Scott Neat, Director of Supervision. NCUA Office of Examination and Insurance. CUNA CFO Conference. NCUA Current Issues May 19, 2014 Las Vegas, NV

Transcription

1 Scott Neat, Director of Supervision NCUA Office of Examination and Insurance NCUA Current Issues May 19, 2014 Las Vegas, NV

2 Long Term Trends 14,000 12,000 10, Years Reflects Tremedous Financial Growth and Consolidation 12,891 1,061,916 1,200,000 1,000, , ,000 Millions 8,000 6,000 4, ,700 6, , , ,000 2, , , , # CUs Total Assets Total Loans Total Shares 0 2

3 Asset Groupings Asset Group Asset Group Asset Group Asset Group Under $10 $10 million to $100 million to $500 million and million $100 million $500 million Greater # of Credit Unions 2,181 2,918 1, Total Assets $8.75 billion $ billion $ billion $ billion Average Assets/CU $4.01 million $36.94 million $ million $1, million Net Worth / Total Assets 14.67% 11.70% 10.79% 10.59% Average Net Worth (non-dollar weighted) 16.19% 12.15% 10.75% 10.72% Net Worth Growth* -1.28% 3.10% 6.49% 9.56% Return on Average Assets (ROA) -0.16% 0.32% 0.60% 0.93% Net Interest Margin/Average Assets 3.28% 3.08% 3.01% 2.69% Fee & Other Income/Average Assets 0.70% 1.17% 1.51% 1.38% Operating Expense/Average Assets 3.87% 3.69% 3.70% 2.91% Members / Full-Time Employees Provision for Loan Loss/Average Assets 0.29% 0.24% 0.26% 0.27% Loans / Shares 56.02% 58.79% 68.39% 73.79% Delinquent Loans / Total Loans 2.20% 1.31% 1.06% 0.94% % of Real Estate Loans Delinquent > 59 Days 2.14% 1.43% 1.23% 1.10% % of Member Business Loans Delinquent > 59 Days 1.23% 1.14% 1.32% 1.62% Net Charge-Offs/Average Loans 0.67% 0.52% 0.54% 0.58% Share Growth* -0.73% 2.05% 3.65% 4.95% Loan Growth* 0.52% 3.35% 7.22% 9.89% Asset Growth* -0.80% 2.05% 3.82% 5.30% Membership Growth* -2.28% -0.25% 2.29% 5.10% Net Long-Term Assets / Total Assets 10.77% 27.51% 36.58% 37.26% Cash + Short-Term Investments / Assets 31.36% 21.15% 14.46% 13.88% Borrowings / Shares & Net Worth 0.14% 0.25% 1.16% 3.97% 3

4 Financial Performance 4

5 Earnings Components YIELDS VS. COST OF FUNDS 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 6.28% 6.06% 5.76% 5.42% 5.01% 2.63% 1.74% 1.95% 1.61% 1.21% 0.93% 1.27% 1.14% 0.73% 0.59% Yield on Avg. Loans Yield on Avg. Investments Cost of Funds Narrowing Margins Could Spell Trouble Down the Road RETURN ON AVERAGE ASSETS VS. PROVISION FOR LOAN & LEASE LOSSES (PLLL) 1.2% 1.13% PLL Funded ROA improvement is tapering off. 1.0% 0.8% 0.6% 0.4% 0.2% 0.18% 0.78% 0.50% 0.67% 0.50% 0.85% 0.36% 0.78% 0.26% 0.0% Return on Average Assets PLL to Average Assets 5

6 Real Estate Loan Credit Risk LOAN DISTRIBUTION (In Billions) FIRST MORTGAGE REAL ESTATE LOANS (In Billions) Other $ % Unsecured $ % Adjustable Rate $ % Real Estate $ % Vehicle $ % Balloon / Hybrid $ % Fixed Rate $ % REAL ESTATE DELINQUENCY 3.5% 3.21% 3.0% 2.5% 2.0% 1.5% 1.0% 1.76% 2.00% 2.01% 1.38% 1.15% 1.21% 1.79% 1.57% 0.91% 1.00% 1.66% 1.15% 1.31% 0.80% 0.5% 0.0% st Mtg Fixed 1st Mtg Adj Other Fixed Other Adj. Total RE 6

7 Three Credit Union Profiles Small Mid-Sized Large 4,332 Units % $61.7 B in Assets - 5.8% 1,452 Units % $162.1 B in Assets % 770 Units % $838.2 B in Assets % $50 Million $250 Million 7

8 Growth Trends (10 year outlook) Hundreds Total Credit Unions Red Bars Straight Line Projection Millions Avg Assets Red Bars Straight Line Projection Total Credit Unions 7,554 7,339 7,094 6,819 6,554 6,357 6,167 5,982 5,802 5,628 5,459 5,296 5,137 4,983 4,833 - Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Red Bars = Forecast Based on Average 3% Decline in Number of Credit Unions Year over Year Years Out approx. 1,500 fewer CU in Number Red Bars = Forecast Based on Average 4.7% growth in assets. Average Assets will likely double and approach $350 million from current $160 million. 8

9 IRR IS THE SINGLE LARGEST EXPOSURE FOR THE CU INDUSTRY TODAY 9

10 Mortgage Trends 10

11 The CU Balance Sheet has Changed 37% 38% 34% Changing FICU Balance Sheet Structure 40% 35% 26% 28% 29% 25% Core Deposit Cushion has materially declined from a high of 38% to 7% over the last 23 yrs. No room for error. 30% 25% 22% 21% 18% 20% 15% 14% 15% 15% 12% 15% 8% 6% 7% 10% 3% 5% 1% 0.1% 0% (Regular Shares + Drafts - Total RE Loans)/Total Assets = Core Deposit Cushion -4% -6% -3% -5% -10% 11

12 Net Long Term Asset Share 12

13 Exposure to Long-Term Investments is Rising 13

14 Balance Sheet Risk Poor IRR Management Slow Heart Attack Poor Liquidity Management Blunt Force 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) Either can kill you Poor Liquidity Amplifies IRR Vulnerability 14

15 IRR The Next Crisis? Single Biggest Risk Concern Across the Industry Liquidity is Related --- May Trigger Crisis IRR Complacency ---- Overconfidence in Assumptions Overreliance on Historical Data/Performance Liquidity Stretch for Near Term Yield at Cost of Long Term Performance It is Imperative and Expected that Management Will Establish Strong Discipline in the IRR & Liquidity Management Strategy 15

16 Liquidity Scaled Appropriately to Size and Complexity $>250 mm $50-$250 mm <$50 mm Liquidity Policy + Contingency Funding Plan+ Federal Contingency Funding Source Liquidity Policy + Contingency Funding Plan Basic Liquidity Policy + Contingency Sources List 16

17 Liquidity Liquidity can trigger crisis History shows Bad times are survivable with adequate liquidity Reasonable plans appropriately scaled Small = basic Large/sophisticated = robust and comprehensive Sources contemplated by all Small = List Med = Plan Large = Positioned Federal Source 17

18 So What is Number 2 Priority for NCUA this year? 18

19 #2 Risk Priority for NCUA in 2014 CYBERSECURITY 19

20 Growing Risk Exposure Cyber Security Size is not so important for criminals anymore Inter-connectedness can compound risk Key Concerns Financial Risk Loss of Assets Account Takeovers $136 cost per capita worldwide - $188 in U.S. (source Ponemon Institute 2013 Study) Reputation/financial Risk loss of personal data function (ID Theft) Target - Profit down 46% sales fell 5.3% since breach. (CBSnews.com) 4214 Breaches in US made public since 2005 (source Privacy Rights.org) 860+ Million Records Stolen Medical, Schools, Financial Institutions, Government. Some Examples DDOS Attacks on FICUs in 2013 CU Corporate Acct takeover - $100k outgoing before Corporate CU stopped. Target Breach - 40 million + records Heartbleed 2 year vulnerability in SSL AOL Deep Breach of Personal Info Michaels April million card numbers 20

21 Cybersecurity Risks Where is the greatest financial gain for bad actors? Who s success depends significantly on public confidence? How much attention have you paid to this lately How much of an investment have you made in security lately? 21

22 Who are the Threat Actors? Nation-States; Hacktivists; Organized Criminals; Insiders What is their Motivation? Espionage (Political & Corporate) Fraud Disruption Destruction Social or political message Undermining reputation/confidence Notoriety - Recruitment War 22

23 Impact of Cyber Threats What Is The Impact? Public Confidence+++ NATION-STATE: Spear phishing to install malware Core product intellectual property stolen HACKTIVIST: Distributed Denial of Service Limited customer access to online banking ORGANIZED CRIME: ATM Cash Out INSIDER: Data theft through internal access $40 million stolen from one institution Stolen Database of Customer Accounts 23

24 FICU Automation Landscape Core Processing Systems in FICUs Other 96 CU Developed In-House System 26 Vendor On-Line Service Bureau 2,233 Vendor Supplied In-House System 4,152 Manual System (No Automation) ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 24

25 FICU Automation Landscape Core Processing Systems in FICUs Other 96 CU Developed In-House System 26 Vendor On-Line Service Bureau 2,233 Systemic - Interconnected Vendor Supplied In-House System 4,152 Manual System (No Automation) ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 25

26 FICU Automation Landscape Core Processing Systems in FICUs Other CU Developed In-House System Internal Resources and Expertise? Vendor On-Line Service Bureau 2,233 Vendor Supplied In-House System 4,152 Manual System (No Automation) ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 26

27 What to Expect In 2014 Training Security Assessment Exam Sweep Possible interagency and NCUA working Groups Supervisory Guidance 27

28 Other NCUA Hot Topics 28

29 Proposed Risk-based Capital Why the change? A little history 12 year old system Overlaid into historical CU model First pass intended more to fit industry into the RBC structure. Balance sheet shifted over the years. Long term assets surpass comparable bank holdings Complex assets make up a substantial portion of balance sheet Complex and volatile funding sources compose largest portion of balance sheet funding sources Lessons learned from crisis highlighted weaknesses. Concentrations turbocharge losses Volatile sources can dry up rapidly (causing crisis) High concentrations cause losses many times the typical failure loss rate* All of these things point to the need for a change * Loss given default typically ranges 15%-20% for failed credit unions vs. 50% or more of reported assets for highly concentrated CUs. 29

30 Remember Cooperative System means the collective jointly underwrites industry risk You pay for your neighbors bad judgment RBC Intends to Target This Group 30

31 Proposed Risk-based Capital What changed? New calculation method (Basel like) Capital is capital is capital. Assets are scored or weighted Updated weights some higher, and some lower NCUA must differentiate for relevant risks (unlike FDIC). High concentrations are a relevant risk IRR is a relevant risk Historical CU core activities receive lower weights Areas of greatest concern receive progressive weighting. RBC represents an incremental change for FICUs Disincentives for excessive risk-taking Excessive IRR, or Concentrations Requires FICUs to more actively plan and manage capital 31

32 RBC Impact 32

33 Risk Based Capital We recognize this is a major change Listening to all concerns Expect to make changes based on feedback and additional analysis Comments Due 5/28/

34 Small Credit Union Exam Program (SCUEP) Hours Distribution Based on FICU Size 60.00% 50.00% 51% 40.00% 40% 30.00% 20.00% 15% 27% 26% 20% 13% Assets Hours 10.00% 6.00% 0.00% < $50 MM $50 MM - $250 MM $250 MM - $1 B > $1 B 34

35 Small Credit Unions Time in CU has greater impact on small than large. Small CUs fail for specific reasons Examiners historically support/prop and try to help during exam Examiners not best resource for this and taints exam objectivity Faster more precise targeted exam may result in performance gains while improving NCUA efficiency. 35

36 SCUEP New structured tiered exam process. Targets key risk drivers in small CUs. Shorter on-site time streamlined reporting approach. Test-Pilot-SCUEP = all the same thing. We are running the program in 2014 to evaluate effectiveness efficiency late in year. 36

37 Private Student Loans Tuition Costs Financial Aid No More Private Lender GSLs Rising Education Costs Flat Household Income Growing Aid GAP/Federal Coverage GAP $23 - $57k max for four year program* Aid does not maintain pace with costs Long Term Loan Commitment Promise of Future Earnings No Collateral Bankruptcy Exemption IRR Liquidity Risk FCU Act - Limitations 37

38 Major Mortgage Market Changes Mortgage Rules Implementation Major changes for CU mortgage Lenders Small Lender Exemptions complicate compliance Potential Uncertainty - market impact & unintended consequences Exam Expectations Good Faith Efforts Count At Least Initially Systems, Forms, Training, Policies/Procedures, and QC in your institution will be reviewed Due diligence with DP Systems 38

39 Ability to Repay What Exactly Is It? TIL Requirement All Federally Related Covered Loans Ability to Repay TIL QM Non QM 8 ATR Requirements All Federally Related Covered Mortgages General Specific Criteria Temporary QM GSE Related Balloon both stds are identical Additional Criteria Limited Application Small Portfolio Lender Alternate QM ATR Standards 1. Fully Indexed Payment Consider and verify: 2. mortgage related obligations 3. Income/Assets 4. Employment Status 5. Simultaneous loans 6. Debt, alimony,, child support 7. DTI, residual income 8. Credit History ATR Standard Applies to All Loans QM Flavors are subset of ATR 39

40 Mortgage lending regulations NCUAs Perspective Examiner training ongoing Tools launched for evaluation Implementation expected soon FICUs should be moving toward full compliance diligently 40

41 Late Filers Consistent radical drop in # late filers Initial penalties will be assessed for 3/31 cycle. Matrix based on several factors Goal is to zero out late filers not to generate penalties 41

42 Office Contact Page Feel free to contact our office with questions or comments. Primary Staff: Scott Neat, Director of Supervision, NCUA Office of Examination & Insurance Office Phone: