The Economy and Credit Unions Catalyst Economic Forum October 22, 2013 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop Economic Overview • Economy gradually accelerates to 3% in 2014. • Inflation a non-issue through 2014. • Unemployment flirts with 6.5% by end of next year. • 10 Year Treasury averages 3% in 2014. • Fed Funds stuck until at least 2014 III. Economic Overview • Economy gradually accelerates to 3% in 2014. • Inflation a non-issue through 2014. • Unemployment flirts with 6.5% by end of next year. • 10 Year Treasury averages 3% in 2014. • Fed Funds stuck until at least 2014 III. Unless Congress messes up Interest Rate Outlook Interest Rates 12 1988 to Present 10 Fed Funds 10-yr Treas 8 6 4 2 0 88 90 92 94 96 98 00 02 04 06 08 10 12 The Fed’s Monetary Policy • Unusually clear • Fed Funds Rate Policy – No change until unemployment reaches 6.5%, unless inflation outlook rises substantially. • Quantitative easing (monthly purchases of long-term securities) – “Tapering” to begin soon, to end around time unemployment rate reaches 7%. The Fed’s Monetary Policy • Unusually clear, sort of. • Fed Funds Rate Policy – No change until unemployment reaches 6.5%, unless inflation outlook rises substantially. • Quantitative easing (monthly purchases of long-term securities) – “Tapering” to begin soon?? To end around time unemployment rate reaches 7%. “Real” 10 Year Treasury Yield Current Yield Minus Trailing One Year Core CPI Unemployment Rates and Recessions Percent of the Labor Force Treasury Yield Curves 3.00 2.50 2.00 1.50 1.00 0.50 0.00 3 mth 1 Yr 3 Yrs April 2013 5 Yrs 7 Yrs Sep 2013 9 Yrs 10 Yrs Yield Curve Changes in 2013 300 Basis Points 281 250 222 200 176 160 150 115 100 78 50 5 0 9 2 6 4 12 12 23 40 71 34 2 1 Mth 3 Mths 6 Mths 1 Yr April 2 Yr Sep 3 Yr 5 YR 7 Yr 10 Yr Credit Union Outlook Through 2014 • Moderate savings and asset growth – Low interest rates, spending rising • Weak, but recovering loan growth – Household de-leveraging is moderating – Improving confidence, building backlogs • Loan delinquencies and losses about back to normal • Modest outlook for net income – Lower loan loss provision expense – Lower stabilization assessments – Net interest income still constrained – Refi revenue moderating • Rising net worth ratios Credit Union Loan Growth 30 Annual Percent Change 25 20 15 12 Months To Aug 10 5 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 -5 -10 14F Changing Distribution of Loans Loan Growth by Type Into and Out of The Great Recession 15.0% Non-Mortgage Loan Growth 10.0% 5.0% 0.0% Total Unsecured New Veh Used Veh Other Non Mtg -5.0% 10.0% 15.0% 20.0% 2006 2007 2008 2009 2010 2011 2012 2013.5 Mortgage Loan Growth 40.0% 30.0% 20.0% 10.0% 0.0% Total Mtg Fixed Rate 1st ARM First FR Seconds ARM Secs 10.0% 20.0% 2006 2007 2008 2009 2010 2011 2012 2013.5 Credit Union First Mortgage Originations 2013 Q2 $ Trillions Annualized Credit Union Share of First Mortgage Originations 2013 Auto Lending Outlook Stronger economy, improving labor markets • Modest increases in market interest rates • Declining but affordability still high • Lots of pent up demand • Continuing shift from used to new • Fewer incentives = increased opportunity for CUs Direct rates vs. banks remain very favorable 2.6% vs 3.9% Annual Light Vehicle Sales Millions Annual Light Vehicle Sales Millions Annual Light Vehicle Sales Millions 2013 Auto Lending Outlook Stronger economy, improving labor markets • Modest increases in market interest rates • Declining but affordability still high • Lots of pent up demand • Continuing shift from used to new • Fewer incentives = increased opportunity for CUs Direct rates vs. banks remain very favorable 2.6% vs 3.9% 2013 RE Lending Outlook Stronger economy, improving labor markets • Modest increases in market interest rates • Home prices up • Affordability still high, although declining • Lots of pent up demand/supplies low Originations will slow • Refi’s down • Purchase money mortgages up Interest Rates 12 1988 to Present 10 Fed Funds 10-yr Treas 8 6 4 2 0 88 90 92 94 96 98 00 02 04 06 08 10 12 Credit Union Delinquency 2.5 Dollars Delinquent as Percent of Total Portfolio 2 1.5 1 0.5 13F 14F 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 38 0 Various Loan Delinquency Rates 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Overall 2006 Credit Cards 2007 2008 2009 Indirect Auto 2010 2011 MBLs 2012 2013 II 3.5% Mortgage Delinquency Rates 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Total Mtg 2006 FR Firsts 2007 2008 ARM Firsts 2009 2010 Fixed Secs 2011 2012 Home Equtiy 2013 II 1.4 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 II 3F Net Loan Charge-0ffs Total Portfolio 1.2 1 0.8 0.6 0.4 0.2 0 Net Charge-Offs by Loan Type 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.7% 2.0% 1.5% 1.0% 0.5% 0.7% 0.6% 0.3% 0.5% 0.2% 0.2% 0.0% 0.0% Overall 2007 Credit Card 2008 2009 Firsts 2010 0.2% Seconds 2011 2012 MBLs 13 II Credit Union Savings Growth Annualized Percent Change 25 20 15 10 5 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 13F Credit Union Net Income 60 To Average Assets 40 20 00 80 60 40 20 0 20 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 13F 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 00 11 12 13 8 13F 12 Net Capital to Assets 10 8 6 4 2 0 U.S. PCA Well Cap'd PCA Adequate What’s Driving Earnings? POSITIVES: • Lower provision expenses • Lower stabilization assessments NEGATIVE, for a while longer: • Net Interest Income TURNING NEUTRAL • Mortgage refinance revenue AT RISK • Debit interchange revenue $10 $9 $8 CU Provisions, Allowances & Net Chargegoffs ($ Billions) Provisions Allowance for Loan Loss Net Chargeoffs $10 $9 $8 $7 $7 $6 $6 $5 $5 $4 $4 $3 $3 $2 $2 $1 $1 $0 $0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Corporate Stabilization Assessments Basis Points of Insured Shares ? 260 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2Q13 Credit Union Net Interest Margin 400 380 360 340 320 300 277 280 The Economy and Credit Unions Catalyst Economic Forum October 22, 2013 Bill Hampel, Chief Economist Credit Union National Association bhampel@cuna.coop