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

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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

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Off-Balance Sheet Risks

• Executive Benefits and Pension Plans–High-Risk, Non-Compliant Investments

• Money Service Businesses

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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