22 nd Annual Conference Association of Credit Union Internal Auditors June 22, 2012

1. 22nd Annual Conference Association of Credit Union Internal Auditors June 22, 2012 “What Will NCUA Look For in 2012-13?”

2. NCUA Hot Topics • Recent Trends • Risk Concentrations • Credit Risk • Interest Rate Risk • Third Party Due Diligence • Credit Union Service Organizations (CUSOs) • Other Examination Focus Areas

3. Recent Trends

4. Performance Snapshot • Strong Share Growth • Loan Growth Turned Positive in 2011 • Improved Earnings • Declining Delinquency and Losses • Strong Net Worth • Positive Member Growth • Over $1 Trillion in Assets

5. Net Worth (Capital) Levels

6. Earnings Performance

7. Credit Union Lending Activity Credit unions continued to lend during the recession.

8. Problem Credit Union Trends

9. CAMEL 3 Trends

10. NCUSIF Performance NCUSIF Capitalized with 1% Deposit Transfer to Stabilization Fund

11. Risk Concentrations

12. Risk Concentrations • Concentration in Real Estate Assets (47%) • Strong Growth in Mortgage Related Assets • High Concentration of Assets and Net Worth • Increasing Reliance on Volatile Funding • Money Market Accounts • Certificates • Short term borrowing • NCUA Letter to Credit Unions 10-CU-03 • Establish policies, procedures and controls • Establish acceptable risk limits • Review reports on risk exposure regularly • Establish actions to take when risk limits are reached

13. The Changing Balance Sheet 55% 39% 32% 23% 84% 65% 48% 41% 12/31/00 12/31/11

14. Growing Concentration of Real Estate Related Assets

15. Credit Risk Trends

16. Delinquency by Loan Type

17. Troubled Debt Restructuring • New Rule Finalized May 2012 • Allows calculation of past due status consistent with loan terms. made through TDR. Thus eliminates delinquency tracking burden on TDR loans. • Requires policies and controls governing workout arrangements • Requires credit unions discontinue interest accrual on loans past due by 90 days or more and establish requirements to return such loans to accrual. • Compliance Date October 1, 2012

18. Interest Rate Risk • Rule finalized January 2012 • Effective September 30, 2012 • Applies to: • Assets $10 to $50 million if sum of first mortgage loans held and investments with maturity over five years is equal to or greater than 100% of credit union’s net worth; and • All credit unions with assets over $50 million • See LCU 12-CU-05

19. ≈450 bps!

20. Third Party Due Diligence

21. Third Party Due Diligence • Steps involved in due diligence • Background check • Business Model • Cash Flows • Financial and Operational Control Review • Contract Issues and Legal Review • Accounting Considerations • NCUA Guidance • LCU 01-CU-20 • LCU 07-CU-13 • LCU 08-CU-09

22. CUSOs • Expands requirements of CUSO regulation that apply to FISCUs • Address accounting, financial statements and audits • Address limits on “less than adequately capitalized” • Adds new registration requirement • All CUSOs must annually provide profile information • CUSOs involved in complex or high-risk activities must provide detailed reports • All subsidiary CUSOs must follow applicable laws and regulations

23. Other Examination Focus Areas

24. Audit, Internal Audit and Supervisory Committee Review • Recent Material Loss Reviews emphasize importance of evaluating internal controls. • Examiners will review audit, internal audit and Supervisory Committee activities during examinations. • Audit workpapers. • Member account verification support. • Interviewing SC and or IA Department. • Commensurate with size, complexity, internal control structure and risk profile of credit union. • If SC or IA department performs annual audit, examiners will review audit workpapers at every examination.

25. Small Credit Union Examination Program • FCUs with $10 million or less in assets with CAMEL of 1, 2, or 3. • Reduces the minimum required examination scope. • Supplements existing Risk Focused Examination practices. • Examiners may refine and adjust scope as circumstances warrant.

26. Questions