Credit Union Exam Solutions Presents With Flying Colors

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This is Mark with a special archive
episode of With Flying Colors.

I hope you enjoy.

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Speaker 2: Hey everyone, this is Mark
t Tril 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?

Uh, this afternoon

Speaker 4: up here in Montana, just

Speaker 3: like the rest of
the US we're going, we're.

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

Yeah.

And if you believe in
global warning, you say,

Speaker 2: gosh, it's hotter than normal.

And if you don't believe in global
warning warming, you say, Hey,

it's just July, so I'm not gonna
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 in, uh, intros for those
folks who are are, are not frequent

listeners who might be new to the show.

Let's have an introduction.

We, let's go Todd Miller first.

Today

Speaker 4: I spent just a little
bit over 34 years with NCA.

I retired in July of 2021.

I can break my time in
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 the
regional capital market specialist.

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.

Speaker 3: Very good.

Speaker 2: And Steve?

Speaker 3: Yeah, it was 30
plus years at NSU A and and

break my career into two parts.

The first 15 years were out in the field.

Predominantly is a problem case officer,
and mainly a West Coast base that

working with those trouble institutions.

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

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

The enforcement manual, the corporate
resolution was the, was the big one.

The risk-based capital.

And then I did spend some time at
the end as the, uh, vice president

of the central liquidity facility.

Yeah, we all spent a lot

Speaker 2: of time dealing with
troubled credit unions, whether it was

director of special actions, problem,
case officer, corporate resolution,

uh, 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, uh, some stats on recent trends in
Camel code threes, which of course come

from, which I've talked about here.

A lot come from n NCAA's shared
insurance briefing, but what can you

share with us on what's going on in
camel camel's codes most recently?

Speaker 3: The, the trend
isn't, it's a short term trend.

I just looked at Euro end, uh, 23
and then the first quarter, and

then the actual Camel threes number.

It, uh, went from 776 at the end of
the year to 760 reported 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, uh, camel threes.

Speaker 2: Yeah, that's very true.

The quarter by quarter.

I've looked at this pretty much ever
since leaving NCUA, that briefing.

Uh, and two slides on the briefing,
the one of the ones you're reading from

is one of my favorite ones to look at.

'cause you 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 in
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 code one, life is good.

NCA 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 NNC a's

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

union that's downgraded to a three.

Speaker 4: I think you start out
with what does a code three mean to

NCUA and without reading their whole
definition from the camel letter,

there's a couple sentences in there
that really inform NCUA supervision

process for code three composite.

They say credits 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.

Uh, process with code threes.

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

to the credit size and complexity.

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

concern from NCAA's level.

It heightens their supervision.

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

but they're trying to assess, are you
willing and able to fix these issues?

And, 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 at Camel three NCA,
supervision goes up quite a bit.

And actually, NCA, they publish their
national supervision policy and you

know, and their practices with respect
to Camel Three and Camel four credits

are actually not redacted in this case,
but there's lots of pieces of that.

Super being.

That might be helpful to credit unions
that seem to be increasingly redacted,

but none of their supervision processes.

Credit unions are redacted,
so credit unions can read

down, um, if they so choose.

But added code three level.

In general credit unions, you can expect
an exam, a follow up exam once a year.

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

Um, that second one is generally
gonna 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 gonna increase.

So they're gonna give you things
to do and then they're gonna be in

your hair every six months making
sure you're actually doing that.

Speaker 2: Very good.

Steve, anything you wanna
add to those comments?

Speaker 3: No, that's just fine.

That's what the, that's what the
manual says, so that's what you can

certainly expect them to try to achieve.

Try,

Speaker 2: try to achieve.

Yes.

I've alluded here sometimes they
may say they're gonna come back

that frequently, but their own
reports show that the code threes

contacts, they tend to get done about.

67% of the time and those start
dates, it 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 to start date.

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

Do I have that right?

Speaker 4: You have that correct.

Speaker 2: Okay.

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

sticks in my mind that sometimes NCA.

Rarely NCA 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 net neck and NA
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?

You're a code three.

What else do, what else can we share?

Well, one of

Speaker 4: the things that are gonna 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 gonna be
true, they're gonna set those completion

dates to tie in with that next exam.

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

problems within that 180 day period.

'cause they're gonna wanna come back.

They're gonna want to assess,
have you corrected issues?

Are you making significant progress?

So if you get a documented resolution,
while examiners are supposed to be

flexible in negotiating terms for those
documentary resolutions and corrective

actions and due dates, you might find
your examiner a little bit in flexible

about those due dates because they're
gonna wanna put due dates that coincide

with that next visit 180 days from now.

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And that can be logical

Speaker 2: from the perspective
of them wanting to be able to

measure 'cause in their systems.

Under the new merit system, if you
have three document resolutions, NCUA

has to say it's finished or it's not.

Log it off, it 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 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 LA but the time they gave
them to it was linked to that next

follow up, which doesn't seem logical.

But the method to that madness is because
they know they're coming in and they

wanna show that there's progress or not.

Speaker 4: Yeah, there is one exception
to that 180 days, and if you're a

credit union has significant record
keeping errors or significant BSA

violations, you will see them in 90 days.

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

a three, you're not gonna be at field one
with significant record keeping errors.

Probably not a code two, but maybe.

But for those two specific areas,
significant BSA violations and

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

just for that record keeping issue.

And the BSAA has a pretty low
tolerance for record keeping problems.

Speaker 2: And the BSA is because of the
link to the importance of that program.

Uh, terrorist activity, money laundering.

They have an agreement with SEN saying
that they will treat things in a

particular way, either in a document
resolution or a letter of understanding,

and 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

Speaker 3: really that simple.

I am 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 record keeping
problems, you're gonna pay to get

'em fixed as quickly as possible.

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

We gotta find out what the numbers
are and that, so that, that

thing, that's really important.

Yeah.

Zero

Speaker 2: tolerance on
record keeping for sure.

And we've seen some instances
of that in my conversations with

NCOA folks that they've seen that.

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 gotta, you gotta get the basics
down before you focus on anything else.

And accounting, accounting is the basic.

They will beat you up on that for sure.

Speaker 4: 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 and COA

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.

Speaker 2: 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, is at or near
a hundred percent I would say.

Any thoughts on.

On the concept of regional DI director
letters and 'cause 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 gonna do everything and then

lo and behold, uh, 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 trees?

Speaker 4: At the time of my retirement,
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 you with code three,
that the board is gonna get involved

in actively hold management accountable
for resolving issues, and the board is

expected to exercise appropriate oversight
and that reasonable electorate letter is.

Wait 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 and there are weaknesses

in your risk management systems.

You need to get down corrected.

Speaker 2: It really shouldn't be
anything surprising in that letter.

'cause it should.

It's gonna paraphrase
what was in the exam.

It's gonna be drafted by the
examiner who wrote the exam.

'cause they're gonna have to
follow the policy to issue it.

It just, it just kind
of naturally follows.

Speaker 4: And the other piece that
follows with this is depending on your

asset sizes of the code three, you're
probably gonna fall under this whole

monthly reporting to your examiner two.

You're gonna be sending them
financial statements, board minutes,

um, 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 gonna 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 recording to
your district examiner,

Speaker 2: 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.

Speaker 4: Since they've went to
Merit, we seem to be seeing it

in a 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 union.

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.

Speaker 2: Got it.

And federal charter versus state Charter.

Any thoughts on.

How that might influence
being a code three.

If you're a state charter insured by NCUA

Speaker 4: for credit unions over 250
million, it doesn't change at all.

Whether you're at FI or, or a
federal NCUA is still gonna be

involved in those follow ups.

There is some flexibility given
for those credit unions under

250 million out of state charter.

They can push that 180 days out to.

A little bit longer
period with a RD approval.

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

federal, but that requires some paperwork.

Some A RD approvals, some
regional director approvals.

They have to say this party union
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.

Speaker 2: The same works for, we'll
get into that when we talk about

Code fours in the next podcast.

But there are other waivers
that that can happen.

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

not happening that frequently.

In a perfect world, uh, a credit
union's gonna 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 gonna pose

the answer or pose the question.

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

You're telling me you're gonna
come back in September by 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, NCA comes
back September 30th, has an 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 a, it's like the,
there, there's a waiver for that.

It can be done.

There's nothing that says NNC
A cannot do it, but it's not

really the norm true statement.

Speaker 4: It, it really depends on
resources that examiner has to conduct

the follow up or is it two people
and they're just looking at the door?

Or do they get two or three 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.

You know, let's say they do like a
mini exam, 80% of it, 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 that.

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
gonna say, Hey, we need to review these

other areas at a full scope exam before
we can upgrade you, is they're gonna

be their response most of the time.

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

NCUA 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,

Speaker 2: but I, I just did
a little bit of math on that.

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

They come, say they're gonna come
back and start it in six months.

In a perfect world, maybe they'd
be done with that contact.

They get you the report in
two months, so you got six.

Six months on another, uh, two 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 gonna

see 'em three times in 20 months.

Speaker 3: Yeah,

Speaker 4: probably.

Probably.

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

We used to have this
whole thing you wanna 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,
so I'll It used to be there though.

Speaker 2: Yeah, I think it is there
and, and Code fours was 12 or 24?

Four months?

I think 24.

Okay.

I got a funny, when we talk about
code fours, I got a funny story

for you on, on code four resolution
from back in the day, but.

Yeah, it's, I I believe
that's still out there.

So their goal would be
at that third one, right?

To have it upgraded.

Perfect.

In all reality.

And if, 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.

Alright guys,

Speaker 3: any last thoughts
on Camel Code threes for this?

I think that points out the
importance that door, that is kinda

new because you became a code three,
is addressing that core problem.

That, that's, that is the goal is if
you're new to a three and or 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 that it, 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.

Speaker 2: Yeah.

And, and you do what's
needed in that door.

You get the results.

Might lead to another it, it could lead to
another door, but that doesn't necessarily

mean that door means you're gonna be,
because a code two can have a door, a

code, one can have a door, but it doesn't
mean that it's a hundred percent done.

Speaker 4: 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.

If 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, um, for

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

accountable for progress records.

Those doors and holding your management
accountable for addressing them.

Speaker 2: And if even if NCA 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 four, what does that mean?

So thanks guys, appreciate
your time and as always, have

Speaker 4: a great day.

Speaker 2: You too, listeners,
I wanna thank you for listening.

As always, hope you'll listen again soon.

This is Mark Trifle signing
off with Flying Colors.

Speaker: Thank you for joining us on
this episode of With Flying Colors.

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