Hey, everyone, this is Mark Treichel with another episode of With Flying Colors. I am flying solo today, and I'm going to be talking a little bit about NCUA's budget. Not much, because people actually aren't interested in that as much as the trade associations are. But the budget did have a couple of interesting topics, one of which I'm going to highlight in this podcast.
And that is that they are changing or they are announcing that they are changing their policies on their examination cycle, which is something the trade groups have asked for some time. And specifically, they're going to make some changes to credit unions over 1 billion and less than 10 billion. There are roughly. 420 some credit unions that fit into that category.
And until recently, those credit unions were required to be examined annually and actually are right now because they have to finalize this, finalize it at their budget meeting in December, which is on Tuesday for a rare situation. It is on December 17th Tuesday, the N. C. A. Board meeting. So they will finalize their budget. And by the way, they announced these changes to the exam cycle in their public budget briefing. Sometimes they call it a hearing.
It's technically a briefing because the federal credit union was accurate. Has changed to say that they needed to do a briefing, and it's a public briefing where, staff presents their budget, which has already been pre cleared by the board chairman and discuss it. And then they invite people to speak and trade groups come. America's credit unions came. The West Coast credit union came, the defense council credit union came.
And I think there was another group that also came and gave presentations. They're speeches about the budget. Essentially, the budget's too high, costs should go down because mergers happen. That's essentially what the trade groups generally say. Now, in this instance, NCUA dropped something in there that, when I saw it, it caught my attention, going, wow, this might actually be some relief for credit unions.
And I think I'm going to call this podcast, what's, either, What's the Sound of One Hand Clapping, or Regulatory Theater. Haven't decided which one I'll use, Because they both have a special ring to what actually happened here. So what did happen or what is about to happen? Let me get to those details. So NCUA. At the budget briefing did a PowerPoint and the PowerPoint has a slide that I will have on my blog story relative to this and I'll post it on LinkedIn as well.
But they mentioned that they're going to make some changes to their exam cycle. Basically, if you're a code 3, a code 4, or a code 5 credit union, nothing changes NCUA. will do their exams. Their policy will be that they will do their exams in the same timelines. And that is for a code for code five. You're gonna have contacts every excuse me, you're gonna have contacts every 120 days. If you're code three every 180 days.
And that's from measured from the close of the last exam to the start of the next exam now where the changes are being proposed. And because they've been proposed again, they're going to be made. They would not propose them if they were not going to do them. This is for all credit unions between a billion. And 10 billion, if you're over, if you're over 10 billion, you're going to get an examination that starts between 8 and 12 months. And that's the too big to fail theory, right?
Credit unions of that size would impact the insurance fund so dramatically that NCUA needs to be in there once every calendar year. Now they don't have to finish the exam every calendar year, which is what it was required long ago, back before Rick Metzger as NCUA Board Chairman made some changes that allowed it to be measured based on start date. But where the theoretically big meat of the change is in credit unions between a billion. And 10 billion.
And currently, those credit unions are in that same category. They need to have exams done between an 8 and 12 month period. Under the proposal, if you're in that category, 1 billion to 10 billion, and you are a CAMEL credit union of a code 1 or 2, and when I say CAMEL, CAMELs, Camel credit union of one or two. That means the C. A. M. E. L. And S. All have to be a one or two.
So if you have a three in any of those categories, say earnings or liquidity or sensitivity, you're going to be under the 8 to 12 month cycle. Every component must be a one or two. And then also they need to have had the same CEO that was in place in the last exam. So if your exam your file, not a follow up exam, your full exam. I'm taking this to me. Your code 10 exam as NCUA would call it in their systems.
If that was as of June of last year, and the same CEO is there and at that contact, that examination contact, everything was a 1 or a 2, you are eligible to instead of having an 8 to 12 month cycle, you're going to have a 12 to 16 month cycle. And then credit unions below a billion, they're actually going the other direction. They're taking away a little bit of, a little bit of relief.
Under the current policy, those credit unions have a cycle of 14 to 20 months, and they're proposing changing that to 14 to 18 months. So they trimmed two months off there. They added four months on those well run credit unions for the lack of a better term where they, that are between the 1 billion and the 10 billion. They actually then went on to say that there are exam hour savings. Of doing this of 21, 000 hours. I think that's the number.
Yes. 21, 000 hours in a year of examination time saved. Now I'm going to explain why that's wrong based on the other information that they talk about. And based on the role I used to have at N. C. U. A. where I would participate in these budgets coming up. And then the budget's being approved. But N. C. U. A. In the explanation talks about the fact that there are 10 examiner positions from the field. Those would be the regions that are going away.
And essentially, it's 9 examiners and 1 supervisory examiner. You could argue that supervisory examiner isn't productive time and it's not in the way that they do math, but it's easier to track to their erroneous number if you include it in the math. So they mentioned 10 examiner positions going away. To figure out how they got to that 21, 000 hours. You take those 10 examiners times 52 weeks times 40 hours a week.
And so any one person, if they work 52 weeks, they will have 52 times 40 hours is 2080 hours per full time equivalent per person. So 2080 times 10 is 20, 800 hours. So they rounded up when they gave the soundbite to 21, 000 hours. But those are not all exam hours.
So what happens is NCUA, essentially, when they budget, unless they've changed this, and if they've changed it, they've changed it to make their individual employee less productive in their assumptions, as opposed to more productive, because they're always adding things that are non productive hours, like going to DEI events, going to training events.
But I digress, and What happens is the NCUA books every hour that an examiner does, and they book it to your credit union, or they book it to annual leave, or they book it to sick leave, or they book it to training, or they book it to office time, or they book it to a training event for the software skills that they have in place, like the DEI that I mentioned, but when you get to the end of all that math, Each examiner only contributes about 1, 000 hours of exam time.
In some years, it might be 1, 020. In some years, it might be 9, 950, but that's what they budget to. And remember, this is what we're talking about. We're talking about their budget. So I did a little bit of math. And if you take. If you take what they talked about there and you look at those credit unions, so there's roughly 420 credit unions that fall into that category. So first you adjust, it's not 20, 000 hours, as I mentioned.
It's about 10, 000. But if you take a look at how many credit unions fall into that category, remember that I've talked about here frequently how NCUA has been showing that code three, fours and five exams are going those credit unions coded three, fours and fives are going up. And the last time they measured it was in September, and they basically said roughly 10 percent of all deposits. Are in 10 percent of all deposits are in code three, fours and fives.
We want to deduct from those 420 some odd credit unions, 10 percent of the credit unions, but there are also credit unions that we need to deduct that might have a code 3 in any 1 of those categories, C, A, M, L, E, or S, or a 4, right? Or maybe even they have 2 3s, but they're still coded an overall 2.
Those credit unions need to come out of the pool that might have expanded hours and, oh, by the way you need to take out credit unions that have a new CEO and there's just turnover, people retire, people get fired people get demoted mergers happen, et cetera, et cetera. The reality is when you start with that 420 and just for rough justice I'm going to deduct 20 percent of those 420.
So you get down to After doing that math, you get down to about 336 credit unions that in any 1 year would be eligible for an examination that would not be required to be done in that 12 month period. And it would be under the new 12 to 16. Category. So if you take 10, 000 hours and divide it by 336, that's 29. 76 hours.
I don't like using the decimal points that long because these are, there's a lot of assumptions in these numbers, other than the fact that there's only 1000 hours of productive time. But some of these numbers are known and some of these numbers are unknown, but. 30 hours of productive time, if they're only getting 20 hours a week out of that's roughly an examiner for a week and a half. But, nobody's average, right?
Some credit unions are still going to get examined within 12 months, and that might be because the examiner's in the same town as you. That happens. The reality is, if they will have in town work, they want to have in town work. It's nuanced a little bit because of off site work that NCUA does. But theoretically, the exam for some credit unions could sneak or change from a 12 month cycle to a 16 month cycle.
Now, that assumes that this was an actual change that was be putting in place because in the reality of all this, I don't think that's what's happening. This is more like the airline industry. Notoriously being late, having flights come late and the statistics would be reported that this airline was only on time. This percentage and this airline was only online on time. That that percentage and with a stroke of a pen, those credit those airlines. we're flying far more timely.
How did they do that? They padded their numbers. They added about 30 minutes to every flight so that, of course, everybody was on time because we're now saying that being on late is being on time and they build it into the budget.
And I believe that's exactly what's happening here at N. C. U. A. And the math proves it, and their own words prove it, because, and I've mentioned it here I've mentioned it in client conversations, credit union conversations, I've mentioned it here on several podcasts, but last January, NCUA approved their operating plan, and that operating plan has goals in it.
And board member Kyle Hauptman, who, by the way, will likely become NCUA board chairman in January with a stroke of a pen, another stroke of a pen when Trump does that and makes other changes, but NCUA in January of 2024 approved their operating plan. And in that discussion, board member Hauptman, said that he was disappointed that they were only doing their code fours on time, which was the 120 days I mentioned 80 percent of the time.
So One out of every five code fours wasn't being done timely. And they also mentioned that their code threes were not being done timely. And only 67 percent of the code threes were being done timely, meaning one out of every three wasn't done timely. So if code fours, which are the most risk to the fund, we're only done on time, 80 percent and code threes, which are the next biggest category of of risk.
And by the way, I'm skipping fives because no one's ever a five, but By the time they code you a five, they take you over, they liquidate you. So fives really don't happen. So fours are the worst, threes are the second, second worst, and those were only completed 67 percent of the time, on time. So what do you think? You think code ones and twos are magically all done on time right now?
No, because they're going to do the ones on time that have the most risk, meaning that code ones and code twos have already slipped, meaning that this chain that changed that NC way, in my opinion, Is proposing and will make is only going to change the policy so that it matches what is actually happening, which is how I get to this being regulatory theater. Now it's great soundbites because they can tell almost said CUNA. They can tell America's credit unions.
They can tell the trade groups, look, we listen, we're changing our policy. The reality is the practice was that was what they were doing. They can't get their exams done on time and they're changing their policy so that they're consistent with that. But the slap to the regions is and we're taking 10 bodies away.
So those people are going to go away, which means they're going to still have challenges coming up and meeting these times, which means there will be a continued elongation because they just don't have the staff and they're not efficient enough. They don't have the experience examiners enough, in my opinion, to get some of these examinations done. So that's. In my mind, the reality of what's happening, and by the way, it's very similar. I gave the airline industry.
It's very similar to a credit union. Have a having a concentration risk policy and then hitting, let's say it's X percent of net worth will only be 300 percent of net worth will only be in commercial lending and you're at 275 and you're at 295 and then you get some really good loan opportunities and you go to 315 and you realize you went over your policy. And then you take it to the board and you change it. NCUA will criticize you if you do that.
They will give you document resolutions if you do that. And oh, by the way I think they just did that for their exonic phone exam cycle. So again, bring it in line with what the reality is. Now that's pretty much all I want to chat about relative to the budget in this podcast. There are a couple other topics I may hit it. I will at least hit in a blog.
They made some changes with some other positions that they're adding and oh, by the way, those positions are like an office of the secretary and behind the scenes types positions as opposed to mission critical positions, which are the examiner positions there they're taking from those positions. Positions and they're putting them into the central office and positions that have 0 percent productivity.
And I don't say they don't get things done that are productive for the good of the credit union movement. What I'm saying is they are not productive as it relates specifically to exam work. So they took bodies and budget from that category. And that is contributing to exams and they moved them over those 10 plus 4 others that they're adding for example, they're adding a position on climate and oh, by the way, I would suspect that once Kyle Houtman.
Takes over that climate position doesn't ever get filled, even though it will be in the buzz it because the chairman will make sure, in my opinion, that doesn't happen. That's how these things work when there's a change of presidents. Elections have consequences. That's it in a nutshell.
I hope you had a wonderful Thanksgiving, and I'll have a little bit more coming on some of these topics, depending on what happens at the actual budget hearing when they approve it skewing at the budget hearing the budget. Approval by the board. on December 17th. But what happens is most for the most part, most of these numbers are all cooked.
If they present it, they may know that they have a little fat here and a little fat there, and they might make a tweak to it to show that they listen to the industry. And I expect that the budget will be mostly approved as already presented that these changes will occur, but all they are is the reality is that this is what's happening. So they might as well spin it and get a little bit of credit while they're stealing some bodies from productive time and putting it over an unproductive time.
And as Van Morrison once said, that's what's the sound of one hand clapping? That's a little bit what we have here on this cycle. So It at first appeared like it was an exciting change and the reality is it's not much of anything as far as relief goes for credit unions. All right, that's it. This is Mark Treichel signing off with Flying Colors.