Elizabeth A Whitehead NCUA Region V Director NCUA

Elizabeth A. Whitehead NCUA Region V Director NCUA UPDATE Utah Credit Union Association Chairman/CEO Summit October 25, 2013

• • • 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 Year-End 2010 Year-End 2011 Year-End 2012 RD 0. 50 % 0. 67 % 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 % Return on Assets Risks on the Horizon Year-End 2009 Year-End 2010 3 2 nd-Quarter 2013 Qtr. 2012 3

Your Story: Utah Credit Unions’ Performance Trends in Utah Credit Unions Compared to U. S. Credit Unions Year-End 2010 Year-End 2011 Year-End 2012 2 nd-Qtr. 2013 RD U. S. Credit Unions 0. 07 % 0. 56 % 1. 20 % 1. 51 % 0. 85 % 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. 04 % Net Charge-offs 1. 72 % 1. 53 % 1. 06 % 0. 58 % Membership -3. 5 % + 0. 2 % + 4. 4 % + 4. 6 % + 2. 2 % Return on Assets Net Worth Risks on the Horizon Year-End 2009 Year-End 2010 3 Qtr. 2012

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 7

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 NCUA Update

Off-Balance Sheet Risks • Executive Benefits and Pension Plans – High-Risk, Non-Compliant Investments • Money Service Businesses NCUA Update

Managing 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 • • • Gradual Decline in ROAA Tightening Liquidity Eventual losses Eventual Depletion of Capital Insolvency Poor Liquidity Management – Blunt Trauma • • • 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 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). 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 • • • 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 Region 5@ncua. gov (602) 302 -6000 Secondary Staff: Mike Dyer, Associate Regional Director – Programs mdyer@ncua. gov (602) 302 -6003 NCUA Update