Mike SchenkDeputy Chief Advocacy Officer and Chief Economist

Credit Union National Associationmschenk@cuna.coop

State of the Economy & Credit Union Industry

5.8

8.5

12.6

17.2

7.85.7 5.8 5.0 5.5

0

5

10

15

20

25

Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

A Dual MandateMisery index % (inflation rate + unemployment rate) // Source: BLS

Unemployment rate = 3.7%+ CPI headline inflation rate = 1.8%

Misery Index (July) = 5.5%

2.25

1.480

2

4

6

8

10

12

14

16

18

20

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Perc

ent

Murderous!Market Interest Rates and Recessions // Source: Federal Reserve and NBER

Recession

Fed Funds (% left axis)

10-Yr Treasury (% left axis)

2.25

2.87

0

2

4

6

8

10

12

14

16

18

20

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Perc

ent

Adjusted for Fed Quantitative Easing?Market Interest Rates and Recessions // Source: Federal Reserve and NBER

Recession

Fed Funds (% left axis)

10-Yr Treasury (% left axis)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

Initial Claims for Unemployment Insurance 4-week Moving Average (SA) and Recessions // Source: BLS and NBER.

-0.3

0.3

0.8

1.3

1.8

2.3

2.8

3.3

3.8

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Unemployment Rate GapPercentage point difference between unemployment rate & low point of the 3-month centered moving average over past year // Source: BLS and NBER.

Recession Unemployment Gap

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jan-60 Jan-66 Jan-72 Jan-78 Jan-84 Jan-90 Jan-96 Jan-02 Jan-08 Jan-14

Residential Investment As a % of GDP // Source: BEA and NBER

0

500

1000

1500

2000

2500

3000

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Thou

sand

s of U

nits

New Housing Units StartedSAAR // Source: Census Bureau and NBER

Recession

New Housing Units Started

0

100

200

300

400

500

600

700

800

900

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

S&P 500 Monthly AverageInflation-Adjusted Index // Source: S&P

Recession Real

0

0.5

1

1.5

2

2.5

3

3.5

4

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Perc

ent

Leading Economic IndicatorsPhiladelphia Fed Index // Source: Moody’s, Federal Reserve Bank of Philadelphia and NBER

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Credit Union “Growth Gap”Year-over-year loan growth minus year-over year savings growth // Source: CUNA Monthly Estimates and NBER

Leading IndicatorsYield curve inverted? YES

Yield curve inverted due to Fed rate increases? NO

Initial Claims heading up? NO

Unemployment Gap > 0.3? NO

Consumer Sentiment > 10-point decline recently? NO

Avg Hourly Workweek (Manufacturing) declining? YES

ISM Manufacturing Index Below 43? NO

Stock Market Broadly Declining? NO

Sharply declining Residential Investment (as a % of GDP)? NO

Leading Indicators Index: ~2% decline over 6 months NO

CU Growth Gap: YOY Loan Growth < YOY Savings Growth? NO

-2.5

2.6

1.6

2.21.8

2.52.9

1.6

2.2

2.9

3.5

2.9

1.1

3.1

2.0 2.11.8

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '18Q2'18Q3'18Q4'19Q1'19Q2 '19 F '20 F

Whoa Horse!US economic growth – annualized percent changes in GDP // Source: BEA, CUNA

Slow economic growth• Well below the 2.8% norm• Partially due to tariffs, little chance of infrastructure spending etc.• Demographics dominate

1.1%

1.7%

2.7%

1.7%

1.2%1.0%

0.5%

50s 60s 70s 80s 90s 00s 10s

U.S. average annual civilian laborforce growthBy decade // Source: BLS

2.7%2.5%

1.2% 1.3%

2.0% 2.0%

1.1%

50s 60s 70s 80s 90s 00s 10s

U.S. average annual productivity growth Nonfarm business real output per person by decade// Source: BLS

1.62.5

1.71.2

0.7 0.5

2.4 0.61.7

2.0

1.1 1.3

1950-1973 1974-1981 1982-1990 1991-2001 2002-2016 2017-2027

Potential Labor Force Productivity4.0

3.13.4 3.2

1.8 1.8

Average annual % growth in real potential GDPSource: Congressional Budget Office

8.2

17.1

7.0

4.4

10.0

3.72

4

6

8

10

12

14

16

18

20

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 '19

Trends in US Unemployment Rates (%)Source: BLS and CUNA

Recession

U-6 Unemployment Rate

U.S

2.8

6.0

4.53.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Asian Black/African American Hispanic or Latino White

Unemployment Generally Down Across All Racial and Ethnic GroupsSource: BLS & CUNA

HELP!!!Source: BLS.

0

2

4

6

8

10

12

14

16

18

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Unemployed (Millions) Job Openings (Millions)

-2

0

2

4

6

8

10

12

14

16

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Perc

ent

Tame U.S. Inflation Year-over-year changes in CPI – All Urban Consumers SA // Source: Federal Reserve and NBER

10-Yr. Tsy = 1.48%- 10-Yr. TIPS = -0.06%Implied Inflation = 1.42%

Consumer Sector

0

500

1000

1500

2000

2500

3000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

S&P 500 Monthly Average(Source: S&P)

Recession

Nominal

Real

283.8

213.4

323.2

160.7

104.1

142.5

0

50

100

150

200

250

300

350

400

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17

Solid Housing Market Gains…S&P Case-Shiller National Home Price Index // Source: S&P

Nominal

Inflation-Adjusted

Nominal Changes:Up 4% over past yearUp 14% vs pre-recession levels

Real Changes:Up 3% over past yearDown -7% vs pre-recession levels

$14,450$15,628

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

Jan-80 Jan-86 Jan-92 Jan-98 Jan-04 Jan-10 Jan-16

Up to their eyeballs! Household debt. Billions of dollars // Source: Federal Reserve

124.2

90.8

50

60

70

80

90

100

110

120

130

Jan-80 Jan-86 Jan-92 Jan-98 Jan-04 Jan-10 Jan-16

Household Consumer & Mortgage Debt As a % of Disposable Household Income // Source: Federal Reserve

8.0

9.0

10.0

11.0

12.0

13.0

14.0

J-80 J-82 J-84 J-86 J-88 J-90 J-92 J-94 J-96 J-98 J-00 J-02 J-04 J-06 J-08 J-10 J-12 J-14 J-16 J-18

Household Debt Payments as a Percent of Disposable Income near All-Time LowSource: Federal Reserve

666692

684

400.0

450.0

500.0

550.0

600.0

650.0

700.0

J-80 J-82 J-84 J-86 J-88 J-90 J-92 J-94 J-96 J-98 J-00 J-02 J-04 J-06 J-08 J-10 J-12 J-14 J-16 J-18

Household Net Worth as a Percent of Disposable IncomeSource: Federal Reserve

0

20

40

60

80

100

120

140

160

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Consumer Confidence: Close to a 20-Year HighSource: Conference Board

Aug = 135.1

Business Confidence IndexSource: NFIB

July = 104.7 Up from 103.3 in June!

Real GDP: GermanySeasonally-adjusted change from year-ago // Source: Eurostat

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19

Trade Wars: “Good and Easy to Win”?

“…according to our estimates, these higher tariffs are likely to create large economic distortions and reduce U.S. tariff revenues.”

New China Tariffs Increase Costs to U.S. Households.- Mary Amiti, Stephen J. Redding, and David E.

Weinstein. Liberty Street Economics. Federal Reserve Bank of New York. May 23, 2019.

II. Consumers & Members

63% 65%69% 70% 73% 75%

2013 2014 2015 2016 2017 2018

Percent of Families “Living Comfortably” or “Doing OK”Source: Federal Reserve Report on the Economic Well-Being of U.S. Households.

25% finding it “difficult to get by” or “just getting by” - 83 million people!

39% could not cover a $400 emergency expense

25% of non-retired have no retirement savings or pension

Consumer/Member Trends

• Rising income volatility • Reduced ability/willingness to save• 60% of households experience at least one financial shock per year• Unemployment/underemployment & debt burdens hit millennials hardest• By 2035, Americans aged 65+ will outnumber those under 18 with and most have little-to-no

retirement funds beyond SS.

• Rising income inequality and rising wealth inequality• Wages for the bottom 50% of earners are unchanged over the past 40 years.• One in five households have zero or negative net worth• Minority households hit hardest

• The uncertain future of work• Gig economy• Overall 20% of all workers today are contractors• 50% of contractors have no benefits!• Autonomous cars/sharing

Consumer/Member Trends: Implications

• Rising income volatility • Small dollar loans & payday loan alternatives more important• Members will gravitate to alternative financial services• Fewer working-age people will mean less demand for core CU financial services

• Rising income inequality and rising wealth inequality• Less access to budgeting tools and advice• Lower household formation rate/lower birth rate/aging population• Reduced ability to borrow & lower ability/willingness to own

• The uncertain future of work• FOM implications• Overall 20% of all workers today are contractors• 50% of contractors have no benefits!• Commerce Department reports ~16 million U.S. workers were employed in occupations that

could be affected by autonomous cars (to varying degrees) – one in nine workers…

www.cuna.org/economics

III. Credit Union Environment

CUNA Strategic Planning RoundtableExecutive Breakout Session (8/18/19)

Top challenges over the next year or two:• Slowdown in mortgage demand• Interest rate spreads/margins• Portfolio quality in a slowing economy• Membership growth/communicating value proposition

Top challenges over the long run:• War for talent• Cybersecurity• Staying relevant – especially on the technology front

Voting with their feet!Percent change in CU memberships (%) // Source: NCUA and CUNA

1.31.6 1.4

0.7

1.5

2.12.5

3.13.5

4.0 4.14.4

4.0

3.2 3.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 17 18 YOY'19/03

'19 E '20 E

6.5 6.7

1.2

-1.2

1.2

4.8

7.3

10.4 10.5 10.610.0

8.97.8 7.5 7.0

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 YOY'19/03

'19 E '20 E

Obvious meaningful interactions!Credit union 12-Month loan growth (%) // Source: NCUA and CUNA

7.9

10.0

20.9

12.9

9.1

1.3

12.4

6.1

8.5

16.0

12.7

10.3

3.5

12.4

7.9

7.3

16.8

12.4

9.8

3.5

14.4

9.1

8.5

13.1

10.2

10.1

7.0

14.0

7.5

6.9

11.7

9.1

9.2

7.0

12.0

7.7 8.

5

8.5

7.3 7.

9 8.1

11.7

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

Broad-based but slower CU loan growth12-month growth within seven key portfolios // Source: NCUA and CUNA

2014 2015 2016 2017 2018 Mar '19

17,8

11

17,4

72

17,1

38

16,9

67

17,2

95

17,4

45

17,0

50

16,4

62

13,4

93

10,6

01

11,7

72

13,0

49

14,7

81

15,8

82

16,8

58

17,8

46

17,8

66

17,5

85

17,4

92

16,7

90

16,5

70

16,4

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Forc

2020Forc

2021Forc

U.S. Car and Light Truck SalesSource: BEA and IHS Markit. Thousands of Units.

IHS Market Forecast (Jul):• 2019: -4.1%• 2020: -1.3%• 2021: -0.8%

$1,7

55

$1,8

45

$1,2

61 $1,6

30 $1,8

91

$1,7

10

$1,6

43

$1,6

82

$1,6

83

$1,7

40

2012 2013 2014 2015 2016 2017 2018 2019 Forc 2020 Forc 2021 Forc

U.S. First Mortgage OriginationsSource: Mortgage Bankers Association. Billions.

MBAA Forecast (Aug):2019: +15%2020: -9%2021: +1%

Credit Union Delinquency Rates: All Loans Percent of Period-End Loans // Source: NCUA & CUNA

1.00

0.88

0.75 0.740.82 0.80 0.76 0.72 0.73

0.68

0.93

1.37

1.821.75

1.60

1.15

1.01

0.85 0.81 0.83 0.810.71

0.58

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3/19

Credit Union Net Chargeoff Rates 1st Qtr. 2019 annualized. Percent of average loans. Source: NCUA & CUNA

0.57 0.58

0.470.40

0.440.50

0.54 0.51 0.510.44

0.49

0.81

1.201.14

0.90

0.71

0.540.47 0.46

0.520.56 0.55 0.57

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3/19

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0

1

2

3

4

5

6

7

8

9

10

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

U.S. Unemployment Rate and CU Delinquency RateSource: BLS, NCUA, CUNA.

Recession Unemployment (Left Axis) Loan Delinquency Rate (Right Axis)

Loan-to-share RatiosFast loan growth & Slow savings growth (%) // Source: NCUA and CUNA

83.4 83.276.3

72.2 69.4 68.6 71.075.1 77.7 79.8 82.8 85.8 82.6

87.0 87.4

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 17 18 YOY'19/03

'19 E '20 E

Solid EarningsCU ROA in basis points // Source: NCUA and CUNA

64

31

18

50

68

8477 80

75 76 77

91 9587

80

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 17 18 YOY'19/03

'19 E '20 E

Three key operational wildcards

1. More obvious margin pressures

• Tight liquidity• Higher deposit rates• Lower loan growth• New Fed rules

2. More obvious pressure on non-interest margins

• Lower demand for fixed-rate mortgages?

• New York Times article – consumer-friendly fees at CUs?

3. Talent management

• Attracting & retaining• Differentiation• Operating expense

pressures

Advocacy Issues• Preserve the credit union tax status/bank attacks• Forward-looking, tailored consumer protection• Data security• CRA• DEI• Strengthen the housing finance system • Catching up to consumer expectations: TCPA• Cannabis banking for safer communities• Bringing federal credit union governance into the 21st century

Exam Issues• Bank Secrecy Act Compliance• Concentrations of Credit• Consumer Compliance

• New HMDA reporting requirements• MLA compliance• Regulation B’s notification requirements following adverse action taken on consumer

credit applications• Review overdraft policies and procedures for compliance with Regulation E

• CECL compliance progress/ALLL impacts• Information security maturity assessments with the Automated Cybersecurity

Examination Toolbox (ACET). • Will use ACET to assess credit unions with over $250 million in assets that have not

previously received an assessment.• IT risk management• Liquidity & interest rate risk

11,22510,862

10,53610,206

9,8989,574

9,2098,877

8,535 8,2687,966 7,708 7,486 7,236

6,9566,680

6,398 6,143 5,906 5,684 5,489

10,4

64

10,2

22

9,90

4

9,61

4

9,35

4

9,18

1

8,97

6

8,83

3

8,68

0

8,53

4

8,30

5

8,01

2

7,65

8

7,35

7

7,08

3

6,81

2

6,50

9

6,18

2

5,91

3

5,67

0

5,40

6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

CU consolidation mirrors trends in the banking industryTotal number of institutions // Source: FDIC, NCUA and CUNA

U.S. CUs

U.S. Banks

-257

-363-326 -330

-308-324

-365-332 -342

-267-302

-258-222

-250-280 -276 -282

-255-237

-222-195

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Credit Union Consolidation: Annual Total Declines have been Slowing in the Past Few Years as More Small CUs Reflect Stronger Financials

(Source: NCUA and CUNA)

-2.2%

-3.2%-3.0% -3.1% -3.0%

-3.3%

-3.8%-3.6%

-3.9%

-3.1%

-3.7%

-3.2%-2.9%

-3.3%

-3.9% -4.0%-4.2%

-4.0% -3.9% -3.8%

-3.2%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Credit Union Consolidation: Annual Percentage Declines also have been Slowing in the Past Few Years

(Source: NCUA and CUNA)

custat@cuna.coop

Thank You!