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NCUA names risks as 2012 supervisory priority

ALEXANDRIA, Va. (1/5/12)--While pointing out in its first letter to credit unions of the year (12-CU-01) that credit union finances continue to improve, National Credit Union Administration (NCUA) also provided credit unions with a heads up on the risk issues it will be particularly tracking this year.

Credit risk, interest rate and liquidity risk, and concentration risk levels will be watched closely by the NCUA, agency chairman Debbie Matz said the letter.

The list of risks is drawn from trends the NCUA has identified in its analysis for the credit union system's numbers from Jan. 1, 2011 through Sept. 30 of that year. The NCUA's third quarter call report data, which was released last year, showed increases in member totals, net worth and total assets, with total credit union assets increasing to $951.1 billion. The net worth ratio equaled 10.15% during the third quarter, and credit union share deposits increased by $7 billion during that time period, totaling $819.2 billion at the end of the quarter.

The NCUA letter said that federally insured credit unions, overall, "appear to be turning the corner," with "many key financial indicators" trending in the right direction, and added that the NCUA will monitor emerging risks "to ensure that the positive financial trends continue in 2012."

One of the highlighted risks, credit risks, "persist in constraining the performance of many credit unions," with delinquencies and charge-offs tied to real estate loans, business loans, and participation loans remaining "historically high," the NCUA said. The agency recommended that credit unions evaluate its Allowance for Loan and Lease Loss1 (ALLL) account, and fully fund that account, to cope with these risks. Credit unions should also monitor their loan modification policies and procedures "to ensure that each borrower is a suitable candidate for modification or other alternatives to foreclosure," the NCUA added.

The NCUA has also recommended that credit unions with high exposure to interest rate risks should "proactively re-structure their balance sheets, sell off excessive concentrations of long-term loans, and re-price share products before rates begin to rise."

Interest rate risks can be exacerbated by holding growing portfolios of long-term, fixed-rate loans and the purchase of investments with longer maturities to obtain slightly higher yields, the NCUA added. New and outsourced loan programs, as well as third-party indirect loan programs, also can be risky, the NCUA said. The agency also warned that credit unions that hold high concentrations of long-term fixed-rate loans could "be subject to negative margins when interest rates rise and short-term funding costs exceed income from fixed-rate mortgages," and said an increase in long-term delinquencies may lead to a sharp increase in charge-offs "in the near future."

"While the NCUA board intends to propose regulatory relief from the requirement to manually track Troubled Debt Restructurings in 2012, credit unions will still need to monitor performance of modified loans on an ongoing basis to properly mitigate credit risks," the letter said.

For the full NCUA letter to credit unions, use the resource link.
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