NASCUS Directors’ CollegeSan Antonio, Texas

November 17, 2015

Duties and Responsibilites

of Directors

Session ObjectivesThe responsibilities of a credit union director are immense and growing more complex every day. My goal this morning is not to discourage you from serving on a CU board but to offer a perspective which may increase your awareness of certain aspects of the environment in which you carry out your duties.

Guiding Thoughts

Every director must keep two thoughts foremost in mind. First, ultimate responsibility for the credit union rests with the board of directors. Secondly, the board is serving the institution and its membership and no one else.

Disclaimer

The views and opinions expressed today do not necessarily reflect the views of the Credit Union Commission or the Governor of the State of Texas.

Legal ObligationsThe legal obligations of a

director are founded both in common law and statutory law. These obligations fall into three broad categories:Duty of CareDuty of LoyaltyDuty of Diligence

Duty of CareRequires that a director

act in good faith, with the care of an ordinary prudent person would exercise under similar circumstances, and in a manner that he or she reasonably believes is in the best interests of the credit union.

Duty of LoyaltyRequires that a director

exercise his or her powers solely in the interest of the credit union and not in the director’s own interest or the interest of another person or organization (including a family member).

Duty of DiligenceRequires that the director be

reasonably capable of reviewing relevant information and to establish and maintain a system of internal controls that allow for prudent decision making.

Due diligence is all about competent oversight of the credit union in an expedient and knowledgeable manner.

Business Judgment RuleRule presumes that directors

fulfilled their fiduciary duties if they acted on an informed basis, in good faith, and with the honest belief that their actions are in the best interest of the credit union

If the requirements for application of the rule are satisfied, a court will not second guess the decision, even if it turns out to be a bad one.

Conflict of InterestThe most popular challenge to

the business judgment rule is to allege a breach of the duty of loyalty because the matter involved a conflicted director.

As a practical matter, directors will likely be presumed to be furthering their own interests if they have a conflict of interest and they did not obtain the fully informed consent of the other disinterested directors.

Overarching ObligationYour board responsibilities are couched around your obligation to promote the best interest of the credit union and consequently its members.

Specific Board ResponsibilitiesThe Board must:

Establish an appropriate corporate culture;

Hire and retain competent management;

Be aware of the credit union’s operating environment;

Maintain an appropriate board structure;

Monitor operations;Oversee business performance; andServe membership credit needs.

Hire and Retain a PresidentSelecting a president to lead

your institution is a board’s single most important responsibility.

Everything flows from this decision, including the CU’s strategy, reputation, the ability to attract critical talent, employee confidence, and the credibility of the board itself.

The CU's Operating EnvironmentDirectors should understand

generally both the CU’s business environment and the legal and regulatory framework within which the CU’s activities operate.

Rapid and ongoing changes in the financial services industry require this understanding to keep the CU healthy and competitive.

Appropriate Board StructureThe Board must ensure that it

has an organizational structure to keep it informed and to provide it with adequate support.

The Board should carefully consider the extent and nature of the demands that are placed on it and should identify areas that committees could appropriately address.

Monitor OperationsAlthough the board may depend on

management’s expertise to run the CU’s daily operations, the board remains ultimately responsible for monitoring the CU’s operations.

The board can monitor the CU’s operations through management reports, but it must do more than merely accept and review these reports; it must be confident that they are accurate, reliable, and contain sufficient detail to allow effective monitoring.

Oversee Business Performance

Sound business performance is one of the board’s primary objectives and responsibilities and a key indicator of management’s success.

Sound financial performance means more than simply how much the CU earned last quarter. Equally important is the quality of earnings over the long term.

Membership Credit NeedsA board’s plans and policies

should not only address earnings and safety and soundness but also reflect efforts to help meet the legitimate credit needs of all members.

Directors frequently represent a cross-section of the membership and thus are in an excellent position to assess membership needs and to formulate appropriate, responsive policies.

Planning and PoliciesThe board is responsible for

establishing the CU’s goals and for ensuring that the CU has the personnel as well as the financial, technological, and organizational capabilities to achieve those goals.

Ongoing changes in the CU Industry make it essential for the CU to have a clear strategic plan.

Short-Term Business PlansTranslates long-term

goals into specific, measurable targets

Management is in the best position to formulate these plans but the board should approve after concluding that they are realistic and compatible with the CU’s tolerance for risk

PoliciesSet standards and courses of action to

achieve specific goals and objectives established by the board and clarify the CU’s tolerance for risk.

Policies and procedures should be in place before any new activity begins.

Written or not, the Board should periodically review policies and oversee revision as necessary to ensure that they remain consistent with the CU’s goals and risk tolerance.

The Board & The DepartmentThe Department supervises CUs by

conducting on-site examinations and by performing periodic monitoring. These activities help determine the condition of individual CUs and the overall stability of the system.

The frequency of on-site examinations is determined by the CU’s size, complexity, risk profile, and condition.

These on-site examinations are conducted either annually or up to every 18 months.

CAMELS RatingCAMELS is an

internal risk rating system utilized by the Department to assign examination resources at future contacts.

Code ratings are not designed, nor should they be construed as a “report card”.

Definitions of CAMEL

Rating

Characteristic

1 “sound in every respect”

2 “fundamentally sound”

3 “exhibits some degree of supervisory concern”

4 “generally exhibit unsafe or unsound practices or condition”

5 “exhibit extremely unsafe or unsound practices or condition”

Overall Assessment Red FlagsA composite or component

rating that is lower than in previous examinations. Directors should be particularly concerned about ratings of 3, 4, and 5.

Many or repetitive violations of law.

References to noncompliance with CU policy or recurring internal control deficiencies.

References to noncompliance with previous examination guidance.

Most Frequent Exam Findings1. Bank Secrecy Act (BSA) / Anti-Money Laundering (AML)

2. Earnings Performance3. Allowance for Loan and Lease Losses (ALLL)

4. Inadequate Liquidity Policy5. Inadequate Recordkeeping

BSA Red FlagsCU personnel are not trained

regularly on BSA and how to identify possible suspicious activity.

Correspondence is received that indicates the CU is filing incomplete or incorrect CTRs

The volume of SAR is very high or low

Account activity is inconsistent with the member’s known business

Member has an unusually large volume of cash

Earnings Red FlagsNet Worth ratio below “well

capitalized”Net Worth growth rate is less than

total asset growth rateRatios significantly different from

peer ratiosDeclining net worth levels or ratiosSignificant variances from budgeted

amounts on income and expense itemsSignificant increase or decrease in

noninterest income

ALLL Red FlagsSignificant shifts in the number or dollar

amount of problem loans, in aggregate, or for loan types.

Growth in the ALLL that is significantly greater or less than the percentage growth in total loans over a given period.

Nonperforming or problem loans as a percentage of total loans increasing at a rate greater than the ALLL.

Loans remaining on the problem loan list for extended periods of time without resolution.

Other Red FlagsIncreasing levels of past-due and

nonperforming loans as a percent of loans.High growth rates in total loans or within

individual categories of loans.Significant increases or decreases in the

percent of long-term assets to total assets.Growth that is inconsistent with the CUs

budget or strategic plan.Large or increasing volume of loans granted

or renewed with policy exceptions.Mismatched funding – funding long-term

assets with short-term liabilities.

Enforcement ActionsEnforcement action is a collective

term that refers to a range of supervisory actions used to correct problems, concerns, weaknesses, or deficiencies noted in a CU.

These actions range from informal written commitments to formal enforcement actions.

Informal Enforcement ActionsInformal actions give a CU more

explicit guidance and direction.Informal actions serve as

evidence of a board’s commitment to correct issues before they affect the CU’s condition.

Most common informal enforcement action is a Document of Resolution (DOR).

Formal Enforcement ActionsFormal enforcement actions

include:Formal Written Agreements

(LUAs);Determination Letters;Consent Orders;Cease and Desist Orders;Civil Money Penalties;Removal or Prohibition Orders; andConservatorships (Remove Board).

Administrative HearingThe administrative hearing process

is similar to being in court for a trial.   However, an administrative hearing involves disputes under the authority of governmental agencies.  An administrative hearing establishes a record of facts in a particular case, toward some type of resolution.  In the hearing, you are allowed to tell your side of the story in the dispute.

An appeal may be made by any party who disagrees with any outcome in the decision. 

Problem Credit Unions and Failures

Common oversight or management deficiencies identified in failed CUs:Uninformed or inattentive board

of directorsNegative influence from insidersOverly aggressive activity by

board or managementFailure to establish adequate

policies, procedures and controls before entering into new business

Attributes of a "Good" DirectorThere are many characteristics and

skills required to be an effective credit union director. But some of the key ones include:The ability to focus on material issues

and not “sweat the small things”.The ability to see the “big picture”.The ability to deal with pressure from

external sources.The ability to influence effectively at the

board table.The ability to respect alternative

viewpoints.

Research Guidance & Contact Info

Credit union laws, rules, and regulatory bulletins can be found on our website at:http://www.cud.texas.gov

Harold E. FeeneyCredit Union CommissionerTelephone: (512) 837-9236Email: commissioner@cud.texas.gov