ncua update utah credit union association chairman/ceo summit october 25, 2013
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NCUA UPDATE
Utah Credit Union AssociationChairman/CEO Summit
October 25, 2013
Elizabeth A. WhiteheadNCUA Region V Director
Agenda•Financial Trends•Risks on the Horizon•Examinations, What to Expect•Regulations•Questions
NCUA Update
Risks on the Horizon
Success Story: Credit Union Industry’s Recovery
Positive Trends in U.S. Credit Unions2010 – 2013
Year-End 2009 Year-End 2010 3RD Qtr. 2012Year-End
2010Year-End
2011Year-End
20122nd-Quarter
2013
Return on Assets 0.50 % 0.67 % 0.85 % 0.85 %
Net Worth 10.06 % 10.21 % 10.43 % 10.50 %
Loan Growth - 1.4 % + 1.2 % + 4.6 % + 5.5 %
Loan Delinquencies 1.76 % 1.60 % 1.16 % 1.04 %
Net Charge-offs 1.13 % 0.91 % 0.73 % 0.58 %
Membership Growth + 0.7 % + 1.5 % + 2.2 % + 2.2 %
3
Risks on the Horizon
Your Story: Utah Credit Unions’ Performance
Trends in Utah Credit UnionsCompared to U.S. Credit Unions
Year-End 2009 Year-End 2010 3RD Qtr. 2012Year-End
2010Year-End
2011Year-End
20122nd-Qtr.
2013U.S. Credit
Unions
Return on Assets 0.07 % 0.56 % 1.20 % 1.51 % 0.85 %
Net Worth 8.3 % 8.8 % 9.4 % 9.7 % 10.50 %
Loan Growth - 10.5 % - 3.5 % + 3.9 % + 6.0 % + 5.5 %
Delinquencies 3.53 % 2.37 % 1.47 % 1.47 % 1.04 %
Net Charge-offs 1.72 % 1.53 % 1.06 % 0.56 % 0.58 %
Membership -3.5 % + 0.2 % + 4.4 % + 4.6 % + 2.2 %
Risks on the Horizon
• Interest Rate Risk• Third-Party Risks• Cyber-Security Threats• Off-Balance Sheet Risks
NCUA Update
Risks on the Horizon 6
Third-Party Risks
7
Cyber-Security Threats
• Distributed Denial-of-Service Attacks• Web Application Attacks• Computer Malware• Social Engineering Attacks
NCUA Update
Cyber-Security Fraud
• Account Takeovers• Unauthorized Funds Transfers• Credit/Debit/ATM Card Fraud• Identify Theft
NCUA Update
Off-Balance Sheet Risks
• Executive Benefits and Pension Plans–High-Risk, Non-Compliant Investments
• Money Service Businesses
NCUA Update
Risk comes from not knowing what you’re
doing.
Warren Buffet
NCUA Update
Managing Risk
Interest Rate Risk
NCUA Update
Interest Rate and Liquidity Long Term Assets, Short Term FundingEarnings at Risk When Rates RiseContingency Funding Arrangements- Interagency Policy Statement on Funding and
Liquidity Risk ManagementOTS-2010-0005
Letters to Credit Unions (4):- 00-CU-13, 01-CU-08, 03-CU-11, 10-CU-14
All references available at www.ncua.gov
Interest Rate Risk
NCUA Update
Balance Sheet Risk
NCUA Update
Poor IRR Management – Slow Heart AttackPoor Liquidity Management – Blunt
Trauma
• Gradual Decline in ROAA• Tightening Liquidity• Eventual losses• Eventual Depletion of Capital• Insolvency
• Rapid outflows/insufficient inflows • Insufficient contingent liquidity• Sale/liquidation of less liquid
underwater investments• Depletion of capital• Inability to meet current obligations
(bankruptcy)
Interest Rate Risk
NCUA Update
What are the Regulatory Requirements?
NCUA Rules and Regulations §741.3(b)(5) outlines requirements for a written interest rate risk policy and an effective interest rate risk management program.
NCUA Rules and Regulations Part 741 Appendix B provides Guidance for an IRR Policy and effective program.
Interest Rate Risk
NCUA Update
• What you can expect examiners to evaluate– Policies, procedures, decision support and internal controls consistent with
sophistication, and depth/level of potential exposure.
– Examiners will challenge your preparedness• Strong policies consistent with size, sophistication, exposure level• Make sure you can support your assumptions
– Don’t try to pass a standard set of assumptions as yours. – Whatever the assumptions are they need to tie back to your organization.
• Ensure full disclosure all the way up the line• Testing, validation and internal controls around the process
– Challenge yourself – How wide or narrow is your safe operating range?– How critical is your non-maturity deposit assumption?
• Will you survive an error in your assumptions?
Improving Consistency
• Use of Documents of Resolution (DORs)• National Supervision Policy Manual • CU Online provides District Examiner and
Supervisory Examiner Contact Info
• Pre-Examination Letter• Report Cover Letter provides info on
formal and informal appeal options
NCUA Update
Examination Report Modernization
NCUA Update
• Document of Resolution and Examiner’s Findings - Stand Alone Documents
• Only material problems in DORs with agreed-upon corrective actions and time frames
• Examiner’s Findings – less urgent problems that need to be corrected in the normal course of business
• Informal Discussion Document eliminated
Examination Report Modernization
NCUA Update
• Overview – CAMEL and risk ratings, high level discussion on CU’s risk profile, financial trends and progress correcting prior items
• Supplementary Facts – additional information, recommendations
• Status Update (new) – compliance with LUAs, PWLs.
Examination Report Modernization
NCUA Update
•Streamlined Examination Report•Better clarifies priority exam action items to be resolved•Reduces redundancy•Ensures consistency•NCUA Letter to CUs 13-CU-09
10 Things Your Examiner Will Like to See
1. Commitment to make tough choices.
2. Forward looking strategy.
3. Well developed and integrated risk management.
4. Balanced appetite for risk.
5. Incentives aligned with sustainable risk levels (Taking a long term strategic view).
6. Continuous monitoring and strong comprehensive reporting regime (Good, Bad or Ugly).
7. Strong control environment.
8. Balanced portfolio and portfolio strategy.
9. Equal weight to the downside risks in the decision making process.
10. Optimal capital deployment (Scaled to level of risk and no over-reliance).
Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis.Dr. Michael Ong
NCUA Update
Resource Reminders
AIRES Questionnaires
NCUA Update
Recent Regulations
NCUA Update
• Loan Participation Rule RR 701.22 & 741.225– Effective September 23, 2013– Originating CU keeps at least 10% ownership– Purchasing CU empowered to grant loan type• Loan complies with all regulatory requirements• Written loan participation agreement• Borrower is a member of originating or purchasing CU• Has a written participation policy• Limit at the > of $5 million or 100% net worth
– Waivers
Proposed Rules Outstanding
NCUA Update
• Proposed Rule Authorizing Charitable Donations– Parts 703 and 721– Comment Period Ends October 21, 2013
• NCUA’s Minority Depository Institution Preservation Program– IRPS 13-1– ANPR Comment Period Ended August 30, 2013
• Maintaining Access to Emergency Liquidity– Part 741 – Comment Period Ended September 2012
Proposed Rules Outstanding
NCUA Update
• Financial Derivatives Transactions to Offset Interest Rate Risk– Part 703– ANPR Comment Period Ended April 2012
• Credit Union Service Organizations (CUSOs)– Part 712 and 741– Comment Period Ended February 2012
• Proposal on Filing Financial and Other Reports - Parts 741 and 748 - Comment Period Ended August 26, 2013
Office Contact Page
Feel free to contact our office with questions or comments.
Primary Staff: NCUA Region VRegion5@ncua.gov(602) 302-6000
Secondary Staff: Mike Dyer, Associate RegionalDirector – Programs mdyer@ncua.gov(602) 302-6003
NCUA Update
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