A CEO's Reaction to NCUA's View of the Credit Union System and Exam Priorities

A Senior Examiner presented the Agency’s latest slide deck on the state of the credit union system and the focus of upcoming exams. One CEO, due for an exam, wrote me in reaction to the slides.


The NCUA's presentation on the state of the credit union system using data from June 30 is insightful. The slides and notes are available for download here.

A close review of the slides is useful because:

  1. The data highlights the strong and improving state of the credit union system. With rising ROA, lower delinquencies and charge-offs, stable capital levels, significant decline in number of credit unions with net losses, the data represents "a truly positive portrait of the industry." 

  2. It contains points of emphasis for the examination and what the Agency is looking for in each area.

One CEO, due for an exam, had this reaction to the slides and the implications of current examination practices:

Interesting slides and actually helpful, in a way. It lets us know what NCUA will be looking for on its annual visit next month.

Obviously NCUA has taken a look at the problems in troubled credit unions and arrived at the set of conclusions presented in the slides. It may miss the point that many of these problems wouldn't have been much of a problem if it weren't for the most severe economic downturn in decades.

I often tell folks the primary reason we aren’t having problems has less to do with quality of management than it does with blessings of geography. Were we in Southern California, I believe we would be in the same boat as many of the credit unions in that corner of the world. During the run-up to the collapse of the housing market, credit unions were faced with either making affordable mortgages to members on rapidly appreciating real estate using 40-year and interest only loans or not making mortgages at all. And, if you didn't make mortgages and were a large credit union, you would be left with trying to make your revenue from vehicle loans. The most efficient way of making vehicle loans is indirect lending. And if you weren't making mortgages or vehicle loans, then you weren't making money. So I'm not sure what NCUA would have had these credit unions do to build capital if they prefer lower concentrations of mortgages and less reliance on indirect vehicle loans.

Exam Quality

My other thought is the quality of the examination force for NCUA varies widely. Although most are no doubt getting the same message from Alexandria, some are taking the information and haranguing their credit unions to avoid risk, no matter how well it is being managed. Some examiners simply don't have the experience or judgment to apply the information in the slides, so they default to risk-avoidance mode.

Example #1

Last year we earned a special examination from NCUA on its mortgage loan program because from our Call Report it noticed that our mortgage loan losses had increased by something like 235%. "Wow," it said. "That's a lot!" So they came on sight with a team of three special examiners only to find out that our losses had gone from $40K to $134K (on a portfolio of several hundred million dollars). In other words, our losses had gone from nothing to next to nothing in dollar terms, yet it focused not on the dollar losses but on the percentage increase. I'm concerned this may be an example of the amount of analysis put to the numbers.

Example #2

A truly well-run credit union in the southern part of the state, about $400 million in assets, had its local NCUA examiner write in his report,  "the credit union is practicing unsafe and unsound practices" by not requiring proof of income on 100% of consumer loan applications! Just what every CEO wants to see in his examination report. Here's the rest of the story: This is a credit union with overall delinquency of 0.52%, loan losses of 0.18%, 12% net worth, and an ROA of something like 75 basis points. Yet the examiner no doubt was told that loans without proof of income are riskier than loans with and chose the risk-avoidance route rather than taking the time to understand what was really going on.

To be fair, I'm not sure the examiners are given the time to really look at the numbers they're seeing. So they glance at a number, apply it to some sort of scale, and arrive at a conclusion from this limited analysis. Considering the environment of constantly moving the examination cycles up, indoctrinating new examiners, and hearing from on high that it's time to be more aggressive in its exams, well, should we really expect anything different from regulators?

Time and PCA Problem Resolution

It is clear to me that NCUA is working as hard and as fast as it can to clean up the troubled credit unions and  to prevent any new credit unions from entering the abyss. I was most struck by your statement, Chip, that due to the nature of the capital-from-earnings model (where credit unions only build capital over time) that time is just what is needed to extract those credit unions under PCA [prompt corrective action] from their current situation. Yet NCUA isn't interested in giving the necessary time; it's only interested in cleaning up as quickly as possible. The entire industry will be hurting from this hurry-up, risk-avoidance approach for years to come.

Still, there's something to be said about the data in the slides. Like anything else, risks poorly understood or poorly managed will cause problems. I think NCUA assumes that if the risks are present, that by definition it means a credit union is not far from trouble; this kind of thinking is our biggest enemy right now.

I'm going to look at their data more closely to see what we can learn from it. The trend from NCUA is a more aggressive approach to the risks identified in the slides. Aggressive in the sense that if you have one of these risks, you're likely to receive some sort of administrative action; 75% of credit unions are now operating under at least a DOR [document of resolution].




Aug. 23, 2010


  • I'm admittedly wet behind the ears when it comes to exams, but it seems to me the NCUA has little credibility at this point given their failure to regulate the corporates. Feel free to blast away if I'm wrong.

    Also, credit unions certainly have a responsibility to be conservative in their practices but without prudent risk taking what's the point of our existence? The original point of credit unions was to take risks that no banks or other financial institutions would make. It seems as if our regulator has forgotten that.
  • This is exactly what happened at our recent exam. We are well, capitalized, well run, and very conservative and still got slammed because of percieved 'risk'.
    Kathy Cranage
  • It is difficult to assess whether the examiner attitudes and behaviors, or misbehaviors, constitute an aberration or a pattern. As the CEO of an association of primarily small, low-income credit unions, I get lots of complaints from my member institutions about examiner harrassment, pressure to merge, over-reaction, and so forth. We are attempting to gather a broader picture through a survey. Unfortunately, the fear of reprisals by NCUA stops most credit unions from publicly seeking redress or remediation of untoward examination experiences, or examiners.
    Cliff Rosenthal
  • A very good article. Thanks for sharing the CEO's perspective!
    Anthony Demangone
  • A very nice article. It explains much of the short-sidedness going on in the financial world today. Sometimes justifying one's job is more important than getting the facts straight. Good luck with the exam. Let's hope there is no quota of closings being set.
    David Branham
  • Excellent article, and very cogent points made by the anonymous CEO. There is no capital without earnings, and there are no earnings without some amount of risk.

    The NCUA appears very concerned not just with increasing concentrations, but increasing anything. "Growth risk" is eighth risk being assessed by examiners. Credit unions with excessively high net worth (>20%) and slow or no growth get the regulatory blue ribbon of excellence.
    Tony Hale
  • I can only assume Jody Major would prefer all helpful lessons regarding the ugly truth of some NCUA examiner deficiencies be conducted behind closed doors. Heaven forbid the management and education of credit union examiners be brought into the open for all to benefit from. At least someone has the balls to try to help us communicate to the NCUA Board a wiser path to re-steer this ship [our industry] in the right direction. "Insightful" knowledge from lessons like this CEO's thoughts benefit not only NCUA but can also benefit millions of our members -- if NCUA demonstrates the ability to learn and think about the realities of running a successful credit union in an economic cycle. What are you afraid of?

    Thank you [again] Chip. I only wish our trades would be more public about what we are all telling them (behind closed doors)!
  • Interesting article. There are over 7,000 federally insured credit unions and Mr. Filson picks the one where the CEO's comments give him the material to write a column. Amazing how he never writes about the good exams. There have to be a few.

    But then, without controversy, who would read his "insights"
    Jody Major
  • Chip,

    I have a suggestion for ferreting out more specifics on the growing disrespect for the agency and its examiners. Invite CUs to comment, with identities protected, on their experiences with:

    1. How the examiners leave their work areas at the conclusion of their examineraion. Ask for pictures!

    2. How DORs show "Agreed To" with the item cited when there was actually no adequate discussion of the item cited and certainly no explicit agreement with the examiner's action cite.

    3. Why Boards of Directors are fearful of challenging an examiner's conduct or Report of Examination by appealing to the Regional Office within the very short appeal period window.

    4. How examiners routine arrive late and leave early in the workday.

    5. How examiners don't follow protocol in requesting information.

    6. How examiners make suggestions cloaked as regulatory requirements.

    7. How examiners are threatening, consdescending, arrogant, etc.

    Certainly, ask for positive feedback as well and recommendations for improvements.

    The feedback will be enlightening and compelling.

    You will being doing the agency, its examiners and the industry a great service.
  • Jody, which part of NCUA do you work for? Is Chip really expected to write about the good exams? I believe they're all supposed to be competent exams, aren't they?

    I agree with you that there are CEOs who underperform, and their exams reflect the numerous problems allowed or fostered under their care, but it's a fantasy to say that a problem exam [or examiner] is the result of a CEO not doing her job.
  • Afraid of? Not a thing. Credit Union CEO's who do their job have nothing to worry about. It's the ones who can only survive during good times that should be concerned. When the going get tough, they are gone.
    Jody Major
  • Thank you Chip! Great article. I wish more light could be shed in this area. Unfortunately, most Credit Unions are silent because they fear the repercussions that they will face if they speak out.