Office of Examination and Insurance

1. Tim Segerson Office of Examination and Insurance Office of Examination and Insurance About E&I and Our Look Forward 06/06/2013

2. NFCDCU Baltimore 2013

3. The Alphabet Soup of E&I Exam Policy & Program Oversight All things Risk Related incl. NCUSIF and Stab. Fund Central Liquidity Data Systems, Reporting, and Financial Analysis – ISO Field Support Guaranteed Note Oversight and Reporting Capital and Credit Market Specialists – Field Support NFCDCU Baltimore 2013

4. What E&I Does Recent Enhancements • Exam Report Cover – Contact Info. • NSPM • SCUEP • Guidance and Rulemakings • TDR • Waivers • Derivatives • IRR Some Things In the Works • Supervisory Guidance: • Benefits Plans • NRSROs • Private Student Loans • ERM • Exam Improvements • DOR Consistency • Continued Bifurcation NFCDCU Baltimore 2013

5. 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

6. Forces Driving Change Marketplace NFCDCU Baltimore 2013

7. The Big Picture Change is Inevitable For Credit Unions Market/Technology Will Drive Strategies – Evolve or Suffer the Consequences • 3 C’s in Force • Sound Operational Controls • Balance Sheet Management • Self Sufficient Liquidity Management For NCUA Industry evolution/rising stakes dictates nimble, transparent and forward looking strategies – NCUA for 2020 • Changing employee demographics • Changing CU demographics • Changing market place • Changing Technology NFCDCU Baltimore 2013

8. Changing Balance Sheet Increasing Long Term Assets and Non-core Shares 56% of shares 26% of Assets NFCDCU Baltimore 2013

9. Can increasing balance sheet exposure become the next crisis in credit unions? Avg. Costs before PLLL = 3.89% 3.89% > 3.53% Locking in 30 yrs.? At these rates? NFCDCU Baltimore 2013

10. Balance Sheet Exposure of LICUs • LICU slightly better positioned for rising interest rates • ST margin shortfalls will reverse quickly for conservative shops • Greater share pricing flexibility NFCDCU Baltimore 2013

11. 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 Baltimore 2013

12. 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

13. Risk Management is Key Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis. Dr. Michael Ong 10 DO’s • Commitment to make tough choices. • Forward looking strategy. • Well developed and integrated risk management. • Balanced appetite for risk (like your life depended on it). • Incentives aligned with sustainable risk levels (Taking a long term strategic view). • Continuous monitoring and strong comprehensive reporting regime (Good, Bad or Ugly). • Strong control environment. • Balanced portfolio and portfolio strategy. • Equal weight to the downside risks in the decision making process. • Optimal capital deployment (Scaled to level of risk and no over-reliance). 10 Don’t’s Lack of commitment to risk management. Disengaged leadership. Concentrated organizational power. Inconsistent or weak process for complexity or risk level. Failure to adhere to policies and procedures. Appetite “creep” (Don’t rationalize – make the touch decision). “Silver Bullets” and “Shiny Objects” (aka shortcuts). Disproportionate yields = unidentified risk (there are no hidden secrets if you have not identified the risk – stop until you can see, measure and control it) 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 ) Misaligned incentives (poorly designed pay and incentive plans Examination 2013: What to Expect

14. Three Credit Union Profiles LICU = 1,675 & $110.6 B in Assets 4,515 Units - 66.9% $64.4 B in Assets - 6.1% $50 Million 1,465 Units - 21.7%` $163.4 B in Assets - 15.5% $250 Million 773 Units - 11.4% $795.1 B in Assets - 78.4% NFCDCU Baltimore 2013

15. Resource Distribution by Asset Cohort Share of Assets vs. Share of Exam Hours NFCDCU Baltimore 2013

16. What is the point? • Leverage technology to optimize efficiency • Modernize Regulatory and Supervisory Framework • Consistency • Flexibility • Specialization • Rent v Buy • Diversify Oversight/Program Management • 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 Modernization NFCDCU Baltimore 2013

17. Office Contact Page Feel free to contact our office with questions or comments. Primary Staff: Tim Segerson, Deputy Director segerson@ncua.gov Office Phone: 703-518-6397 NFCDCU Baltimore 2013