Economic & Credit Union Monthly Update March 216 To access this monthly update go to: www.cunamutual.com/trendsreport If you have any questions or comments, please contact: Steven Rick, Chief Economist CUNA Mutual Group Economics 8.356.2644, Ext. 665.5454 steve.rick@cunamutual.com Table of Contents Economy.Page 2-9 Household Financial Condition Page 1-15 Credit Union Loans... Page 16-25 Credit Union Investments.Page 26-29 Credit Union Savings Page 3-39 Credit Union Earnings..Page 4-51 Credit Unions and Members...Page 52-55 Economic & CU Forecast...Page 56-59 CUNA Mutual Group Proprietary Reproduction, Adaptation or Distribution Prohibited CUNA Mutual Group
Economics Section Gross Domestic Product Labor Market Inflation Interest Rates Auto and Home Sales Exchange Rate and Oil Prices Stock and Home Prices 2
Modest Economic Growth and Falling GDP Gap 6. 5. 4. 3. 2. 1.7 1.. -1. -2. 3.9 2.7 2.5-1.5 U.S. Economic Output (Real GDP - Quarterly Growth Rate) 2.9.8 4.6 2.7 1.9.5.1 1.9 1.1 3. GDP Growth 2.5% Maximum Sustainable Growth Rate 3.8 -.9 4.6 4.3 2.1.6 3.9 2. 1.4 2.82.82.82.8 2.52.52.52.5 1:1 11:1 12:1 13:1 14:1 15:1 16:1 17:1 Source: Department of Commerce. 8% 7% 5% 3% 1% % -1% - -3% - -5% - -7% -8% Recession GDP Output Gap vs. Federal Funds Rate 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 Source: CBO & Federal Reserve. Output Gap (Left Axis) Federal Funds Rate (Right Axis) 11% 1% 9% 8% 7% 5% 3% 1% % The economy expanded at a 1. annualized rate in the 4th quarter of 215, below the long-run natural rate of 2.5%, due to slowdown in inventory accumulation, the plunge in energy sector capital spending and a big drag from net exports Consumer spending and housing investment were the main drivers of growth. Final Sales of Domestic Product added 1.62 percentage points and the change in inventories subtracted.22 percentage points. The economy grew 2. in 215, the same as 214. Expect the economy to grow 2.5% in 216 and 2.75% in 217. The economy is approaching its potential rate of output so the Fed will raise the fed funds interest rate 5 bps in 216. 3
Thousands Strong Employment Gains Reach Full Employment 6 5 4 3 2 US Payroll Employment Monthly Changes SA 6 5 4 3 2 18 17 16 15 14 13 12 Unemployment Rate Recession Unemployment Underemployment (U-6) Full Employment Target = 5% Underemployment Target = 9% 18 17 16 15 14 13 12 1 5 6 7 8 9 1 11 12 13 14 15 16 17-1 1-1 11 1 9 8 11 1 9 8-2 -2 7 7-3 -4-3 -4 6 5 4 6 5 4-5 -5 3 3-6 -7-8 -9 Recession Payroll Growth 15, Target -6-7 -8-9 2 1 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 Source: Department of Labor. 2 1 The labor market added 242, jobs in February and 171, in January, above the 15, target. Average hourly earnings fell -.1% in February but are up 2. during the last year as the labor market approaches full employment. The unemployment rate remained at 4.9% in February, which corresponds to 7.9 million unemployed workers. The labor force rose 555, (53, employed + 25, unemployed). The underemployment rate fell to 9.7% or 15.6 million (7.8 mil. unemployed, 6. mil. involuntarily part time, 1.8 mil. marginally attached). Continued employment gains will increase household incomes, wage growth, household formations, confidence and desire to borrow and spend. Expect loan growth to remain strong in 216. 4
Inflation Below Target and Falling Inflation Expectations 5% Inflation (CPI) (year over year % growth) 5% 6. 5.5 Nominal Interest Rates, Real Interest Rates and Inflation Expectations Inflation Expectations 1-yr Treas TIPS (1-Yr) 6. 5.5 3% 3% 5. 4.5 4. 3.5 Nominal Interest Rates = Real Rates + Expected Inflation Expected Inflation Nominal Rates 5. 4.5 4. 3.5 3. 3. 1% 1% 2.5 2. 2.5 2. % -1% - -3% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 Headline Core (excludes food and energy) Federal Reserve's Core CPI 2.5% Target % -1% - -3% 1.5 1..5. -.5 7 8 9 1 11 12 13 14 15 16 17-1. Real Interest Rates 1.5 1..5. -.5-1. Headline inflation fell. in February but rose 1.% during the last 12 months while core inflation rose.3% for the month and 2.3% during the last year. Core CPI inflation is approaching the Federal Reserve s Core CPI target of 2.5%. The Fed s preferred measure of inflation, the core PCE deflator is running at 1.3% year over year, below the Fed s Core PCE target of 2.%. There are 4 factors keeping inflation low: the negative output gap leads to idle capacity, a rising value of the dollar keeps import prices low, the commodity super cycle keeps commodity prices low, and low oil prices. The 1-year Treasury interest rate fell to 1.78% in February from 2.9% in January due to falling inflation expectations (11 basis points) and falling real interest rates (2 basis points). 5
Yield to Maturity Rising Interest Rates and Flattening Yield Curve 1 Interest Rates and Recessions 1 4. Treasury Yield Curves 4. 9 9 3.5 3.5 8 7 8 7 3. 3. 6 6 2.5 2.5 5 5 2. 2. 4 4 1.5 1.5 3 2 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Recession Baa Fed Funds 1-yr Treas Forecast 3 2 1 1..5. February 216 January 216 February 215 1 2 3 5 1 15 2 25 3 Years to Maturity 1..5. The Federal Reserve did not raise interest rates at their March FOMC meeting but is expected to raise rates.5 percentage points in 216. The Fed believes the new neutral fed funds rate is 3.25%. Interest rates will normalize in 218 at levels below previous plateaus due to lower real interest rates and lower expected inflation. The Fed will hold off ending its reinvestment program until 217. By maintaining the current size of the Fed s balance sheet and thereby depressing the term premium on long-term bonds, long-term interest rates will be slow to adjust upwards. This will cause a flattening of the yield curve over the next two years, which typically leads to downward pressure on credit union net interest margins. 6
Thousands Thousands Strong Auto Sales and Rising Home Sales 21 2 19 18 17 16 15 14 13 12 11 1 9 8 Millions of Units U.S. Vehicles Sales Seasonally Adjusted Annual Rate Recession New Auto Sales Inherent Demand 5 6 7 8 9 1 11 12 13 14 15 16 17 Source: Autodata Corp. 21 2 19 18 17 16 15 14 13 12 11 1 9 8 8, 7,5 7, 6,5 6, 5,5 5, 4,5 4, 3,5 Existing Home Sales (annual rate) & Inventories Recession Sales (Left Axis) Inventories (Right Axis) Healthy Housing Market 4,25 4, 3,75 3,5 3,25 3, 2,75 2,5 2,25 2, 3, 1,75 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 U.S. vehicle sales slowed to a 17.5 million unit seasonally-adjusted annualized pace in February, from 17.6 million in January. Sales were up 6.7% year over year in February. Low gasoline prices are driving light truck sales. Consumer fundamentals (strong job growth, rising incomes and rising wealth) remain favorable to drive auto sales into the future. The trend pace of auto sales inherent demand - that is consistent with the growth in the driving age population, income growth and household wealth is approximately 16.5 million units. Existing home sales fell 7.1 in February, falling to a 5.8 million annual rate, but are up 2. from February 214. Home inventories remain tight (1.88 million) leading to home prices rising 4. year over year. 7
The Dollar and Oil Prices fell in February 12 11 1 9 8 7 6 U.S. Dollar Exchange Rate Major Currency Index Nominal & Real (1973 = 1) Nominal Real 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 12 11 1 9 8 7 6 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 Oil Price per Barrel (West Texas Intermediate Crude) Recession Nominal Real 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 The U.S. dollar fell 2. in February from January due to market expectations that the Fed will raise interest rates at a slower pace in 216 than previously anticipated. But over the last year, the dollar rose 4. which has reduced the cost of imports to U.S. residents but raised the cost of exports from the point of view of foreign buyers. This will worsen the trade deficit and slow economic growth. The price of a barrel of oil averaged $3.32 in February 216, down from $5.6 one year ago, a decline. This will slow energy investment but boost consumer spending. Oil Economics: P oil = $1 => P Gas = $.25 => growth.3% -.5% over next two years. 8
Volatile Stock Prices and Rising Home Prices 2,2 2,1 2, 1,9 1,8 1,7 1,6 1,5 1,4 1,3 1,2 1,1 1, 9 8 7 6 5 4 3 2 1 S&P 5 Stock Index (monthly average) Recession Nominal Index Real Index 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 2,2 2,1 2, 1,9 1,8 1,7 1,6 1,5 1,4 1,3 1,2 1,1 1, 9 8 7 6 5 4 3 2 1 15 1 5-5 -1-15 OFHEO House Price Index (4-Qtr Percent Change) Recession U.S. 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 Seasonally-Adjusted Purchase-Only Index 15 1 5-5 -1-15 Household balance sheets have improved over the last year due to rising home prices. Stock prices were 9% lower in February 216 than one year earlier, creating a negative wealth effect. Home prices rose 5. over the last year, due to rising home demand colliding with a lack of housing inventory for sale. 9
Household Financial Condition Income Statement Balance Sheet 1
Household Income Statement Income + Change Debt = Taxes + Debt Interest + Spending + Savings 1 9 8 7 6 5 4 3 2 1-1 -2-3 -4-5 -6 Personal Income & Consumption Expenditures [Year Over Year % Change] 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 Recession Consumption Income 1 9 8 7 6 5 4 3 2 1-1 -2-3 -4-5 -6 1..9.8.7.6.5.4.3.2.1. -.1 -.2 -.3 -.4 -.5 Personal Income & Consumption Expenditures [Month Over Month % Change] Feb. Mar. April May June July Aug.Sept. Oct. Nov. Dec Jan. Feb. 215 216 Consumption Income Personal income rose. in February and 4.% year over year, due to rising rental and asset income. Wage income growth fell to -.1%. Nominal spending rose. in February (led by durable good spending) and 3.8% year over year. The outlook for spending is positive because of the recent rise in discretionary items (recreational goods, furniture and appliances, and vehicles sales). Lower gas prices are freeing up cash for other purposes. Consumers had chose to save the gas windfall and/or pay down debt. Now they are starting to spend the gas windfall. Household balance sheets improved over the last year as home prices rose and debt burdens fell. This will boost spending from the wealth effect and from additional access to credit. The lowest debt burdens & payments in 35 years is freeing up income for additional spending. A surge in household formations will lift spending in the next couple of years. 11
Percent Household Income Statement $ bil (SA) Income + Change Debt = Taxes + Debt Interest + Spending + Savings 16 Consumer Credit Outstanding (monthly change & annual growth rate) 4 19% Household Debt Service Ratio 19% 14 35 18% 18% 12 3 17% 17% 1 8 25 2 1 1 6 4 2 15 1 5 15% 1 13% Recession Debt Service Ratio Financial Obligations Ratio 15% 1 13% 6-2 7 8 9 1 11 12 13 14 15 16-5 1 1-4 -1 11% 11% -6 Recession -15 1% 1% -8 Consumer Credit Monthly Change (RHS) Year-over-Year Growth (LHS) -2 9% 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 9% Consumer credit rose $1.5 billion in January, an acceleration from $6.4 billion in December. Consumer credit rose 6.5% over the last year (revolving rose 3.9% and nonrevolving rose 7.9%). Big ticket items (auto and student loans) continue to be the major driver of consumer credit. Rising consumer confidence is a sign consumers are more willing to take on debt via credit cards. The household debt service ratio (mortgage and consumer debt payments (interest and principal) required to remain current on that debt as a percent of disposable personal income) rose to 1.7% in the fourth quarter from the record low of 1.1% in the fourth quarter of 214 but below the record high of 13.2 in Q4 27. Low debt payments freed up disposable income for additional consumption or savings. 12
Household Income Statement Income + Change Debt = Taxes + Debt Interest + Spending + Savings 1 9 8 7 6 5 4 3 2 1 National Savings Rate [3-month moving average (Personal Savings/DPI)] 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 1 9 8 7 6 5 4 3 2 1 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 Consumer Confidence & Sentiment Index Recession Confidence Sentiment 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 15 14 13 12 11 1 9 8 7 6 5 4 3 2 1 The saving rate (savings / disposable personal income) rose to 5. in February from 5.3% in January. Savings should decline as households begin spending some of their gasoline savings windfall. In this environment of modest savings, spending gains will be highly dependent on income growth and consumers preferences for additional savings. Consumer Confidence Index fell to 92.2 in February from 97.8 in January due to slow job and wage growth in January. Consumer Sentiment Index fell to 91.7 in February from 92 in January due to falling stock prices. Improving GDP growth will boost consumer confidence and also the demand for credit. 13
Household Financial and Non-Financial Assets are Rising Household Financial Assets (As a Percent of Disposable Household Income) Household Non-Financial Assets (As a Percent of Disposable Household Income) 58% 58% 3 3 5 5 5 5 5 5 3% 28% 3% 28% 5% 48% 5% 48% 2 2 4 4 4 4 2 2 4 4 2 2 38% 3 38% 3 3 3 3 3 18% 18% 3% 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 3% 1 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 1 Source: BEA & Federal Reserve. Source: BEA & Federal Reserve. Financial assets as a percent of disposable income rose to $5.17 in the fourth quarter of 215. This is a measure of the real annual purchasing power of financial assets (i.e., financial assets equal 5.17 years worth of disposable income). The ratio is up 22.5% from the cyclical low of 4.22 set back in the first quarter 29. Rising stock prices were the major contributing factor. The real annual purchasing power of non-financial assets rose to $2.28 per dollar of disposable income (2.28 years worth of disposable income), up 16.3% since the cyclical low of 1.96 set in the third quarter of 211, due mainly to rising home prices. Non-financial assets as a percent of disposable income is down 23% from the record high of 2.96 set back in the fourth quarter of 25. 14
Household Balance Sheets Are Healing Household Debt (As a Percent of Disposable Household Income) Household Net Worth (As a Percent of Disposable Household Income) 1 13% 1 11% 1% 9% 1 13% 1 11% 1% 9% 7% 68% 6 6 6 58% 5 5 7% 68% 6 6 6 58% 5 5 8% 7% 5% 8% 7% 5% 5 5% 48% 4 4 4 5 5% 48% 4 4 4 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 Source: BEA & Federal Reserve. Source: BEA & Federal Reserve. During the fourth quarter of 215, households debt burden ratio (debt-to-disposable-income) rose to 1.31, from 1.28 in the third quarter as debt grew faster than disposable income. The debt burden ratio is down from the record high of 1.29 set in the fourth quarter of 27. Financial institutions writing off and households paying off mortgage debt were the major contributing factors for the decline. The deleveraging phase of the business cycle has come to an end. If the growth rate in debt equals the growth rate of disposable income over the next few years the debt burden ratio will remain around the 1% which is what economists believe is sustainable in the long run. The real annual purchasing power of household net worth rose to $6.39 per dollar of disposable income (or 6.39 years worth of disposable income). 15
Credit Union Loans Section Total Loans Loan Quality New Auto Used Auto Credit Card Home Equity Fixed-Rate First Mortgage Adjustable-Rate First Mortgage 16
Percent Rapid Credit Union Loan Growth 12 1 8 6 4 1.9 7. Credit Union Loan Growth (Annual Percent Growth) 7.5 1. 1.8 11. 7.8 7.6 6.7 4.8 7.3 1.4 1.3 1. 9. 16 14 12 1 8 6 Credit Union Loan Growth (by Asset size) 214 215 6.1 5.3 7.5 7.2 9.4 8.6 11.411.3 13. 12.4 2-2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 1.2-1.2 1.2 4 2 2.6 2.6 3.6 3.9 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Expect loan balances to grow 1% in 216 and 9% in 217 as the strengthening economy boosts members willingness and ability to accumulate debt and therefore satisfy some of their pent up demand that was accumulated during the weak and uncertain economic recovery of the last six years. But the loan growth disparity between small and large credit unions is rather large. In the last 12 months ending in Q4 215, credit unions with assets greater than $1 billion reported an 12. increase in loan balances versus credit unions with assets less than $2 million reported loan growth of only 2.. 17
Improving Credit Quality As Unemployment Falls CU Delinquency Rate Versus Unemployment Rate 12 2. 11 1.9 1.8 1 1.7 1.6 9 1.5 8 1.4 1.3 7 1.2 1.1 6 1. 5.9.8 4.7.6 3.5 2 Recession.4.3 1 Unemployment (Left Axis).2 Delinquency (Right Axis).1. 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % CU Net Chargeoff Rate Versus Unemployment Rate 7:1 8:1 9:1 1:1 11:1 12:1 13:1 14:1 15:1 16:1 Source: Department of Labor, NCUA,CUNA Unemployment Rate (Left Axis) Net Chargeoff Rate (Right Axis) 1. 1.3% 1. 1.1% 1.%.9%.8%.7%..5%..3%..1%.% The credit union loan delinquency rate (loans two or more months delinquent as a percent of total loans outstanding) rose to.81% in January, from.79% in December 215, but below the.83% reported one year earlier. Today s delinquency rate is slightly above the.71% average reported for the years 23-27. So, 5 years after the Great Recession ended there appears to be few credit problems still lingering on credit union balance sheets from that time. Net charge-off rates rose to.5 in Q4 215, from.4 in Q3 215 and.53% in Q4 214. 18
Rapid Credit Union Loan Growth CU Loan Growth Seasonally Adjusted Annualized Growth Rate 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17-1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% -.7%..5%..3%..1%.% -.1% -. -.3% -. -.5% -.45% -. -.7% -.8% -.59% CU Loan Seasonal Factors -.2.2.19%.4.39%.3.% Jan Feb Mar Apr May June July Aug Sept -.5% Oct Nov -.5% Dec Source: CUNA & NCUA. -.2 Credit union loan balances grew at a 1.9% seasonally-adjusted annualized growth rate in January, similar to the pace set during the credit boom of 23-25. January s seasonal factors usually subtract.45 percentage points to the underlying trend growth rate. The strong lending season will soon be upon us as April through August are the strongest loan growth months of the year. 19
Rapid New Auto Loan Growth - - -8% -1% -1-1 -1-18% CU New Auto Growth Seasonally Adjusted Annualized Growth Rate 28% 2 2 2 18% 1 1 1 1% 8% % - 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 28% 2 2 2 18% 1 1 1 1% 8% % - - - -8% -1% -1-1 -1-18% New Auto Loan Seasonal Factors 1. 1.%.8%..57%.57%..31%.3.2...% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -. -.13% -. -.29% -.39% -.38% -.4 -. -.6 -.8% -1.% Source: CUNA & NCUA. Credit union new-auto loan balances grew at a 18.% seasonally-adjusted annualized growth rate in January, a pick up in pace compared to the last few months. January s seasonal factors usually subtracts.39 percentage points from the underlying trend growth rate. The economic factors that are currently supporting vehicle lending are an improving job market, greater access to credit, low interest rates, improving household balance sheets, and rising incomes. Expect car sales to increase 3% in 216 to reach 17.8 million units sold as more pent up car demand is satisfied. 2
Rapid Used Auto Loan Growth CU Used Loan Growth Seasonally Adjusted Annualized Growth Rate 18% 17% 1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-18% 17% 1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% - Used Auto Loan Seasonal Factors 1.%.9%.8%.7.7%..5%..3.37%.35%.3%..13%.15%.1%.% -.1% Jan Feb Mar Apr May June July Aug -.1% Sept Oct Nov Dec -. -.11% -.3% -. -.5% -.3 -.41%-.4 -. -.7% -.8% -.7% -.9% -1.% Source: CUNA & NCUA. Credit union used-auto loan balances grew at a 17.8% seasonally-adjusted annualized growth rate in January. January s seasonal factors usually subtract.7 percentage points from the underlying trend growth rate. The used auto buying and lending season begins in March and runs through August. 21
Slowing Credit Card Growth CU Credit Card Growth Seasonally Adjusted Annualized Growth Rate 1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% - Credit Card Loan Seasonal Factors. 5.% 4.% 3.13% 3.% 2.% 1.%.59%.85%.71%.5%.2.% Jan Feb Mar Apr May June July Aug Sept -.48% -.2 Oct Nov Dec -1.% -1.31% -2.% -1.95% -2.38% -3.% Source: CUNA & NCUA. Credit card loan balances grew at a 5. seasonally-adjusted annualized growth rate in January, due to rising consumer confidence and spending on durable goods. January s seasonal factors usually subtract 238 percentage points from the underlying trend growth rate. The outlook for credit unions credit card lending is positive because of strong consumer fundamentals like the improving labor market, rising home and stock values, faster wage growth, and greater access to credit. 22
Rising Home Equity Loan Growth - - -8% CU Home Equity Growth Seasonally Adjusted Annualized Growth Rate 3% 28% 2 2 2 18% 1 1 1 1% 8% % - 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 3% 28% 2 2 2 18% 1 1 1 1% 8% % - - - -8% 1.%.9%.8%.7%..5%..3%..1%.% -.1% -. -.3% -. -.5% -. -.7% -.8% -.9% -1.% -1.1% -1. -1.3% -1. Home Equity Loan Seasonal Factors Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -.13% -.21% -.21% -.28%-.2 Source: CUNA & NCUA. -1.3.5.3%.19%.6.55%.57% Credit union home equity loan balances grew at a 1.9% seasonally-adjusted annualized growth rate in January, due to rising home prices and improving consumer confidence. January s seasonal factors usually subtract.13 percentage points from the underlying trend growth rate. Home equity loan balances will remain strong due to rising home prices, the improving job market, rising consumer confidence, consumers releasing pent up demand for durable goods, and low interest rates. 23
Slowing Fixed-Rate First Mortgage Growth 3% 28% 2 2 2 18% 1 1 1 1% 8% % - CU Fixed-Rate First Mortgage Growth Seasonally Adjusted Annualized Growth Rate 3% 28% 2 2 2 18% 1 1 1 1% 8% % 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-1.% Fixed-Rate 1st Mortgage Seasonal Factors.9.9%.8%.78%.7%..5.5%..3%.21%..1%..% -.1% Jan Feb Mar Apr May June July -.3% Aug Sept Oct Nov Dec -. -.3% -.2 -. -.3% -.35% -.5% -.4 -. -. -.7% -.8% -.9% -.77% -1.% Source: CUNA & NCUA. Credit union fixed-rate first mortgage loan balances grew at a modest 3. seasonally-adjusted annualized growth rate in January. January s seasonal factors usually subtract.77 percentage points from the underlying trend growth rate. Credit union purchase mortgage originations should increase 15% in 216 as housing demand recovers and refi activity increases slightly. A stronger labor market and rising wages will give more potential homebuyers the wherewithal to purchase a home. Moreover, fading memories of the housing bust will give homebuyers the confidence and willingness to purchase a home. 24
Strong Adjustable-Rate First-Mortgage Growth CU Adjustable-Rate First Mortgage Growth Seasonally Adjusted Annualized Growth Rate 38% 3 3 3 3% 28% 2 2 2 18% 1 1 1 1% 8% % - 98-99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-38% 3 3 3 3% 28% 2 2 2 18% 1 1 1 1% 8% % - - -.9%.8%.7%..5%..3%..13%.1%.% Adjustable-Rate 1st Mortgage Seasonal Factors.8.8.29%.13%.1.7% -.1% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -. -.3% -. -.29% -.5% -. -.5% -.48% -.41% -.7% -.8% -.9% -.8 Source: CUNA & NCUA. Credit union adjustable-rate first mortgage loan balances grew at a strong 22. seasonally-adjusted annualized growth rate in January. January s seasonal factors usually add.13 percentage points to the underlying trend growth rate. Credit unions are placing more adjustable-rate mortgages on their books in preparation of the Federal Reserve raising short-term interest rates 5 basis point in 216. 25
Credit Union Investments Section Surplus Funds Yield on Surplus Funds Investment Maturities Liquidity flows Surplus Funds Distribution 26
Investments Are Falling and Yields Are Stable 75% 73% 7% CU Surplus Funds (Cash + Investments) 38% 3 9.% 8.% 7.% Credit Union Yield on Surplus Funds and Loans Fed Funds Rate Yield on Earnings Assets Yield on Surplus Funds Yield on Loans 9.% 8.% 7.% 68% 3 6.% 6.% 65% 3 5.% 5.% 63% 3% 4.% 4.% 28% 58% 2 55% Recession 2 53% Surplus Funds-to-Assets (Right Axis) 2 Loan-to-Asset (Left Axis) 5% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 3.% 2.% 1.%.% 4:1 5:1 6:1 7:1 8:1 9:1 1:1 11:1 12:1 13:1 14:1 15:1 16:1 Source: NCUA 3.% 2.% 1.%.% Surplus funds fell to 3.3% of assets in January, below the 32.8% in January 215. Investments as a percent of assets fell over the last 2 years as loans growth accelerated. Loans now make up 65. of assets, up from the cyclical low point of 57% set in March 213. The yield on surplus funds fell to 1.19% in Q4 215, down from 1.21% in Q4 213. Loan yields fell to 4.6 in Q4 215, the lowest in credit union history, from 4.75% in Q4 214. With loan balances expected to grow another 1% in 216 ($76.4 billion), expect surplus funds as a percent of assets to fall below 28% by year end, the lowest level of liquidity since February 29. 27
Falling Investment Maturities as Yield Curve Flattens 5 45 4 35 3 25 2 15 1 5 46.9 28 Maturity of Surplus Funds (% of Total) 16.9 6.5 Less than 1 Year 42.5 42.4 23.9 21.2 2.9 1.5 44.3 27.5 27.6 19.4 7.7 7.5 12 13 14 15 1-3 Years 3-5 Years 5-1 Years 3.% 2.5% 2.% 1.5% 1.%.5% -1.% -1.5% -2.% Percent of Surplus Funds Liquid Versus Yield Curve Slope Recession Percent of Surplus Funds < 1 maturity (Right Axis) 3-Yr Treasury - Fed Funds Rate (Left Axis).% -.5% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 8% 75% 7% 65% 55% 5% 45% 35% 3% Surplus funds with a maturity less than 1 year rose to 46. in January 216, up from 44.8% in January 215. The yield curve flattened in January (as measured by the difference between the 3-year Treasury interest rate and the fed funds interest rate) to 8 basis points due to the Fed raising short-term interest rates in December and capital inflows from the rest of world. Longer term investments as a percent of surplus funds fell significantly over the last year; 5-1 year investments fell to 7.5% of surplus funds from 7.7% a year earlier while 3-5 year investments fell from 2.9% to 19.. 28
Billions of Dollars Credit Unions take Advantage of Arbitrage Opportunity $8 Credit Union Liquidity Flows $76. 55 Surplus Funds Distribution (Percent of Total) 55 $7 5 5 $6 $55.2 45 45 $5 4 4 $4 $3 $2 $1 $ -$1 -$2 $5.1 $6. $1.4 $1.5 $8.6 $1.7 -$3.1 -$5.1 From 1 month ago From 1 year ago 35 3 25 2 15 1 5 Cash Deposits in Fin. Inst. Share/Deposits in Corp. CUs Deposits in Comm. Banks Government Securities Cash Deposits in Corp. CU Federal Agency Securites 35 3 25 2 15 1 5 Loans Investments Savings borrowings Capital 2 3 4 5 6 7 8 9 1 11 12 13 14 15 Credit union borrowings grew $1.4 billion in January, in part to take advantage of a recent riskless arbitrage profit opportunity. In December 215, the Federal Reserve increased the interest rate paid on excess reserves to.5%. This created an arbitrage opportunity whereby financial institutions can borrow funds in the short term interbank credit markets at a lower interest rate, say.35%, and deposit the funds into their regional Federal Reserve Bank account earning.5%. The principal limiting factor on the amount of credit union borrowings is their quarter-end capital-to-asset ratios. The arbitrage opportunity exists because the government sponsored enterprises, Fannie Mae and Freddie Mac, cannot deposit their excess liquidity at the Fed and must therefore sell their excess liquidity in the fed funds market. 29
Credit Union Savings Section Total Savings Savings Distribution Savings Interest Rates Regular Share Share Draft Money Market Account Share Certificate Borrowings 3
Percent Slower Saving Growth in 216 16 14 12 1 Credit Union Savings Growth (Annual Percent Growth) 15. 11.3 1.6 1 9 8 7 6 Credit Union Savings Growth (by Asset size) 214 215 5.4 6. 7.7 5.9 6 8.6 8 6 4 2 6.2 8.4 5. 3. 4.1 4.8 6.9 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 4.4 5.2 6.1 3.6 4.4 6.9 5. 4. 5 4 3 2 1.9 2. 1.7 3.5 2.8 4.3 3.6 < $2 mil $2-$5 $5-$1 $1- $25 3.8 $25- $5 $5-$1 bil >$1 bil Savings balances rose 6.9% in 215 due to savings at the gas pump, rising household income, strong job growth, and fast membership growth. Savings balances are expected to grow 5% in 216 and only in 217 as members use more savings for purchases and higher interest rates lead rate-sensitive members to transfer funds to money market mutual funds. Savings growth disparity is rather large. In the last 12 months ending in Q4 215, credit unions with assets greater than $1 billion reported a 8. increase in savings balances versus credit unions with assets less than $2 million reported savings growth of only 2.%. 31
Percent Short-term Liquid Funds Dominate Savings Mix 6 55 5 45 4 Savings Distribution U.S. Credit Unions Certificates Share Drafts MMAs IRAs Regular Shares 6 55 5 45 4 7 6 5 Deposit Interest Rates versus Fed Funds Fed Funds Regular Shares MMAs CDs 35 35 4 3 3 25 25 3 2 2 15 15 2 1 5 1 5 1 89 9 91 92 93 94 95 96 9798 99 1 2 3 4 5 6 78 9 1 11 12 13 14 15 16 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 Regular shares made up 34.7% of total savings in Q4 215 as members prefer short-term liquid deposits. This is the highest percentage since 25. Members anticipate the Federal Reserve will raise interest rates soon, and therefore do not want to lock up their funds in term deposits. Credit union CD interest rates are slowly rising as liquidity tightens at many credit unions reporting strong loan growth. With the Federal Reserve expected to raise the fed funds slowly during 216, expect credit union CD and money-market account interest rates to rise throughout 216. 32
Surging Saving Growth as Gas Prices Fall CU Savings Growth Seasonally Adjusted Annualized Growth Rate 18% 17% 1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18% 17% 1 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % CU Savings Seasonal Factors 1. 1.45% 1. 1. 1.1 1.%.8%....8%.3%.% -. Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -.13% -.18%-.17% -. -.38% -.35%-.3 -. -.49% -.5% -.8% Source: CUNA & NCUA. Credit union savings balances grew at a 6.% seasonally-adjusted annualized growth rate in January, due mainly to low gas prices putting more money in members pockets. January s seasonal factors typically subtract.13 percentage points from the underlying savings trend growth. 33
Rapid Regular Share Growth 18% 1 1 1 1% 8% - - -8% CU Regular Share Growth Seasonally Adjusted Annualized Growth Rate % - 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 18% 1 1 1 1% 8% % - - - -8% Regular Share Seasonal Factors 3.% 2.5% 2.3 2.% 1.8 1.5% 1.%.5%.3 -.1%.% -. Jan Feb Mar Apr May June July Aug -.7% Sept Oct Nov Dec -.5% -.47% -.4 -.53% -.69% -1.% -1.1-1.% -1.5% -2.% Source: CUNA & NCUA. Credit union regular share balances grew at a 1.5% seasonally-adjusted annualized growth rate in January, due mainly to low gas prices putting more money in members pockets. January s seasonal factors typically subtract.4 percentage points from the underlying regular shares trend growth. 34
Rapid Share Draft Growth 2 2 18% 1 1 1 1% 8% % - - - -8% CU Share Draft Growth Seasonally Adjusted Annualized Growth Rate 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 2 2 18% 1 1 1 1% 8% % - - - -8% Share Draft Seasonal Factors 6.% 5.5% 5. 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.68%.63%.59%.5.5%.% -.5% Jan Feb Mar Apr -.5% May June July Aug Sept Oct Nov -.1 Dec -1.% -.68% -.61% -1.5% -1.4-2.% -1.7% -2.5% -3.% -2.71% Source: CUNA & NCUA. Credit union share draft balances grew at a 9.5% seasonally-adjusted annualized growth rate in January. Seasonal factors typically subtract 1.44 percentage points from the underlying share draft balance trend growth. 35
Rising Money-Market Account Growth CU Money Market Growth Seasonally Adjusted Annualized Growth Rate 4 38% 3 3 3 3% 28% 2 2 2 18% 1 1 1 1% 8% - % 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 - - 4 38% 3 3 3 3% 28% 2 2 2 18% 1 1 1 1% 8% % - - - Money Market Seasonal Factors 1.5% 1.11% 1.%.79%.63%.5%..% -.5% Jan Feb Mar Apr May June July -.15% Aug Sept -. Oct Nov -.1 Dec -.5% -.29% -.43% -.3-1.% -1.3% -1.5% Source: CUNA & NCUA. Credit union money-market account balances grew at a 7.1% seasonally-adjusted annualized growth rate in January, due mainly to low gas prices putting more money in members pockets. January s seasonal factors typically subtract.5 percentage points from the underlying money-market account balance trend growth. 36
Resurgent Share Certificate Growth CU Share Certificate Growth Seasonally Adjusted Annualized Growth Rate 3% 28% 2 2 2 18% 1 1 1 1% 8% % - 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 - - -8% 3% 28% 2 2 2 18% 1 1 1 1% 8% % - - - -8% 1.%.8%....% -. -. -. -.8% -1.%.48% Share Certificate Seasonal Factors.1 -.19% -.23% -.33% -.3.9%.1%.4.11% Jan Feb Mar Apr May June July Aug -.1% Sept Oct Nov Dec Source: CUNA & NCUA. -.1 Credit union share certificate balances rose a 4.1% seasonally-adjusted annualized growth rate in January. January s seasonal factors typically add.48 percentage points to the underlying share certificate trend growth. Members will begin shifting funds from regular shares to CDs and money-market mutual funds when short-term interest rates rise later this year. 37
Falling IRA Growth - - -8% -1% -1-1 -1 CU IRA Growth Seasonally Adjusted Annualized Growth Rate 2 18% 1 1 1 1% 8% % - 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 2 18% 1 1 1 1% 8% % - - - -8% -1% -1-1 -1 IRA Seasonal Factors 1.%.8%.73%.65%..47%..37%.27%..7%.% Jan Feb Mar Apr May June July Aug Sept Oct -. Nov Dec -. -. -.31% -.27% -.37% -. -.8% -.69% -.83% -1.% Source: CUNA & NCUA. Credit union IRA balances fell at a 11.1% seasonally-adjusted annualized growth rate in January. January s seasonal factors typically subtract.69 percentage points from the underlying IRA balance trend growth. 38
Resurgent Borrowings - -3% - -5% CU Borrowings Growth Seasonally Adjusted Annualized Growth Rate 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 15% 1 13% 1 11% 1% 9% 8% 7% 5% 3% 1% % -1% - -3% - -5% Borrowings Seasonal Factors 1% 9% 8% 6.9 7% 5% 4.63% 3.75% 2.8 3% 2.29% 1.9 1% % -1% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec - -1.41% -3% -2. -2.4 - -5% -4.4-4.43% - -7% -6.4-8% -9% -1% Source: CUNA & NCUA. Credit union wholesale borrowings rose at a 27. seasonally-adjusted annualized growth rate in January. January s seasonal factors typically add 2.29 percentage points to the underlying borrowings trend growth. Credit union borrowings grew $1.4 billion in January, in part to take advantage of a recent riskless arbitrage profit opportunity. In December 215, the Federal Reserve increased the interest rate paid on excess reserves to.5%. This created an arbitrage opportunity whereby financial institutions can borrow funds in the short term interbank credit markets at a lower interest rate, say.35%, and deposit the funds into their regional Federal Reserve Bank account earning.5%. 39
Credit Union Earnings Section Return on Equity Yield on Assets Cost of Funds Net Interest Margin Operating Expenses Fee Income Other Income Provision for Loan Loss Net Income Capital Ratio Asset Growth 4
Percent Falling Return on Equity 12 1 8 6 4 1.6 9.4 1.9 8.3 Return on Equity (Net Income to Capital) 7.8 6.6 7.9 5.5 5. 7.6 8.5 4.2 9. 6.5 6. 1 9 8 7 6 5 4 3 Credit Union Return on Equity 214 215 2.6 2.7 4.3 (by Asset size) 3.6 5.2 4.5 6.1 5.6 7.9 6.5 9.3 8.4 2-2 1.5 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-1.2 2 1 1.2.9 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Credit union return-on-equity ratios fell to 6.5% in 215 from 9% in 214. A higher ROE ratio allows for faster asset growth, which then leads to lower operating expense ratios, higher profit margins, and ultimately greater earnings. The disparity between large and small credit unions return-on-equity ratios remained large in 215. Credit unions with assets exceeding $1 billion reported ROE ratios of 8., more than twice that reported by credit unions with assets less than $1 million. 41
Basis Points Rising Yield on Assets 8 7 6 5 4 7.34 6.93 5.89 5.3 Yield on Assets (Percent of Average Assets) 4.72 4.97 5.52 5.89 5.56 4.91 4.46 4.5 3.62 3.36 3.36 3.36 3.4 35 34 33 343 342 33 328 Credit Union Yield on Assets (by Asset size) 34 338 346 344 341 34 214 215 341 337 335 333 3 2 32 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 31 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Credit union loan growth of 1-11% in 215-16 will shift assets away from low yielding investments and into higher yielding auto and mortgage loans. This will push credit union assets yields above the record low of 3.3 set in 214. Faster economic growth in 216 will put upward pressure on interest rates with the 1-year Treasury crossing over 2.5%. This will push mortgage rates up and boost earnings. The Fed will raise the fed funds interest rate slowly in 2165 raising the yields on short-term credit union investments. Aggressive loan pricing by banks returning to the consumer lending arena will, however, lower net returns on some loans 42
Basis Points Rising Cost of Funds -.5-1 -1.5-2 -2.5 Cost of Funds (Percent of Average Assets) 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-2.28-1.65-1.41-1.73-2.35-2.41-1.73-1.21 -.72 -.59-.54 -.52 -.61 -.92 8 7 6 5 4 3 214 215 3 3 31 3 Credit Union Cost of Funds (by Asset size) 34 32 39 36 42 4 44 42 65 62-3 -2.78 2-3.5-4 -3.56-3.35 1 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Rising short-term interest rates in 216 will increase credit union cost of funds from the record low mark of.5 set in 215. The rise will be modest as excess liquidity will allow deposit interest rates to lag increases in market interest rates. With almost all member certificate of deposits repriced to today s low interest rates, the funding cost increase will come sooner than it did during the last rising interest rate cycle of 24. Rising interest rates will encourage members to shift funds out of core deposits and into higher yielding money-market accounts, a liability mix effect. 43
Basis Points Stable Net Interest Margins 4 3.8 3.6 3.4 3.2 3 2.8 3.78 3.58 3.61 Net Interest Margin (Percent of Average Assets) 3.38 3.31 3.24 3.17 3.11 3.15 3.18 3.25 3.13 2.9 2.77 2.82 2.85 2.79 35 34 33 32 31 3 29 312 314 Credit Union Net Interest Margin (by Asset size) 298 298 36 36 37 38 298 3 297 295 214 215 2.6 2.4 2.2 2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 28 27 26 25 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil 273 268 >$1 bil Net interest margins will decrease in 216 cost of funds rise faster than asset yields. Credit union net interest margins reached the lowest in history in 213 due to historically low interest rates and excess liquidity. Deregulation over the last 3 years has increased competition in the financial services arena, resulting in lower net interest margins. For an individual CU, margins will also be determined by local market demographics: population growth, median household income, local industry, age trends. Margin compression is forcing CUs to increase the array of financial products and services offered while at the same time boosting efficiency and productivity. 44
Basis Points Falling Operating Expense Ratios -2.9-2.95-3. -3.5-3.1-3.15-3.2-3.25-3.3-3.35-3.4-3.39-3.35-3.26 Operating Expenses (Percent of Average Assets) 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16-3.19-3.2-3.24-3.33-3.38-3.35-3.16-3.19-3.26-3.14-3.16-3.1-3.11-3.8 44 42 4 38 36 34 32 3 28 26 24 Credit Union Operating-Expense-to-Assets (by Asset size) 363 358 355 353 367 369 37 371 363 354 345 34 214 215 277 273-3.45 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Operating expense ratios will decline slightly over the next 2 years as the growth rate in assets exceed that of operating expenses. Corporate stabilization assessments are expected to be zero in 216 because the combination of corporate capital written off ($5.6 billion) and total assessments paid to date ($4.8 billion) is close to what the losses are likely to be. NCUSIF premiums are expected to be zero in 216 due to a build up of reserves for insurance losses and less CU failures. However, credit unions will experience rising compliance costs for new Dodd-Frank Act regulations and new Consumer Financial Protection Bureau rules. 45
Basis Points Falling Fee Income Ratios 1.9.8.7.6.5.4 Fee Income (Percent of Average Assets).87.85.86.82.82.79.78.74.74.74.71.69.69.66.66.65.63 1 9 8 7 6 5 4 63 62 75 73 Credit Union Fee Income (by Asset size) 84 84 88 87 85 84 8 82 214 215 52 52.3 3.2.1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 2 1 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Fee income as a percent of average assets will continue its 7 year decline as the economic recovery lowers penalty fees. Moreover, web and mobile banking is providing members easier access to account balance information which reduces penalty fees. Fees from checking accounts serves as the single largest source of credit unions fee income. The average percentage of fee income derived from nonsufficient funds (NSF), overdraft, and courtesy pay fell to 3 in 213. The CFPB s expected focus on checking/odp in 215 puts a big income stream at risk, and continuing issues with overdraft revenue could prove challenging. 46
Basis Points Stable Other Income Ratios.8.7.6.5.4.36.36.4 Other Income (Percent of Average Assets).37.43.44.49.5.41.55.57.71.71.68.68.69 9 8 7 6 5 214 215 Credit Union Other Income (by Asset size) 47 45 52 53 67 67 67 62 78 8.3.2.29 4 3 2 22 23 34 35.1 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil The end of the mortgage refinance boom will reduce loan origination fees and gains on sale of mortgages over the next 2 years. Interchange income may decline in 216 if interchange rates fall more than the increase in card transactions. Merchants have incentives to move customers to new alternate low-cost payment systems, reducing the market power of the card networks. The interchange fee cap rule (October 1, 211) capped the maximum fee charged per debit card transaction to 21 cents (plus an additional 2-3 cents for fraud prevention) for institutions greater than $1 billion. 47
Basis Points Rising Provisions for Loan Loss Ratios -.2 -.4 -.6 -.8 Provisions for Loan Losses (Percent of Average Assets) 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 -.31 -.33-.35 -.34 -.35-.39 -.31 -.43 -.85 -.78 -.5 -.35-.26 -.28 -.34 -.35 4 35 3 25 2 23 Credit Union Provision for Loan Losses (by Asset size) 25 214 215 22 22 26 24 24 29 29 29 26 23 3 39-1 -1.2-1.11 15 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Provision for loan loss ratios will increase slightly in 216 due to strong loan growth. But falling loan net charge-offs, tight underwriting standards, an improving labor market, rising home prices and a still overfunded allowance for loan loss account will keep loan loss provisions below long term levels. Many credit unions still have over-funded allowance for loan losses. leading to provisions lower than net chargeoffs over the last few years. Home prices are expected increase in 216, reducing the number of mortgages at risk of foreclosure. 48
Basis Points Basis Points Falling Return-on-Asset Ratios 12 1 8 6 4 2 12 95 17 14 Net Income (Percent of Average Assets) 95 85 82 Corporate Stabilization Expense (basis points of average assets) 29 = 3 bps 21 = 11 bps 211 = 18 bps 212 = 7 bps 84 213 = 6 bps 8 77 75 68 7 64 31 18 5 1 9 8 7 6 5 4 3 2 1 Credit Union Return on Assets 16 12 214 215 31 32 (by Asset size) 47 41 54 48 64 6 81 7 95 89 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Credit union return-on-asset ratio will decline to.7% in 216. Rising asset yields due to faster loan growth and modestly higher market interest rates - will not outpace higher funding costs. This will reduce net interest margins. Expect loan loss provision expense to rise and operating expense ratios to rise. The disparity between large and small credit unions return-on-asset ratios remained large in Q4 215. Credit unions with assets exceeding $1 billion reported ROA ratios of.89%, more than twice that reported by credit unions with assets less than $1 million. 49
Rising Capital Ratios 12 11.5 11 Net Capital-To-Asset Ratios 11.5 11.4 11.4 11.2 11.1 11. 1.9 1.9 1.9 1.9 1.8 16 15 14 13 13.713.8 Net Capital-to-Assets (by Asset size) 214 215 1.5 1 1.5 1.6 9.9 1.4 1.5 1.2 1.1 12 11 1 1212. 11.3 11.3 1.8 1.8 1.61.7 1.7 1.8 1.6 1.4 9.5 9 9 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 8 < $2 mil $2-$5 $5-$1 $1- $25 $25- $5 $5-$1 bil >$1 bil Credit union capital-to-asset ratios will continue to rise in 216 as capital accumulation outpaces asset growth. Credit unions continue to build their buffers above the 7% target considered to be well capitalized under NCUA s Prompt Corrective Action rule. By the end of 217, capital ratios will approached 11., approaching the record high set back in 26. 5
Percent Slowing Asset Growth and Wider Inequality 16 14 12 1 8 6 4 2 6.4 14.4 Credit Union Asset Growth (Annual Percent Growth) 11.7 9.5 6.2 4.8 4.6 6. 7.2 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 8.6 3.3 5.1 6.2 3.9 5.7 7.3 5.5 4.5 1 9 8 7 6 5 4 3 2 1 Credit Union Asset Growth (by Asset size).9 1.9 214 215 1.9 3.3 3.3 4.2 4.3 5.4 < $2 mil $2-$5 $5-$1 $1- $25 4.6 6.1 $25- $5 6.8 7.8 $5-$1 bil 7.6 9.3 >$1 bil Asset growth is expected to slow in 216 as deposit growth slows. Asset growth will outpace savings growth by.5 percentage point, however, due to fast rising borrowings and capital. The average credit union asset growth of 7.3% in 215 masked a wide growth rate disparity between large and small credit unions. During the last 12 months ending in Q4 215, credit unions with assets greater than $1 billion reported asset growth of 9.3% while credit unions with assets less than $2 million reported asset growth of 1.9%. 51
Credit Unions & Members Section Number of Credit Union Credit Union Members 52
Credit Union Consolidation Accelerates 4 38 36 34 32 3 28 26 24 22 2 332 328 Annual Decline in Number of Credit Unions 315 332 363 331 353 266 38 257 234 246 281 275 282 29 295 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 3,5 3, 2,5 2, 1,5 1, 5 2,931 2,688 Number of CUs (by Asset size) 1,194 1,157 753 745 72 726 < $2 mil $2-$5 $5-$1 $1- $25 Number of CUs January 216 = 6,198 34 336 $25- $5 231 238 229 253 $5-$1 bil 214 215 >$1 bil As of January 216, CUNA estimates 6,198 credit unions were in operation. During the last 12 months the number of credit unions fell by 29, above the 282 annual decline set one year ago. The pace of consolidation in the credit union system is accelerating due to the following factors: retiring baby-boomer CEOs, rising regulatory/compliance burden, record low net interest margins, rising concerns over scale and operating efficiency, rising competitive pressures and members demand for ever more products, services and access channels. 53
Percent Membership Growth Surges 4 3.5 3 2.9 Credit Union Membership Growth (Annual Percent Growth) 3.1 3.5 3. 7 6 5 214 215 Credit Union Membership Growth (by Asset size) 5.2 4.9 6.3 6.2 2.5 2 1.5 1.5 2.3 2.2 1.8 1.4 1.1 1.4 1.2 1.6 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 1.4.6 1.5 2.1 2.5 4 3 2 1-1 -2-1.3-1.6.5.6 1.8 1.4 1.8 2.6 < $2 mil $2-$5 $5-$1 $1- -.7 -.7 $25 $25- $5 $5-$1 bil >$1 bil Credit unions should expect membership growth to exceed 3% in 216 due to strong job growth. This will push the total number of credit union memberships to 18 million by year end 216, which is equal to 33% of the total U.S. population. In the last 12 months ending in Q4 215, credit union with assets over $1 billion reported 6. membership growth, compared with less than 1% for credit unions with assets less than $1 million. The 2,688 credit unions with assets less than $2 million reported a 1.3% decline in memberships. 54
Rapid Membership Growth 6.% 5.5% 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% CU Membership Growth Seasonally Adjusted Annualized Growth Rate 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 6.% 5.5% 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% CU Membership Seasonal Factors.3%..1.11%.1%.7%.9%.3%.%.%.% -.1% Jan Feb Mar Apr May June -. July Aug Sept Oct Nov Dec -. -.1% -.1 -. -.23% -.3% Source: CUNA & NCUA. Credit union memberships grew at a 4.8% seasonally-adjusted annualized growth rate in January. January s seasonal factors typically subtract.4 percentage points from the underlying membership trend growth. The rapid membership gain began with Bank Transfer Day on November 5, 211 and is being maintained by the recent rapid pace of new job creation and the tremendous growth in credit union auto lending. 55
Economic Forecast We now expect the U.S. economy to grow by 2.5% in 216 and 2.75% in 217. Robust domestic demand in the household and business sectors will continue to spur growth in 216 and 217. Pressures of the rising U.S. dollar on manufacturing and exports are easing and will boost GDP growth. Economic conditions in China, the Euro area, Japan and other emerging markets will continue to have spillover effects on the U.S. economy. However, the U.S. remains resilient given its limited exposure to weaker aggregate demand from the rest of world. Headline and core (excluding food and energy prices) inflation will be 2.25% in 216. In 217 core inflation will stay at 2.25% but headline will overshoot core with a 2.5% increase. The uptick in headline inflation will be driven by higher energy prices against the backdrop of an economy fast approaching full employment. U.S. economic expansion without inflation will be a thing of the past. Consumer benefits from lower petroleum prices and the strong U.S. dollar will start to diminish. The unemployment rate will finish 216 at 4.7% and at 4.5% in 217. Monthly job gains will continue to nudge the unemployment rate lower. The quality of jobs created continues to shift from lower-paying entry-level to higher-paying professional and construction jobs. Unemployment resulting from lower commodity prices such as job losses in oil and gas will begin to dissipate as oil and energy prices start to increase. Re-entry of discouraged workers into the job market will mean unemployment rate declines will not be as dramatic as those in the recent past. However, overall job growth should remain strong, reaching full employment no later than the end of next year. The Federal Funds interest rate will increase to.9% by the end of 216 and to 1.9% by the end of 217. Federal Reserve actions will remain data driven. Rising output, tighter labor markets, and higher inflation in 216 will cause the FOMC to continue monetary policy normalization. We now expect two quarter-point rate hikes this year and four next year. The 1-year Treasury interest rate will increase modestly to 2.5% by December 216. That is still about 1.5 percentage points below what we might expect given the condition of the U.S. economy, but geopolitical uncertainty will continue to overrule domestic financial considerations. We expect the 1-year Treasury rate to reach 3.% by December 217. The Treasury yield curve will flatten in 216 as short-term interest rates rise faster than long-term interest rates. 56
Economic Forecast March 216 Actual Results Quarterly Results/Forecasts Annual Forecasts 5Yr Avg 215 216:1 216:2 216:3 215:4 216 217 Growth rates: Economic Growth (% chg GDP)* 2.% 2. 1.25% 3.% 2.% 1.75% 2.5% 2.75% Inflation (% chg CPI)* 1.55%.67% 2.25% 2.5% Core Inflation (ex. food & energy)* 1.9 2.9% 2.25% 2.25% Unemployment Rate 5.1 5.% 4.8% 4.7% 4.68% 4. 4.7% 4.5% Federal Funds Rate.17%.2...63%.9%.9% 1.9% 1-Year Treasury Rate 2.21% 2.2 2.25% 2.45% 2.55% 2.75% 2.5% 3.% 1-Year-Fed Funds Spread 2. 2.% 1.85% 1.85% 1.9 1.85% 1. 1.1% *Percent change, annual rate. All other numbers are end-of-period values.. 57
Credit Union Forecast Credit union savings balances will grow by 5.% in 216 and 4.% in 217. As the Federal Reserve continues raising shortterm interest rates this year, we expect the anticipated transfer of funds to money market mutual funds will finally materialize. With inflation in the offing and the windfall from lower oil prices disappearing, cautiously optimistic members will seek higher returns. Membership growth will continue to increase in 216 by 3.% due to more indirect auto lending and spreading word of the positive credit union value proposition. We expect membership growth next year to be slightly lower, at 2.75%, as the auto lending boom begins to slow and indirect borrower memberships decline. Credit union loan balances will increase by 1.% in 216 and 9.% in 217. Loan growth this year will be only marginally lower than the impressive loan growth of last year. As the economy continues to expand, we expect households to continue to release pent up demand for autos, furniture and appliances over 216, and a slightly slower pace in 217 year. New auto loans, credit card loans and purchase mortgage loans will remain to be strong growth areas. Credit quality will remain healthy 216 and 217. The improving job market will contain the numerators of the loan quality ratios, and fast loan growth will expand the denominator. This will push the delinquency ratio down from.81% in 215 to.75% in 216 and 217. Net charge-offs will likewise decline from.48% in 215 to.45% in 216 and 217. Credit union return on assets will decline marginally to.7% in 216 and could dip to.65% in 217. Interest margins will be helped by strong loan growth in 216 but hurt by the flattening yield curve. Mortgage refinancing and its resulting revenue will decline in 216. The effect of overfunded loan loss allowance accounts, which kept loan loss provision expenses very low for the past few years, will dissipate in 216. Higher funding costs, higher operating expenses due to a tighter labor market, and lower fee income from overdrafts and NSFs will also contribute to lower return on assets in 216 and 217. Net worth ratios will increase to 11.% in 216 and 11. in 217. Even with the expected slight decline in earnings, capital ratios will continue to rise this year and next as soft savings inflows provide for only modest asset growth. 58
Credit Union Forecast March 216 Actual Results Quarterly Results/Forecasts Annual Forecasts 5Yr Avg 215 216:1 216:2 216:3 216:4 216 217 Growth rates: Savings growth 5. 6.8% 3.3%.5%.5%.8% 5.% 4.% Loan growth 6.8% 1.5% 1.5% 3.5% 3.3% 1.8% 1.% 9.% Asset growth 5. 7.3% 2.3% 1.% 1.% 1.3% 5.5% 4.5% Membership growth 2.5% 3.5% 1.%.9%.8%.3% 3.% 2.8% Liquidity: Loan-to-share ratio** 72. 77.7% 76. 78.7% 8.8% 81. 81. 85.5% Asset quality: Delinquency rate** 1.8%.81%.75%.75%.75%.75%.75%.75% Net charge-off rate*.6.48%.4.45%.45%.45%.45%.45% Earnings: Return on average assets (ROA)*.77%.75%.71%.71%.7%.69%.7%.65% Capital adequacy: Net worth ratio** 1.7% 1.9% 1.8% 1.9% 11.% 11.% 11.% 11. *Annualized Quarterly Data. **End of period ratio. Additional information and updates available on our MCUE website. 59
The Credit Union versus Human Heart Analogy Banks and Credit Unions are to the economy what the heart is to the human body Money Blood Deposits Deoxygenated (blue) Blood Loans Oxygenated (red) Blood (Loans like blood lead to productive outcomes) Loan departments collect information Lungs collect oxygen Capital Heart Muscle Banks/CUs Allocate Capital Aorta Artery Allocates Blood (to Most Productive Use) Toxic Assets/Loans (MBS) Plaque Banking Crisis Heart Attack Government Intervention Defibrillator $2.6 Trill Excess Reserves/Cash Atrial Fibrillation (Atrium Blood Pooling) (False Economic Signals Abnormal Electrical Signals) 6