NCUA Insights: Emerging Trends and Risk Management in Credit Unions

At the recent Brown Edwards Credit Union Seminar, attendees had the privilege of hearing from John Kren, a principal examiner with the NCUA. His presentation offered valuable insights into current trends and potential risks facing credit unions. Here are the key takeaways that will be most relevant to credit union management.

Examination Trends

The NCUA is observing a slight decline in the number of credit unions rated CAMEL 1 and 2, with a corresponding increase in those rated 3, 4, and 5. This trend is particularly noticeable among larger institutions, often driven by interest rate risk concerns.

Interest Rate Risk

The rapid rise in interest rates from March 2022 to February 2023 has significantly impacted credit unions. Key points include:

1. New Metrics: The NCUA has introduced new tools for assessing interest rate risk, including the Estimated Net Economic Value (ENT) tool and the Interest Rate Supervisory Test.
2. Non-Maturity Shares: There's increased scrutiny on the assumptions used for non-maturity shares in ALM models.
3. Model Understanding: It's crucial for credit unions to thoroughly understand their ALM models and the assumptions used.

Liquidity Risk

While liquidity risk became a significant concern following interest rate increases, it appears to be stabilizing. However, credit unions should:

1. Monitor Deposit Behavior: Keep a close eye on changes in deposit behavior and potential shifts from core deposits to certificates.
2. Stress Test: Conduct regular liquidity stress tests and maintain robust contingency funding plans.
3. Consider Holistic Balance Sheet Management: When addressing liquidity needs, consider the broader impacts on the balance sheet and strategic plans.

Credit Risk

Credit risk is emerging as a significant concern. Key observations include:

1. Rising Delinquencies and Charge-offs: Particularly in areas like indirect lending and credit cards.
2. Inflation Impact: Inflation is affecting borrowers' ability to service debt, which isn't always captured in traditional DTI ratios.
3. Real Estate Market Changes: The cooling real estate market and potential "maturity wall" in commercial real estate loans could present challenges.

Cybersecurity and Technology Risks

Recent events like the Trellance outage and the Patelco ransomware attack highlight the ongoing importance of robust cybersecurity measures. Credit unions should:

1. Conduct Thorough Vendor Due Diligence: This includes understanding fourth-party risks.
2. Test and Validate Backups: Ensure all critical systems, not just the core, are adequately backed up and recoverable.
3. Stay Alert to Emerging Threats: Be aware of new risks, such as those posed by artificial intelligence in social engineering attacks.

Looking Ahead

John Kren shared some predictions for the near future, including:

1. Potential challenges in commercial real estate, particularly for single-use and office space projects.
2. Continued pressure on unsecured credit balances and potential increases in HELOC utilization.
3. An expectation that cybersecurity threats will intensify before they improve.

For credit union professionals, it's crucial to stay informed about these trends and proactively address potential risks. Regular communication with external auditors and examiners can provide valuable insights and help ensure credit unions remain strong and resilient in the face of these challenges.

Remember, while these trends and risks are important to consider, each credit union's situation is unique. It's essential for institutions to evaluate how these factors specifically impact their operations and tailor risk management strategies accordingly.