National Federation of Community Development CUs Annual Meeting

1. National Federation of Community Development CUs Annual Meeting Alonzo A. Swann III NCUA Region III Director June 8, 2007

2. Objectives of this Session.. Introduce you to the Interpretative Ruling and Policy Statement #02-3. Highlight your responsibilities in implementing this IRPS. Explain the NCUA�s responsibilities in enforcing this IRPS. Explain Updates to IRPS (Accounting Bulletin 06-01. Discuss Common Mistakes Regarding ALLL.

3. IRPS 02-3 - Key Points All credit unions must comply with GAAP in relation to the ALLL. Management is responsible for developing and documenting their methodology and establishing an appropriate ALLL level. Credit unions must ensure there is an independent review of the methodology completed periodically by either the Supervisory Committee, internal auditors, or external auditors.

4. What does this IRPS Replace? Old valuation test method for ALLL reasonableness was a 2-step process Classification of delinquent loans Historical net charge off factor Methodology (old) based on EXPECTED loss rather than INCURRED loss

5. NO More RAP Old two-step process is OUT & GONE GAAP requires compliance by selecting FAS # 5 FAS #114 (if applicable) Formulate process, prepare policies and implement procedures

6. What changed NCUA�s Position on the Old Methodology? New Method comes as a result of the Credit Union Membership Access Act of 1998 � which requires: CU�s $10 million or more must conform to Generally Accepted Accounting Principles (GAAP) Part 702 of NCUA Rules and Regulations requires GAAP for all credit unions.

7. Accounting Guidance SFAS #5, Accounting for Contingencies FAS Interpretation #14, Reasonable Estimation of the Amount of a Loss � an interpretation of FASB Statement #5 SFAS #114, Accounting by Creditors for Impairment of a Loan AICPA Audit and Accounting Guide, Banks and Savings Institutions FASB Viewpoints Article, Application of FASB Statements 5 and 114 to a Loan Portfolio

8. It is Very Important that the  Process be: Appropriate FAS #5 FAS #114 Systematic: Your Charge-Off Policy must be strong so that loans are charged off on a timely basis � Letter to CUs Consistent: Applied from period to period Validated: Via 3rd party testing GAAP -FAS #5 and FAS #114 apply to all credit unions regardless of size -A lower or higher ALLL balance may be a byproduct of conversion to GAAP -For many CUs conversion has resulted in a lower ALLL balance GAAP -FAS #5 and FAS #114 apply to all credit unions regardless of size -A lower or higher ALLL balance may be a byproduct of conversion to GAAP -For many CUs conversion has resulted in a lower ALLL balance

9. Other Significant Points Loss allowance has only two parts Component(s) for specific pools of loans (SFAS 5); these are homogenous loans with similar characteristics Component for loans individually evaluated for impairment (SFAS 114); these are very large-balance non-homogenous loans SFAS 114 will be very rare for small credit unions. There are no other components to the analysis.

10. FAS#5 Applies To: Consumer Loans Small balance business loans Small balance agricultural loans For most CU�s only FAS #5 will be applicable