Dear Board of Directors:
The credit union industry’s 2010 financial results show challenges remain for 2011, specifically related to elevated levels of credit risk, interest rate risk, and concentration risk.
The attached report focuses on key trends and risks that NCUA will continue to closely monitor and supervise.
Credit risk continues to place stress on credit union performance. In particular, real estate and business loan delinquencies have increased, as economic uncertainties persist. Modifications for real estate, consumer, and business loans increased $3.1 billion since first reported in March 2010. Since modified loans are still at risk for future delinquency, NCUA will maintain close supervision of credit unions in this area. To further address credit risk concerns, NCUA is considering ways to enhance the business lending regulation to better ensure safe and sound underwriting and credit risk management.
Interest rate risk remains a concern for credit unions and will be an area of emphasis during examinations in 2011 and beyond. The credit union industry continues to hold a significant amount of long-term, fixed-rate loans and other longer-term assets, while shares are primarily in short-term accounts. Further, a majority of shares are deposited in rate-sensitive accounts. Growth in lower-rate real estate loan modifications also increases interest rate risk. Proactive structuring of balance sheets, including proper control over loan concentrations and share products, is essential to future success. Due to the importance of this issue, NCUA has proposed a regulation that will provide greater emphasis on the management and mitigation of interest rate risk. The proposed rule is posted at www.ncua.gov along with results of the NCUA Board’s open meeting on March 17.
Concentration risk has been an area of emphasis for NCUA examiners in recent months. The high level of real estate loans to assets coupled with the stresses in real estate values across the country highlight the need for sound concentration risk mitigation practices. Currently under development by NCUA is a proposal to adjust the Risk Based Net Worth calculation in the Prompt Corrective Action regulation that would place more emphasis on concentration risk factors.
While key financial ratios are moving in a positive direction, credit unions still face challenges in overcoming the effects of the economic downturn. NCUA examiners are working diligently with credit unions to help mitigate existing and potential risks and maintain stable balance sheets. NCUA will continue to take proactive steps to protect the safety and soundness of the credit union industry.