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This is Mark Treichel with another episode of With Flying Colors. And today I'm back with frequent guests and my team members at Credit Union Exam Solutions, Steve Farr and Todd Miller. Guys, how you doing this afternoon? It's hot here in Montana, just like the rest of the U. S. Yeah, we're hot and muggy. Yeah, hot and muggy here in Virginia, where I'm at today. Yeah. And if you believe in global warming, you say, gosh, it's hotter than normal.
And if you don't believe in global warming, you say, hey, it's just July. So I'm not going to pick which side of the camp I'm in, but those are the two camps. But yeah, it's hot. It's hot indeed. All right. And so intros for those folks who are not. Frequent listeners who might be new to the show. Let's have an introduction. We, let's go Todd Miller first today. I spent just a little bit over 34 years with NCA. I retired in July of 2021. I can break my time in the NCA down into three parts.
I spent basically a third of it as an examiner and a problem case officer, a third of it as a regional capital market specialist, and a third of it as a director of special auctions dealing, supervising problem case officers and regional capital market specialists. So between those items, a good part of my career was spent with what NCA would call troubled credit unions are large and complex credit unions. Very good. And Steve?
Yeah, I was 30 plus years at NCOA and break my career into two parts. The first 15 years were out in the field, predominantly as a problem case officer and mainly a West Coast based that Working with those troubled institutions. Then I went into the central office into the division of risk management where I got to work on just a variety of projects over the years. The enforcement manual, the corporate resolution was, it was a big one, the risk based liquidity facility.
Yeah, we all spent a lot of time dealing with. Troubled credit unions, whether it was director of special actions, problem, case officer, corporate resolution, writing the enforcement manual and it was a lot of fun doing that. We talk about that a lot here and it's a good that's a good fit for the conversation of our topic today. And this podcast will be called something like, so you're a code. So you're a camel code three. Now what?
And as we dive into this, Steve, I thought maybe you could give us some stats on recent trends in camel code threes, which, of course, come from which I've talked about here a lot come from NC ways share insurance briefing. But what can you share with us on what's going on in camel camels codes? Most recently? Yeah, the the trend isn't it's a short term trend. I just looked at your end 23 and then the 1st quarter and the actual camel threes number went from 776 at the end of the year.
To 760 report is of March. The assets went up from 160 billion to 177 billion. And I said, that would probably be one of the numbers that seemed pretty obvious and that we're seeing more bigger credit unions ended up with the camel threes. Yeah, that's very true. The quarter by quarter I've looked at this. Pretty much ever since leaving N. C. U. A. That briefing and two slides on the briefing.
The one of the ones you're reading from is one of my favorite ones to look at because it really reveals where things are going. And it's like the 10th quarter in a row when Camel threes have gone up. And the point you made. Is spot on that smaller credit unions, camel codes, there's not much change. It's the bigger codes going from ones and twos to threes.
And in more recently, maybe, and maybe this upcoming quarters, we'll see threes going to fours cause camel codes tend to move one, one grade at a time, although not always but it's those large credit unions that are driving the numbers right now. And you can see it in the stats and we've seen it in our conversations. When you're a code one life is good. NCUA may come see you once a year. They may not depending on your size when you're a code two, same kind of thing.
But when you're a code three life tends to change a little bit. Let's talk a little bit about how things change at NCU from N C's perspective on Camel code threes and how that might change for a credit union that's downgraded to a three.
I think you start out with what does a code three mean to MCUA and without reading their whole definition from the camel letter, there's a couple sentences in there that really inform MCUA supervision process, for code three, composite, They say credit unions in this group exhibit some degree of supervisory concern in one or more components. But then at the end of the definition, this is what really drives NCUA supervision process with code threes.
It says risk management practices may be less than satisfactory relative to the credit union size and complexity. And so when you get those things, it raises a supervisory concern. from NCOA's level, it heightens their supervision. They're trying to assess. They don't think it's going to fail at this point, but they're trying to assess. Are you willing and able to fix these issues?
And what they're trying to do is prevent an issue that is starting to go south from actually going south and crossing the border into an unacceptable level. Once you're a CAMEL 3, MCUA supervision goes up quite a bit, and actually MCUA, they publish their National Supervision Policy Manual, and their practices with respect to CAMEL 3 and CAMEL 4 credit unions are actually not redacted in this case.
There's lots of pieces of that supervision manual that might be helpful to credit unions that Okay. So you'll notice that it's a little bit more in depth in this section. The, A follow up exam once a year. So you're going to get two visits a year from your examiners. That second one is generally going to focus on the doors. There's some exceptions to that which we can talk about in a little bit. But the biggest thing is your time and effort in dealing with your examiners is going to increase.
So they're going to give you things to do and then they're going to be in your hair every six months. Making sure you're actually doing that. Very good. Steve. Anything you want to add to those comments? No, that's as fine as that's what the that's what the manual says. So that's what you can certainly expect them to try to achieve. Try to achieve. Yes, I've alluded here. Sometimes they may say they're going to come back that frequently, but their own reports show that the code threes.
Contacts, they tend to get done about 67 percent of the time. And those start dates used to be when you and I were doing exams guys long ago, it used to be end date to end date. They've given themselves a little bit of flexibility and correct me if I'm wrong. It's from end date to S to start date. So they just have to start the exam within six months. Do I have that right? You have that correct.
Okay. And the other thing I'll add from the definitions, the one sentence that always sticks in my mind that sometimes NCUA rarely NCUA raises, but when CEOs read it, they get frustrated. The code three definition of management includes a sentence that says management may be, management and board may be unwilling or unable to correct the problems that are present.
And sometimes when a CEO sees that sentence their hair will stand up on the back of their neck and NCA tends to downplay that side of it. But those are pretty chilling words for a code three, the first time they see it. And as you say, they show up twice as much to. twice as frequently to to assess their own risk. But that has a drag because it takes a lot of your time preparing, et cetera, et cetera. So what else your code three, what else do, what else can we share?
One of the things that are going to go with this is you'll get a document of resolution as a code three and documents of resolution have completion dates. And generally, and this is generally going to be true, they're going to set those completion dates to tie in with that next exam.
So you can expect to have completion dates and they're going to expect you to resolve problems within that 180 day period because they're going to want to come back and they're going to want to assess, have you corrected issues? Are you making significant progress?
So if you get a document or resolution, While examiners are supposed to be flexible in negotiating terms for those document resolutions and corrective actions and due dates, you might find your examiner a little bit inflexible about those due dates because they're going to want to put due dates that coincide with that next visit 180 days from now.
And that can be logical from the perspective of them wanting to be able to measure because in their systems, under the new merit system, if you have three document resolutions NCOA has to say it's finished or it's not. Log it off. They can write that it's substantially finished or finished, but in their systems, they now have the ability to track it, which may be why we're seeing them so much focus on that timeline.
And, thinking of a conversations we had where a credit union was asking, getting asked to stand up an enterprise risk management solution. Program from start to finish. The examiners in the meeting said, it'll take you two years to do this, but the let, but the time they gave him to it was linked to that next follow up, which doesn't seem logical. The method to that madness, is because they know they're coming in and they want to show that there's progress or not.
Yeah, there is one exception to that hundred and eighty days. And if you're a cardi gene that has significant record keeping errors or significant VSA violations, you will see them in 90 days. And that doesn't matter what your CAMEL code is, whether it's a 2 or a 3, you're not going to be a code 1 with significant record keeping errors, probably not a code 2, but maybe.
But for those two specific areas, significant VSA violations and significant record keeping problems, you can see an examiner every 90 days. Just for that record keeping issue and the BSA has a pretty low tolerance for record keeping problems. And the BSA is because of the link to the importance of that program, terrorist activity, money laundering, and they have an agreement with FinCEN saying that they will treat things in a particular way.
Either a document resolution or a letter of understanding, of course the record keeping problem, because they don't know if there's a risk to the fund. If you don't know what your balance sheet is, right? It's really that simple. I'm sure Todd and I shared this that we had no sympathy for when we came into a place and discovered record keeping problems. It was like, you got a record human problems, you're going to pay to get them fixed as quickly as possible.
And, that was 1 that that, that I just what didn't negotiate on that one. We got to find out what the numbers are. And so that I think that's really important. Yeah, zero tolerance on record keeping for sure. And we've seen some instances of that. In my conversations with NCA folks that they've seen that and when they do their briefings of camel codes, the board will often ask what is it that's triggering that and operational and accounting issues has come up on a couple of instances.
You got it. You got to get the basics down before you Focus on anything else in accounting. Accounting is the basic, they will beat you up on that for sure. You're managing your members money. You should know where it's all at. It's a fiduciary type thing. The other thing is when you have record keeping problems, it just opens the door to fraud and all kinds of other things.
Just even clerical mistakes, with ACHs and feds and returns, if you can't do record keeping, you can miss deadlines and cause losses just because of that. And just one other thing with the record keeping and the BSA violations, NCOA actually has separate tracking systems just for those two issues. And, supervisors get reports on that every single month. Here's our outstanding record keeping and BSA problem children. No, makes sense. Makes sense.
So if you're a code three in addition to the examination, you mentioned you'll get a document resolution. The likelihood of also getting what's called an RDL or a regional director letter is at or near 100%. I would say any thoughts on. On the concept of regional director letters and because sometimes our clients will get that and they'll be surprised that they got a letter. They had a good exit meeting. They said they're going to do everything.
And then lo and behold, they get a letter saying, Hey, you better take this seriously from the regional director. Any thoughts on regional director letters as it relates to code 3s. At the time of my retirement, at the time I retired, that was a standard practice in the western region. That regional director, you got a new code three, she was going to send you a letter.
I think part of that is, there's an expectation on the board when you get Problems related to a code three that the board is going to get involved and actively hold management accountable for resolving issues. And the board is expected to exercise appropriate oversight and that regional director letter is. The way for the regional director to tell the board, Hey, you need to pay attention. You need to take this seriously.
It's to support and emphasize the examiner's rating of a three that there are supervisory concerns here. There are weaknesses in your risk management systems and you need to get them corrected. There really shouldn't be anything surprising in that letter because it should, it's going to paraphrase what was in the exam. It's going to be drafted by the examiner who wrote the exam because they're going to have to follow the policy to issue it. It just it just kind of naturally follows.
And the other piece that follows with this is, depending on your asset sizes, the code three, you're probably going to fall under this whole monthly reporting to your examiner to you're going to be sending them financial statements, board minutes, board packages. Every month in most cases, if you're over 250 million, it's absolutely required.
It's optional in other cases, but almost every examiner supervisor, they're going to make their examiners pay attention to what's going on in all of their code three. So while policy requires that over 250 million, any code three can pretty much expect that there's going to be monthly reporting to your district examiner.
And we've seen that either placed in a document resolution or just asked for in the, in an email but the right place for that would be in the report to make sure that the board's aware that it needs to happen, correct? Since they went to merit, we seem to be seeing it in the report almost all the time, either in the overview or in the document or resolution section or in that RDL letter.
It was always optional for examiners, how they communicated that request to the credit, whether they just pick up the phone and say, from this point, start doing it, or they will just tell management that on site. But since they went to merit, it seems to be showing up in the report formally in most cases on our code threes. Got it. And federal charter versus state charter. Any thoughts on how that might influence being a code 3 if you're a state charter insured by NCUA?
For credit unions over 250 million, it doesn't change at all, whether you're a fiscal or a federal, and COA is still going to be involved in those follow ups. There is some flexibility given for those credit unions under 250 million out of state charter that can push that 180 days out to a little bit longer period with ARD approval.
Their policy allows for a waiver of those contacts in a state charter, even a federal, but that requires some paperwork, some ARD approvals, some regional director approvals. They have to say this party does not represent any risk to the share insurance fund, and I don't see many RDs actually signing that very often, unless they have a great deal of confidence in that state regulator.
And the same works for a we'll get into that when we talk about code four is in the next podcast, but there are other waivers that can happen that that while theoretically, they may be allowed, they're probably not happening that frequently. In a perfect world, a credit union is going to stay a code one or a code two, if they slip into a code three. NCOA is coming back in six months and I know the answer to this question, but I'm going to pose the answer or pose the question.
So you downgrade me to a code three, March of 2024. You're telling me you're going to come back in September, start the exam by the end of September, 2024. I have three document resolutions. The dates all come and go by that point in time. NCWA comes back September 30th, has a exam, two, three weeks in a follow up exam, two weeks in September. You get the report by the end of the year, maybe, hopefully and you have a conversation with your examiners. Here's the question. So that's the context.
Here's the question. When you come back for the follow up exam, Will you upgrade me? Possibly, but probably not. Possibly, but probably not. So it, it's not, it's like the, there, there's a waiver for that. It can be done. There's nothing that says NCUA cannot do it, but it's not really the norm. True statement.
It really depends on resources that examiner has to conduct the follow up, is that 2 people and they're just looking at the door, or do they get 2 or 3 other people and can they look at the door and look at all the findings and maybe look at your business plan if they have time and resources to make that follow up. Expand that scope beyond just the follow up on the door, then there's a chance of that upgrade. Let's say they do like a mini exam, 80 percent of an exam or 70%.
There's some number in there where if they have time and resources to look at things in depth, there's a chance that they will upgrade you if you're deserving of it. In most cases, though, they don't have those resources. They're focused just on that document or resolution. Maybe some of the findings and they're basically just going to say, Hey, we need to review these other areas at a full scope exam before we can upgrade you is they're going to be their response most of the time.
And what we're seeing with time report or the time it takes for MCUA to issue reports today. I think in most cases in the current era, they don't have the resources on a follow up to expand it. To the point where they can look at enough stuff to upgrade you, even if you're deserving of it. So that's why I said, probably not in the current environment. And I just did a little bit of math on that. So you come in, you get downgraded to a 3 in March.
They come say they're going to come back and start it in 6 months in a perfect world. Maybe they'd be done with that contact. They get you the report in 2 months. So you got 6, 6 months on another 2 months. So we're talking 14 months at that 14 month point. You're told you're not getting upgraded. Meaning they have to come back in another six months. So really when you get downgraded to a three, it means you're going to see him three times in 20 months. Yeah, probably. Probably.
You're the one, Mark, who reads NCUA's business plans in detail. We used to have this whole thing. You want to see, code threes and fours resolved in 24 months. Is that still part of their annual business plans and goals? I didn't read last year's that close. It used to be there though. Yeah, I think it is there. And and code fours was 12 or 15. 24 months, I think 24. Okay. I got a funny when we talk about code for us. I got a funny story for you on code for resolution from back in the day.
But yeah, it's I believe that's still out there. So their goal would be at that 3rd 1 right to have it upgraded. Perfect in all reality. And If things have gotten worse, that's when you start finding out that you you maybe went from a three to a four instead of the goal of going back to a two. All right, guys, any last thoughts on camel code threes? I think that points out the importance that door. That is kinda new because you became a code three is addressing that core problem?
Is that, that's, that is the goal is if you're new to a three and haven't been before, there should be an issue you all know is coming and that that door will fix what it is. 'cause sometimes you do it, but you don't get the results that were expected. And then it doesn't really fix the problem, but then that is the goal is to correct those problems really quickly. But so it doesn't escalate. Yeah, and you do what's needed in that door you get the results.
Might lead to another, it could lead to another door, but that doesn't necessarily. Mean that door means you're going to because a code 2 can have a door code 1 can have a door, but it doesn't mean that it's 100 percent done. The other thing for directors that are listening and maybe even for CEOs that are listening to as directors, if you get a code three in a door, you should have some type of tracking reporting system in place.
That your management team is making progress on resolving these doors. You're a CEO, chief operating officer type individual responsible for correcting of that door. You should be developing reports to let your board know that you are making progress on it. So it goes both ways. You should be demonstrating that we're resolving this door for our boards and as board members, you should be holding your management accountable for progress reports.
On those doors and holding your management accountable for addressing them. And if, even if NCOA doesn't ask for it formally, we've seen it asked for formally, we've seen them asked it when you send it to the board, put it in your board packet, et cetera. But that's a great point. Those establish the expectations, but then verify. Right. Very good guys. All right.
I appreciate you sharing your wisdom as it relates to camel code threes and next week we'll have a follow up to this which you might guess is now that you're a code for what does that mean? So thanks guys. Appreciate your time as always. Have a great day. You too. Listeners. I want to thank you for listening as always. Hope you'll listen again soon. This is Mark Treichel signing off with flying colors.
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