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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…
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
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
$663.01 $663.01 billionbillion
Average AssetsAverage Assets $3.99 million$3.99 million $36.54 $36.54 millionmillion
$222.27 $222.27 millionmillion
$1.64 $1.64 billionbillion
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%
2013 CU Environmentalism
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!!!
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
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
2013 CU Environmentalism
PLACES WHERE PLACES WHERE ITIT’’SS
RAINING…RAINING…
2013 CU Environmentalism
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.
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
2013 CU Environmentalism
PLACES WHERE PLACES WHERE ITIT’’SS
CLOUDY…CLOUDY…
2013 CU Environmentalism
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
2013 CU Environmentalism
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
2013 CU Environmentalism
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
2013 CU Environmentalism
PLACES WHERE PLACES WHERE ITIT’’SS
DAWNING…DAWNING…
2013 CU Environmentalism
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
2013 CU Environmentalism
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
2013 CU Environmentalism
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.
2013 CU Environmentalism
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
2013 CU Environmentalism
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
2013 CU Environmentalism
Management considerations Marketplace factors Economies of scale Financial performance Member demands Regulatory compliance Stagnant member & product growth
FACTORS DRIVING MERGERS
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
2013 CU Environmentalism
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
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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