The post describing NCUA examiner’s arbitrary imposition of IRR tests causing a credit union loss of $10 million resulted in other readers sharing their experiences.
Their long-standing frustrations suggest the need for a more balanced, common sense, exam process.
Story 1: LOC’s and Liquidity
“I remember conversations about our investments during the time of your most recent article. Fortunately, the vast majority of our investments was in CDs so there was very little to even talk about in terms of unrealized losses. We did have one or two securities, but they were near maturity so even unrealized losses were minimal.
“This was around the same time that the examiners demanded we establish some kind of borrowing capacity in case liquidity suffered. I set up a LOC with our corporate and “borrowed” just to be sure everything was set up correctly. When the examiner saw the tiny bit of interest I paid for this test, the furrowed brows and disapproving scowl came out. Why would I do such a thing? It appeared as though our liquidity was fine so why did I use our LOC?
“I said it was a new product and I wanted to make sure it would function correctly in the event we ever needed it. The only way to prove that was to actually test it. All this ruckus over a charge of less than $100 interest for the less than 30 days we had the money. In the process, I wrote up specifically how to borrow from it, how to book the GL entries, how to pay the money back, etc. so that if the line ever had to be accessed, we would know how to do it. We have never used it. Not once.
“During my last exam NCUA recommended we increase the limit on it. GRRRR. Keep in mind, our last exam was at the height of the pandemic when we literally had liquidity dripping from every corner of the credit union and they were recommending we increase our LOC. I can’t imagine being the credit union that lost millions because of misguided “guidance”.
“I’m afraid I would have spontaneously combusted. Credit to them for staying in the industry because those are the kinds of things that cause us to lose some of our best advocates.”
Story 2: Ending a Profitable Business
“A related horror story about examiners making short-sighted decisions… A credit union right after the great recession was told by their regional examiner that their expense to asset ratio was too high and they must shut down their insurance division to get things in line.
“The insurance division was profitable. It was throwing off $360k of profit a year – profit with no strain on net worth – and profit from any perspective (GAAP, Free Cash Flow, Cash Basis). There was no funny business in the numbers. It was showing steady growth in earnings as it was finally hitting its stride.
“What the examiner failed to understand was the fastest way to restore capital is with an income source that requires no regulatory capital to begin with.
“I told the CEO he needs to die on that hill and fight hard. He complied however, and shut down the insurance operation.
The Moral of Stories
Sharing stories, good or not so good, is how credit unions learn from each other’s experiences. This is one way change for the better can occur in NCUA’s interactions with the industry.