Credit Union Exam Solutions Presents With Flying Colors

Speaker: Hey everyone, this
is Mark Kel with another

episode of With Flying Colors.

Today I'm going to be doing a camel
or camels overview of the 2025.

Camel Trends.

Uh, this is a podcast I typically got in
the rhythm of doing once every quarter.

I kind of got away from that
in 2025 'cause the numbers were

getting better theoretically.

Uh, I just spent a bunch of time
number crunching what actually

happened in 2025, compared it
to a couple of my last podcast.

One of which, for lack of a better
term, there was a, a, an alarm sound

by former board chairman at the
time, Todd Harper, about the trends.

So, we're gonna walk through those trends
here, uh, in the podcast and on YouTube.

I.

I've got a PowerPoint, uh,
that links to this, that I will

kinda walk through numbers wise.

So if you're listening to the podcast
I'll try not make it so numbers

centric that that you have that,
that you have to go say, Hey, I'm

gonna pause this and go to YouTube.

I know some people like YouTube,
some people like the podcast.

I'll try and.

Uh, say this in a way that
works for both audiences.

So I've titled this glass half full,
glass, half empty, and the base case.

Another way to look at that
is, what do the trends mean?

Optimistically, what do they mean?

Uh, pessimistically and or skeptic,
skeptically, and, uh, what the

pragmatic approach would be.

So pragmatic, skeptic, and optic optimism.

Or said another way, glass
half full, glass half empty.

And of course the base case, which
would be there in the middle.

So again, I mentioned Chairman Harper.

Sounded an alarm, uh, in September
of 2024, which kind of sets this up

well, since I'm looking at 2025 data.

He sounded alarm in 2024 and said it has
been a decade at that juncture since we

saw this proportion of shares at risk.

And during that quarter the number of code
four and code fives over $500 million in

assets tripled from three to nine, which
looked like a quite alarming trend, right?

So something triples in a quarter,
uh, it means something, but code

fours and code fives tripled.

In the second quarter, between
the second quarter of 2024 and the

third quarter of 2024, which is what
Harper, uh, was making his point of.

And numbers wise, that was
136 credit unions that were

code fours and code fives.

At that juncture, there were 743 credit
unions that were Camel code threes.

And so if you take those and say that
equates to being troubled in some

way, uh, what it does mean is NCO a is
gonna show up theoretically more often.

Of course, we're gonna get into that
'cause they've got a 27% cut in staff

making it more difficult for them to
get where they think they need to go.

And there were one in five of
those credit unions that, uh, you

could say were in distress mode
in the code four, code five mode.

So I'm gonna walk through
each quarter of 2025.

Yeah.

And I've got a couple different
ways of splicing and dicing this.

And the chart I have in front of me
shows, uh, the baseline of, of the fourth

quarter of 2024, Q1, Q2, Q3, and Q4.

So we have all five.

The five last quarter ends.

And over that time, code fours and code
fives went down in total from 135 to 117.

And uh, more importantly, from 16.3

billion in assets to 12 billion
in assets, so down 25% in assets,

coded code fours and code fives.

Excuse me, that was shares.

It's essentially the same 'cause
obviously you build in assets,

builds in liabilities, and, uh,
undivided earnings, et cetera.

So assets are actually 18
point a half billion to 13.6

billion.

Code threes went down from
715 to 653 code three shares.

Down from 157 billion, 158
billion to 145 billion.

And oh, by the way, during this time
period, the number of credit unions

in existence fell from 4,467 to 4,297.

So a drop of a hundred and rough,
and again, there was an anomaly

in, uh, the second quarter of 2020.

Five camel, three count fill, but
the dollar exposure, exposure went

up and that would be from most likely
a four being improved to a three.

It's kind of like a, a snake
eating a large rat, right?

You're gonna see that
move through the system.

So if a code four or a five becomes a
code three that's large, that's gonna

move, uh, the numbers quite dramatically
in from a four to a three bucket.

So visualizing camel trends by institution
on this chart, uh, we've got the green

code ones and twos, the amber code
threes and the black or blue, uh,

which are code fours and code fives.

This chart shows the, basically.

The green code ones and twos,
the orange or amber code threes

the black code, fours and fives.

Uh, and you can see the Camel four and
five share by billions of dollars going

from 16 to 18 to 13 to 12 to 12, and
the code threes at 158 billion 146.

Then they went back up to 1 68.

That would be the anomaly, uh,
then down to 1 54 and 1 45,

uh, at the end of the year.

So.

Numbers are trending in a positive
direction, but breaking that down by

asset category reveals a little bit more.

So this would be what are the
trends for those large institutions?

And as a reminder, NCA classifies credit
unions over $500 million as complex.

Uh, and this slide shows that data, so the
number of code threes over 500 million.

Was three of these quarters was at
69, so end of 20, 24, 69, 20 25.

First quarter, 69 actually went up to 72.

Second quarter, 2025 down to 69,
third quarter of 2025 down to 66

during the fourth quarter of 2025.

And maybe that's a little
bit of truth in coding.

Maybe that's NCA saying, Hey
credit unions have gotten better.

Maybe that's NCOA saying,
Hey, we've got 27% less staff.

Staff.

We really need to do a
little bit more triage.

And here you can also see that
the, let's see, code three insured

shares in 2024 end of twenty twenty
four, a hundred twenty eight.

Billion down to one 17, up to 1
39 the second quarter against that

same trend of a handful of code four
large credit unions becoming code

threes if you're in that category.

Congratulations.

I know I had a.

Uh, I've had some conversations
with credit unions that were in

that bucket down to 124, uh, down
to 116 at the end of the year.

And then code fives and fours
from 13 to 15 to 10 to nine.

So that trend is good.

So the Harper Alarm tier, this is what
kind of drove, uh, chairman Harper to

say, Hey, we need to sound an alarm.

Camel fours and fives peaked at 11 and
Q1, uh, before recovering to seven.

Uh, at year end, seven at year
end, that number is different.

Uh, let's see, 7, 7, 7.

Below the level triggered by Harper's.

The seven was the number.

Oh, I'm, I'm, I'm mixing,
mixing my chart up here.

So I'm, uh, I was looking at the billion
dollar shares, so, so that's accurate.

We're down to seven large institutions
as code fours and code fives.

Camel three count was essentially
flat all year, 69 down to 66.

Uh, but shares in net bucket swung
wildly down to 117 billion in Q1.

Spiking.

And then the composition of who was
coded a three in this tier changed

more than the count suggests.

The glass half full Harper's
specific alarm was resolved.

The glass half empty, two of these
institutions moved from three to four and

five in Q1 before improving this tier is.

Is a little bit wonky
because there's less numbers.

So you can see these large,
dramatic dollar changes in

the share insurance fund.

And by the way, that goes into
the calculation, you know, you

have your Cecil calculation.

Well, NCUA has their NCUA has their share
insurance reserves that they need, and

that's based partially by Camel Code.

So when things go the wrong way,
they need more reserves aside.

That impacts whether or not
you get a dividend or have to

pay a premium or status quo.

Uh, but that's a whole nother podcast
and how the insurance fund works.

We have a couple of those out
there, some that compare us

to us, compare credit unions,
N-C-O-S-I-F, to the FDIC the model.

Uh, if you find that interesting,
uh, I would encourage you

to, um, go onto our podcast.

Area, uh, on our website or, uh,
on YouTube so glass half full.

The Harper specific,
uh, alarm is resolved.

Glass half empty.

Two of these institutions moved from three
to four at five in Q1 before improving.

This tier is never fully stable.

And again, that's because large numbers,
the law of large numbers, you can

see them moving because there's less
in number, uh, but they're bigger.

So you can see the swing in
assets and the swing in shares.

So the a hundred million to $500 million.

Uh, this is the tier where
2025 made almost no progress.

So these are not the large,
but they're not the small.

Although if you're in that category,
you might consider yourself small.

So Camel four and five count
started at eight and ended at nine.

So the s.

So slight slightly worse.

Camel threes went from 92 to 94.

Also slightly worse.

The aggregate numbers improved because
small credit unions drove the gains.

Uh, if you're a mid-size credit
union, and again, this will,

will consider this mid-size.

Your peer group did not benefit
from the trends that moved.

The headline numbers, shares at risk
in this tier were remarkably stable

all year, hovering around 19 to
20 billion for camel's three, one.

Three to 1.44.

Camel four.

Stability here means no
prices, but also no resolution.

So kind of treading water in this
category, which might be what

you're thinking as you're trying
to deal with economies of scale

as you're trying to deal with.

Uh, administrative burden, regulatory
burden, et cetera, et cetera.

It's tough to be in this category.

It's tough to be smaller, but it's
also tough to be in this category

'cause your members expect you to
do everything and your budget might

not allow you to do everything.

All right?

So less than a hundred million.

Where the improve improvements
actually happen, improvements

with a exclamation point.

So virtually all of the 2025 camel's
improvements were concentrated here.

Camel's four and fives dropped from
118 to 101 a reduction of 17 out of the

total of 18 improvement across all tiers.

So set up said, I'll say that again.

The Camel four and code five
improvements 17 of the 18 over this.

15 month period happened in credit unions.

Less than a hundred million Camel
threes dropped from 554 to 493

61 out of 62 of the reduction.

So some of this is genuine
improvement or rehab.

Some is merger.

Small credit unions are absorbed
into healthier big credit unions.

Either way, the risk exits the
trouble bucket and reduces the risk

theoretically to the insurance fund.

So dollar exposure here is small, 1.5

billion in four and
five shares at year end.

So the insurance fund impact is
limited, but the count matters,

uh, for their supervisory workload.

Fewer small credit unions means
NCOA stretched exam Staff has a

more manage manageable queue of
work, uh, that they need to get to.

And again, we've had
podcasts on this, but NCA.

Dropped into their national supervision
policy manual without any fanfare that

they were stretching out their exam cycle
for billion dollar plus credit unions.

They also made it easier, easier
to comply with their policies back

when I started and for virtually
forever, uh, over the last 40 years,

if you're a code four, you had to
have a follow-up exam every 120 days.

If you're a code three, you had to have
a follow-up exam every 180 days That

went from a mandate to a goal, and they
have some tracking mechanisms for that.

But, if you are a code three,
uh, they'll tell you they're

coming back to do an exam.

And they may or they may not.

If you're a code four, they'll tell
you they'll come back every 120 days.

They may or may not.

They have to do triage.

They're doing triage, they're
tweaking where they go when and

that's creating some pressure on.

On a lot of things, right?

And obviously nobody there's not
a lot of credit unions that say,

Hey, I wish you had 27% more staff.

I wish you hadn't lost all those people,
because less eyes means less scrutiny

in, in, in the short term, right?

So, that's just the reality.

I wanna go back to the and talk
a little bit about the quarter

the Q2, uh, 2025 anomaly.

The dollar the count was down, but the
dollar exposure was up, so they went camel

threes went down from 6 79 to 6 67 down 12
looks like progress, but the camel three

assets went from 172 to 198, went up 25.

Does not look like progress.

So smaller credit unions that
exited the bucket through

genuine improvement of mergers.

Meanwhile, larger institutions
entered it and or moved from the

code five, four to the three bucket.

So the, as I've called it here, the
Harper Alarm alarm Complex credit

unions code four and five is greater
than 500 million in assets pre alarm.

There were three and
then nine at the alarm.

Uh, a large alarm stage in 2024,
uh, end of the end of fourth quarter

nine, up to 11, down to eight,
then to eight, then to seven.

So as low as three pre alarm.

Uh, the alarm when Harper, yelled
it from from his podium as chair

wars at nine, got as bad as 11.

And now back into what I've have
as the green stage, which is uh,

seven at the end of the year.

We'll have to see where that goes.

I'm gonna get back on track of doing these
podcast quarterly, updating this one,

updating these slideshow as we go forward.

So, there is three ways to read this data.

As I mentioned, on the front end,
the glass half full, the base

case, and the glass half empty.

What's the glass half full case?

In summary, there's 18
fewer troubled institutions.

The code four and five count being down
from 135 to 117 over the full year,

and it declined every single quarter.

The dollar exposure, nearly halved.

Shares at four and five rated credit
unions went from 18 billion to 12 billion.

The remaining institutions
are smaller or on average.

So I dollar exposure nearly Hal,
that's actually, it went down, uh, 33%.

I'm gonna have to check my math
on that, how I came up with,

uh, with that dollar exposure.

Nearly hald.

It wasn't halved, it came down 33%.

Harper's alarm was answered.

Complex credit union coded
four and five, peaked at 11.

And it backed down to seven below the
nine that triggered his concern and

the agency's concern at that time.

And there are 62 fewer Camel three
institutions from seven 15 to 6 53.

Camel three shares at year
end, 145 billion are below.

When Harper sounded the alarm.

The glass half empty, the quarter
two anomaly camel three count

fell, but assets jumped 25 billion.

That just shows you that
things can change quickly.

If a few credit unions grow the wrong
way the numbers can get out of whack.

And of course, the glass half empty is
these numbers are masked by mergers.

Some improvements are credit
unions that merged away.

A substantial number of them are,
and of course, if credit union

merges, odds are their camel code.

Wasn't as good, uh, as the
credit union that they merged in.

I'm not saying there aren't
twos that merge into twos, there

aren't ones that merged into twos.

But a lot of these improvements,
uh, in the total numbers are credit

unions that said, Hey, you know what?

We're tired of fighting within
NCA and threes and fours, and we

wanna do more for our members.

And that goes into a podcast I did.

That either, that either comes out
the week before or the week after

this one on mergers, no, excuse me.

It already came out.

The merger podcast came out where we
talked about that 20% of of credit union

credit unions that merged were under
duress and that 80% of them did it for on.

Expanded services.

So the NCOA staffing wildcard,
27% of staff took buyouts.

That's actually not the right number.

27% staff down there were people who left
from attrition that didn't take buyouts.

The buyout was closer to 21, 22, or 23%.

So does this mean that we're
getting truth in coding or does this

mean we don't have the resources?

So we'll just be nicer?

You could argue either.

Uh, the glass half empty would be
arguing that, hey, they're just, uh.

They're just coding better
'cause they don't have the staff.

The glass half empty also,
there's still 770 credit unions

coded at code three at year end.

That's one outta six federally insured
credit unions in that category.

So it's not a clean bill of health.

And if you go back to the quarterly
analysis podcast I did with Todd Miller,

Steve Farr, and Dennis Bauer of my team,
uh, we talked about the fact that for

the first time in a very, very long time.

Delinquency in credit unions is over 1%.

While that number isn't alarming,
is not alarming, the trend

is in the wrong direction.

And that would play into that
because NCA knows that when they

take insurance losses, why is it?

It's because of asset quality or
economics that drive asset quality.

So the base case.

If you're a Camel Code one or
a Camel Code two, you're gonna

see NCAA lot less frequently.

Use this time wisely.

Do your internal work,
stay on top of things.

If you're, you know, I, we, we
have conversations and, and clients

that are ones and twos, and we have
clients that are threes and fours.

Fives typically don't
stick around long, uh, but.

You wanna stay there because if you
slip into the three or four NCA is

gonna come bother you more frequently.

As I, and as I say, uh, and
have said in some posts, there's

an old country Western song.

How can I miss you if you won't go away?

And that song kind of says, Hey, if
you're having to report monthly, if you're

having to do monthly calls with NCOs.

Uh, problem case officer, or if you're
having to have exams every 120 days, it

seems like you're always preparing for
NCA and not caring about your members.

So if you're in the three, four, or
five bucket, you will get attention.

Might not be as much
as you got in the past.

And your Campbell code
matters more now than ever.

As NCOA is resource constrained and
they lost a lot of talented people.

And every time I say.

They lost a lot of talented people.

I always wanna say that the new
people and the people that are already

there will grow into their positions.

Uh, but it could be some growing pains
if you have a less experienced examiner.

As a result.

So the, and then, you know, you get to the
known unknown, NCA staffing, uh, cycles.

I've mentioned that down 27%, they're,
they're still a hiring freeze at

federal government agencies, right?

As people leave, as people retire
they find their happiness elsewhere,

as you say, uh, it's gonna get worse
staffing wise before it gets better.

And even when NCUA gets the spigot.

Turn back on, it takes 3, 6, 9
months to actually start getting

the job announcements out there.

And then, oh, by the way, uh, are they
gonna attract the same pool of people

that they did before because, um,
you know, people seek out government

employment for different reasons,
but, uh, safety being one of them,

and it hasn't been necessarily the
safest place to be employed right now.

That's not.

That's just, that's not an editorial
comment, that's just the reality.

And exam cycles are getting elongated.

So again, some Camel Code
improvements are real.

Some of them are, are the reality
of they, they don't have the people.

So maybe they'll just be nicer.

Uh, what to watch for in 2026.

The quarterly board briefings now, I
talk here a lot about, um, NCA needing

to do things in the sunshine, which
quite frankly, they haven't done lately.

Uh, they've been having
less board meetings.

I am hearing rumblings that a new
board member will come in as chair

to take the place of helpmann soon.

And when they do that,
I'll do a podcast on that.

But, uh, they need to get back to
communicating better with the industry.

Uh, they've been doing a lot of reg
regulatory reductions some of which are

real, some of which are happy to, glad
I've got some podcasts coming out on that.

Uh, the hiring free
status, will it get lifted?

When will it get lifted?

And then I haven't said much about the
economy, the eco economic headwinds.

That's the reality of
what's drives this train.

If the economy gets worse in 2026, these
numbers will get worse, and that's where N

COAs losing 27% of their staff will really
start to have impacts at the agency.

Whatever your code is, that helps
define your relationship with NCUA.

If you're a one or two, you wanna
keep that protected and guard it.

If you're a three, four, or five.

NCUA is stressed for resources.

Communication is always the
key to a good examination.

It's even more important when NCUA
has less staff, less experienced

staff, that you are the consummate.

Communicator that you take the
bull by the horns in that regard.

Alright, that's it.

As always, I wanna thank you for
watching or thank you for listening.

If, uh, you are finding yourself
needing a help on an exam, you

know where to find us on LinkedIn,
on our website, mark trico.com.

Uh, or email me at info@marktrico.com.

That's a wrap.

Have a wonderful rest of your
day, rest of your week, and

again, reach out if you need help.