Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone, this
is Mark Treichel with another

episode of With Flying Colors.

This is our fourth annual podcast on
NCOA's Priority Letter, and I'm here with

Steve Farr and Todd Miller of my team.

Guys, how are you doing today?

Steve Farrar: Doing good,

Todd Miller: even

Steve Farrar: though it's cold.

Todd Miller: Doing well.

Woke up last night with a sore throat
and I've been sucking on cough drops

for a few hours, but I feel good.

I might sound a little off though today.

Treichel: Yeah, so to those
who've heard your voice before,

they might say, hey, Todd's got
something wrong with the speaker.

It's actually his throat.

So I hope you're, I hope we hope we
don't ruin your throat for you today.

But this is.

I always say to clients or credit
unions when I'm talking to them that

the most important letter that NCUA
comes out with is this priority letter.

And the other day when it came out I
don't know why this popped into my head,

but I had a vision of Steve Martin in the
movie, The Jerk when he's, when he gets

all excited because the new phone books
are here, the new phone books are here.

And his phone, his name was in the
phone book for the first time and

he was really excited about it.

He was somebody.

Yeah, he was somebody right there.

Exactly.

And so I feel a little bit like Steve
Martin when this letter comes out.

And I I think last year I even
did some predictions about

what I thought would be in it.

I did a separate podcast
on that this year.

It snuck up on me cause it
came out a little bit early

and we can maybe speak to that.

Typically it's not out quite as quick.

And I think we might have a sense
as to but Yeah, so that's it.

We've got we've got the priority
letter and guys just in case somebody's

hearing this podcast for the first
time, could you give a little bit of

your background at NCUA before you
ended up departing and changing teams?

Steve, what was it that you
did at NCUA back in the day?

Steve Farrar: I always break
my career into two parts.

The 1st half of it, 15 years or so
was in the field predominantly as a

problem case officer overseeing a lot
of the worst problems predominantly in

the western part of the United States,
including dealing with conservatorships.

A lot of special assistance and
those types of and merger packages

and those types of things.

Then I shifted to the central office
and working remotely for the most

part for the next 15 plus years.

And in the division of risk
management and along those lines

many things, including the training
of the PCOs, which I really enjoyed.

And then later I ended up
writing a lot of regulations.

Cause once you write one and it
works and you know how to do it, you

get pegged with doing that a lot.

And the biggest one on that one would have
been the risk based capital regulation.

So that's sums my career up.

Treichel: Very good.

And Todd.

Todd Miller: I'll break my career down
into 3 parts for the 1st, 3rd of it.

I followed Steve.

We were hired by the same person.

We were PCOs at the same time,
although he did it a lot longer than

I did, but I was an examiner PCO
for about the 1st, 3rd of my career.

The second third of my career, I spent
a decade basically as a regional capital

market specialist and doing a lot of the
training on liquidity and interest rate

risk for examiners and writing policy
and exam processes back in that decade.

That was basically from 2000 to 2010
from 2010 to when I retired in 2011, I

was The director of special actions in
the Western region, supervising problem

case officers and the regional capital
market specialists and a few other

duties here and there along with that.

But altogether, I spent 31 years
with NC way in those 3 pieces.

It was a very enjoyable 31 years.

Treichel: Yeah, it was.

It was.

I had a good time there as well.

And those problem credit
unions, you always learn things.

They learn things.

And when those troubled institutions
can be reborn and get back on the right

path, whether it's a camel code improving
or whether it's capital improving it,

that was always fun to be part of.

And we all played a big
role in some of those.

Now, this priority letter is an
effort by NCUA to say, Hey, it's

Here's how you stay out of trouble
and they point out some things here,

some trends and different things.

But why don't we walk through the
letter in order of what NCUA put

them and first up on NCUA's priority
letter this year is credit risk.

Any general thoughts about what NCUA
says here relative to credit risk and

who wants to go first on this one?

Steve Farrar: I'll hit it up since
Todd's a little under the weather and

put some general comments out there.

The comments in this letter,
particularly are real generalized.

And they basically, if you look
at the FPR for the industry.

They, it's just real logical items that
they noted that they put out there.

And it talks about, delinquency rising
and the 12 month charge off ratio rising.

And, yes, so those are what are happening
in, particularly in the area of credit

cards and commercial real estate.

One thing I did notice is I was comparing
Credit unions results against what

community banks reported and you end up
with all the stuff through q3 And, they

have the same thing going on as we do, but
I found that 1 thing really interesting

on the credit card delinquency, highly
regionalized and I don't know exactly why.

And I would imagine that we have the
same thing going on in our credit unions.

And particularly, it was like, the
New York region had just a huge

problem with the credit cards.

And I think those could be
driving a lot of the numbers.

And there's a, and there is generally
we consider that loan losses and

credit quality is going to return to
the norm because we've been outside of

normal because of outside influences
that have affected ever since

covid and, even going back to 2008.

So what is normal losses and that kind
of drives what the allowance thing is.

And it's normal is somewhere around the 0.

4 to 0.

5%.

So we'll, I think we're going to see
that PLL expense, return to normal.

The only item under there that
I am more concerned about is.

When you look at the credit union
systems allowance for loan losses against

delinquency, we're running significantly
a lower percentage of coverage than

you'll see in the community banks.

And that could be because of the
difference of lack of commercial

lending, but it's a pretty large
difference and it makes me a little

bit concerned that CECO reporting and
maintaining their allowances adequately.

Treichel: That's interesting.

That's I hadn't picked up on that.

Todd any thoughts on what Steve
said or anything you'd like to

add on the credit risk side?

Todd Miller: I'll add a couple other
nuances to the whole thing, and some of

this is just the way the credit industry
is react to the marketplace in the way.

They've reacted to NCUA.

As we come out of COVID and interest
rate risk, our interest rates

rose, NCUA really started beating
people up on interest rate risk.

Credit unions had very significant
portfolios of underwater securities.

How do they make up for that in earnings?

For the most part, the industry has
raised their loan to share ratio.

You look at loan concentrations to capital
credit cards have jumped from 36 to 50

percent of net worth real estate loans.

And you would assume with the rising
rates that real estate loan portfolios

wouldn't be growing, but relative
to capital, they've jumped from 270

percent in 2021 to 342 percent today.

That's a big shift in
concentration risk right there.

Auto loans have stayed the same.

For the first time here in September 2024,
commercial loans are now exceeding 100

percent and at worth across the industry.

In response to the agency beating
them up over interest rate risk and

their need for earnings, credit unions
have expanded their loan portfolios.

And so their concentration risk
has kept, crept up on them.

And to see credit risk here as
the first supervisory priority, it

absolutely has to be, out there.

I think economic conditions have
created this whole situation where

delinquency and loss levels are rising.

And the industry has increased their
concentration risk especially in that real

estate, commercial, and unsecured areas.

Car loans have stayed relatively the
same, but delinquency and charge offs

have really spiked with that unsecured
and while we don't see losses in the

real estate loan portfolios yet or the
residential real estate loan portfolios,

those delinquency levels have pretty
much doubled in a couple years.

They're still pretty low at 70
basis points, but That are still

doubled in the last couple years.

So there will be interesting
to see how that plays out.

And I noticed just in my local market,
and I don't know how many other

markets are you, I get a lot of emails
from Zillow just because I looked

when my son was buying a house, but.

I haven't seen this before, but in
the last three, four or five months,

you're seeing price increases on,
homes that were listed for sale.

And that is something, at
least in our local area, I

haven't seen for several years.

And all of a sudden you're
seeing it now, right?

When real estate delinquency is going
up and things of that nature and, NCUAs.

They do talk about interest rate risk,
we went until September of this year.

The yield curve was inverted for 790 days.

Makes challenging situations for
our credit unions and they're still

sitting on a lot of underwater
securities and really fed funds were

inverted compared to treasuries right
up until the middle of last month.

So almost two and a half years.

Hopefully a flat yield curve,
it will give credit unions a

chance to Maybe adjust earnings.

I think overall they've reacted
well to the conditions that we're

throwing at them, but we'll see.

Treichel: It's interesting to
the real estate to capital and

the concentration risk going up.

As you described, as you said
that I did a word search and NCWA

uses references concentration
risk three times in the letter.

We've seen concentration risk hit hard
in a lot of credit unions recently,

but to see some of those number peaking
up, I could bet that we're that if

a credit union is listening and they
are getting hit on these concentration

risk percentages, similar to what
the collective industry is getting

hit that they may see some things in
their examination relative to that.

We've got some podcasts
that talk through that.

That you you can go back.

I, if you go to our website and and
type in concentration risk, you'll get

a podcast that will pop up on that.

And if I remember, I'll
put that in the show notes.

I'll also say that NCUA.

Under credit risks has 1, 2, 3, 4,
5, 6, 7, 8, 9 links to other sources.

They link to the examiner guide.

They link to the commercial real
estate loan, accommodation, and

workout letter from oh five.

They link to allowance for
loan loss letter from oh four.

They link to a home equity line of credit.

Letter from oh eight, a
link to concentration risk.

That's one of the three links to a
letter from oh three and four other

letters that go as far back as oh one
on credit union loan charge off guides.

I'm, I didn't test all these links.

I'm hoping they work better than the
links work in their examiner guide.

Sometimes those take you to dead
links, but I would bet a hundred

percent of these work if they're tying
it to this letter to credit unions.

But while I didn't.

While the letter is shorter, they
have a lot of hyperlinks that

provide good resources but are
also incorporated by reference.

Another general thought.

I I like to, I did that word search.

Credit or concentration
risk came up three times.

I looked back at the
letters the last two years.

2023 there were roughly 3, 000 total
words in the letter and about 15

percent of that related to credit risk.

In a paragraph or two or
a category of credit risk.

Last year, There were an additional,
there were 350 words in the credit

risk section, but the credit, but the
letter itself had shrunk by 500 words.

So it was up to 20%.

This year, the letter has about 650
words in two different categories.

On credit risk.

It's about one out of every four words
in this letter are devoted to credit

risk, which kind of gives you a hint at
really where they think their problems

could be coming from where credit unions
problems could be coming from and oh, by

the way, they haven't listed first and
you should have your top priority first.

So that all seems to be congruent.

Any thoughts relative
to what I added there?

Or should we move on to the next topic?

Todd Miller: I just thought it
was interesting that they put

a 1991 letter about interest
rate adjustments on arm loans.

We just went through a two year
period where rates went up.

Now they're going down again and they
throw this in and you know you on your

surface you might think that doesn't
make sense but I do know in my career

most of the time when we've made credit
unions go back and audit their interest

rate risk adjustments, it's always
failure to adjust them back down.

Is where most of the problems were.

The problems went both directions.

And quite often when you have a credit
audit, they would have errors both ways.

But it is interesting that they for
throw this old thing in there from 1991.

They're telling you, hey,
watch rates as rates fall.

Make sure you're adjusting those arms.

Down and I don't know who thought
to throw that in there But it's

interesting that they threw it in
there and it's probably someone that's

been around a long time Who's actually
went through a cycle like this?

So I thought that was an interesting ad

Treichel: One of the yeah, one of
the old timers and I guess the reason

I didn't i'm glad you pointed that
out Because I didn't catch that.

It's the last one listed there, but
it's because they changed The way

they number it, they used to put
the year apparently back in 1991.

They put the year on the front end
of the number, as opposed to on the.

Back end of the letter or am I getting
all those or all the other ones?

Yeah.

Yeah.

So I actually flipped it.

So the numbers I was citing were
from the, they were the numbers

of the letters, not the years.

Okay, that's a great catch.

Good clarification.

But yeah, that's

Todd Miller: you mentioned.

You mentioned links.

I didn't check them all,
but I checked a lot of them.

Most of these letters, the links work,
but I did find places inside the links

where there's other links that don't work.

Treichel: Got it.

Which that's, that can be hard to
track, but they should be able to.

Change your websites,

Todd Miller: Over decades.

It's hard to keep that.

It is.

Treichel: It is very hard.

All right.

So, that's a wrap on credit risk.

What do we have next?

They call this balance sheet management
and risk to earnings and net worth.

I don't think I've ever seen a
bolded headline of that category.

We've seen all of those things in
priority letters, but not where

it's been all encompassed in that.

So balance sheet management and
risk to earnings and net worth.

What are your thoughts guys?

Steve Farrar: I think we can break
it into Todd hit on it a little bit.

We can break it into the 3 topics.

Number 1 being, basically interest
rate risk and then we can talk about

earnings and net worth, but it'd be
easier to break it apart like that.

Yeah, my, 2 cents worth on
interest rate risk is, what's

happening with net interest margin?

It's expected to, probably not improve
on the throughout the next year.

The prognosticators are saying that
there's 3 to expecting 3 to 4 rate

cuts from Fed funds to end up with 3.

5 to 3.

75 this year.

It will be interesting because with with
the political influences could be on that,

but there is some additional uncertainty
and how that would play forward.

I saw a lot of the commentaries about
when you have the declining interest

rate margin, you'll have the low deposit
betas that are existing credit unions and

that we're slow to as an industry adapt
to that, which Todd hit on even earlier.

The outlook per interest rate risk
is, declining rates and how are

set up to react to that, Todd?

Todd Miller: Yeah, I think, the
interest rate risk piece is still there.

It's somewhat interesting because
liquidity is talked about in this too.

And this is part of it too.

During COVID deposit and liability
structures just got really distorted.

And even before that with low interest
rates where you can differentiate,

the rate paid on your Regular savings
versus your money market versus a CD.

When rates started rising, our
deposit structure has changed.

I think it's actually reverted
back to normal, what it

looked like, in 2007, 2008.

It didn't change very much between
December of 2023 and September, other

than some borrowed money paid down.

People borrowed money here when rates
went up because they had a huge amount

of securities that are underwater at one
time that unrealized loss was 2 trillion

and it's still 20 billion of unrealized
losses and investment portfolios.

Hopefully the falling rates
will allow parties to normalize

that investment portfolio and
improve things along those lines.

Maybe people now can take some losses
to actually get some adjustments

in their yields or if rates fall,
it'll just make those investments

a little bit more worthwhile.

The industry has been really beat
up on interest rate risk over the

last few years, and like Steve said,
some people were slow to adjust.

I think the important thing is people,
especially with the CDs and higher

rates, adjust quickly this next time
around as rates continue to fall.

If they continue to fall, I
think that's a big question.

They're forecasting them to
fall, when you have a new party

in government, who knows whether
they're really going to fall or not.

So credit unions need to
be a little bit quicker.

Flexible along those lines.

They do talk about earnings
and net worth in here.

It's interesting.

They basically put, balance
sheet management in one category

where historically they've broken
this out to interest rate lists.

Interest rate risk, liquidity risk,
and then, your whole capital plans.

And they've thrown three really,
really broad areas into one thing.

But I think it boils down to this.

They're going to be looking at
your business plans, and they're

going to be looking at how
adaptable are you with tactics.

Conditions change, but and we're seeing
this, just amongst our clients in the

last couple of years, there's been just
an increased focus on business plans.

And in some ways credit
unions get criticized if

they're just off a little bit.

And it's Oh, conditions
are changing quite a bit.

They can't really predict that.

So there needs to be a
little bit of grace there.

But at the same time,
a lot of credit unions.

They need to be up front about what's
in their business plans, and if things

aren't working and they're changing
things, let's be transparent in how

we're doing that and why we're doing it.

Treichel: All great
thoughts and yeah, they did.

It's I used to say 4 or 5 years ago.

I think the 1st time we did this, I
maybe the 1st, 2 times we did this.

I talked about if everything's a
priority, nothing's a priority and

has gotten better at scaling back
on what they're calling a priority.

But like you said, they've collapsed.

They've collapsed basically 3
categories into this 1 paragraph.

And that could be just because they
had a new starting author at NC way.

That could be because the current N.

C.

U.

A.

chairman said, Hey, let's take a
little bit different approach to this.

Or this could be that the likely
incoming chairman, Kyle Hauptman,

who should be named chairman of N.

C.

U.

A.

shortly after Trump is inaugurated,
it could be that he had a little

bit more influence on this.

I was quite frankly surprised
the letter came out this quick.

I didn't know if they would just delay
it until Hauptman came on so he could

sign it or conversely the opposite.

It was going to be one of two things.

They rushed to get it out so
Todd can sign it or they wait

and they let Hauptman sign it.

Now, Hauptman could go out and
start doing speeches to tweak this.

He can, put his finger on the scale
a little bit about what goes on.

And what he communicates to the
executive director and the the

regional directors, but that gets
difficult for the field staff.

And I know we have some field staff
that, that that listened to this podcast,

but, this is something, this is a kind
of a beacon for credit unions to look

at this letter, but it's also something
that, that is to a staff looks at.

So with the administration changing
that could get that could get

interesting as we see a pivot there.

But I do believe that is
why this came out quicker.

I think Todd wanted to get done on his
watch, but he also was very collaborative

generally speaking, when you compare
all the different board chairs and how

collaborative they were or weren't, Todd
tends to be collaborative from what I've

seen and from what I've heard and from
what I know when I was still back at N.

C.

U.

A.

Any more thoughts on this topic
or any thoughts on anything?

I just pondered there, gentlemen.

Steve Farrar: No, but, as we move
forward on that, and we'll look

at, the comment in the letter is
that net interest margins have only

slightly exceeded operating expenses.

And so I looked at how we compare
to community banks on that.

And yeah, we're running at operating
expenses interest margin 97 percent

and that that we're just a little
bit there and that same measure in

that, the community banks have a
significantly higher margin there

between the net interest margin
and their operating expenses.

And there's going to be
pressure on operating expenses.

They have been rising more
than net interest margins.

Isn't that, credit unions are going
to be looking at, having to deal with

their systems and how you're going to
compete against, the fine tech fintechs.

So there's, there's lots of opportunity
there, but it's going to require

probably some new significant investment.

Treichel: That's

Steve Farrar: going to be interesting
to see how the industry deals with that.

Treichel: And

Todd Miller: go ahead, Todd.

Question for you, Steve.

Did you look at fee income
from banks to credit unions?

Because I know credit unions, their
fee income has fallen about 30 basis

points over the last three years.

And that's a big number.

30 basis points is drop in fee
income, compared to assets.

It's the difference between 70
basis points of earnings versus 1%.

Yeah.

So did you look at that
compared to our banks?

And I didn't really, analyze
the fee income of why it fell.

You can probably surmise that some
of it is loan origination fees

have shrunk with the rising rates,
although I don't know that to be true.

I just do know that fee income
has been tumbling the last

several years in credit unions.

Steve Farrar: Yeah, I believe it's
also in tumbling in the community

banks is that right now great unions
that have a higher fee income ratio

to assets than in the community banks.

Go

Treichel: ahead.

I'm sorry.

Go ahead.

Steve Farrar: The short term impact
has been some of the pressure on

the supposedly junk fees and the.

NSF fees that has been out there, so that
was expected, at least on the short run.

Now, we'll see if rates.

Come down, there's an
opportunity for refinances.

And even though margins may get
compressed, there's opportunity there

for fee income on the refinance side,

Treichel: And that is an area to
where I think the political change the

Biden administration coined junk fees.

They had banking regulators
at the White House.

When making statements about junk
fees, which then it was extrapolated

into the regulators talking about it.

Chairman Todd Harper talked about it,
saying that fee income concentration is

a concentration risk, even though it's
not said that it is anywhere else by N.

C.

U.

A.

But he said it.

So that makes it but that's the point
that once you have a new chair, he can

go out and say things and do things
that can calm the nerves down and maybe

maybe there'll be a little bit of a
recovery here on that fee income side.

The other thing as you're
talking about those All those

pressures about making money.

I've had a few calls with clients.

I've had a few calls with
prospective clients this week.

And the merger is a big theme where
there's credit unions that you wouldn't

think would necessarily be contemplating
merger are contemplating merger.

And then others I've had, I had
a conversation with the smaller

credit union this week and they're
ready to throw the towel in.

Just because of the challenge of the
exam, the challenge of making a profit

and having self determination where
they can actually influence it and

make a decision on a merger when they
can actually help pick who that is,

which is how most of them get done.

You want to do it when you still
have ample capital, but the pressures

that are out there are real.

And I got a feeling that mergers as a
percentage of outstanding units in 2025

will probably they're not going to go down
and that they probably might even go up.

Steve Farrar: Yeah, most prognosticators
figure M& A activity will increase.

This year.

Yeah,

Treichel: very good.

So cyber security.

Just 1 last comment on,

Steve Farrar: Net worth.

Yep.

There is some new in the banking industry.

It's some new bought Basel 3
accord kind of stuff coming out.

It's mostly affects
really large institutions.

It.

Tends to maybe change some of the risk
weightings to reducing some of the

risk weightings for risk based capital.

So there's a little bit of downward
pressure on the amount of capital

for financial institutions to hold.

But I think that's going to play out
this year as to where exactly that goes.

Treichel: Got it.

Got it.

So next on NCOA's letter
is cyber security.

Any thoughts on cyber security in
general or what NCOA said here?

Todd Miller: I don't see that
ever coming off of this list.

It might get higher some years than
others, but just the instances that

we've had in the last year with some,
of our large credit unions having

security incidences, the whole AI is
creating whole new environments of fraud.

You got the regulators going after the
Zelle, and what's happening with fraud

losses there and who should pay for them.

I just I don't see this ever not being
a challenge for our credit unions.

I will just say at the moment, based
on our clients, NCUA is still very

much, is still very much let's hold
your hands and help you through it.

They're not being punitive.

They're being, let's instruct
our credit unions and do our

best to make them better.

That seems to be their approach
to cyber security, but.

From my perspective, like I
said, I don't think it's ever

going to come off this list.

It just seems to be getting worse
and more challenging every year.

AI comes out, you'd think, hey, can
that help us with cybersecurity?

It helps the bad guys create more
holes in cybersecurity, so it's just

a constant leapfrog battle there.

So I don't ever see it
coming off the list.

I do think it's positive that NCUA
takes a Helping approach to this

with their credit unions, they're not
beating them up over it there Let's

mature our whole information security
platform seems to be the approach

that Ncua has historically taken and
are still taking to our knowledge

Steve Farrar: Yeah, I would say what
we've learned from people that have

experienced problems when you hit
that button to you know turn on a new,

Application or something for your members.

Make sure it works because if you
hit that button and it fails, it's

just total misery on every level.

Oh yeah.

This is always interesting because
it's such a fast moving area that it is

even difficult for regulars to keep up
because I was reading then about the,

the quantum computing that's coming out.

And there's obviously expenses in
there, but there are opportunities

there to improve items such as
fraud detection and just the more,

about what your customers want the
better you're able to react to that.

But that's just shows how fast
this part of operations moves

Treichel: Very good point.

And I think every issue a board
member ever at when asked what

keeps him up at night lists.

Cyber security is 1 of
the top 2 or 3 things.

So I agree.

It's going to be here forever.

And it's something you need to.

The dollars you spend on it will only
go up and you need to prioritize that.

But it is a definite and
real risk that all financial

institutions and consumers face.

Speaking of consumers Consumer
Financial Protection is always

going to be on here, most likely
as well, always has been on here.

Any general thoughts?

I know you guys aren't Consumer Financial
Protection specialists from your

background at NCUA, but any thoughts
about what is said in the letter here

on Consumer Financial Protection?

Todd Miller: I think it's
interesting that Fair Lending has

showed up here two years in a row.

Usually, they change these from
year to year, but Fair Lending

was in last year's letter too.

Treichel: Yeah, they've
hit pretty hard on that.

They've added staff in the budget.

I quite frankly thought they'd add
more fair lending examiners than than

they did over the last two years.

That being said they've doubled, I
think, the number of fair lending exams.

That they've had going on.

But yeah, there's
definitely a focus there.

That could be something that you
see a little bit of the emphasis.

But probably not probably
not a quick turn.

I think they'll probably do what they
are planning on doing in 2025, but by

the time the budget rolls around next
time, they may deemphasize that when

we're doing this recording in 2026.

That may fall out.

I'll just comment on
the overdraft program.

I've got a recording of a podcast
scheduled with Joe Goldberg, one

of our team members here at Credit
Union Exam Solutions, to talk

about NCUA's letter that came out
on overdraft programs last month.

More to follow on that.

Steve, any thoughts on
consumer financial protection?

Steve Farrar: Yeah, didn't we have a
few publicized instances of fines being

imposed on some of our credit unions?

Treichel: Yes.

Yeah.

N.

C.

U.

A.

Has has been and the Justice Department
has been aggressive on a couple

of such situations making, raising
some things into the spotlight,

if you will, for some situations.

And that's also an area I think with
the pivot to the Trump administration

will probably be de emphasized.

Todd Miller: So I haven't listened to your
podcast on Overdraft, so I was going to

ask you which direction do you think it
goes, because I find the whole Overdraft

thing somewhat interesting, and while I'm
sure there's banks and credit unions out

there that kind of abuse it, in general,
Though for the most part overdraft fees

actually almost become a service that
actually helps their members more than

hurts them you know, it's a way to keep
them out of the payday lending and the

pals lending and the pawn shops and it's
a short term financing vehicle and they

know they're getting feed for it They're
still going to use it anyway, because

they have needs to do so You know, they
might not build up their credit cards

because of that and it's one of those
things from my mind It seems well This

is the best intentions in the world.

But at the end of the day, it may
actually hurt more members than it helps.

Treichel: Todd, what you
just said is my opinion.

I think the attack on overdraft
program is whack a mole.

If you can't fee him here, you'll
find a way to fee him there.

And there are people that need that.

And they'll go to the fees that
credit unions are offering.

Generally speaking are better off.

Than the other the payday
lending like you described.

Now, we haven't recorded that podcast
and that one is going to be recorded

next week and come out in a couple weeks.

But so I

Todd Miller: advertised for you.

Yeah,

Treichel: you did.

But what you said I would agree with.

And I think if you if and I have to
believe and I do believe that because

the administration and because N.

C.

U.

A.

Has focused on this, there have
been people and credit unions

who've shut programs often are
just bouncing the checks now.

And and there's rules they need
to follow relative to that.

So people are being driven to payday
lending sources in an environment

where You know where things are
inflationary and it's going to get

harder and harder for the people that
they're trying to help in my opinion.

So I would agree with that.

So other updates exam updates.

I've got a couple of thoughts on
this, but I'll just read this 1.

it says in 2025, the NCUA will update
its exam flexibility initiative to

provide an extended exam cycle for
credit unions over 1 billion in assets

where the NCUA rated the credit union,
a camel composite or camels composite 1.

One or two with no change in CEO since the
last exam, these institutions will now be

eligible for a 12 to 16 month exam cycle.

Additionally, the extended exam
cycle for the eligible federal credit

unions will be shortened from 14
to 20 months to 14 to 18 months.

So they're trimming it two months on one
end, but they're allowing the big credit

unions to have an elongated exam cycle.

Any general thoughts on that?

What you've seen
historically in this area?

I have a separate podcast I did on this
when they brought this up when they snuck

it into a statement at the board table.

But what are your thoughts on that guys?

Todd Miller: I'm sure they're
doing it because they can't

meet their own exam program.

But let's just say they've
moved their exam cycles many

times over our 30 year careers.

And it's every time they extend it, it
just doesn't turn out well for them.

Treichel: Meaning it leads to
insurance fund losses in the

end, which is what the game is.

They end up having more losses because
things, more things can get missed

and more situations can go from bad
to worse before they go back in.

Todd Miller: Troubled credeans ends up
accelerating and speeding up on them.

Treichel: Sure.

Yep.

Todd Miller: Yep.

In some respects, I think if this
is a thing with all the regulators

and it's like cybersecurity,
you're reacting to the environment.

You're reacting to political situations.

It's very difficult for them
to get ahead of situations.

They're always reacting to
things that went on behind them.

So excellent

Treichel: point.

Steve, anything you want to

Steve Farrar: this is going to
put, examiners, need to do good on

those cases assigned to them on how
they're managing their district.

And, looking at the periodical, we're
actually looking at the reports.

Hopefully they're getting enough budgeted
time to where they're going to do.

Feel like they get to spend enough
time to monitor their district and

feel like they know what's going on.

So they can spot negative trend.

Earlier and react.

Treichel: Great point.

Great point.

I'm looking back to try and
see the name of that podcast.

I did on this.

It was episode number 222.

By the way, guys, we're on
about 230 episodes of With

Flying Colors at this juncture.

But episode number 222, I called
it NCOA Changes Exam Frequency,

colon, or Regulatory Theater.

Todd, you Pointed out that N.

C.

U.

A.

Has had a difficult time
doing their exams timely.

They've pointed that out in their annual
performance report where they put their

goals that link to their strategic plan.

And Kyle Houtman, who I've
mentioned a couple of times

here, is going to be the chair.

Has said, Hey, we're not even
getting our exams done on time.

We're not getting our
code fours done on time.

We're not getting our
code threes done on time.

I guarantee you if they're not doing the
fours and threes on time, that they're

not doing the twos and ones on time
either, because those have less risk.

I was talking about this as it happened
and my wife was sitting in here, and

she came up with a perfect analogy.

Before I recorded that last podcast
saying that it sounds like what the

airlines did when the airlines 10, 15
years ago, couldn't get anywhere on

time and they were getting beat up in
the press that they were always late

here and they were always late there.

What did they do?

They added a half hour or 45 minutes to
every flight and every flight was on time.

So this is more.

We haven't been doing them timely.

We haven't been getting there
in there every 12 months.

So we might as well get the good political
soundbite of saying we're elongating our

cycle setting aside the fact that people
take forever to get their exams, but

they're really just changing their policy
to match what has actually been being done

for, I would say two, maybe three years,
maybe all the way back to the pandemic.

It sounds good.

It's a good sound bite.

I got some ideas on who in that
building might've figured out how

they might be able to spin it.

When you've been there 34 years and you
see the spin you got a column on it.

Todd Miller: Steve mentioned
something, about district

management for credit unions.

And so Steve was a PCO for 15 years.

I spent 15 years dealing with
troubled credit unions, probably

more because a lot of my first CMS
time was troubled credit unions.

And I'm sure you've seen
a lot of this too, Mark.

The district, So there's postmortems that
NCUA always issue when a crating fails,

and they always say management, caused
the failure of the crating, which is true.

But what they almost rarely say is
how frequently NCUA should have caught

things a lot sooner and didn't because
district management wasn't there.

It's interesting.

They've created tons of tools
to now examiners have reports

like crazy to fill out.

They have rate reviews.

They have these risk reviews.

They have tons of things, but it's
still just they still don't just seem to

catch up on let's catching things early.

And I think maybe they're, they've created
so many tools that examiners are checking

boxes and not really thinking about
what's happening in their credit unions.

I don't know how the agency fixes that,
but when they get to cycles like this.

They do need to figure out a way
where there's less false positives

in their monitoring system.

I think their monitoring system
creates lots of false positives.

So people miss the real important
things when they start going south.

Treichel: Yeah, great point.

And when they talk about credit risk
and they're, they seem to really

be concerned about credit risk,
the data is going the wrong way.

And then they say, Oh, by the way,
we're increasing the exam cycle.

That's not congruent.

That's just not congruent.

Any final thoughts, guys before we wrap?

I know there's a category on minority
depository institutions and which I,

that tends to be something that's in
there under Democrats and it tends to

fall out under Republican Republicans.

And that's all good language
there and things credit unions

should do if you're an MDI.

Credit union, you should
take a look at that.

There are resources available from InsuA
to assist, but any final thoughts on this

or or any other topics in the letter?

Todd Miller: I think it's
just a big one there.

Number one is credit risk, and
that's what causes the vast majority

of failures in credit unions.

Okay, there's a fraud last year in
there, but it's credit risk most of

the time and really credit unions.

I had a CEO I don't know.

It was about a 700 million credit.

And one time tell me his number
one responsibility was ensuring

that their credit risk was solid.

Even though that was a large credit
and that person probably never

touched loans, he seen that as
one of his key responsibilities.

And what we see with clients over the
last few years, there's a huge emphasis

on getting your concentration risk
numbers aligned appropriately with

your capital position getting your
whole loan servicing systems in place.

If you're a commercial lender, it's not
just did you make a good loan today,

but are you servicing it appropriately?

The NCUA has told credit
unions, hey, we're focused on

credit risk, credit unions.

You need to make sure your credit
lending systems are up to par,

collection systems are up to par,
credit monitoring systems for all

your various loan types are up to par.

They're going to be looking at those
things and really for the survivability

of your institution, if you're a lender.

You need good credit risk
management systems in place

and a good credit culture.

Another member of Mark's team, Ben Beaton,
he hammers on credit culture all the time.

And NCA is going to be out there
assessing your credit culture.

Treichel: That's a fact.

That's a fact.

Great point, Steve.

Steve Farrar: One thing I was surprised
that didn't appear in the letter.

Because we saw it a lot in some
of our clients is Either examiner

findings or document resolutions was
the topic of corporate governance

Treichel: Yeah, i'm shocked.

You got one of you guys had pointed
that out before we started recording

I'm shocked that's not here because
it is very present in Examinations as

you said when someone gets an examiner
finding or a door It seems to be

linked back to corporate governance.

Yeah very surprised it's not there,
but just because it's not there don't

expect NCOA to stop asking you about it.

There's good, we have good podcasts
out there, two or three different

podcasts on corporate governance
that you should listen to.

They will help you with
your exams for sure.

Yeah.

Steve Farrar: And Todd kind
of hit on that whole credit.

Management thing in culture
is, what is your risk appetite?

Can you describe it and
share it with your employees?

So they everybody's on this on
board with what the mission is

in terms of a credit culture?

Treichel: Absolutely.

Yep.

Great point.

All right, guys, as
always, this is a fun one.

Listeners Stephen Todd, I want to
thank you for being available today

to talk about this with our listeners.

And listeners, I want to thank
you for listening as always.

I hope you listen again soon.

This is Mark Treichel signing off.

With flying colors.