Office of Examination & Insurance National Credit Union Administration. NCUA Update. Current Regulatory and Supervisory Initiatives.

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1 Office of Examination & Insurance National Credit Union Administration NCUA Update Current Regulatory and Supervisory Initiatives May 18, 2016

2 IRR Supervision IRR: Why this, why now? Drivers Trends Elevated vulnerability (for some) IRR Rule (2012) Derivative Rule (2013) Specialized reviews, research & analysis PCA Stakeholder discussions Revised thresholds and metrics 2

3 IRR Program 1. Standardized IRR Supervisory Test 2. Estimated NEV Tool 3. Defined tolerance thresholds including process for PCA 4. Streamlined procedures 5. Updated guide 6. Enhanced data 7. CAMELS 3

4 What are the benefits for CUs? 1. Targets outliers 2. Uniform, measurable, consistent and transparent supervisory measure 3. Clear expectations 4. Rating accuracy 5. Examiner consistency 6. Risk-focused discussions 7. Negligible burden 4

5 What are the benefits for NCUA? 1. Measures relative risk (baseline and benchmark) 2. IDs outliers 3. Increases clarity/transparency 4. Enhances surveillance/monitoring 5. Increases consistency 6. Improves resource allocation 7. Improves communication 5

6 NEV Supervisory Test 1. Post- Shock NEV* 2. Post-Shock IRR Sensitivity (% change from Base) 0% n% Above Z% Low Moderate Y% - Z% X% - Y% Below X% *Using Standardized NMS Values for Base Case and Shock Test part one: The level of the post-shock NEV ratio Test part two: The percentage change in NEV from the base case to shock 6

7 Market Risk Ratings & Supervision Market Risk Rating Low Moderate High E Low - Supervision Details Routine examination and supervision process Moderate - Supervision Details Routine examination and supervision process High -Supervision Details Higher management expectations Possible heightened supervision May need to de-risk Extreme -Supervision Details Unsafe & Unsound Close Supervision Required Must de-risk (reasonable time) May necessitate PCA reclassification 7

8 AIRES Workbook Structure A Market Risk NEV Supervisory Test in tab H Analysis of Balance Sheet Valuations B Earnings at Risk C Stress Testing D Measurement Systems E Risk Management F Overall Rating Review of Approach Review of results/assumptions Review of Scenarios Results Platform assessments Platform controls Oversight Policies/Reporting/Controls/Staff Section Scores IRR Rating 8

9 Transition plan to S Rating Today: CAMEL Letter No. 07-CU-12 Future: Liquidity L C A M E L S ALM IRR New IRR supervisory rating will be incorporated into existing scheme (part of L rating) for now. Future CAMELS rating methodology may be issued for public notice and comment. At a minimum, would separate liquidity from sensitivity to market risk. 9

10 Office of Examination and Insurance Final Rule: Part 723 Member Business Loans

11 Member Business Loan Balances are Growing at a Steady Pace Net MBL Balance (NMBLB) and MBL as % of Total Loans MBL Composition by Loan Type $ in billions $70 $60 $50 $40 $30 $20 $10 $- $58.09 $ % $ % % 14% 12% 10% 8% 6% 4% 2% 0% C&D Loan, 3.88% Commerical and Industrial, 12.66% Owneroccupied Nonfarm and Nonresidential, 22.16% Ag Loan, 3.61% Unsecured and other, 1.03% Non owneroccupied Nonfarm and Non-residential, 31.20% Nonfarm Residential, 25.45% NMBLB (Left Axis) MBL OS as % of Total Loans (Right Axis) 11

12 Goals for Reform Replace overly prescriptive requirements with principles-based standards Reinforce risk management requirements needed to safely conduct commercial lending activities Improve the expertise requirements and policy provisions of the regulation 12

13 Goals for Reform Change supervisory focus to sound commercial risk management practices from compliance with prescriptive regulatory requirements Eliminate NCUA involvement in day-to-day operations of CUs by eliminating need for waivers Distinguish between commercial loans and the statutory definition of MBLs 13

14 Exemption Provision 723.1(b)(1) Exemption from the Board/ Management Responsibilities (723.3) and Loan Policy Requirements (723.4) Current Rule N/A Final Rule Smaller credit unions (Total Assets<$250MM) with limited commercial loan exposures and that infrequently originate and sell commercial loan participations are exempt from the commercial loan policy and board/management requirements 14

15 Board Responsibilities Provision Current Rule Final Rule Board of Director and Management Responsibilities Limited coverage (adopt and review policy) 2 years of direct experience Clearly articulates that the CU board is ultimately accountable Removed the 2 year requirement and specifies the types of experience with emphasis on commercial risk management 15

16 Policy Requirements Provision Current Rule Final Rule Loan Policy Requirements Limited coverage on risk management processes Requires underwriting commensurate with size, scope and complexity Requires a reliable credit risk rating system Requires a loan approval process Stipulates sound risk management processes including periodic loan review, exceptions tracking, etc. 16

17 Provision Current Rule Final Rule 723.4(c) Loans to a Single Borrower or a Group of Associated Borrowers Single Borrower Concentration Limit The greater of $100K or 15% of net worth Maintains the 15% limit with added flexibility to go up to 25% if the amount above the 15% is secured by readily marketable collateral Modifies the definition of associated borrower to narrow its scope (parallel change made to Loan Participation rule) 17

18 Provision Current Rule Final Rule 723.4(c) Unsecured MBLs Limit on Unsecured MBLs Lesser of $100,000 or 2.5% of Net Worth to one member (Well Capitalized CUs only) 10% of CU Net Worth Removed the limits Requires credit unions to set internal policy limits 18

19 Loan-To-Value Ratio Provision Current Rule Final Rule 723.5(a) LTV 80% Removed the 80% limit Requires sufficient collateral commensurate with the level of risk Excludes junior debt from other lenders in calculating the LTV ratio 19

20 Personal Guarantees Provision Current Rule Final Rule 723.5(b) Personal Guarantee Requires personal guarantee Removed the explicit requirement Requires credit unions to determine and document mitigating factors when personal guarantee is not required Requires credit unions to set internal policy limits 20

21 Construction & Development Loans Provision Construction and Development Loans Current Rule 25% equity interest 15% of net worth Final Rule Removed the limits Clearly defines collateral valuation method Requires CUs to value collateral appropriately and ensure risk sharing Requires CUs to set internal policy limit Stipulates loan administration requirements 21

22 Non-Member Business Loan Participations Provision Current Rule Final Rule Non-member business loan participations Included in the MBL cap unless waiver is granted Removed non-member business loans from the calculation against the MBL cap No longer requires waivers 22

23 State MBL Rules Provision Current Rule Final Rule State Rule Seven states have parallel rules (CT, IL, MD, OR, TX, WA, WI) Grandfathers the 7 existing state rules Preserves the option for a state to develop state rule that complies with FCU Act and is at least as stringent as Part

24 Implementation Timelines The final rule becomes effective Jan 1, 2017 However, 723.5(b) Personal Guarantee provision becomes effective May 13,

25 CREDIT 25

26 Credit Unions Posted Strong Loan Growth in 2015 Total Loans Outstanding and Loans as % of Total Assets Loan Composition $ in billions $900 $800 $700 $600 $500 $400 $300 $200 $100 $- $ % 58.48% 80% $ % 70% 65.35% 65% 60% 55% 50% % of Total Loans 100% 80% 60% 40% 20% 9.64% 0.44% 6.20% 33.30% 9.46% 40.95% Other Loans Student Loans Credit Cards Auto Loans Other RE Loans Total Loans Outstanding (Left Axis) Loans as % of Total Assets (Right Axis) 0% st Lien RE loans 26

27 Overall Credit Performance Remains Strong 5.0% Delinquency Rate by Loan Type 5.0% Net Charge-off Rate by Loan Type 4.0% 4.06% 4.0% 4.30% 3.0% 3.0% 2.06% 2.32% 2.19% 1.98% 2.0% 2.0% 1.0% 0.0% 1.18% 0.42% 0.27% 0.25% 1.61% % 1.09% 1.01% 0.75% 0.73% 0.68% 1.0% 0.0% 1.33% 0.98% 0.54% 0.40% 0.19% 0.07% 0.16% 0.01% 0.15% 0.05% 0.07% MBL Other RE loans Credit Cards 1st Lien RE loans Auto Loans Student Loans MBL 1st Lien RE loans Other RE loans Auto Loans Credit Cards Student Loans 27

28 LIQUIDITY 28

29 System Liquidity 12/31/14 12/31/15 Loans to assets 63.48% 65.35% % of FICUs with loan to asset ratios in excess of 80% 7.08% 7.71% Loan growth 10.42% 10.49% Share growth 4.47% 6.86% Cash + short-term investments to assets 13.65% 13.48% Borrowed funds to assets 3.48% 3.94% % of FICUs with borrowed funds 13.51% 13.07% # of FICUs that are members of the Central Liquidity Facility Loan growth outpaced share growth again in 2015 Credit union access to federal liquidity sources has continued to increase Banks Liquidity Coverage Ratio requirement impacts demand for high-quality liquid assets and deposit offerings 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Liquidity Loans/Shares (right axis) Borrowings/Shares and NW Cash+ST Inv/Assets Liquidity risk is not an immediate threat in most institutions; however, credit unions should: 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Set on-balance-sheet liquidity targets based on liquidity outflow experience. Understand access to market sources of funds and the level of unencumbered assets acceptable to lenders. Obtain access to a contingent federal liquidity provider such as the Discount Window or Central Liquidity Facility. This is required if over $250 million in total assets. 29

30 What are the Key Aspects of a Sound Liquidity Plan? Balance Sheet Market Funding Backup Facilities Hold cushion of unencumbered high quality liquid assets (e.g., cash, Treasuries) Establish funding strategy that provides for diversified sources of funding (e.g., corporate credit union or bank LOC, repurchase agreements, FHLBank advances, etc.) Maintain access to a Federal liquidity source for unexpected emergencies (i.e., Fed Discount Window, Central Liquidity Facility)

31 Liquidity Today 1. Balance Sheet 2. Market Funding 3. Backup Facilities Consumer loans are growing and cash & STinvestments are declining Loan-to-share ratio has risen Post-recession, markets have tightened Counterparty standards Securities markets trading All FICUs > $250m belong to CLF and/or have borrowing arrangements in place with Fed Loan-to-share ratio = 78% (highest since Q3 2009) Cash + ST Investments/Assets = 13% (down 26% in past 2 years) Does your contingency funding plan (CFP): Forecast funding needs? Identify contingent sources? Track assets available to sell/pledge? Include liquidity warning indicators? Address how often to test sources? Contingency Funding Plan 31

32 QUESTIONS? 32