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Treichel: Hey, this is Mark TriCal with
another episode of With Flying Colors.

Today's topic is going to be an
update on NNC a's stakeholder forum

on interest rate risk supervisory.

Framework.

This webinar and update from
NCOA just happened at 2.

30 Eastern on September 15th.

I listened to it and one of my team
members, Todd Miller, who is Got a

great background in this, also listened
to it, and we're going to talk through

our immediate take on having just
heard NCUA's webinar on their changes

to Interest Rate Risk Supervisory
Framework, which was outlined in

letter 22 CU09, issued just this month.

Todd, how are you doing today?

Miller: I am doing, the
weather's a little bit cooler.

It's been a lot, a very hot summer out
here, but today, weather's nice, doing

well, and this is an interesting thing.

Been waiting for it
since I signed up for it.

So listen to it with a
great deal of anticipation.

Treichel: Yeah, you and I have both
been looking forward to this one.

We've got some clients we've assisted
on interest rate risk over the past few

months who have been waiting with a abated
breath for the letter to credit unions.

And then also for potentially some
clarifications with the webinar today.

And it's, it's been a few
episodes since you and I chatted.

We actually did do an, ironically,
we did do a net economic value pick.

Podcast early on in the history
here of with flying colors.

I did a follow up on that
when rates started going up.

And so this will actually be yours and
my second discussion on this, but the

third actual podcast I've had on this
particular topic, but if you could,

for people who haven't listened to.

Some of the podcasts that you have been
on, if you could give a little bit of

your background at NC, and then they'll
quickly realize why it makes sense to

listen to this episode and hear what
you have to say relative to this topic.

Miller: Like you, Mark, I'm
a retired NCUA employee.

I was with NCUA from 1987 up to 2021.

So 34 years call it during that time
I spent most of my time as a problem

case officer spent 10 years as a
capital market specialist from 2000

to 2010 and then from 2010 to 2021
when I retired, I was a director of

special actions in the Western region
supervising capital market specialist

and as well as problem case officers
and dealing with troubled credit unions.

So in my 10 years as A capital market
specialist did a lot of training

for NCOA examiners on the review
of interest rate risk and liquidity

and had a hand in developing some
of these tools that they use today.

And if I didn't, staff that worked for me
certainly did very close to all of these

topics, especially over the last 10 years.

Treichel: Yeah, yeah, you, as you said,
10 years as a capital market specialist,

and then another 10 plus years supervising
those capital market specialists and

having been in on meetings where NCUA set
some of these policies and or provided

some input on where NCUA was at in the
past, and that's actually might be a

good transition on providing, we've given
your background a little bit, maybe it'd

be good if we kind of walk through for
the audience a little bit of history

and background on this whole arena.

Yeah.

with where NCUA has come since
the early 2000s and where they're

at coming up to today's webinar.

Miller: Sure, we can do that.

And we did a lot of this
background in our NEV podcast, too.

If people want to go back
and listen to that one.

In the early 2000s, NCUA had this
thing they called the 17 4 test.

It just looked at asset volatility.

It was a scope determinant.

2016 is really when they came out with
a policy that they were talking about

today and revisions made to that.

So we'll talk a little bit about that one.

That's when NCUA determined that
we were going to use, or the agency

was going to use, premiums of one in
4 percent for non maturity shares.

You'll have to excuse me if I say we,
sometimes I think I'm still with NCUA.

I spent so much time.

With that family, but that
was addressing a problem.

There were parties out there that had
very large non maturity share premiums.

It wasn't a lot of them, but there was
a number of them where those premiums

would be 15%, 20%, even on occasions, 30%.

And in those situations, the credit
union could essentially have about

a hundred percent of their loans in
fixed rate, long term real estate,

and the models would say they're fine.

So.

I would rephrase it as credit unions were
using model results to justify what they

were doing and not using their models to
inform their decision making, so to speak.

So, to just alleviate all of that, NCUA
came up with the 1 and 4 percent premiums.

They did a lot of research.

Everyone's models on the asset side of
the balance sheet look very much the same.

Most of the liability side
look very much the same.

But then you come to these non
maturity shares and results were all

over the place and very inconsistent.

So NCA said, we'll make this consistent.

We'll create some bright lines.

It will avoid us from having these
discussions with credit unions.

It's a one size fits all approach.

That works for most of the time, and it
did accomplish what the agency wanted in

terms of some consistency of measurement
and helping them compare risk in one

credit unit to another credit unit.

It accomplished that very well.

Treichel: And they actually, Todd, they
actually in the webinar, which we'll,

I'll have a link to the actual NCOA
webinar in the show notes once they, I

may have to go back and add that because
we might get our podcast up before NCOA

gets their webinar up, although they've
been moving those more quickly, lately.

But they made a reference to that.

Uh, that specific issue that it
helps NCUA provide context if we're

looking at everybody doing all
of their own assumptions on it.

And as you said, you could have
people going with as a lowest

4 percent and as high as 30%.

The numbers come out so much differently.

This provides context to NCUA so they can
take their quarterly data and take a look

at it and see who those outliers are.

So that perhaps they could say, Okay.

Because they're outliers here, we might
want to send a capital market specialist

into those credit unions so that we could
see if they have the systems in place and

the programs in place to mitigate whatever
risks those numbers might show or that

there actually might not be any risk.

Does that sound right?

That

Miller: does sound about, and I
think it's an accurate statement,

but we'll go back and talk a little
bit more about the background is.

It creates some problems too.

Anytime you do a one size fits all
approach, you're going to have outliers

where that approach just doesn't work.

The fact of the matter is credit unions
are not all the same balance sheets vary.

There's an infinite number of
combinations of risk and reward out there.

And one size fits all approaches
doesn't work for everybody.

And in fact, their guidance
in 2016 was very inconsistent.

from the way they manage other risks.

They've always talked about
it's examiner judgment.

We need to look at a given risk
area in light of other risks areas.

So we need to aggregate risks together
and their approach in 2016 says if

you hit this bright line, you're going
to get a document or resolution and

we're going to ask you to de risk.

So, It's like a sledgehammer to
a problem that just really needed

something as simple as a Dremel tool.

They went way overboard with it,
and it was very inconsistent with

their other examination procedures
in that and everything else.

Let's look at aggregate risk here.

They said, Here's a silo.

There's zero examiner judgment.

We're going to look at this one factor.

We're not going to consider
how much credit risk you have.

We're not going to consider how
much liquidity risk you have.

We're not going to consider that
accrediting with 2 percent operating

expenses can accept a lot more interest
rate risk than accrediting with,

say, 2 4 percent operating expenses.

So from that one aspect, this bright
line that they created in 2016

was actually not really consistent
with the rest of their exam guide

and the rest of their processes.

And when you really come down to
this program update in this new

issuance that they issued here last
month, and that we talked about

today, they really just fix that.

And really brought the world back to
let's be more consistent with the way

we evaluate all these other risk areas.

We do evaluate risk in
light of other risk areas.

We are going to allow a
measure of examiner judgment.

We are going to go back where this test
they use, and they're still going to

use the test is a scope determinant
and it helps them find outliers.

So it's still useful for that.

They're going to use it for that.

That's.

more consistent with the way they
examine all the other areas of risk.

So in the big scheme of things,
I would just say they're maybe

fixing a mistake they made in 2016.

Other people might not categorize it
like that, but the reality is that

policy has cost a lot of angst for a
lot of credit unions here this year.

Treichel: Yeah, it sure has.

And I think it went unnoticed
until rates went up, right?

We didn't have a situation where we saw
the results of what it was doing where

everybody was getting rated extreme.

And if you were extreme, you automatically
had to get a document resolution.

And as you've so eloquently
said, examiner judgment.

In every other area determines whether
or not you get a document resolution,

whether you get an examiner, funny, let
me back up setting aside bank secrecy

act, where there are some required
document resolutions and things like

that, based on agreements with other
agencies, this really gets this whole

interest rate risk topic more aligned with
the rest of their exam program, which.

Again, comes back to examiner judgment.

Todd, one other thing you mentioned
is, if someone, if the, if someone

has extremely low operating expenses
or extremely high net worth, yet

they have some issues with their.

Uh, interest rate risk calculation here,
the ENT or the NEB, whichever, whichever,

whichever way you want to call it, if
they have a lot of other positives, those

can be mitigating factors that may result
in the examiner using that judgment

and concluding that the credit union
does not need a document of resolution.

Anything you'd like to expand on
relative to the statement I just made?

Miller: I think that's absolutely it,
and they alluded it to it a little bit

in the webinar that you may still find
yourself, a criterion may still find

itself with a high risk rating for
interest rate risk or for sensitivity is

the term they use now, it's on the camels.

But yes, you can use these mitigating
factors now where perhaps you

won't get a document or resolution.

Yeah.

We'll go through maybe the slides a
little bit in their presentation and

get to the document or resolution.

The letter is very specific as to when
you'll get a document or resolution.

It's more consistent with other
practices and that you're going

to get a document or resolution if
your risk is high enough to cause.

Some undue risk to the insurance fund.

Our management risk management
practices are severely deficient.

Now you can have that number, but
if your risk management processes

are good and you have control of
your risks and other areas, you're

probably not going to get a door.

I'm sure there's still going to be some
uncomfortable discussions about your risk

position and what is really management
doing to recognize that and assessing.

If they need to do something with it,
pardon on, I thought it was interesting.

They had a slide during today's webinar
on contributing factors and results.

Some of this is because we just had a
huge surge in deposits over 2020 and 2021.

During the pandemic, they grew
over 20%, both of those years.

So capital ratios dropped
across the industry.

So we're starting out at a
lower point than perhaps we were

when this policy was enacted.

It is interesting that growth has
slowed tremendously since then.

And in fact, from March to June, there's
been almost no show share growth, but

it's hitting this whole high risk.

It's hit a very specific
number of credit unions.

And they talked a little bit around it
during the webinar, but The ones that it's

really impacted the most are these credit
unions with lower loan to share ratios.

So you have a group of credit unions
that are relying on their investment

portfolio for earnings, not just
liquidity management, but they have

large investment portfolios that are
really serving as their loan portfolio.

So they have zero credit risk, but
they've taken on duration and extended

the maturity of their investments because
it's a core piece of their earnings.

While the rise in interest rate risks.

or interest rates, it's dropped
the value of those significantly.

And you can see it on
the FPR just nationally.

I think it's around, they mentioned
it during the webinar, 17 percent

of net worth is sitting in these
unrealized losses and investments.

So those criteria have been hit
really hard in terms of triggering

extreme risk on that supervisory test.

But also the parties that have the
most mitigating factors, they typically

have very low operating expenses.

And because they're not making loans,
they have almost no credit risk.

So they need to be taking on interest
rate risk to generate earnings.

And it's all reasonable.

And Many of these credit unions
were just showing up as moderate

risk in December, all of a sudden,
now they're extreme went from

Treichel: moderate to extreme.

And now the definition of
extreme is, oh, is gone.

But that may have led to them already
getting a document resolution.

Miller: Yeah, so those are the people that
have been hit really hard by this policy,

and they're the very ones where when you.

Assess the risk mitigation.

They have the most mitigation.

So they're the group that can actually
take the most interest rate risk too.

Treichel: Fascinating.

Fascinating.

Yeah.

We might want to do a little deeper
dive into that, but the other

thing too, is it might be best for
someone who hasn't seen the letter.

If we maybe talk through the highlights
of the actual letter to credit

unions to, to give a primer on who
the letter applies to, et cetera.

So what, what are the highlights
of the, this recent letter that we.

Miller: So I would say there's a
couple main highlights in the letter.

First off, this applies mostly
to credeans over 50 million.

So the smaller credeans, it
doesn't impact them at all.

The letter does a number of things.

In the 2016 policy, they created
this extreme risk category where

there was no ifs, ands, or buts.

You were going to get a document of
resolution if NCUA supervisory tests

determined your risk was extreme.

Using their 1 and 4 percent
non maturity shares.

It does away with that
entire extreme risk rating.

It's gone.

They've just eliminated it.

Now we just have low, medium, high.

So, they've eliminated that entire
risk rating, which was appropriate.

Policy in 2016 also took
away examiner flexibility.

They were not allowed
to alter that rating.

at all.

It was a numerical rating.

This new guidance in the letter, it
gives the examiner some judgment back.

Now, it does say it should be rare
for credit unions to lower that

risk rating, but it does create
an environment where they can.

And then, of course, the absolute
largest thing it does is the 2016

guidance required a document of
resolution and a de risking plan.

That has done away with.

They've created some specific criteria
where A document of resolution is still

appropriate, but for a lot of credit
unions, not for a lot, it's hard to judge.

For many credit unions, the
document of resolution is probably

not going to be appropriate.

They laid out conditions for when
they might still need a document

of resolution, and that's undue
risk to the insurance fund.

A credit union really hasn't
reacted appropriately to

these rising interest rates.

Risks.

It's a big change in risk rating and
should be talking about their various

loan and investment and pricing
strategies and they probably need to

change them or at least reassess them.

So there's a category of folks that have
not done that may still find themselves

with the door, even at a high risk rating.

And then the third piece, and
this has always been a reason for

having a document or resolution.

It lays out if a criterion has
material issues or weaknesses

in their governance of risk.

And that's always required the
door in regardless of the area.

So that's really not a new policy.

It's just reaffirming a
policy that's already existed.

But that was the biggest change
is they deleted the extreme risk,

gave their examiner judgment back.

Doors are not automatic.

Now they need a safety and soundness
reason for giving you a door, basically.

Treichel: Got it.

You also mentioned as we were chatting
before we started, before I hit the record

button, that there's a sentence or two
in the letter where the NCOA equates the

fact of asset growth and complexity and
risk, and I know you have some general

thoughts on that, on whether or not
that's, that, that, is that a truism

or is there, is it a little bit more

Miller: I'll actually go, I have
the letter right in front of

me, so I'll read the sentence.

There's two sentences and then
I'll chat with them about.

So the two sentences in the letter says
the crediting system has experienced

significant growth and complexity
over the past two years, with total

assets growing by approximately 25%.

As the system has grown, concentrations
in longer maturity assets have

significantly increased sensitivity
to changes in interest rates.

So, They're talking about assets,
and I guess NCUA has been doing this

for a long time to justify budget
growth, to justify new departments.

Assets are growing, so the
world is getting more complex.

And that's not necessarily the case,
and in here, that, those two sentences

infer that complexity is increasing.

But the fact of the matter is, if you
pull down NCUA's call reports for June,

uh, This year, long term fixed rate
real estate loans have moved from 23.

2 percent of assets in 2018 to 22.

39 percent at June of 2022.

So in four years.

Exposure to fixed rate real estate
loans as a percentage of assets.

It's actually come down a little bit.

It hasn't gone up.

Now, total real estate loans
have gone up, but as a percentage

of assets, no, it's come down.

Another big piece of that is commercial
loans because they throw all these

commercial loans into long term assets.

They went from 4.

88 percent of assets in 2018 to 5.

88 percent today.

It's very much an insignificant change.

So it's one of those things,
NCU, and they say that a lot,

that growth equals complexity.

But really when you look at that
balance sheet composition and how

they're funding those assets, it
hasn't really changed, they leave

out the funding side of it, which
hasn't gotten any more complex either.

I just find it interesting.

They throw that into all their letters.

They use it a lot.

Assets are growing.

World is getting more complex.

Not really.

Assets are growing, but complexity
is not changing very quickly in

aggregate across the industry.

There might be individual parties
that increased a lot, but across

the industry, no, that complexity
has not really changed since 2018.

Treichel: Got it.

No, that's I think that's an interesting
point that I didn't pick up on.

I'm glad you did a deep
dive on the numbers.

And like you said, individually, credit
unions risk profiles have changed.

And we've seen that on some
individual situations that

that we've been involved with.

But that's good to point out.

Now, one thought on the whole liquidity
Side of this in the webinar, and I might

be getting a little bit ahead of myself
here, but this just popped into my head.

So let's go forward.

So in the webinar, there was some
discussions about the liquidity, the

requirement for liquidity policies
and different things like that.

And there's, there were also references
and you might have the slide in

front of you, but references to the
upside down nature of the investment

portfolios collectively in credit
unions, where, where the net worth is.

A certain percentage of the net
worth is eaten up by the fact that

these investments are underwater.

And of course, they don't have
to recognize that if it's in

a whole to maturity category.

However, there are some situations
where credit unions need to worry

about that longer term if that.

If they have a big investment portfolio
and if that loss keeps going up,

that can have some ramifications on
their liquidity in different ways.

But one of those ways is the relationships
that they have for borrowing.

I've heard you speak to me on that
offline, but can you highlight,

highlight that here for our listeners?

Miller: So there's lots of
pieces to the liquidity piece.

And I think this is one of those
things where NCOA, they tend to.

fall behind on where risk is really
going and then it hits them in the face

and then they start adjusting policies.

In fact, someone asked a question
during the webinar today.

Is NCUA looking at how it's
looking at liquidity and do they

have any plans to change it?

And they talked around the answer.

So somebody is paying
attention to what's going on.

I think there's a few things going on
with liquidity risk and there's a lot

of indicators that it's increasing.

So, first.

A lot of creditors and lenders,
they look at your gap equity as

opposed to your regulatory equity.

And while regulatory equity isn't
falling because it doesn't consider

these investment losses, gap equity
is falling pretty significantly too.

It's down a From about 11.

2 in 2019 to 9.

99 today on an aggregate basis, you
look at the investment portfolio.

Let's see.

I have a call report in front of me.

I'll get to it here.

Fair market value of hold to
maturity investments is down

to 94 percent of book value.

And that unrealized loss on
available for sale investments is 7.

5 percent at June.

Credit unions don't like
to sell investments.

At a loss, one of NCOA's internal models
that they used to use years ago, it had

an indicator for investment losses greater
than 2 percent because just intuitively

history shows when you're more than
2 percent underwater, you typically

don't want to sell those investments.

They're still available to pledge, but
that's a secondary source of liquidity

and your haircuts are going to get
larger, especially if a credit union

starts having asset quality problems.

Generally, if asset quality is good, they
can still use those investments to assess.

wholesale funding.

A couple of other things going
on that they don't talk about

behind the scenes is we have these
very large inflation numbers.

No one really talks about them.

But if you go look at deposit growth
since March of this year, It's 0.

2%.

Deposit growth is ended.

People are struggling to pay bills and
I'm sure that has an impact on that whole

deposit growth, which is almost nothing.

When I looked for March to June
across the industry, all your asset

growth was from borrowed money.

So borrowed money is growing very rapidly
and then we have these rising rates.

So what is the cost of
that borrowed money?

Right now it's not showing up in
cost of funds yet because all that

borrowing is shifting to overnight.

Historically, credit unions, they
would borrow long term to fund loans.

They would borrow long term
to hedge interest rate risk.

Now you're seeing just an explosive
growth in overnight borrowed money.

And that's funding growth in the industry,
and that's just from March to June.

And so those are kind of indicators
that, hey, liquidity problems

might be coming down the pike
for individual credit unions.

And so you got a combination and
borrowings are going up, investment values

are falling, gap net worth is falling.

We have these large inflation
numbers, which potentially means

parts of the economy are slowing down.

People are having troubles playing bills.

I remember one of our clients,
we were having a conversation or

they had us look at their credit
committee meetings and their cost

of fuel oil for that one person,
their members tripled from last year.

And so they had just a segment of
their middle class members are going to

struggle just because of the increase.

Costs in heating costs this winter.

So there's lots of little warning
indicators around liquidity.

And so they did mention during the
podcast today, there is a liquidity

regulation, you are supposed to
have a contingency funding plan.

You do have to have the access
to the federal reserve or the

CLF, if you're over 250 million.

So just as a side note, even though this
is a podcast about interest rate risk.

The industry would do well to go reassess
their liquidity risk at an individual

party level and see if strategies about
that might need to change as well.

Treichel: No, that's a great point.

And it's, they're related and
an issue I think that's brewing.

And as you mentioned, you've got, you
didn't miss mentions of specifics, but

you've got the corporate credit unions,
you've got the federal home loan banks.

Of course, you've got the fed and
their liquidity borrowing abilities.

Can be at one or all of those and
of course, obviously, depending on

their size, but other factors are
potentially painting some credit unions

in a corner because of the fact of the
value of their portfolios because of

the fact that maybe they've already
accessed some of their lines and as

numbers start to deteriorate, those.

Sources tend to look a little bit
more closely at the credit union.

I think you've said they put,
they may start monitoring and put

them on some sort of watch list.

It's something you definitely want to
get ahead of before you end up having

some of those things evaporate under you.

And as I've heard said before, liquidity
doesn't matter until it matters.

And when, and then it's the
only thing that matters.

Miller: Yeah, and I think
we're a ways away from it.

I don't want to imply that borrowing is
bad or credit unions are In totally in

trouble because that's not the case at all
But that whole borrowing and ability to

borrow is there to help serve your members
and get you through these Crises and we

don't really know how long the economy
is going to stay down or how inflation

How long inflation will remain elevated
and how that will impact consumers.

So far, you don't see it
on the asset quality side.

Delinquency isn't coming up
anywhere yet in credit unions.

So that's a good thing, but you might
start seeing it become elevated and

that becomes a watchword with liquidity
issues too, is when credit risk

starts going up and you start seeing
elevated delinquency and elevated

charge offs, then the liquidity
risk will Really start accelerating.

Treichel: Sure.

And of course that gets to that
inflation that gets to where, where

our company's profits at, what do
they do relative to unemployment?

What's the impact of unemployment on,
on, on rates going up to try and control

inflation and just listing those things
makes my head hurt and there's smarter

people out there than me that, that know
what all that means, but it does mean that

it can create some issues individually for
credit unions, individually for people.

And what have you, so

Miller: I'm sure it's extremely
challenging for every credit management

team out there and board out there
because you have these national

trends, but then you have all this
localized stuff and I'm sure places

where the economy is still very robust.

There's places it's slowing down,
there's places where their segments are

good and other parts are slowing down.

It has to be, they're just.

The uncertainty is higher, I
think, than it has probably been

in the last four or five years.

And they alluded to that a
little bit in this letter.

It's, wait, we haven't seen
an interest rate risk increase

like this in a long time.

And so that level of uncertainty, it
always creates risk management challenges.

So.

It's a tough time for management
teams and boards of directors.

Treichel: Yeah, that's a fact.

So we've talked about what
the letter highlighted.

We talked about the door
clarification of what happens

relative to not requiring a door.

What's what.

What might require a door and we both
listened to the webinar, maybe we should

talk through what we thought the key
takeaways were where they provided some

context in the webinar on the letter.

So what jumps out to you
having just listened to it?

What do you think we
should highlight here?

to the webinar if they haven't
listened to it themselves.

Miller: The person who spoke about this,
Jonathan Farrell, he spoke very quickly,

but he had a slide on things that would
help you avoid getting in the door.

And they gave some examples in the actual
letter itself of situations that you

would not necessarily receive a door.

And I think for a lot of credit
unions, those need to be one

of their takeaway points.

What do you have to do to not get a
door, even though their supervisory tests

might tell you you're very high risk?

A lot of that really comes down
to, you need to have good risk

management practices in place.

The words they use during the webinar
is your risk management processes need

to be commensurate with your risk level.

And that's Regulatory language
that's been used for decades.

Sometimes it's hard for credit
needs to put their finger around.

What does that actually mean?

But many credit use vendors.

They have peers.

Let's have some discussions with that.

Let's have some discussions with
your examiners ahead of time

of what they might think that.

may also mean.

They'll pretty much say you won't get
a door under two conditions and that's

if your risk management processes
are acceptable and commensurate or if

the crediting has already taken steps
to act on their high risk rating so

they've noticed their risk has gone up.

So They've went back and
they've come up with a plan.

We're going to change
our pricing strategy.

We're going to slow the growth of long
term assets, whatever that may be.

What they're looking for, does the
credit union already have a plan to

maybe start reining in their risk
level or containing it or reducing it?

So it's those two pieces
are the big takeaways.

You're not going to get a door if
you have really good risk management.

Practices and governance across your
credit union are if your risk is

elevated, has your management team
done something to rein that back in?

Do you have a plan to
contain this rising risk?

So those are the two big takeaways.

If you want to avoid a door and
get a good risk rating is make

sure your risk management processes
are Acceptable and consistent.

And I think for some of the
credit is that already got a door.

They did have good risk
management processes.

I think the examiners were very
reluctant to give them a door.

They knew one wasn't necessary, but
they had this agency policy that says

I have to give you a door that has
happened to places that have very That

have risk management practices that are
commensurate with their risk, but the

second piece for the smaller, moderate
credit unions, and if you haven't

got an exam yet, and you are going to
hit their new high risk ratings, do

make sure and do a self assessment.

Have we addressed these issues?

Have we paid attention to
our rising risk levels?

Do we have some discussions
in our ALCO committee?

What are we going to do about it?

Are we going to talk about
our earnings challenges?

And I really, let's go back
and look at everything.

Is your credit risk management
where it needs to be?

Have we assessed how this changing
marketplace might impact your liquidity

risk and credit risk down the road?

So continue doing what you're doing.

If you have good practices
in place, you should be fine.

Treichel: No, that all makes good sense.

And you talked about, so someone
who's offering fixed rate.

Real estate loans.

And that may have played a role.

You can tweak what you're putting
on the books moving forward.

Same as tweaking what it is that you're
putting on the rest of your assets.

You mentioned credit unions that rely
heavily on the investment portfolios.

You obviously, if they want to hold
what they've got to, they've got to let

that play out, but they can change what
it is they're adding to their book.

I know one of the things.

You and I, again, have talked
about, so one scenario, one of the

things that drives this is if your
liabilities are mostly in the core

deposits, the share, the regular
share deposits that have no term.

You can try and attract and move that
money by creating rates that might help

move that money, but it really relies
on what your members are willing to do.

And then it also has an
impact on the bottom line.

The other thing you can do is,
You can, you can start borrowing

longer term to make your numbers
come out a little bit better.

Any thoughts relative to anything I
just threw out on the table there on

what might make sense, what doesn't
make sense, what thing credit unions

could consider when they're looking at
different levers that they can pull to.

Reduce their

Miller: overall risk.

You can pull all those levers,
just recognizing there's

going to be a cost to them.

And like I said, one of the things
that's somewhat interesting is

credeans are getting increasingly
competitive for loans, even though

interest rates are going up, yield on
loans across the industry is coming

down because they're just fighting
with the banks, credit unions.

Internet lenders are fighting with
everybody for loan dollars because

even though rates are going up,
there's still such a big spread

between loans and investments.

People are fighting for loan dollars.

So loan yields are coming down.

That's fascinating.

You normally, you would think about,
okay, we can pay a higher amount

of money to borrow, to fund loans.

You can pay a higher amount
to borrow, but you might not

have the loans there to grant.

Sure.

A positive spread.

So there's costs to borrowing money.

You can do all of those things.

The challenge for credit unions is,
and it's kind of contrary to what you

might think, is the credit unions with
the most non maturity shares, which

are in effect the most stable funding,
are the ones that are being punished

the most under this supervisory test.

They have the biggest impact, even
though they're, in effect, Have the

least risk and the most stable funding.

So it's one of those one
size fits all approaches is

somewhat dangerous to people.

I think the credit is, they just have
to look at all their levelers and

it's a manner of managing earnings.

And that is really challenging right now.

People doing things to
manage those earnings.

They're competing for loans.

You're seeing more
people purchasing loans.

They alluded toward the webinar.

One of the biggest issues is it's
longer duration investments and.

That's Cartagena's reaching
out there for earnings.

It's not there in the loan marketplace
because people aren't raising

loan rates the way they need to.

Consumer loans, the real estate loans
are going up because the secondary

market does impact those real
estate loan rates to a great deal.

People want to keep that
liquidity available.

So people price those
to the secondary market.

So they do move with treasury rates,
all these other consumer loans.

And I would suspect we've seen
this in the last recession back,

In 2006 2007, commercial loans
tend to get underpriced, too.

And while it's only 5 percent of Cretien's
assets, the Cretien's that are in that

business, they need to pay attention
to their pricing because quite often

you see that get underpriced, too.

And that has consequences when
delinquency starts rising.

Later, sure, and see
if it starts visiting.

I would just throw one
last thing out there.

And I guess maybe this is a piece of what
you asked me about what they can do in

terms of funding, but it's go look at
your concentration risk levels everywhere.

And that's on your share side
and on your house that side.

I think you're going
to see your examiners.

They're going to start.

Scrutinizing those concentration risk
levels a little bit more, and I already

elevated it a couple years ago with
a letter on concentration risk, but

I think you might see an even more
enhanced focus on it going forward.

Treichel: That's good advice.

Very sound advice.

So the webinar itself went about went a
little over probably about 70 minutes.

About half of that was
actually the presentation.

That's when they got into
the question and answers.

And there were some good questions.

And 1 of the biggest questions that
I was interested in hearing how

they answered was the timing issue.

So.

Credit unions, as you and I know, since
May, a lot of credit unions have received

document resolutions simply because,
perhaps simply because the previous

guidance required that the examiner give
the credit union a document resolution.

if they were rated as extreme.

So there were a couple different
questions relative to, all right,

so I got a document resolution.

What happens now that I was
rated extreme, which required

me to get a document resolution?

Now extreme doesn't exist.

What is NCUA going to do relative to that?

Any thoughts relative to the, or could
you summarize what you heard as the

answers that they gave relative to that?

Any thoughts on that?

Miller: I can summarize it and then
I can tell you what wasn't said

too, which is almost as interesting.

So they said the region, if you're one
of these cruddies that hit extreme risk

because of the supervisory testing,
you received a door to send in a plant

during the webinar, what they said is
the region is going to go back and assess

those doors and they will contact you.

What wasn't said is what criteria
are they going to use to assess those

doors, and are they going to contact
you if your door might be modified,

or are they not going to contact
you if your door is not modified.

So they're going to turn it back over to
the regional directors to go through and

assess doors that have already been issued
and determine what happens with them.

And.

Like I said, the interesting part of
the webinar is they didn't say what

criteria the regions will use to do that.

In the new guidance, there's a whole
set of extra steps for examiners to go

through and assess the sources, how that
interest, what made that rating change.

And you have clients, they went
from moderate to extreme in a

quarter, even though their balance
sheets didn't change, the guidance.

Says examiners in the future are
going to assess what caused that.

I'm just going to surmise that for
these credit unions that have already

received doors that the regions have
to go back and reassess is they'll have

their examiners go back and look at that.

What caused it?

Why did it occur?

Was it just a market change?

Is the credit unions other?

practices.

So I think they'll just go back and
review those exam reports in light

of this new workbook and guidance.

That's what I'm going to
guess is going to happen.

Although I don't know that's
speculation on my part.

It is speculation.

They don't say.

And NCUA is short of staffing
and they're short of resources.

So, you know, this is a big time
commitment to go back and how

does that play into everything?

I don't know.

They didn't say that.

Treichel: They didn't say they did.

They did say that they're going
to be training their staff.

They're going to be trading, trading,
training the states, and perhaps

they're still trying to figure out
what they're going to do there.

And perhaps that will be
part of that training.

Todd Harper did open up about on the
front end, talking about wanting to

make sure that credit unions were.

Treated consistently that an exact
credit union in Region 1 would

be treated similar to Region 3.

There is this nuance now, though,
when you push things back towards

judgment, it gets harder and harder
to treat everybody fairly because

Todd, as you and I know, everybody
has a little bit different judgment.

Every examiner has a little
bit different risk tolerance.

Every credit union has a little bit.

different risk tolerance.

My advice to a credit union, if you had
a document resolution and you listen to

this webinar, and hopefully you listen
to this podcast, I would reach out to

your examiner and engage a conversation
saying, Hey, we really want to talk

to you about the things we've done.

You, you, they probably already know
it, but highlight to them again,

make them aware of the fact that
they're going to be reevaluating

that and put your best facts forward.

Relative to the document of resolution.

And some of the reality is some of the
things in there you're going to want to

do anyway, but whether or not you need
that document resolution is something

that is definitely up for play here.

Miller: A couple of
things that kind of segue.

Into that as well as Todd Harper.

Also, he mentioned that interest rate
risk was a supervisory priority in 2022.

He said it's going to be
on our list again in 2023.

And I think it's been on the list.

I don't know.

I don't remember a year
when it wasn't on the list.

But then something else they said during
the webinar as well is the intensity.

of your exam and the review of
interest rate risk, it isn't

going to change with this letter.

We took out an extreme risk rating.

We said a door isn't required, but
they actually added exam steps to

their whole interest rate risk review.

And they were very clear the intensity
of our interest rate risk review.

It's not going down.

It's probably going to go up.

This is not going to make
your life any easier.

It might mean you don't get a door,
but The examiner's scrutiny of interest

rate risk, it's not going to change.

It's still going to be elevated.

In fact, it's going to go up for a certain
group of credit unions that hit that high

risk threshold on that supervisory test.

They were pretty clear in the webinar that
What we're doing isn't going to go down.

It's going to go up.

You might not get a door, but
our review is going to get

more thorough and more intense.

Treichel: Todd, I think you just hit the
biggest highlight of the whole webinar,

and it's what you just summarized
and what Todd said on the front end.

It's a priority now.

It's going to be exam priority next year.

And you also picked up on the fact
that their exam steps have gone up.

Todd was sending signals there that
he wants to make sure that this Is

addressed appropriately by credit unions.

But as you said, there's going to
be some difficult conversations.

They've armed the examiners with some
more exam steps that will lead to

some more difficult conversations.

But when you get to the other side of
that, those conversations, hopefully

you can demonstrate that you've put
good things in place, and then perhaps

you'll learn a thing or two from those
conversations that can help you guide your

own credit union even NCWA is pointing
out, but again, you nailed it right there.

That this issue isn't going away, and
so we will be asking those difficult

questions regardless of whether or
not guidance requires a door or not.

That's a great point.

point and again a highlight
of the webinar today.

Miller: I think there's another piece
to it too if you're an accrediting

official or just a member of the
public who cares about the NCISIF and

there's some positives in there too
because the other policy when they

had it and says you're going to get a
door at extreme interest rate risk it

caused a lot of examiners to maybe give
creditings a break that were at high or

moderate in risk management processes
weren't what they should have been.

Because the examiners didn't have
to scrutinize them closely and the

simple fact of the matter is, there
are probably pretty names out there

that might be moderate risk for
that supervisory test that they do

deserve a door and they probably have.

Taking on more risk than they should have.

And maybe some of those people will get
caught now because the examiners don't

get that automatic get out of jail free
card where we're going to reduce our

scope and level of review just because the
numbers are moderate and they'll turn that

focus back on governance a little bit.

And that's a positive thing.

If you really want to see your
share insurance fund protected,

that goes the other way as well.

Treichel: It does.

Now that's a, that's, I hadn't thought of
it in that way, but that's crystal clear.

That makes perfect sense.

We've hit a lot of the highlights of
the letter and we've hit a highlights

and I think you just hit the two
key points of what was said today

before we wrap this, this episode up,
Todd, is there anything else that.

Anything I should have asked you or
anything that pops into your mind that

a credit union might want to take into
consideration as they're negotiating

these difficult waters of the world today?

Miller: I'll just throw one more thing
out there and this has always been

true and it affects all your clients.

It was brought out in the
question and answer session.

Someone asked a question about if
they're already high or extreme risk,

should they reach out to the examiner
before the examiner calls them?

And it's easy to view your examiner
as an enemy, but the reality is if you

open the door and communicate with them
up front, they can become a resource

for your credit union and you can
smooth a lot of things over and you can

reduce a lot of exam anxiety and reduce
the difficulty of these questions.

If you're communicating with your
examiner up front, so pick up the

phone, call them occasionally.

A lot of this stuff you can get put
aside and you create a lot of trust and

credibility with them and life can become
a lot easier for you if you have open,

honest and consistent communications
with your examiner and that.

Kind of came out during the webinar
too in the answering question session.

So I would say that's one takeaway.

Don't necessarily treat that
examiner and COA as an enemy.

They're part of the cost of
doing business, but you can

turn them into a partner if you
communicate effectively with them.

Treichel: Great point, Todd.

And you reminded me of a quote that I
have to now get out of my head here.

And that so communication
breeds familiarity.

And there was a quote that that
Mark former board member, Mark

McWater said that I won't forget.

And that was familiarity breeds consent.

So you have those communications and
you have those dialogues and they start

to understand NCWA starts to understand
better what it is you're doing.

And they're going to do.

That's going to create consent.

They're going to come
towards your direction.

If you're building a good program and
you're communicating that to them,

they're going to be able to better
understand what's going on and then use

that examiner judgment in a way that is.

reasonable in dealing
with the credit union.

So great point.

The communication is always a key.

Todd, I really appreciate you.

And I've been talking about the
letter coming out and then we heard

that as soon as the letter came
out, they mentioned that the, this

webinar was going to be happening.

And I'm glad this worked into both
of our schedules so that we could

listen to what NCUA had to say.

We could record this to give
our take on it and we can get it

out to the listeners real quick.

Next week, this will be the
episode and thanks again for.

Listening to the webinar today
and sharing your wisdom with

our listeners on the podcast.

Miller: Always a pleasure.

Treichel: Great.

Great.

And to those of you listening,
we appreciate your time.

Thanks for listening to this episode
of With Flying Colors, and we hope

that you'll listen again soon.

And this is Mark Treichel
signing off With Flying Colors.

Katie: Thank you for joining us on
this episode of With Flying Colors.

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