Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey, everyone.

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

I'm back again with Steve Farr and Todd
Miller, formerly of NCUA, currently of

my team at Credit Union Exam Solutions.

How are you guys doing today?

Feeling good.

Feeling good.

Feeling great.

All right.

All right.

That's good.

That's good.

And we, a lot of our, we have a lot of
longtime listeners and we appreciate

that, but occasionally we, every
week we get a few new listeners.

Steve, if you could give a little bit of
your background for someone who may not

have heard you on the podcast previously.

Miller: I'm going to take my background
and make it up more specific of this

topic, but I spent 30 plus years at N.

C.

U.

A.

the 1st, 15 was predominantly as a
problem case officer and as a problem

case officer, you're working with, of
course, most troubled credit unions

and I did a pretty much throughout the
nation, but in those cases, I dealt

with a number of issues where we had
to deal with underperforming management

or underperforming boards of directors.

So that was a good experience there.

Then for the last.

15 plus years, I was in the central office
and one of my duties in there was that I

wrote the enforcement manual, which deals
a bit with this topic inside of there.

Definitely.

I did get to deal with
was seeing what regions.

We're putting out in dealing with
problem management in particular, they

can take that experience going forward.

And, lately, we've been focused
a lot on corporate governance.

So I think that as in this job,
and I think that'll come into play.

Treichel: You got a
great summary and Todd.

Farrar: I was with NCUA
for 34 years or so.

I'll break my career
down into three parts.

The first third of it, roughly, I spent
as an examiner and a problem case officer.

Interesting, Steve and I, we actually
started under the same supervisor.

And got a lot of shared
experiences early on in our career.

We're problem case officers
together for a few years as well.

The middle 3rd of my career, I was
a regional capital market specialist

and then the last 3rd of my career.

I was a director of special actions
supervising problem case officers.

Capital market specialist, regional
lending specialist, dealing with

a lot of troubled credit unions
and those underperforming ones

as Steve characterized them.

Treichel: But I'm going to guess that
you guys work for the same director,

special actions, but without naming
names, is it the guy that you had a

secret code where if you dropped the
pen, he was supposed to stop talking?

Farrar: Yes, we did work for him together.

Yeah.

Yeah.

And we love him.

Treichel: Yeah, we love love to death.

I worked for him too, and another
job and he never when I tried

dropping the pen, he just ignored it.

Yeah,

Farrar: Generally ignored ours too.

Treichel: Very good.

All right.

So with that organizational reviews, we've
seen this in a small number of situations,

but nonetheless, I'd say it's a growing
trend that NC, from our client sample

that we've seen situations where credit
unions have been asked in some form or

another to do an organizational review.

So with that, I'll just leave it
as a broad statement like that.

And Steve kick it to you to give some.

Your thoughts on this whole process,
this whole requirement, excuse me.

Miller: Yeah I would start by saying,
if you're ever in a point to where

your examiner starts talking about
the need for the credit union to

get an organizational study or an
assessment of senior management,

things are serious, very serious.

And your camel code should
be reflective of that.

And it shouldn't come as a surprise to
your credit union because either your

professional management's underperforming.

Or your board of directors
underperforming and possibly not

holding senior management accountable.

So in sui and other regulars, look
for what's a tool that we can use.

To get a independent review as to how the
credit union is managing its own business.

I think that's a, it's a big step for
and so it's why we don't see it a lot.

We have had just a handful of
cases, but it is very disturbing,

of course, the place to it.

And the other thing is it's expensive.

I come through the usually 1 of
the, it's put in and it starts as

a door and it usually says, engage
for an organization organizational

structure and management assessment.

And normally they'll point out
that the reason for that is under

performance of the board, or
sometimes it's just lack of doing.

Appraisals of senior management, but
I've noticed that some of the things.

It says ensure the assessment
addresses at a minimum the following

organizational structure and staffing
to ensure sufficient oversight and

appropriate separation of duties,
senior management, qualifications

and performance evaluations,
effectiveness of job descriptions.

To ensure they clearly outline duties and
responsibilities of senior management,

staff training and development.

Management's reporting to the board of
directors to ensure sufficient information

is provided for sound governance.

The other 1 that I have access to
tell said to, to hire, obtain an

organizational structure assessment,
and it says 3rd party to perform

a written assessment of the credit
union's organizational structure.

Including assessment of senior
management to identify potential

weaknesses and to improve management's
oversight or effectiveness as

well as the board's governance.

And it really just says the same thing
as I said before, job descriptions,

staff training, management reporting.

And what they'll often say is obtain
approval of the 3rd party from your

assigned supervisor and examiner
prior to entering into an engagement.

That's what the once have been saying,
and they've been really consistent.

I have throughout my career looked at
what is doing in this same area and

I do much prefer the way they write.

What they're asking their institutions
to do when they are requiring

management analysis, and I'll
say develop written analysis and

assessment to the banks management
needs for the purpose of providing

qualified management to the bank.

And there's a juice is a little more.

I like.

Some items inside of what they require
the management study shall include a

minimum identification of both the type
and number of officers positions needed

identification and establishment of
such bank committees that are needed.

Evaluation of all bank officers to
determine these individuals, but since

the ability experience and qualifications
required to perform their duties.

Evaluation of all bank officers
compensation, including salaries.

These and other benefits the
plan to recruit and hire any

additional replacement personnel
with requisite ability experience

and other qualifications.

The other thing that FDIC does a lot is
they address this in that the engagement

letter needs to address these items.

So it's right up front to make
sure that what they're asking the

institutions to do is clear within
the agreement with the 3rd party.

And this 1 usually has the description of
work to be performed under the contract.

The responsibilities of the consultant.

Identifications of the specific
procedures to be used when carrying

out the work performed, qualifications
of the consultant, provision for

unrestricted access by the supervisory
authorities to the consultant work papers.

I think that 1 is a real important 1
there and that that's, the regular can

look at what they're, what they've done.

The statement that the consultant
is not affiliated with any,

in any manner with the bank.

And a requirement, the consultants
analysis and assessment be

several summarized in a written
report within 90 days from the

date of the engagement letter.

The thing I really like about
the things is they address what

do you do with that report?

And it says, usually, it says within
30 days of the consultant study.

The board must submit to the supervisor
authorities and acceptable written

management plan that addresses the
findings in the consultant study.

And I think that is item that
is often missed in that are

just requires that it's done.

And then doesn't have that
follow up requirement for what

needs to take place in there.

I'm looking through the 3rd
letter that I have here.

See if there's anything different.

No they're pretty consistent there.

The big thing on that is, is now it
comes down to who are those 3rd parties?

And they're not easy to find.

I'll open it up for you guys as
to, what we're finding out there in

terms of, if you're asked to do this.

What is the availability
of good 3rd parties?

So I'll throw that 1 out
there for our discussion.

Treichel: Very good.

A lot.

A lot.

A lot.

You walk through there.

I'm going to Todd any thoughts on
what Steve said there at the end

relative to good 3rd parties or.

Any anything beyond that
you want to highlight that

relative to what Steve said.

I

Farrar: just want to re emphasize
a couple things that Steve said

before we answer his question
about who are these third parties.

The first one, Steve said, hey,
these are serious problems.

Usually they're systemic and by the
time NCUA issues a DOR of this nature,

they've reached the conclusion that
management is unwilling or unable

to address the underlying problems.

They don't do this lightly.

They do it.

On a rare occasion, just another
little side piece to this.

It's also not uncommon where you'll
see this targeted at one department

within the credit union, basically
exact same language addressed to

the commercial lending department
or the same exact language addressed

to an accounting department.

That probably happens, especially
with the commercial lending more often

than the overall organizational 1.

For credit unions that get one of these or
boards that get one of these, it's really

important to e read that fine print.

You don't want to go out and hire
someone and get them started when

your LUA or document or resolution
says NCUA approval of the vendor and

you start down the path of paying the
money without getting NCUA approval.

So you have to be careful with that your
accrediting that receives one of those.

And the second piece of it is.

Oftentimes, not always, but NCUA will
say, Hey, we want to approve the scope

engagement letter with that vendor.

Make sure you do that
before they start work.

But like Steve said, it's a pretty
critical issue when a credit union starts

getting one of these, because you're at
the point where NCUA probably correctly

believes the current management team
is unwilling, unable to address the

problem without the Changes of some sort.

And it doesn't always
mean that it's the CEO.

Maybe you just need the right
people in the right departments.

And it's not always,
hey, get rid of everyone.

It's get the right people
in the right departments.

Treichel: The words unwilling and
unable that unwilling and unable.

That's where Chris is going with that.

That's code words for at least
a management code 3, right?

Because the camel code 3 definition
for management is unwilling or

unable to resolve the problems.

I've seen, I think I've seen a
handful of 4, maybe 4 of such.

Such requests since I started consulting.

I'm aware of 2 different
parties that dealt with it.

One of whom, if I was to recommend, I'd
be comfortable recommending, and another

one, which was an East Coast State
Chartered Credit Union, and the report

they got was draconian, might be a better
way to put it, and in that situation,

the document resolution, which was being
driven more by the state than in CUA,

had a clause in there that said, and
you will adopt every recommendation of

the report, which to me was overzealous
unwarranted because just because a

consultant recommends, it doesn't mean
a credit union should have to do it.

The board should have the ability
to ultimately decide that.

And I think the language Steve, that
you Sighted there from the FDIC reports

that essentially said and develop a
plan within X number of days to deal

with what the findings of the report
are that gives more flexibility to

the board to do what needs to be done.

And as Todd, as you pointed out there.

It doesn't necessarily mean the CEO.

It doesn't mean necessarily that you need
to let people go, but you might need to

add people to your team in a particular
department, et cetera, et cetera.

When the results of these ports
come out and the board decides

how to best deal with that.

Yeah, and.

The, what I, what we might wanna do
too is maybe I can put a link or two

in the show notes to some of those
examples that are out there from FDIC.

'cause those are public.

What happens in the nnc, Steven,
the reason you have access to

those is those are in the form of
a public cease and desist order.

Where they've made it public
that the bank needs to do that.

I've not.

I don't recall, I know I never
used that at NCUA where I went

with a C and D and made it public
that a credit union need to do it.

That's a tool that FDIC uses far more
than NCUA, but we could put a link to

that in the show notes of this exam.

Miller: Yeah, one other item that has come
up with these items was that one examiner

asked and really was insistent upon that
the consultant would send them directly.

The final report and I really was
uncomfortable with that because the

credit union has engaged this person.

They have done that report
for the credit union.

I think it's only right that
the credit union should be able

to receive the report, attach a
cover letter on it saying that it.

Here's the report basically stating
their understanding of what the report

says and what they're going to do with
it to provide at least some insight

to the examiner versus just getting
the report from directly from the

vendor and which the credit would at
the same time be seeing the report.

Treichel: Yeah, great point.

I would say that, you definitely,
the credit union should definitely

have the opportunity to see it
first and then forward it along.

Obviously, NCOA can get access, but
it's a little bit of an overstep there.

I agree with your
thoughts relative to that.

The other thing that, that pops into
my mind is and I've advised a lot of

credit unions relative to this, who the
credit union employs is 100 percent up

to The credit union now, if you're a
troubled institution, and you're needing

to bring somebody on and your code for
your code 5, some higher level positions

and board positions need to be approved
by, but you get to propose who you want.

But as far as staff that are on
site, cannot stay, you need to fire

person X, person Y, or person Z,
and they cannot be that direct.

These approaches where they're
looking for organizational.

Reviews, if there is someone that in
NCOA's mind, they believe shouldn't

be at the credit union, this is a
little bit of leading the course to

water saying, hey, we know you have
weaknesses here, hire a consultant to

help you figure out where they are.

That's as close as NCOA can come in
those situations to to addressing

deficiencies in management.

Any general thoughts on
what I just said there?

Farrar: The 1 or 2 times where I've done
this as a DSA or a problem case officer,

it's exactly the situation you outlined.

We generally knew who the problem
employees were that needed to be

replaced either by terminated or by
someone else stepping into their role

and demoting people or what have you
almost always As examiners, or as the

director of special actions, we knew who
that person was having an organization

review like this done was a way to get
in convey that same information to the

board because a competent third party
is going to identify the same areas.

And it was generally effective.

The times we've used it in that manner

Treichel: point.

Great point.

All right.

What else?

What else here, guys?

Do we want to talk about on this topic?

It's a serious situation.

Make sure that you get a scope
that is acceptable to you and N.

C.

U.

A.

Steve, when you talked about When
you were reading through how the

FDIC does it, it sounded a lot to me
like one thing that popped in my head

is if you ask the wrong question,
you're going to get the wrong answer.

And then it almost sounded like the
way they were doing it was like an

agreed upon procedures from a CPA firm.

What are the procedures that you're
going to get done that will comply

with what you need done and what
NCUA is wanting you to get done?

Those are some wrapping thoughts I have.

But you guys have any general
other thoughts before we close?

We put this 1 out there live
for the listening of audience.

Miller: I think one of the main thing
is if you're, if you get one of these

things, you're going to probably
have to practice some humility and

that'll probably get you through it
a lot easier and to recognize that.

Yeah.

You're not perfect and you may have some
blind spots that this can help you with,

but those, Credit unions to deal with
it in that if it's the CEO thereafter,

but if the CEO can say, you know what,
I don't need to be the smartest person

in the room anymore, I really just need
to get better people underneath me and

get an understanding of what skills are
needed there that can be, as Todd says,

some things as simple as the fixes to
what it is he's looking for, because.

We all were in institutions that had
CEOs that we weren't overly impressed

with, but 1 about them is, was they
were willing to hire good people and

let them do what they needed to do.

And, they took more of a role
that actually ended up being

more of a figurehead and
take care of all those other.

Items at the credit union, but let
the smarter people they brought

in actually do the operations and
fix the things that are there.

So it isn't, isn't into the world,
but it is a great tool for boards

board of directors and those to do.

But 1 of the common things you'll see on
these was poor assessments being done by

the board of directors is they need that
you need to make sure that you as a board.

Are doing good assessments of your
professional management and that

you're making it clear, when those
will be done and what you're looking

for and what you're expecting
from those top level managers.

Treichel: Great point.

Great point.

And Todd any Steve, you just reminded
me of something I'm going to, I'm

going to mention here in a second.

But Todd any final thoughts from you?

Farrar: No, other than
that, these are costly.

You need to take them seriously.

Read those reports closely
when you get them back.

You paid a lot of money for them.

I think Steve hit a great point that you
need to approach it with some humility.

Just getting the report done and
throwing it in the drawer is not

going to appease the examiners
and it's not going to address the

issues that they want addressed.

And generally when you get one of these,
it's not one problem that you're facing.

It's generally systemic problems.

Throughout the credit union,
and it does require, as Steve

said, some smarter people with,
deeper backgrounds to fix them.

Ultimately, if you continue to be
unwilling or unable your credit may

end up in conservatorship or insolvent.

Take it very seriously
because we've done podcasts on

conservatorship in the past and.

That's the next step after one of
these if this doesn't address the

problems in an effective manner.

Treichel: That's another
great set of points there.

And Todd, you segued into 1 thing
that I, the example I was going

to give here to wrap it up and
that's the word conservatorship.

And, of course, conservatorship is when
has removed the board and is running

the credit union, and the credit union
can be merged or Or can be returned to

the members and I was watching going
back to a situation where we had a

conservatorship in the region I was in
and I was watching the Super Bowl and

the phone rang and it was my, it was the
regional director and we were supposed

to be flying on Wednesday to recommend a
credit union come out of conservatorship.

And of course, you put in a long
package saying all the problems are

fixed and the team that's running.

This is the premium.

And so that's the documentation
we had sent in and the regional

director called me and said.

The CEO is upset because he didn't
like the performance appraisal he

got from the problem case officer.

And they had they had given the CEO a bad
review between when we sent the package

in and when and when we were going to
do the presentation that it was a really

bad performance review for the CEO.

So I had to call the director of
special actions during halftime.

And I said director of special
actions, we have this situation.

We've just told the industry
board, this is going on.

The CEO is upset and isn't
going to accept this appraisal.

I said, you need to talk to the problem
case officer and resolve this issue.

He called the problem case officer
who didn't want to change it.

He called me back and said,
he's not going to change it.

I said, okay, so here's
my question for you.

I said, he's not going to change it.

Tell him to call me and explain why he
put a package into the end to a board

that said everything is fantastic.

But this guy is unacceptable.

Okay, if he can answer that question, he
doesn't have to change that appraisal.

And by the end of the game, I got a
call back and said, we've revised the

appraisal and sent it to him, but the.

Regional director ended up
flying and meeting with the.

CEO, I believe it was in
the Philadelphia airport.

They rented a, he rented a hotel
office meeting room at the hotel,

got him to agree to stay so that then
he could go make the presentation

and say that everything was fine.

Those appraisals, sometimes,
everybody, nobody's perfect, right?

There's things that need to be approved.

But in this instance, NCUA was trying
to make a point that went awry because

again, the individual was doing.

A really good job.

There were just some personality
conflicts between NCOA and the CEO.

I always wondered if I'd ever
weave that story into one of these

podcasts, and this is the one
where it seemed to have happened.

So we'll see if I edit that out.

I don't any edit anything
out, so it'll be here.

All right guys, as always,

Farrar: that was a good,
that was a good story.

If I was a DSA, I'd have been really
upset if my PCO did something like that.

Treichel: Yeah, and the poor
guy, we both, if I told you the

name, you'd know who it was.

And he was in an acting role.

He was a PCO, basically having to work
for his boss, who was somewhere else.

So he was actually having to call
his peer and tell him, and he did a

really good job once I, once once I
explained what the real options were.

Okay, guys, thanks so much.

I appreciate it as always.

It's nice that we can share
some of these war stories.

I appreciate your time today, guys.

And listeners, I want to thank you.

I appreciate your time.

I hope you'll give us
more time down the road.

We appreciate you listening.

And this is Mark Treichel
signing off with Flying Colors.