1. CU Finance 101 Northwest Credit Union Association
2016 Winter Operations, Sales & Service Networking Conference
March 1st, 2016 • Videoconference
Mike Schenk
Vice President, Economics & Statistics
Credit Union National Association
Telephone: Facsimile:

2. Acronyms!
Handout…
Examples????

3. Management Discretion!
Not much but…
Allowance account (ALLL)
2. Mortgage servicing rights
3. Defined benefit plans

4. CECL
By 2021…
Shift from incurred loss (estimate for next year) to expected loss (over life of loan)
2. Impact? ALLL (Xx current net chargeoffs?)
3. Run models prior to

5. Accounting Balance Sheet Assets = Liabilities + Net Worth
2. Income Statement
Income – Expense = Profit (Loss)
Balance sheet: Stock measure- point in time – “photograph”
Assets: (things we “own”) – Earning assets (Loans, Investments) / Non-earning assets (Building, equipment, furniture)
Liabilities/Net worth: (things we “owe”) – liabilities: Mostly membership deposits, borrowings. Net worth: reserves and undivided earnings – ‘buffer’
Income statement: Flow measure – activity over time – “movie”
Income – Interest income (associated with assets)/Noninterest income (fee income, gains on sales etc.)
Expense – Interest expense (associated with liabilities)/Noninterest expense-PEOPLE ~ 50% of total!!!

6. supervisory ratings from 1 (high) to 5
What Makes a Healthy CU?
Regulators Say:
CAMEL
supervisory ratings from 1 (high) to 5
Capital Adequacy
Asset Quality
Management
Earnings
Liquidity or Asset/Liability Management
CAMEL Ratings:
1=strong performance and risk management – consistently safe and sound operations
2=satisfactory performance and risk management - consistently safe and sound operations
3=performance that is flawed to some degree and is a supervisory concern
4= poor performance – serious supervisory concern
5= unsatisfactory performance = critically deficient need immediate attention
~6,300 CUs at year-end ‘14; Overall 276 are “troubled” with CAMEL rating of 4 or 5.
Note CU is prohibited from revealing this rating – but knowing what regulators are concerned about is helpful for focus
Historically CAMEL composite score based on averaging the score of four metrics
Net worth/assets (CAMEL 1 = 7%+);
$Delinquencies/$Loans (CAMEL 1 <1.25%);
$Net Loan Chargeoffs/$Average Loans (CAMEL 1< 0.25%);
Earnings (i.e., net income/average assets) (CAMEL 1 >1.00%)

7. supervisory ratings from 1 (high) to 5
What Makes a Healthy CU?
Regulators Say:
CAMEL
supervisory ratings from 1 (high) to 5
Capital Adequacy (NW/Assets >7%)
Asset Quality
Management
Earnings
Liquidity or Asset/Liability Management
CAMEL Ratings:
1=strong performance and risk management – consistently safe and sound operations
2=satisfactory performance and risk management - consistently safe and sound operations
3=performance that is flawed to some degree and is a supervisory concern
4= poor performance – serious supervisory concern
5= unsatisfactory performance = critically deficient need immediate attention
~6,300 CUs at year-end ‘14; Overall 276 are “troubled” with CAMEL rating of 4 or 5.
Note CU is prohibited from revealing this rating – but knowing what regulators are concerned about is helpful for focus
Historically CAMEL composite score based on averaging the score of four metrics
Net worth/assets (CAMEL 1 = 7%+);
$Delinquencies/$Loans (CAMEL 1 <1.25%);
$Net Loan Chargeoffs/$Average Loans (CAMEL 1< 0.25%);
Earnings (i.e., net income/average assets) (CAMEL 1 >1.00%)

8. supervisory ratings from 1 (high) to 5
What Makes a Healthy CU?
Regulators Say:
CAMEL
supervisory ratings from 1 (high) to 5
Capital Adequacy (NW/Assets >7%)
Asset Quality (Delinquency/Loans<1.25%
Management
Earnings
Liquidity or Asset/Liability Management
CAMEL Ratings:
1=strong performance and risk management – consistently safe and sound operations
2=satisfactory performance and risk management - consistently safe and sound operations
3=performance that is flawed to some degree and is a supervisory concern
4= poor performance – serious supervisory concern
5= unsatisfactory performance = critically deficient need immediate attention
~6,300 CUs at year-end ‘14; Overall 276 are “troubled” with CAMEL rating of 4 or 5.
Note CU is prohibited from revealing this rating – but knowing what regulators are concerned about is helpful for focus
Historically CAMEL composite score based on averaging the score of four metrics
Net worth/assets (CAMEL 1 = 7%+);
$Delinquencies/$Loans (CAMEL 1 <1.25%);
$Net Loan Chargeoffs/$Average Loans (CAMEL 1< 0.25%);
Earnings (i.e., net income/average assets) (CAMEL 1 >1.00%)

9. supervisory ratings from 1 (high) to 5
What Makes a Healthy CU?
Regulators Say:
CAMEL
supervisory ratings from 1 (high) to 5
Capital Adequacy (NW/Assets >7%)
Asset Quality (Delinquency/Loans<1.25% & NCO/Avg Loans<0.25%)
Management
Earnings
Liquidity or Asset/Liability Management
CAMEL Ratings:
1=strong performance and risk management – consistently safe and sound operations
2=satisfactory performance and risk management - consistently safe and sound operations
3=performance that is flawed to some degree and is a supervisory concern
4= poor performance – serious supervisory concern
5= unsatisfactory performance = critically deficient need immediate attention
~6,300 CUs at year-end ‘14; Overall 276 are “troubled” with CAMEL rating of 4 or 5.
Note CU is prohibited from revealing this rating – but knowing what regulators are concerned about is helpful for focus
Historically CAMEL composite score based on averaging the score of four metrics
Net worth/assets (CAMEL 1 = 7%+);
$Delinquencies/$Loans (CAMEL 1 <1.25%);
$Net Loan Chargeoffs/$Average Loans (CAMEL 1< 0.25%);
Earnings (i.e., net income/average assets) (CAMEL 1 >1.00%)

10. supervisory ratings from 1 (high) to 5
What Makes a Healthy CU?
Regulators Say:
CAMEL
supervisory ratings from 1 (high) to 5
Capital Adequacy (NW/Assets >7%)
Asset Quality (Delinquency/Loans<1.25% & NCO/Avg Loans<0.25%)
Management
Earnings (ROA > 1.00%)
Liquidity or Asset/Liability Management
CAMEL Ratings:
1=strong performance and risk management – consistently safe and sound operations
2=satisfactory performance and risk management - consistently safe and sound operations
3=performance that is flawed to some degree and is a supervisory concern
4= poor performance – serious supervisory concern
5= unsatisfactory performance = critically deficient need immediate attention
~6,300 CUs at year-end ‘14; Overall 276 are “troubled” with CAMEL rating of 4 or 5.
Note CU is prohibited from revealing this rating – but knowing what regulators are concerned about is helpful for focus
Historically CAMEL composite score based on averaging the score of four metrics
Net worth/assets (CAMEL 1 = 7%+);
$Delinquencies/$Loans (CAMEL 1 <1.25%);
$Net Loan Chargeoffs/$Average Loans (CAMEL 1< 0.25%);
Earnings (i.e., net income/average assets) (CAMEL 1 >1.00%)

11. What Makes a Healthy CU? 3 Keys to Success
Make money
Stay solvent
Grow
ROA: Return on Assets or Net Income as a % of average assets
Net worth ratio: Net worth (i.e., reserves and undivided earnings) as a % of average assets
Asset growth rate
Growth is not included in CAMEL – Regulators care most about protecting the insurance fund (i.e., preventing CU failures) and less about lack of CU growth. Shrinking CUs reflect ever-increasing capital ratios (bigger and bigger buffers to protect the insurance fund) so supervisory authorities don’t normally come down hard on CUs that are shrinking.
BUT GROWTH IS CRITICALLY IMPORTANT. IT IS THE KEY MEASURE OF RELEVANCE IN THE MARKETPLACE.
In addition, there is an exact mathematical relationship between earnings, capital and growth.

12. MUST KNOW RATIOS!
A ratio is a statement of how two numbers compare. It is a comparison of the size of one number to the size of another number.
Q: A CU reported 2014 earnings of $1 million. Is that result reflective of a “healthy” CU?
At a $100 million asset CU?
At a $10 billion asset CU (i.e., a CU with $10,000 million)?
Q:How does income compare to assets (stuff that’s generating income)?
$1 million/$100 million = .01 = 1.00%
Ratios provide valuable comparisons between CUs of different sizes
Ratios provide valuable comparisons of a single CU over time
CUs like to talk in dollar terms- but ratios are critically important for making useful comparisons.
Note in the example above the $100 million CU is earning $1 million – this translates to a 1.00% earnings rate (or Return on Assets – ROA of 1.00%).
Note: many financial professionals will refer to this ROA of “one percent” as ROA of “one hundred basis points” – a basis point is one one-hundredth of a percentage point. A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is often used as shorthand to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point:
Percentage Basis Points
0.10%
1.00%
10.00% %

13. 1. Make Money: CU Earnings (Net Income as a Percent of Average Assets
1. Make Money: CU Earnings (Net Income as a Percent of Average Assets. Source: NCUA and CUNA)
Earnings or ROA (return on average assets) is defined as the difference between income and expense – expressed as a percent of average assets. (Note the earnings rates above also can be expressed in basis points – the 0.64% ROA in 2007 is “64 basis points”.)
Note: for many of the slides the left-hand panel shows about nine years of historical results. The right-hand panel show results for the current period by CU asset size – emphasizing the substantial variation in results by CU size: Compared to their smaller counterparts, large CUs tend to earn at higher rates and grow substantially faster.
Note in the graphic on the right-hand side the first bar is for CUs with assets < $20 million. These CUs represent roughly 45% of the total 6,300 CUs operating in the US today! The second bar represents about 20% of all CUs and the third bar represents about 10% of all CUs. In other words, the first two bars represent about two-thirds of all CUs and the first three bars represent about 75% of all US CUs.
Note the low earnings rates at the nation’s smallest institutions. At this stage in past recoveries most of these CUs would be reporting ROA of nearly 1.00% (100 basis points). Also note the numbers presented are averages & they hide exceptions to the general rule – many small CUs are earning at high/healthy rates.

14. How Do CUs “Make Money”? Generate income
Balance sheets with high-earning assets
Balance sheets with low-cost funding sources
Pricing appropriately
Benchmarks
Risk-based pricing
Control expenses
Staffing
Branching
Technology/Security
Making good credit decisions

15. First Three Qtrs 2015 Credit Union Spreads
All Items as a Percent of Average Assets – Annualized.
Yield on Total Assets
3.35% -
Dividend/interest cost of Assets
0.51% =
Net Interest Margin (Gross Spread)
2.84% +
Noninterest Income (Fee & Other Income)
1.36%
Noninterest Expense (Operating Expense)
3.10%
Loan & Lease Loss Provisions
0.31%
Net Income (Return on Average Assets or ROA)
0.79%
This table summarizes how we think of CU income – using annualized year-to-date results for the most recent year. All dollar amounts are expressed as a percent of average assets to make year-to-year comparisons eaiser.
Recognize that as financial intermediaries CUs borrow money from members who have too much (i.e., depositors) and lend that money to members who don’t have enough. CUs pay depositors dividends (i.e., interest) for the money they borrow and the charge members interest on the loans they make. That’s the bread-and-butter business.
The traditional focus is on generating interest income received from lending money to members in an amount that will cover the cost of paying for funding the loans (i.e., the interest expense on deposits) and the cost of operations.
Interest income – mostly from loans but also from investments – expressed as a percent of average assets is often referred to as the “yield on total assets”.
Interest expense – mostly from paying depositors dividends for the use of their funds but also from borrowings – expressed as a percent of average assets is often referred to as the “dividend/interest cost of assets”.
The difference between interest income and interest expense is called “net interest margin” or “gross spread”.
Noninterest income consists of deposit/loan fees and other income such as gains on mortgage sales and interchange income.
Noninterest expense – or operating expenses consist of salaries/benefits, office operations, office occupancy etc. Salaries/benefits typically account for about one-half of CU total operating expenses.
Loan and lease loss provisions are the expense CUs incur to cover potential losses in lending operations. Loan losses or chargeoffs occur when members default on their loan obligations.
Net income – or return on average assets (ROA) is the CU “bottom line”.

16. 2. Stay Solvent CU Net Worth/Assets (Source: NCUA and CUNA)
CU capital or Net Worth is equal to reserves and undivided earnings – earnings that have not been returned to members.
Net worth serves as a buffer against bad decisions or exogenous shocks (like crash in housing prices)
CU regulator requires 6% net worth to be adequately capitalized and 7% to be well capitalized, but most CUs prefer to operate with even higher capital (i.e., net worth) ratios – so that unanticipated swings in the business cycle and other shocks do not cause capital ratios to decline below 7%. In cases where capital ratios decline below 7% regulatory scrutiny increases, and declines below 6% can cause especially nasty consequences – more severe the lower the ratio falls.
The net worth ratio that a CU choses to target is usually based on the risk profile of the institution & the NCUA’s new risk-based capital requirement formalizes one approach. In general those with riskier assets will need/want to hold more capital.

17. 3. Grow: Assets (Source: NCUA and CUNA. Percent.)
Asset growth is a function of deposit growth. When members make deposits CUs put those deposits to work in loans or investments.
Economic uncertainty typically causes consumer confidence to fall and often results in “flight to safety” activity as members hunker down and build precautionary savings balances and/or move out of more volatile investments. – which means CU deposit growth (hence asset growth) tends to be especially strong in economic downturns.

18. The Fundamental Challenge
CU has $100 in assets and $10 net worth
Net worth ratio = $10/$100 = 10.0%
CU assets grow 10.0%
$100 x 1.10 = $110
Net worth ratio?
Net worth ratio = $10/$110 = 9.1%
How do we keep the net worth ratio at 10%?
Shrink
Earn money (and keep some)
As noted earlier the net worth ratio that a CU choses to target is usually based on the risk profile of the institution & the NCUA’s new risk-based capital requirement formalizes one approach.
Holding high levels of capital comes at a cost. The higher a CU’s desired/targeted net worth ratio, the more ROA needs to be generated to maintain that ratio over time.

19. Growth / Net Worth / ROA Tradeoff
Beginning net worth ratio = 10%
Assumed asset growth rate = 10%
Required return on ending assets to maintain net worth ratio
= Beginning net worth ratio x Assumed asset growth rate
= x =
= %
The math is pretty straightforward

20. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
10%
14%
Some calculation examples…..

21. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
10%
14% x =

22. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
10%
1.00%
14% x =

23. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
10%
0.50%
1.00%
14% x =

24. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
10%
0.25%
0.50%
1.00%
14% x =

25. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14% x =

26. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14% x =

27. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.175%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14% x =

28. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.175%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40% x =

29. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.175%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40% x =

30. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.175%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40% x =

31. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.18%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40%
The faster you grow – x =

32. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.18%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40%
The faster you grow – the more you need to earn to maintain your capital ratio x =

33. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.18%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40%
The faster you grow – the more you need to earn to maintain your capital ratio
The higher your capital ratio - x =

34. Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.18%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40%
The faster you grow – the more you need to earn to maintain your capital ratio
The higher your capital ratio - the more you need to earn for a given rate of growth x =

35. Starting Net Worth Ratio
Maintaining a high capital ratio comes at a high “price”!!!
Starting Net Worth Ratio
Asset
Growth
Required ROA 7%
2.5%
0.18%
5.0%
0.35%
10.0%
0.70%
10%
0.25%
0.50%
1.00%
14%
1.40%
The faster you grow – the more you need to earn to maintain your capital ratio
The higher your capital ratio - the more you need to earn for a given rate of growth x =

36. 3. Grow: Memberships (Source: NCUA and CUNA. Percent.)
Membership growth also is an important metric (even though it doesn’t directly figure into our ROA/Net worth/Growth calculation). If a community-based CU is seen as relevant in the marketplace its membership growth should be at least equal to the population growth of the community being served.
Census bureau population growth data is a valuable tool for comparing a CUs growth to the growth in a local community (this can be done down to the metro level.
US population has been growing at a rate of 0.9% lately – so aggregate CU growth of 3.5% over the past year is very impressive – CUs memberships are growing more than three times faster than US population.
This metric is less relevant for a SEG-based CU – but when interacting with a CU it often is possible to obtain clues to the changes in overall potential membership. SEG-based groups often reflect substantially slower growth than the population as a whole (reflecting declines in manufacturing sector, declines in union membership, declines in membership of other fraternal organizations, etc).

37. Loan Growth (Source: NCUA and CUNA. Percent.)
Loan growth is usually high during economic expansions. Increasing employment, take-home pay, and confidence increase member ability/willingness to make purchases – including big-ticket purchases (for “durable goods” such as cars, refrigerators, furniture etc.). These big-ticket purchases often require borrowing from the CU.

38. Savings Growth (Source: NCUA and CUNA. Percent.)

39. Loan-to-Savings Ratios (Total Loans/Total Savings
Loan-to-Savings Ratios (Total Loans/Total Savings. Source: NCUA and CUNA. Percent.)

40. Three Key Risks
Liquidity Risk – likelihood you won’t be able to pay creditors (i.e., depositors or others) when you need to do so.
Credit Risk – likelihood members don’t pay their loans when they promised to do so.
Interest Rate Risk – likelihood earnings (or capital) changes when market interest rates change.

41. 1. Liquidity Risk Loan-to-Savings Ratios (Total Loans/Total Savings
1. Liquidity Risk Loan-to-Savings Ratios (Total Loans/Total Savings. Source: NCUA and CUNA. Percent.)

42. 2. Credit Risk Asset Quality: Delinquency (Percent of Total Loans
2. Credit Risk Asset Quality: Delinquency (Percent of Total Loans. Source: NCUA and CUNA)

43. Note strong relationship between unemployment rate and CU delinquencies. When most are employed they have the financial means to pay their bills – including their loan payments.

44. 2. Credit Risk Asset Quality: Net Chargeoffs (Percent of Average Loans
2. Credit Risk Asset Quality: Net Chargeoffs (Percent of Average Loans. Source: NCUA and CUNA)

45. Interest Rate Risk (Net Long Term Assets as a % of Total Assets
Interest Rate Risk (Net Long Term Assets as a % of Total Assets. Source: NCUA and CUNA)
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets

46. 3. Interest Rate Risk (Net Long Term Assets as a % of Total Assets
3. Interest Rate Risk (Net Long Term Assets as a % of Total Assets. Source: NCUA and CUNA)
Net Long Term Assets:
Real estate loans that do not reprice, refinance or mature within 5 years;
Member business loans;
Investments that mature in more than 3 years;
NCUSIF deposit;
Land and building;
Other fixed assets

47. Common CU Ratios Make money Stay Solvent Grow Int. Rt. Risk
Net income/average assets
Interest income/average assets (asset yield)
Interest expense/average assets
Net interest margin/average assets
Non-interest income/average assets
Operating expense/average assets
Loss provisions/average assets
Earning assets/total assets Loans/assets
Unsecured loans/assets
Term deposits/assets
Stay Solvent
Net worth/assets
Grow
Asset growth rate
Membership growth
Int. Rt. Risk
Fixed-rate mortgages/assets
Core deposits/assets
Certificates/assets
Credit Risk
Share secured loans/assets
Mortgages/assets
Liquidity risk
Loan-to-share ratio
Cash & S.T. investments/assets

48. Macro Economics Three big goals: Growth Employment Inflation
Two Primary Tools:
Fiscal Policy
Monetary Policy
Consumption (70%)
Government spending (19%)
Business Investment (16%)
Net exports (-5%)
Taxation & Govt. Spending
Economic developments greatly influence CU operations.
Federal Reserve has a dual mandate to 1) grow the economy and ensure unemployment is low and 2) maximize price stability
It targets short-term interest rates to achieve these goals:
If too little growth/too much unemployment Fed lowers short-term interest rates to stimulate borrowing and spending.
If too much growth/too much inflation – or inflation pressure Fed increases short-term interest rates to slow borrowing and spending.
Federal Reserve

49. Economic output is measured as GDP - $ value of goods and services produced in the US.
On average consumer spending accounts for 70% of US economic growth.
Therefore, the relationship between CU Loan Growth and US Economic Growth (not surprisingly) reflects a strong positive correlation.

50. Market Interest Rates & CU ROA
Source: BLS.
Changes in Fed police drive changes in CU ROA:
Federal Reserve Federal Funds rate increases typically lower the spread between short-term and long-term interest rates. Think of the short-term Federal Funds rates (black line) as a proxy for funding costs (i.e., what CUs pay their depositors) and the 10-year Treasury (red line) as a proxy for asset yields. You can see that as the Fed raises rates the spread between funding costs and asset yields declines. That means (all else equal) funding costs are rising faster than asset yields so net interest margins (and ROA) declines.
Note when the fed inverts the yield curve (black line rises above red line) it historically results in the appearance of the grey bars (i.e. – causes recessions). Any time you see an inverted yield curve you should be thinking RECESSION!

51. Federal Reserve Federal Fund rate increases do not cause an immediate decline in loan growth.
Historically it isn’t unusual for loan growth to increase (for 12 to 15 months) AFTER the initial Fed increase.
Why? Because consumers who have put off purchasing and borrowing will realize more rate increases are on the way and conclude that if they are going to borrow they should do it sooner rather than later (when market interest rates are higher). Note: in the last rate cycle the Fed increased the Federal Funds interest rate target from 1% at mid-year 2004 to 5.25% at mid-year 2006 – a 4.25% increase over two years. FF increased in 0.25% increments for 16 consecutive Fed meetings. This time the increases are expected to again be small (0.25%) but to occur over a longer time – no increases at each and every meeting.

52. CU loans decline during recessions and CU savings tend to grow during recessions (flight to safety). Liquidity increases (loan-to-share ratios fall). CU Earnings (ROA) tends to bottom out in recessions.

53. Average since 1980 = 2.6%
Economic output is measured as GDP - $ value of goods and services produced in the US.
Long-run average annual growth rate is 2.6%. Fed goal is 2.5% to 3.0%.
Two consecutive quarters of contraction is widely considered recession. Federal Reserve would be lowering market interest rates in that environment. – which would tend to increase demand for loans, reduce liquidity (increase Loan-to-share ratios) and boost CU ROA. Conversely, consistent growth well above 3% would usually signal inflation pressures are building – which (if confirmed) would cause the Federal Reserve to begin increasing the Federal Funds interest rate target.

54. Average since 1980 = 6.4%
Goal = full employment (~4.5% to ~5.0%)
If substantially higher => Federal Reserve would typically reduce the FF rate target. If 5% or lower the Fed would typically begin increasing the FF target (fearing that the full employment would cause strong wage gains and spending increases – which would lead to inflation pressures.

55. Average since 1980 = 3.5%
Federal Reserve target = 2.0%
Fed target is 2%. Inflation above 2% will virtually guarantee a Fed that is raising its short-term interest rate target (in an attempt to cap borrowing and spending – thereby reducing inflation).

56. Economic Snapshot U.S. economy growing at a healthy rate
Inflation is tame but trending up
Labor markets at full employment
Consumer balance sheets are in good shape
China remains the biggest wild card
Economy grew at an annualized 1.0% pace in the 4th quarter – well off the 2.0% pace in 3rd quarter and the
3.9% increase in the second quarter. However, the full-year increase was 2.4% - exactly matching the 2014 advance. Fourth quarter revisions up are possible due to exclusion of non-store sales/on-line retailing.
Inflation YOY: Headline=1.4% Core=2.2%. Core PCE lower. Expectations for low: 10Yr Tsy~ 1.80%; 10Yr TIPs ~50 = 1.3% long-term expectation.
Although employment gains are trending down over the past few months (and the 151,000 increase in January was below consensus expectations – the economy added 2.7 million jobs in the year ending January. Compared to previous calendar year results that’s the second-best showing since & an average of 253,000 monthly over the past three months
Unemployment rate is down nearly a full percentage point (from 5.7% last Jan to 4.9% in Jan ‘16 – a 0.8% decline).
Broad-based increases: Geographically over 80% of MSAs/only one industrial sector. Also the U-6 rate is declining faster than the headline number – from 11.3% year-ago to 9.9% in January – 1.3 percentage point decline.
Overall 5.6 million job openings today – 4.9 million at the start of 2015!
Debt levels are down
Home prices up ~6% (3.5% in Iowa)
Stock market down ~8% YTD and 12mo but still up 20% compared to pre-recession levels.

58. Credit Union Trends Very strong membership growth
High and increasing loan growth
Low savings growth
Vastly improved asset quality
High earnings
Tremendous variation
Continuing consolidation

59. CUNA’s forecast for the economy/CU operations appears on our web site at:
You can always contact a CUNA economist/statistician for help. The best way to get a quick response is through our general
You also can call us:
then press #8290

60. Appendix Additional CU Metrics

61. Asset Yields (Interest Income in bp of Average Assets
Asset Yields (Interest Income in bp of Average Assets. Source: NCUA and CUNA)
Asset yields are basically interest income (from loan payments and investments) as a percent of average assets.

62. Dividend/Interest Cost of Assets (Interest Expense in bp of Average Assets. Source: NCUA and CUNA)
Dividend/Interest cost of assets (i.e., funding costs) are basically interest expenses (from dividend payments on deposit accounts and interest payments on borrowings) as a percent of average assets.
Note: larger CUs generally reflect relatively high funding costs – they tend to enjoy economies of scale (i.e., have lower operating expenses) so can afford to pay depositors more. In addition, compared to their smaller counterparts, large CUs are more likely to offer higher-cost deposits (such as term certificates and money market deposits)

63. Net Interest Margin (In bp of Average Assets. Source: NCUA and CUNA)
Net interest margin (or gross spread) is the difference between asset yields (interest income as a percent of average assets) and funding costs (interest costs as a percent of average assets).
As shown in the left-hand chart, CUs are suffering through a cyclical decline in net interest margin – due to the recent decline in market interest rates and resulting narrower difference between asset yields and funding costs.
However NIM also is reflecting a long-term secular decline. NIM averaged ~4.5% to 5.0% in the 1980s. This secular decline has put increasing pressure on CUs to generate fee income: imposing fees on traditional products/services and offering new/different products & services. Overdraft protection/courtesy pay; credit life/disability insurance, etc.
Note in the right-hand graphic, large credit unions can

64. Noninterest Income (In bp of Average Assets. Source: NCUA and CUNA)
This includes fee income from deposit accounts (e.g., NSF, certificate early withdrawal fees etc.) and other non-interest income such as gains on sales of mortgages and interchange fees. Over the past decade fee income from the former source (deposit account fees and loan fees) accounted for 57% of total noninterest income and the latter source accounted for about 43% of the total. The deposit account/loan fee total is down from about 68% in the prior decade.
Smaller CUs tend to offer fewer fee-income producing services (hence reflect less noninterest income than larger CUs). Also, many small CUs seem to be more philosophically opposed to imposition of fees even when offering services that often have associated fees.

65. Operating Expenses (In bp of Total Assets. Source: NCUA and CUNA)
Note the huge economies of scale enjoyed by $1billion + CUs. In 2015 these CUs reflect a 60bp to 90bp advantage relative to smaller CUs – and this (all else equal) allows the larger institutions to deliver more membership benefits (higher deposit rates/lower loan rates/fewer or lower fees/more technology/more branching, etc.)
Recent CU operating expense breakdown:
Compensation/fringe benefits (51%)
Office operations (19%)
Professional/outside services (8%)
Loan servicing expense (7%)
Office occupancy (7%)
Educational/promotional expense (4%)
Travel/conference (1%)
Operating fees (0.4%)
Member insurance (0.1%)
All other expenses (3.4%)

66. Loss Provisions (As a % of Total Assets. Source: NCUA and CUNA)
Loan and lease loss provisions are the expense CUs incur to cover potential losses in lending operations. Loan losses or chargeoffs occur when members default on their loan obligations.

67. Credit Union Credit Quality Trends (As a % of Loans
Credit Union Credit Quality Trends (As a % of Loans. Source: NCUA and CUNA)
This chart shows that increasing net chargeoffs (i.e., loan losses net of recoveries) or an anticipation of future net chargeoff increases will cause CUs to respond by increasing loan loss provisions (an expense item) in an effort to build up loan loss allowance accounts (a balance sheet item).