Credit Union

Credit UnionEnvironmentalism…

An Insider’s Perspective on Where Regulation, Legislation and Marketplace Factors are Taking

America’s Credit Unions in 2013 and BeyondPresentation By:

Dennis Dollar, Former NCUA Chairman and Principal Partner, Dollar Associates, LLC

Utah Credit Union Association Salt Lake City, UT – March 8, 2013

2013 CU Environmentalism

PLACES WHERE PLACES WHERE ITIT’’SS

STORMING…STORMING…


CHALLENGES TO GROWTH AND COMPETITIVENESS

Growing regulation restricts income Increasing supervisory action impacts

innovation and investment in members NCUSIF assessments for corporate

stabilization & natural person CU losses remove vital earnings needed to compete

Ability to achieve economies of scale through merger de-railed by unnecessarily tight view of FOM and “in danger of insolvency” interpretation

No industry or economy has ever regulated itself out of a downturn…growth is essential to righting the ship

Summary of Trends Report

As of September 30, As of September 30, 20122012

Asset Asset GroupGroup

Under $10 Under $10 millionmillion

Asset Asset Group Group

$10 million to$10 million to$100 million$100 million

Asset Asset Group Group

$100 million to$100 million to$500 million$500 million

Asset Asset Group Group Over $500 Over $500

millionmillion

# of Credit Unions# of Credit Unions 2,4022,402 3,0543,054 1,0291,029 403403

Total AssetsTotal Assets $9.60 billion$9.60 billion $111.59 $111.59 billionbillion

$228.71 $228.71 billionbillion


Average AssetsAverage Assets $3.99 million$3.99 million $36.54 $36.54 millionmillion

$222.27 $222.27 millionmillion


Net Worth/Total AssetsNet Worth/Total Assets 14.47%14.47% 11.42%11.42% 10.41%10.41% 10.03%10.03%

Net Worth GrowthNet Worth Growth 0.13%0.13% 3.82%3.82% 7.08%7.08% 10.78%10.78%

Return on Average Return on Average Assets (ROA)Assets (ROA)

0.02%0.02% 0.40%0.40% 0.68%0.68% 1.01%1.01%

Loans/SharesLoans/Shares 55.30%55.30% 58.17%58.17% 66.19%66.19% 70.48%70.48%

Delinquent Loans/Total Delinquent Loans/Total LnsLns

2.14%2.14% 1.35%1.35% 1.18%1.18% 1.14%1.14%

Share GrowthShare Growth 4.36%4.36% 5.98%5.98% 6.56%6.56% 8.02%8.02%

Loan GrowthLoan Growth 0.71%0.71% 2.55%2.55% 4.60%4.60% 5.72%5.72%

Asset GrowthAsset Growth 3.72%3.72% 5.90%5.90% 6.78%6.78% 8.34%8.34%

Membership GrowthMembership Growth -1.38%-1.38% 0.82%0.82% 2.58%2.58% 5.54%5.54%


3241 Credit Unions 3241 Credit Unions Reported Membership Reported Membership

Declines in 2012Declines in 2012

46% of all credit unions!!!46% of all credit unions!!!


THE SEEMING TENDENCY OF TRYING TO REGULATE OUT OF A CRISIS

Effective regulation is needed to help stay out of a crisis and primarily to be prepared for the inevitability of crisis

Excessive regulation has never, in American or world history, initiated a period of economic growth or industry recovery

The stimulation of innovation and growth is essential for recovery – excessive regulation and unnecessary supervisory action can kill those two essential factors for recovery


SUPERVISORY PRESSURES

In 2012, according to a leading publication, over 5200 credit unions (out of approx. 7000 total) are operating under some form of formal supervisory action (DOR, LUA or Cease and Desist)

CAMEL ratings are lower, with more CAMEL 3s, 4s and 5s – Coming back slowly, but coming back

Many downgrades are justifiable, as are many supervisory actions, in a difficult economic period

Practical impact is that regulators are running over 70% of credit unions, thus making them risk averse and largely unable to innovate or invest without supervisory approval



RAINING…RAINING…


MISSED MARKETPLACE MISSED MARKETPLACE OPPORTUNITIESOPPORTUNITIES

With anti-big bank sentiment at an all-time high and “profit at any cost” Wall Street under high profile scrutiny, not-for-profit financial cooperatives are positioned for best growth opportunity in decades

Best opportunity in our credit union lifetime being hindered by corporate losses, insurance premiums, income hits through regulation and statutory changes and supervisory action proliferation

If credit unions cannot seize the marketplace brass ring when it is available, it is troublesome to imagine when such an opportunity will re-appear

When the fog lifts for credit unions, it lifts for all competitors…this opportunity is historic and can be lost.


MARGIN CHALLENGES No margin, no mission. No mission, no

margin. Debit interchange fee income impact yet to

come – but still possible Overdraft income still on CFPB radar Spread getting thinner on interest rate

products Assessments continue for corporate

stabilization through 2021 (likely single digits around 7-9 bps, NCUSIF assessments unlikely in 2012-2013 – depending on economy

Supervisory pressures driving towards less risk in lending, thus reduction in loan-to-share ratios



CLOUDY…CLOUDY…


CFPB OUTLOOKCFPB OUTLOOK

Far reaching regulatory has broad umbrella of “consumer protection” without responsibility for factoring safety and soundness into the regulatory equation

Has examination authority on FIs over $10 billion in assets and can examine below $10 billion if it feels there is a consumer need

NCUA and states will enforce CFPB regulations Potential areas of focus: overdraft fees, credit

card fees, mortgage re-fi fees, ATM surcharges, affirmative action lending, disclosures, notifications, data collection

All-Inclusive APR proposal, HOEPA proposals, qualifying mortgages…all will carry burden and cost


LEGISLATIVE OUTLOOKLEGISLATIVE OUTLOOK

Have not been able to pass MBL cap increase with small business focus strong in Congress and unpopular banks getting $30 billion

Interchange loss was huge, defeated twice (once on defense, once on offense)

Can probably defeat major losses, taxation and independent regulator loss

Vote on MBL amendment in Senate being promised Capital bill significant - HR 3993 Possibility of capital modernization, FOM

enhancements, MBL cap removal, CUSO investment limit increase…all uncertain today, but needed

2013 CU EnvironmentalismLOSS OF INDEPENDENT LOSS OF INDEPENDENT

REGULATOR/INSURER ALWAYS REGULATOR/INSURER ALWAYS LOOMINGLOOMING

NCUA under Treasury or Fed becomes driven by banking model approach

Treasury supervision would increase taxation likelihood significantly

Combined with CFPB regulation, the regulatory burden would be geared for banks but paralyzing for CUs (CRA, branching restrictions, FOM restrictions, product approval)

With all of its faults, a credit union specific regulator at the federal level and a healthy dual charter system with states is a franchise issue


TAX EXEMPTION SAFE FOR NOW,TAX EXEMPTION SAFE FOR NOW,BUT MUST KEEP WATCHBUT MUST KEEP WATCH

Still the Holy Grail issue for credit unions Budget crisis and federal debt keeps all revenue

sources on the table Obama study group has recommended its

consideration Greater Treasury influence in CU affairs through

corporate and insurance fund issues creates more pressure

Likely would begin with bifurcated taxation structure based upon size

Would bring about the end of credit unions as we know them

Would bring about massive conversion to MSB charter if this charter remains viable because the larger CUs would be most impacted – most able to convert



DAWNING…DAWNING…


FINANCIAL PERFORMANCEFINANCIAL PERFORMANCE

•Over $1 trillion in assets first time in history

•Largest 12 month contribution to capital in history was 9/11-9/12 –

$7.98 billion

•Pre-assessment ROA of .95 is highest since 2005

•Loan originations hit record $244.5 billion through 9-30-12

•Highest first mortgage share at 6.5%

•3.3 million new checking accounts in the 12 months since 9-30-11

•2,500,000 net new members since 9-30-11


THE HISTORICAL ASSURANCE OF THE THE HISTORICAL ASSURANCE OF THE SWINGING PENDULUMSWINGING PENDULUM

Too much regulation creates unhealthy balance sheets, thus forcing a shift back toward more reasoned regulation or the regulator’s job becomes impossible of their own making

Supervision that is beyond that which is required stymies innovation and keeps credit unions from having flexibility to serve members and invest in them

TDR proposal a positive sign Regulatory and Supervisory pendulums swing…

they always do (Callahan to D’Amours, D’Amours to Dollar)

The question is not if it will swing, but when and how will credit unions be positioned when it does


CAPITAL MODERNIZATION IN SOME CAPITAL MODERNIZATION IN SOME FORMFORM

HR 3993 – Significant legislative vehicle While legislative solutions may seem unlikely in current

environment , a financial crisis is a great time to push for risk based or even secondary capital buffers to potential taxpayer losses

Regulatory options are not completely off the table…would require creative leadership but current legislative PCA standards could become leverage ratio and risk weighted formula could be incorporated into the supervisory actions taken within PCA. Secondary capital could even be brought into the formula, not undermining the legislative PCA standards but providing something other than “one size fits all” when assessing the level of NWRP required or other potential supervisory actions under PCA – PCA plus, if you will.

Capital modernization is the generational issue of credit unions today. It must be fixed. Leadership at the regulatory and industry level is essential on this linchpin issue.


CUs CAN SEIZE MOMENT TO BECOME CUs CAN SEIZE MOMENT TO BECOME LEADING COMMUNITY FIsLEADING COMMUNITY FIs

Differentiation opportunities in tough, anti-bank and non-responsive bank marketplace

Fewer community banks after current crisis Build new areas of community oriented product

growth – student lending, credit cards, business services, mortgages, checking account innovation

Shared branching / Nationwide branding 12-07 to 12-11: CU lending up 7.6%, while bank

lending down 6.5% - CUs are meeting a national need

2011 loan losses: consumer loans (1.15% vs 6.42%); mortgages (.64% vs 1.92%); MBL’s (.65% vs 1.83%) – and CUs are doing it smartly


ECONOMIES OF SCALE DRIVES ECONOMIES OF SCALE DRIVES EFFICIENCY THRU MERGERSEFFICIENCY THRU MERGERS

Mergers have averaged one per business day since 2000 – trend will continue and escalate with current pressures

Economies of scale, particularly with income pressures and impact of premium assessments, will drive more mergers – smaller and larger both

Although distressing to some, the sign of a maturing industry in a challenging time

Predict 5000 credit unions by 2020, maybe before


Management considerations Marketplace factors Economies of scale Financial performance Member demands Regulatory compliance Stagnant member & product growth

FACTORS DRIVING MERGERS


MORE MERGER DRIVERS Loss of RegFlex program Fixed asset waiver requirements DORs, LUAs and tougher exams New regulatory proposals (loan

participation rule, IRR rule, CUSO rule)

CFBP regulations Lack of workable FOM expansion

options in some cases


NCUANCUA’’S LOW-INCOME CU INITIATIVES LOW-INCOME CU INITIATIVE

Low-income designation provides some statutory exemptions of considerable value- MBL Cap exemption- Ability to take non-member deposits- Ability to issue supplemental capital instruments

May not be needed now, but would be good to have in the strategic arsenal

NCUA has streamlined approval – over 600 accepted automatic qualification

50.1% of members reside in CDFI designated low-income or underserved census tracts

Designation can be applied for if numbers are there


The environment is there.It is real.

The weather will change.

The question is how do we

strategically adjust to these realities??

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