AGM 2011 W E L O O K A T T H I N G S D I F F E R E N T L Y Implementation of the New Assessment Guidelines David Matthews – ILCU National Supervisors Forum 2012 W E L O O K A T T H I N G S D I F F E R E N T L Y Implementation of the New Assessment Guidelines David Matthews – ILCU National Supervisors Forum 2012

W E L O O K A T T H I N G S D I F F E R E N T L Y 2 Contents Changing role for Supervisors PEARLS & CAMELS contrasted Assessing Board performance –Financial aspects The importance of Business Planning –Is the Board in control? Non-financial factors Questions & answers

W E L O O K A T T H I N G S D I F F E R E N T L Y 3 Changing Role Board Oversight Committee Assess whether the board has operated as required by the governance requirements Ability to comprehend (at a minimum) –the nature of the credit union’s business, operating principles, activities and related risks –the credit union’s financial statements Must undertake appropriate training to support the above within a reasonable time

W E L O O K A T T H I N G S D I F F E R E N T L Y 4 Implications for Supervisors Must understand:- –The business model –The role of the Board –The role of the Manager –The financial statements –The key drivers of the business –The warning signs –The big picture What makes the credit union tick?

W E L O O K A T T H I N G S D I F F E R E N T L Y 5 Focus on risk! Loans to Members –Key driver but biggest risk Policy, procedures, assessment Deposits & Investments –Small in number, large in size Policy, compliance Fixed Assets –High value, security is key Other Assets –Cash, savings stamps, stationery, etc.

W E L O O K A T T H I N G S D I F F E R E N T L Y 6 What’s the difference? PEARLSCAMELS Developed by WOCCUDeveloped by NCUA Designed as a management toolDesigned as a supervisory tool Used in Ireland since 199x tailored, 50+ ratios Used in Ireland up to 199x All quantitative, no opinionsOn-site examination plus examiner’s opinions

W E L O O K A T T H I N G S D I F F E R E N T L Y 7 PEARLSCAMELS ProtectionCapital Adequacy Effective Financial StructureAsset Quality Management Rates of Return and CostsEarnings LiquidityLiquidity & ALM Signs of GrowthSensitivity to market

W E L O O K A T T H I N G S D I F F E R E N T L Y 8 Using PEARLS PEARLS ratios provide users with a snapshot of the financial health of the credit union Focus on the key ratios (provisions, rates of return, arrears, solvency, growth, etc) Key ratios will change over time PEARLS report shows current status and results for previous year Trend / direction is key!

W E L O O K A T T H I N G S D I F F E R E N T L Y 9 PEARLS Example DescriptionSep 12Jun 12Mar 12Dec 12Goal P3 Solvency > 109% E1 Loans to Assets %+ A1 Gross Loans in Arrears < 5% R5 Expenses to Income < 43% L2 Percent who borrow High S1 Growth in Loans

W E L O O K A T T H I N G S D I F F E R E N T L Y 10 Using CAMELS System assigns a rating for each component –Rating is 1 (best) to 5 (worst) Qualitative and quantitative –Qualitative – examiner’s opinions –Quantitative – on-site visit –Management is 100% qualitative CAMELS also assigns a composite (overall) rating of 1 to 5

W E L O O K A T T H I N G S D I F F E R E N T L Y 11 CAMELS Ratings Rating 1 - Sound in every respect. Any weaknesses are minor and can be handled in a routine manner by the board of directors and management. Rating 2 – Fundamentally sound. Only moderate weaknesses are present. Rating 3 - Some degree of supervisory concern over weaknesses that may range from moderate to severe.

W E L O O K A T T H I N G S D I F F E R E N T L Y 12 CAMELS Ratings Rating 4 – Unsafe and unsound practices or conditions stemming from serious financial or managerial deficiencies that result in unsatisfactory performance. Rating 5 – Extremely unsafe and unsound practices and conditions beyond management's ability or willingness to control or correct. Ongoing supervisory attention and intervention is necessary. Failure may be probable.

W E L O O K A T T H I N G S D I F F E R E N T L Y 13 CAMELS Assessment Factors Capital Adequacy Level and quality of capital Overall financial condition The ability of management to address emerging needs for additional capital Compliance with risk-based net worth requirements Composition of capital Interest and dividend policies and practices Quality, type, liquidity, and diversification of assets Loan and investment concentrations Balance sheet composition including the nature and amount of market risk, concentration risk, and risk associated with nontraditional activities Growth plans and past experience managing growth

W E L O O K A T T H I N G S D I F F E R E N T L Y 14 CAMELS Assessment Factors Asset Quality Quality of loan underwriting, policies, procedures, and practices Internal controls and due diligence procedures in place to review new loan programs, high concentrations and changes in underwriting procedures Adequacy of the provision for loan losses and other asset valuation reserves Ability of management to properly administer its assets, including the timely identification and collection of problem assets Level and composition of restructured loans Existence of significant growth trends indicating erosion or improvement in asset quality Existence of loan concentrations that present undue risk to the credit union Appropriateness of investment policies and practices

W E L O O K A T T H I N G S D I F F E R E N T L Y 15 CAMELS Assessment Factors Management Corporate governance (remuneration policies, conflicts of interest, professional ethics and behaviour) Strategic planning Internal controls (IT systems, segregation of duties, audit program, record keeping, safeguarding assets, staff education) Adequacy of policies and procedures 100% Qualitative Subjective judgment required

W E L O O K A T T H I N G S D I F F E R E N T L Y 16 CAMELS Assessment Factors Earnings Quality and sources of earnings Ability to fund capital commensurate with current and prospective risk through retained earnings Adequacy of valuation allowances Adequacy of budgeting systems, forecasting processes, and management information systems Future earnings adequacy under a variety of economic conditions Quality and composition of assets Earnings exposure to market risk including interest rate risk Material factors affecting the credit union's income producing ability such as fixed assets and other non-earning assets

W E L O O K A T T H I N G S D I F F E R E N T L Y 17 CAMELS Assessment Factors Liquidity & Asset Liability Management Balance sheet structure Liquidity management Qualifications of asset-liability management personnel Quality of oversight by the board and senior management Earnings and capital adequacy over changing economic climates Prudence of policies and risk limits Business plan, budgets, and projections Contingency planning to meet unanticipated liquidity events Contingency planning to handle periods of excess liquidity Cash flow budgets and projections Integration of liquidity management and ALM with planning & decisions

W E L O O K A T T H I N G S D I F F E R E N T L Y 18 Assessing Financial Performance Key Ratios Comparisons –Over time –With other similar credit unions Trends –Better or worse? Forecasting Ability to pay a dividend

W E L O O K A T T H I N G S D I F F E R E N T L Y 19 Key Ratios Provisions (P1) –Have we enough in our provision? Solvency (P3) –Is the credit union solvent and viable? Capital (E6c) –Are we meeting our Regulatory requirement? Arrears (A1) –How good are our lending and credit control processes? Rate of Return (R3) –Are we maximising our income? Liquidity (L1) –Are we meeting our Regulatory requirement?

W E L O O K A T T H I N G S D I F F E R E N T L Y 20 Comparisons & Trends Comparisons –Over time (have we improved or deteriorated?) –With other credit unions (how do we measure up against our peers? Chapter, size, demographic, membership, potential, etc. Trends –What way are we heading (good or bad?) –Where will be if the trend continues? –What is the Board doing to address any negative trends?

W E L O O K A T T H I N G S D I F F E R E N T L Y 21 Forecasting Has the Board prepared a forecast? If no, why not? If yes, is it realistic? Has the Board got a plan for dealing with issues identified by the forecast? –Loan Book –Income –Expenditure –Bad Debt Costs Sample Projections

W E L O O K A T T H I N G S D I F F E R E N T L Y Commission Report – key part of Board’s role FSA & CBI requirement! Should do it anyway Forces us to think about the future Where will we be if we do nothing? Highlights potential future problems Suggests areas for improvement or change What can / should we change? Gives us something to measure our performance against Gives us some control over our future Why plan?

W E L O O K A T T H I N G S D I F F E R E N T L Y Key questions for Supervisors:- Is it the Board’s plan? Are the objectives realistic and achievable? Can they be measured? Who is going to do it, when and how? Does it deal with the key challenges? Does it consider the key risks? Does the credit union have the capability to carry out the plan? Is there a monitoring and review process in place? Assessing the plan

W E L O O K A T T H I N G S D I F F E R E N T L Y Don’t forget - it’s not all about money! Not for profit but for service Improvement – Is the Board aware of its deficiencies? Has it identified the gaps in skills and abilities? Is it trying to address them? Renewal & Rotation Training & Development Has it carried out a training needs analysis? Succession Planning Non-financial factors