1. Industry Trends, Supervisory Concerns and The Directors/OFIS Role Addressing Them MCUL Fall Leadership Conference John J. Kolhoff, Assistant Director Michigan Office of Financial and Insurance Services

2. Agenda Industry Trends Supervisory Concerns Role of the Director and Regulator Questions

3. Industry Trends

4. Michigan credit unions remain safe and sound. Well capitalized with aggregate Net Worth to Avg. Assets of 12.17%.

6. Industry Trends Earnings trending downward from.64% at December 2006 to.30% ROA. NIM has stabilized at 4.76%. Provision for ALLL to Avg. Assets up from.39% at December 2006 to.74% at June.

8. Industry Trends Aggregate delinquency climbing from 1.08% of total loans to 1.34%. Aggregate charge offs stable at.53% of average loans. Aggregate loan delinquency up 24% from December 2006 at $281 million. First mortgage delinquency (fixed rate) up 74% to $98.5 million (or 1.20%). First mortgage delinquency (adjustable) up 51% to $12.1 million (or.48%).

11. Industry Trends Commercial RE/Construction/Land Development commitments up 381% to $32.7 million (2.6%). Total MBL delinquency up 311% to $16.8 million. Number of MI institutions down to 227 (from 250 at 12/05). Mergers are of like kind as well as small to larger institutions. Trend is expected to continue. MI has not shared in the economic improvements seen nationwide.

12. Supervisory Concerns

13. Increased credit risk due to falling property values. Lack of recognition of Commercial purpose real estate loans. Unrecognized losses due to falling market values and/or management’s perception of low credit risk. Liquidity/market risk impact on CU who are inexperienced in the product. Non traditional products slowly moving into Michigan. Real Estate Lending

14. Supervisory Concerns Lack of due diligence on new programs Lack of recognition of the more volatile market values of commercial real estate values. Lack of understanding on how the new products impact the inherent credit, liquidity, and interest rate risk of the institution. NCUA 723 compliance. Commercial Lending

15. Supervisory Concerns CU have significant connection because of their SEG based roots. Recent “geographic” FOM diversification has helped but as we know doesn’t mitigate the regional connection to employers. Credit Union Technical Assistance Program. Automotive Industry

16. Supervisory Concerns Narrowing margins and member service competition has pushed CU to diversify into more complex balance sheet products and riskier services. Some management teams have not completed appropriate due diligence, set up adequate control systems and/or demonstrated an understanding of the implication these products have on the institutions risk profile. Management

17. Supervisory Concerns Michigan Chartered CAMEL Components 3, 4 or 5 C 7 (3.1%) A 46 (20%) M 57 (25%) E 81 (36%) L 12 (5.3%)

18. Supervisory Concerns Average Credit Union Size$89.6 million Average Problem C.U. Size$38.1 million Excludes CenCorp Michigan Chartered 3, 4 or 5 Institutions

19. Director’s Role

20. Directors Role Understand the duties prescribed by the bylaws, common law, and regulations. Have an interest an ability to keep well informed about the CU. Be loyal to their office and not engage in activities adverse to the CU. Generally a Director should:

21. Directors Role Possess the integrity not to use their office for personal benefit. Be Capable of retaining confidences. Be able to evaluate facts, free from prejudices or personal interests, in reaching sound, independent decisions. Generally a Director should:

22. Directors Role Differentiate their “oversight” role from the “hands on” participation of executive management. Remember that their authority rests with the board, not with each individual director. Understand their primary responsibility to protect the members interests. Generally a Director should:

23. Directors Role Be involved in communications with auditor/examiners. Ensure Safety and Soundness and accounting deficiencies are handled appropriately. Generally a Director should:

24. Regulators Role Ensure the Safety and Soundness of the CU Industry. Ensure compliance with appropriate regulations. Ensure compliance with Board approved policies. Report to the chartering agent, insurer AND the Board of Directors findings.

25. Questions?

26. John J. Kolhoff Email: jjkolho@michigan.gov Phone No: 517-373-6930 Office of Financial and Insurance Svcs 611 West Ottawa Lansing, MI 48909