NCUA Regulatory Update Cherie L. Freed, Region V Director National Credit Union Administration NCUA Regulatory Update Utah 2017 Executive CEO Summit May 24, 2017

Credit Union Total Assets Are Growing $12.5 billion 12/31/16: $1.29 trillion

More Members - Fewer Credit Unions

Median Asset Growth 12/31/16 #s

Share and Deposit Growth

Median Annual Loan Growth

Median Loans to Shares

Median Delinquency

Median Return on Assets

Share of CUs with Positive Income

State Dashboard

Region V Composition Areas Supervised State # FICUs FICU Assets # FCUs FCU Assets # FISCUs FISCU Assets California 315 $159,215,726,912 190 $61,261,664,179 125 $97,954,062,733 Washington 90 $31,237,279,880 36 $3,462,205,556 54 $27,775,074,324 Utah 68 $22,776,885,953 34 $21,074,853,955 $1,702,031,998 Oregon 61 $20,429,459,313 40 $3,435,396,958 21 $16,994,062,355 Arizona 43 $16,205,156,207 24 $8,793,663,264 19 $7,411,492,943 Hawaii $10,610,105,896 $0 Alaska 12 $9,428,445,140 11 $8,436,232,662 1 $992,212,478 Idaho 28 $7,487,750,035 13 $2,911,777,480 15 $4,575,972,555 Nevada 10 $2,205,378,876 7 $536,297,278 3 $1,669,081,598 Guam 2 $480,739,119 Total 690 $280,076,927,331 418 $121,002,936,347 272 $159,073,990,984

Region V Delinquency Rates Nation AK AZ CA GU HI ID NV OR UT WA Total 0.8% 1.3% 0.6% 0.4% 1.0% 0.7% 0.5% Real Estate 2.0% 1.1% 0.2% 0.9% 0.3% Credit Card MBL 1.6% 0.1% Auto Indirect 0.0% The columns highlighted show states which have higher than average delinquency rates by product type, compared to the national average as of December 31, 2016. Utah is lower than the national average in all loan types.

Utah Credit Unions

Utah Credit Unions

Utah Credit Unions Utah credit unions have higher than average loan/assets.

Utah Credit Unions Utah credit unions continue high growth in other real estate loans.

Utah Credit Unions Utah credit unions are experiencing high growth in participation loans.

Utah Credit Unions

Utah Credit Unions

Utah Credit Unions Utah credit unions achieved a return on average assets ratio well above regional and national averages. This is due in large part from the high gross income to average assets ratio of 5.6 percent, which is 103 basis points higher than the regional average.

Issues on Our RADAR… Cyber Threats Interest Rate Risk Operational Risk Bank Secrecy Act

Cyber Threats Cyber Thieves Cyber Terrorists Target: Large Institutions Tactic: Attack Individual Systems Objective: Steal Money Cyber Terrorists Target: Vulnerable Entry Points (Small Credit Unions) Tactic: Infiltrate Interconnected Systems Objective: Cripple or Destroy the U.S. Economy

Interconnectivity Expansion

Cyber Security – What Can You Do? Ensure your CU systems are secure. Implement risk mitigation controls: vendor due diligence, strong password policies, proper patch management, employee training, and network monitoring. Get educated. Share cyber-security best practices. Participate in local, state and national information-sharing forums.

Questions to Ask about Cyber Security What are the potential vulnerabilities of hackers using the credit union as an entry point to gain access to larger interconnected systems? Year-End 2009 Year-End 2010 3RD Qtr. 2012 Has staff done due diligence to evaluate the cybersecurity of every vendor and every payment system with which the credit union has a digital relationship? How could the credit union change cybersecurity protocols based on guidance from FFIEC? How could the new national cybersecurity standards further protect the credit union and members?

Interest Rate and Liquidity Interest Rate Risk Interest Rate and Liquidity Long-Term Assets, Short-Term Funding Earnings at Risk When Rates Rise Contingency Funding Arrangements

New IRR Guidance Interest Rate Risk Effective January 1, 2017 Net Long Term Asset ratio, 17/4 test, and supervisory interest rate risk threshold no longer considered in assessment of risk Developed new Interest Rate Risk Review Procedures Workbook Updated Interest Rate Risk tolerance thresholds in the NEV Supervisory Test Created an estimated net economic value tool for credit unions with total assets of $50 million or less

about Interest Rate Risk Questions to Ask about Interest Rate Risk How is the credit union measuring interest rate risk exposure? What has been learned from shock testing? Year-End 2009 Year-End 2010 3RD Qtr. 2012 What changes should be considered in the credit union’s balance sheet, product pricing or investment strategy to avoid excessive interest rate risk? How should the CU’s interest rate risk policy be updated to reflect the new Fed interest rate forecast? What internal controls ensure the CU will follow the board’s interest rate risk policy?

CAMEL(S) CO, CT, ID, MA, ME, MI, MS, MT, NE, NH, NV, TX, UT, VT, WA, WI “S” = Sensitivity to Market Risk Treats Interest Rate Risk / Asset-Liability Management separately from (L)iquidity component. 16 States have adopted the “S” NCUA likely to add “S” with next-gen AIRES

New Risks Require Enhanced Internal Controls Operational Risk New Risks Require Enhanced Internal Controls Deter Fraud Detect Fraud Earlier / < Losses Detect / Reduce Errors Detect Other External Threats Reduce Reputation Risk Strong Audits are a Must!!

Operational Risks – Fraud Hot Spots Poor Accounting Controls/Un-reconciled Books Ensure clean timely records and effectively monitor financial activity Fictitious and Fraudulent Loans Monitor new loans, charged off loans, due dates, subsidiary vs control account Un-cleared Overdrafts Ensure timely bank reconcilements, review general ledger, access controls and override reports Dormant/inactive share accounts Monitor and clear inactive accounts Control reports Unrecorded shares Segregate activity and limit access control Monitor bank activity False Expenditures Unsupported expenditures Budget/financial statement monitoring

Bank Secrecy Act Continued Emphasis on Proper Risk Monitoring and Controls Money Service Businesses – Proper Due Diligence Expected Many large vendors are not catching suspicious activity – onus on CU

NCUA Initiatives in Process Specialists Improved examiner training Call Report Modernization Enterprise Solutions Modernization Loan, Investment, Shares and ALM Analytics Value added analytics reports available to CUs Better coordination in pre-exam process = less time onsite Secure coordination and communication portal Update of Examiner’s Guide

Exam Flexibility Initiative Adopted 10 Recommendations Established Federal Credit Union eligibility criteria for extended examination cycle Adjusted examination cycle for all other Federal Credit Unions Continued enhanced examinations at small Federal Credit Unions Enhanced coordination of Federally Insured, State-Chartered Credit Union examinations Established a joint NCUA-State Supervisor working group Establish applicable provisions for all Federally Insured Credit Unions Enhanced planning and notice procedures Reinstitute optional credit union survey Reduce NCUA’s onsite presence Improve consistency of examiner training

Cherie L. Freed Regional Director Contact Information Cherie L. Freed Regional Director Region 5 r5mail@ncua.gov 602-302-6000