How To Ace An NCUA Exam

Preparation, communication, and simple hospitality can go a long way toward making the grade with the regulator.

Examiners can make things tough for any credit union, especially when they’re with the NCUA, but the relationship doesn’t have to be adversarial. In fact, it often isn’t. Preparation is the cardinal rule for doing well on NCUA examinations,plus it doesn’t hurt to be hospitable.

Don’t put them in the broom closet while they’re there, says MJ Coon, executive vice president and chief financial officer at Ent Federal Credit Union($4.1B,Colorado Springs, CO). The relationship with our examiners is very important to Ent. I would choose a good relationship over a bad one any day. Who needs the added tension?


data as of 12.31.14

  • HQ: Colorado Springs, CO
  • ASSETS: $4.1B
  • MEMBERS:244,741
  • BRANCHES: 29
  • 12-MO SHARE GROWTH: 3.93%
  • 12-MO LOAN GROWTH: 18.35%
  • ROA:0.92%

Kim Zelna agrees. I know some people think of them as the enemy, but I don’t consider them an adversary, says the new director of compliance services at the Pennsylvania Credit Union Association. They’re just trying toprotect your credit union and make it better. You just need to be prepared to help them do that.

Coon was an NCUA examiner herself for more than a decade before joining her credit union 17 years ago. Zelna, meanwhile, is a former auditor who joined the PCUA in February after serving the past several years as CEO and CFO at P & G Mehoopany Employees Federal Credit Union($104.7M, Tunkhannock, PA).

Here Zelna and Coon share tips on how to ace an examination.

What is the No. 1 rule for doing well on an NCUA examination?

MJ Coon:Be prepared. Keep the exam in mind all year by collecting documentation you know you’ll need. To help start on the right foot, have everything requested by the examiner within reason and assuming the examinerprovided you with a request list well in advance ready to go on day one of the on-site visit.


data as of 12.31.14

  • HQ: Tunkhannock, PA
  • ASSETS: $104.7M
  • MEMBERS: 16,880
  • BRANCHES: 10
  • 12-MO SHARE GROWTH: 8.42%
  • 12-MO LOAN GROWTH: 8.85%
  • ROA: 0.51%

When the lead examiner emails the questionnaires and checklists prior to the exam, our internal audit department separates them by functional area. Internal audit then sends the documents to the department heads for completion well in advance of the arrivalof the exam team. We attempt to provide everything we can in electronic form but also gather hard copies of the items we cannot provide electronically.

How about the No. 2 rule?

Kim Zelna: Make sure you have corrected everything from the prior exam. If you had an independent auditing firm or someone like that come in, make all the corrections they recommended, too, and share that with your examiner.

The NCUA puts out an annual supervisory letter that says what its focus is going to be. What was in the 2015 supervisory letter that stood out to you this year?

KZ:Cybersecurity. Credit unions should have a security committee in place.

Asset/liability management and interest rate risk are other areas the NCUA is really looking at now. What if interest rates go up 100 or 200 basis points? Credit unions should have an ALM committee that does shock tests on the balance sheet to see whatthe effect would be.

How do you prepare for that kind of IRR scenario? And how you document that for the examiners?

MJC:We stress test our balance sheet and run various NEV (net economic value) scenarios throughout the year. We add those tests to a master log and save the results in supporting tabs on a spreadsheet. In addition to running scenariosthat are probable or even slightly possible, we try to think of scenarios the NCUA might be interested in and we document the results.

It’s like playing the yeah, but game. I imagine the examiner saying, Yeah, but what if this other highly unlikely scenario happens? Did you think of that? It bodes well for the organization if you have tested for thatand have it ready for their review.

In your experience, do examiners care more about what has happened or what’s about to happen?

KZ:They want to see where you’re going, not where you’ve been.

MJC: Let’s take lower level capital as an example. If a credit union has what they know the NCUA considers low capital, they should prepare for the exam by analyzing how long it will take to return to a position that will not becriticized.

They want to see where you’re going, not where you’ve been.

Build a realistic, multi-year projection to show the recovery and share that with the examiner when they arrive. Or, if your strategy is to hold only minimal capital, then quantify the aggregate risk in your credit union from all sources and show theexaminer how your lower level of capital is acceptable based on that risk analysis.

Next: 5 Exam Tips From The NCUA

Can you give an example from your days as an examiner?

MJC:I remember a credit union that had a very low return on assets. When I arrived to begin the exam, the CEO walked me through a well-documented strategy that clearly showed net income would be materially lower than normal fortwo years as the credit union made changes and set the stage for future growth.

It had calculated the cost of the various initiatives and the impact to capital. It also projected the next five years to show return to its typical level of ROA and overall long-term impact to capital. What I saw was a well-planned strategy, and thateased my concern.

What are some best practices in managing your relationships with examiners?

KZ: Access to the right people is really important. If they want to ask about compliance, have them talk to the person in charge of compliance.

MJC: I strive to see things from their perspective. A lot of the positions they take are not necessarily theirs by choice they’re the positions of the agency.

We also give the examiner in charge a heads-up during the year if we are about to embark on something new for example, derivatives, dollar rolls, or a new investment type. That gives them the chance to brush up on it before they come on-site forthe exam.

Constructive recommendations/criticism, professionally communicated (in either direction), will be well received more often than not.

We also don’t hesitate to email examiners for clarification on a subject we know they will be keenly interested in. Basically, we try to make their job easy so they can get in, get it done, and move on.

How do you work with their on-site findings? How do you handle the review at the end of the visit?

KZ: If they’re making recommendations while they’re there, follow up on those recommendations while they’re there. That shows you respect what they say and recognize they’re working from a guide that’s intendedto help you and your credit union.

5 Exam Tips From The NCUA

Want to perform well during the next NCUA examination? According to Larry Fazio, director of the Office of Examination and Insurance at the NCUA, credit unions should:

  1. Proactively identify concerns and develop solutions. Don’t wait for the examiner to point them out.
  2. Establish working procedures upfront with the examiner. This will make for a smoother exam and help avoid misunderstandings.
  3. Have information ready as quickly as possible and make it as easy as possible for examiners to access the records they need. Preparing and coordinating with the examiner in advance helps the exam go more quickly.
  4. Maintain dialogue throughout the year. Don’t wait for the exam to communicate with the examiner.
  5. Keep examiner discussions focused on the credit union. This is not the time to air grievances with the NCUA.

BONUS TIP: The NCUA annually issues a supervisory focusletter that details its priorities for the year. It also publishes a monthly newsletterthat regularly addresses examination issues. Read up to prepare.

MJC:Be open to criticism, but be prepared to push back if necessary. Constructive recommendations/criticism, professionally communicated (in either direction), will be well received more often than not. We may not alwayshave the best answer and we might actually learn something from the experience. And on the flip side, understand that you may be in an educator role with the examiner.

Have you ever had a bad experience with an examiner? How did you handle it?

MJC:We’ve been fortunate to have good examiners since I’ve been at Ent. However, we did have one exam team member who was just out for confrontation. She even tried to write us up for something that was clearlywithin the guidance issued by the agency.

Luckily she reported to a more levelheaded examiner-in-charge. We appealed to him and he made sure her comments were excluded from the final report.

If a credit union finds such a situation and that difficult examiner is the lead examiner, I recommend contacting the supervisory examiner to discuss the situation.

Any final thoughts?

MJC:It’s always helpful to regularly monitor the industry to learn about hot examiner topics. This information allows us to prepare for those discussions ahead of the exam.

KZ: Don’t hesitate to turn to others for help. My new job here at the PCUA is to help credit unions with compliance, and we have a lot of resources to help with examinations. Your state league is a great place to start.

June 4, 2015

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