Credit Union System Challenges and Opportunities Jeff Post CEO CUNA Mutual Group

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Credit Union SystemChallenges and
OpportunitiesJeff PostCEO CUNA Mutual Group

• August 1, 2006

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CU System OverviewIntroduction

• The U.S. Credit Union system is dominated by 3
  fundamental trends
• Consolidation
• Concentration
• Increasing Competition
• These trends are stable, long-term and not likely
  to change
• Any successful strategy must identify
  opportunities within the context of these trends
• A fourth C Conversion might emerge as a
  major trend soon

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Strategic ChallengesSystem Consolidation
Number of Credit Unions
Forecast
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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CU System OverviewConsolidation CUs and
Community Banks
of Institutions
of Credit Unions
of Community Banks
Community Banks Assets less than 1 billion
Source CUNA Economics Statistics, and FDIC and
estimates for CUNA Mutual
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Strategic ChallengesSystem Consolidation
Thousands of Credit Unions
Losing a credit union a day!
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesSystem Concentration

• Credit Unions With Assets of 100 Million and
  Above

Market Share ()
490
801
1,235
1,599
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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CU System OverviewSystem Concentration EOY 2005
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CU System OverviewSystem Concentration

• The trend towards the mega-Credit Union will
  continue
• By 2012 the U.S. CU system is projected to have
  199 CUs with assets greater than 1 billion
• The billion dollar CUs will control
• 51 of total CU system assets
• 42 of total CU members
• An additional 800 CUs will have between 200
  million and 1 billion in assets
• 33 of total CU system assets
• 35 of total CU members

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CU System OverviewIncreased Competition

• Each year powerful new competitors enter the
  retail financial services market targeting
  mid-market customers
• Online price discounters (ING Direct, GE Money
  Bank)
• Point of sale retailers (Wal-Mart, Home Depot)
• Insurance companies (State Farm Bank)
• Many of these entrants target the underbanked
• Wal-Mart offers check cashing, bill payment,
  money orders, remittances
• GE offers low-limit credit cards and checking
  accounts
• Each competitor targets only those products and
  segments where it can be most profitable
• In many cases they aim for the CU markets best
  customers

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Our Evolving Industry
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CU System OverviewCompetitor Case Study

• ING Direct
• U.S. subsidiary of Dutch bank - founded 2001
• In 5 years has become the U.S. largest
  standalone Internet bank
• 51 billion in assets
• 3 million customers
• 37 billion in deposits
• Pre-tax profits in 2004 159 million
• Business model is simple and straightforward
• Focus on do-it-yourself consumers one product
  at a time
• Offer good rates based upon low cost structure
• Fire customers that demand too much

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Capital Market Realities
Consumer Installment Credit
in Billions
588
1988 Consumer Installment Credit 88 Billion
CUs 29 Billion Securitized Pools
215
Source Federal Reserve Statistical Release G.19
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Capital Market Realities
Consumer Financial Assets
in Billions
8,106
Number of Funds
1975 Assets 38 Billion CUs 46 Billion
Mutual Funds
668
Source CUNA Economics Statistics and
Investment Company Institute
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CU System OverviewKey Questions to Consider

• CU Members comprise 30 of the U.S. population
  but Credit Unions hold only 2.2 of U.S.
  household financial assets
• What can CUs do to gain greater share of the
  Members wallet?
• What must CUs do to become/remain relevant in the
  face of strong competition?
• How can we work together to find a solution to
  the competitive challenges?
• Is it possible to compete successfully without
  achieving operational scale?
• How urgent is the current situation?

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Strategic ChallengesSlowing Member Growth Rate

• One of the greatest challenge facing CUs is the
  difficulty in attracting new members
• Member growth rate is well below the long-term
  average
• Problem is more pronounced among community
  charter CUs
• Deteriorating SEG relationships also pose a major
  problem
• CUs have largely failed to attract the youth
  market
• Changing member demographics and
  borrowing/savings patterns are also an issue

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Strategic ChallengesSlowing Membership Gains
Millions of Members
Forecast
10 Year Average 1.8 Million
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesSlowing Membership Growth
Percent
Forecast
10 Year Average 2.3
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesMember Relationship Depth -
Savings
Savings per Member (bars)
2005 Savings/Member 6,851
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesMember Relationship Depth -
Savings
Savings per Member (bars)
Change in Savings/Member (line)
2005 Savings/Member 6,851
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesMember Relationship Depth -
Borrowing
Loans per Member (bars)
2005 Loans/Member 5,449
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesMember Relationship Depth -
Borrowing
Loans per Member (bars)
Change in Loans/Member (line)
2005 Loans/Member 5,449
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesChanges in Source of Lending
Gains
Billions
45.5
40.5
33.3
30.4
26.7
24.4
21.7
21.5
18.4
16.6
13.8
60
73
67
63
64
42
42
54
75
52
25
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesChanges in Source of Member
Vehicle Gains
Percent of 2005 Total Member Increase
Percent of 2005 Total Vehicle Increase
4
30
70
96
Indirect
Indirect
Source CUNA Economics Statistics, NCUA 5300
and CUNA Mutual 2006 Forecast
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• Indirect Share of 2005
• Lending Gains and Loan Portfolios

Indirect Share of 2005 Gain
Indirect Share of 2005 Portfolio
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• Total Indirect Loans Outstanding
• at Credit Unions
• Nominal and Real Growth

Percent
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• 1st Mortgage Loans Outstanding
• at Credit Unions
• Nominal and Real Dollars

in Billions
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• 1st Mortgage Loans Outstanding
• at Credit Unions
• Nominal and Real Growth

Percent
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Strategic Challenge Remaining RelevantAge
Distribution Members and Non Members
Source CUNAs 2006-2007 National Member Survey
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Strategic Challenges Remaining RelevantCU
Member Age Distribution 1996-2006
2006
1996
Source CUNAs 2006-2007 National Member Survey
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Credit Unions Percentage of Adult MembersAge 25
to 44 1985 to 2006
Peak Borrowing Years Declining Share of Members
Source CUNA National Member Survey Reports and
CUNA Member Statistics
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Strategic ChallengesIncreasing Financial Pressure

• CUs face increasing financial pressures from many
  directions
• Declining mortgage lending rates
• Reliance on indirect auto loans
• Deteriorating savings growth rates
• Declining Net Interest Margin
• Increasing operating costs
• The combined effect has been a deterioration in
  average ROA
• Many of the issues facing CUs are common to all
  retail financial services firms

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Current Trends in Retail Financial Services

• The Corporate Executive Board recently identified
  these key trends in financial services
• NIM has declined by about 10 over the past 8
  years.
• Aggressive increases in fee revenue have not
  fully compensated for declining interest income.
• Mortgage volumes are decreasing.
• Firms are earning less for each incremental
  dollar of household balances.
• Rapid product innovation has led to accelerated
  commoditization.
• Only 1/3 of executives believe they have
  successfully differentiated in the past 5 years.
• More than 90 believe that they can differentiate
  by improving the quality of the customer
  experience.

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Strategic Challenges - GrowthTotal Credit Union
Assets
in Billions
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic Challenges - GrowthTotal Credit Union
Loans
in Billions
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Commoditization in Consumer Financial
ServicesGross Spread Under Pressure
Basis Points
319
Source CUNA Economics Statistics and NCUA 5300
Call Report
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Commoditization in Consumer Financial
ServicesIncreasing Cost of Member Diversity
Operating Expenses to Total Income
51
35
Source CUNA Economics Statistics and NCUA 5300
Call Report
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Commoditization in Consumer Financial Services
Expenses / Total Income
Operating Expenses to Total Income
All Other CUs 61.2
Next 800 54.7
Top 200 43.5
Source NCUA 5300 and CUNA Mutual
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Commoditization in Consumer Financial Services
Expenses / Average Assets On the Rise
Operating Expenses to Average Assets
All Other CUs 3.96
Next 800 3.57
Top 200 2.71
Source NCUA 5300 and CUNA Mutual
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Commoditization in Consumer Financial Services
Limited Fuel for Growth
ROA
0.81
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Commoditization in Consumer Financial Services
Not Purely a Spread Business Model
ROA
0.81
ROA less Fees and Other Income
-0.38
Source CUNA Economics Statistics and NCUA 5300
Call Report
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Commoditization in Consumer Financial Services
Cost of Funds to Rise
Net Total Savings 21.7 Bln. (3.8)
in Billions
IRAs 1.6 Bln.
CDs 26.5 Bln.
Share Drafts 5.1 Bln.
Regular Shares -7.7 Bln.
Money Markets -3.9 Bln.
Source CUNA Economics Statistics and CUNA
Mutual 2006 Forecast
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Strategic ChallengesLack of Scale in the U.S. CU
System

• Many global financial cooperatives outside the CU
  system have learned to combine scale and the
  cooperative spirit
• Rabobank One of the worlds 25 largest banks
  with 600 billion in assets and 9 million
  customers.
• Desjardins 87 market share in Quebec
  complete vertical integration.
• Raiffeisen Bank More than 1 trillion in assets
  in Germany and Austria.
• French Financial Cooperatives Control more than
  50 of the retail financial services market.

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What is the future of the U.S. CU System?
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Credit Union SystemChallenges and
OpportunitiesJeff PostCEO CUNA Mutual Group

• August 1, 2006