Mutual Savings Association Advisory Committee Meeting June 17, 2013 OCC Supervisory Tools Michael Finn Senior Thrift Advisor, NE District
Overview of OCC Supervisory Tools I. Mutual Overview Package II. Canary System Enhancements III. Thrift Analysis Report Tool IV. Other Considerations 2
I. Mutual Overview Package 1. Portfolio Statistics Asset & caseload distributions, asset size ranges, district demographics, charter age 2. Financial Metrics Balance sheet, asset quality, earnings, capital, liquidity and sensitivity 3. Supervisory Data Composite ratings, rating distributions, aggregate risk, quality of risk management, direction of risk, MRAs 3
Mutual Overview: Portfolio Stats OCC Supervised Assets MCBS Supervised Assets 3/31/2013 61% 3/31/2013 93% Banks Banks $940 $9.3 billion trillion (1,238 (1,283 charters) charters) 7% 39% Thrifts Thrifts $723 $603 billion billion (534 (530 charters) charters) * Excludes 4 thrifts in Large Bank program. • OCC-regulated charters hold $9.3 trillion in assets, including $723B in thrifts Total assets held by MCBS institutions were $1.5 trillion or 16% of all OCC • supervised assets and the 1,768 MCBS charters were 97% of all OCC charters • Thrift charters represent 30% of MCBS supervised charters with $603 billion in assets or 39% of all assets held by MCBS institutions • There are 193 Federal mutual thrifts with $52 billion in assets, not including MHCs 4
Mutual Overview: Portfolio Stats Trends in OCC Supervised Mutual and Stock Thrifts $868 $853 $863 700 $900 $749 $760 $761 $800 600 $667 $671 $700 220 216 214 500 212 $600 204 # Banks 200 Assets 195 193 400 $500 $400 300 $300 429 421 405 200 388 369 365 351 341 $200 100 $56 $55 $55 $55 $54 $52 $52 $52 $100 0 $0 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 (649) (637) (619) (600) (573) (565) (546) (534) # Stock # Mutual Stock $ (B) Mutual $ (B) • Mutual thrifts account for 36% of OCC-regulated thrifts • Mutuals hold 7.2% of total thrift assets • The number of mutual charters has declined by 5% over the past year • Mutually held assets of $52B have remained fairly stable 5
Mutual Overview: Portfolio Stats 178 thrifts 81 thrifts 65 mutuals 25 mutuals 37% mutuals 31% mutuals 169 thrifts 88 thrifts 74 mutuals 29 mutuals 44% mutuals 33% mutuals Mutual charters are concentrated in the OCC’s Central (74) and Northeastern (65) districts There are six states with 10 or more mutuals (IL-16, OH-15, IN-12, PA-12, MD-11 & NY-10) Ten other states had more than 5 mutuals (WI, KS, KY, GA, MA, LA, MO, SC, MI & MN) 6
Mutual Overview: Portfolio Stats • 90% of mutuals have assets totaling less than $500 million 71% of mutuals have less than $250 million in assets • • The NE district has the greatest % of larger mutuals (TA > $250M), at 40% • Mutually held assets by OCC district are distributed as follows: NE $23.0B CE $15.6B SO $6.6B WE $6.5B 7
Mutual Overview: Portfolio Stats • Eighty (80) Federal mutual thrifts were formed more than 100 years ago • 87% of all current Federal mutuals have operated for 75 years or more • There is only one remaining mutual that was formed in the last 50 years • 24 credit unions converted to mutual savings associations under OTS 8
Mutual Overview: Financial Metrics • Mutual loan portfolios are focused in residential mortgage loans at 74% of all loans • Mutuals held similar levels of Commercial RE loans as compared to stock thrifts • Mutual loan portfolios less concentrated in C&I and consumer loans vs stock thrifts 9
Mutual Overview: Financial Metrics Mutual asset quality metrics have improved year over year at 3/31/13 • • Classified assets declined slightly to 27% of Tier 1 plus ALLLs • Noncurrent loans and OREO were also down Y-to-Y at 3.20% • Mutual thrifts held ALLLs representing 1.26% of portfolio loans • Asset quality indicators show greater stress in the Central and Southern district mutual portfolios 10
Mutual Overview: Financial Metrics • Mutual earnings declined slightly year over year with an ROAA at 0.29% • Margins shrank somewhat as asset yields fell more than funding costs • Capital measures continued to show strength and each PCA measure improved The Northeastern and Central mutual portfolios have a greater impact on the All Mut column • measures due to larger mutual asset concentrations 11
Mutual Overview: Financial Metrics • Mutual funding is derived predominantly (96%) from retail deposits Loan to deposit levels remain high (77%) even with low loan origination levels • • Nearly half of all mutual assets are long term as defined in the UBPR • Residential real estate loans represent 58.7% of all mutual assets Non maturity deposits roughly equaled the level of long term assets at 96.8% • 12
Mutual Overview: Supervisory Data • Mutual composite ratings drifted lower since Q1 2010, but stabilized in 2012 • Eighty percent of all mutuals remain satisfactorily rated with a Composite 1 or 2 • The level of 1-rated mutuals declined as the 2-rated category has grown • For comparison, stock thrift ratings at Q1-2013 were: 1 – 8%, 2 – 59%, 3/4/5 – 33% 13
Mutual Overview: Supervisory Data • Mutual thrifts were often assigned strong Capital (49%) and/or Liquidity (48%) rating • Earnings ratings were the lowest with 41% of mutuals assigned 3, 4 or 5 ratings Asset quality also showed stress with 32% of mutuals rated 3, 4 or 5 • Mutuals show much stronger ratings in Capital and Liquidity than stock thrifts • • Even the challenging mutual Earnings and Asset Quality ratings remain slightly better than stock thrift Earnings and AQ ratings 14
Mutual Overview: Supervisory Data • Mutual Aggregate Aggregate risk as Risk ratings measured in OCC’s measured using exams using the Risk Assessment System. Risk Assessment Aggregate risk takes System (RAS) into account both • Aggregate Risk takes the quantity risk into account both and quality of risk management. the Quantity of risk and Quality of risk management Aggregate Risk is low to moderate in nearly all RAS categories • The highest Aggregate exposure was Credit Risk with 22% of mutuals rate High • More than 50% of mutuals had a Low RAS ratings in Compliance, Liquidity, Price and Reputation • The lowest level of Low ratings was Operational Risk, followed by Credit and Interest Rate Risk • • The mutual RAS ratings, in general, are markedly better than their stock thrift counterparts 15
Mutual Overview: Supervisory Data The Quality of Risk Management is how well risks are identified, measured, controlled, and monitored and is rated as strong, satisfactory, or weak • The Quality of Risk Management RAS factor was Strong or Satisfactory for at least 70% of mutuals across all RAS factors • For many factors (Price, Liquidity, IRR & Compliance), the level of Weak ratings was under 10% • Mutual Credit risk showed the highest level of Weak ratings at 30%, followed by Operational Risk with 19% of mutuals rated Weak Liquidity and Compliance had the highest level of Strong ratings for Quality of Risk Management • 16
Mutual Overview: Supervisory Data RAS Ratings of High Aggregate or Moderate & Increasing (H/MI) requires management focus and can lead to supervisory concerns if not properly managed • Credit risk presented the highest level H/MI RAS ratings, followed by Operational, Strategic and Compliance Liquidity and Reputation Risk had lowest level of H/MI ratings at 8% and 10% • The H/MI RAS risk ratings distributions are consistent with many the OCC’s • recent Risk Perspectives 17
Mutual Overview: Supervisory Data Matters Requiring Attention are practices that: ‐‐ Deviate from sound governance, internal control, and risk management principles, which may adversely impact the bank’s earnings or capital, risk profile, or reputation, if not addressed; or ‐‐ Result in substantive noncompliance with laws and regulations, internal policies or processes, supervisory guidance, or conditions (0%) imposed in writing. Credit related issues were the most often cited MRA issue in the last 12 months • Capital Markets, Audit & Internal Controls and IT Management issues were the next highest cited • MRA issues at 16%, 14% and 14%, respectively The level of Earnings & Capital, BSA, Compliance and Management MRA issues were reasonably low • with each cited at less than 10% of mutual exams in the past year 18
Mutual Overview: Other Data • Other available data not in this Overview – Trust powers, assets under management – Texas ratio, CRE concentrations – Problem banks, watch list – PCA capital categories – Composite, component rating changes – Foreclosure, OREO trends – Mortgage banking activity – Violations of laws, regulations 19
II. Canary System Enhancements 1. Project Background 2. Credit Benchmarks 3. Liquidity Benchmarks 4. Interest Rate Risk Benchmarks 20
Canary System Enhancements • Reviewed all benchmarks – Credit, Liquidity & Interest Rate Risk • Assessed alternative benchmarks • Developed new thrift benchmarks • Revised existing national bank benchmarks • Implemented changes internally in May 2013 • Will publish on OCC BankNet 21
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