Elizabeth A. Whitehead
NCUA Region V Director
NCUA UPDATE
Utah Credit Union Association
Chairman/CEO Summit
October 25, 2013
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Agenda
Financial Trends
Risks on the Horizon
Examinations, What to Expect
Regulations
Questions
NCUA Update
Success Story:
Credit Union Industry’s Recovery
Positive Trends in U.S. Credit Unions
2010 – 2013
2nd-Quarter
2013
Year-End
2010
Year-End
2011
Year-End
2012RD
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 %
Return on Assets
Risks on the Horizon
Year-End 2009 Year-End 2010
3
Qtr. 2012
3
Your Story:
Utah Credit Unions’ Performance
Trends in Utah Credit Unions
Compared to U.S. Credit Unions
2nd-Qtr.
2013
RD
U.S. Credit
Unions
1.20 %
1.51 %
0.85 %
8.8 %
9.4 %
9.7 %
10.50 %
- 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 %
Year-End
2010
Year-End
2011
Year-End
2012
0.07 %
0.56 %
8.3 %
Loan Growth
Return on Assets
Net Worth
Risks on the Horizon
Year-End 2009 Year-End 2010
3
Qtr. 2012
Risks on the Horizon
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Interest Rate Risk
Third-Party Risks
Cyber-Security Threats
Off-Balance Sheet Risks
NCUA Update
Long-Term Trends in Assets and Liabilities Point to
Need for Increased Interest Rate Risk Management
Percent of Assets
Percent of Deposits
1990
to
2013Q2
25
60
Non-Core Deposit Share (line) -- Right Axis
20
55
Fixed Rate RE Share (Bars) -- Left Axis
15
50
10
45
5
40
0
35
1990q4
1995q4
2000q4
Fixed Rate RE Share of Assets
2005q4
2013q2
Non-Core Deposit Share
Non-Core deposits equal total deposits minus share draft and regular shares.
Risks on the Horizon
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Third-Party
Risks
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Cyber-Security Threats
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Distributed Denial-of-Service Attacks
Web Application Attacks
Computer Malware
Social Engineering Attacks
NCUA Update
Cyber-Security Fraud
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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
Managing Risk
Risk comes from
not knowing
what you’re
doing.
Warren Buffet
NCUA Update
Interest Rate Risk
Interest Rate and Liquidity
Long Term Assets, Short Term Funding
Earnings at Risk When Rates Rise
Contingency Funding Arrangements
- Interagency Policy Statement on Funding and
Liquidity Risk Management
OTS-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
NCUA Update
Interest Rate Risk
• What is likely to happen when rates rise
– Rate will impact share rates faster and deeper than past cycles:
• Either liquidity will drain (if you don’t price competitively)
Or
• Costs to maintain stable funding will rise faster than in the past
– Asset yield will increase at a slower rate than in the past for Real
Estate/Long Term laden balance sheets.
• Yield increases will be incremental and may not keep pace with cost of
funds
– Rapid or sustained rate rises can overwhelm tight margins.
• Declining margins and cyclically worsening ROAA
• Declining liquid assets/liquidity – possibly triggering events in some credit
unions
NCUA Update
Balance Sheet Risk
Poor IRR Management – Slow Heart
Attack
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Gradual Decline in ROAA
Tightening Liquidity
Eventual losses
Eventual Depletion of Capital
Insolvency
Poor Liquidity Management – Blunt
Trauma
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Rapid outflows/insufficient inflows
Insufficient contingent liquidity
Sale/liquidation of less liquid
underwater investments
Depletion of capital
Inability to meet current obligations
(bankruptcy)
NCUA Update
Interest Rate Risk
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.
NCUA Update
Interest Rate Risk
• 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?
NCUA Update
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
• Document of Resolution and Examiner’s
Findings - Stand Alone Documents
• Only material problems in DORs with agreedupon 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
NCUA Update
Examination Report Modernization
• 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.
NCUA Update
Examination Report Modernization
• Streamlined Examination Report
• Better clarifies priority exam action items
to be resolved
• Reduces redundancy
• Ensures consistency
• NCUA Letter to CUs 13-CU-09
NCUA Update
10 Things Your Examiner Will Like to See
Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis.
Dr. Michael Ong
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Commitment to make tough choices.
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Forward looking strategy.
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Well developed and integrated risk management.
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Balanced appetite for risk.
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Incentives aligned with sustainable risk levels (Taking a long term strategic view).
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Continuous monitoring and strong comprehensive reporting regime (Good,
Bad or Ugly).
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Strong control environment.
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Balanced portfolio and portfolio strategy.
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Equal weight to the downside risks in the decision making process.
10. Optimal capital deployment (Scaled to level of risk and no over-reliance).
NCUA Update
Resource Reminders
AIRES Questionnaires
NCUA Update
Recent Regulations
• 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
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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
NCUA Update
Proposed Rules Outstanding
• 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
NCUA Update
Proposed Rules Outstanding
• 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
NCUA Update
Office Contact Page
Feel free to contact our office with questions or
comments.
Primary Staff:
NCUA Region V
Region5@ncua.gov
(602) 302-6000
Secondary Staff:
Mike Dyer, Associate Regional
Director – Programs
mdyer@ncua.gov
(602) 302-6003
NCUA Update