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Our local economy appears to recovering well. New construction is increasing and housing prices are slowly increasing. Several housing developments that stopped construction after 2007 have started up again at a slower pace. Our membership, the bulk of which is paid professional firefighters and their immediate families, is quite stable. We are positioned well for rising rates whenever that begins to happen.
Our local market is finally beginning to improve. We are seeing new businesses start up and unemployment has stabilized. The number of people losing jobs has decreased, but the number of new jobs is still too low. In addition, it seems many employers are hesitant to hire full-time employees, so more individuals than ever are part-time workers that often work two or three jobs. We are hoping we will finally see the recovery in 2014 that many parts of the state have seen.
Employment is improving and housing prices are increasing. Loan demand is up, especially for "toys" like RVs, four-wheelers, boats, etc. Loans for used cars are still in demand, and sales of new cars are increasing. We're seeing decreased refinancing in mortgages and a slow increase in demand for new purchases of homes. Member growth is continuing but at a slower pace. Delinquencies remain low for consumer loans, and bankruptcies are down.
Pat Force, CFO
Northwest Community ($831.0M, Eugene, OR)
The economy in Oregon is gradually improving — some local markets are clearly stronger than others. The employment picture and real estate values are improving more in the larger urban areas, especially Portland, than in the rest of the state. Job growth has been, and is expected to remain, consistent. Asset quality has returned to more normal levels; foreclosures have declined significantly. Consumer confidence is stronger, which should continue to stimulate loan demand. Oregon's economy was hit harder by the recession but has a history of recovering quicker than the nation as a whole. The unemployment rate, which at one time was the second-highest in the country, is now at the national average, and real estate values have bounced back at a pace faster than other regions in the United States. Oregon had a significant loss of middle class jobs during the recession, which continues as more companies automate processes. Job loss coupled with high household debt and fiscal issues at the state, county, and city levels leave a cloud of uncertainty in our local economies. Overall, the positive economic trends should be stronger than the economic headwinds in 2014.
Almost everything turned out better this year compared to 2012. With the improved economy, stock market, unemployment rate, and housing, we saw 35% loan growth, mostly in real estate as property values increased in the Riverside/San Bernardino area more than most of the nation. We see members refinancing, purchasing, and investing in real estate. It works well as our underwriters leased part of our building; we have developed a good relationship. Training the loan officers to make more loans and still have a 0.1% delinquency ratio is attributed to the economy. We are enhancing our website and Internet banking and starting remote deposit capture in 2014, which should help us improve our efficiency. In addition, we closed a branch and eliminated share branching, which helped us reduce our lobby transactions. Because long-term interest rates have increased significantly, we see us investing longer term to increase our yield. We started 2013 looking at ways to cut expenses and reduced our operating expenses $600,000 for the year. The only decrease has been fee income as we saw reductions in NSFs, loan late fees, and courtesy fees for share draft advances, again attributed to the improved economy.
Regional real estate values are improving. Residential sales activity lags behind other regions, though. Demand for auto loans is improving, demand for new autos in particular has improved greatly. Commercial activity is little changed, with a slight increase only in construction and development. Deposit growth is consistent.
Todd Sheffield, CEO
Community First CU ($162.6M, Santa Rosa, CA)
Much of our results are dependent on the economy and the direction of interest rates. We see rates increasing slightly, perhaps more on the long term and less so on the short term. If this happens, it will not incur a large increase in cost of funds, which is important considering the declining interest margin. On the loan side, the improving economy should spur more consumer borrowing, but the higher rates will depress real estate borrowings. We're forecasting a 20% rise in consumer loan production, a 40% decline in real estate loan production.
Norm West, CFO
Alaska USA FCU ($5.4B, Anchorage, AK)
Alaska USA operates in a number of different areas whose economies vary quite a bit from Alaska. Those areas include Alaska, whose economy is usually quite a bit different than the other 49 states, the Pacific Northwest, and Southern California. This geographic diversification is by design in order to smooth out the economic bumps of a particular area. In Alaska, the current situation is stable. The outlook for the near future, however, is uncertain as the state, which has large rainy day savings accounts, grasps with rapidly declining oil production and revenue. Holds and delays on new, potentially massive resource extraction projects exacerbates the situation. Some of these holds result from the state's tax and development policies, but most are due to environmental concerns, particularly by non Alaskans. The cost of compliance with new consumer and real estate lending regulation as well employee benefits cost is causing us, like all financial institutions in the United States, to emphasize cost control. Although our Alaska business is growing because of our large market share, growth comes slow in a mature market. Most of our growth, per strategy, continues to come from our members outside of Alaska.
The housing market is rebounding strongly in the Seattle market, a little less so in the Olympia market. Commercial lending is picking up and a number of local and regional credit unions are adding to their commercial lending infrastructure with the intent to grow this area in 2014. It is becoming increasingly difficult to find good talent, especially in specialized positions like IT, business intelligence, and compliance.
Randy Baldwin, EVP/CFO
Arizona Federal Credit Union ($1.2B, Phoenix, AZ)
Home values in Arizona have increased dramatically over the past two years. We’ve recovered part of the lost values from the peak in 2006 but are still down 37%. This has impacted the housing industry and related businesses, which normally thrive in Arizona. We're still down about 50,000 jobs since the recession began. We're also feeling the effects of the White House's budget dysfunction as we have a large military presence. I'm of the opinion that the military should be among the last expenses to cut, while other federal spending needs to be reigned in to stop the insanity. The unemployment rate in Arizona is a full percent higher than the national average. We're seeing slow progress, but by this point in the recovery, we should be much farther along. We shouldn't be using "modest" and "slow" to describe growth at this point — we're six years from the beginning of this. I'm an optimist by nature, but as long as the federal government tries to intervene in every aspect of business and the economy, recovery is going to be slow and painful.
The Hawaii economy will continue to grow as it has the past few years. However, unlike prior years where tourism has been the main driver, construction will be driving the economic growth. Inflation should remain about the same as the previous few years. As far as credit unions, there will be more consolidation as the smaller institutions cannot survive even amid an improving economy.
Michael Stremme, CEO
Kaiperm Federal Credit Union ($68.2M, Walnut Creek, CA)
Real estate drives our lending portfolio, and with the changes in real estate rules, laws, and regulations, 2014 seems very unsettled, especially in the first quarter. The change in direction at the FED and its recent comments also cause concern as to the direction of the U.S. economy and the impact it has on local economies.
Our market demand has been remarkably strong recently. We have seen an increase in specialized short-term (10 years max) mortgage loans, and auto loan demand has also been good. Market rates are still low, but it seems members are anticipating higher borrowing costs in the future and are locking in low rates now.
2013 has proven to be a good year and I expect 2014 to continue in the same vein. Housing prices are rising while mortgage rates remain low. Loan demand has improved dramatically, especially in the second half of 2013. I think we will continue these trends in 2014; however, the rise in housing prices will be at moderate or back-to-normal levels. I see liquidity becoming a factor in 2014. We have been discouraging deposits over the last few years, but I think we will be looking to increase deposits to meet the increased loan demand. And we will be competing with a more robust equity market for those deposits, so our cost of funds is sure to rise.
Paul Lewis, CEO
SD Medical ($71.3M, San Diego, CA)
The economy is recovering, but slowly. Loans are still sluggish, and auto loan competition has kept rates unreasonably low. Hopefully, as the yield curve steepens, lenders will wake up and increase rates. Real estate lending has not returned yet, but as valuations increase hopefully this market will come back. Most members want 30-year-fixed mortgages, which creates a maturity mismatch that we cannot accommodate.
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