Ken Welch's presentation on Risk Environment during the Volunteer Track of the 9th Annual Police Officers' Credit Union Conference.

1. ©2012 CliftonLarsonAllen LLP
©
POLICE OFFICERS
CREDIT UNION CONFERENCE
2012
STRATEGIC DECISION MAKING
IN THE CURRENT FINANCIAL
IN THE CURRENT FINANCIAL
ENVIRONMENT
11 ©2012 CliftonLarsonAllen LLP

2. MARKETPLACE OPPORTUNITIES
• With anti‐big bank sentiment at an all‐time high and “profit at any cost”
Wall Street under high profile scrutiny, not‐for‐profit financial
cooperatives are positioned f b growth opportunity i d d
i ii d for best h i in decades
• Best opportunity in our credit union lifetime being hindered by corporate
losses, insurance premiums, income hits through regulation and statutory
changes and supervisory action proliferation
• If credit unions cannot seize the marketplace when the brass ring is
available, it is troublesome to imagine when such an opportunity will re‐
appear
• When opportunity rises for credit unions, it rises for all competitors…this
opportunity is historic and can be lost.
pp y
2 ©2012 CliftonLarsonAllen LLP

3. LEGISLATIVE OUTLOOK
• MBL CAP relief unpopular with banks but small business focus for credit
unions, we need to expertise but must manage the risk
• CURIA for credit unions was defeated, may come again
• Possible loss of tax exemption is major carrot
• FOM enhancements
• CUSO investment and increased regulation and oversight
• Interchange loss – 2 major defeats, must continue the fight
• Loss of independent regulator has been threatened
Loss of independent regulator has been threatened
• Going to need to be aggressive, willing to take managed risks in a tough
political environment
• “C
“Consumer protection” political umbrella is growing – areas of focus
t ti ” liti l b ll i i ff
(Overdraft fees, CC fees, mortgage refi fees, ATM surcharge, notifications,
data collection, affirmative action lending)
3 ©2012 CliftonLarsonAllen LLP

4. POSSIBILITIES...
• Lower corporate credit union assessments and recovery of legacy assets
• Mergers will continue and escalate, we will be at 5,000 credit unions
before you know it
– Troubled Credit Unions
– Inefficient Credit Unions
– Under capitalized Credit Unions
U d i li d C di U i
– Succession plan strategy
• Fewer Community Banks as well
• More shared branching
M h db hi
• Nationwide branding of the Credit Union Industry
• Credit Unions will need to grow to survive
• To grow and survive Credit Unions will need to stay focused on their
strategic advantages
4 ©2012 CliftonLarsonAllen LLP

5. COMMIT TO COMMUNITY INVOLEMENT
• Credit union mantra – “People Helping People”
• Demonstrate the Credit Union Difference with action
• To engage your CU in the community and establish/build relationships
To engage your CU in the community and establish/build relationships
• Because it’s “the right thing to do” as a progressive and responsible
business
business
• Improves CU image, reputation and brand recognition, builds goodwill,
and grows membership base
d b hi b
• Benefits the credit union financially –Non‐profit accounts, personal
accounts
5 ©2012 CliftonLarsonAllen LLP

6. COMMUNITY INVOLEMENT – HOW TO:
1. Define the business objectives for community involvement which
support a strategic plan.
2. Design a Corporate Social Responsibility Plan that integrates these
business objectives.
3. Determine key partnerships internally and externally.
4. Determine expectations for this program at the onset.
5. Allow ownership of program by team members.
6. Recognize participation in the program and make the team aware of its
Recognize participation in the program and make the team aware of its
successes Keep motivation high and commitment strong through
recognition.
7. Be willing to adjust the program to the needs of the community or based
Be willing to adjust the program to the needs of the community or based
on feedback.
8. Think Big! ‐ Long term commitments.
9.
9 Tell your story – External (press releases, Facebook, Website)
Tell your story – External (press releases Facebook Website)
Internal – Newsletters, Annual Report, Employee and Official meetings
6 ©2012 CliftonLarsonAllen LLP

7. TODAY’S RISK FOCUS
NCUA Supervisory Focus for 2012
“Accordingly, NCUA will focus supervisory efforts on
credit unions with elevated levels of credit risks,
credit unions with elevated levels of credit risks
interest rate risks, liquidity risks, and concentration
risks.”
Source: NCUA Letter to Credit Unions 12 CU 01
Source: NCUA Letter to Credit Unions 12‐CU‐01
(January 2012)
7 ©2012 CliftonLarsonAllen LLP

8. TODAY’S RISK FOCUS
Greater Risk Management Expectations
• What is Concentration Risk?
• Measuring Concentration Exposure
• Concentration Risk & Capital Adequacy
• Formulating Concentration Limits
8 ©2012 CliftonLarsonAllen LLP

9. REGULATOR RISK EXPECTATIONS
NCUA expects credit union management and officials
NCUA expects credit union management and officials
to be aware of what material concentrations exist
within their balance sheets, to take appropriate steps
ithi th i b l h t t t k i t t
to measure, monitor, and control such concentrations,
and to establish a commensurate level of credit risk
bl h l l f k
analysis to monitor significant concentrations.
Source: The NCUA Report , October 2011 Number 10
9 ©2012 CliftonLarsonAllen LLP

10. CONCENTRATION RISK
A risk concentration is any single exposure or group of
exposures with the potential to produce losses large
enough (relative to capital, total assets, or overall risk
level) to threaten financial i tit ti ’ h lth or
l l) t th t a fi i l institution’s health
ability to maintain its core operations.
According to NCUA – Supervisory Letter 10‐03 , 2010
“It is up to the credit union management to identify the
risk in each product or service line, quantify the risk
i ki h d t i li tif th i k
and set appropriate concentration limits based on
the analysis.
the analysis ”
10 ©2012 CliftonLarsonAllen LLP

11. TYPICAL CONCENTRATION RISK HIERACHY
• Credit Default Risk
Credit Default Risk
• Interest Rate Risk
• Liquidity Risk
Li idit Ri k
• Price / Market Risk
• Operational Risk
l k
• Third‐Party Risk
11 ©2012 CliftonLarsonAllen LLP

12. TYPICAL CONCENTRATION RISK ‐ SOURCES
• Residential mortgage 1st & 2nd lien portfolios
• Member business loans (MBLs)
Member business loans (MBLs)
• Sub‐prime and indirect loans
• Mortgage‐related securities (MBS & CMOs)
M t l t d iti (MBS & CMO )
• Loan participations
• Unsecured loans
l
• Limited share product diversification
• Single credit & borrowing source
12 ©2012 CliftonLarsonAllen LLP

13. BUILD A RBNW MATIX
WHAT YOU NEED –
• Balance sheet stratified at product and group levels
• Interest rate risk and price volatility risk data
I t t t ik d i l tilit i k d t
• Investments stratified by issuer, type, collateral, etc
• Risk surveillance (MDPA program)
k ll ( )
• Loan participation or other third‐party data
• Allowance for loan loss data
• Liquidity forecast, liquidity planning
13 ©2012 CliftonLarsonAllen LLP

14. CONCENTRATION LIMITS
Once a minimum RBNW requirement is known and
it has been compared against actual adjusted net
it has been compared against actual “adjusted” net
worth, the credit union can:
1. Determine if current capital supports the aggregate
1 D t i if t it l t th t
balance sheet risk components.
2. Identify products that generate the most risk.
2 Identify products that generate the most risk
3. Identify interrelated risks among and/or across
product types or scenario.
product types or scenario
4. Begin to establish or adjust concentration limits at
the product and group levels
the product and group levels
14 ©2012 CliftonLarsonAllen LLP

15. CONCENTRATION LIMITS
5. Focus on the largest concentration first.
6. Determine if balance sheet size is held steady or
6 Determine if balance sheet size is held steady or
grows/shrinks. Adjust share‐liabilities if needed.
7. Evaluate product and group concentration limits in
7 Evaluate product and group concentration limits in
conjunction with strategic initiatives, budget
forecasts, and member trends.
,
8. Consider other related ALCO limits or policies.
9. Board review and approval.
9. Board review and approval.
15 ©2012 CliftonLarsonAllen LLP

16. RISK MANAGEMENT
• Maintain accurate and detailed portfolio data.
• Understand and track loan level risk factors
Understand and track loan‐level risk factors.
• Identify & understand interrelationships within
balance sheet and between risk components.
balance sheet and between risk components
• Timely and relevant concentration risk reporting.
• Documented policies and guidelines
Documented policies and guidelines.
• Effective risk mitigation strategies
16 ©2012 CliftonLarsonAllen LLP

17. STRATEGIC BOARD LEVEL ISSUES
• Board succession
• Management succession
• Board expectations, effectiveness and accountability
• Set strategic units, markets and geographic scope
• Risk identification, policy limits, measurement and reporting
• Compensation and incentive programs
d
• Growth and performance expectations
• Core values and code of conduct
Core values and code of conduct
17 ©2012 CliftonLarsonAllen LLP

18. STRATEGIC MANAGEMENT LEVEL ISSUES
• External factors and economic trends
• Earnings, growth and performance
Earnings, growth and performance
• Risk identification and monitoring
• Market segments and product offerings
• Image, reputation and competitive assessment
• Employee management – training, retention, performance,
communication, compensation
i i i
• Service quality standards
• Financial strategies and reporting
Financial strategies and reporting
• Regulatory change and compliance
18 ©2012 CliftonLarsonAllen LLP

19. STRATEGIC MANAGEMENT FOR CHANGE
• Keep it simple and clear
Keep it simple and clear
• Good organizations start with good leadership at the top
• Identify critical impact areas
• Begin with the “end in mind” – develop a vision for success
• Clear and accountable timelines
• Always have an action plan
• Communicate – where you are headed and how we’re doing
19 ©2012 CliftonLarsonAllen LLP

20. STRATGIC PRIORITIES ‐ 2012
• Regulatory and compliance issues
• Capital adequacy
Capital adequacy
• Enterprise risk assessment
• Asset quality (ALL, concentrations, credit quality, appraisals,
problem loan management, investment strategy and quality)
• Margin, spread management (interest rate risk)
• Liquidity management – cash flow and alternate sources
i idi h fl d l
• Share growth
• Overhead efficiency and technology deployment
Overhead efficiency and technology deployment
• Efficiency of processes
• g
HR management
• Identification of target segments – business units, members
20 ©2012 CliftonLarsonAllen LLP

21. HOW TO OPERATE STRATEGICALLY
• Listen to your members
Listen to your members
• Clearly define your business
• Think, plan and act with a long term focus
• Build effective processes – for them and you
• Understand your “bets” (Risk)
• Invest in employees and organizational structure and culture
• Ask for business
• Resist the status quo – embrace and manage change
R i t th t t b d h
• Operate with a sense of urgency – tackle the big issues
21 ©2012 CliftonLarsonAllen LLP

22. • Questions
• Kenneth Welch, CPA
• Partner
• Credit Union Group
• Ph. (703) 825‐2182
• Kenneth.welch@cliftonlarsonallen.com
K h l h@ lif l ll
22 ©2012 CliftonLarsonAllen LLP