Credit Union Exam Solutions Presents With Flying Colors

Speaker 3: It's an emergency.

What is it?

Just wait and see.

Boardroom, courtroom, footnotes, fees.

Policy shifts quietly.

New regulation, new direction,
leadership in question.

Insurance fund, CAMEL
watch, examiner attention.

We don't wait for next week when
the meeting's on the NCUA web.

Agenda drops, something pops.

Now it's in your head.

Ooh, ooh, ooh, ooh, ooh.

It's in your head.

Ooh, ooh, ooh, ooh, ooh.

Third party cyber liquidity.

Hey, hey, hey.

Concentration rising.

Hey, hey, hey.

Risk model stress assumptions.

Everybody wising.

It's an emergency.

Didn't plan it.

Here we go.

When the signals start flashing
red, we hit record, you know.

Speaker: Hey, everyone, this
is Mark Treichel with another

episode of With Flying Colors.

This is one of my emergency podcasts,
although I'm only moving this release

of this item from the normal Tuesday
slot to a Monday morning slot.

I am recording this on
Thursday, May seventh.

Yesterday, NCUA conserved Jackson
Area Federal Credit Union, so that

date was May sixth, which will
come up in our discussion shortly.

But in NCUA's press release,
they say, "Jackson Area

Federal Credit Union conserved.

Accounts remain protected
by the Share Insurance Fund.

Member service is uninterrupted.

The NCUA today placed Jackson Area
Federal Credit Union in Jackson,

Mississippi into conservatorship.

Member services will continue while
NCUA works to resolve issues affecting

the credit union's operations.

NCUA placed Jackson Area Federal
Credit Union into conservatorship

because of unsafe and unsound
practices at the credit union."

That is a standard canned statement,
'cause the act allows them to

do that for that reason, and
that's why they cite that reason.

And of course unsafe and unsound
is in the eye of the beholder, but

I think data shows that they were
probably quite unsafe and unsound.

But member deposits at Jackson
Area Federal Credit Union remain

protected by the NCUSIF- Which
has the backing of the full faith

and credit of the United States.

Administered by NCUA, the Share Insurance
Fund insures individual accounts at

Jackson Area Federal Credit Union up
to $250,000, et cetera, et cetera.

Member service will continue
uninterrupted at Jackson Area

Federal Credit Union's main office.

Jackson Area's Federal Credit Union
members can continue, can con- can

continue to conduct normal financial
transactions, deposits, and access funds,

make loan payments, and use shares.

The office is open from
eight to 4:30 Central.

While continuing normal member service,
NCUA will work to resolve issues

affecting the credit union's operations.

Members with credit un- with
questions can call this number.

A h- there are frequently asked
questions posted on NCUA's website.

Members with questions about their
Share Insurance Fund coverage

can find more information in the
Share Insurance Coverage section

of NCUA's mycreditunion.gov.

Jackson Area Federal Credit Union is a
federally insured, federally chartered

credit union with 15,561 members
and reported assets of $162,360,956

according to its recent call report.

Jackson Area serves employees of the
City of Jackson, Mississippi, as well

as employees and elected or appointed
officials of Hinds County, Mississippi.

In the early 1990s, the credit union began
expanding its field of membership and

now serves 38 distinct groups, primarily
composed of local government employees.

Also, they are a low-income and
minority depository institution

which I'll get into here shortly.

If you go over to NCUA's or their
website, usually what'll happen is

once NCUA has taken control they'll
say something on the webpage about

about it being under control.

But just looking at their staff
I note that they did have a

director of internal audit, which
we'll get into the president's

SVP, and chief operating officer.

Odds are some or all of those folks
may have been removed by NCUA, 'cause

when NCUA conserves a credit union
they take out people at the top.

And I'm anticipating because of a
couple things I'm gonna say here,

that they may have taken out more
than one other than just the board.

All right, so with that, I'm going
to which gets me to my PowerPoint

Jackson Area Federal Credit Union
that I put together based on my

knowledge of NCUA and how it operates.

And by the way I have zero insider
information on this situation.

I'm basing this on my 34 years at NCUA,
my six years of consulting, my work as a

problem case officer, my work as the staff
person who was given the responsibility

to conserve WesCorp and US Central.

Why was I given that responsibility?

Because up until that point
in time, I had conducted the

biggest conservatorship at NCUA.

So I know a lot about how conservatorships
work, why you conserve, when you

conserve, et cetera, et cetera.

And all of this intuition the...

Malcolm Gladwell had a
book called Blink, right?

Where y- your brain after you take
the journey that you take during life

is like a camera and a computer and
things and you instantly know things.

And that's really a lot of intuition here.

And you see I have on this first
screen, why did NCUA conserve?

Most likely due to fraud.

And so I'm gonna say alleged fraud.

I'm gonna say possible fraud.

Anytime I've mentioned the word fraud
here, I have no evidence of fraud,

but there is some guns, are some
guns that are smoking that lead me

to think that this is probably fraud.

Who did it?

I don't know.

Somebody internal, probably.

And we'll get to that.

We've got the charter number here.

Assets I built this PowerPoint based on
end of year data, which was December 2025,

at which point in time they showed $162.4

million.

They were conserved yesterday or
you'll be seeing this Monday, they

were conserved last Wednesday.

Typically, NCUA does conservatorships
on Friday, although they've

gotten out of that rhythm.

When I was conserving credit unions,
I always liked to have the weekend.

And my team members Steve and Todd, who
have worked on conservatorships also

would prefer to do Friday 'cause you never
know what's gonna happen the day you take

over, and the weekend helps you do a lot
of digging before you have to come out

the next day, talk to NCUA staff, the
boar- NCUA board, or talk to members.

It just to me, works a
little bit better to do that.

So for some reason, they
decided to do it on a Wednesday.

And they did it right after they filed
a call report, which I'll get into.

But, NCUA the March call report
shows only $143 million in assets.

And there was some runoff in some
non-member deposits allegedly.

So all right, that's level setting.

I believe that fraud was involved,
and we'll get into why I believe that.

All right, so what is a conservatorship?

As a reminder NCUA's authority to conserve
comes from the Federal Credit Union Act.

The, if you're watching on
YouTube, more details here.

But I'll try and speak this in
a way that it doesn't matter if

you're watching or listening.

So a conservatorship is the v- involuntary
appointment of NCUA as a conservator

of the federally insured credit union.

NCUA assumes all rights, powers and
duties of the credit union members,

directors, officers, and committees.

The credit union remains open
and continues to serve members,

but operational and financial
decisions move under NCUA control.

So the NCUA regional director becomes
the board, becomes the conservator.

They sub-- they appoint sub-agents to
the conservator, and those would be the

people on site who would take action.

And essentially NCUA represents
the insurance fund on one side, and

they represent the members on the
other side, and they have to act in

a way that's consistent with both.

But in the end, tie goes to the runner,
and it's all about the insurance fund.

So in a conservatorship, NCU--
the credit union stays open.

The NCUA has operational control.

And they can do a couple different things.

They could return it to the members
at some point in time, and they

would have to pick a board that would
serve and they would have to train

that board, et cetera, et cetera.

And I don't have a number off the
top of my head, but it's less than

twenty percent, less than ten percent
probably of conservatorships that

actually go back to the membership.

The other options are a merger or an
involuntary liquidation, and sometimes

you'll see that when they can make
sure that the assets are the assets and

the liabilities are the liabilities.

They clean certain things up.

They'll bring bidders in to
take over the credit union.

And that's still a possibility that
the field of membership will be served,

but I think it's highly unlikely that
this gets returned to the members.

I think it's highly
unlikely that it's merged.

I believe it'll be liquidated
sometime between now and the next

time they have to file a call report.

But I could be wrong, but
again, that's my intuition here.

All right an unusual profile for
for regulatory inter-intervention.

Why is it unusual?

The credit union was reporting
nine point two percent net

worth at the end of the year.

You don't conserve someone who
actually has nine point two percent

of net worth unless there's a lot
of things going on underneath.

But the most likely situation is
that net worth is not real, right?

And so there's some other
stats that are weird.

Their loan to assets at the
end of the year was only 27.8%,

so there's not a lot of lending going on.

They had 66% of their assets reported
as cash in other financial institutions

and not the corporate based on a
quick glance at the call report.

So I'm guessing these were local banks
or were certificates of deposits that

that may possibly not have existed.

We'll see.

And 25.7%

of of deposits were non-member
deposits, and they came up recently.

Over the last several years, they
started getting into non-member

deposits, and that's in the 99.9th

percentile.

So ask yourself, why do you have
non-member deposits when you don't

have loan growth on the other side?

It's very odd to have just under
30% loan to assets and have

such a high non-member deposits.

What do they need those deposits for?

To park it in cash at a low rate?

It doesn't, just doesn't make sense.

So the bottom line is that the
reported financials exhibit multiple

patterns consistent with potential
fraud rather than operational failure.

Real money came in through
non-member deposits.

The asset side claims it was parked
in cash at other institution.

The income statement, we'll see, makes
it look like maybe that cash wasn't

actually earning a return anywhere which
i- is another outlier type situation.

So $41.8

million in non-member
deposit funding is possible.

Possible fraud, possible phantom cash.

But at the end of 2021, their loan
to assets were as high as they've

been over that period at 36%, and
they had cash of $50 million, and

they had no non-member deposits.

December 2022, very similar data.

Loan to assets 36%, no
non-member deposits.

December 2023 non-member
deposits up to $12.5

million.

Cash went up to $70 million.

Loan-to-assets stayed about the same.

December 2024, another $13 million went
out in non-member deposits, and cash

went up to a corresponding $13 million.

Loan-to-assets down to 33%.

September 2025, another $10 million
went out in non-member deposits,

and cash went up $16 million.

And loans stayed down at the $45 million
mark, and loan-to-assets was at 30%.

And then December 2025, the last call
report filed by the credit union staff

non-member deposits had increased to $41.8

million, and cash on deposits was up
to $108 million, and loan-to-assets

reduced to the aforementioned 28%.

Loans really essentially
went nowhere, up $7 million.

And they took out $42 million in
non-member deposits for some reason,

to park it in cash apparently.

So cash on deposit, 66% of total assets.

A credit union with $45 million in
loans, $22 million in investments,

and 15,000 members has no business
reason to hold $108 million in

cash at correspondent banks.

Now, if that's where they reported it,
what were they saying to the examiners?

I don't know.

Was it earning...

Was it sitting in a cash account, a
checking account that didn't earn money?

I don't know.

Was it not on, not where it said?

Did they have fake bank statements

so income also does not support
the reported asset base.

To me, a tell is the 2025
yield on earning assets, 2.61%

is in the 16th percentile nationally.

$4.55

million of interest and dividend income
reported on $174 million of earning

assets when the national median is 3.56%.

So they're earning 90 basis points
less- If that cash is not in the bank,

not earning money, like it was stolen
allegedly, possibly, maybe, that would

be a reason for the yield to look low.

That's one way in postmortems you can
look and say, "Hey, this was a red flag."

It's possibly a red flag.

I believe that this might
be what happened here.

Let's re- do a little reverse engineering.

So the reality is the income that they
were, th- this slide shows without

getting overly complicated, this slide
shows that from what they were reporting

in cash and what they were reporting
on income, things didn't seem to lie-

line up, and that could be a red flag.

The credit union's producing income like
107 to $127 million institution as opposed

to a $162 million institution, which
means there's a gra- a, a gap of 47 to 67

million, possibly, maybe, I don't know.

That could be phantom cash.

Could be.

Not saying it is.

Saying that they conserve for some reason.

You don't conserve someone if their
net worth is at 9% and everything's

being operationally sound.

They don't have a lot of loans That's
probably not where the issue is.

My guess is that if there's fraud here,
it's in the cash and, or in unrecorded

liabilities, which we'll get into.

I have a possibly fabricated 2.13

net worth entry.

So in the fourth quarter, they had a 2.13

million net worth entry.

And net worth went up 2.7

million, while their actual
income for the fourth quarter

was reported at only 42,000.

And the net effect looks to be about
a $2 million unaccounted for income.

Now, I did a search.

I tried to see if they had ESIP
monies or grants, and obviously

that was previous to that.

So that, that they showed
no income tied to the ESIP

program from several years ago.

And they wouldn't have wanted to
record that in the fourth quarter.

But I was just trying to look at,
okay, what could explain that?

I could not find any CDFI funds,
grants that would equate to.

And if there were grants from NCUA,
they're capped at a much lower level.

So it's probably not that.

This entry actually increased their net
worth above the well-capitalized area,

and maybe it was something they booked
to keep NCUA happy with their capital.

So peer outlier status
and capital erosion.

On the right here on
the chart, 2021, 11.8%

capital.

2022, end of year, 12%.

2023, 10.5%.

2024, 9.5%.

September, 8% approaching PCA.

And in December, it jumped back up to 9.2%

with a recognition of income that, that
does not appear to have made sense.

So also, they are one, one credit
union of any substantial size out

of 4,374 who have this statistic,
non-member deposits greater than 25%

and loan to assets less than 30%.

There are only six credit unions
in the country that fit that,

that have non-member deposits
of more than 25% of assets and

loan to assets of less than 30%.

Six credit unions in the
country that have that.

The other five are all under 3.2

million.

So there's only one large credit
union out of the whole pool of

credit unions that fits that profile.

Again, earlier I said, why would
you have non-member deposits

when you don't have any loans?

Why would you have non-member
deposits and only park it in cash?

Something just doesn't make
sense relative to that.

And I'm not saying NCUA
should have caught that.

I am saying that'll be looked at
and if there's a postmortem and

if there's a material loss tied
to this but that caught my eye.

When I first looked at the FPR,
saw no loans and saw non-member

deposits that's what stuck in my
head as a likely odd situation.

All right, so fraud can occur on
both sides of the balance sheet.

Did it?

I don't know.

Fictitious assets on one side, unli-
unbooked liabilities on the other.

E- either alone can hide losses.

So on the fictitious asset
side, is it in loans?

I don't know.

Are there any?

I don't know.

It could be that everything's
gonna be fine and this will

be returned to the members.

But you don't take someone over with 9%
net worth if that 9% net worth is real.

Reported $107 million in cash.

Quite possibly that's not there.

Unbooked liabilities.

Some of NCUA's biggest losses, and
actually there there was an IG report

from, I believe, the FDIC that talked
about a f- a $50 million bank that was

actually twice the size because they
had two sets of books and records.

Oftentimes, when a conservatorship
happens and there are losses, there

will be people who will come in and say,
"Hey, I have a share certificate here."

And you look on the books and it's not
on there, and then you discover that

there's a second set of books and records.

The data isn't saying that
this is what happened.

The data to me, points more
to the asset size side.

But with unme- with non-member deposits
coming in maybe there were unbooked

liabilities that, that somehow somebody
at the credit union became aware of,

and the person who was in charge of
possibly committing this fraud, if indeed

fraud happened somehow was discovered
and they had to change their MO.

That's possibly what happened.

Sometimes, fraud gets caught
when someone is sick, right?

You always want to build in
somebody having to take vacation.

If you have somebody who doesn't ever
leave because they need to keep, they

ke- need to keep juggling the balls,
and if you have two sets of books, you

definitely have to be there to say, "Hey
yeah, we have your certificate over here.

Come see me."

So what triggered NCUA to act?

Time will tell.

Time will tell.

Another thing that happens is there,
when NCUA, if and when this turns into a

loss, the inspector general has to do a
material loss review under two scenarios.

If the loss is more than $25
million, or if the loss is g- 10%

of the assets of the credit union.

And of course, you don't know what
the assets are right now, right?

And I'll explain why I'm saying you
don't know what the assets are right now.

But and the greater of those two
numbers triggers th- that review.

Yeah, and that will look at what
happened, what were the root causes

of the failure, when it, when NCUA
became aware of the conditions and

what they did, and whether supervisory
actions were timely and appropriate.

And when an IG does a material loss
review, they come to conclusions, and they

say, "We believe X, Y, and Z happened.

We believe NCUA needs to change
their policies in this manner."

And then the Office of the
Executive Director has to come to an

agreement with the inspector general
and make a commitment to that.

So long-term, if this was a big loss,
what I could see is it w- if and when

there's a new board, that they look at
the restructure that happened at NCUA,

and if it's a Democrat in particular,
and they'll use this material loss

review, again, if one materializes,
to say, "Hey, we need more examiners."

Or, "We need to do more of these exam
steps, and because we need to do these

exam steps we need to hire more people."

So that pendulum could swing and when
pendulum swings, it's gonna be when

there's a new board or a Democratic
board or a loss of such significance

that NCUA says, "Hey, you know what?

We need to do more in this area."

So that's just a, that's a
long-term projection into 2028.

And obviously we'll know before
then if this credit union gets

returned to the membership.

My my intuition will have been wrong.

If they end up liquidating this
between now and the end of the

next quarter it may be right.

And as we start to see, and inspect, these
material loss reviews do become public.

It'll take a while for that to happen.

And by the way I have recorded
another podcast that looks at the

semi-annual report to Congress for
NCUA's inspector general, and there

were seven losses that I talked about
in that podcast, which I guess I'll

slot to move up to next week in light
of me talking so much about fraud here.

But I talked about those losses, which
ones were tied to fraud, what it meant,

the fraud the fraud triangle opportunity
motive, et cetera, all those things.

So that one will follow next Tuesday.

And I'm going to every six months take
a look at that and do a podcast on

the inspector general report from NCUA
and also the other banking regulators,

although I have not recorded that one yet.

In, in, in researching this, I
did some analysis of the data

from December 2025 and back to
come up with some of those stats.

And then I downloaded the call report
from the end of the year, and I

downloaded the call report from March.

And in scanning through that I noticed
that the call report from the end

of the year was signed by the CEO.

The call report from March 31st was
signed on May 5th as an estimate, and

it was signed by an NCUA employee-
And it said the person's name, which

I'm not gonna say here and then
it said, "Estimated call report."

What happens is NCUA needs to
get all the data up, right?

There's always stragglers.

NCUA, if you file late, will s-
assess civil money penalties.

Sometimes if NCUA's already conserved
a credit union, NCUA has to file it

for the credit union, or they'll have
staff do it, and staff that they've

retained at the credit union will do it.

But in this instance it doesn't say
that it's an NCUA employee, but I

looked the person's name up and saw on
LinkedIn that they are an NCUA employee.

I thought it might have
been the number two.

That's what I was expecting to
see, but then I saw it was NCUA,

and the light bulb went on, right?

So May 5th, they file an estimated call
report, and they say that it's estimated.

Why do they say it's estimated?

'Cause they don't know...

they know that it's not right.

They don't...

they may know a lot, they may know a
little, but they know that it's estimated,

and they wanted to put that in there.

Somebody at a higher level
said just put estimated.

We need to get the data in there."

And then the next day they announced
that they conserved the credit union.

That may be why they
conserved it the next day.

They wanted to get the call
report up and and up and running.

Now, earlier I mentioned...

when I started off I mentioned the
that the press release said that

they had estimated assets of X.

I looked at the last several press
releases on conservatorships.

They don't always say estimated assets.

They say it in some instances, and
I think they, that may be a tell

that they know there's fraud here.

Instead of just saying assets of
X, they said estimated assets of X,

and they cited the end of the year.

So it's not the one the NCUA
employee filed, it's the

one the credit union filed.

Very interesting indeed.

So now what happens?

NCUA operates Jackson Area Federal
Credit Union to, to determine resolution.

They'll be verifying assets.

They'll be having public
outreach as members come in.

The worst case scenario is members come in
that you don't even know are members, and

they're saying, "I have a deposit here."

I'm not saying that is gonna
happen, but that does happen in

an occasional conservatorship.

It does happen in frauds.

It did happen at that bank I referred
to, and it's happened in some of

NCUA's biggest losses that they've had.

Because again, the best way to fool NCUA
is to have a whole second set of books.

When somebody comes in they
have a deposit, but it's just

not on the books and records.

Although, with cash being so high,
that may not be the case here.

It may just be that there were assets
that don't exist and the theft was of

money that came in that is on the books.

Hopefully, that's the case.

Hopefully, it's not on the asset
side and the liability side.

But I wouldn't be surprised if it is both.

So five lessons from Jackson
Area Federal Credit Union.

Healthy ratios are not safety.

Okay?

Net, 9.2%

net worth, hardly any loans to assets.

What's the real risk here?

The real risk might be that
there was fraud involved.

The income statement can
tell you the truth sometimes,

phantom assets earning nothing.

Where's the yield that would
correspond to that level of assets?

Non-member deposits without lending.

Is it a red flag?

Maybe it should be.

Equity entries without
income demand scrutiny.

Maybe that's what triggered it, but
that, that, that was like a snake eating

a rhinoceros when you saw that, that
number flowing through the financial

statement, and maybe that's phantom
equity, maybe it's not, but it seemed odd.

And then lastly, NCUA exams
are not fraud au- audits.

I'm not doing this podcast
to be critical of NCUA.

Whenever I was at NCUA and I heard that
there was a big fraud in a, in another

area I knew that it was not that I
was doing better than the other area.

It was just the reality of fraud happens.

Now, there will be, in my opinion
if this turns out to be a big fraud

loss there'll be some soul-searching
at NCUA on what they can do better.

There'll be criticism from the trades.

There'll be criticism from the press.

And again, NCUA is not a fraud auditor.

Their supervisory committee
exists to look at that.

CPA audits exist to look at that,
and even those are not fraud audits.

So in any event very ex-
very interesting times.

Conservatorships get my blood
flowing, if you can't tell.

As we learn more publicly, which may
take a while, I will report more here,

unless, of course, it was so bad that
they liquidated it over the weekend,

which I guess would be one reason why you
would take it over on Wednesday if you

knew you were gonna close it on Friday.

Not saying that's gonna happen.

If that happens and I hear about it,
I will publish this one immediately,

and I won't wait until Monday.

And I'll probably drop in a
front end saying, "Hey, I moved

this up 'cause NCUA liquidated."

But I doubt that will happen.

I think they'll be there for a
month or two cleaning up this mess.

All right, I'm going to
click stop sharing my screen.

We're back to the main
screen here, everyone.

As always, I appreciate you listening.

I appreci- I appreciate you watching.

This is Mark Treichel signing
off with Flying Colors.