Tim Segerson
Office of Examination and Insurance
Office of Examination and
Insurance
About E&I and Our Look
Forward
06/06/2013
May 23, 2013
NCUA Office of Examination and Insurance
E&I Director President of
NCUSIF
Larry Fazio
Director
NGN Oversight Committee
E&I Director Chairs NGN
Oversight Committee
Administrative
Staff
Division of Risk
Management
Monitors
System Risk,
Oversees
Enforcement
and Assistance
Activities,
Monitors and
Measures
NCUSIF and
TCCUSF reserve
needs
NGN Oversight Work
Group
Tim Segerson
Deputy Director
Division of
Supervision
Oversees Exam
Program,
Resource
management,
and exam policy
and regulation
Primary FFIEC
interface
Division of Data
and Analytic
Services
Performs analysis of
data, develops and
manages models,
manages and
maintains data
systems (CU Online,
FPR) Responsible for
all official data
releases, field
support and training
in advanced
information security
Monitors, values and handles all
valuation, forecasting and assessment
levies for NGN program and
stabilization fund. Audits, validates
third party research and security
market issue maintenance
DCCM Director - President CLF
Division of Credit
and Capital Markets
Specialized
review and
analytics for
capital markets,
liquidity and
credit risk; field
support,
technical
training in
capital markets
and advanced
credit markets
Central Liquidity
Facility
Separate CLF
Operation and
Staff
Page 1
NFCDCU Baltimore 2013
2
The Alphabet Soup of E&I
Exam Policy &
Program Oversight
DOS
CLF
Central Liquidity
DRM
All things Risk Related incl.
NCUSIF and Stab. Fund
DDAS
Data Systems, Reporting,
and Financial Analysis –
ISO Field Support
E&I
Guaranteed Note
Oversight and Reporting
NGN
DCCM
Capital and Credit Market
Specialists – Field Support
NFCDCU Baltimore 2013
3
What E&I Does
Recent Enhancements
• Exam Report Cover – Contact
Info.
• NSPM
• SCUEP
• Guidance and Rulemakings
–
–
–
–
TDR
Waivers
Derivatives
IRR
NFCDCU Baltimore 2013
Some Things In the Works
• Supervisory Guidance:
–
–
–
–
Benefits Plans
NRSROs
Private Student Loans
ERM
• Exam Improvements
– DOR Consistency
– Continued Bifurcation
4
Capacity, Clarity, Consistency
• Capacity
– Examiners will evaluate capacity to manage Operational
Risk and Balance Sheet Risk.
• Clarity
– NCUA will work to improve guidance for examiners AND
credit unions.
• Consistency
– Use of Documents of Resolution (DOR’s)
– National Supervision Policy Manual
– Exam Procedures
NFCDCU Baltimore 2013
5
Forces Driving Change
Marketplace
Technology
• Information
Security
• Mobile Access
• Innovation
• “Leap-Frog"
Technologies
Competition
• Overlapping
FOMs
• Non-bank
financial
institutions
• Economies of
Scale
• Investment and
Loan Products
NFCDCU Baltimore 2013
Regulatory
Environment
Accounting
Standards
• CUMAA, 1998
• Gramm-LeachBliley, 1999
• Basel III, 2006
• Dodd-Frank,
2010
• Business
Combinations
• Fair Value
Accounting
6
The Big Picture
Change is Inevitable
For Credit Unions
For NCUA
Market/Technology Will Drive Strategies – Evolve
or Suffer the Consequences
Industry evolution/rising stakes dictates nimble,
transparent and forward looking strategies –
NCUA for 2020
•
•
•
•
•
•
•
•
3 C’s in Force
Sound Operational Controls
Balance Sheet Management
Self Sufficient Liquidity
Management
NFCDCU Baltimore 2013
Changing employee demographics
Changing CU demographics
Changing market place
Changing Technology
7
Changing Balance Sheet
Increasing Long Term Assets and Non-core Shares
Long Term Assets (in billions)
$300
26% of
Assets
$250
$200
Shares (in billions)
$900
$800
NLTA =
19% of
Assets
$700
$600
56% of
shares
Non-Core =
52% of
Shares
$500
$150
$400
$300
$100
$200
$50
$100
$0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Fixed Assets
Land & Building
Inv. > 3 years
Loans > 5 years
NFCDCU Baltimore 2013
NCUSIF deposit
$0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Drafts
Other
CDs
Regular
Non-Member
IRA
MM
8
8%
6%
4%
0%
4/30/1971
12/31/1971
8/31/1972
4/30/1973
12/31/1973
8/31/1974
4/30/1975
12/31/1975
8/31/1976
4/30/1977
12/31/1977
8/31/1978
4/30/1979
12/31/1979
8/31/1980
4/30/1981
12/31/1981
8/31/1982
4/30/1983
12/31/1983
8/31/1984
4/30/1985
12/31/1985
8/31/1986
4/30/1987
12/31/1987
8/31/1988
4/30/1989
12/31/1989
8/31/1990
4/30/1991
12/31/1991
8/31/1992
4/30/1993
12/31/1993
8/31/1994
4/30/1995
12/31/1995
8/31/1996
4/30/1997
12/31/1997
8/31/1998
4/30/1999
12/31/1999
8/31/2000
4/30/2001
12/31/2001
8/31/2002
4/30/2003
12/31/2003
8/31/2004
4/30/2005
12/31/2005
8/31/2006
4/30/2007
12/31/2007
8/31/2008
4/30/2009
12/31/2009
8/31/2010
4/30/2011
12/31/2011
8/31/2012
Can increasing balance sheet exposure become the
next crisis in credit unions?
Average Monthly Mortgage Rates 1971 - Present
20%
Source Freddie Mac
18%
9/30/1981, 18.16%
14%
Avg. Costs before PLLL = 3.89%
3.89% > 3.53%
Locking in 30 yrs.? At these
rates?
NFCDCU Baltimore 2013
30 yr Fixed Mortgage Rate
Statistics
16%
Average
Median
1971 - 2013
8.65%
8.15%
2003 - 2013
5.38%
5.71%
12%
10%
6/30/2008, 6.32%
3/31/2000, 8.24%
2/28/2013, 3.53%
Cost of Funds (0.73%)
2%
FISCU Operating Expenses (3.18%)
9
Balance Sheet Exposure of LICUs
LICUs have more ST Cash
40
35
30
25
20
15
19.80
20.45
19.28
18.75
19.56
10
5
16.80
16.10
17.30
17.49
18.50
Dec-2009
Dec-2010
Dec-2011
Dec-2012
Mar-2013
0
Cash/ST ALL FICU
Cash/ST All LICU
LICUs have More Core Type Shares
80
70
60
50
40
30
20
10
0
LICUs have Fewer LT Assets
40
35
30
46.02
49.99
47.36
49.05
50.77
25
20
26.59
28.24
29.75
27.98
30.63
15
10
36.12
Dec-2009
38.10
Dec-2010
40.50
42.74
Dec-2011
FICU Reg Shrs/Drafts
Dec-2012
LICU Reg Shrs/drafts
NFCDCU Baltimore 2013
44.36
5
Mar-2013
0
31.50
32.98
32.42
32.89
33.45
Dec-2009
Dec-2010
Dec-2011
Dec-2012
Mar-2013
FICU NLTA
LICU NLTA
10
Operational Risk
New Risks Require Enhanced Internal Controls
Old Risks require strong controls
• Fraud losses cost the industry the most of all the failures
(sometimes several multiples of reported assets)
• Internal controls, risk mitigation, and oversight
– No substitution for controls
– Multiple review levels can mitigate but not replace
– Independence
• Strong effective audit process
• Internal audits
• Oversight
NFCDCU
11
Baltimore 2013
Operational Risks – Fraud Hot Spots
•
Poor Accounting Controls/Un-reconciled Books
– Clean Records and Effectively Monitoring Financial Activity
•
Unrecorded shares
–
–
•
Segregate activity/access control
Monitor bank activity
Fictitious and Fraudulent Loans
– New loans, Charge off loans, Due Dates, Subsidiary vs Control Account.
•
Un-cleared Overdrafts
– Bank Reconcilements, general ledger reviews, access controls/override reports
•
Dormant/inactive share accounts
– Timely monitoring and clearing inactive accounts
– Control reports
•
False Expenditures
–
–
Unsupported expenditures
Budget/financial statement monitoring
NFCDCU Baltimore 2013
12
Risk Management is Key
Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis.
Dr. Michael Ong
10 Don’t’s
10 DO’s
1.
Commitment to make tough choices.
1.
Lack of commitment to risk management.
2.
Forward looking strategy.
2.
Disengaged leadership.
3.
Well developed and integrated risk
management.
3.
Concentrated organizational power.
4.
Balanced appetite for risk (like your life depended
on it).
4.
Inconsistent or weak process for complexity or risk
level.
5.
Incentives aligned with sustainable risk
levels (Taking a long term strategic view).
5.
Failure to adhere to policies and procedures.
6.
Continuous monitoring and strong
comprehensive reporting regime (Good, Bad or
6.
Appetite “creep” (Don’t rationalize – make the touch
decision).
7.
“Silver Bullets” and “Shiny Objects” (aka shortcuts).
8.
Disproportionate yields = unidentified risk (there are no
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).
Examination 2013: What to Expect
hidden secrets if you have not identified the risk – stop until you can see,
measure and control it)
9.
A state of denial (The truth of the matter is that you always know
the right thing to do. The hard part is doing it. -Norman Schwarzkopf )
10.
Misaligned incentives (poorly designed pay and
incentive plans
13
Three Credit Union Profiles
LICU = 1,675
&
$110.6 B in Assets
Small
4,515 Units - 66.9%
$64.4 B in Assets - 6.1%
$50 Million
Mid-Sized
1,465 Units - 21.7%`
$163.4 B in Assets - 15.5%
$250 Million
Large
NFCDCU Baltimore 2013
773 Units - 11.4%
$795.1 B in Assets - 78.4%
14
Resource Distribution by Asset Cohort
Share of Assets vs. Share of Exam Hours
60.00%
51%
50.00%
40%
40.00%
30.00%
27%
Hours
20%
20.00%
10.00%
Assets
26%
15%
13%
6.00%
0.00%
< $50 MM
NFCDCU Baltimore 2013
$50 MM - $250 MM
$250 MM - $1 B
> $1 B
15
What is the point?
•
Increasing Large Institutions
•
– Greater sophistication and complexity
requires different staffing approaches •
and exam approaches
– Higher impact to the national NCUSIF
•
Limited/Scarce Resources
– Stakeholder Value
– Consumer/System Protection
•
Leverage technology to optimize
efficiency
Modernize Regulatory and Supervisory
Framework
–
–
Consistency
Flexibility
Specialization
–
–
Rent v Buy
Diversify Oversight/Program Management
Modernization
NFCDCU Baltimore 2013
16
Office Contact Page
Feel free to contact our office with questions or
comments.
Primary Staff:
Tim Segerson, Deputy Director
segerson@ncua.gov
Office Phone:
NFCDCU Baltimore 2013
703-518-6397
17