Matz Worries Staff Too Lean, Fears it's Leading to More CAMEL 4 and 5 Credit Unions

ALEXANDRIA, Va.-NCUA’s high vacancy level has been at issue at the agency for some time now. At the July 21 NCUA Board meeting, NCUA Board Member Debbie Matz raised concerns that the agency’s low staffing levels could be taking a toll on examinations of federal credit unions. “Operating with a high level of vacancies has become a systemic problem across NCUA,” she said. “Our hard-working employees are spread too thin. Many employees have been expected to take on additional responsibilities, for months at a time, to cover for vacancies – while still doing their own jobs with little or no backup support.” NCUA had 35 vacancies as of the board meeting and was 7,500 examiner hours behind. NCUA CFO Dennis Winans clarified that one of those positions was for the board seat and another seven have been filled but the new hires had not started yet. He also explained that the agency has put new programs in place to get the positions filled more quickly. These vacancies include 10 examiner positions of which five are filled but not started yet, according to NCUA’s Office of Examination and Insurance. Still, Matz said NCUA Executive Director Len Skiles told her that agency vacancies should not exceed 2% of full time equivalents, or 19 vacancies. She pointed out that the agency had hired 51 new FTEs but lost 46, for a net gain of just five. “At this rate, it would take three-and-a-half years to fill all of our current vacancies,” she said. Matz continued, “And these vacancies are clearly having a significant impact on NCUA operations. It is shocking to hear that we are 7,500 hours behind in completing our examination program for this year. This means NCUA has been falling behind on our most important job – examining all federally insured credit unions in order to protect the safety and soundness of the credit union system.” NCUA Chairman JoAnn Johnson was traveling out of the country and unavailable for comment. However, NCUA Director of External Affairs Nick Owens assured, “Safety and soundness is NCUA’s foremost priority and as such maintaining and achieving staffing levels are a key priority. The risk-focused examination has provided flexibility as we achieve the optimal staffing level.” Owens explained, “No, the number of hours is not unusual for a mid-year projection. Our Risk-Focused Exam Program & Risk-Based Scheduling system provide for enough flexibility to absorb this type of resource short fall. Regional management makes adjustments throughout the year to ensure they complete their exam & supervision program. As of June, all regions report they are on track to complete their program by year-end.” For comparison, he pointed out that in 2004 the agency showed a 9,400-hour deficit at mid-year. During the July 21 NCUA Board meeting, Matz continued, “So it doesn’t surprise me to see the number of CAMEL 4 and 5 credit unions continuing to rise, even as the number of total credit unions continues to fall.” NCUA data shows that the number of CAMEL 4 and 5 credit unions has been rising each year since the Year 2000, with 79 more problem credit unions for a 39% increase. “But what’s even more disturbing is the growing number of large credit unions that have been downgraded to CAMEL 4 and 5,” Matz said. Nearly half of all shares in the current 275 CAMEL 4s, $5.4 billion, are concentrated in nine large credit unions representing $2.6 billion in insured shares; three were downgraded to CAMEL 4s during the second quarter of 2005. The percentage of insured shares in CAMEL 4s and 5s is the highest it has been in a decade and, for the first time in 10 years, the percentage of insured shares in problem credit unions exceeds 1% of all insured shares. Additionally, there are 1,725 CAMEL 3 credit unions and nearly 60% of these shares are held by 56 credit unions with $23.3 billion in insured shares. The average size of failed credit unions so far this year is $7.9 million, which is the peak so far in an upward trend since 2001, when the average was $1.2 million. According to Owens, history has shown that the number of CAMEL 4s and 5s increases more rapidly in the first half of the year. “An increase in the number of credit unions receiving a CAMEL code of 4 or 5 was anticipated due to the declining net margins within the industry,” he said. “Measurement of the supervision of institutions disclosed an average of 63 days since the last completed contact for CAMEL 4 and 5 credit unions and 130 days for CAMEL 3 credit unions, indicative of an acceptable level of supervision.” An alternative reason for the increase in the labeling of CAMEL 4 and 5 credit unions is the risk-focused examination process identifying more. “The Risk-Focused Exam process targets our examiners’ work on the highest risk institutions and activities. The process also includes training our most qualified examiners as subject matter examiners. This training coupled with our focus on risk is leading to more credit unions being designated as troubled.” Matz hypothesized at the board meeting, “Since it takes larger teams of examiners to effectively examine large credit unions, I can only conclude that our 35 vacancies and our 7,500-hour examination deficit are the reasons why more credit unions are in trouble. So we are truly paying the price for the ongoing shortage in NCUA staffing.” She added, “[W]hen we authorize the funds to pay for more than 3,700 hours of overtime to help make up the exam deficit, we should keep in mind that we are also paying an untold human cost. “As our employees will be spread more thinly, taking on more responsibilities and working more hours, we need to give them the appreciation they have earned. And I hope that in the future, we will give them all the resources they need to do their jobs.” CUNA Associate General Counsel Mary Dunn said that CUNA’s Examination and Supervision Subcommittee is looking into the issue and is working on setting up a conference call with NCUA’s Winans to “try to determine if there is a relationship between the vacancies and some of those trends Debbie Matz and others mentioned at the meeting.” “I don’t know that it’s a problem, but it’s a potential issue,” she stated. “I think Ms. Matz raised an interesting point in terms of vacancies. The agency has been recognizing their vacancies for some time now,” NAFCU Chief Economist Tun Wai, staff liaison to the group’s Share Insurance, Liquidity and Development Funds Oversight Committee, said. Having fewer vacancies is “a good thing,” he said at this point. However, he pointed out, “In our budget testimony (last year), we said if NCUA continues to operate without the fully staffed level, then we question if we need the fully staffed level in the budget.” Wai added, “Unless you over hire, you never catch up.” He emphasized that the ratio of examiners to credit unions is continuing to increase due to industry consolidation. The economist said that NAFCU feels NCUA is committed to the examination process and, while the trade association is “a little concerned with the (CAMEL) 4s and 5s rising, Wai believes it is more a result of the economic environment than an agency shortfall. Matz agreed in a subsequent interview. “I don’t think we can entirely take the blame for [the increase in troubled credit unions]. It’s a combination of factors,” the board member-an economist by background-said. However, in the current rising rate environment, NCUA’s low staffing levels do not mitigate that risk, she said. “If we remain understaffed,” Matz warned, “that will combine to put more credit unions at risk.” “Is it a crisis? No. Is a crisis imminent? No,” she concluded, but it is an issue of concern. Matz, whose term on the NCUA Board expires Aug. 2, admitted that she is concerned about future boards handling of staffing, but is “not going to try to second guess the new board members.” -