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Hey everyone.

This is Mark Treichel with another
episode of With Flying Colors.

And recently the NCOA board at their
quarterly share insurance briefing noted

that camel codes continue to deteriorate.

I did a podcast about it, short podcast
about it recently, following up on

their communication of this information.

And what happens when
camel codes get worse?

Examinations get harder, examination
reports get harder, and specifically,

credit unions start getting more
examiner findings, supplementary facts,

document of resolutions, perhaps regional
director letters, informal type of

communications, informal enforcement
actions from NCUA that That can make

credit unions life's more complicated.

So we're here today to start talking about
all of those things I just mentioned,

and I've got Steve Farr and Todd
Miller of my team with me here today.

Guys, how are you doing?

Good morning.

I'm doing great today.

We have a day with no wind for a change.

Glad to hear it.

No wind.

We'll try and wrap this up so you can
go get out, get some yard work done

there in the beautiful state of Montana.

But guys, if Steve and Todd,
let's go with Steve first.

If you could give a little bit of
background, maybe there's some new

listeners who haven't heard you on
the podcast before, if you could

give a little bit of your background
at NCUA and that'd be great.

So Steve, fire away.

Hello everyone.

Yeah, Steve Farr.

I spent 30 plus years at NCUA.

Most of 'em I would say really great.

And the first half of my career was
in heavily involved in the examination

function, primarily as a problem
case officer on the west coast.

But I was involved in Conservatorships
throughout the nation.

Then I moved into the central office.

And I spent the last half of
my career there working in the

division of risk management.

One of my accomplishments or
duties that would particularly

apply to this broadcast was.

I wrote the enforcement manual, which
was put out as an instruction and I

just realized that was 20 years ago.

20 years ago, time flies, man.

Yeah, it seemed like yesterday
when I was looking back at it.

And then, spent my career there in
the division of risk management and

worked on the corporate resolution.

And 1 of the last things worked on
was the risk based capital role.

Very good.

Similar to Steve, I was
around more than 30 years.

Actually, I was just a couple
short months, less than 35 years.

I enjoyed my career a great deal too.

And instead of breaking mine
in two, like Steve, I could

probably break mine in three.

The first 10 years or so I was an
examiner and problem case officer.

The second 10 years, I spent it
as a capital market specialist

from 2000 through 2010.

I do have a last year there
where I was involved with a

conservatorship at West Corp.

And then the last decade or 11 years of my
career, so I was the director of special

actions in the western region supervising
problem case officers and capital market

specialists just a little sideline.

I also spent time on N.

C.

U.

A.

Supervisory Review Committee.

I chaired a couple of appeals,
sat on another appeal.

So that was an interesting little
sidelight to my career, but like Steve,

I enjoyed almost all my years with NCUA.

COVID was a little less fun when
you couldn't talk to people, but

for the most part, I enjoyed working
with credit unions a great deal.

Very good.

I would echo that remark in my 34 years.

And now in this new This new thing
that we're all doing I'm having

even more fun helping credit union.

So a lot of credit union conversations
we've had has been based around.

The examination reports in the issue
in the enforcement manual related

items tied to the examination report.

And whether it's, getting draft
documents that they don't quite

understand why it might be placed in a
certain part of the examination report.

A lot of questions around that arena.

So I thought it would be good to just do a
little bit of education on the particular

parts of the examination report.

Yeah, I'm thinking that maybe
the first item to discuss

would be the examiner findings.

So let's chat a little bit about
examiner findings and or pivot,

from that any which way you think
based on your vast experience on

exam reports and examiner findings.

Go ahead, Todd.

Examiners findings, they reflect problems
that examiners find during the exam that

they think credit union should address.

But there are problems that don't threaten
the viability of the credit union.

They don't represent systemic
violations for the most part.

They're treated as items that
management can correct in the

normal course of business.

They don't require the timeliness
that some of the other things do

that we're going to talk about later.

But they're just items that the
examiners believe need to be

corrected, but they can be corrected
in the normal course of business.

Examiners don't usually spend a lot of
time documenting them in the report.

The descriptions of them are fairly brief.

There's a short action deal with this over
the course of the next year in general.

And I think one of the important things
on those is is, as a, if you were a board

member looking at the exam report, that
looking at the volume that you have of

examiner findings, it may be that the
NCOA is trying to send you a message.

Because we've had cases where the problems
weren't real horrible, horrible, and that

it wasn't going to get to where it was.

It costs the insurance fund, something
and not quite to level the door.

There's just a lot of
little, little things.

And when you get a laundry list of just
examiner findings covering multiple

areas, the minor things that's that's
a clear indication that he's trying

to send to the board of directors that
they need to pay attention to is what's

the root cause of all those issues is
that breakdowns at multiple levels?

Is that a breakdown at the top?

Is a breakdown and internal controls,
but pay attention to what could be.

An overarching message.

Great points guys.

We'll probably get into this again
in different discussions, but

citation of a regulation citation
of safety and soundness citation of.

A letter to credit unions and an
examiner finding anything you want

to share relative to what I just
said there, as opposed to contrasting

it with a document resolution.

I guess the ultimate question is
if something's in the examiner

findings, should the examiner be
able to tie it to a written into

a product as a reference point?

Yes, yes.

They're supposed to cite a regulation,
for any of these informal administrative

remedies, whether it's an examiner's
finding a door, a preliminary warning

letter, an LUA, regional director
letter, those citations should be there.

They should include regulations,
your examiners findings and doors.

They, in addition to the regulations,
they may include other guidance

letters at the carding that is issued.

So letters to credit unions and issue
a supervisory guidance documents.

It could cite 1 of those, it could cite
the exam guide, but in general, all of

these informal actions when examiners
are asking you to take action, there

should be citations to a regulation.

Very good.

Very good.

Steve, anything else on that topic you
would like to add on the examiner finding?

Yeah, just a reminder, our listeners
and that it's easy to use the tools on

the internet to look up the regulations.

That I use the ECFR and you can negotiate
and navigate around that really easily.

And then just focus on that one area
so that, that's the quick and easy.

The other advantage on that is,
It has the links to the kind of

the history of that regulation.

You can go in and you can read the
preamble if you're really want to

get into the details of what happened
with that regulation, what's its

history, you can get to it that way.

And when we are faced with something
like that, we spend a great deal

of time in those preambles to make
sure that we understand what NCOA's

intent was with certain regulations.

That's a great point on the preamble
actually always have enjoyed the

preamble more than the actual regulation.

You can probably read that and
know what you need to know.

And I think in a previous podcast, I
might have made a statement such as that.

It's a regulation is almost a 3 act play.

There's the preamble of the proposal.

There's the preamble of the final and
then there's the actual regulation

and to really understand the entirety
of what is trying to achieve.

It's important to understand.

I think all 3 of those documents.

So

negotiating with NCUA, Todd, you
mentioned in a perfect world, it

would cite a regulation, right?

And you could argue that any regulation.

In and of itself if an NCWA examiner
wanted to take a position that a

regulation was violated, that that could
rise to the level of document resolutions.

Oftentimes, it doesn't.

But let's say, for example, you've
got a situation where there are a

volume of examiner findings, and they
decided maybe with negotiations with

the credit union that they would it.

Put them in the examiner finding
instead of a document resolution.

Next exam comes around.

What happens to the, what does the
examiner do relative to the 10,

10 examiner findings that were out
there coming into the next go round?

What should the credit union
expect to happen, particularly

if maybe there is noncompliance?

It's somewhat interesting because, I
used to teach and Steve also taught a

lot of examiners classes and examiners
would ask questions like this.

And the answer to them was, it depends.

There is no black and white answer
to this, and it really depends

on the nature of those examiners
findings, to elevate them to a door.

There has to be some evidence that if
they're not corrected, it's going to

cause financial or operational damage
to the credit union or continued

noncompliance with the regulation.

as Steve alluded to earlier, sometimes
if there's a significant number

of findings not being addressed,
it represents a widespread problem

throughout the credit union.

Sometimes they get elevated to a door
just to send a message to the board

that there's significant numbers of
internal control problems here that.

Are not being addressed.

So sometimes findings just get left
as findings for a couple years.

Sometimes the findings are not addressed.

And like I said, the examiner's
judgment, those unaddressed findings

can lead to operational problems
or violations of regulation or

internal control deficiencies.

then they can rise to a
document of resolution.

For most credit unions, they should
probably operate on the assumption that

if they don't resolve findings in a
material way, they probably will find

their way to a document of resolution.

I would agree.

I would agree with that sentiment.

And I'm thinking of a quote,
commit no minor blunders, right?

You've been told this is an issue you
can expect and see a way to look at it

when you come back and the best way to
make sure it doesn't go to a document

resolution is to resolve the issue.

And of course that that presumes that
you're comfortable that the issue

needs to be resolved and you can,
have discussions with the court.

The credit union around that topic.

So any last words on examiner
findings before we pivot

perhaps to supplementary facts?

No, very good.

Okay.

So the supplementary facts portion
of the examination, back in the day

long time ago, back even before the
20 years ago, when Steve wrote the

enforcement manual I remember utilizing
the supplementary facts for compliance

with a letter of understanding.

And that was really where I,
got my teeth wet as an examiner

was the an LUA was outstanding.

We, as a problem case officer,
you typically would have those.

So you'd give an update in that
form, but it over time, it's morphed

into being utilized a lot more.

And if you would like to describe the
purpose of the super supplementary facts

and maybe some advice for credit unions
in that, on that top on that document.

Thank you.

Examiners use supplementary facts for a
number of different ways, and sometimes

they're tied to document a resolution.

Sometimes they're tied
to examiner's findings.

Sometimes they're just
general information.

But in general, it gives criteans
alternatives to address the problem.

Here's some deficiencies.

In your commercial lending program.

Here's options.

A, B, C, D, E suggestions
that might address that.

So it gives credit unions a
broader explanation of what the

examiner sees an issue and perhaps
alternatives to address it.

They put a lot of suggestions
in supplementary facts nowadays.

Because the overview is supposed to be
condensed, but maybe there's an issue

that doesn't rise to an exam finding,
but could in the future, and examiners

will use supplementary facts to explain
that and some of these issues, especially

with information security some of
the consumer compliance type regs.

Some of the intricate credit
risk management type things.

There are long discussion items that
really don't belong in the overview.

The overview is tied to the officials.

Here's the main things.

The supplementary facts can be used.

Here's other important things that
management needs to pay attention to.

It doesn't rise to the board level.

So that supplementary facts has
become a multiple use document.

Yeah, in many different ways,
and examiners have a lot of

discretion as to when they choose
to use the supplementary facts.

Nowadays, NCUA has so many specialists.

They have the information
security specialist, the

payment systems specialist, the
regional lending specialist.

The regional capital market specialists.

A lot of times you'll see those
specialists will use that supplementary

fax to convey information to the credeans.

And here's how you can mature your
program in these respective areas.

So you see the specialists use
the supplementary fax quite often.

No, that makes sense.

Do you have any thing to add
on supplementary fax and the

use of them in the exam report?

No, that was just to add written down to
make sure we cover the specialist thing.

And Todd just covered it really well.

Todd hit another grand slam.

So we'll I didn't even
have that in my notes.

You mentioned supplementary facts.

You don't comply with it or
something maybe deteriorates.

And this is, I think
your answer is depends.

You're going to give me the
lawyer answer, but it could then

rise to an examiner finding.

So really, in the hierarchy of pain for
a credit union, the lowest pain to have

something discussed in his supplementary
facts, the next highest level of pain

would probably be the examiner finding.

Which we've discussed so let's
pivot to see, I even turned it.

I'm not going to give you the
opportunity to say it depends.

I'm just going to paraphrase that.

Let's pivot to the document resolution.

And, we've.

We had a conversation.

All of us were had some conversations
with the credit union recently

that had a substantial volume of
document resolutions, north of a

really big number and to the point
of prioritization becomes an issue.

But before we maybe dive into that
particular nuance of a document

resolution, what's the purpose?

What's your.

Your vast experience about with
document resolutions would you like

to communicate here with the operator?

Audience today,

I think this one, maybe
we will just read from N.

C.

U.

A.

's national supervision policy.

So you understand exactly what examiners
are how they're supposed to be using

document a resolutions, from their
own national supervision policy.

Items that elevate themselves to
a document or resolution must be

significant enough that an examiner
would recommend escalating to the next

level of elevated enforcement actions.

That being an RDL, an LUA,
preliminary warning letter.

One of the things the examiners are
supposed to consider when they decide

they're going to write a door is if
left unresolved, could the violation

or problem cause a pretty serious
financial or operating damage?

Does the problem result in fundamental
noncompliance with laws or regulations?

Is the problem something that would
need to be escalated to the next

level of enforcement if unresolved?

And is the problem a result
of management's inability or

unwillingness to properly identify,
measure, monitor, control risk?

And then Steve talked about this
earlier, the last item is is the problem

widespread throughout the credit union?

So that's one of those if you have,
30 minor findings, is it really

an indication of a widespread
problem with internal control?

So those are words specifically
straight out of the National

Supervision Policy Manual.

Documents of resolution
should be significant issues.

That if left uncovered presents a
risk to the insurance fund or the

reputation of the credit union.

That's a good summary right from the
words of NCUA and of course the NSPM,

the National Supervision Policy Manual.

There is a redacted version of
that out live for credit unions.

There is what appears to be an increasing
tendency of NCUA to redact more and

more of that and It's something I
haven't really talked about a lot

here, but it's something that I.

I have on my list to potentially
talk with NCOA down the road,

especially if it keeps getting worse.

But Steve, anything relative to what
Todd said, I'm sure that document

resolutions, you've got a lot of
experience on these both at NCOA

and recently, what are your thoughts
on the document resolution process?

Oh, one of the things that
crossed my mind is that.

You talked about the volume of them.

We've had some of our recent
clients that were getting like

their first document or resolution.

And, that one was a really big deal.

And then we have some of those that have
pages and pages of document or resolution.

And it's so they can run the whole gambit.

And, the thing is, how you react
is, is everything to do with it.

One of the things Todd has wanted to talk
about while we're on that subject is.

I can't recall if it's inside
supervision and, what would you call a

well, written document of resolution?

I know that we used to is, do they have
still the smart principle in there?

I know the uses a thing that called the
5 C's format is used to communicate.

What essentially is there, they
call it matters requiring attention.

We call them doors, but there's was he
had to address concern cause consequence.

Mainly of inaction corrective
action and commitment.

I think ncaa within we used to is it
in the regulation, but we used to teach

the smart principle Todd, you want to
touch on it still in the supervision

manual the smart principle it's more
the smart is geared to that corrective

action piece Not those other pieces that
the occ uses and see where they do have

to describe the problem But the smart
principle is The actions that they ask

the credit union to do, or that the credit
union agrees to do, and we'll talk about

negotiating doors, I think, before we're
done, but the SMART principle is those

actions that we're asking of the credit
union, or NCUA is asking of the credit

union, they should be specific in nature.

They should be measurable.

So are they achieving the results intended
in a very concrete, measurable way?

They should be achievable.

And sometimes this is where examiners
run afoul and why people hire us

is because they're given doors that
are perhaps not achievable in the

manner that the examiners request.

They should be result oriented.

So they should address the
root causes of the problems.

And That's a difficult one, especially
for newer examiners who like to

address symptoms of problems rather
than the actual problem and root

causes, and they should be timely.

So to reiterate that just in the SMART
letters, specific, measurable, achievable,

results oriented, and timely is how those
corrective actions should fit in that box.

When you walk through the SMART
principle to pop out at me, achievable,

because we've had some situations.

Where

NCUA's expectations we're, I
want to say not in touch with

reality, but that's a little harsh.

We're a little aggressive.

And the other one that pops
into my head is timely.

And, I've been, we've been experiencing,
credit unions have been experiencing, and

NCUA's board members have actually talked
about it, that the timeliness of reports

Can complicate the ability to achieve it.

For example, if when the examiner is on
site, they're saying I want something

done by September and then August 15th.

They actually give me the final report
where they go through all the nuances

and they talk about it in the overview.

And I see some things in there
that I don't really like.

And then by the way, they,
depending on code, they might

be coming back pretty quickly.

So you can see some of these things
colliding where the smart principle.

Isn't necessarily followed whether
it's because of staffing issues or just

having an expectation of what, what
can be achieved in a, a time period.

I remember when we were all out on the
West Coast, there was a guy that worked

in the office named Eric Jacobson.

And I remember him saying, Mark, only
so much water is going to go down

the sink at one point in time, right?

There's only so much that can be done
with the resources that you have.

Any thoughts on achievable
or timely and any advice to

credit unions in that regard?

I think when we see those doors
that you are perhaps not achievable,

perhaps not timely, perhaps not really.

results oriented.

I think it comes down to how examiners
negotiate those doors because what should

happen throughout the exam process is
that if examiner has an issue and they

feel it's a material issue like this,
they should sit down with management,

discuss the issue, get management's
agreement that it is an issue and that

management actually understands the
issue, and then it becomes a negotiation.

Management should say, this is
what we're able to do with our

resources to address this problem.

And I think a lot of the ones where we
run into problems with our clients, or

where they run into issues with DOORS
not being smart, it's because that whole

negotiation discussion process hasn't
occurred, the examiners are under time

pressure, they write the door, they throw
it in front of management space without

management having time to say that this
is what we're able or unable to do.

There hasn't been this whole
agreement that this is even a problem.

And there is a lot of disagreements
out there, especially around interest

rate and liquidity in this environment.

So when examiners shortcut the
process, that's when you start

ending up with doors that are not
achievable results oriented or timely.

And this is really important that when
accrediting gets a door, especially at

the board and management level, that they
truly understand the examiner's concern.

There's always more than one
way to address a problem.

And I think what we're seeing
quite often with our clients is.

There hasn't been a discussion of these
multiple ways to address a problem and

the examiner is just, here's my solution,
credit you can follow it, and they're

not given that opportunity to say, wait,
here's other ways we can address this.

That's not always the case.

A lot of examiners are really good
about writing open ended doors that

examiner or credit you can give us
a plan to address this issue by the

state and we'll assess it there.

But.

In many instances, we do see this
where they're given a door by Fiat.

They're given goals and timelines, and
there hasn't been that upfront discussion

with management or that agreement that
this is a significant problem that

jeopardizes the credit union's future.

Great point, Steve.

Yeah, 1 of the items I know that
we've been dealing with our clients

on is, the timeliness of when they
get the exam report and it has the

door in there and then when they start
looking at what it'll take to fix it,

the cost of some of these door items
is a really great in some cases, and

probably not much of a consideration
than when it was put together.

And I think, my, that's where I think
when you get into 1 of these, and it's

going to be really, really costly.

Before you really tie into that, make
sure that you're you and your examiner

are on the same boat, because it'd be
terrible to put a bunch of resources

into something that you thought had
marginal benefit to you, but you thought

was going to take care of the door.

That might not be a good
decision that could have been

taken care of a communication.

The other thing that can happen.

And I used to see this a lot when I came
into cases as a problem case officer

was doors that were inconsistent.

One part of it would say
reduce operating expenses.

And the timeframe was
that kind of immediately.

And then on the other parts of the door
where all of these items that we're going

to acquire more resources and people and
be like, well, that's inconsistent there.

So you guys have any thoughts on
how to deal with those issues.

The one thing that jumps into my
head and it related to the priority,

but the cost is prioritizing.

We'll, we'll often advise credit
unions to, you got, you've got six I.

T.

findings.

Which one does NCUA think
is the most important?

Typically, when you were training
examiners, presumably there was

discussions about, putting document
resolutions in priority order, putting

examiner findings in priority order to
the extent you can, and, we've advised

credit unions to try and establish that
point so that then they could maybe have

some discussions about if there's five
that are saying I need to add expenses,

And you're at the meantime, you're saying
I'm, my, my profitability isn't enough

for my, for where I want my capital to be.

That's one way to approach it.

But Todd, what are you, what
are your thoughts on that?

The NSPM still says DOORS should be issued
to the credit union in priority order.

I don't think it says that
about exam findings anymore.

A lot of the exam findings,
examiners tend to organize those

around subject areas, and it's which
examiner turned in their work first.

That, that capital market specialist
or that regional lending specialist.

But those are items correctable in
the normal course of business and

don't rise to the priority level.

Doors do.

Doors should be in priority order and
cost should be a consideration of that.

I remember back in the 90s, we used
to look at credit operating expenses

and then we had a board that came
in and said, examiners, you don't

get to look at operating expenses.

Stay away from them.

That's the credit decision.

So it goes back to Steve's thing,
when Examiner says, improve your

risk management program, hire a chief
risk officer, develop an ERM program.

I don't think examiners quite
understand that those asks are

potentially millions of dollars.

They're not something you do in the normal
course of business, like an exam finding.

Those are significant.

Resources and you start asking
people for third party consultants.

Those things are not cheap and
examiners don't dig into expenses

and I haven't for a couple decades.

Those are then maybe some of
the problem case officers.

So a lot of times I don't think
examiners like Steve said they don't

understand what these things cost.

And the cost is maybe
a bigger problem than.

Problem they're trying to fix.

So parties need to push back and
examiners with that is wait, this is

the resources this is going to take.

And is it really going to
achieve the results intended?

That's why you should be
given the opportunity.

Is there another way we
can address this issue?

So I took some notes during this
conversation and I want to circle back to

The NSPM portion where you talked about
the purpose of the document resolution.

And I wrote down a circle, three
things, inability or unwillingness,

fundamental noncompliance

in widespread.

So

what caught my attention on inability
or unwillingness was it linked

in my head that the definition.

Of a code three is the
management may be unwilling or

unable and the operative word.

There is may oftentimes and we're we'll
do some podcasts coming up here on camel.

But it really caught my ear that.

When they're talking about if you
need a door, it's because you're in a

management's inability or unwillingness.

And that's very similar to
language about the code.

Any thoughts relative to document
resolutions and how they.

Relate how they should
relate to the camel code.

I had that written down
as a question also.

So I guess I'll throw it to Todd.

What?

Why do I get picked on here?

There is a feedback loop between
the 2, for instance, in a code 1,

you're almost never going to see a
document or resolution code twos.

You might see 1 or 2.

usually, they're going to be
compliance or BSA related.

There are certain regulatory things that
Might not be significant, but because

there are violations of the law they
rise to a document of resolution when

otherwise they would be a finding.

You can correct these in the
normal course of business.

And you see a lot of those with BSA issues
and FinCEN related issues, because we have

agreements with other agencies that these
items will be a document of resolution.

Our NCUA has agreements.

I keep throwing we in there.

I'm not with NCUA anymore.

Just seems like it.

Yeah it's after 35 years of
being with an organization

and probably working for them.

There's a little bit of, it
feels like an old family.

But there is feedback related to
the doors and the camel rating

should be congruent with each other.

And, there's a three camel rating.

Those are crediting that, they're not in
imminent danger of failure today, but if

they don't address things, they could be.

You expect more doors there to
address those root causes to make

sure that the direction that credit
moves is to a two not down to a four.

So there should be some relationship
between camel codes and Your exam

reports and doors and findings.

It's very rare that you're going
to see a camel three that doesn't

have a door unless it used to be
a four and addressed everything.

That's maybe the one exception, but it's
a very rare situation as you get down

into that camel four rating you're almost
always going to have the next topic

of discussion for us and An LUA or a
preliminary warning letter type of action.

There is a step in between there
The unwillingness and inability to

address problems, if that is truly
a foundational issue, it's almost

always going to get beyond a door.

Eventually, what good point fundamental
noncompliance when I see that the

word I key in on is fundamental
and, violating the loans to 1

member violating a commercial loan.

A principal tenant of
a commercial loan rule.

I think you mentioned BSA.

Because of the agreements they have fund,
anything on BSA is going to, would fit

into fundamental noncompliance almost.

And then widespread we've
had lots of conversations.

Thought on the podcast about situations
where it almost appears as if corporate

governance is is rising in importance in
credit unions from an NCUA perspective.

And when I think widespread, I don't know
why I'm linking that to this topic in my

mind, but I am where maybe an NCUA has.

eight examiner findings, and they have
a few things in the document resolution.

We're seeing document resolutions being
grouped into corporate governance.

Any thoughts and I know this is a
little off topic, but based on our

recent conversations we've had, any
thoughts on document resolutions?

Being widespread and corporate governance
and how NCOA is doing that right now.

I think it's NCOA catching up and
maturing their own level of knowledge

about root causes of issues.

Before they dealt with the symptoms of it,
I was always a proponent that we should

have specific training classes at N.

C.

U.

A.

Just on risk management
and corporate governance.

N.

C.

U.

A.

Really doesn't do that.

Based on what we're seeing with our
clients, maybe they are starting to do

that because we're starting to see a
lot of doors and findings that are under

that guise of corporate governance.

But realistically, corporate
governance is important.

I think MCUA over the decades have left
it alone because they didn't want to scare

volunteer board members away from serving.

Now it's become somewhat critical to the
safe and sound operation of organizations.

So I think just as an agency, their
understanding of corporate governance has

improved and that's why we're seeing those
types of language in these documents of

resolution and findings today is they're
getting better at identifying root causes.

Now sometimes it does go astray,
but overall I would see it as a

positive and something that perhaps
needed to happen a long time ago.

Just one person's take.

Yeah, I agree.

I'm a big proponent of corporate
governance because it takes care of all

those little issues that used to, Todd
drive us crazy when it would be a matter

of ethics and those types of things.

It would just infuriate us and
they were hard to overcome.

1 thing I'm seeing, though is there's
this creeping that's occurring in the

levels of corporate governance is out
there because there's a lot of guidance

out there for institutions, not just
credit unions above the 10Billion dollar.

Mark all of which is good advice,
but I think I'm seeing, that's

requirement is like, creeping down
to apply it in more than an intended

level to the smaller institutions.

It's something that.

be wary of and know that, this
is the appropriate corporate

governance for our size.

But if we're shooting to be much
bigger, what does our corporate

governance need to look like?

Going forward, go ahead, Todd.

NCUA's knowledge is maturing
in this process and rightfully

they're still stumbling blocks.

We still see examiners Perhaps putting
burdens on boards of directors to

get involved in daily operations and
daily committees, which is very much

misplaced in larger credit unions.

There's clear separations of what
is boards responsibility versus

management's responsibility and how
management demonstrates compliance

with things, five, 10 years ago, you
would never see an exam report that

talked about risk appetite statements.

We're starting to see those and
rightfully but I also think sometimes

examiners don't have their hands
around what that all means yet.

From my perspective, so I think
NCOA is still taking baby steps

down the right path, but their
knowledge level still needs to mature

along the way, and they have a lot
of employees to get up to speed.

Credence, you can hire us.

We'll help you out with that.

If you got an examiner, that is
misplaced along their journey.

You're very good.

And Todd, the catching up concept.

It was a conversation.

The three of us were involved
in, I think, last week.

It might have been an after
conversation, but you said

something that resonated with me.

It was like back 20 years ago, 15 years
ago, whenever capital market specialists

came into existence and NCUA elevated
the expectations on liquidity and asset

liability management and income simulation
and all those things, it was much needed.

And we, the agency and credit
unions were behind where banks were.

And there was this This maturity
process within the agency and then

within the credit unions, I think
we're at the beginning stages

of that in corporate governance.

And then I'll pivot to say, the office
of national exam and supervision has

highlighted as corporate governance
and a lot of the initiatives

that came out in their guidance.

And then, Ones used to be over
10 billion, then they shifted it

to 15 billion, yet they have the
capital planning for the 10 billion.

And then Steve, you alluded to
other guidance sets out there, which

there's this great document that
you've pointed out to some of our

clients and to me, the FDIC proposed
guidance on corporate governance,

which, quite frankly, is fantastic.

But it's for 10 billion credit unions, but
that creeping effect is, we see that we

pointed out to clients, NCUA sees it, they
look at it and go, wow, this is better

than anything we've got in our NSPM.

And we don't have a letter
to credit unions on it.

And you can start to see
examiners taking on some of those

tenants, which is a good thing.

But you can have, depending on
who gets assigned to, you can have

the expectations of a 10 billion.

Guidance that's not even final
for banks that ends up being part

of a discussion for a 1 billion
or a 500 million credit union.

Same thing being said, if you're at a
billion dollars and you get corporate

governance brought up, what you want to
do is look at what's out there, what,

how you can mature your systems and
there might be some things there that do

make sense for you at your asset size.

Any, anything I triggered there or should
we move on to regional director letters?

Go ahead, Todd.

I spent two decades dealing
with troubled credit unions.

I spent, a couple, a decade as
an examiner problem case officer

and then call it another decade
as a director of special actions.

And even my time as a regional capital
market specialist, there was dealing

with a lot of troubled credit unions.

When you go through the whole process
of resolving issues in troubled credit

unions, there's almost always was
corporate governance at the root.

It's a failure of corporate
governance that got them into trouble.

Most of the time, not all the time, but
most of the time it was never in writing.

And CUA said, Hey, credit
unions don't need ERM programs.

When I was the director of special actions
for a billion dollar credit union, if

they got The code for rating came into
special actions I wasn't letting them

out until they were well down the path
with a fully established erm program

Because those are the things to make sure
they don't ever come back into special

actions again And I found over my career
over the 2000s like even you go through

the last recession in 2008 and stuff
The credit unions in california and on

the west coast washington, oregon that
had erm programs in place before that

recession You None of those guys ended up
as code fours or troubled credit unions.

Those programs are successful
at mitigating and managing risk.

They're almost essential in
this competitive environment.

Once credit unions start
hitting that 1, 2, 3, 5 billion.

I don't think they're optional anymore.

I think of accrediting wants to survive
and compete those risk management

processes in governance processes.

They have to be in place if
you're going to survive long term.

Great.

Great point.

I had one more topic on, on the document
of resolution because it is an item

that at the end of the exam and the
joint conference, the the regulator

usually asks for the board to accept
or approve the document or resolution.

Sometimes there's an uneasiness there.

I thought maybe we should discuss,
what is the board's options

when they're faced with that
decision, at the joint conference.

It's a great point.

I think we're both going to look
to Todd for his take on that.

And then we'll have had some comments.

I think it comes back 1st from a board
level perspective is do you really

understand the examiner's concerns and.

A lot of times board members are
reluctant to ask the examiners

questions, when they get a document
or resolution, they're supposed to

get that exam report ahead of time.

They should be discussing things with
management, even lay out the questions

that they might have with the examiners
and make sure they truly understand what

the examiners concerns and issues are.

And you get that examiner quite
often their supervisor is there

well at that joint conference.

Don't be scared to ask them
questions and make sure you have

an understanding of the issues.

At the end of the day, the examiners
are actually trying to do what's best

for the credit union, even if some of
their suggestions and guidance might

be a little bit misplaced, or there's
alternatives to ways to address it.

But That's the root piece
right there is board members.

Make sure you understand what
the examiners are really asking.

There is provisions.

The examiners are always going to
ask you to approve that document

or resolution and agree to it.

And most of the time it's in creating his
best interest to do sometimes it's not.

And if it's not crediting, they're
allowed 30 days to respond to it.

We disagree with this.

Here's what we're willing to do.

Here's what we're able to do.

There's a whole appeal process.

If they think the examiners have
gone astray to a great deal,

there's a lot of costs and time
and energy involved in appeals,

so it's not always your best path.

But having an open door and a two way
communication so you truly understand

each other, that's step one in the
whole thing for board members, is

make sure you understand what the
examiners are really telling you.

And this is another thing to the
timeliness and some of the issues

we're seeing the examiners are taking.

Two, three months to get
a report finalized after

they're done with field work.

And then the board members are getting,
24 hours or less notice to digest it.

And that's not a timely
way to address the problem.

These are volunteers.

They need a little bit of time
to adjust, especially complex

doors that are asking a lot.

I think NCOA is sometimes not giving
them the time they need to do that.

And I think it's perfectly fine for
management to say, We need another

five days to think about this and
truly understand it and digest it.

So credit unions shouldn't be scared
to ask for that additional time.

We had a client the other day that
the examiners wanted to meet with

the board with no documentation
at all, no agenda, nothing.

And of course that management
team was right in saying we're

uncomfortable doing that.

And, we even told them don't do
it until they give you something.

And it's just not necessarily a good idea.

We did indeed, the.

That issue of the reports coming in
late and getting dropped on the board.

It's a real issue out there.

It's, we're seeing it too much.

For it not to be and I know NCUA is
trying to deal with it because of some

statements from the NCUA board vice
chairman, but that that's been frustrating

recently for credit unions, and I think
there's pressures on the examiners

to get it done, which is why they end
up, dropping on them and they want

to write in the closed section of the
report, by the way, the closed section,

Is what the credit union doesn't see.

It's a little summary of, things that
aren't worthy of going in the report.

Here's the hotel you should stay at,
those kind of internal items where NCA

will say yes, they voted on doing the
document resolution in the perfect world.

That's what the examiner
Wants to have happen.

The other thing, the other word that
you mentioned that I had written down

and Steve had said it and you said it
and I want to say it here communication.

Everything we're talking about here comes
back to communication on both sides.

All the documents we've talked about will
be better in final form if communication

is working optimally on both sides.

Regional director letter.

Anybody want to chat about our, also
known as an RDL, any thoughts on a

regional director letter from where you
sit today versus where you sat at NCUA?

Steve's nodding.

I think he's waiting for
me to talk first again.

Regional director letters, they're
quite often seen in when you

get that code three, they sit in
that slot somewhat in between a

document or resolution and before.

in a letter of
understanding and agreement.

It's usually a way for the regional
director, because they're personal,

the regional director signs them to
tell the credit union's board that I

have concerns about these doors here.

These are the items you need to fix.

They tend to mirror the doors that
the credit union has been given.

Quite often they're tied to
issues that have been persistent.

And have not been resolved for a period
of time that's typically where they occur.

So you've got a repeat type door a
longstanding code three that doesn't

seem to improve to a code two.

It's just the regional director's
way to tell the board of directors.

You need to pay a little bit more
attention here because issues are not

being addressed in a timely manner and the
real directors will say, I expect you to

address these issues in a timely manner.

Credit unions should take them pretty
serious because they're a prelude to

a higher level of informal action if
you're not addressing these issues.

Excellent, excellent points.

You alluded to a higher level of
informal which would be preliminary

warning letters and letters of
understandings that are not published.

You can argue that's a gray area where
you're starting to get more formal

because when a board member is asked to
put their signature on it, something,

it seems formal, but it might not
meet the definition of a legal formal.

I think what we'll do here today is leave
those discussions to to record another

day and that those might be a good primer
to the more draconian formal formal

actions such as cease and desist orders.

Which are rare removal of
officials, which are not existent.

It's a, as I've said to a lot of people
in conversation, they it's something

that's never done unless they're all
done unless it's a conservatorship.

So N.

C.

U.

A.

doesn't go halfway into
removing officials.

They either conserve or
they don't remove officials.

And we'll talk about those another day.

Any last thoughts here before we before
we wrap on a discussion of Most of

the informal actions that NCWA has.

You hit it in so much of the issues
that we deal with, they all come down

to communication and people slotting
in the time that it takes to do

communications and that's always seems
to be the root cause of a lot of the

problems that we end up dealing with.

Good point.

Todd, any last thoughts?

The communication breakdowns
can happen on both sides, too.

Freddie is you need to make some
efforts to communicate with their your

examiners on an ongoing basis, get to
know them and let them get to know you.

And I think maybe the code years
were examiners were totally off

site has led to some of this.

There's no face to face conversations.

Even today, a lot of the staff are remote.

Some credit unions are choosing
to be remote and not sit down and

meet with their examiners, because
that's the model that they've

developed coming out of COVID.

But communication needs to
be intentional on both sides.

I know NCA Historically, has
spent a lot of time on examiner

training with communications.

But like Steve said, quite
often there is a breakdown and

quite often it's on both sides.

So credit unions, you need to make
a conscious effort to make sure

your under your examiners understand
you and what you're doing and why.

And sometimes a short conversation
is better than the examiner

spending, three days looking
at your ELCO and board minutes.

Sit down and talk to them.

Tell them what's behind this
business plan and your challenges.

Very good.

You gave me the opportunity to
end with that quote that you

guys have heard far too much.

Familiarity breeds consent.

The more familiar you are with them and
the more familiar they are with you,

you start to understand each other.

When you understand each
other, It's because of the

communications have been better.

This has been a lot of
fun guys, as always.

I want to thank you for
your time, Steve and Todd.

Have a great day, Mark
Steve and listeners.

I want to thank you for listening.

I hope you'll listen again soon.

We've got we've written down a lot of
topics that we want to record podcasts

on here coming up the rest of 2024.

So stay tuned for those.

I think you'll enjoy them.

Perhaps as much as you'll enjoy this one.

This is Mark Treichel signing
off with flying colors.

Speaker 2: Thank you for joining us
on this episode of with flying colors,

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