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Hey everyone.

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

And today I'm back with frequent guests
and my team members at Credit Union Exam

Solutions, Steve Farr and Todd Miller.

Guys, how you doing this afternoon?

It's hot here in Montana,
just like the rest of the U.

S.

Yeah, we're hot and muggy.

Yeah, hot and muggy here in
Virginia, where I'm at today.

Yeah.

And if you believe in global warming,
you say, gosh, it's hotter than normal.

And if you don't believe in global
warming, you say, hey, it's just July.

So I'm not going to pick which side of the
camp I'm in, but those are the two camps.

But yeah, it's hot.

It's hot indeed.

All right.

And so intros for those folks who are not.

Frequent listeners who
might be new to the show.

Let's have an introduction.

We, let's go Todd Miller first today.

I spent just a little bit
over 34 years with NCA.

I retired in July of 2021.

I can break my time in the
NCA down into three parts.

I spent basically a third of it as an
examiner and a problem case officer,

a third of it as a regional capital
market specialist, and a third of it as

a director of special auctions dealing,
supervising problem case officers and

regional capital market specialists.

So between those items, a good part
of my career was spent with what NCA

would call troubled credit unions
are large and complex credit unions.

Very good.

And Steve?

Yeah, I was 30 plus years at NCOA
and break my career into two parts.

The first 15 years were out in the field,
predominantly as a problem case officer

and mainly a West Coast based that
Working with those troubled institutions.

Then I went into the central office
into the division of risk management

where I got to work on just a
variety of projects over the years.

The enforcement manual, the corporate
resolution was, it was a big one,

the risk based liquidity facility.

Yeah, we all spent a lot
of time dealing with.

Troubled credit unions, whether it was
director of special actions, problem,

case officer, corporate resolution,
writing the enforcement manual and

it was a lot of fun doing that.

We talk about that a lot here and
it's a good that's a good fit for

the conversation of our topic today.

And this podcast will be called
something like, so you're a code.

So you're a camel code three.

Now what?

And as we dive into this, Steve, I
thought maybe you could give us some

stats on recent trends in camel code
threes, which, of course, come from

which I've talked about here a lot come
from NC ways share insurance briefing.

But what can you share with us on
what's going on in camel camels codes?

Most recently?

Yeah, the the trend isn't
it's a short term trend.

I just looked at your end 23
and then the 1st quarter and the

actual camel threes number went
from 776 at the end of the year.

To 760 report is of March.

The assets went up from
160 billion to 177 billion.

And I said, that would probably be one
of the numbers that seemed pretty obvious

and that we're seeing more bigger credit
unions ended up with the camel threes.

Yeah, that's very true.

The quarter by quarter
I've looked at this.

Pretty much ever since leaving N.

C.

U.

A.

That briefing and two
slides on the briefing.

The one of the ones you're reading from is
one of my favorite ones to look at because

it really reveals where things are going.

And it's like the 10th quarter in a
row when Camel threes have gone up.

And the point you made.

Is spot on that smaller credit unions,
camel codes, there's not much change.

It's the bigger codes going
from ones and twos to threes.

And in more recently, maybe, and
maybe this upcoming quarters, we'll

see threes going to fours cause camel
codes tend to move one, one grade

at a time, although not always but
it's those large credit unions that

are driving the numbers right now.

And you can see it in the stats and
we've seen it in our conversations.

When you're a code one life is good.

NCUA may come see you once a year.

They may not depending on your size when
you're a code two, same kind of thing.

But when you're a code three life
tends to change a little bit.

Let's talk a little bit about how
things change at NCU from N C's

perspective on Camel code threes and
how that might change for a credit

union that's downgraded to a three.

I think you start out with what does
a code three mean to MCUA and without

reading their whole definition from
the camel letter, there's a couple

sentences in there that really inform
MCUA supervision process, for code three,

composite, They say credit unions in this
group exhibit some degree of supervisory

concern in one or more components.

But then at the end of the definition,
this is what really drives NCUA

supervision process with code threes.

It says risk management practices may
be less than satisfactory relative to

the credit union size and complexity.

And so when you get those things,
it raises a supervisory concern.

from NCOA's level, it
heightens their supervision.

They're trying to assess.

They don't think it's going to fail at
this point, but they're trying to assess.

Are you willing and able
to fix these issues?

And what they're trying to do is prevent
an issue that is starting to go south

from actually going south and crossing
the border into an unacceptable level.

Once you're a CAMEL 3, MCUA supervision
goes up quite a bit, and actually

MCUA, they publish their National
Supervision Policy Manual, and their

practices with respect to CAMEL
3 and CAMEL 4 credit unions are

actually not redacted in this case.

There's lots of pieces of that
supervision manual that might be

helpful to credit unions that Okay.

So you'll notice that it's a little
bit more in depth in this section.

The, A follow up exam once a year.

So you're going to get two visits
a year from your examiners.

That second one is generally
going to focus on the doors.

There's some exceptions to that which
we can talk about in a little bit.

But the biggest thing is your time
and effort in dealing with your

examiners is going to increase.

So they're going to give you things
to do and then they're going to

be in your hair every six months.

Making sure you're actually doing that.

Very good.

Steve.

Anything you want to
add to those comments?

No, that's as fine as that's what
the that's what the manual says.

So that's what you can certainly
expect them to try to achieve.

Try to achieve.

Yes, I've alluded here.

Sometimes they may say they're going
to come back that frequently, but their

own reports show that the code threes.

Contacts, they tend to get done
about 67 percent of the time.

And those start dates used to be when
you and I were doing exams guys long

ago, it used to be end date to end date.

They've given themselves a little bit of
flexibility and correct me if I'm wrong.

It's from end date to S to start date.

So they just have to start
the exam within six months.

Do I have that right?

You have that correct.

Okay.

And the other thing I'll add from the
definitions, the one sentence that

always sticks in my mind that sometimes
NCUA rarely NCUA raises, but when

CEOs read it, they get frustrated.

The code three definition of management
includes a sentence that says

management may be, management and
board may be unwilling or unable to

correct the problems that are present.

And sometimes when a CEO sees that
sentence their hair will stand up

on the back of their neck and NCA
tends to downplay that side of it.

But those are pretty chilling words for
a code three, the first time they see it.

And as you say, they
show up twice as much to.

twice as frequently to
to assess their own risk.

But that has a drag because
it takes a lot of your time

preparing, et cetera, et cetera.

So what else your code three, what
else do, what else can we share?

One of the things that are going to go
with this is you'll get a document of

resolution as a code three and documents
of resolution have completion dates.

And generally, and this is generally
going to be true, they're going

to set those completion dates
to tie in with that next exam.

So you can expect to have completion
dates and they're going to expect you

to resolve problems within that 180 day
period because they're going to want

to come back and they're going to want
to assess, have you corrected issues?

Are you making significant progress?

So if you get a document or resolution,
While examiners are supposed to be

flexible in negotiating terms for those
document resolutions and corrective

actions and due dates, you might find your
examiner a little bit inflexible about

those due dates because they're going
to want to put due dates that coincide

with that next visit 180 days from now.

And that can be logical from the
perspective of them wanting to be able

to measure because in their systems,
under the new merit system, if you

have three document resolutions NCOA
has to say it's finished or it's not.

Log it off.

They can write that it's substantially
finished or finished, but in their

systems, they now have the ability to
track it, which may be why we're seeing

them so much focus on that timeline.

And, thinking of a conversations
we had where a credit union was

asking, getting asked to stand up an
enterprise risk management solution.

Program from start to finish.

The examiners in the meeting said,
it'll take you two years to do this,

but the let, but the time they gave
him to it was linked to that next

follow up, which doesn't seem logical.

The method to that madness, is because
they know they're coming in and they want

to show that there's progress or not.

Yeah, there is one exception to
that hundred and eighty days.

And if you're a cardi gene that has
significant record keeping errors

or significant VSA violations,
you will see them in 90 days.

And that doesn't matter what your
CAMEL code is, whether it's a 2 or

a 3, you're not going to be a code 1
with significant record keeping errors,

probably not a code 2, but maybe.

But for those two specific areas,
significant VSA violations and

significant record keeping problems,
you can see an examiner every 90 days.

Just for that record keeping
issue and the BSA has a pretty low

tolerance for record keeping problems.

And the BSA is because of the link to
the importance of that program, terrorist

activity, money laundering, and they have
an agreement with FinCEN saying that they

will treat things in a particular way.

Either a document resolution or a letter
of understanding, of course the record

keeping problem, because they don't
know if there's a risk to the fund.

If you don't know what your
balance sheet is, right?

It's really that simple.

I'm sure Todd and I shared this
that we had no sympathy for

when we came into a place and
discovered record keeping problems.

It was like, you got a record human
problems, you're going to pay to get

them fixed as quickly as possible.

And, that was 1 that that, that I just
what didn't negotiate on that one.

We got to find out what the numbers are.

And so that I think
that's really important.

Yeah, zero tolerance on
record keeping for sure.

And we've seen some instances of that.

In my conversations with NCA folks that
they've seen that and when they do their

briefings of camel codes, the board will
often ask what is it that's triggering

that and operational and accounting issues
has come up on a couple of instances.

You got it.

You got to get the basics down before
you Focus on anything else in accounting.

Accounting is the basic, they
will beat you up on that for sure.

You're managing your members money.

You should know where it's all at.

It's a fiduciary type thing.

The other thing is when you have record
keeping problems, it just opens the door

to fraud and all kinds of other things.

Just even clerical mistakes, with ACHs
and feds and returns, if you can't do

record keeping, you can miss deadlines
and cause losses just because of that.

And just one other thing with the
record keeping and the BSA violations,

NCOA actually has separate tracking
systems just for those two issues.

And, supervisors get reports
on that every single month.

Here's our outstanding record
keeping and BSA problem children.

No, makes sense.

Makes sense.

So if you're a code three in addition
to the examination, you mentioned

you'll get a document resolution.

The likelihood of also getting
what's called an RDL or a regional

director letter is at or near 100%.

I would say any thoughts on.

On the concept of regional director
letters and because sometimes our

clients will get that and they'll
be surprised that they got a letter.

They had a good exit meeting.

They said they're going to do everything.

And then lo and behold, they get a
letter saying, Hey, you better take this

seriously from the regional director.

Any thoughts on regional director
letters as it relates to code 3s.

At the time of my retirement, at the
time I retired, that was a standard

practice in the western region.

That regional director, you got a new code
three, she was going to send you a letter.

I think part of that is, there's
an expectation on the board when

you get Problems related to a code
three that the board is going to get

involved and actively hold management
accountable for resolving issues.

And the board is expected to
exercise appropriate oversight and

that regional director letter is.

The way for the regional director to tell
the board, Hey, you need to pay attention.

You need to take this seriously.

It's to support and emphasize the
examiner's rating of a three that

there are supervisory concerns here.

There are weaknesses in your
risk management systems and

you need to get them corrected.

There really shouldn't be
anything surprising in that letter

because it should, it's going to
paraphrase what was in the exam.

It's going to be drafted by the examiner
who wrote the exam because they're going

to have to follow the policy to issue it.

It just it just kind of naturally follows.

And the other piece that follows
with this is, depending on your asset

sizes, the code three, you're probably
going to fall under this whole monthly

reporting to your examiner to you're
going to be sending them financial

statements, board minutes, board packages.

Every month in most cases, if you're over
250 million, it's absolutely required.

It's optional in other cases, but
almost every examiner supervisor,

they're going to make their examiners
pay attention to what's going

on in all of their code three.

So while policy requires that over 250
million, any code three can pretty much

expect that there's going to be monthly
reporting to your district examiner.

And we've seen that either placed in
a document resolution or just asked

for in the, in an email but the right
place for that would be in the report

to make sure that the board's aware
that it needs to happen, correct?

Since they went to merit, we seem
to be seeing it in the report almost

all the time, either in the overview
or in the document or resolution

section or in that RDL letter.

It was always optional for examiners,
how they communicated that request

to the credit, whether they just
pick up the phone and say, from this

point, start doing it, or they will
just tell management that on site.

But since they went to merit, it seems
to be showing up in the report formally

in most cases on our code threes.

Got it.

And federal charter versus state charter.

Any thoughts on how that might
influence being a code 3 if you're

a state charter insured by NCUA?

For credit unions over 250 million, it
doesn't change at all, whether you're

a fiscal or a federal, and COA is still
going to be involved in those follow ups.

There is some flexibility given for
those credit unions under 250 million

out of state charter that can push
that 180 days out to a little bit

longer period with ARD approval.

Their policy allows for a waiver of
those contacts in a state charter,

even a federal, but that requires
some paperwork, some ARD approvals,

some regional director approvals.

They have to say this party does
not represent any risk to the share

insurance fund, and I don't see many
RDs actually signing that very often,

unless they have a great deal of
confidence in that state regulator.

And the same works for a we'll get
into that when we talk about code

four is in the next podcast, but there
are other waivers that can happen

that that while theoretically, they
may be allowed, they're probably

not happening that frequently.

In a perfect world, a credit union
is going to stay a code one or a code

two, if they slip into a code three.

NCOA is coming back in six months
and I know the answer to this

question, but I'm going to pose
the answer or pose the question.

So you downgrade me to a
code three, March of 2024.

You're telling me you're going to
come back in September, start the

exam by the end of September, 2024.

I have three document resolutions.

The dates all come and
go by that point in time.

NCWA comes back September 30th, has
a exam, two, three weeks in a follow

up exam, two weeks in September.

You get the report by the end of the
year, maybe, hopefully and you have

a conversation with your examiners.

Here's the question.

So that's the context.

Here's the question.

When you come back for the follow
up exam, Will you upgrade me?

Possibly, but probably not.

Possibly, but probably not.

So it, it's not, it's like the,
there, there's a waiver for that.

It can be done.

There's nothing that says NCUA cannot
do it, but it's not really the norm.

True statement.

It really depends on resources that
examiner has to conduct the follow up,

is that 2 people and they're just looking
at the door, or do they get 2 or 3 other

people and can they look at the door and
look at all the findings and maybe look

at your business plan if they have time
and resources to make that follow up.

Expand that scope beyond just
the follow up on the door, then

there's a chance of that upgrade.

Let's say they do like a mini
exam, 80 percent of an exam or 70%.

There's some number in there where if they
have time and resources to look at things

in depth, there's a chance that they will
upgrade you if you're deserving of it.

In most cases, though, they
don't have those resources.

They're focused just on
that document or resolution.

Maybe some of the findings and they're
basically just going to say, Hey,

we need to review these other areas
at a full scope exam before we can

upgrade you is they're going to be
their response most of the time.

And what we're seeing with time
report or the time it takes for

MCUA to issue reports today.

I think in most cases in the current
era, they don't have the resources

on a follow up to expand it.

To the point where they can look
at enough stuff to upgrade you,

even if you're deserving of it.

So that's why I said, probably
not in the current environment.

And I just did a little
bit of math on that.

So you come in, you get
downgraded to a 3 in March.

They come say they're going
to come back and start it in

6 months in a perfect world.

Maybe they'd be done with that contact.

They get you the report in 2 months.

So you got 6, 6 months
on another 2 months.

So we're talking 14 months
at that 14 month point.

You're told you're not getting upgraded.

Meaning they have to come
back in another six months.

So really when you get downgraded
to a three, it means you're going

to see him three times in 20 months.

Yeah, probably.

Probably.

You're the one, Mark, who reads
NCUA's business plans in detail.

We used to have this whole thing.

You want to see, code threes
and fours resolved in 24 months.

Is that still part of their
annual business plans and goals?

I didn't read last year's that close.

It used to be there though.

Yeah, I think it is there.

And and code fours was 12 or 15.

24 months, I think 24.

Okay.

I got a funny when we
talk about code for us.

I got a funny story for you on code
for resolution from back in the day.

But yeah, it's I believe
that's still out there.

So their goal would be at that
3rd 1 right to have it upgraded.

Perfect in all reality.

And If things have gotten worse, that's
when you start finding out that you you

maybe went from a three to a four instead
of the goal of going back to a two.

All right, guys, any last
thoughts on camel code threes?

I think that points out
the importance that door.

That is kinda new because
you became a code three is

addressing that core problem?

Is that, that's, that is the goal
is if you're new to a three and

haven't been before, there should be
an issue you all know is coming and

that that door will fix what it is.

'cause sometimes you do it, but you
don't get the results that were expected.

And then it doesn't really fix the
problem, but then that is the goal is to

correct those problems really quickly.

But so it doesn't escalate.

Yeah, and you do what's needed
in that door you get the results.

Might lead to another, it
could lead to another door,

but that doesn't necessarily.

Mean that door means you're going to
because a code 2 can have a door code

1 can have a door, but it doesn't
mean that it's 100 percent done.

The other thing for directors
that are listening and maybe even

for CEOs that are listening to as
directors, if you get a code three in

a door, you should have some type of
tracking reporting system in place.

That your management team is making
progress on resolving these doors.

You're a CEO, chief operating
officer type individual responsible

for correcting of that door.

You should be developing reports
to let your board know that

you are making progress on it.

So it goes both ways.

You should be demonstrating that
we're resolving this door for our

boards and as board members, you
should be holding your management

accountable for progress reports.

On those doors and holding your management
accountable for addressing them.

And if, even if NCOA doesn't ask for
it formally, we've seen it asked for

formally, we've seen them asked it
when you send it to the board, put

it in your board packet, et cetera.

But that's a great point.

Those establish the
expectations, but then verify.

Right.

Very good guys.

All right.

I appreciate you sharing your wisdom
as it relates to camel code threes and

next week we'll have a follow up to
this which you might guess is now that

you're a code for what does that mean?

So thanks guys.

Appreciate your time as always.

Have a great day.

You too.

Listeners.

I want to thank you for
listening as always.

Hope you'll listen again soon.

This is Mark Treichel signing
off with flying colors.

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