22nd Annual Conference
Association of Credit Union Internal Auditors
June 22, 2012
“What Will NCUA Look For in 2012-13?”
NCUA Hot Topics
 Recent Trends
 Risk Concentrations
• Credit Risk
• Interest Rate Risk
 Third Party Due Diligence
• Credit Union Service Organizations (CUSOs)
 Other Examination Focus Areas
2
Recent Trends
3
Performance Snapshot
December
2010
December
2011
March
2012
Number of
FICUs
7,339
7,094
7,019
Total Assets
$914.3 billion
$961.8 billion
$1,001.8 billion
Total Shares
$786.4 billion
$827.4 billion
$866.0 billion
Total Loans
$564.7 billion
$571.5 billion
$572.0 billion
ROAA incl. SF
Excl. SF
.50%
.67%
.72%
.88%
.84%
.89%
Delinquency
Loan Losses
1.76%
1.13%
1.60%
.91%
1.44%
.78%
Net Worth
Ratio
10.06%
10.23%
10.01%
Current
Members
90.5 million
91.8 million
92.5 million
 Strong Share Growth
 Loan Growth Turned





4
Positive in 2011
Improved Earnings
Declining Delinquency
and Losses
Strong Net Worth
Positive Member
Growth
Over $1 Trillion in
Assets
Net Worth (Capital) Levels
14
12
11.5
11.4
9.9 10.2
10
8
6.8
6.3
6
4
2
0
5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0
1
2
3
4
5
6
7
8
9 10 11
Earnings Performance
1.40%
55.0%
50.2%
1.20%
45.0%
1.03%
1.00%
0.82%
0.80%
0.68%
0.60%
0.40%
0.20%
31.7% 35.0%
10.8%
9.8%
-0.02%
0.00%
25.0%
15.0%
5.0%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11
-0.20%
-5.0%
ROA
6
% of CUs Unprofitable
Credit Union Lending Activity
90
18
83.1
80
14
70
Credit unions continued to lend
during the recession.
60
69.07
12
10
50
8
40
6
30
4
20
2
10
0
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0
Loan Growth
7
16
1
2
3
Loan to Share Ratio
4
5
6
7
8
9 10 11
-2
Problem Credit Union Trends
6.0%
5.0%
5.6%
5.4%
5.4%
5.1%
4.0%
3.1%
3.0%
2.0%
1.0%
0.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
CAMEL 4&5 >$1B % Total Shares
8
CAMEL 4&5 CU % All Cus
CAMEL 4&5 CU % Total Shares
CAMEL 3 Trends
45%
40%
39.2%
35%
30%
26.1%
24.8%
25%
20%
17.5%
17.6%
15%
10%
5.0%
5%
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Code 3 CU % Total Cus
9
Code 3 Shares % Total Shares
NCUSIF Performance
1,100
1.30
1.20
900
700
NCUSIF
Capitalized with
1% Deposit
1.00
0.80
500
Transfer to
Stabilization
Fund
300
0.20
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11
-300
10
0.60
0.40
100
-100
1.40
0.00
-0.20
Premium/(Dividend)
Equity Ratio
Risk Concentrations
11
Risk Concentrations
 Concentration in Real Estate Assets (47%)
 Strong Growth in Mortgage Related Assets
 High Concentration of Assets and Net Worth
 Increasing Reliance on Volatile Funding
 Money Market Accounts
 Certificates
 Short term borrowing
 NCUA Letter to Credit Unions 10-CU-03
 Establish policies, procedures and controls
 Establish acceptable risk limits
 Review reports on risk exposure regularly
 Establish actions to take when risk limits are reached
12
The Changing Balance Sheet
Real Estate Loan
Concentration (% loans)
Decreasing
Asset
Diversity and
Price
Flexibility
(Net Long Term Assets)
Untested
Balance Sheet
Structure
39%
55%
23%
Increase in Volatile Funding
(MMA & Certs)
32%
Increasing Reliance on Fee
Income
(May Challenge for Member Focused
Competitive Edge)
Growing
Long Term
Assets at
Historically
Low Rates
41%
13
Long Term Asset
Concentration
12/31/00
12/31/11
48%
65%
84%
Increasing
Volatility of
Funding
Sources
Growing Concentration of Real Estate Related Assets
47% Assets
459% NW
500
48% Assets
464% NW
450
400
Billions
350
300
35% Assets
317% NW
250
200
150
100
50
0
14
Participations
12/31/2004
6,277,684,561
12/31/2008
11,069,737,648
12/31/2011
13,007,806,940
MBLs
12,316,390,232
30,191,139,173
37,273,325,248
RE Mortgage Backed Investments
12,676,657,904
46,925,425,275
87,306,750,394
RE Mortgages
192,113,567,173
304,539,689,008
312,930,397,263
Credit Risk Trends
1.8%
1.9%
1.7%
1.7%
1.6%
1.5%
1.3%
1.2%
1.1%
0.9%
0.7%
0.7%
0.6%
1.1%
0.5%
0.5% 0.4%
0.9%
0.5%
0.3%
0.3%
0.1%
-0.1%
90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11
PLLL Exp to Avg Assets
15
Delinquency
Net Charge Offs
Delinquency by Loan Type
4.5%
4.2%
4.0%
3.8%
3.5%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.0%
1.9%
1.3%
1.6%
1.2%
1.2%
0.9%
1.0%
0.7%
0.5%
0.0%
Credit Cards
Real Estate
MBLs
2007
16
Indirect
2011
Participations
Total
Troubled Debt Restructuring
 New Rule Finalized May 2012
 Allows calculation of past due status consistent with loan terms.
made through TDR. Thus eliminates delinquency tracking
burden on TDR loans.
 Requires policies and controls governing workout arrangements
 Requires credit unions discontinue interest accrual on loans past
due by 90 days or more and establish requirements to return
such loans to accrual.
 Compliance Date October 1, 2012
17
Interest Rate Risk
 Rule finalized January 2012
 Effective September 30, 2012
 Applies to:
 Assets $10 to $50 million if sum of first mortgage loans held
and investments with maturity over five years is equal to or
greater than 100% of credit union’s net worth; and
 All credit unions with assets over $50 million
 See LCU 12-CU-05
18
≈450
bps!
19
Third Party Due Diligence
20
Third Party Due Diligence
 Steps involved in due diligence
 Background check
 Business Model
 Cash Flows
 Financial and Operational Control Review
 Contract Issues and Legal Review
 Accounting Considerations
 NCUA Guidance
 LCU 01-CU-20
 LCU 07-CU-13
 LCU 08-CU-09
21
CUSOs
 Expands requirements of CUSO regulation that apply to
FISCUs
 Address accounting, financial statements and audits
 Address limits on “less than adequately capitalized”
 Adds new registration requirement
 All CUSOs must annually provide profile information
 CUSOs involved in complex or high-risk activities
must provide detailed reports
 All subsidiary CUSOs must follow applicable laws and
regulations
22
Other Examination Focus Areas
23
Audit, Internal Audit and Supervisory Committee Review
 Recent Material Loss Reviews emphasize importance of
evaluating internal controls.
 Examiners will review audit, internal audit and Supervisory
Committee activities during examinations.
 Audit workpapers.
 Member account verification support.
 Interviewing SC and or IA Department.
 Commensurate with size, complexity, internal control structure and
risk profile of credit union.
 If SC or IA department performs annual audit, examiners will
review audit workpapers at every examination.
24
Small Credit Union Examination Program
 FCUs with $10 million or less in assets with
CAMEL of 1, 2, or 3.
 Reduces the minimum required examination scope.
 Supplements existing Risk Focused Examination
practices.
 Examiners may refine and adjust scope as
circumstances warrant.
25
Questions
26