Credit Union Exam Solutions Presents With Flying Colors

treichel: Hey, everyone.

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

I'm here today with Todd Miller and Steve
Farr of my team, also formerly of NCUA.

Guys, how are you doing today?

farrar: Good morning.

Windy and cold here in Montana today.

treichel: Windy and cold.

A good day to talk about CAMELS.

Miller: Absolutely.

farrar: So- We

treichel: even had

farrar: some road closures around here-

treichel: Road closures … from the

Miller: weather.

It's,

treichel: it's gonna be 90
degrees where I'm at I wish I

was windy and road closures.

90 is a little too hot for me.

But speaking of hot, we're gonna talk
about CAMELS, but guys, can you guys

in case someone's listening for the
first time or watching for the first

time, could you give a short summary
of your background before we jump into

what's going on in the world of CAMELS?

farrar: I'll go first.

30-plus year at, years at NCUA.

NCUA career is broke into two parts.

The first half would've been in the
field as primarily a problem case

officer, predominantly on the West
Coast, but involved with a lot of

turnaround situations, conservatorships
enforcement actions and that sort.

And then I followed you to the
central office, and I worked

remotely from there for many years
in the Division of Risk Management.

And in that, I got to be
involved in a lot of things.

Ma- the best thing was I did the
tr- a lot, a week of training

for the problem case officers.

Actually, everybody had to
take it problem resolution.

Worked on the enforcement instruction,
and just a lot of issues, the,

when the 2008, the corporate
s- situation, helped with that.

And then I worked towards
the end, I worked a lot on

the risk-based capital rule.

And then we've been at
this consulting now for…

Isn't it, what do we say, sixth year?

treichel: Yeah, we're in the sixth year.

Yeah.

Isn't that wild?

Wild and

farrar: crazy.

Yeah, so along those lines, it's
been really nice because we can

apply what all we learned, and then
we also, enfor- it allows us to keep

up with what's going on out there.

treichel: Yeah, said.

Said.

Todd?

Miller: I spent 34 years with NCUA.

I can break my career into three parts.

First part, like Steve, I was spent
as an examiner, problem case officer.

Then I spent a decade as a capital
markets specialist in the West Coast.

Did a lot of training and developed
a lot of NCUA's training on interest

rate risk management and liquidity.

Spent a lot of time in complex
credit unions, both good and bad.

The last decade of my career, I spent
it as the director of special actions

in the Western region, supervising
problem case officers, capital markets

specialists, regional lending specialists.

As a director of special actions,
of course, you're dealing with the

most complex credit unions and the
biggest problem cases in the region.

I did do a number of conservatorships.

I never kept count of how many I did, but
I did keep count of the two I returned

to the members 'cause those were kinda
highlights in the career and it always

satisfying when you can take a troubled
institution, put it in conservatorship,

and then give it back to the members.

There was a lost year there
where I was reassigned to Mark on

the conservatorship of WesCorp.

I call it a lost year 'cause I
wasn't allowed to talk to anyone.

I did stay with NCUA about a year longer
than Mark and Steve Mark called me in when

I retired, and I've only been at it five
years 'cause I stayed with the agency-

a year longer than these other two guys.

treichel: That's right.

Miller: Very satisfying career at
NCUA, and it's been very satisfying

the last five years working with
Mark and helping credit unions out.

treichel: Yeah, this is a lot of fun.

I I've learned a lot since
leaving NCUA about how NCUA…

I learned a lot while I was there, but
I've learned even more, I think since.

So guys camels, a lot of, A lot of
time and en- energy and angst goes

into what's the CAMEL rating gonna
be, and I'll probably use CAMEL

and CAMELS inter- intermittently,
because CAMEL just sounds better.

But we, of course, we have the S
that we've thrown on the end there.

But under the the leadership
of the Trump administration, we

have a lot of deregulation going
on, and that's bled into CAMELS.

And they've rewritten the rule
for the first time in 30 years.

I've got a PowerPoint here that
we may go through in detail,

but it's really our agenda.

But i- it's been 30 years since the last
the last comprehensive change in 1996.

It's approved by the FFIEC.

All the banking regulators have
to use it, so they run in unison,

which is why NCUA is part of this.

We may point out some of the reasons that
th- that it's a little different for NCUA.

But anything on this slide you guys
wanna hit, or any opening comments you

wanna make- Yeah … before we jump in?

Y-

farrar: yeah, Mark.

Do you recall what the system that we had
at NCUA when we first started was called?

And-

treichel: Early, early warning system.

farrar: EWS.

treichel: EWS.

farrar: And how did we decide
what that EWS code would be?

treichel: Based on management.

farrar: Yeah, probably.

Also up around here, because of
our distance and travel, we were my

trainer had taught me, "Don't code
anything more than 100 miles from

your house a code three or above."

treichel: Yeah.

And so they got rid of…

Y- that's a really good
talking point, too.

They got rid of the early warning
system because it put too much judgment

into it for the examiner, and you
could get ticked off about one thing.

So they led to the CAMELS score, where
it was originally, I think, based on

we had a matrix and if your earnings
was X, you'd start off as a two, and if

it was Y, you'd start off as a three.

But then it would all come home
to roost in the M rating which

still had a lot of judgment.

And a little bit of what's happening
here is some ability to use

judgment is is going out the door.

Todd any thoughts from
you as we jump in here?

Miller: No, as you mentioned the EWF,
I just think of the multi-part carbons

and the fact that you only had about
a half inch to explain each thing.

treichel: Yeah, that's right.

And if you started using your typewriter
and you got into the middle of a sentence,

by God, you'd figure out how to get
out of it so that it mostly made sense.

And the goldenrod and pink.

I didn't know what goldenrod was
till I had those carbon papers.

Miller: We might be dating
ourselves here, though.

We

treichel: might be.

Miller: Yeah.

Getting average marks on
carbon, three-part carbon.

treichel: Yeah, that's right.

We are dating ourselves, but
that doesn't mean we don't

know what we're talking about.

farrar: Yeah, we had to do our own math.

treichel: R- that's a great point, right?

Because then when they turned it
into spreadsheets, we knew where

the numbers flowed from, and they
had to actually train that into

examiners a little bit more than
us because we had to do the math.

Like you said, we had to figure
out what the solvency ratio

was versus the net worth ratio.

Ah, th- that…

Bringing back lots of good
memory, good and bad memories.

All right, so this slide, we
just, of course, we've got capital

adequacy, asset quality, management,
earnings, liquidity, sensitivity.

You get a one, two, three, four
or five in those categories.

I'm gonna blow by this one here.

So here we're getting into some of
the meat of what's being proposed.

So there's a proposal out there that
talks about making changes to CAMELS,

and these are some of the highlights.

Guys, is there any…

Let's walk through these or
anything else you might wanna say

relative to what's on the slide.

Anybody wanna start?

Miller: It's a chicken or
egg question in my mind.

So you walk into a credit union as an
examiner, do you start with the composite

and then figure out your components,
or do you figure out your components

and then decide on composite rating?

I will just say over my
career I did it both ways.

treichel: Steve?

farrar: Y- yeah, I was a
real numbers-driven person

m- more than anything.

And, but my difference was is I
was more interested in what do the

numbers look like six months from now.

That had a lot to do with how we're-
we'd ultimately decide on that

especially the composite score.

treichel: And it…

This reminds me of a thing I say
on occasion, which is it's it's

more like classical music than…

It's more like jazz music than
classical music, or vice versa.

But by getting rid of judgment, it
becomes more like classical music that

you need to play in a particular way.

J- jazz music is a little bit more
impromptu and and free-flowing.

And the changes to the CAMELS is
going to take away some judgment.

And judgment I relate to
that that jazz comparison.

Any thoughts on the first bullet here?

Management no longer gets
primacy in the composite.

The agency's own data shows that
that was the most influential factor.

Any thoughts on management
there you wanna mention?

farrar: Not on that one

treichel: Okay.

Next up, trim management factors.

Removes depth and
succession, responsiveness

to auditors and supervisors.

We had a client recently that got dinged
for not being responsive in a way that

didn't make a whole lot of sense from
our perspective, but and willingness

to conserve to serve community needs.

Thoughts on that on what
can go into management?

farrar: I think on that, that one
there, really FDIC is reevaluating

what they call process related issues,
and then that's kinda where that

one comes into play, is like these
items are more along those lines

Miller: Give an example of
that whole process thing.

So we had out there a group of credit
unions, I'd call them perpetual threes.

A lot of them were smaller credit unions.

They would have these unresolved findings.

Sometimes they would sit there
for literally a decade as a code

three, the same unresolved findings.

You'd have these process issues that were
giving them the CAMEL threes, but their

financial performance would be consistent.

It wouldn't be great, but
it would be consistent.

Capital would stay level.

We weren't gonna give them a code four.

We weren't gonna give them a C and D.

We weren't gonna code them a four
when they're, 300 miles away from

home because they just floated along.

You knew eventually management was gonna
retire and, they would probably merge.

But a lot of those, they were
process-related code threes.

Really, the credit unions were fairly
resilient, and that's one of the--

maybe getting ahead of ourselves-
That's okay … but that's the things

that disappeared in all the ratings.

So if you look before, there
was a lot of mention about

resiliency to financial change.

All that language is gone in this one.

It's a little bit with the three and
four composite but, in NCUA's CAMEL

system, they mentioned resiliency in
just about every single component.

And that language about resiliency to
financial changes, that's all gone.

That kind of jumps out at me.

We throw in the material risk
threshold, and we take out all

this language about resiliency.

treichel: And in that regard,
so resiliency when I hear that

disappearing and I think what Steve
talked about, what's it gonna be

like six months down the road?

And, basing it on the numbers, but
you wanna also be for-forward-looking.

Resiliency seems to be a
forward-looking m-m-m-concept, right?

A-and it makes it harder
to, to look to the future.

It sounds like it almost has to
be more based on just the math.

Miller: It almost sounds like when
you read their definition, do you

want to code them based on your
exam date, not where they're going?

Steve had said-

treichel: Yes

… Miller: give them credit where I'm going.

It's no, we want to give them
a grade where they're at today.

And there's good and bad to that.

treichel: Yep, good point.

Any other, on this slide,
anything else jump out, guys?

farrar: Yep.

Number three is a big one.

treichel: Okay.

farrar: This is that material
financial risk, right?

Are we covering that later or-

treichel: We can…

Let's do it now.

We can piggyback off it later.

farrar: All right.

'Cause it, it, in the notice and request
for comment, it is in there 38 times,

so it tells you that is a major issue.

And so I was like, okay, make, you make
sure that we really understand what they

believe is a material financial risk.

And the definition that I could find
material financial risk is, "Any act,

practice, or failure to act by a financial
institution that has already caused

material harm to its financial condition
or, if continued, could reasonably be

expected to do this includes risks that
threaten the stability of an institution's

earnings capital, or present a material
risk of loss to the insurance funds."

So that is the, basic under
definition of material financial risk.

But it's not- Which is
nice that it's defined

… treichel: it's defined.

It's a little…

It's not like defining beauty
exactly, 'cause it is defined, but

then anytime anything is defined
with words, what do those individual

words mean within that definition?

Yes.

And then how does this relate to safety
and soundness or unsafe and unsound,

which I think we'll get to as well.

Todd, any thoughts on
this number three here?

Miller: Yeah.

When do the immaterial
things become material?

It's that forward-looking thing.

You look at new programs, for instance.

Let's just take Centrix for m-
many years ago because no credit

unions are involved in it.

treichel: Good

Miller: example.

It, it started out very small
in a lot of credit unions.

Examiners did identify a lot of
process-related holes, and eventually

it became quite large and it caused
several credit union failures.

But when along to that matrix, does
this new program that started out

small become a material financial
risk because you have the processes

and eventually things crumble?

Which is- Well- … an interesting
question, is when along, when does

that concentration risk hit a point
where this becomes a material thing?

treichel: Wow.

That's a, that's an interesting take.

Yeah.

And NCUA is big on concentration risk.

They have letters to credits.

They, they-- I believe the
letters are still out there.

Maybe they'll pull some of them under,
you know- the concentration- the

Miller: 53

treichel: more

… Miller: concentration risk is mentioned
a couple times in the revision.

treichel: Okay, good.

Miller: But still, it's
back to Steve's thing.

He was looking where things were going.

This proposal seems to, I
wanna grade you on this day.

And, is it gonna result…

And, part of it is gonna be how well
are examiners trained on this and

how does it change their behavior.

But there's still a piece of it, do
examiners catch things and address

them early enough before they
become that material financial risk?

This is almost, let's wait till it's a
problem before we deal with it a thing.

Or there could be a propensity for
that to occur the way this is written.

treichel: Sure.

And when you say that, I think short term,
if I'm a credit union or if I'm talking

to one of my clients a more restrictive
CAMEL code downgrade is viewed as a good

thing because if you don't downgrade me as
quickly or you don't do a a warning shot

code three, or I just wanna make a point
code three you're limiting those options.

That's a good thing for a credit union.

Long term if you're focusing on the past
instead of what's on the road in front

of you the likelihood of that leading
to some insurance fund losses is real.

And I'm gonna be recording a podcast,
updating a podcast I did on conser-

the conservatorship that happened at
NCUA recently, where there's about

a $70 to $90 million loss that's
brewing to the insurance fund.

And so when those things start dropping
out of the sky and credit unions might

have to pay money into the insurance
fund and there might be a change, in

the White House that has a reaction to
change all this CAMELs back it won't be

as fun for credit unions at that juncture.

But that's kinda one way to look at it

Any four, five or six on here.

Anything here you wanna highlight, guys?

Miller: It says a composite recalibration.

If you read the definitions,
they didn't change very much.

Like I said, they took out
the resiliency type of things.

But I think for the vast majority
of credit unions, this isn't gonna

change their CAMEL composite at
all, and the definitions are very

similar to what they were before.

You mentioned the big changes
in that material risk threshold.

They took out a lot of
process-related stuff.

If the credit union's just kinda right
at the edge between, a two and a three

or a three and a four, where this may
have some impact on how they get rated.

And the big question will always be
how does NCUA institutionalize a new

rating system with examiners that have
been using the same one for 30 years?

treichel: Sure.

A lot of those 30-year-old, 30-year-old
folks that have been doing it,

not 30-year-old, people who've
been doing it for 30 years left in

the buyout, and of course they've
got 27 to, what, 30% less staff.

How will they train?

How will they socialize this?

Is going to be a very big part of of what
actually does or doesn't happen here.

But you're right, a lot of credit unions
that have been Code 1s and Code 2s forever

aren't even really gonna notice anything.

It's when you get to the edge
of a 3 or the edge of a 4 where

it's gonna get more challenging

So what is it?

This, we got the big one demoting the M.

Management loses the special consideration
that let it override the other five

Thoughts on this on this concept, guys?

Miller: You have most of them captured
in the slide, but there's another

little piece that kind of affects
our, a lot of our clients, 'cause we

see this in findings all the time.

NCUA's current rating system,
and they have it in literally

every composite rating, they
have it in all the components.

They talk about it in
the management rating.

They take out the word risk
management systems commensurate

with size and complexity.

That's only in this proposal once or
twice, where before it was everywhere.

treichel: Okay.

Miller: Examiners use that
a lot in their findings.

When you read examiners' exam
reports, when they describe their

composite rating, especially when
it was down there in a three and a

four, they would use that language
all the time to justify their rating.

Your risk management system are
not sufficient for the size and

complexity of the credit union.

They took that size and complexity out of
the rating system just about everywhere.

So it speaks to maybe there's more
objective criteria involved here rather

than the size and complexity, which means
different things to different examiners.

treichel: Yeah, that's a great point.

Size and complexity is a judgment
matter, and they're trying

to eliminate the judgment.

Steve, any thoughts on that or
anything else on this slide?

farrar: No, that was a good
point that Todd made there.

treichel: And then I'll just highlight
the for those of you who are listening

and not watching under the proposal,
management is weighed alongside

the other five, not above them.

The composite is meant to reflect
overall financial condition.

No single leg- leg should
quietly drive the score.

So that could be where, y- if you got
a three in capital and you had twos

in other things, but the capital was
something that the examiner wanted

to make a big point on, they might
give management a, a two or a three.

The ability to weigh heavily on
one thing in management is being

watered down for lack of better word

So let's see.

Here we got the new bar for a downgrade
to land on a three or worse on management.

There now has to be a material
financial risk, not just a process gap.

Thoughts on this?

Miller: I think it's a good thing, i-- We
see this all the time with exam reports.

They'll get downgrades, not because
management is doing something wrong,

but because there's no documentation
of their decision-making process.

Or they'll get downgrades
because of policy issues.

We've seen this with liquidity, especially
where their liquidity position is

fine, management has strengthened, but
their policy allows a risk threshold

that's quite low, so two or three, and
they'll hang a three on that component

just because their policy allows
it, not because management does it.

I thought it was always interesting when
I was in credit, especially with loans.

I would go look at a half dozen or twenty
loans, and then I'd go read the policy.

But what do the loans really look like?

'Cause sometimes, good policies don't
necessarily mean good practices, and

weak policies don't always indicate
that you have bad practices either.

Sometimes experience weighs a lot and
management can be really effective,

even all that documentation isn't there.

And this is going to give those
folks a leg up, if you will

treichel: Yeah, that I always used to
use the example of I'd rather have a

good quality commercial loan portfolio
and a policy that needs some tweaks,

as opposed to a great policy but
the quality wasn't as good, right?

So that's a great point.

Steve any thoughts here on
this on this slide or what

we've been chatting about here?

farrar: Yeah, the, one of the
main goals that is in the notice

is the improving consistency.

So I think in the, a, a, what a, a three
in management looks like and what a

three composite looks like would be a
little bit more comparable credit union

to credit union than it can be now.

treichel: Yeah.

Great point.

Great point.

And on the slide I'm gonna,
I'm gonna pull out an item here

I had highlighted in yellow.

The carve out to watch.

Examiners can still assign a
three plus, so three or worse, for

unreliable reporting, failure to
safeguard assets, or significant

non-compliance with law or regulation.

So compliance still has a lot of teeth.

I could see as they're de-emphasizing…

Just thinking how, how this
plays out once it's up and

running, one, two or three years.

You have less judgment that
you could you could instill.

And Todd you said do you walk
in and come up with the, the

code and then work backwards?

Or do you come up with the individual
components and then you come up with the

final, and sometimes you've used either.

What I could see is if
your gut is telling…

'Cause you have your gut instinct, right?

When you do what we did for 30, 34 years,
you're there a week and you know just

because of everything you know in your
head that this is a three or this is a

two, and then you work backwards to that.

What I see happening here is if that's
where your brain is going and you can't

use it with judgment, they're gonna
highlight failure to safeguard assets.

They're gonna highlight significant
non-compliance with law or regulation.

So where NCUA may put the hammer
down is that law or regulation.

When they really wanna support a three,
if you violated it in less than a material

way or a material way, if they wanna
support that three, they might use that

hammer a little bit more than normal.

Miller: You can drive a semi
through unreliable reporting.

treichel: Good point.

But unreliable reporting to who, right?

To NCUA, to the board.

N- not documenting enough
corporate governance.

Would that fall into unreliable reporting?

I don't know.

Miller: I could shoehorn it in there

treichel: Right?

Yep.

So that's the thing is when you change
a de- even at, like Steve, earlier

we talked about it's good we have a
definition, but that definition is made

up of words, and then the reality is they
have what now, four, 4,500 credit unions

that get exams done every 18 months.

As you get out there these fixes that make
it less judgmental will get watered down

over time as they figure out how to use
their judgment based on these new words

Miller: The saving grace for
credit unions, like the unreliable

reporting, like I said, you
could put anything under that.

Your credit risk management systems,
your liquidity cashflow forecasting,

your budget reports and everything.

But at the end of the day, when they
write citations, they still have to come

back to a regulation, not a CAMEL letter,
unless they turn this into a regulation,

which I don't think they're going to do.

So there is that little bit of
protection still on some of these, and

they still have to cite regulation.

treichel: Great point.

Great point.

And so the slide I pulled up here
talks about is this good or bad?

What does the-- what are
the pros, what are the cons?

The supporters out there in the those
who crafted it those who are talking

about it from overzealous examiners
that, is that the M became a catch-all.

That exams got bogged down in dotting
I's and crossing T's on documentation

instead of, appropriate things.

And that it's clearer, more measurable
factors mean more predictable outcomes.

The other side of it is tying
concerns to financial weakness can

miss problems before they surface.

Management is the early warning system.

Weak oversights creates tomorrow's
losses, and it could water down examiner

discretion to flag emerging risks.

Any of those you wanna flush out?

Miller: I'll just say one thing.

They removed the whole management
succession plan and things.

In the western region, examiners got
reports when there were changes to CEOs.

Because there's the big time supervision
you need to pay attention when places

get new management teams 'cause they
take new directions, and 90% of the

time that new direction is really good.

And then there's that other
percentage of time where that new

management team takes a left turn
and goes off the road, so to speak.

treichel: And along those lines to
get the last time they changed the

exam cycle, they di- they previously
didn't allow billion-dollar-plus credit

unions to have the extended exam cycle.

When they put them into the pool of
eligibles, I think one of the things

they have on their qualifications
is you can't-- you've had to have

the same examiner, or excuse me, the
same CEO for the last two cycles.

So if there's a new CEO, they're going
to come in quicker, which is a good thing

farrar: And then your point down
there in, in blue where it talks

about, the failures mainly.

Signature Bank is the one
that's most often pointed to.

There's also Silicon Valley
Bank that was a big failure.

And that one…

and then the quote I find from FDIC
documents, "Failure of Silicon Valley

ill- illustrated the issue where
most of the outstanding supervisory

criticisms when the bank failed were
unrelated to core financial risk."

Miller: There you

farrar: go.

And the one criticism related to
interest rate risk was focused

on the bank's modeling rather
than a hole in the balance sheet.

So it's, and you gotta figure
examiners might have been even

living in that institution.

treichel: Yep.

Yep.

farrar: And we had
people living in WesCorp.

Touché.

treichel: Yeah.

No, absolutely.

farrar: Yeah.

And, sometimes you just, you just
gotta shake your head at some of

the things that, how that ended
up g- getting what happened there.

treichel: Great point.

Great point.

And Signature and Silicon Valley Bank
were huge losses to the FDIC fund

that got charged back to credit union.

Or sc- excuse me, got
charged back to banks.

And any time you make it harder for an
examiner you can argue that it's a good

thing, and it might be a good thing, but
if you take away some of their tools,

eventually there will be some losses.

And of course, NCUA is a, an insurance
company and insurance fund, right?

So there should be some losses.

And you shouldn't have unlimited
resources, but you should

have the right resources.

So here we are in a period where
they've, cut 30% of their staff,

and they're watering things down.

No doubt in my mind that in the short
term that's good for credit unions

individually on exams, but in the long
term it's gonna lead to some losses.

And then when there's losses over
certain dollar amounts, the inspector

general has to do a loss report and
then comes up with recommendations.

What do you think those recommendations
will be when that happens?

Maybe you should go
back to a harsher CAMEL.

Maybe you should hire more staff.

Maybe you shouldn't do this, should
do that, et cetera, et cetera.

So life is a pendulum in Washington,
DC, and we've seen it go both ways.

Any thoughts on what I
just threw out there?

Miller: Maybe a topic for a different
podcast, but we're not always very

honest about what really went on with our
postmortems N- not really that honest.

Could you repeat that on the postmortems?

We're not really honest about
what really happened in a credit

union with our postmortems.

They, they all kind of point to
examiner or to management mistakes.

On the credit union side, they're
rarely willing to admit NCUA's mistakes.

They will have recommendations that,
you know, because, as a director of

special action problem case officer,
you get to read postmortems and you've

actually been there and that's not
exactly what really happened here."

farrar: Yeah.

Yeah.

That's a really good example because,
they came and interviewed me for the

postmortem of WestStar, and I kept telling
them, the thing you can't forget is just

it was the mezzanine structure of the
investment that they held, which is why

they in- they fell the way they did."

The word mezzanine never
occurred in the postmortem.

As soon as I got it, I was like,
we did a word search for it, and

I'm like, "I can't believe it."

The whole issue as to why those
investments were ba- didn't really

have to do with the fact that we had
those poor mortgages under behind it.

It had to do with the structure.

treichel: Missed.

Yeah.

farrar: And that was missed by our
examiners in the postmortem, everything.

So it can be as simple as something…

The failure can be caused as, by
something as simple as that, and then

if you concentrate in it, y- you're
you put the insurance fund at risk.

treichel: Yeah.

Said.

Said.

Great point.

I hadn't heard that word mezzanine.

Usually, I…

It's when I'm on Ticketmaster.

Look, looking for the nosebleed seats.

But yeah, the mezzanine is where
the higher risk was, and even

though it was triple A rated
the mezzanines were blowing up.

A- and they had a lot of them.

So other items that that kind of relate
to this, and Steve, yesterday when we

were t- when we had a little bit of
pre-conversation on a pre-meeting on the

recording of this all right, guys Steve,
you had mentioned unsafe and unsound

and that there's a, an advantage to
banks in some instances because there's

a definition of unsafe and unsound,
and NCUA doesn't really have one.

And that kind of weaves in here.

And then another thing that recently
got watered down on CAMEL was

the re- the removal of reputation
risk from consideration in CAMELs.

Any thoughts on either
of these topics, guys?

farrar: The unsafe and unsound one
is a issue that I always have had a

lot of interest in because when I was
training examiners, I'd always ask

them, "Where in the regulation i- is
unsafe and unsound defined in there?"

Because we talk about it all
the time, so where is it?

And you'd see them, looking through
the materials and, where is it?

And it didn't exist.

It was all based on kinda
case loss practices on it.

Then, in October, as you have on here
the FDIC did issue a it's not a rule, but

it's one that's out for comment, I think.

The, to establish uniform definition
for the term unsafe and unsound, and

they define the term unsafe and unsound
practices for their purpose of 12 USC 1818

as a practice act or failure to act alone
or together with other practices, acts,

or failures to act that is contrary to
generally accepted standards of prudent

operation, and has materially harmed the
financial condition of the institution,

or if continued, is likely to materially
harm the financial insti- condition of

the institution, or present a m- material
risk of loss to the insurance fund,

treichel: interesting.

Todd-

farrar: Yeah, and then along those lines,
they've also kinda are directing that

their kinda their documents of resolutions
would be more specifically addressing

just kinda those major, like we c- we call
them, this s- significant financial risk.

They're trying to have those doors much
more specific to material financial risks.

And I think we see the same thing
as Todd, and I can tell you, when we

would take over cases as problem case
officers and we'd look at the document

of resolutions, and it was just like they
didn't make them get meteorite insurance.

It would have so much stuff in
there- … and not focus them

on the most important issue that
was the material financial risk.

So when we took over cases, a lot of times
they'd go from a door that contained 15

items, that we might have five And be
like, "We gotta fix these five things."

And then, then we'll work on the
oth- we will work on the others,

but they're not as important.

So that was I think what
hopefully might come out of this.

treichel: That's I like that.

Yeah, and if everything's a
priority, nothing's a priority.

And that's one of the things.

You, you- credit unions will get
assigned to special actions and thinks

it was gonna get worse, and oftentimes
it got better 'cause the staff was

the most experienced, and there was…

The staff had seen more.

It's like the three of us, sometimes
I'll describe to clients is, we saw

everything that happened at NCUA.

We were involved in the most crazy things.

So when we things, when we see things that
are less than crazy, we don't overreact.

And that can be an overreaction where you
have 15 15 doors or 15 findings when you

really only need to focus on these three.

So maybe that'll be the silver
lining, is that they'll use a

little bit more discretion on what
actually gets into these reports.

Todd, any thoughts on unsafe or
unsound or reputation risk to add here?

Miller: Reputation risk
came up very rarely.

Occasionally in a small town, you
did a stupid program or something.

But in my career, it had…

It was very rare for it to have
immediate impact on a credit union.

Yes, you could get a bad reputation
as an institution, and it could

affect your growth for a decade.

You would hear bad things sometimes
about credit unions as long as a

decade out when they did foolish
things that were known to the public.

But in the big scheme of things,
it didn't play into CAMEL ratings

or risk ratings very often.

treichel: Yeah.

Great point.

Great

Miller: point.

So it was just a rare thing.

And then the whole, and this NCUA
getting rid of its experienced

staff, this plays into it.

You mentioned the problem case
officers and folks like Steve

and I focusing on just the three
or four more important things.

That's an experience.

The younger examiners, less experienced
people, less experienced supervisors.

There is a quality control thing, so
supervisors should be controlling it, too.

But less experienced people,
they tend to err on the side of,

let's get everything in there.

It's a CYA type of move.

farrar: Yep.

Miller: And, it takes time and
experience to be comfortable to say,

"Let's set these other things aside and
fix these two or three things first."

And, NCUA's lost a lot of
experience, and it'll be interesting

to see how that plays out.

But, we've seen it with some of our
clients where there are 17, 18, 30 things

that they're supposed to deal with.

They're just not gonna be
able to deal with all of it.

And if I do these- There's
not enough hours in the

day

… treichel: And if I do these
three, it's not mathematically

impossible to do these four, right?

Yeah.

Incongruent reporting.

So this is we're getting
closer to a wrap here.

What it means for your credit union.

Succession and soft findings.

We've got share insurance fund framing.

Newer, newer to full CAMELS.

CU's only adopted the sixth component.

Yeah, that's not that big a deal here.

Compliance still bites.

Any thoughts here on this slide
on any of those four topics, guys?

farrar: I think we've touched on a
lot of it, but Todd and I can never

overemphasize the reliable reporting
issue, 'cause it was just a thing that

we- you just could never get past.

And it still comes up more
often than you would expect.

And that was always the,
our, the biggest headache.

And then your immediate fear is if I don't
know what's going on, I'm uncomfortable.

treichel: Yep.

Yeah, 'cause un- unreliable reporting
can lead to losses, can lead to

fraud, e- et cetera, et cetera.

Great point

I think to, to…

This goes into the whole safe- this
slide goes into the unsafe or unsound.

I think eventually NCUA's
gonna have to come up with a…

The- they'll approve this change,
and then there will be this gap on

safe and sound, and hopefully NCUA
will, and their new chair, if and

when he gets in, will define that.

Any thoughts on this slide, guys?

farrar: Essentially, the FTC's
definition of unsafe and unsound in

terms of if it's really defined by
case law will become basically the

standard that- the way point- Great

treichel: point.

farrar: Yeah

… treichel: through the

farrar: industry.

treichel: It'll bleed to credit unions.

Great point

And again, if you have thoughts on
what we said here, reach out to us.

If you have thoughts on what should or
shouldn't be in the proposal, you have

until August 17th to reply and provide
your comments to NCUA or the FFIEC

or wherever those comments should go.

It's outlined in the proposal, no doubt.

farrar: Yeah.

And they, they did have
specific, what is it?

It's 11 specific requests for comments
on questions that they have proposed, and

that's what you do when you're sending
out the first part when you're sending

out a notice and a request for comment.

That is essentially the fishing expedition
in the rule making, and then you do a

proposed rule and then final kind of rule.

So I imagine it would
follow the same process.

treichel: That's right … if you
want- y- I don't think you mentioned it

this time, but you were the architect
of the Risk-Based Capital Rule.

And like you s- you've said several
times, once they figure out you

know how to write a rule, they
have you write several others.

So you understand how that
mechanics of that all works.

All right, guys.

farrar: Okay.

treichel: Go ahead.

Go.

farrar: Yeah.

There's already … You can go on, and
you can see there's already a number

of, I think it was 20 yesterday.

treichel: Really?

I

farrar: didn't read them, but if
you really wanna find out what

people are really saying about
this, y- you can always look at the,

what comments they're getting in.

treichel: And were those
on on the NCUA website?

Is that where they're Google-

farrar: No, it links
through with, if you just,

treichel: Okay

… farrar: pull up just any
Google search off of it.

I think I ended up in it.

It's off of the Federal Register
site where you it, it has where

the comments g- get posted.

treichel: Very good.

Very good.

All right, guys, so Todd,
I'm gonna go to you.

Any final thoughts

Miller: on- Yeah

… treichel: CAMELS?

Miller: We only talked about the
management component rating, but the

capital markets specialist in me just
has to go look at, how they change the

sensitivity rating language in this.

We've always done podcasts for our, for
the whole exam solutions where we talk

about, hey, earnings should be weighed
much more r- than this whole NEV.

And you go look at all the component
things in the sensitivity, heavy emphasis

on earning, a little bit on market risk.

Let's just say NCUA supervisory
test as a risk rating measure is not

congruent with what this letter says.

treichel: Really?

Really?

Miller: as factors to
evaluate sensitivity.

treichel: That's that's fascinating.

Maybe, maybe that will
disappear in the longer term.

I know that the current executive
director, Larry Fazio was a

big push behind that NEV model
back when it was put to- put in

place to solve some real issues.

And of course, we've talked here about
how it's not as good as income simulation,

and it can create some issues, and
it's a little bit of rough justice.

But maybe the NEV test is something
that'll fall away as a positive because

the CAMELS is incongruent with it.

I like that take.

farrar: Yeah.

And I think just this whole n- notice a-
and request for comment it essentially

would be a good training tool for board
members to, if they've been around for

a while, and say to read because it's as
with some of the other stuff that's been

put out, it- it's got a lot of really
good basic information that m- that will

enhance the ability of board members to
certainly understand what's, what they're,

they should be doing and looking forward.

So I would say it's a, be a good
learning tool for board members

and staff, senior management staff.

treichel: Great point.

I'll put a link to it in the show notes.

Miller: I thought it, they
did well in writing it.

It follows the plain writing.

They shortened things up
down to just the meat.

They took out all the little flowery
language that regulators like to

use, like the size and complexity
and all this resiliency stuff.

It makes it an easier read
than what you had before.

And, they laid out, here's the
factors that we're gonna use

to evaluate each component.

And it says, "Examiners, you throw
in something else, you really

gotta justify those other things."

And like I said, in the big scheme
of things, I don't think people's

ratings are gonna change very much,
just those at the edge that we

talked about during the podcast.

When you're just right on the border,
you may end up with a different rating

under this if it comes to fruition.

treichel: Excellent.

Yep, great point.

All right, guys, this has
been a lot of fun as always.

Thank you for your time and your service.

And listeners, watchers, I wanna
thank you for listening or watching.

I hope you will do the same again soon.

This is Mark Trakel signing
off with flying colors