By Doug Wadsworth
You have one paid employee, the CEO. You also have one truly independent third party who will tell you whether that CEO is doing a good job. It’s not your league, not a consultant and not even the monthly packet your CEO wrote. It is the regulatory exam report.
Trust, but verify
Examiners will show up about once a year, dig through hundreds of items, and leave a final report. You must read it. Sometimes you need to take some parts with a grain of salt, because examiners are paid to protect the insurance fund and check “regulatory compliance” boxes. They don’t necessarily care whether you are returning value to members, and sometimes they will treat a typo on a CTR as if it threatens your safety and soundness.
Nobody is perfect, and none of that lets you off the hook. Examiners are still the only people in the room who do not work for the CEO. Their exam report isn’t being filtered or translated before it reaches you, it’s the only truly independent analysis of your credit union.
Not Saying the Quiet Part
They will not say the quiet part
If examiners think the CEO is in over their head, they cannot write “fire the CEO” in their report, but they can paint you a picture in the hopes you understand the unspoken message.
Do not get lost in individual findings. There will always be findings because examiners essentially have a “quota” (so there is no perfect exam). A couple pages of check-the-box minutiae does not mean your CEO failed. You should sit up when you see a lot of big findings, repeat findings from last year (still are not fixed), systemic breakdowns in how the shop actually runs, or anything urgent to safety and soundness (which can be a little subjective, use good judgement).
A Document of Resolution is the examiner raising a hand. A Letter of Understanding and Agreement is the examiner calling for regulatory backup. If you get there and the CEO is still explaining it away, you probably need to “draw a line,” before it is too late.
Learn the Language
Skip the individual findings (the weeds) and read the written analysis at the front — the CAMELS narrative. That is where they are talking to you. Healthy shops get words like strong, commensurate, fully funded, little risk, prompt, reasonable, well controlled, sound, satisfactory.
Unhealthy shops get a different vocabulary: significant noncompliance, serious or critical deficiency, unreasonable, inadequately controlled, high risk, less than satisfactory, unacceptable risk management, troubled, weaknesses not satisfactorily addressed.
If too many of those “negative” words keep showing up, the examiner is not nitpicking your document-destruction log, they are probably trying to tell you that your credit union — or the person running it — is in trouble.
CAMEL 2 (Thank You)
Be happy with a CAMEL-2. It is a broad category. When I took over a dying shop in 2008, we were rated a 2 while earnings and net worth were plummeting like a lawn dart and I was the fourth CEO in three years (yikes). A few years later, after we had become one of the most profitable shops in our peer group, they still rated us as a 2?! The examiner later admitted (off the record) that the agency had stopped handing out 1s after the housing crash of 2008.
The examiner also admitted that being a 1 is often such low risk, that you likely aren’t very profitable either- so 2 is better. There ya go. Don’t worship the number but be aware that a 3 with no course correction is a red flag, while a 4 or 5 probably won’t last much longer without major changes.
Do not let the CEO filter it
Full exam and audit reports belong in director (and supervisory committee) hands, not a translation or summary from the CEO.
Ask the Obvious
Ask the obvious questions. What picture is this painting? Are last year’s findings gone? Is the CEO making the credit union sound healthier than the examiner says it is? If the two stories do not match, make your CEO explain the gap.
While the examiner’s safety and soundness analysis is vital, don’t expect improved regulatory compliance to magically make you more profitable, because businesses cannot be regulated into higher ROA. If you want a more profitable credit union (able to give more back to your members), talk to healthy credit union peers, or hire a consultant. If you don’t know where to find a good consultant- ask your local league.
Lonely in the “Hot Seat?”
Examiners like private interviews with the chair and the supervisory chair, which sometimes is fine, and sometimes is even vital. However, if that sounds intimidating, ask your CEO to sit in as a silent resource. There is no regulation that forbids it (unless the subject is the CEO or suspected fraud). While my long-time board chair does not need CEO support in these interviews, my supervisory chair does, because some examiners forgot she was an unpaid volunteer (who shouldn’t be expected to have a hundred different audit acronyms and regulations memorized for instant recall).
Why this is your job
Small credit unions fail in slow motion. Read the picture. Ask the high-level questions and either back your CEO or replace them. That examiner report is your only truly independent source of credit union health, ignoring it is how good little shops disappear.
Doug Wadsworth is president of Tri-CU Union in Kennewick, Wash., and president/founder of the Endangered Small Credit Union Defense. His handbook for small credit union officials, The Board Member Bible, is available on Amazon.
6 Responses
The article gets one thing right: directors should read the examination report themselves and understand what regulators are telling them. But calling it the board’s “only truly independent analysis” is an extraordinarily expansive claim—and one that seems difficult to reconcile with the author’s broader criticism of regulatory overreach and inexperienced examiners.
If examiners are sometimes inexperienced, overly focused on technical compliance, or prone to treating relatively minor issues as significant, why should their report suddenly become the board’s definitive independent assessment of the CEO and the credit union? The fact that an examiner is independent of management does not make the examiner independent of the regulatory mission, regulatory framework, or institutional biases that shape the examination.
More importantly, a board that needs an exam report to tell it whether its CEO is doing a good job has a governance problem. The board—not NCUA—should establish the risk appetite, approve the strategy, define measurable objectives, monitor performance against those objectives, and conduct a meaningful annual CEO evaluation. Those responsibilities cannot be outsourced to an examiner.
An exam report is an important regulatory input. It is not a board strategy, a CEO scorecard, or a substitute for board judgment. Indeed, treating it as such risks making the board more dependent on the regulator precisely when the board should be exercising its own independent judgment.
Agreed. If an exam surprises management or the Board, or they learn anything substantive from it, the failure in management and governance occurred long before that. Credit unions of all sizes should have robust risk processes to assess, identify, mitigate or accept risk.
Cool, now do the opposite with more than a paragraph of sweet nothings of admiration. Otherwise this is not entirely accurate as the exam isn’t the only independent analysis of your CEO, especially when the examiner’s job is to overly protect the share insurance fund. Safety and soundness, parrot sound here. But if there are signs of trouble, they should show up in an audit, exam and especially monthly meetings. So it wouldn’t hurt to balance this view and give a little space for when the exam is sterling, but the board can’t get it’s collective head out of it’s arse and give the CEO space might also be a worthwhile consideration. Otherwise, this is just clickbait.
Credit unions fail in slow motion and fail because of poor management, governance or both. Small credit unions expect too much from regulators and not enough from their vendors. Look at the Sharetec issue. Small CEO’s are calling for NCUA oversight and authority over vendors, when ultimately it’s a failure of their own due diligence and third-party risk management processes. The NCUA has a mission to protect safety and soundness, but it that doesn’t make them good at it. Now they are the only true “ independent” review on which boards should base CEO performance?
Then we need another small CU advocacy group that calls NCUA the petty, irrational, and focused on all the wrong things, non risk-based, etc. Then we create a web site to post bad examiner stories – which all credit unions have, by the way. But then chalk it up to “nobody’s perfect” while we position them as the ONLY credible independent review of the credit union and CEO?
It’s time for more accountability from small credit unions. We blame regulators, large credit unions, leagues, and vendors for making it too hard for us, all while ignoring the underlying market forces, operating environment, and our decision to be small and low or no growth competitors in an industry that offers commodity products and puts a premium on scale. Kudos to the leaders of small credit unions that understand this and seek the right solutions for their members. For those that don’t, in the game of slow CU failures, what inning are you in?
From the Author:
Always great to hear additional perspectives, and I recognize my anonymous troll in at least one of them, ha! My response:
First commenter: So what other truly independent source is available to board members of small CUs, about the health of the CU, exactly? You criticized my expansive claim, but didn’t name any? Examiners aren’t perfect and regulatory agency need to be improved in some ways… but that doesn’t negate the fact that their report is truly independent, valuable and vital for the board members to read. Sure, there are poor examiners and regulatory overreach, these can all be true (not mutually exclusive)? Your point is? Why are you trying to frame me as totally “anti-regulation?” We need regulators, and our movement is lucky to have the NCUA.
Second commenter: Yes – the board reading the exam doesn’t compensate for needing a sound strategy – and the CU should hire a good consultant (or refer to peers) for help… as noted in my article. Yep.
Third commenter: What? Well, maybe having the NCUA visit board meetings is a good idea for a struggling CU, okay? Some boards aren’t any good and micromanage, that’s true too. ?
Fourth Commenter: My troll (HAHA): Yes, we should demand more of our vendors, and without scale leverage that can be a challenge, it’s true. Small CUs are calling for NCUA oversight of their vendors? What percentage of small CUs? I was not aware of this. And yes… the regulator is *still* the only truly independent source of CU health information from the board (including ratios, not just CAMELS). See above – that does not have to be mutually exclusive with other things that are also sometimes true?
Your final paragraph -“We..” oh are you a small CU CEO now? We’ll never know because you hide behind anonymity (7-figure annual salary in the corner office?). You seem very far away from the cooperative movement and again forgot that some of the healthiest CUs in the nation are small (how many times must I remind you of this fact)? Yet you keep focusing on *scale* and *commodity*. To each their own, I guess.
Other perspectives are always informative, thank you for the feedback. Now, if you *really* want to help… write your own book or article for a trade journal, to correct where I am off track!
-Doug Wadsworth
Regulators are independent from management and the Board, but they are a stakeholder with an agenda and purpose, and their scope is far more limited than a CEO performance.
So now the NCUA is only true source for ratios? The NCUA has data but doesn’t do peer analysis and there are multiple sources where someone can get that information. Seems to me a CU might learn on their own how they compare to peers. A Board member could actually do that all on their own, for free. An external auditor is more independent, a consultant is independent, etc.
I don’t think you are anti-regulatory, but others also see the hypocrisy of lamenting the regulators as the top inhibitor of CU success, and they evidently make people quit and cry, but sure, let’s turnaround and exalt them as the best and only source (apparently even better than the Board) to evaluate CEO performance. Difficult to reconcile.
“Some” of the healthiest CU’s are small credit unions. Well, that’s a matter of perspective, isn’t it? Small CU excessive capital ratios driven by shrinking or low or now growth assets, might be technically safe and sound, but that doesn’t mean they are healthy, and more importantly, sustainable. Small CU’s are also the source of “ALL” of the cu failures and fraud. For those that failed or were conserved, how “valuable and vital” were the exam reports to those Boards, especially around CEO performance?