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A CREDIT UNION WATCH LIST for 2013 and BEYOND

Explore the areas that can cause significant losses or threaten the future existence of your credit union. From governance to risk assessment, ensure you are doing the right things for your membership.

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A CREDIT UNION WATCH LIST for 2013 and BEYOND

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  1. A CREDIT UNION WATCH LIST for 2013 and BEYOND 2013 Utah Credit Union Association Annual Meeting and Convention March 9, 2013 Ron Parker, CPAparkerconsult@cox.net520-275-5043

  2. Watch List Areas WHAT CAN CAUSE OUR CREDIT UNION SIGNIFICANT LOSSES AND/OR THREATEN OUR FUTURE EXISTENCE!

  3. Watch List Areas • Governance—right things • Personnel—right people • Membership—right demographics • Products—right for our membership • Services—right for our membership • Delivery systems—right for our membership

  4. Watch List Areas • Planning—effective planning processes • Monitoring and measuring operational results—what and how • Risk assessment—what and how • Profitability and maintenance of capital • Regulatory and compliance focus

  5. Observations • More business like—profit oriented • More delegation to management • Greater focus on strategic vs. operational issues • More is expected and required—compliance for instance

  6. Observations • Clarification of responsibilities– NCUA rule 701.4, General authorities and duties of Federal credit union directors, took effect on January 27, 2011. The purpose of this rule is to clarify and document the important duties of boards of directors of federal credit unions.

  7. Observations • Increased focus on ethical conduct • Increased emphasis on improved corporate governance • Challenges in succession • Increased understanding of general credit union finances and risks

  8. ARE WE DOING THE RIGHT THINGS? or the same things?

  9. 2011 Letters to Federal Credit Unions 11-FCU-02 Duties of Federal Credit Union Boards of Directors; 02/2011

  10. Key Provisions • Responsible for the credit union’s general direction and control 2. Carry out duties in good faith, in the best interests of the membership 3. Administer affairs fairly, impartially, and without discrimination

  11. Maintain a working familiarity with basic finance and accounting practices 5. Direct operations in conformity with Federal Credit Union Act, NCUA Rules and Regs, other laws, and sound business practices. 6. Rely on information prepared or presented by employees or consultants to be reliable and competent

  12. Always Does the Right Things (even when unpopular) and believes in the Importance of Tone at the Top and Effective Corporate Governance Ethical--Understands and Supports the Credit Union’s Core Values (what we believe) and Code of Conduct Understands what constitutes effective corporate governance • Governance framework should provide strategic guidance and effective oversight of management • Clarify the roles and responsibilities of board members and senior management in order to facilitate board and management accountability to the both the credit union and its stakeholders. • Ensure a workable balance of authority

  13. BOARD GOVERNANCE • Understanding the board and management roles • Assessment of needs (succession) and recruit according • Annual board evaluation, assessment and rewards • Conflict and other appropriate ethics and conduct policies

  14. From Good to Great—You can’t achieve great things without great people!When in doubt, don’t hire or appoint—keep looking.When you know you need to make a people change, act.

  15. Determine the Appropriate Role for your Board and make certain that Management and Board roles are clearly defined.

  16. Policy Governance ModelBy John Carver 1. Establish expectations: What is the board and management responsible for; what do we expect from management, staff and ourselves. 2. Clearly stated responsibilities and authority: To the CEO, staff, committees etc. Doing so will allow the board to hold these groups accountable for meeting board-stated expectations.

  17. Corporate Governance The definition of corporate governance most widely used is "the system by which companies are directed and controlled” More specifically it is the framework by which the various stakeholder interests are balanced, or "the relationships among the management, Board of Directors and other stakeholders".

  18. Corporate Governance Golden Rule of corporate governanceis that the business morality or ethic must permeate an organization from top to bottom and embrace all stakeholders.

  19. Evaluate the Performance of Management, Board of Directors and major Committees (How many Committees do we need to function effectively?)

  20. New Directors on the Board Our board should have a mandatory retirement age Our board should have term limits Source: Filene Research Institute

  21. Avoid any and all actual orappearance of conflict of interest; unethical or inappropriate conduct!

  22. No Official nor Family Member Should Ever Profit in any manner from their position as a Credit Union Volunteer!

  23. In which areas do WEas a Board need to focus our attention? Where doIas an individual Board member need to focus my attention?

  24. Right Management Personnel--Officials and Key Management--Now and in the Future--Succession

  25. CEO Succession Planning If you had to name someone as CEO immediately (not on an interim or emergency basis), could you? If you have an emergency candidate to replace the CEO, is this person also a succession candidate? Source: Stanford University, Heidrick & Struggles (2010)

  26. Seven Steps To A Board Succession Plan Assess your credit union’s needs. List required attributes. Assess current board members. Provide opportunities for development. 1 5 Develop a process to anticipate voluntary board member departures. Build a list of potential members and start to orient them to the credit unions. Develop a formal board member succession policy. 2 6 3 4 7

  27. Who are our Leaders and Managers? Where will future leaders come from?

  28. Leaders climb trees and determine the direction we should go to get out of the jungle. Managers cut down the trees in the most efficient and effective manner. Leadership Vs. Management

  29. Have the Right Personnel…Hold Accountable…RewardAppropriately

  30. Appropriate Membership Growth/Demographics, Products, Services and Delivery Systems

  31. Mobile vs. Online Banking Adoption(by millions of households) Source: BAI Online Banking Report, 2010

  32. Likelihood of CUs’ Tech Investments Basic mobile banking (check balances/transfer funds) Online account opening Mobile payments Remote deposit capture (RDC) for all members E-statements Online banking application Mobile person-to-person payments Personal financial management tools RDC for business members Member-analytics tools Small-business online banking application Source: Aite Group, 2011

  33. Membership Growth and Demographics • Decreasing rate of membership growth • Decreasing number of members in prime borrowing years • Not able to attract 18-24 age group • Not able to attract minorities • Loyalty decreasing • 40% of eligible members not familiar with Credit Unions

  34. Growth of Ethnic Groups in U.S. 2010 2050 Source: U.S. Census Bureau (16% Hispanic in 2010=50.5 million)

  35. Are You Eligible to Join a CU?* Age Yes No Maybe Overall36% 19% 45% 18 to 24 11 10 79 25 to 34 55 13 32 35 to 44 28 27 44 45 to 54 41 22 37 55 to 64 45 22 33 65 or older 33% 20% 47% *Asked of nonmembers Source: CUNA’s 2011-2012 Survey of Potential Members

  36. CU Members’ Age Distribution Source: CUNA’s 2011-2012 National Member Survey

  37. RISK ASSESSMENT, MEASURING AND MONITORING

  38. DO WE UNDERSTAND THE LEVELS OF RISKBEING ASSUMED BY THE CREDIT UNION AND HOW THEY ARE MONITORED AND MEASURED BY MANAGEMENT!

  39. Credit Risk Interest Rate Risk Liquidity Risk Transaction Risk Compliance Risk Strategic Risk Reputation Risk Concentration Risk Growth Risk Types of Risk

  40. Credit Risk The Risk that we won’t get our money back from a loan, investment or other asset!

  41. Interest Rate Risk • If interest rates change, what will happen to our earnings? • How much capital is at risk? Earnings--Capital

  42. Liquidity Risk Risk that adequate cash will not be available to fund loans, meet withdrawal demands, or pay bills.

  43. Transaction Risk Risk of fraud or operation problems in transaction processing that results in an inability to deliver products, remain competitive, and manage information

  44. Compliance Risk Risk of violations and non-compliance with applicable laws and regulations resulting in fines, penalties, payment, or damages

  45. CEOs Concerned About Regulatory Burden 45% 70% 53% Interest-rate environment Weak economy/ loan demand Regulatory burden 19% 24% 18% 12% Growing fee income Membership growth Credit quality/ problem loans NCUA assessment Source: About Resources Inc.

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