NCUA UPDATE Utah’s Credit Unions Chairman/CEO and Volunteer Conference October 10, 2014

1. Elizabeth A. Whitehead NCUA Region V Director NCUA UPDATEUtah’s Credit UnionsChairman/CEO and Volunteer ConferenceOctober 10, 2014

2. Agenda National Trends Examination Modernization 2014 Exam Priorities

3. Credit Union Industry’s Trends Positive Trends in U.S. Credit Unions 2010 – 2014 3RD Qtr. 2012 Year-End2009 Year-End 2010 3

4. UtahCredit Unions’ Performance Trends in Utah Credit Unions Compared to U.S. Credit Unions 3RD Qtr. 2012 Year-End2009 Year-End 2010

5. Improving Credit Risk October 9, 2014

6. Problem Credit Unions Decreasing CAMEL 3, 4, and 5 Institutions

7. Decline in Number of Credit Unions Number of Institutions (by asset size)

8. Three Credit Union Profiles Total Assets: $1.01 Trillion $50M 4,245 1,460 786

9. exammodernization

10. Completed Initiatives • Restored annual exam cycle for federal credit unions and larger FISCUs • Established Office of National Examination and Supervision (ONES) • Corporate credit unions and NPCUs with more than $10 billion in assets • Developed National Supervision Policy Manual • Implemented Small Credit Union Exam Program

11. Completed Initiatives • Exam Modernization (LCU 13-CU-09) • Updated exam report cover letter • Separated DOR and Findings • Simplified Overview, DOR includes full discussion of material problems • DOR status report • Status update template • Removed informal discussion items • Controls over DORs (cessation, follow-up, communication with management)

12. Initiatives in Process • Small credit union exam techniques • Enhanced questionnaire workbook • Update of Examiner’s Guide • AIRES update • Loan, Investment, Shares and ALM Analytics • Value added analytics reports available to CUs • Better coordination in pre-exam process = less time onsite(?)

13. 2014 Exampriorities

15. New Requirements

16. Changing Credit Union Balance Sheets 20-Year Real Estate Loan Trends Increasing concentration results in increased interest rate risk sensitivity and slower increases in yields

17. Changing Credit Union Balance Sheets 20-Year Share Trends Increasing volatility and sensitivity from funding sources means costs will rise faster

18. Interest Rate Risk • Sophisticated balance sheets demand sophisticated and robust analysis • Interest rate risk rule in place (Part §741.3(b)(5)(i) of NCUA Rules and Regulations) • Requires written IRR policy and effective risk management programs • Rule does not apply to credit unions with less than $50 million in assets • Excess risk will be addressed through supervisory action

19. Cybersecurity Web Services in FICUs Nearly half of all FICU members use a transactional website Cybersecurity risk affects credit unions of all shapes and sizes

20. Cyber Security • Growing Risk Exposure • Size is not so important for criminals anymore • Inter-connectedness compounds risk • Some key fronts • 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) • 860+ Million Records Stolen since 2005 (privacy rights.org)

21. Cyber Security • Some Recent Examples • Target Breach - 40 million + records • Heartbleed – 2 year vulnerability in SSL • Internet Explorer vulnerability – May 2014 • AOL Breach – April 2014 • Michaels – April 2014 - 8 million card numbers • CU Corporate Acct takeover - $100k outgoing before Corporate CU stopped. • DDOS Attacks on FICUs in 2013

22. Cybersecurity Key Fronts • Financial risk (loss of assets, account takeovers) • $136 cost per capita worldwide • $188 cost per capita in U.S. • Reputation/financial risk (loss of personal data function, ID theft) • 860+ million records stolen since 2005 • Target Corporation’s profits fell 46%; sales fell 5.3% following data breach (CBSnews.com)

23. Cybersecurity Program Elements

24. Recent FraudAreas in Credit Unions

25. Major Areas of Control WeaknessesLending

26. Major Areas of Control WeaknessesChange Fund

27. Major Areas of Control WeaknessesIT Controls

28. Internal Control Realities

29. Types of Fraud Financial Statement Fraud Misappropriation of Assets

30. Financial Statement Fraud Mask delinquent loans (bumping due dates) Defer Loan charge offs (rewrite bad loans) Increase earnings for year end bonuses (usually ALLL account) Increase asset size for CEO contract negotiations (share CD specials) Hide incompetency

31. Misappropriation of Assets Stealing “borrowing” cash from change fund or teller drawers Fictitious loan and loan payments Unrecorded share deposits Loans to family and friends Unrecorded non-member share deposits

32. Fraud Hot Spots Poor accounting/internal controls or un-reconciled accounts (corporate statement) Fictitious and fraudulent loans Dormant/inactive accounts Un-cleared overdrafts Unrecorded shares No internal audit function

33. Internal Controls to Mitigate Losses Adopting travel expense policies and controls Implementing a whistleblower policy Restricting access to CU’s GL and corporate accounts, staff and related-party accounts. Segregating duties Rotating employee duties Fraud training with emphasis on fraud prevention Conducting mandatory investigations of all out-of-balances or shortages

34. Control Framework Controls can vary with the complexity of the organization Small institutions often have limited segregation of duties

35. Contact NCUA National Credit Union Administration Region V – Tempe, AZ 602-302-6000 region5@ncua.gov