year 2013 sales = 16% increase over 2012.• Existing sales = 5.1 million (strongest since 2006). Full-year 2013 sales = 9% increase over 2012.

• Lowish supplies (January 4.7 months supply vs. LR avg of 6.0) -> higher prices/more building

• Solid price gains - consistent increases almost everywhere you look

• Housing starts (Census) = 2013 total=931,000 – strongest year since 2007.

• Builders Confidence (NAHB) = 47 in January ~ 50 for past nine months (and near 8-year high)

• Foreclosure filings (RealtyTrac) = -18% YOY January (40 consecutive months of YOY declines)

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 09 10 11 12 130

2000S&P 500 Monthly Average

(Source: S&P)

~55% ownership

Every $ gain = $0.03 in-crease in spending over following two years

Big Equity Market Gains

79Q1 82Q1 85Q1 88Q1 91Q1 94Q1 97Q1 00Q1 03Q1 06Q1 09Q1 012Q10.00

Debt as a Percentage of Disposable HH Income(Source: Federal Reserve)

Dramatic Decline in Debt

Record HH Net WorthSource: Federal Reserve and BLS.

Nominal Inflation-Adjusted

Slow & Unsteady Recovery

Economic ForecastJanuary, 2014

5Yr Avg 2012 2013:1 2013:2 2013:3 2013:4 2013 2014

Growth rates:*Economic Growth (% chg GDP) 0.80% 2.80% 1.10% 2.50% 4.10% 2.50% 2.55% 3.25%Inflation (% chg CPI) 1.80% 1.70% 1.50% 1.75%Core Inflation (ex. food & energy) 1.75% 2.20% 1.70% 1.75%Unemployment Rate 8.30% 8.10% 7.70% 7.60% 7.30% 7.00% 7.40% 6.50%Fed Funds Rate 0.50% 0.14% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%10-Year Treasury Rate 2.95% 1.81% 1.95% 2.00% 2.71% 2.75% 2.35% 3.25%* Percent change, annual rate .

All other numbers are averages for the period

Actual Results Quarterly Results/Forecasts Annual Forecasts

Taxation Threat Is Real• Comprehensive Tax Reform Efforts Underway

– Congress starting with a “clean slate”– Public strongly supports deficit reduction efforts– Many CU members unaware of tax status– An example…Family_Pays_More.wav

• The more CU members know, the stronger their resistance to taxation. Winning message points:– Member-owned, member-directed– Locally controlled– Benefits returned to members

• Lower fees/cheaper loans/higher savings yields/easier to get loans• Nationally $5.8 billion in 2012 - $120 per credit union household• Measure and tell the world about the financial and nonfinancial benefits you deliver

• Need grassroots support– Engage your members – taxation is a tax on members – benefits at risk – Tell Congress: Don’t Tax My Credit Union!– www.donttaxmycreditunion.org/

Recent CU Results

• Fast membership growth

• Slow but increasing loan growth

• Vastly improved asset quality

• High earnings despite low interest margins

• Tremendous variation

Fast Membership Growth(Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

1.31.6 1.4

1.52.1

12-month Growth

U.S. Utah

20-Yr. Avg. ~ 2.1%Net Great Recession ~ 2.2%

< $5 Mil. $5 to $20 Mil. $20 to $100 Mil. $100 Mil+

Full Year 2013By Size

U.S Utah

Faster Loan Growth(Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

6.5 6.7

12-month Growth

U.S. Utah

3.22.8

U.S Utah

Broad-Based Loan Increases

(Source: NCUA and CUNA)

Credit Cards Other Unsecured New Auto Used Auto 1st Mtg. HEL/2nd Mtg. MBLs

5.74.8

8.67.9

6.57.7

12-month Growth

2012 2013

Asset Quality: Delinquency

(Percent of Total Loans. Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

1.82 1.751.60

1.15 1.01

Period-End

U.S. Utah

Year-End 2013By Size

U.S Utah

Asset Quality: Net Chargeoffs

(Percent of Average Loans. Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

1.211.14

0.730.57

Total During Period

U.S. Utah

0.55 0.530.57

U.S Utah

Interest Rate Risk(Net Long Term Assets as a % of Total Assets. Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

32.0 31.633.1 32.5 33.0

Period-End

U.S. Utah

U.S Utah

Liquidity Risk(Total Loans/Total Savings. Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

83.4 83.2

76.372.2

69.4 68.6 71.0

Period-End

U.S. Utah

57.1 54.959.4

72.670.773.2 71.2

U.S Utah

High Earnings(Percent of Average Assets. Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

0.68 0.84 0.77

1.45Total During Period

U.S. Utah

-0.240.09

0.840.21

U.S Utah

Surprises in the Details!Credit Unions Exceeding National NormsSource: NCUA and CUNA.

Category Totals

Total Memberships Growth > 2.1%

Total Loan Portfolio Growth >5.5%

ROA > 0.84%

Asset Category

Number of

% of All US CUs

Number of CUs

% of CUs in Asset Group

Number of CUs

<$5 Mil. 1,456 21% 276 19% 407 28% 250 17%

$5 to $20 1,799 26% 326 18% 457 25% 261 15%

$20 to $100 2,067 30% 503 24% 634 31% 309 15%

$100 Mil. + 1,495 22% 711 48% 672 45% 464 31%

What’s Driving CU Earnings?

2011 2012 Change 2013 ChangeAsset yield 405 362 -43 336 -26

- Int. cost of assets 92 72 -20 59 -13

= Net interest margin 313 290 -23 278 -12

+ Non-interest income 131 145 +14 140 -5

- Operating expenses 326 316 -10 314 -2

- L&L loss provisions 50 35 -15 26 -9

= Net Income 68 84 +16 77 -7

Light Vehicle Sales(Cars + Light Trucks. Source: BEA)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10,000

12,000

14,000

16,000

18,000

2007 = 16.1 million2008 = 13.2 million2009 = 10.4 million2010 = 11.6 million2011 = 12.7 million2012 = 14.4 million2013 = 15.5 million

18.3 Million

Auto Sales Back• Average age (Polk) = record 11.4 years in 2013• New outlook (Edmunds):

– 16.4 million units in ‘14– Up from 15.5 million actual in 2013– Highest total since 2006– But # and % gains smallest since 2009– Big technology gains spurring interest

• Used outlook (CNW Mkt. Res./RVI Grp.):– Supply beginning to increase late in ’13 – Downward pressure on prices– Buyers market– Sales above 41 million units annually peaking at 43.5 in ’16– Private party sales climbing – hitting 31% in 2020

“Toy” Sales Firming• US motorcycle sales up (non-scooter sales up 3% in 2013 according to

Motorcycle Industry Council). Harley worldwide sales up 5.7% 4Q ‘13 & 4.4% full-year.

• RV shipments finished 2013 at a four-year high of 321,127 -- 12.4% ahead of 2012 levels. Motorhome shipments rose 36% to 38,322 units. Airstream sales +59% in 2013. RVIA expects a 6.1% increase in sales this year (which would mark the fifth consecutive annual gain).

• Off-roaders (ATV-type vehicles) continue to show accelerating growth, with annual sales up 13% in 2013 to about 250,000 units.

• Recreational boating industry continues post-recession gains, projecting a 5% to 7% increase in new powerboat sales for 2014, on top of a 5% increase last year. Leading the industry's growth are small fiberglass and aluminum outboard boats 26 feet or less in size.

Housing Outlook(Mortgage Bankers Association)

• Housing starts +13% in ‘14 and +10% in ‘15• Strong sales

– Existing homes: +4% in ’14/+4% in ‘15– New homes +9% in ’14/+4% in ’15

• Prices: +4.4% in ’14/+3.5% in ’15• Overall 1-4 Family Originations:

– -36% in ’14/+10% in ‘15– Refinance share: 63% in ‘13/39% in ’14/35% in ‘15

Net Interest Margin(Source: NCUA and CUNA)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

387 384377

388 387393

384 381

327 329 332 333 330

312305

Non-Interest Income Issues• Decline in refinancing activity• Overdraft protection

– CFPB report issued mid-June• Overdraft & NSF accounted for 61% of consumer deposit account charges in 2011• Overdraft median fee = $34 at large; $30 at small • Amount of annual fees fir accounts with at least one fee was $225• Growth of average monthly payments per household from 2000 – 2011 was 53%

– Inadequacies in disclosures– Egregious practices that maximize fees– Fees imposed prior to offering solutions– Proposal out later this year or early next year (no plan to regulate fees)

• Interchange litigation– Merchant/plaintiff sued to invalidate the Feds interchange rules– Fed filed appeal in August - status quo for now

• Stay & current rules in place until decision Fed recently filed briefing • Oral arguments – Fed ignored Congressional intent: “..none of us is buying that….”• Decision May?• If upheld in entirety – new rule in 4th quarter• If only partially upheld – early 2015

Credit Union Credit Quality Trends

(As a % of Loans. Source: NCUA and CUNA)

Net Charge-offsAllowance for Loan LossesLoan Loss Provisions

Corporate Stabilization Assessments

(Basis Points of Insured Shares. Source: NCUA and CUNA)

2009 2010 2011 2012 2013 2014 2015 2106

9.58.0

0.0 0.0 0.0

2013 = 8bp insured shares ($700 billion)Enough!Assessments + depleted capital exceed actual losses by $4 bilEstimated unrealized losses = $4 bilLiquidity concerns are key; recent recoveries have been large

CU Capital(Source: NCUA and CUNA)

2007 2008 2009 2010 2011 2012 2013

11.410.8

9.8 10.0 10.2 10.410.8

Period-End

U.S. Utah

15.813.4

11.5 10.6

12.8 12.9

U.S Utah

Capital Reform• Our view

– Highest/most restrictive rules – CUs need more flexibility to serve members– Congress should modify the definition of credit union net worth to include

supplemental forms of capital & give NCUA more flexibility.• NCUA

– Bank vs. CU capital trends– Basel III changes– Sr. staff/Matz rumblings

• CUs with assets over $50 million subject to “improved” risk-based requirements• Result will be higher capital levels for credit unions with high concentrations of risky assets

• Comments: May 28th, 2014 (CUNA/NAFCU seeking extension)• CUNA evaluations

– PCA (7% “leverage” and generally nonbinding risk components)– Basel III (5% leverage ratio and more strict risk components)– Mix (Basel leverage & PCA risk weights/PCA leverage & Basel risk weights)

Closer to “Normal”Credit Union ForecastJanuary, 2014

5Yr Avg 2012 2013:1 2013:2 2013:3 2013:4 2013 2014

Growth rates:Savings growth 6.6% 6.1% 3.6% 0.0% -0.4% 0.5% 3.7% 4.0%Loan growth 2.5% 4.8% 0.2% 2.3% 2.7% 1.5% 6.7% 7.0%Asset growth 6.1% 6.2% 3.3% 0.1% 0.1% 0.8% 4.3% 4.3%Membership growth 1.5% 2.1% 0.7% 1.0% 0.4% 0.2% 2.3% 2.3%

Liquidity:Loan-to-share ratio** 73.9% 68.6% 66.3% 67.9% 70.0% 70.7% 70.7% 72.7%

Asset quality:Delinquency rate 1.47% 1.27% 1.06% 1.01% 1.01% 1.00% 1.02% 0.90%Net chargeoff rate* 1.00% 0.73% 0.61% 0.55% 0.54% 0.55% 0.56% 0.55%

EarningsReturn on average assets (ROA)* 0.52% 0.84% 0.83% 0.84% 0.69% 0.75% 0.78% 0.75%

Capital adequacy:Net worth ratio** 10.2% 10.4% 10.3% 10.5% 10.7% 10.8% 10.8% 11.1%

* Annualized Quarterly Data**End of period ratio

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

Quarterly Results/Forecasts Annual ForecastsActual Results

Housing Finance Reform• Inactivity & FHFA reporting large deposits into Treasury• House:

– Financial Services Chair Hensarling: PATH Act – Winds down FNMA and FHLMC– Removes government guarantee– Incentivizes private capital to step in– Eliminates key financing option for CUs/members

• Senate:– Ten members drafted Corker/Warner housing reform bill– Widely supported by housing/finance groups– Maintains the government guarantee– Replaces FHFA with FMIC (capitalized by premiums collected by issuers)– Establishes the Mutual Securitization Corporation– Requires private capital to take on at least 10% of the first-loss position when

dealing with mortgage securitizations – Chair Johnson and Ranking Member Crapo also are drafting a bill – Hearings on the horizon

utah and national cu economic update 2014 ulcu annual meeting and convention march 14 th , 2014 •...

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