Credit Union Exam Solutions Presents With Flying Colors

Markoverdub: Hey everyone, this
is Mark Treichel with another

episode of With Flying Colors.

I'm excited today to be
here with Bill Peyton.

Bill, how you doing today?

Doing

Bill: great, Mark.

Thanks for having me.

Markoverdub: You got it.

Yeah, you and I have chatted a little
bit discovered each other, I think

either over email or on LinkedIn.

But, I know that you've got a
LinkedIn presence and you're the

vice president, a vice president
at Aloia Federal Credit Union.

And you and I chat a little bit
about liquidity in some of our

sidebar conversations on LinkedIn.

I know you also do some
things with subordinated debt.

And a few other areas.

And I'm looking forward to chatting
with you today about the interesting

year we've had in 2023 in credit unions.

How does that sound?

Bill: It sounds great.

And it has been interesting for

Markoverdub: sure.

Yeah, it sure has.

And, anything else about
a lawyer on the front end?

Any, anything from your Your resume you
want to highlight in case my viewers

don't aren't connected with the lawyer.

I know a lawyer serves what about
28, 30 percent of the credit union.

So some of them are probably well aware of
you, but any other things I should hide,

we should highlight on the front end here.

Yeah,

Bill: just, we're a corporate
credit union, so we're a

credit union for credit unions.

Like you said, we serve somewhere between
25 and 30 percent of the credit unions,

depending upon how many merged that year.

And we do we serve them through
the capital markets initiatives,

which we'll talk about today, as
well as the payments initiatives.

That's a, it's a big piece going on this
year and all through our technology.

Yeah, we're we're excited.

Loy is doing great things
for its credit unions.

We support, our tagline is.

We support credit

Markoverdub: union success.

I like it.

I like it.

We support credit union success.

I think I think 2024 is going to be
interesting in that regard because of some

of the, challenges we've had looking back
and looking forward, but so let's chat a

little bit about overall liquidity topics.

What have you seen in credit unions and
the credit unions and the clients that

you have in 2023 as it relates to look
at liquidity challenges, obviously.

We had the banks that failed
and the aftermath of that.

But even before that, there were some
challenges liquidity wise and credit.

What is it that you've seen in 2023 that.

That you'd like to chat about here today.

Yeah, we're,

Bill: 2023 was interesting
is that I say is the year we

collectively lost our minds.

We're really back to pre pandemic levels.

And I think we're so quick to forget.

Just even recent history.

And a lot of what I do is talk to credit
unions throughout the country and of

course there's issues, and so during
the pandemic, all that stimulus money

came in and it was really good timing.

And credit unions had to do, they
had all this money and they had to

figure out what to do with it, but
we're back from an aggregate level.

We're really, high levels,
historically high levels.

we're back to where we were right
before the pandemic happened.

If you just look at the overall numbers,
but if you take like a deeper dive into

that, those overall numbers are really
spurred on by the large credit unions,

if you dig into, the different asset
groups different asset sizes, I should

say, mid and small size credit unions.

Do have a little bit of money, right?

They're not feeling the same pressure
that the largest credit unions are.

Now, I don't want to say that
they're not feeling pressure.

They are, they have no deposits,
they're fighting the deposit battle.

They have to pay up for, their deposits
and, they continue to see high levels

of loan volume, but in general, it's
probably not as bad as maybe You know,

the headlines say, it doesn't mean that,
the top 20 largest credit unions aren't

seeing really heightened liquidity.

They are, but they're in, they're
really driving the overall numbers.

If you took a deeper
dive, it's not that bad.

Now I'll say this.

I was chatting with a credit union was
maybe 200 million and they were telling me

that they were having a liquidity issue.

said, okay what's your
loan to share ratio?

And they said, 60%.

It's okay it doesn't sound like
a liquidity issue to me, 60%.

And I said historically, we run at 50%.

And so we're up, that's
20%, over, what we're up.

And we're just not used to that.

We like to be at 50%.

Okay that's a different problem.

But I would say liquidity really
isn't a major issue for you're

running a little bit higher.

And so That's probably the same.

If we were to just have that conversation
with most credit unions, regardless of

size across the board, it's probably
the same answer we're going to get.

They're feeling a pinch,
but probably not that bad.

No, a couple of very large ones.

Not withstanding, right?

That's a different story.

Markoverdub: Sure.

It's a function of, okay, you got six,
you were normally at 50 percent loan

to assets, we're now at 60%, and what
did they do with that other 30 or 40

percent during the last five years?

Did they go long with investments,
or did they keep it short?

And how do they compare, if you
rack and stack them that way?

But it's good that they're Concerned
about the liquidity side of things,

even if it's that they don't have
upside down investments and didn't

go along and they're just wishing
they had a little bit more cash.

It's good that they're thinking about
it because NCA clearly is hitting it.

And hitting it hard in nearly every
exam, regardless of, what asset size.

So

Bill: I've been doing this for going
on 18 years now, and she will always

hit it, has always said liquidity.

It's always important.

It's never not going to be important.

Even during the COVID years, they
hit it right because, Hey, when

is the money going to come out?

Those things.

Yeah it's always going to be
at the forefront of the NCOA's

mind and should always be at the
forefront of credit union's mind.

It's pretty good job security, from
from that perspective, I say that,

knocking on wood, but it's fun to
be in the liquidity space because

there's always something right.

And I think more than anything, 2023, to.

Your point, right?

Credit unions historically stay
short in their investments.

Again, there's some credit unions
that have gone long, things of that

nature, which, which have hurt.

But in general, credit unions do a really
good job of managing their liquidity.

Comparatively they stay short.

Sometimes that hurts their
net income, but that's okay.

It's better for the liquidity.

And so again, I think credit unions
are a little bit better off than maybe

even they'll say, if you get them
off to the side and really have a, a

heart to heart with them, they might
say, it's not all that bad it ain't

great, but it's, it's not where it
wasn't, March of 2023, when we thought

the world was ending and SVB was, was
failing and all those banks are failing.

Yeah, it's tight, but

Markoverdub: we will get through this.

And along those lines, I saw I
haven't read it yet, but I saw another

podcast that was talking about an O.

C.

guidance on what their focus is
going to be on in 2024 and N.

C.

U.

A.

comes out with that mid
January for credit unions.

But the teaser on the podcast that I wanna
listen to and I wanna re read the OCC

report basically said they're, they've
shifted their top concern from liquidity

to asset quality and delinquency.

So that's a shift in banks.

I'm very curious to see, NCA has
talked about that, and N NCAA's

chairman has talked about loan
quality and concerns there.

The, in, the trends in that.

While the numbers collectively are not
bad, the trends have been going in the

wrong way, which isn't really a surprise.

I'm thinking, I'm curious
to see what OCC has to say.

I'm looking forward to see what NCOA has
to say in that regard, which kind of,

gets us to a follow up question to that.

So 2023, we talked about
what you've seen there.

So what do you, so from where we're at,
where do you see, what do you see on

the vision for 2024 for credit unions?

Said another way, where
do you think we're going?

In that regard, and either liquidity
or anything else on your radar.

Yeah, so

Bill: I think liquidity
will normalize a bit.

I think it's going to be up right.

I think I don't think we're going
to see, an average loan to share

ratio at 70 percent or 68 percent
whatever it was in 2020 or 2021.

I forget what number it was,
but it was down significantly.

But I do think, we'll get some
ease from the liquidity standpoint.

One of the great things
that happened in 2023, 2023.

Is more and more credit
unions got creative, right?

In terms of how they they get access to
liquidity and manage their balance sheet.

And the main thing that comes to
mind is securitizations, right?

And that's a hot topic seemingly every
month or every other month, new credit

union will come out with a securitization.

And I think there's been nine
of them or 10 of them in a

recent industry publication.

And they talked about how they expect more
to come and we're seeing the same thing.

, but it's when times are tough,
ingenuity and creativity comes right.

And I think we're seeing that in 2023.

So securitizations, I think
more and more credit unions

will continue to go that route.

I think more credit unions will
continue to do interesting things.

There is two credit unions in Texas.

They were doing a deposit swap and that
became a real big thing for a while.

I don't know how, if that will continue
to be of importance to credit unions.

But I just highlight those
things to say credit unions

will continue to get creative.

As they need to manage your
money in their balance sheet.

And right now, so what we're talking
about right now, there's going to be a

new creative solution that some credit
unions will be bringing to the table

in 2024 that we don't even know about.

And I think more than anything over the
last 3, 4, 5 years, we've seen some real

creativity across the whole board and
I expect that to continue to happen.

So I expect more credit
unions to issue securities.

Or should go through the
securitization process.

I think more and more credit
unions will look for outlets to

sell some of their assets as they
continue to originate loans, right?

I'm excited for I think
it's great for the industry.

It's very intriguing.

It's, it, and it can only
be good things for us

Markoverdub: for down the line.

Yeah, those are it's interesting.

I've got.

I've had some conversations with the,
with a couple of credit unions that

are now into securitization and It's
not it's not super simple to do it.

You've got to have a lot
of bandwidth to do it.

And, there's groups out there
that can help you with that.

Is that something that a lawyer
particularly is involved with, or is that

something that you guys can assist people
with or point them in the right direction?

Bill: Sure.

Yeah.

So we were fairly plugged in
within the industry, right?

So a lawyer is working on I would say a
more scalable program for securitizations.

So some of the big list of getting
into securitization is right.

You have to have your data.

Correct?

You talk to anybody involved with that.

That could mean a lot of different things.

But ultimately, at the end of the
day, you have to be able to pull

your data from your systems correctly
on time to report to investors.

So when you issue a securitization
and you're dealing with, the SEC at

that point so it can be a little bit
more, more of a constraint the cost

associated with securitizations is
massive for lack of a better term.

And it's a great tool.

It's an incredible tool for
a handful of credit unions.

And so I'll say this, I talked
to a 300 million credit union.

Last week about this because they were
interested in, Hey, we hear about this.

We should, we want to
sell like securitization.

And I had to take, 30 minutes
just to give them a high level

overview of this is what it entails.

And these are the costs 300 million
credit union probably shouldn't

be doing a securitization.

And there, there's a lot that
goes into that, but that doesn't

mean that there isn't a creative
solution that we can create.

That will allow for more
credit unions to access that.

And that's what we're
looking at right now.

We don't have a solution ready to
come in and say, Hey, give me a call.

But that is something we are
actively looking at and working on.

But we're pretty plugged in
with most of the players.

And if you're interested in it now and
you want to learn more, give me a call.

I'll tell you all the players
who's involved right now.

I'll be happy to introduce you to them.

And we can, we can educate
on that perspective as well.

But yeah, securitization is what will
continue to be that and as more and

more credit unions do it, they'll
talk to one another, they'll share

good information with one another.

So every new credit union that
comes along that does it, it'll be

an easier lift for the next credit.

That's how those things

Markoverdub: work.

That's the beauty of how credit
unions are truly cooperative, right?

So they share that wisdom.

And then as you're talking through
that, I'm thinking maybe down the

road this sounds like a credit union
service organization or QSO that,

that might be able to help people
pool and share the costs potentially.

So there's,

Bill: There's something there.

We'll figure somebody will figure it out.

Markoverdub: There's that.

Yeah, somebody will figure it out.

There's a lot of smart people
out there that that, and that,

and like you said, on a crisis,

new ideas are born.

As everybody was doing the loan
participations for so long and then

the tide went out and the liquidity
tightened up that wasn't there and it

made people a little bit tighter and
and the securitization is a good option.

Now you mentioned deposit swaps.

When I hear that, is that the
type of scenario where you can.

Double the amount of insurance
because you're sweeping it over

to another institution or is it
something different than that?

Bill: I don't want to apply it on
that just because I'm not an expert.

I just remember reading about it and
thinking, wow, this is really cool.

And I've heard of other ways around
how credit unions are trying to get

extra insurance and, or trying to skirt
where they're taking in, I don't know,

a million dollars and then they're
flowing off, 750, 000 to keep it.

And I, I don't know if those are,
if that's legit, so I don't want

to give anybody bad advice here.

Deposits are not my cup of tea.

That being said, I thought
it was super interesting.

And so I just want to, I like that.

Go, Hey, Freddy's are going to do
interesting things and they're going

to continue to do interesting things.

Cause they have

Markoverdub: to, cause they have to.

Yeah, that's right.

Very good.

Another thing that in the long term
potentially could impact credit unions,

banks life insurance companies is the
recent 100 year report from the F.

H.

F.

A.

on the federal home loan
bank system and the whole.

role that they play.

I know that I interviewed Ryan
Donovan, who's the head of

the the trade associations for
the federal home loan banks.

And there's acts that would
require acts of Congress.

There's acts that would require
regulation changes by the FHFA.

And then there's guidance that they
could put out, but any thoughts on

what you've read relative to that
whole arena and how things, how.

How a lawyer works with credit
unions versus federal home loan

banks or with or any Intel there
or you have on that whole arena.

Yeah, so

Bill: like the FHLB, a
lawyer is a lender, right?

In that regard.

So all your corporates, all the
corporates, I think there's.

nine or 11 of us at this point.

But all of us are lenders, right?

And we're really an
aggregator of deposits.

And that's why we were created.

And we were the, to my knowledge, I
believe we were the first QSO, right?

Like corporates were the first QSO,
they were kicked out of banks, and to go

access the Fed and then provide liquidity.

So to this day that we still hold
those two truths, we just do those

things a little bit differently.

So just like the FHLB, we are a lender.

What I would say is we are a lender
basically on a day to day perspective.

We can provide term lending and we
do and I think it's a great option.

We have competitive
rates most of the time.

But we're not a federally guaranteed,
company like the Federal Home Loan Bank.

So I'll, credit unions will say my,
my rate is much lower at the FHLB.

That's true because, the cost
of funds is essentially zero.

And so to say all that, so a lawyer
is a lender and that's one of our

main components of what we do.

We do it in a different way in general.

We do it on a day to day basis.

So if you need.

If you can't hit payroll or a
large deposit came out and, and you

have an investment coming in the
next week or two, you're probably

going to borrow from a corporate.

It's just tends to be a little bit easier.

FHLBs, from what I can see, generally,
that's a little bit more of your

Your planned borrowing, right?

You need money for X amount of time.

You're going to go to FHLB.

You're going to do that, or you're going
to take advantage of maybe some down

rates at the FHLB and some up rates and
then arbitrage opportunity elsewhere.

That was a big thing for two
years that credit unions did.

All that to say credit unions typically
don't use the FHLB as an emergency source

of liquidity, which if you look at that,
the hundred year report, which you're

referencing, and all the stuff that
happened with SVB and all the other banks,

they were using that as an emergency.

The FHLB system as an emergency source.

So I do think that there will
be some changes in how financial

institutions can borrow from the FHLB.

I don't know what that's going to be.

And regardless, I don't believe how credit
unions access the FHLB is the same way

is really what makes the FHFA worried
that being said, they are, they're a

community financial depository, right?

The likely are going to,
there's going to be some.

sOme instance where whatever is changed
through the FHA, it's going to play a part

in how the credit unions access to FHLB.

What that is, I don't know.

I hope it's not much, but I
am anticipating at some point,

something's going to change.

And, who knows what that is.

Maybe, they'll restrict
borrowings in some way.

I've heard, and I didn't listen to
Ryan's podcast, but maybe I've heard

along the lines of, they want the FHLB
to go back to its original form, which

was basically just for mortgage lending.

That would have drastic impact on
the industry if they did something

of that nature, which would put
more pressure on the corporates

to be an even greater liquidity

Markoverdub: provider.

Yeah, that's a theme of
that report for sure.

So I think, to me, the takeaway
is it's good to have options.

Life is about maintaining options and
having a good relationship with the

corporate, having a relationship with
the federal home loan bank, the Fed,

if, your asset size allows for it, the
CLF even, it's good to have options.

And and of course the corporates
being part of the cooperative

system are always a great one to
have in your toolbox for sure.

Bill: Sure.

Yeah, the CLF is something that I
don't think enough credit unions

look at, if I were to sit here on a
soapbox, I would say I would seriously,

furiously suggest looking at it.

Markoverdub: I know that, yeah, I
know NCOA would agree with you and

it's always on the list to get a
little bit of regulatory change and

small credit unions have some more
liquidity challenges as that way.

That whole system is set up.

And I know the corporates have
covered for the small credit unions.

In some of the crises, these
are the past and recently.

Agree with you that, CLF is a good
thing to check out and see if it makes

sense for the individual credit unions.

I don't recall that non member deposits
have talked about non member deposits yet.

I know that they play a role.

Is that something that Aloia assists with?

Or is that just a trend that you've
seen in credit unions out there?

Any thoughts on non member deposits
and how credit unions are using, how

credit unions are utilizing non member
deposits as part of their liquidity tools?

Bill: Yeah.

It's something that a lawyer assists with.

We are an owner and a QSO
primary financial, which, they

have the simply CD program.

It is a massive piece of
the liquidity toolkit.

And one of the real cool things
that we've seen, and this will

be, going into your question 10
minutes ago or five minutes ago.

What do you see on the horizon?

I see more assets.

of the system.

And r they have allowed this ye bit last
year was credit non member deposits who m

To be able to hit the DTC market,
which effectively allows them to go

get other institutional investors
in those non member deposits.

And, I've talked to a lot of
Non credit union investors

over the last year and a half.

Credit unions are wonderful for
other institutional investors.

They hit the ESG threshold that
that investors are looking for.

So if you're a credit union, specifically
low income, low income designated

and you do not have, you're not set
up yet to access the DTC market.

It's a great opportunity for
you to to go and do that.

It's exciting in a couple
of pieces of paper, right?

But now you're able to access this huge
market of institutional investors and

not just other credit unions, right?

Markoverdub: And and DTC NCOA
itself, we were always really good

at acronyms, but if someone doesn't
know what DTC stands for, could you

Bill: Yeah, it's depository trust company.

Ultimately it's just
a way it's an acronym.

That's the company that
basically puts the QSIP on it.

Again, maybe I'm messing this up, but
I believe it's the one that puts the

QSIP on it and allows them to go and
access the other institutional investors.

Markoverdub: Got it.

Got it.

Makes sense.

I should know

Bill: more about that.

I had a little

Markoverdub: homework for me after this.

There you go.

There's always, that's the sharpening
the saw, the continual learning,

learning that that those those of
us that that love this industry,

there's always something to learn.

That's for sure.

Yep.

One of the challenges I mentioned in
2023, there are a handful of credit

unions out there that, That reached
for yield as it related to investments.

And, you gave an example
of a credit union.

That's normally at 50 percent loan
to assets and they're feeling a

little tight because they're at 60.

There are other credit unions that
that didn't and there's banks, quite

frankly, a lot of banks too, that
maybe where it's a little slow at

pricing their loans during 2023.

and especially if they maybe did
some, they had the parameters

set with, their their loans, they
did indirect loans, et cetera.

And they had them priced and they were a
little slower to change and move them up.

And then they booked a little bit, their
loan to assets, let's say went from 75 to

90 before they could turn the spigot off.

And then, delinquencies are
spiking up a little bit.

And those loans aren't were priced at a.

For a market that was
200 basis points ago.

Any thoughts relative to 2024 how
people should be approaching loan

pricing in conjunction with the fact
that they might be, you said they're

back generally where they were
coming into COVID liquidity wise.

Any thoughts on that arena
from what you've seen and

what we might expect in 2024?

Yeah, one

Bill: thing that I think more and
more credit unions are getting attuned

to is Liquidity management really
is starting at the loan pricing.

Like it's starting at loan origination.

And to your point, Mark, credit unions
were a little slow on doing that.

And those that were in tune with
the market because liquidity loan

sales, whether it's participation or
securitization were a piece of their

liquidity management toolkit, they had
to reprice basically every day, which is.

A very smart way to go about doing things.

More credit unions, regardless
of size, are repricing.

Their loans and being a little
bit more competitive on a

regular basis, which is great.

So I, you know My advice to any credit
union is to price competitively and

I get some pushback with that from
credit unions rightfully so which is

hey We're here to serve our membership.

And if that means giving a car loan at 2.

99 we're doing the best we can and I
would say you are and that's great And

if your balance sheet can handle a 2.

99 car loan for however long it's
going to stay on, because it's

probably not going to, reprice or get
sold off or anything of that nature.

Great.

Continue to serve your membership.

You're doing exactly what
you're supposed to be doing.

But if you need to sell loans
at any time, you need to

understand where that market is.

And so the best thing to do is follow
those markets and the loan sale market.

Can follow, different
benchmarks across the board.

The easiest way to do it is to just
understand where the treasury market

is and price somewhere around that
for your consumer loans, right?

Mortgage loans are going
to be something different.

Commercial loans are going
to be something different.

So wherever your benchmark is on your
loans that you need to have that make

sure you're just you're following those
and you can price your loans accordingly

as for anybody who's sitting on loans that
are quote unquote underwater right now.

tHat's a tough conversation.

Does it make sense for you
to sell loans at a loss?

At what loss does that
make you make sense?

That is a conversation we have
with credit unions every day.

And one that we'll continue to have
and sometimes it makes sense, right?

You can take that those, that
money, you can pay off some high,

higher debt you can reinvest it
and another type of, investment.

You can make new loans
at market rates, right?

So you have to figure out what
the best is going to be for you,

or you just sit on them, right?

Most credit unions don't
like taking losses ever.

Most of the time they just sit on them.

Markoverdub: Conversation to have and that
might not, it might be the right decision.

It might not be the right decision, but
it's easy to, it's like when you buy a

stock and it goes down and you want to
wait for it to get back to the price

you paid for it and it might never.

Sure.

But also that's the beauty of.

Liquidity, right?

Liquidity, you can manage your way
through it as long as your asset quality

holds, if the, if you bought triple
a treasuries that are just upside

down because you went a little bit
long, if you have the ability to hold

that, you'll get them paid back fully.

And if you have the ability to hold
those car loans they'll do the same, that

doesn't mean repositioning might make
sense, like you said, cause you can get

the money out earning at a higher rate.

And that's a lot of math
that goes behind that.

I do know that N.

C.

U.

A.

and I, I've had conversations directly,
with some of the regional directors that

they've told credit unions and they've
told their staff if somebody finds himself

in that position, and they want to purge
a little bit of risk, which results in

their net worth coming down a little bit.

Because it positions them better for the
long term, that NCUA, is going to look

very positively at a approach that that
looks at it in that light and is measured.

But it is hard sometimes for people
to, say, Hey, I took a loss on this and

they'd rather just let it ride at times.

Bill: Sure.

Yeah it's difficult.

And that's the conversation that
each credit union must have.

Amongst themselves at the management
level could be even at a board

level in conjunction, I would
say this in conjunction with

your examiner not a bad thing.

If you can do that too, right?

At least let them know that's coming.

If that's a decision that
you are thinking about.

Yeah, those are tough conversations.

And those are done at an
individual credit union level.

I would never say what's good
for one is good for everybody.

Markoverdub: Sure.

Absolutely.

Absolutely.

Billy, this is this has been
an enjoyable conversation.

I'm sure there's a question perhaps that
I should have asked you that I didn't.

Is there anything else you'd
like to highlight here as

we wrap up our chat today?

No,

Bill: I think I think we're good.

The quicker we can get off record and
start talking college basketball again.

That's right.

Markoverdub: Yeah.

Yeah.

We had a good chat about college
basketball college football, and even

teeny tiny lakes in the Adirondacks that
we were both surprisingly close history

we have with with both of our loves of
the Adirondack mountains at New York.

Very good now.

So if someone Bill, if someone wants to
reach out to you at Aloia, what's the best

way for them to continue if this triggered
some questions they'd like to ask you,

what's the best way for them to reach you?

Yeah

Bill: Two ways.

The quickest probably is LinkedIn.

Like you said, Mark, I'm
fairly active on LinkedIn.

You can look me up.

It's William Payton.

I'm the one at Aloia Corporate.

I think that there's numerous
William Paytons out there, but

I'm the one at Aloia Corporate.

So that's my profile.

You can shoot me a
connection or a message.

It's fine.

As long as you're not trying
to sell something and then the

the other one is you can email
me it's bill b i l dot payton.

So p a t o n So b i l dot p a
t o n at a lawyer corp dot org.

So a l o y a C o r p dot o r g.

So again the easiest is linkedin
after that mouthful, but but

yeah You can you know shoot me
an email Shoot me a LinkedIn.

Happy to connect however you want.

Markoverdub: It's great.

And I will put your your LinkedIn
profile a link to your LinkedIn

profile in the show notes.

So if someone listens to it and
goes down into the notes, they can,

they could find it there as well.

Bill, I wanna thank you so
much for your time today.

I really enjoyed chatting with you about
all things liquidity and all things

related to a lawyer and what you're
doing there to help credit unions.

Thanks so much for your time today.

Appreciate it.

Thanks, Mark.

Have a great one.

You got it.

And listeners, I want to
thank you for listening again.

I hope you'll listen again soon.

This is Mark Treichel signing
off with Flying Colors.