fiduciary duties: an overview and action plan for ncua’s ... · overview of corporate governance...

Fiduciary Duties: An Overview and Action Plan for NCUA’s New Rule

Today’s Agenda

• The Current Climate

• An Overview of Corporate Governance and Fiduciary Duties

• Detailed Review of NCUA’s Rule• Detailed Review of NCUA’s Rule– Fiduciary Duties

– Volunteer and Employee Indemnification

– Merger and Conversion Issues

• A Framework for Meeting the New Expectations

The Current Climate

The Current Climate

• Credit Union Failures

– The NCUA Office of Inspector General

– Material Loss reviews

• Every credit union that was the subject of a Material Loss Review had “ineffective management (poor planning and weak oversight)”

From the Banking World

• During a recent meeting with OTS and OCC senior executive staff, it was noted that that every major bank failure involved the following:following:

1. Lax underwriting

2. Concentration risks

3. An overbearing management official (board or management team) that stifled discussions, critical feedback, and due diligence efforts.

Regulator Lawsuits

• NCUA’s lawsuit regarding WesCorp directors

• As of December 14, 2010, the • As of December 14, 2010, the FDIC has authorized 109 lawsuits against individuals

The Current Climate: Conclusion

• Expect additional attention to corporate governance and the role of the board

• Expect examiners to dig deeper into corporate governance issues

– Risk management

– Concentration risk

– Internal controls

Overview of Corporate GovernanceGovernance

Overview of Corporate Governance

• Corporate governance and boards

• Credit union world

– FCU Act, regulations, bylaws, guidance– FCU Act, regulations, bylaws, guidance

The board of directors shall meet at least once a month and shall have the general direction and control of the affairs of the Federal credit union. (Federal Credit Union Act)

Ever-present Duties

• The Duty of Care

–Preparation and due diligence

–Examples: Policies, strategic planning–Examples: Policies, strategic planning

• The Duty of Loyalty

–Removal of conflicts

–Examples: Recusal, loan requirements

What if you breach?

• Breach of duty + damages = potential liability

• Indemnification, insurance

• Who would sue?–NCUA, members with uninsured

shares, disgruntled ex employees

• Business judgment defense–Volunteer nature not a shield

NCUA’s Fiduciary Duties RegulationRegulation

Overview of Rule

• Creation of federal duties

• Indemnification changes

• Credit union conversions and • Credit union conversions and mergers

Fiduciary Duties

• Fiduciary duties portion applies to federal credit union directors

• Other provisions apply more broadlybroadly

• Effective dates:–January 27, 2011 in general

–July 27, 2011 for “financial literacy”*

Fiduciary Duties Thumbnail Sketch

• Clarification that directors are responsible for general direction and control.

Four specific FCU director duties

1. Directors must carry out duty in good faith, in best interests of membershipbest interests of membership

2. Administer affairs fairly, impartially and without discrimination in favor or against any particular member

3. Financial literacy

4. Ensure management’s operation comply with all applicable “rules”

Fiduciary Duties 12 CFR 701.4

• General direction and control– Board is ultimately responsible.– Delegation of execution? Yes.– Delegation of responsibility? No.– Delegation of responsibility? No.

• Carry out duties– In good faith– Reasonably belief that actions are in best

interest of membership as a whole– Use same care as “ordinary prudent

person” in similar situation


• Administer affairs of CU:

–Fairly

–Impartially–Impartially

–Without discrimination in favor or against any particular member


• “Financial Literacy”

– (Within six months of joining board) Have at least a working familiarity with basic finance and accounting, including the ability to read and accounting, including the ability to read and understand the FCU’s balance sheet and income statement, and to ask appropriate questions of management and internal and external auditors

• So, is training mandatory?


• Direct management’s operations in conformity with the requirements of:–The Federal Credit Union Act

–NCUA regulations–NCUA regulations

–Other applicable laws

–Sound business practices

• Training requirement?

• FDIC Monterey Bank Consent Order

Fiduciary Duties 12 CFR 701.4Outside Staff and Consultants

• Boards are empowered to retain staff and outside consultants as needed

• Boards may rely on staff, officers, committees or outside consultants if committees or outside consultants if directors “reasonably believe” the person is reliable and competent in that area

• Higher standard for legal counsel, public accountants and others retained for their skills or expertise?

Indemnification 12 CFR 701.33

• FCUs may not indemnify officials or employees for personal liability

– Related to decisions affecting fundamental rights/interests of membersrights/interests of members

– Where decision giving rise to claim is determined by a court to have constituted

• Gross negligence

• Recklessness

• Willful misconduct

Indemnification 12 CFR 701.33

• Exception will allow advance of funds before final disposition if

– Disinterested board members/supervisory committee deem official acted in good faith

– Disinterested individuals determine that payment – Disinterested individuals determine that payment will not harm safety and soundness

– Employee/official provides in writing that they acted in good faith and that they’ll repay credit union to the extent that payments are not covered by insurance or if the employee/official is not entitled to indemnification due to judge’s decision

Credit Union to MSB Conversions

• Revises Part 708a of NCUA’s Regulations

• Member votes on conversions must be by secret ballot overseen by independent entityentity

• Enhanced member disclosures– Statement regarding future version to stock

institution or mutual holding company

– Estimated cost of conversion, and affect on availability of services, facilities and consumer loans

Merger of Insured Credit Unions Into Banks 12 CFR 708a

• Due diligence to determine how merger is in best interest of membership

• Determination of merger value of CU

• Determination by majority of board that merger • Determination by majority of board that merger (after first two steps) is the best choice available

• Notice to NCUA and request for member vote

• Vote: 20% of eligible members must vote in secret ballot managed by independent entity

• NCUA approval

Merger of Insured Credit Unions or Termination/Conversion of Insured Status

• Additional information in merger plan when merging credit union has a higher net worth than surviving credit union

• Disclosure of merger-related financial arrangements for officials/managers

– When increase exceeds the greater of 15% or $10,000

– Including name and title

A Framework for Meeting the New Expectations

Fiduciary Duties Thumbnail Sketch

• Clarification that directors are responsible for general direction and control.

Four specific FCU director duties

1. Directors must carry out duty in good faith, in best interests of membershipinterests of membership

2. Administer affairs fairly, impartially and without discrimination in favor or against any particular member

3. Financial literacy

4. Ensure management’s operation comply with all applicable rules

Board Composition and Governance

• Recruiting

• Nominating Committees

• Credit Union Committee Structure• Credit Union Committee Structure

• Associate Board Members

• Directors Emeritus

• Board Governance/Ethics Policies

Board Resources

• Access to Outside Experts and Audits

• Board Packets

• Training

– “Financial Literacy”

– Ensuring “Compliance”

– Training on effective board governance

• Strategic planning

Board Resources

• NAFCU Freebies…

–Quarterly President’s Report

–The NAFCU Flash Report–The NAFCU Flash Report

–The Federal Credit Union

–NAFCU Update

–NAFCU Today

Parting Thoughts

• Culture

• Board composition

– Acceptance of role and responsibility

– Inquisitive, risk-minded, forward-thinking– Inquisitive, risk-minded, forward-thinking

– Provides oversight, but allows management to do its job

– Credit union comes first

• Board/Management relationship

Questions?

Anthony DemangoneAnthony Demangone

NAFCU Vice President of Regulatory Compliance

(703) 842-2278

[email protected]

Basic finance, accounting principles and financial principles and financial

reports …

Dan Clark Associates LLC

in plain English

Three targets of this material …

1. Understand what is on a Balance SheetSheet

2. Learn what makes up an the Income or Performance Statement

3. Uncover relevant accounting practices

Agenda• Your personal balance sheet as a

familiar place to start

• We’ll look at familiar arrangements for the balance sheet, and what’s on it

• We’ll look at the income statement

• Q & A -- and along the way

In your study guide, next to this image …

1. Enter a few asset items you own and their 1. Enter a few asset items you own and their approximate market values, to the nearest thousand ($000)

Home valueTotal value of vehiclesRetirement fundsSavingschecking


2. Enter some of your liabilities and their approximate balances in thousands

Home mortgage balanceLoans on vehiclesCC Debt

approximate balances in thousands


3. Subtract Sub-Total Liability total from Sub-Total Assets. Sub-Total Assets.

The result is your estimated

personal Net Worth.

Typical Credit Union Balance Sheet Layouts

Liabilities &

Assets

Assets

& Member Shares

Side-By-Side

Net Worth

Over-Under

Assets

Liabilities & Member Shares

Net Worth

Balance Sheet / Statement of Condition

Total Assets Total Liab. & NW

When the first member deposited …

Cash Shares

Member

Assets

Member Shares, Liabilities and Net Worth

Transactions also balance:

debits = credits


Primarily Debt

Primarily Credit

Net Worth


Debt Balance Accounts

CreditBalance

Accounts


Application of funds

Net Worth


of funds

Sources of Funds

How Your Personal Balance sheet and the Credit Union’s Differ – fixed assets

Depreciated Book ValueMarket value

Depreciation

Matching principle: match revenue with portions of the cost of an asset over the portions of the cost of an asset over the period served by that asset;

A.K.A. Useful life.

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $


Acquisition of CU assets involves

Net Worth

Total Assets Total Liab, Capital & NW

CASH &

INVESTMENTS

involves trading other assets for it.


Acquisition of CU assets involves

Net Worth


involves trading other assets for it.

CASH

INVESTMENTS

FIXED ASSETS


… is a ‘contra’ or negative-balance asset.

Accumulated Depreciation

Net Worth


balance asset.


FIXED ASSETS

Contra Asset

CASH

INVESTMENTS

How Your Personal Balance sheet and the Credit Union’s Differ - investments

Personal = market valuesMarket Values help you keep

current tabs on your estimated net worth.

Book Values and Notes are more consistent for evaluating investment

opportunities.

How Your Personal Balance sheet and the Credit Union’s Differ - investments

Balance Sheet / Statement of Condition… an investment reserve or loss allowance is another ‘contra’

Net Worth


another ‘contra’ or negative-balance asset to explore.

Market devaluation

Investments

Contra Asset

Investments Training

How Your Personal Balance sheet and the Credit Union’s Differ

– Accounting Formula:

Personal formula

Assets – liabilities = net worth

Business formula

Assets = liabilities + net worth


Loans

Loans

- Allowance

= Net Loans

The Allowance for Loan Losses

Net Worth


Loans

AllowanceContra Asset


Secured loans

Net Worth


Allowance

Unsecured loans


ABC

Potential loan losses based on

Net Worth


Allowance

CDE

based on borrower risk category

The Allowance as a Bucket

When charging off a loan the ALL Bucket Bucket figuratively springs a leak and drains the amount of the charged off loan.

The Allowance as a Bucket

When the ALL When the ALL balance falls below the ALL requirement, post a PLL expense with the same amount to figuratively refill the Bucket.


Liquidity

Member Shares

L-T CDs

S-T CDs

Member Secured Loans

Net Worth



FIXED ASSETS

CASH &

INVESTMENTS

Liabilities

Retirement

Regular Shares

Share DraftAllowance

Unsecured Loans

- Cost of Funds

+ Interest Incomes

Income / Performance Statement

= Gross Margin

- provision for loan losses

- Cost of Funds

+ Interest Incomes


= Gross Margin

+ non-Interest Inc

- Operating Exp.


- Cost of Funds

+ Interest Incomes



- Cost of Funds

= Net Income

= Gross Margin

+ non-Interest Inc

- Operating Exp.

Final Questions?

Contact Dan Clark atwww.danclark.com

or call 850-559-7094

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