NCUA’s proposed FY 2009 budget includes a $24.3 million increase, more than 110 new examiner hires, and an overall expenditure growth of 15.3%, requiring a double digit rise in the operating fee and a higher charge to the NCUSIF via the overhead transfer rate.
The challenge that NCUA says it is addressing is to be “more preemptive in recognizing areas of risk.”
This budgetary “surge” raises two critical questions:
- Is the Agency managing the problem or is the problem managing the Agency?
- Is the “surge” just adding more resources or will the resources be used more effectively?
The Need for More Examiners
Is the challenge the Agency faces going to be resolved by adding more “boots on the ground” doing more often what the current examiner corps claims to be doing. Year after year NCUA has said it is improving its “risk based examinations.” What will change in this new deployment, or will it just be more of the same? If there is a new strategy, might it make sense to try that first before committing more resources, the last of which would not be in the field for more than two years?
Is there really a shortage of examiners? Or is the real question whether the Agency’s systems, management approaches, and structures are appropriate for the evolving credit union movement? Might it be more effective to spend just 1% of the projected increase ($250,000) on an independent, expert review that could answer these fundamental questions versus spending more doing the same thing and expecting a different outcome?
Some Quick Math
Today, with approximately 650 examiners out of 950 FTEs and 4,800 federal credit unions, NCUA’S ratio of credit unions per examiner is 7.5. There are 225 workdays in a year which would mean an average of 30 examiner days per each credit union. Moreover, about 75% of credit unions are under $50 million and the majority of those under $20 million. So, if the current exam cycle is almost two years, that means there is almost 60 days average examiner time per credit union. And this gives no role for the 300 other overhead staff in the supervisory process.
Even allowing for training, group exams, travel, and other “down time,” is the problem one of resources, or how the resources are being managed? In the September NCUSIF report to the Board, the Agency’s own data shows the number of code 4 and 5 credit unions as well as the number of failures this year trails earlier years in this decade.
When evaluating resources, it should be noted that over 500 credit unions and all of the students at the Western CUNA Management School use a software, database program that allows the trained user to analyze up to six years of call report data on any credit union, against any peer group, anywhere in the U.S. using any 5300 criteria, in minutes. The program can identify performance outliers in seconds. Do examiners have the same capability?
Today, the Agency takes over 90 days to release the 28 monthly Corporate 5310 call reports. The Corporates, on average post, on their websites, these same results within weeks of the month end, often with commentary. Why are the Agency’s processing cycles three times slower than the credit union’s filing the reports?
What Examiners Do
Examiners are trained to be challenging, skeptical, and very literal in their assessment of data and facts. The assumption underlying the surge appears to be that if we spend more time and be more critical, we would have found the current difficulties earlier.
But is this the right lesson and more examiners the right cure? Examiners are trained to look into a rear view mirror. Projecting results of a credit union’s efforts into the future is always ambiguous, requiring judgments and life experiences that are difficult to teach, let alone apply.
A New Examination Philosophy
Today, the credit union system is the most successful financial model in America. This year, if current trends continue, credit unions will have originated more loans than at any time in their history. And the country is in the middle of a credit crisis!
Credit unions are producing incredible results and most importantly continuing to serve members faithfully, while Washington is still trying to jump start the rest of the financial system. Even after government capital injections, waivers on tax rules, wholesale merger and chartering changes, multiple guarantees and lending facilities, and even buying bank and commercial debt, the other financial intermediaries are unable to get help to where it is most needed- to the American consumer.
So, could a new “examination” approach enable the Agency and credit unions to be even more productive in this uncertain time?
Might such an approach not really be new at all? Could it be as old as credit unions? Here is how it worked in 1990.
A Case Study
In July 1990, San Antonio Federal Credit Union (SACU) had approximately $500 million in assets, a negative net worth of $36 million (almost 7.0%) and a very troubled $100 million business loan portfolio. It was not a merger candidate and liquidation might cause serious harm to the financial structure of the NCUSIF.
Every traditional workout approach had been tried and several changes of leadership had taken place. That year, Jeff Farver, who had already turned around two seriously troubled credit unions, took on his third challenge, “on a handshake” agreement with the NCUA’s regional director John Ruffin
The results. By focusing on consumer loans by December 1994, the credit union had zero equity (not negative); one year later equity was at 4% of risk assets; and in December 1996, the net worth ratio was 6%.
Today, the credit union is $2.7 billion in assets, over 8.5% net worth, a creative force in its community and the second largest lender in the United States of manufactured housing loans with a $673 million portfolio.
All done “on a handshake.” Could there be a lesson in that experience for today? Might a focus on common efforts to improve results be more efficient and effective than just adding examiners?
P.S. NCUA has requested comments on its budget proposal that can be sent to the Board@NCUA.gov. Don’t forget to send your vote!