Branching Out

Top 10 ‘Additional Triggers’

Red flags examiners should watch for as signs that a CU is failing.

March 22, 2012

The recent Government Accountability Office (GAO) report regarding NCUA and failed credit unions was an eye-opener—primarily due to its use of the words “government” and “accountability” in a manner that might lead a reader to think they’re compatible.

The results of the report were interesting. Specifically, after describing NCUA as “a bunch of people with the intelligence and stamina of gnats in heat” (I might be mixing it up with something I read from the American Bankers Association), the report recommended changes in two areas.

An NCUA press release says the GAO recommended that NCUA:

  1. Provide the agency’s inspector general the necessary documentation to verify loss estimates for the corporate stabilization fund; and
  2. Consider additional triggers for prompt corrective action (PCA) that would require early and forceful regulatory action and offer proposals to Congress on how to modify PCA, as appropriate.

Regarding the first issue, the best way for NCUA to document its loss estimate is by grabbing a dart board, two dice, and a copy of a 1972 edition of The Wall Street Journal.

But the second point—referring to a trigger and PCA—is the one we might all regret. Are there indicators a credit union is headed for trouble?

Or better yet, indicators that credit union management might be thinking about a situation which could eventually lead them to a decision whereby they may or may not make a decision which could, indirectly, affect the long-term viability? (Yes, I am thinking like an examiner).

This seems to be the question the GAO posed.

James Collins
James Collins is Credit Union Magazine's humor columnist.

I truly appreciate the hard work of our examiners, so it’s time for the credit union movement to lend them a hand. Rather than prying them away from writing up our allowance accounts as being underfunded (even when credit unions are 500% overreserved and have taken the tack of charging off loans as soon as they’re booked), it’s up to us to help them out.

So let’s count down the top 10 red flags NCUA examiners should heed when reviewing credit unions:

10. The strategic plan includes the words “avoid jail time” and “felony.”
9. The credit union still considers the National Credit Union Share Insurance Fund to be an “asset.”
8. When you ask for the credit union’s list of nonperforming assets, the board and management point to the CFO.
7. The credit union’s information technology department is almost prepared for Y2K.
6. Loan staff don’t think they have insider loans because all loans “were signed in the parking lot.”
5. Credit union staff consider their workplace a “family friendly credit union,” which seems appropriate until you find out every employee is, indeed, a family member.
4. When you ask about “reserves” they point you to a nice 1992 Reserve Merlot.
3. The CEO reminisces about his time in the war; then you find out it was the Civil War.
2. You see a “For Sale by Owner” sign on the front lawn.
1. Management expresses keen interest in becoming a bank.

Humor aside, the GAO report did leave an open question. After the reports about failed credit unions (and living through multiple exams myself), here are my five true-life recommendations for examiners:

  1. If it looks too good to be true, it probably is. Managing a credit union is a difficult balancing task.
  2. Turnover is a double-edged sword. While too much turnover is a bad sign, never having turnover is also a red flag.
  3. Never put much faith in the thoroughness of the last exam. If you doubt this one, read the GAO report.
  4. Don’t be destructive. Tell credit unions when they’re doing well. To most of us, an examination is akin to asking an ex-spouse what he or she thinks of us now.
  5. Remember, whatever you do, credit union employees are innocent until proven guilty. We’re not potential criminals—99% of us are trying to do the best job we can, frankly, in an environment that’s both unforgiving and difficult to predict.

JAMES COLLINS is president/CEO at O Bee CU, Tumwater, Wash. Contact him at 360-943-0740.