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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

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  1. Credit Union Environmentalism… An Insider’s Perspective on Where Regulation, Legislation and Marketplace Factors are TakingAmerica’s Credit Unions in 2013 and Beyond Presentation By: Dennis Dollar, Former NCUA Chairman and Principal Partner, Dollar Associates, LLC Utah Credit Union Association Salt Lake City, UT – March 8, 2013

  2. 2013 CU Environmentalism PLACES WHERE IT’SSTORMING…

  3. 2013 CU Environmentalism 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

  4. Summary of Trends Report

  5. 3241 Credit Unions Reported Membership Declines in 201246% of all credit unions!!! 2013 CU Environmentalism

  6. 2013 CU Environmentalism 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

  7. 2013 CU Environmentalism 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

  8. 2013 CU Environmentalism PLACES WHERE IT’SRAINING…

  9. 2013 CU Environmentalism MISSED MARKETPLACE OPPORTUNITIES • 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.

  10. 2013 CU Environmentalism 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

  11. 2013 CU Environmentalism PLACES WHERE IT’SCLOUDY…

  12. 2013 CU Environmentalism CFPB 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

  13. 2013 CU Environmentalism LEGISLATIVE 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

  14. 2013 CU Environmentalism LOSS OF INDEPENDENT REGULATOR/INSURER ALWAYS LOOMING • 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

  15. 2013 CU Environmentalism TAX EXEMPTION SAFE FOR NOW,BUT 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

  16. 2013 CU Environmentalism PLACES WHERE IT’SDAWNING…

  17. 2013 CU Environmentalism FINANCIAL 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

  18. 2013 CU Environmentalism THE HISTORICAL ASSURANCE OF THE SWINGING 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

  19. 2013 CU Environmentalism CAPITAL MODERNIZATION IN SOME FORM • 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.

  20. 2013 CU Environmentalism CUs CAN SEIZE MOMENT TO BECOME LEADING 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

  21. 2013 CU Environmentalism ECONOMIES OF SCALE DRIVES EFFICIENCY 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

  22. 2013 CU Environmentalism FACTORS DRIVING MERGERS • Management considerations • Marketplace factors • Economies of scale • Financial performance • Member demands • Regulatory compliance • Stagnant member & product growth

  23. 2013 CU Environmentalism 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

  24. 2013 CU Environmentalism NCUA’S 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

  25. 2013 CU Environmentalism 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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