Credit Union Exam Solutions Presents With Flying Colors

Mark Treichel: Hey everyone, this is
Mark Treichel with another episode of

With Flying Colors, and this is our
third annual NCUA Letter to Credit

Unions on Exam Supervision, Supervisory
Priorities, or Exam Priorities, the

letter, as I like to call it, which comes
out every January, and I'm excited to

have two of my team members here that
I've worked with at NCUA for a long time

and have helped me here on the podcast
and have helped Help me with the clients

that we have throughout credit unions.

And I want to introduce them.

If you haven't, they haven't been
on the podcast unless it was a rerun

that I reran because it was so good.

They haven't been on the
podcast last couple of months.

And 1st up we're joined by Steve far.

Steve, could you give yourself a little
bit of an intro on what you did at N.

C.

U.

A.

for those new listeners who may not
have heard some of the older podcasts.

Steve Farrar: Oh, great.

Yeah, glad to be back for the year three.

Interesting year last year and
we'll see what happens next

that has this coming year.

But I spent 32 years in NCOA and
half of it was working in region,

the western region, and most of
that was as a problem case officer.

Which was really good to get well
rounded and strengthen operations.

Then I spent the last half of my career
in the central office working on problem

resolution on a more national basis.

And then towards the end of my
career, I was the vice president of

the Central Liquidity Facility and
worked a long time on the risk based

Todd Miller: capital role.

Mark Treichel: Long time on the risk based
capital rule, got it ready for prime time.

And then politics took a little while
longer after you retired for basically

that rule to get approved as you had
drafted it before, before you left.

So Steve and I worked together at many
of those stops he mentioned there.

And anyway, so with that, I'm
gonna Pivot to Todd Miller.

Todd, could you give a little
intro of your background at NCUA?

Todd Miller: Didn't realize it until
just now, but I beat Steve by two years.

I was with NCUA for 34 years
roughly the same time as Steve.

Steve, I retired in 2021.

During my career, the first
10 years, you can say I was an

examiner and a problem case officer.

The middle 10 years.

I was a capital market
specialist from 2000 to 2010.

And then the last 11 years of my
career, I spent it as a director of

special actions, supervising problem
case officers and capital markets.

Around 2010.

That was a great recession.

So I had a couple of very busy years
there as a director of special actions.

Unfortunately, there's a few credits in
the western region didn't survive that

we can serve to quite a few of them.

1 of them return to the members.

So that was quite a good experience
to be able to fix accrediting

and return it to his members.

But I had 34 good years
with enjoy every bit

Mark Treichel: of it.

You and me both.

And you beat me by four months.

I was 33 years and eight months.

So you are the longevity
winner at NCOA, at least for us

three, at least for us three.

All right, guys.

There are seven priorities.

Well, I've plus two other mentions that
we're going to walk through here today

compared to the last couple of years.

And for the most part, we'll walk
through them in order of what they're

listed at in the NCUA letter, although
we may pull interest rate risk up for

a discussion along with liquidity.

But first out of the gate in
NCUA's letter, is credit risk.

And as a reminder of where that was
previously last year, credit risk was list

third and in 2022 it was rated first in
order and in order doesn't necessarily

but it does mean something because you
want to put first what's most important.

Number one, 2024 NCUA's priorities
for the examination is credit risk.

What are your thoughts relative
to that topic and how it relates

to credit unions for 2024?

Yeah,

Steve Farrar: I'll take a look.

I looked at some of the numbers
and, the trends, definitely show.

And a weakening of credit quality,
which was expected as inflation

started to impact people's income
and decisions that they had to make

the another important item is you
start looking at credit risk is.

In the opening of the letter, they
talk about their concern about the

increase in assets in Camel 3 and above.

And that is, you can generally
can be reflective of it.

Anytime you have increases in delinquency,
it's going to affect Camel codes.

And then there were,
there was a kind of a shh.

Fairly sharp increase in the provision
for loss expense, which would have

been, of course, affecting earnings.

So that part is also part of what's
caused this concern with the credit

unions with the camel codes of 3 and
above, especially some of the larger

ones, but you just can't ignore that.

So many of the loan types show trends
in increasing delinquency, credit

cards being one and junior liens, the
kind of the unsecured products are

showing the most weakness that I could

Mark Treichel: see.

Interesting.

Todd Miller: There's a
couple more pieces to that.

Prior to the thought podcast, I went on
Fred's and I pulled down some numbers

just on income growth, median income
growth and where inflation is and

really for the last pretty much since
June of 2021, consumers are getting

behind while unemployment is low.

If you look at income growth, it's
actually lagging behind inflation.

Realistically, for two and a half years,
consumers are in a worse position on a

median, and I think it probably affects
the lower income people, maybe higher

than folks in those higher income tiers,
and there's always a lag effect to this.

If you look at quarterly numbers
last year, March actually

looked better than year end.

So all that deterioration
Steve talked about has really

happened from March to December.

If you look at the references
that NCUA made, There are the

attachments to the letters.

They're all a referral back
to credit risk fundamentals.

There's stuff that was published.

At or before that last recession.

So they're really directing people,
Hey, let's go back to credit

risk management fundamentals.

They have a right to be concerned.

When we go for two years and consumers
are falling farther behind inflation,

and then you combine that with rising
interest rates, it's going to be harder

on borrowers and unemployment the
press tells you it's all time lows.

That's kind of true.

It's actually been inching up
during 2023, and there's really a

wide disparity around the country.

You've got places that are at 1.

9%.

And then you've got other states
that are hitting five and a half.

And our large population states,
California, New York, Texas,

those guys are in the four.

Behind that one gross number, you've
There's little bubblings of problems

here and there around the country.

And, NCUA has a right to
be scared of credit risk.

We've all read articles of what's going on
with commercial real estate and potential

vacancies there and a crumbling there.

That's what causes the agency.

Large chunks of money is deteriorating
credit risk, a little fraud here and

there, but credit risk is the big one.

And there's lots of signs
that the consumers are.

Struggling.

Mark Treichel: And I think Todd in
a call with a client recently, you

might have talked about how it was
the sand states in 0809, right?

And recessions don't happen uniformly.

And so some of the numbers you
just cited would link to that,

that we're going to start seeing
pressure points in different areas.

And then another thing that was touched
on I was listening to an economist

walking today and they were saying
that actually unemployment rate went

up when you adjust for those that
are dropping out of the workforce.

Right?

And so you've got all of those different,
different things interacting and

then piggybacking off of some things
Steve said tied to, the delinquency

going up in different things.

I think about how the delay.

Yeah.

For implementing Cecil was something
that politically was things Cecil

was talked about for several years,
and it was delayed, delayed, delayed.

And then by the time it all came
forward to having to book that

you also had other real issues.

So it was kind of like a double
whammy and how much of this is Cecil

and how much of it is delinquency
and in all that I don't know.

And I don't I'm not expecting you to
know those numbers there, but you've

kind of got all these different things
mixing together and the condition of the.

Borrowers and the lower income folks that
are impacted by inflation, et cetera.

It's going to be.

An interesting 2024, but I don't
expect to see the numbers getting

better anytime soon in that regard.

Todd Miller: CECL is an interesting
comment because, there's a ratio

on the FPR of your allowance to
delinquency, right after CECL in March.

That number shot up to like 216 percent.

It was at 126 in December, but then
over the course of this year, it's

fallen back down to 166 and provision
for loan loss expenses have doubled.

And so did we overfund CECL
or did we fund CECL right?

And as the years progressed,
credit unions are sitting

there underfunded in September.

I don't know the answer to that question.

It could have been a conservative
overfunding of CECL in that first quarter.

And if It wasn't over
funding the first quarter.

Then we have balance sheets that
are underfunded now in September.

I don't know which was a true
case, but one of those two is true.

Mark Treichel: Well, in that
ratio cover the coverage ratio.

If you I think that is the is or similar
to the coverage ratio, which reminds me

of when Steve and I worked for Dan Murphy.

When I was a director of special actions
and, we would brief him on different

cases about, the delinquencies X percent
here, but the allowance is overfunded.

And it's in this type alone.

And the next one would come in and
it would be a different type alone.

And the, and everybody was saying
but the allowance is adequate.

And it was all over the map as far
as delinquency and the allowance.

And so Dan just said, you guys
come in here and tell me, I

just look at the allowance.

And I look at delinquency and I
compare the two, and I think I think

we coined it the Murphy ratio at
the time, so that made, it made Page

happy if there was enough in the
allowances, there wasn't delinquency

because it was a simple benchmark.

All right, anything else
on credit risk, guys?

Todd Miller: No.

Returning to fundamentals, if we
look at clients, one of the things

we've seen routinely amongst clients
last year is NCUA wanted people to

justify their concentration limits.

We've seen that over and over.

It's concentration risks that
cause the agency money or cost the

agency money and insurance losses.

And that's one thing we've seen
across many of our clients last

year is they wanted justification
for those concentration limits.

I'll tell

Mark Treichel: you so much so that the
last I did a solo podcast saying, Hey, the

letter would normally come out this week.

Here's what I think is going to be on it.

And my prediction was concentration
risk was going to pop back on

because of how much we've seen
credit unions being asked about that.

I'm a bit surprised it's not.

All right.

So topic NCUA's list is liquidity risk.

We've.

We've talked a lot about it with clients.

We've talked a lot
about it on the podcast.

And CUA has it number two here.

They came out with a regulatory alert
the week before, which was interesting

that they had an alert and then a week
later they had it in their priorities.

And here it is at number two.

As a reminder, it was
number two last year.

And ironically there were 10 priorities in
2022 and it was not any of the 10 interest

rate risk where they may have dabbled
into it was 10th on the list in 2022.

So it shot up to number two, stayed at
number two with a bullet here for 2024.

Thoughts on liquidity risk?

Todd Miller: This is interesting.

I keep a whole bunch of statistics going
back to 2000 on party and share structure

on savings rates, different things.

Earlier I mentioned, with loans,
their whole references, they

want to return to fundamentals.

I think with balance sheet
structures in general.

What we're seeing today is a reversion to
mean, if you go back to 2005, 2007, 2008.

Hot money, which I would call
borrowings, non member deposits,

certificates, money markets.

Back then it was roughly 54, 55 percent
of a credit union's balance sheet.

And then we got into this period of low
rates out of the end of the last recession

that lasted all the way through 2022.

And things got somewhat muddled.

That hot money fell to as low as 35
percent of the balance sheet, and then

as the Fed started reducing or increasing
rates in April of last year I read a thing

a long time ago that people don't really
care about rates, so they're insensitive

to rates until rates get around 4%.

And we're seeing that.

So what we've seen in the last year and a
half since the Fed started raising rates

is this migration from core deposits
to certificates, credit unions using

borrowed money and non member deposits
to control that marginal cost of funds.

It's easier to do that rather than
raise rates on the whole thing.

As we get to the end, September of
2023, that hot money, borrowed money.

And CDs and non member deposits, it's
still only 46 percent of shares, so it's

still way less than it was back when we
had a normal interest rate environment.

I think what we're going to see,
and NCUA has a right to be nervous

about liquidity, is we're going to
continue to see that migration from

core deposits into higher cost shares.

We're going to continue to see
credit unions using borrowed money

and non member deposits to control
that marginal cost of funds.

I'm actually somewhat surprised as how
well credit unions have been able to

keep their interest margins where they
were given how fast these rates will.

Have risen.

They've actually done a
fairly good job with that.

The other thing that we see
that's a little out of the norm.

If you look historically from 2000
up until the last 23 years, credence

deposit growth was a little faster
than the national savings rate.

That hasn't been true.

The last 2.

5 years and part of this.

We already talked about it.

Inflation is rising faster than income
rates or growth, but just even at

the national savings rate, credit and
share growth have been behind that,

and that's the first time that's
happened in a couple of decades.

And I think maybe that's a reluctance
for them to raise rates, or it's

just a matter of trying to control
that marginal cost of funds.

It's one of those unusual types of things.

The borrowing and the increase
in the borrowings, it certainly

made the regulators nervous.

We've seen a lot of exam reports that
have findings and they're critical of

credit unions, liquidity management.

We see a lot of exam reports.

inferring that there's a whole issue
with this rising cost of funds.

Even in credit unions that have kept
their interest margins stable, they're

still being criticized for that
potential increasing cost of funds.

So I find that somewhat interesting.

It tells you that examiners are
nervous and NCUA is nervous that this

cost of funds will continue to rise.

And I think it will because we haven't
reverted back to that mean yet.

That hot money is not where it's
at yet on the balance sheet.

So I think we're going to see
some continued deterioration

in those core deposits probably
through the next year yet.

We'll see what the Fed does with rates.

It's certainly the increase in
borrowings and reliance on non member

funds is making the agency nervous.

And we see it in clients exam reports.

They're getting criticized
for that rising cost of funds.

They're getting criticized
for using borrowed money.

In some cases, it's deserved.

In other cases, it's not.

Examiners aren't just going through
that whole total analysis process and

seeing what's going on with everything.

The liquidity is really, really tied
very closely with interest rate risks.

It's changes in interest rate
risk that started creating all the

pressures on everyone's liquidity.

Yeah, we've went through an unprecedented
time over the last 20 months.

I think our fed funds have risen.

I got it written down here
somewhere on one of my sheets.

I don't want to wrinkle my paper and
get that involved in the thing, but

it's a little over 500 basis points
that Fed funds have went up since April

of 2022 that created an inverted yield
curve because long term rates have

only went up a couple hundred basis
points or a little bit less than that.

That's caused a devaluation
in credit unions assets.

You see it very clearly
in those gap net gap.

net worth ratios, that has fallen.

You see it in the losses on
the HTM and AFS portfolios.

They're down around 13, 14 percent.

I don't have the number exactly in
front of me, but that creates a whole

bunch of pressure on institutions
and they can't really go sell

assets to fund this liquidity.

So even the folks that have significant
investment portfolios, They're

unwilling to use them to fund that loan
portfolio because they have to recognize

those losses and so with liquidity,
they reference that in the letter.

They want you to go back and look at
that interagency guidance from 2010.

They want people shoring up
their contingency funding plans.

For some credit unions, they've
dug into parts of their contingency

funding plan, just to help restructure
their balance sheet this year.

So I think the liquidity pressures will
continue unless rates fall, those asset

valuations are not going to go back up.

So there's still going to be a
reluctance to sell things overall,

though I think you give the industry
some kudos, the increased in borrowings.

It's just an indication of their
managing their cost of funds.

in marginal cost of funds to
the best of their ability.

And like I said, overall, I think
the industry itself has done fairly

well at managing their liquidity and
responding to the interest rate risk.

NCUA had to do away with their
extreme risk rating on asset liability

management in part because so many
credit unions were hitting it, which

means they probably shouldn't have
had it in there before to begin with.

I guess 1 thing that we see with our
clients and we see a lot of clients

being asked to reduce interest
rate risk or change their limits.

Something maybe that bothers
me a little bit is N.

C.

U.

A.

is really focused on any V.

but what you don't see in their exam
reports is any discussions of the credit

is income simulations or liquidity.

And a lot of these institutions, they're
doing just fine at holding up with keeping

their earnings level where they're at.

Capital ratios have come down a little
bit because of growth, but a lot of

credit unions are doing just fine in
terms of managing that net interest

income, keeping that net income
positive, keeping those assets or

capital numbers where they need to be.

And so I think NCOA is maybe being
a little bit harsh and emphasizing

this NEB number, which has definitely
went down when rates go up 500.

And they're not looking at that
income simulation piece, which

is also very, very important.

And I guess.

What makes me nervous is some of the
NCOA's guidance, and we see in clients,

they want them to reduce interest
rate risk without making any changes

in interest rate risk assumptions.

This yield curve is changing
every single quarter.

It's really challenging for management,
and things they do to make NED look

better today in this inverted yield curve
could actually cost them a lot of money

when that curve comes back to normal.

And so I think credit unions You need
to really be doing some simulations

at different interest rate risks.

You need to be able to
push back on examiners.

I think a little bit on
this emphasis on any B.

What is your income
simulations looks like?

Let's not do something today that's
going to cost us a lot of money in

the future when rates change again.

Certainly some credit unions are
interest rate has gotten excessive,

but I think a lot of credit unions have
also been told their interest rate risk

is excessive and it's probably just
fine and they can weather the storm.

If they keep their liquidity appropriate
and keep their earnings there, the

liquidity always becomes a problem
when you have poor asset quality and

net worth starts falling, but, credit
unions keep their capital level and

they keep earnings positive, they can
generate liquidity if they need it.

where they get into trouble when
asset quality deteriorates and

capital starts deteriorating.

Then that wholesale funding gets taken off
the table and you have some more issues.

So the credit risk is
definitely at the heart of that.

That's what causes those things
to deteriorate the fastest.

But interest rate risk and liquidity,
it's just so challenging because of how

fast interest rates rose and how the
shape of the yield curve changed on them.

Certainly there's individual
creditors having trouble.

They, in, Refer to that in the
increased number of Camel 3s.

But as an industry, the craniums are
actually doing pretty well managing

through this challenging environment.

Mark Treichel: Well said, said.

And Steve any thoughts you want to add to

Steve Farrar: it?

I want to emphasize one thing and
then ask Todd about three other

issues that shouldn't take long.

I liked how he talked about, when
when the credits are taking action

to improve liquidity or interest
rate or reduce interest rate risk.

Some of the responses, they need to
be properly analyzed as Todd talked

about, kind of, when you're going
to take those actions and then make

sure that you outline the income
affect the expenses related to that.

And also include that foregone revenue
that be from those things, because,

sometimes these short term actions to get
the examiner off your back, but they're

not a real good long term decision.

If you document that, at least
you're able to respond on that.

The other 2 issues I wanted to bring
up with that for discussion is.

The increased competition for deposits,
which I noted the other regulators had

made comments on, and I wanted to get
Todd's thoughts real quickly on how

he sees that affecting liquidity risk

Todd Miller: and interest rate risk.

Well, you need, we've had loan
growth and loan growth has continued.

It's slowed, but it continues.

So the matter of is do you
really need those deposits?

I would go back first.

Let's make sure you're pricing
your loans and that loan growth is

genuine and you're going to get some
positive returns on that loan growth.

I think the competition for
funds is going to continue.

Like I said, the savings
rate is really low.

We've already talked about it.

Inflation is still higher
than income growth.

So you're not seeing a huge
growth in, disposable income debt

for people to add to savings.

There's lots and lots of strategies
out there for generating new deposits.

A lot of this is new products.

Can you create products?

If you go back and look when hot
money was 55 percent of the deposit

base You know you had people that
were somewhat rate sensitive, but

they didn't lock their money up That
was sitting in money market accounts.

My wife is one of those she wants
a fair return But she doesn't

really want to lock her money up.

She wants to go down to the bank
and get it tomorrow Then you've

got these investor type savers.

They want very Competitive CD rates.

They have no problems going from Bank
A to Bank B to credit C to credit D.

They're very rate sensitive money.

Those people are probably the
people we've seen moving already.

But I don't think we've Really
sorted out that middle tier.

It's all in flux.

So a lot of this is product development
and talking to your members You

know going out and getting borrowed
money or non member deposits easy.

It's a phone call to break a broker
What's a little bit harder is that

organic growth you need to spend some
time building up relationships with your

members and Asking them for deposits.

I guarantee you every credit union members
have more money that they don't have it.

The tricky part is, is I think
in this environment, right?

You just have to recognize
they're going to have to pay

competitive rates to get that.

And core deposit growth
is not going to be easy.

It's a demographic thing.

We have more old people going away
than we have young people coming up.

Usually it's new families
and new households.

We're creating all that
deposit core deposit growth.

And.

We're just not generating those new
households anymore at the rate we used to.

So, it's challenging for credit unions.

They're going to have to
work at this deposit growth

and, the core deposit growth.

You're going to have to steal it
from the competition by having

better relationships, better
product designs, better websites.

All the things young people want.

And at the higher end for the people
that are rate sensitive, you're going to

be have to be willing to pay for that.

And that really requires your
local communities to really balance

your loan rates with your deposit
rates and understand the margin.

Is this loan product profitable, given
what we have to pay for deposits,

our wholesale funding to fund it.

And I think credit unions
have done a good job of paying

attention to that marginal stuff.

They were maybe a little bit slow to raise
loan rates, but you see, most of them are

getting those loan rates up there now.

I don't really, I don't envy the
challenges that cruddy in space right

now in this competition for deposits.

And part of it is the savings rate is low.

The pie is not getting big as
fast as they need it to get.

And like I said, one of the
things I commented on is we're

at a point where this is.

First time in a long time where
credit is deposit growth is

lower than that savings rate.

I don't know what the
numbers look like in banks.

2023 was really good returns
for people in the stock market.

I don't know how much money
that sucked out of, the banking

and the credit industry.

I'm certain it was some it's
going to be a challenging 2024.

And I think if credit is continue
to do what they did in 2023, though,

they'll do all right in 2024.

But examiners are going to be looking,
cashflow forecasts better be good.

They're going to look for
lots of scenario analysis.

They're going to look for you
modeling that business plan.

We do see just amongst some of our
clients an increased level of criticism

if you don't hit your targets in your
business plan and really that just means.

A longer discussion at your ALCO in
minutes where you're talking about why

I don't think in an environment like
this, you can hold credence to hitting

every metric in their business plan,
but credence need to sit down and have

some discussions at the ALCO level.

So their actions and their decisions
are transparent to the examiners.

I think that's one thing we see.

is examiners don't see that transparency.

It invites criticism of management.

It's still with COVID, the offsite exams,
the agency has said they're still going

to continue to do offsite what they can.

There just seems to be less dialogue
between credit unions and management.

And so if things aren't transparent
in your committee minutes, board

amendments, you invite a little bit of
criticism from your examiners because

they don't seem to be sitting day.

Take the time to sit down and talk with
management about what they did and why.

It just doesn't seem to be
occurring the way it has in the

past, in certain cases anyway.

Yeah, I think

Steve Farrar: you covered 1 of my
other questions that there is that

with all of the change in the interest
rates, a lot of credit unions found

themselves outside of policy numbers
in terms of liquidity measures and a L.

M.

measures.

And I think you kind of just covered
that before I even asked it and that

it's that you properly document that.

And we've seen some of our
clients we deal with that.

They're looking at now in their next
run, they'll be making changes to their

assumptions, which will change their
results to suddenly bring them into

compliance of policy and examiners
are certainly going to be going what

you just change your assumptions.

So you could get him policy that I
think that's going to be an issue this

Todd Miller: year.

Actually, I want to take just
a minute to talk about it.

It might run things a little bit
long, and it's not related to the

letter, but I think it's valid.

So if you go historically, they wanted
those non maturity deposit assumptions to

be built over multiple business cycles.

And so credit unions did that.

Now what we're seeing is share
growth is negative in those checking

accounts, money markets, it's flowing
into CD funds and now examiners are

telling credit unions, hey, we want
you to update your assumptions just

based on these short term trends.

If you look at what's going on
with rate sensitivity factors.

Most of the cruddy's they haven't
raised their core deposit rates.

They haven't raised rates
on those regular shares.

They haven't really done anything
to checking accounts that did pay

interest rates, money markets.

They moved them a little, but a lot
of cruddy's haven't moved them at all.

So when cruddy's update their
assumptions, they end up lowering

their rate sensitivity factors
because that's in truth what it was.

They had conservative assumptions,
examiners that update your assumptions.

Now it makes the shares a little
bit longer because rate sensitivity

factors are lower and it reflects the
criteria's behavior and decay rates.

What you're finding, and we've seen
this with our clients, a lot of them

were excessively high and they do
the studies based on what they have.

And yes, some of them have
lost shares this year.

They end up lowering their decay rates,
too, and making those shares longer.

So, you know, the examiners, we
start out with, we want assumptions

based over multiple cycles, because
we don't like what's happening.

Now they say, Update your assumptions
based on short term assumptions.

Well, those assumptions are actually
better for the carding, so the

examiners don't like that either.

So they don't

Mark Treichel: get the reality.

We don't like, yeah, we
don't like the reality.

Those numbers didn't impact it
the way we thought it might.

So that, careful what you ask
for, you just might get it.

Todd Miller: Yeah I think it's
interesting, and it was interesting

just to see examiners ask for that,
because It was pretty self evident that

that's the way the math is going to
come out, that those rate sensitivity

factors are going to get lower because
gradients haven't changed rates.

And the examiners want it both ways.

That's why I think gradients, they
need to be willing to push back

on the examiners a little bit.

And the whole point of the NCUA's
supervisory NEV test was not to have

this discussion about core deposits.

And then they delve into it anyway, and
it doesn't go the way they want, which.

I find somewhat interesting.

Mark Treichel: Yeah, so they've lost
sight of the reason we did any B and

as you both were talking, I took a
bunch of notes and it reminded me of

some other conversations we've had.

But, we went through 3, 3 black swan
events, essentially the pandemic.

500, 600 increase to Fed
funds, 500 base point increase.

And then Silicon Valley Bank, which
rocked the world on how money moves.

All of those individually could be
considered to be black swan events.

And Todd, as you're talking about
NEB and what it's used for, and

what it can be misused for, and
what else you need to consider.

It reminds me and I might not get this
quite right, but you can correct me on it.

It reminds me of something you said once
where it shows a 300 basis point shock

because it triggers all of the things
that are built into those bonds and It

makes the covenants kind of explode.

So you see what you've got.

And now we've already had 500 basis
points and then to then rely on any

V and say, okay, well, is it going
to go up another 300 basis points

when we've already had five and we've
already triggered everything, any,

anything there you want to touch on?

Todd Miller: Well, I've always believed
that NAV is a good indicator of risk,

but not the sole way to manage your
balance sheet because you're making

assumptions and doing cash flows.

If you're a real estate lender,
they're over a 30 year period.

So I think they're a good
indicator of direction of risk.

And certainly when you get down to
negative NAV numbers you're probably,

it's an indication of trouble.

But I've always been a believer
too that, this income simulation

and this other piece is important.

And yeah, credit union cash
flows, the, the 300 basis points

was to trigger all the options.

And I'm pretty sure we've
triggered all the options on a

credit union's balance sheet.

The real estate loans they're extending
out is as far as they're going to.

What you don't capture in the
models and which you're also seeing

in the optionality is this whole
inflation rate and the fact that

disposable incomes are not growing.

That's triggering and altering some of
the people's behaviors, not in favor.

Of our credit unions in any way, shape
or form so I just think it's interesting

that any B is important, but those income
simulations and how you're managing that

interest for net interest margin and
how you're holding up with liquidity

and capital is every bit as important
as that any B number, and I think N.

C.

U.

A.

Is losing sight of that sometimes
because we see it in exam reports.

We read there's this criticism or any B
is going and there's not even a mention.

of their income simulations
or liquidity numbers.

I mean, they're just totally silent.

And so it's an important number.

It's a good indicator, but relying
solely on that without looking at

other factors is not the way to
analyze your interest rate risk.

Mark Treichel: I'm part
of the challenge to that.

And not that this is an excuse.

But, I think back to when
we all started and we took

examiner level 1, 2, 3, 4 and 5.

And I remember any time
a discussion went into.

It was like, oh, we're we're, we're
going to handle that in the last class.

We're going to handle that
in the last class and.

Built up all that anticipation of
that last class being real good

where they explained it to me.

And I remember walking out of there
scratching my head saying they

said they'd answer it in the last
class and they didn't, which led

to there being some good, we hired
better people, experts in that area.

But then you layer on top of that,
since the 0809 economic the Great

Recession, half of NCOA staff.

Is new since then, maybe even more,
but at least half of the staff.

So they've not really gone
through any of these issues and

any of the income simulations.

All those things are nuanced
and they're stretched thin and.

I think that's leading to some of
these over reliant, it's like when

they had CMOs and it was thumbs
up or it's thumbs down, right?

NEV, it's the be all end all, and
we're seeing a little bit of that

in what, what's happening out there.

And credit unions just need to push
back and try and make sure they're

being treated fairly on these, on this

Todd Miller: issue.

That's probably true.

I hadn't really thought
about the new examiners.

Because the other thing you see with
new examiners, and I'm sure I was this

way too, Is they tend to be risk averse,
and they're scared of making a mistake.

And I think with experience and, Steve and
I, and yourself, we were all problem case

officers and you have to take a little bit
of risk to fix the troubled credit union.

And so we're probably a little bit
more accepting of different risk levels

than a lot of the newer examiners are.

And that, that just comes with
experience and it comes with that

whole total analysis process.

And that's what we see maybe lacking
sometimes is, our examiners and

our clients, they're picking on
one single fact and they'll pull

that out and what they write in
their reports is factually true.

Yeah.

But they're missing the whole picture,
and everything is used out of context,

and that's when credit unions need to push
back a little bit with their examiners

is, wait, look at the whole picture here.

Yes, what you said is true,
but, we don't run any financial

institution by one number.

There's a focus on member service
here and, managing risk takes

a lot of different numbers and

Mark Treichel: especially, yeah,
especially in this environment,

especially in this environment.

That was a great conversation on
that possibly, and this is I think

in the past I've cut this podcast
into, and I think I might do that.

And this might be a natural spot.

where we do it.

And so we discussed credit risk
number one, liquidity risk number two.

We jumped down to number five, which was
interest rate risk because that but the

reality is that's because liquidity risk
and interest rate risk are so intertwined.

Microphone Array (Intelr Smart Sound Technology for Digital Microphones):
And this is where I did

cut the podcast in two.

, I want to thank you for listening, , to
part one of NCUA's priority letters,

and you can stay tuned for part two,
which will discuss consumer financial

protection and a few others of NCUA's
priorities from their priority letters.

Thanks again for listening.

This is Mark Treichel signing
off with Flying Colors.