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Unemployment is still in the double-digit range in our area. We still have about 40% of our mortgagees owing more than their house is worth. A soft labor market and still weak housing prices have kept us from seeing a full recovery. Nevertheless we have seen big improvements in terms of credit quality which has allowed us to reduce the provision for loan losses. The low mortgage rates have sparked a big refinance boom and we doubled our budgeted production for real estate loan and earned a huge amount of income from selling real estate loans. Our budgeted net income was about $6 million. We will end the year with about $22 million in net income. It was a very good year.
Looking ahead to 2013 we won't have the benefit of reducing provision expense. We expect far less income from selling real estate loans because we expect to sell less loans and book more of them. We also expect lower premiums for selling the loans. Overall we think loan production will increase by about 6%. We see strong gains in auto lending and credit card lending for 2013. We expect modest increase in savings and a bigger increase in our investment business with an increase in assets under management as we sell mutual funds and other investments to members. We see a gradual uptick in small business lending. The recovery has now extended to small business. We also see a bigger proportion of real estate loans will be purchase loans rather than refinance loans.
The credit union deferred capital improvements during the downturn. We increased our capital spending in 2012 and we expect to increase it to almost $5 million in 2013. We have a list of about $21 milllion in capital spending that will happen over the next 4 years as we upgrade our core DP system, replace all of our ATMs, expand our headquarters space, add branches, add ATMs and replace our teller cash machines with either remote teller stations or with cash recyclers.
The Inland Empire of Southern California continues to struggle with unemployment, depressed housing values and tight fiscal policy on the part of manufacturers, governments and other major employers. We have seen an improvement over the worst period, but more improvement is still needed. Low inventory in housing is starting to translate into stable and slightly improving home sales prices, but builders are focusing on multi-family housing rather than single-family homes. Financial institutions have worked through most of the inventory of foreclosure and REO property and most have returned to profitability; many are experiencing record profits despite tightening interest rate margins. Loan demand is starting to pick up a little, but is still lower than normal.
Evie Rasmussen, CEO
United Advantage NW FCU ($36M, Portland, OR)
Oregon’s economy has finally turned the corner especially in the labor market. Some large jobs are expected to create an over-employment situation whereas workers outside of the state will be solicited to travel to Oregon and help get the work done. Currently Oregon is second only to D.C. in experiencing the highest influx of new residents, mostly due to new jobs. Even though the unemployment rate continues to be slightly higher than the national rate, it underscores the new job planning. Portland is seeing higher home prices and encouraging reluctant sellers to place their property on the market as there is a shortage of homes on the market – we have moved from a solid buyers’ market to a quasi-sellers’ market. The rest of Oregon is also seeing improvement in home sales and higher home prices. We have a long way to go before we experience the heyday of the late 1990’s but we are certainly moving away from the devastation the last 3-4 years brought. Our credit union’s SEGs are finally back to work, the first time in 11 years and our net gain after corporate assessment is at 94bp for 2012 - a major and much needed improvement.
Spokane area credit unions saw declining delinquency and charge-offs levels in 2012 compared to 2011, allowing some to reverse some provision expense. Average home sales prices have declined about 15% since 2009 but that decline has slowed and is expected to be stable in 2013. Mortgage loan activity remains strong as members continue to refinance into these all time low rates. Auto loans appear to be picking up in the area as members have finally decided to replace that older car. STCU's auto loan growth was 24% for the year and strong growth is expected in 2013. Indirect activity has been brisk. RV's showed some surprising growth in 2012 and that category is expected to continue in 2013 as the weather begins to warm up. Overall deposit growth was about 7% in 2012 with strongest growth in regular savings accounts followed by checking accounts. The growth rates for 2013 will be similar and slower than growth in 2008-2010 as members continue to pay down debt instead of saving in this very low interest rate environment.
San Jose is an extremely competitive market – there are over 80 financial institutions represented here. Mortgage lending has been robust with rates low and home prices increasing due to lower inventories. We are seeing a slight shift from the high level of refinancings to purchase money mortgages. Also seeing a slight shift from fixed rate to ARM loans. Lending for new autos is also extremely competitive with 0% deal financing readily available. Used auto financing is good. We experienced good growth in multifamily and CRE lending. The high level of competition in all loan products continues to compress loan pricing.
Our region is somewhat less fragile though far from stable and growing. There is a sluggish recovery with modest improvement in unemployment. Locally the rate is likely to continue to hover around 8%. There is concern for continued under employment in our immediate area. Improvement is being seen in the local manufacturing sector. We are cautious regarding higher inflation and the impact of national deficit reduction and budgeting with its potential negative consequence on military spending within our region.
On the one hand, with historically low interest rates and increasing equity, we anticipate some uptick in housing demand from individuals and positive movement in new construction starts. Meanwhile, the specter of short sales is projected to continue for higher-end inventory. Compression on earnings looms as higher rate loans run off and are replaced by low interest rate loans.
Eddie Young, CFO
SF Police CU ($723M, San Francisco, CA)
Overall loan demand appears to be on a slow upward trend, but loan origination is still a big challenge, especially consumer loans. The loan that is in demand is fixed rate 30-year mortgage loans. Of course, having more of fixed rate mortgages under today's rate environment will cause asset liability issues down the line. On the other side of the ledger, deposits seem to have hit a plateau. Our credit union, over the past four months has not seen any growth in deposits despite our dividend rates being in first or second place amongst our local bank and credit union competitors.
When we review the financial crisis and the impacts on our community and credit union, it is easy to see that the Southern Oregon economy was one of the First In and Last Out of the financial doldrums. While the local economy has been tough on local financial institutions with a bank and credit union failure, and multiple acquisitions, we have found that our measured and methodical response to the crisis has resulted in creating amazing community confidence in our credit union. This has opened up many doors that have never been open to us before and created considerable market opportunity that has allowed us to grow from #5 in local deposit market share to #1! Yes, that includes US Bank, Wells Fargo, Bank of America, Chase, and regional players like Umpqua Bank.
Our membership growth consistently exceeds peers and we have experienced loan growth above peers. Through incredible devotion to our members and considerable trust in senior leadership our Board of Directors faced the crisis head on and led our credit union to local market leadership! They set a straight and true course that has resulted in our credit union being well positioned to take full advantage of the recovery... and the recovery is coming!
Nationally loan growth among credit unions has been improving and America First Credit Union loan growth has as well. Most of the growth has come from our own efforts to redesign and deliver new products to our members. In 2013 we pledge to remain competitive and creative and offer relevant products and services to our members at all stages of their lives. Delinquency and foreclosure rates have been declining nationally and at America First Credit Union. This is another sign of an improved economy, and also a measure of the strength of our credit union in controlling the risks we assume as a premier lending institution. At America First Credit Union, deposits have grown as members have exercised caution in an uncertain environment. Credit union members have opted for more liquid accounts. In 2013 we expect to see renewed interest in term deposits that will benefit members as long-term rates are higher than short-term rates. America First Credit Union and our members are resilient. We have all experienced the worst recession since the Great Depression. At America First Credit Union, we remain financially strong and are here to serve our members. We are on a slow path to economic recovery, and 2013 promises to be a great year that will lead us forward as we strive to remain relevant to our members financial needs for a lifetime.
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