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

Agenda Financial Trends Risks on the Horizon Examinations, What to Expect Regulations Questions NCUA Update

Risks on the Horizon Success Story: Credit Union Industry’s Recovery Positive Trends in U.S. Credit Unions 2010 – 2013 Year-End 2009Year-End RD Qtr Year-End 2010 Year-End 2011 Year-End nd -Quarter 2013 Return on Assets 0.50 %0.67 %0.85 % Net Worth %10.21 %10.43 %10.50 % Loan Growth %+ 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 %+ 1.5 %+ 2.2 % 3

Risks on the Horizon Your Story: Utah Credit Unions’ Performance Trends in Utah Credit Unions Compared to U.S. Credit Unions Year-End 2009Year-End RD Qtr Year-End 2010 Year-End 2011 Year-End nd -Qtr U.S. Credit Unions Return on Assets 0.07 %0.56 %1.20 %1.51 %0.85 % Net Worth 8.3 %8.8 %9.4 %9.7 %10.50 % Loan Growth %- 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 %0.56 %0.58 % Membership -3.5 %+ 0.2 %+ 4.4 %+ 4.6 %+ 2.2 %

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

Risk comes from not knowing what you’re doing. Warren Buffet NCUA Update Managing Risk

Interest Rate Risk NCUA Update 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 Letters to Credit Unions (4): - 00-CU-13, 01-CU-08, 03-CU-11, 10-CU-14 All references available at

Interest Rate Risk NCUA Update 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

Balance Sheet Risk NCUA Update Poor IRR Management – Slow Heart Attack Poor Liquidity Management – Blunt Trauma Gradual Decline in ROAA Tightening Liquidity Eventual losses Eventual Depletion of Capital Insolvency Rapid outflows/insufficient inflows Insufficient contingent liquidity Sale/liquidation of less liquid underwater investments Depletion of capital Inability to meet current obligations (bankruptcy)

Interest Rate Risk NCUA Update 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.

Interest Rate Risk NCUA Update 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?

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 NCUA Update Document of Resolution and Examiner’s Findings - Stand Alone Documents Only material problems in DORs with agreed- upon 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

Examination Report Modernization NCUA Update 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.

Examination Report Modernization NCUA Update Streamlined Examination Report Better clarifies priority exam action items to be resolved Reduces redundancy Ensures consistency NCUA Letter to CUs 13-CU-09

10 Things Your Examiner Will Like to See 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). Good Risk Management fosters vigilance in times of calm and instills discipline in times of crisis. Dr. Michael Ong NCUA Update

Resource Reminders AIRES Questionnaires NCUA Update

Recent Regulations NCUA Update Loan Participation Rule RR & – 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

Proposed Rules Outstanding NCUA Update 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

Proposed Rules Outstanding NCUA Update 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 Comment Period Ended August 26, 2013

Office Contact Page Feel free to contact our office with questions or comments. Primary Staff:NCUA Region V (602) Secondary Staff:Mike Dyer, Associate Regional Director – Programs (602) NCUA Update