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Credit Union Environmentalism… An Insider ’ s Perspective on Where Regulation, Legislation and Marketplace Factors are Taking America ’ s Credit Unions in 2013 and Beyond. Presentation By: Dennis Dollar, Former NCUA Chairman and Principal Partner, Dollar Associates, LLC - PowerPoint PPT Presentation

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  • Credit UnionEnvironmentalism An Insiders Perspective on Where Regulation, Legislation and Marketplace Factors are Taking Americas Credit Unions in 2013 and BeyondPresentation By:Dennis Dollar, Former NCUA Chairman and Principal Partner, Dollar Associates, LLCUtah Credit Union Association Salt Lake City, UT March 8, 2013

  • 2013 CU EnvironmentalismPLACES WHERE ITS STORMING

  • 2013 CU EnvironmentalismCHALLENGES TO GROWTH AND COMPETITIVENESSGrowing regulation restricts incomeIncreasing supervisory action impacts innovation and investment in membersNCUSIF assessments for corporate stabilization & natural person CU losses remove vital earnings needed to competeAbility to achieve economies of scale through merger de-railed by unnecessarily tight view of FOM and in danger of insolvency interpretationNo industry or economy has ever regulated itself out of a downturngrowth is essential to righting the ship

  • Summary of Trends Report

    As of September 30, 2012Asset GroupUnder $10 millionAsset Group $10 million to$100 millionAsset Group $100 million to$500 millionAsset Group Over $500 million# of Credit Unions2,4023,0541,029403Total Assets$9.60 billion$111.59 billion$228.71 billion$663.01 billionAverage Assets$3.99 million$36.54 million$222.27 million$1.64 billionNet Worth/Total Assets14.47%11.42%10.41%10.03%Net Worth Growth0.13%3.82%7.08%10.78%Return on Average Assets (ROA)0.02%0.40%0.68%1.01%Loans/Shares55.30%58.17%66.19%70.48%Delinquent Loans/Total Lns2.14%1.35%1.18%1.14%Share Growth4.36%5.98%6.56%8.02%Loan Growth0.71%2.55%4.60%5.72%Asset Growth3.72%5.90%6.78%8.34%Membership Growth-1.38%0.82%2.58%5.54%

  • 2013 CU Environmentalism3241 Credit Unions Reported Membership Declines in 2012

    46% of all credit unions!!!

  • 2013 CU EnvironmentalismTHE SEEMING TENDENCY OF TRYING TO REGULATE OUT OF A CRISISEffective regulation is needed to help stay out of a crisis and primarily to be prepared for the inevitability of crisisExcessive regulation has never, in American or world history, initiated a period of economic growth or industry recoveryThe stimulation of innovation and growth is essential for recovery excessive regulation and unnecessary supervisory action can kill those two essential factors for recovery

  • 2013 CU EnvironmentalismSUPERVISORY PRESSURESIn 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 backMany downgrades are justifiable, as are many supervisory actions, in a difficult economic periodPractical 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

  • 2013 CU EnvironmentalismPLACES WHERE ITS RAINING

  • 2013 CU EnvironmentalismMISSED MARKETPLACE OPPORTUNITIESWith 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 decadesBest opportunity in our credit union lifetime being hindered by corporate losses, insurance premiums, income hits through regulation and statutory changes and supervisory action proliferationIf credit unions cannot seize the marketplace brass ring when it is available, it is troublesome to imagine when such an opportunity will re-appearWhen the fog lifts for credit unions, it lifts for all competitorsthis opportunity is historic and can be lost.

  • 2013 CU EnvironmentalismMARGIN CHALLENGESNo margin, no mission. No mission, no margin.Debit interchange fee income impact yet to come but still possible Overdraft income still on CFPB radarSpread getting thinner on interest rate productsAssessments continue for corporate stabilization through 2021 (likely single digits around 7-9 bps, NCUSIF assessments unlikely in 2012-2013 depending on economySupervisory pressures driving towards less risk in lending, thus reduction in loan-to-share ratios

  • 2013 CU EnvironmentalismPLACES WHERE ITS CLOUDY

  • 2013 CU EnvironmentalismCFPB OUTLOOKFar reaching regulatory has broad umbrella of consumer protection without responsibility for factoring safety and soundness into the regulatory equationHas examination authority on FIs over $10 billion in assets and can examine below $10 billion if it feels there is a consumer needNCUA and states will enforce CFPB regulationsPotential areas of focus: overdraft fees, credit card fees, mortgage re-fi fees, ATM surcharges, affirmative action lending, disclosures, notifications, data collectionAll-Inclusive APR proposal, HOEPA proposals, qualifying mortgagesall will carry burden and cost

  • 2013 CU EnvironmentalismLEGISLATIVE OUTLOOKHave not been able to pass MBL cap increase with small business focus strong in Congress and unpopular banks getting $30 billionInterchange loss was huge, defeated twice (once on defense, once on offense)Can probably defeat major losses, taxation and independent regulator lossVote on MBL amendment in Senate being promisedCapital bill significant - HR 3993Possibility of capital modernization, FOM enhancements, MBL cap removal, CUSO investment limit increaseall uncertain today, but needed

  • 2013 CU EnvironmentalismLOSS OF INDEPENDENT REGULATOR/INSURER ALWAYS LOOMINGNCUA under Treasury or Fed becomes driven by banking model approachTreasury supervision would increase taxation likelihood significantlyCombined 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

  • 2013 CU EnvironmentalismTAX EXEMPTION SAFE FOR NOW, BUT MUST KEEP WATCHStill the Holy Grail issue for credit unionsBudget crisis and federal debt keeps all revenue sources on the tableObama study group has recommended its considerationGreater Treasury influence in CU affairs through corporate and insurance fund issues creates more pressureLikely would begin with bifurcated taxation structure based upon sizeWould bring about the end of credit unions as we know themWould bring about massive conversion to MSB charter if this charter remains viable because the larger CUs would be most impacted most able to convert

  • 2013 CU EnvironmentalismPLACES WHERE ITS DAWNING

  • 2013 CU EnvironmentalismFINANCIAL PERFORMANCEOver $1 trillion in assets first time in historyLargest 12 month contribution to capital in history was 9/11-9/12 $7.98 billionPre-assessment ROA of .95 is highest since 2005Loan originations hit record $244.5 billion through 9-30-12Highest first mortgage share at 6.5%3.3 million new checking accounts in the 12 months since 9-30-112,500,000 net new members since 9-30-11

  • 2013 CU EnvironmentalismTHE HISTORICAL ASSURANCE OF THE SWINGING PENDULUMToo much regulation creates unhealthy balance sheets, thus forcing a shift back toward more reasoned regulation or the regulators job becomes impossible of their own makingSupervision that is beyond that which is required stymies innovation and keeps credit unions from having flexibility to serve members and invest in themTDR proposal a positive signRegulatory and Supervisory pendulums swingthey always do (Callahan to DAmours, DAmours to Dollar)The question is not if it will swing, but when and how will credit unions be positioned when it does

  • 2013 CU EnvironmentalismCAPITAL MODERNIZATION IN SOME FORM

    HR 3993 Significant legislative vehicleWhile 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 lossesRegulatory options are not completely off the tablewould 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.

  • 2013 CU EnvironmentalismCUs CAN SEIZE MOMENT TO BECOME LEADING COMMUNITY FIsDifferentiation opportunities in tough, anti-bank and non-responsive bank marketplaceFewer community banks after current crisisBuild new areas of community oriented product growth student lending, credit cards, business services, mortgages, checking account innovationShared branching / Nationwide branding12-07 to 12-11: CU lending up 7.6%, while bank lending down 6.5% - CUs are meeting a national need2011 loan losses: consumer loans (1.15% vs 6.42%); mortgages (.64% vs 1.92%); MBLs (.65% vs 1.83%) and CUs are doing it smartly

  • 2013 CU EnvironmentalismECONOMIES OF SCALE DRIVES EFFICIENCY THRU MERGERSMergers have averaged one per business day since 2000 trend will continue and escalate with current pressuresEconomies of scale, particularly with income pressures and impact of premium assessments, will drive more mergers smaller and larger bothAlthough distressing to some, the sign of a maturing industry in a challenging timePredict 5000 credit unions by 2020, maybe before

  • 2013 CU EnvironmentalismManagement considerationsMarketplace factorsEconomies of

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