Essential Financial Literacy Education: Resources to · PDF fileEssential Financial Literacy Education: Resources to Keep ... 2 ©2012 CliftonLarsonAllen LLP ... member of the American

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Essential Financial Literacy Education: Resources to Keep Your Credit Union Compliant

Presented for the National Association of Federal Credit Unions

May 9th, 2012

©2012 CliftonLarsonAllen LLP 2

Speaker’s Biography – Greg Schwartz

• Greg Schwartz, CPA, CMA, is a principal in the Financial Institution Credit Union Group of CliftonLarsonAllen. Greg has been auditing credit unions for 25 years and his areas of expertise include audit and supervisory committee agreed-upon procedure engagements, GAAP and GAAS issues related to credit unions, supervisory committee issues, and review and evaluation of internal audit functions.

• Greg has worked with hundreds of credit unions all over the country and is considered an expert on credit union audit and accounting issues. He has made numerous presentations to credit union boards, supervisory committees and management on a variety of accounting and credit union issues.

• Greg graduated from Minnesota State University, Mankato, with a Bachelor of Science in Accounting and a minor in Computer Science. He is a CPA and a member of the American Institute of Certified Public Accountants (AICPA) and the AICPA credit union conference planning committee.


Agenda

• Introductory Overview (10 minutes)

• Best Practice Ideas (70 minutes)

• Wrap-up and Questions (10 minutes)


Introductory Overview

• NCUA Regulation 701.4, Issued February 2011

• Issued as a 5 page LCU

• Had 6 main parts


Reg 701.4 – 6 Parts

• Part 1 – Delegating Responsibility

• Part 2 – Good Faith Effort

• Part 3 – Impartial

• Part 4 – Financial Literacy

• Part 5 – Rules and Sound Business Practices

• Part 6 – Information from employees


Reg 701.4 – 6 Parts

• Part 1 – Delegating Responsibility

• Part 2 – Good Faith Effort

• Part 3 – Impartial

• Part 4 – Financial Literacy • Part 5 – Rules and Sound Business Practices

• Part 6 – Information from employees


Reg 701.4 – Financial Literacy

• Definition: A director must have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the credit union’s balance sheet and income statement and the ability to ask, as appropriate, substantive questions of management and auditors.


Reg 704.1 – Industry response

• Seminars

• Webinars

• Webcasts

• Workshops

• Boot Camps

• In-house training

• On-line training



• Which was the Best?



• They all were

“…it’s not so much where you are but what direction you are heading” …Oliver Wendell Homes

Significant focus on:

1. understand the credit union’s balance sheet and income statement and the ability

2. Understanding ratios


What did we learn?

• This is a process not an event

• We can do the bare minimum or we can do it to extract the maximum value

• There are certain “Best Practice” concepts, as follows:


“Best Practice” concept 1

• Understand Risk

We need financial literacy to manage risk

Or

Understanding risk improves financial literacy


Risk Categories

• Risk is the potential that an event, expected or unanticipated, may have an adverse effect on the credit union's net worth and earnings. The categories of risk for credit union supervision purposes are:

◊ Credit

◊ Interest Rate

◊ Liquidity

◊ Transaction

◊ Compliance

◊ Strategic

◊ Reputation

• Any product or service may expose the credit union to multiple risks; these categories are not mutually exclusive.


Credit Risk

• Credit risk is the current and prospective risk to earnings or capital arising from an obligor's failure to meet terms of any contract with the credit union or otherwise fail to perform as agreed.

• Credit risk exists in all activities where the credit union invests or loans funds with the expectation of repayment.


Credit Risk Examples

• Private Label Securities

• 2nd Mortgages

• Corporate Credit Union Capital Accounts

• TDR’s

• All lending – the key is to manage it


Interest Rate Risk

• Interest rate risk is the risk that changes in market rates will adversely affect a credit union's capital and earnings


Interest Rate Risk - Example

• Current market rates – what happens when they go up?


Liquidity Risk

• Liquidity risk is the current and prospective risk to earnings or capital arising from a credit union's inability to meet its obligations when they come due, without incurring material costs or unacceptable losses.


Liquidity Risk - Examples

• Capital Corporate Credit Union

• NCUA Guarantee of Corporate Credit Union accounts


Transaction Risk

• Transaction risk is the risk to earnings or capital arising from fraud or error that results in an inability to deliver products or services, maintain a competitive position, or manage information.


Transaction Risk - Example

• Fraud


Compliance Risk

• Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards.


Compliance Risk - Examples

• Of the 7,600 credit unions, approximately 5,000 are operating under a DOR or LUA.

• Interest rate resets

• UBIT


Strategic Risk

• Strategic risk is current and prospective risk to earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes.


Strategic Risk – Examples

• ATM

• Overbuilt Brick and Mortar

• Internet


Reputation Risk

• Reputation risk is current and prospective risk to earnings or capital arising from negative public opinion or perception.


Reputation Risk - Examples

• Losing member data

• Bad press


Risk Catagories

◊ Credit

◊ Interest Rate

◊ Liquidity

◊ Transaction

◊ Compliance

◊ Strategic

◊ Reputation


What do we do with Risk

• Identify

• Measure

• Control


Risk Identification

• Past due loans – an indication of loss (Credit)

• Member survey – an indication of service (Strategic)

• Teller cash counts – an indication of loss (Transaction)


Risk Measurement

• Past due loans – start monitoring at 60 days (Credit)

• Member survey – investigate scores below 80 (Strategic)

• Teller cash counts – investigate over/short $5 (Transaction)


Risk Control

• Past due loans – nonaccrual at days (Credit)

• Member survey – performance evaluation at 50 (Strategic)

• Teller cash counts – terminate if over $100 (Transaction)


Material Loss Review - OIG

• Office of Inspector General does a Material Loss Review of significant losses to the insurance fund.



• US Central Credit Union

“Did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of the mortgage-backed securities held in the investment portfolio.”



• WesCorp

“and left WesCorp increasingly vulnerable to significant credit risk, market risk, and liquidity risk through the portfolio‘s exposure to economic conditions in the residential real estate sector.”



• Ensign Credit Union

“We determined Ensign failed because its Board of Directors and management did not implement appropriate risk management practices related to concentration and credit risks.”



• Clearstar

“We concluded Clearstar failed because its Board and management did not implement proper risk management policies and procedures related to credit and concentration risk.”



Clean-up the Financial Literacy “stuff”

• Board packets contain way too much detail information

• Many contain schedules or analysis that no one can remember where it came from


Board Packets

• Only relevant information

• Only summary information

• Make it visual


Not Visual

• Jan 1.30 1.55

• Feb 1.38 1.30

• Mar 1.47 1.10

• Apr 1.56 1.20

• May 1.62 1.22

• June 1.71 1.28

• July 1.73 1.28

• Aug 1.70 1.37

• Sept 1.70 1.25

• Oct 1.69 1.19

• Nov 1.67 1.11

• Dec 1.58 1.04


Visual


Visual


Non Visual

Listings Directory

• ALL | NYSE | NYSE ARCA | NYSE EURONEXT | NYSE ALTERNEXT Overview Name Region Industry To view an alphabetical list of listed companies, select a letter. A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Other NYSE Technologies Global Market Data | as of 17:40 ET 01 May 2012 | Market data delayed

• Name Symbol Listing Last Trade Date/Time Volume Change % Change

• A. M. Castle & Co. CAS NYSE $ 12.80 01May12 16:02 ET 396,043 $ 0.59 4.40

• A. O. Smith Corporation AOS NYSE $ 47.65 01May12 17:23 ET 647,150 $ 0.05 0.10

• A.H. Belo Corporation AHC NYSE $ 4.27 01May12 16:36 ET 140,983 $ 0.14 3.17

• A.S.T. GROUPE ASP Euronext-PAR € 4.70 30Apr12 09:59 CET 1,107 € 0.00 0.00

• AAG Holding Company, Inc. GFW NYSE $ 25.46 01May12 15:56 ET 8,574 $ 0.01 0.03

• AAG Holding Company, Inc. GFZ NYSE $ 25.28 01May12 15:59 ET 10,019 $ 0.08 0.31

• AAR Corporation AIR NYSE $ 15.31 01May12 16:00 ET 458,017 $ 0.14 0.90

• Aaron's Inc. AAN NYSE $ 27.38 01May12 16:03 ET 476,922 $ 0.21 0.77

• ABB LTD. ABB NYSE $ 18.26 01May12 16:05 ET 3,004,206 $ 0.10 0.54

• Abbott Laboratories ABT NYSE $ 62.23 01May12 16:02 ET 6,149,396 $ 0.17 0.27

• ABC ARBITRAGE ABCA Euronext-PAR € 6.91 30Apr12 17:35 CET 26,196 € 0.01 0.14

• Abercrombie & Fitch ANF NYSE $ 53.02 01May12 16:00 ET 4,368,672 $ 2.85

http://www.nyse.com/about/listed/lc_ny_overview.html

http://www.nyse.com/about/listed/lc_ar_overview.html

http://www.nyse.com/about/listed/lc_eu_overview.html

http://www.nyse.com/about/listed/lc_al_overview.html

http://www.nyse.com/about/listed/lc_all_overview.html

http://www.nyse.com/about/listed/lc_all_region.html

http://www.nyse.com/about/listed/lc_all_industry.html

http://www.nyse.com/about/listed/lc_all_name_B.html

http://www.nyse.com/about/listed/lc_all_name_C.html

http://www.nyse.com/about/listed/lc_all_name_D.html

http://www.nyse.com/about/listed/lc_all_name_E.html

http://www.nyse.com/about/listed/lc_all_name_F.html

http://www.nyse.com/about/listed/lc_all_name_G.html

http://www.nyse.com/about/listed/lc_all_name_H.html

http://www.nyse.com/about/listed/lc_all_name_I.html

http://www.nyse.com/about/listed/lc_all_name_J.html

http://www.nyse.com/about/listed/lc_all_name_K.html

http://www.nyse.com/about/listed/lc_all_name_L.html

http://www.nyse.com/about/listed/lc_all_name_M.html

http://www.nyse.com/about/listed/lc_all_name_N.html

http://www.nyse.com/about/listed/lc_all_name_O.html

http://www.nyse.com/about/listed/lc_all_name_P.html

http://www.nyse.com/about/listed/lc_all_name_Q.html

http://www.nyse.com/about/listed/lc_all_name_R.html

http://www.nyse.com/about/listed/lc_all_name_S.html

http://www.nyse.com/about/listed/lc_all_name_T.html

http://www.nyse.com/about/listed/lc_all_name_U.html

http://www.nyse.com/about/listed/lc_all_name_V.html

http://www.nyse.com/about/listed/lc_all_name_W.html

http://www.nyse.com/about/listed/lc_all_name_X.html

http://www.nyse.com/about/listed/lc_all_name_Y.html

http://www.nyse.com/about/listed/lc_all_name_Z.html

http://www.nyse.com/about/listed/lc_all_name_Other.html

http://www.nyxdata.com/

http://www.nyxdata.com/

http://www.nyse.com/about/listed/cas.html

http://www.nyse.com/about/listed/aos.html

http://www.nyse.com/about/listed/ahc.html

http://www.euronext.com/trader/summarizedmarket/stocks-2593-EN-FR0000076887.html?selectedMep=1

http://www.nyse.com/about/listed/gfw.html

http://www.nyse.com/about/listed/gfz.html

http://www.nyse.com/about/listed/air.html

http://www.nyse.com/about/listed/aan.html

http://www.nyse.com/about/listed/abb.html

http://www.nyse.com/about/listed/abt.html

http://www.euronext.com/trader/summarizedmarket/stocks-2593-EN-FR0004040608.html?selectedMep=1

http://www.nyse.com/about/listed/anf.html


Extreme Visual



Significant focus on:

1. understand the credit union’s balance sheet and income statement and the ability

2. Understanding ratios



• Train and practice key ratio literacy with your credit unions specific goals in mind:


Capital Restoration

• Capital ratios

• Income ratios

• ALM tests


Earnings Growth

• Spread analysis

• Operating expense ratios


Growth

• Average balance growth

• New member growth



• Understand the Control Structure


Roles and Responsibilities: Management

• The Chief Executive Officer (top manager) of the organization has overall responsibility for designing and implementing effective internal control.

• More than any other individual, the chief executive sets the "tone at the top" that affects integrity and ethics and other factors of a positive control environment.


Roles and Responsibilities: Board of Directors

• Management is accountable to the board of directors, which provide governance, guidance and oversight.

• Effective board members are objective, capable, and inquisitive.

• They have knowledge of the entity's activities and environment, and commit the time necessary to fulfill their board responsibilities.


Internal Controls

• Preventative vs. Detective Controls

Approvals

Reconciliations

Passwords

Limits

Policy


Internal Controls

• Segregation of Duties

No one individual handles a transaction from beginning to end



• Extend the Financial Literacy movement to other reports

5300

Tax Returns (990 990T)


NCUA Form 5300 and Tax returns

• Who at the credit union prepares?

• Who reviews ?

• Do we take any controversial positions?



• Extend Financial Literacy to other financial processes

Budgeting

ALM

Complying with Credit Union Regulations

Complying with Consumer Regulations


701.4 Part 5

• A director must direct the operations of the federal credit union in conformity with the Federal Credit Union Act, NCUA’s Rules and Regulations, other applicable laws, and sound business practices


Budgeting – Old Goal

• 1% ROA


Budgeting – Goals Today

• Much lower ROA – not necessarily our optimum goal

• Capital Restoration

• Smaller credit unions – growth to a critical mass

• Recover impaired assets

• Survival

Know the Goals


Budgeting – Board Responsibility

• The primary responsibility of the board is to approve a budget that will achieve the organization’s goals while understanding the risks assumed in that budget


Budgeting – Does the Budget…

• Plan increases in higher-risk loans?

• Plan increases in higher-risk investments?

• Plan expansion into new member groups?

• Plan expansion into new geographies?

• Plan streamlining the loan origination process?



• Plan increases in higher risk loans?

• Plan increases in higher risk investments?

• Plan expansion into new member groups?

• Plan expansion into new geographies?

• Plan streamlining the loan origination process?

We are taking on additional Credit Risk



• Anticipate an overly optimistic rate environment?

• Anticipate overly optimistic loan and deposit growth?



• Anticipate an overly optimistic rate environment?

• Anticipate overly optimistic loan and deposit growth?

We are taking on additional Interest Rate Risk



• Anticipate the ability to always obtain cheap borrowings?

• Anticipate the ability to always sell investments near par?

• Anticipate the ability to always originate high-rate loans?



• Anticipate the ability to always obtain cheap borrowings?

• Anticipate the ability to always sell investments near par?

• Anticipate the ability to always originate high-rate loans?

We are taking on additional Liquidity Risk



• Reduce internal audit resources?

• Reduce external audit resources?

• Reduce personnel resources to the point that control activities are reduced?

• Reduce insurance coverage?

• Not emphasize internal controls?



• Reduce internal audit resources?

• Reduce external audit resources?

• Reduce personnel resources to the point that control activities are reduced?

• Reduce insurance coverage?

• Not emphasize internal controls?

We are taking on additional Transaction Risk



• Not address the current business environment?

• Rely on old business models that do not work?

• Not consider new business models that may be the future?

• Not consider the infrastructure needed to achieve goals?

• Not consider the personnel resources needed to achieve goals?



• Not address the current business environment?

• Rely on old business models that do not work?

• Not consider new business models that may be the future?

• Not consider the infrastructure needed to achieve goals?

• Not consider the personnel resources needed to achieve goals?

We are taking on additional Strategic Risk



• Reduce controls over member data?

• Reduce resources devoted to safety and security?

• Reduce expenditures for new technology?

• Reduce expenditures over security training?



• Reduce controls over member data?

• Reduce resources devoted to safety and security?

• Reduce expenditures for new technology?

• Reduce expenditures over security training?

We are taking on additional Reputation Risk


ALM - Board Responsibilities

• Responsible for adopting a policy statement

• Responsible for establishing and approving policy limits

• Responsible for overseeing implementation of management responsibilities

• Responsible for periodic review of compliance with the credit union’s policy limits and management controls



• Make Financial Literacy forward looking

IFRS

NCUA Rules and Regs



• Extend Financial literacy training to all volunteers



• Make Financial Literacy training a “process”


Thank You

Greg Schwartz, CPA

[email protected]

Documents

Essential Financial Literacy Education: Resources to · PDF fileEssential Financial Literacy Education: Resources to Keep ... 2 ©2012 CliftonLarsonAllen LLP ... member of the American