Region I Report
DETERMINING SAFETY AND SOUNDNESS –
FROM THE EXAMINER’S PERSPECTIVE
REGION I
The examination of your credit union is about to commence,
and although this occurs annually, you may have
apprehension. It is okay. The examiner team does as well.
Typically, the examination cycle focuses on common areas from
one year to the next. But in addition, new topics of focus emerge
regularly based on national trends and, in many cases, trends
developing within each credit union’s distinct operations. The
examiner’s focus is safety and soundness, adherence to the
regulatory environment, and risk to the National Credit Union
Share Insurance Fund (NCUSIF). An examiner’s approach
includes the idea that adherence to regulation and safety and
soundness are interrelated.
The examination process is a joint effort between NCUA
examiners, State Supervisory Authorities, and credit unions.
The intent is to ensure safe and sound operations to protect
individual credit unions and the industry from net worth loss
due to controllable factors, and to minimize loss resulting from
uncontrolled factors, like economic downturns.
The process is not easy, but it is not meant to be
confrontational. The process is intended to protect everybody,
but most importantly, to protect your membership.
Primary areas of focus, which raise examiner’s awareness of
safety and soundness concerns include, but of course, are not
limited to:
; Board oversight of management and staff accountability;
; Consistency in business (or strategic) plans as compared
to actual results;
; The state of the internal control structure and internal
audit department;
; Areas of high growth or abrupt changes in balance sheet
accounts;
; Operating expense structure;
; Level of due diligence and planning for new program
implementation;
; Reconciliations and outstanding items, particularly relative
to corporate accounts;
; Reliance on third parties for loan origination and servicing;
; Reliance on third parties for investment decisions and
analysis; and
; Board and management assessments, or lack thereof, of
balance sheet risk exposures and financial trends.
Each of these areas of review, combined with credit union
responses, interpretations, and written objectives, leads to an
initial determination of safe and sound operations. From that
point, examiners expand their reviews into perceived areas of
higher risk. Why? Because your most controllable element is
the effectiveness of management’s actions, decisions,
implementation, and achievement of strategic objectives.
Operations, objectives, goals, and ultimately performance,
commence and conclude with management (management
includes the board and subcommittees).
Safe and sound operations include accountability for financial
results and strategic direction. Examiners expect credit unions
to demonstrate this rigorously and enforce accountability at
all levels of management. Your board is ultimately responsible
for the credit union’s operations and financial condition and
although delegated to the management team, the board needs
to remain informed. If examiners perceive weak board
oversight of management, then examiners would consider the
global aspect of operations and financial performance to be
high risk and of concern, therefore expanding review scope in
major operational areas.
Safety and soundness is more than just a report card of past
performance. It ensures the organizational structure is
adequately built proactively to handle the strategies and
future plans for each credit union. A question all boards
should ask is if its credit union’s business practices
encapsulate board policy, regulations, and sound business
strategies. This translates to the idea of substance over form,
wherein the board establishes and writes policies; however,
the actual practice differs.
A major red flag raised in the viewpoint of all examiners is if
management has not adequately addressed noted problem
areas in the Examiner’s Findings or Document of Resolution
action items. Not addressing agreed upon action items is a
significant safety and soundness issue. Based on this fact,
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