risk environment - cliftonlarsenallen

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POLICE OFFICERSCREDIT UNION CONFERENCE

2012

STRATEGIC DECISION MAKINGIN THE CURRENT FINANCIALIN THE CURRENT FINANCIAL

ENVIRONMENT

©2012 CliftonLarsonAllen LLP1 111

MARKETPLACE OPPORTUNITIES

• With anti‐big bank sentiment at an all‐time high and “profit at any cost”Wall Street under high profile scrutiny, not‐for‐profit financial

i i i d f b h i i d dcooperatives are positioned for best growth opportunity in decades

• Best opportunity in our credit union lifetime being hindered by corporatelosses, insurance premiums, income hits through regulation and statutorychanges and supervisory action proliferation

• If credit unions cannot seize the marketplace when the brass ring isavailable, it is troublesome to imagine when such an opportunity will re‐appear

• When opportunity rises for credit unions, it rises for all competitors…thisopportunity is historic and can be lost.

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LEGISLATIVE OUTLOOK

• MBL CAP relief unpopular with banks but small business focus for credit unions, we need to expertise but must manage the risk

• CURIA for credit unions was defeated, may come again• Possible loss of tax exemption is major carrot• FOM enhancements• CUSO investment and increased regulation and oversight• Interchange loss – 2 major defeats, must continue the fight• Loss of independent regulator has been threatened• Loss of independent regulator has been threatened• Going to need to be aggressive, willing to take managed risks in a tough

political environment“C t ti ” liti l b ll i i f f• “Consumer protection” political umbrella is growing – areas of focus (Overdraft fees, CC fees, mortgage refi fees, ATM surcharge, notifications, data collection, affirmative action lending)


POSSIBILITIES...

• Lower corporate credit union assessments and recovery of legacy assets• Mergers will continue and escalate, we will be at 5,000 credit unions

before you know it– Troubled Credit Unions– Inefficient Credit Unions

U d i li d C di U i– Under capitalized Credit Unions– Succession plan strategy

• Fewer Community Banks as wellM h d b hi• More shared branching

• Nationwide branding of the Credit Union Industry• Credit Unions will need to grow to survive• To grow and survive Credit Unions will need to stay focused on their

strategic advantages


COMMIT TO COMMUNITY INVOLEMENT

• Credit union mantra – “People Helping People”

• Demonstrate the Credit Union Difference with action

• To engage your CU in the community and establish/build relationshipsTo engage your CU in the community and establish/build relationships

• Because it’s “the right thing to do” as a progressive and responsible businessbusiness

• Improves CU image, reputation and brand recognition, builds goodwill, d b hi band grows membership base

• Benefits the credit union financially –Non‐profit accounts, personal


accounts

COMMUNITY INVOLEMENT – HOW TO:

1. Define the business objectives for community involvement which support a strategic plan.

2. Design a Corporate Social Responsibility Plan that integrates these business objectives.

3. Determine key partnerships internally and externally. 4. Determine expectations for this program at the onset. 5. Allow ownership of program by team members.6. Recognize participation in the program and make the team aware of its6. Recognize participation in the program and make the team aware of its

successes Keep motivation high and commitment strong through recognition.

7. Be willing to adjust the program to the needs of the community or based7. Be willing to adjust the program to the needs of the community or based on feedback.

8. Think Big! ‐ Long term commitments.9 Tell your story – External (press releases Facebook Website)


9. Tell your story – External (press releases, Facebook, Website) Internal – Newsletters, Annual Report, Employee and Official meetings

TODAY’S RISK FOCUS

NCUA Supervisory Focus for 2012

“Accordingly, NCUA will focus supervisory efforts on credit unions with elevated levels of credit riskscredit unions with elevated levels of credit risks, interest rate risks, liquidity risks, and concentration risks.”

Source: NCUA Letter to Credit Unions 12‐CU‐01Source: NCUA Letter to Credit Unions 12 CU 01 (January 2012)


TODAY’S RISK FOCUS

Greater Risk Management Expectations

• What is Concentration Risk?

• Measuring Concentration Exposure

• Concentration Risk & Capital Adequacy

• Formulating Concentration Limits


REGULATOR RISK EXPECTATIONS

NCUA expects credit union management and officialsNCUA expects credit union management and officialsto be aware of what material concentrations existithi th i b l h t t t k i t twithin their balance sheets, to take appropriate steps

to measure, monitor, and control such concentrations, bl h l l f kand to establish a commensurate level of credit risk

analysis to monitor significant concentrations.

Source: The NCUA Report , October 2011 Number 10


CONCENTRATION RISK

A risk concentration is any single exposure or group ofexposures with the potential to produce losses largeexposures with the potential to produce losses largeenough (relative to capital, total assets, or overall riskl l) t th t fi i l i tit ti ’ h lthlevel) to threaten a financial institution’s health orability to maintain its core operations.According to NCUA – Supervisory Letter 10‐03 , 2010“It is up to the credit union management to identify the

i k i h d t i li tif th i krisk in each product or service line, quantify the risk and set appropriate concentration limits based on the analysis ”


the analysis.

TYPICAL CONCENTRATION RISK HIERACHY

• Credit Default Risk• Credit Default Risk• Interest Rate Risk Li idit Ri k• Liquidity Risk

• Price / Market Risk l k• Operational Risk

• Third‐Party Risk


TYPICAL CONCENTRATION RISK ‐ SOURCES

• Residential mortgage 1st & 2nd lien portfolios • Member business loans (MBLs)• Member business loans (MBLs) • Sub‐prime and indirect loans M t l t d iti (MBS & CMO )• Mortgage‐related securities (MBS & CMOs)

• Loan participations l• Unsecured loans

• Limited share product diversification • Single credit & borrowing source


BUILD A RBNW MATIX

WHAT YOU NEED –

• Balance sheet stratified at product and group levels I t t t i k d i l tilit i k d t• Interest rate risk and price volatility risk data

• Investments stratified by issuer, type, collateral, etc k ll ( )• Risk surveillance (MDPA program)

• Loan participation or other third‐party data • Allowance for loan loss data • Liquidity forecast, liquidity planning


CONCENTRATION LIMITS

Once a minimum RBNW requirement is known andit has been compared against actual “adjusted” netit has been compared against actual adjusted networth, the credit union can: 1 D t i if t it l t th t1. Determine if current capital supports the aggregate balance sheet risk components.

2 Identify products that generate the most risk2. Identify products that generate the most risk. 3. Identify interrelated risks among and/or across product types or scenarioproduct types or scenario.

4. Begin to establish or adjust concentration limits at the product and group levels


the product and group levels

CONCENTRATION LIMITS

5. Focus on the largest concentration first.6 Determine if balance sheet size is held steady or6. Determine if balance sheet size is held steady or grows/shrinks. Adjust share‐liabilities if needed.

7 Evaluate product and group concentration limits in7. Evaluate product and group concentration limits in conjunction with strategic initiatives, budget forecasts, and member trends. ,

8. Consider other related ALCO limits or policies. 9. Board review and approval.9. Board review and approval.


RISK MANAGEMENT

• Maintain accurate and detailed portfolio data. • Understand and track loan level risk factors• Understand and track loan‐level risk factors. • Identify & understand interrelationships within balance sheet and between risk componentsbalance sheet and between risk components.

• Timely and relevant concentration risk reporting. • Documented policies and guidelines• Documented policies and guidelines. • Effective risk mitigation strategies


STRATEGIC BOARD LEVEL ISSUES

• Board succession• Management succession• Board expectations, effectiveness and accountability• Set strategic units, markets and geographic scope• Risk identification, policy limits, measurement and reporting

d• Compensation and incentive programs• Growth and performance expectations• Core values and code of conduct• Core values and code of conduct


STRATEGIC MANAGEMENT LEVEL ISSUES

• External factors and economic trends• Earnings, growth and performanceEarnings, growth and performance• Risk identification and monitoring• Market segments and product offerings• Image, reputation and competitive assessment• Employee management – training, retention, performance,

i i icommunication, compensation• Service quality standards• Financial strategies and reporting• Financial strategies and reporting• Regulatory change and compliance


STRATEGIC MANAGEMENT FOR CHANGE

• Keep it simple and clearKeep it simple and clear• Good organizations start with good leadership at the top• Identify critical impact areas• Begin with the “end in mind” – develop a vision for success• Clear and accountable timelines• Always have an action plan• Communicate – where you are headed and how we’re doing


STRATGIC PRIORITIES ‐ 2012

• Regulatory and compliance issues• Capital adequacyCapital adequacy• Enterprise risk assessment• Asset quality (ALL, concentrations, credit quality, appraisals,

problem loan management, investment strategy and quality)• Margin, spread management (interest rate risk)

i idi h fl d l• Liquidity management – cash flow and alternate sources• Share growth• Overhead efficiency and technology deployment• Overhead efficiency and technology deployment• Efficiency of processes• HR management


g• Identification of target segments – business units, members

HOW TO OPERATE STRATEGICALLY

• Listen to your membersListen to your members • Clearly define your business• Think, plan and act with a long term focus• Build effective processes – for them and you• Understand your “bets” (Risk)• Invest in employees and organizational structure and culture• Ask for business

R i t th t t b d h• Resist the status quo – embrace and manage change• Operate with a sense of urgency – tackle the big issues


• Questions

• Kenneth Welch, CPA• Partner • Credit Union Group• Ph. (703) 825‐2182

K h l h@ lif l ll


• [email protected]

risk environment - cliftonlarsenallen

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