Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone.

This is Mark Kel with another
episode of With Flying Colors.

I'm back here today with Steve Farr
and Todd Miller, former, also formerly

event COA, and also members of my team
here at Credit Union Exam Solutions.

How you guys doing today?

Farrar: Doing good.

Happy Spring.

Treichel: Happy Spring.

We made it.

For those listeners who may be new Steve
and Todd have been on many podcasts, and

I'm gonna have them do a little bit of an
introduction of themselves, what they've

been doing what they did at NCUA, and then
we'll jump into an exciting topic today.

Steve, why don't you go first?

Farrar: Yeah, I was just gonna go
through, decided to kinda update

my career with the three parts.

The first part was, like 15 years
as a problem case officer at NCOA,

working with the problems mainly on
the west coast, involving consumer

conservatorships assisted mergers
and a lot of successful turnarounds.

We turned credit unions around with
zero capital back in those days.

Then I went to the central office
about the time Mark was in the

central office and worked for the.

Officer risk management.

And that was a fun career.

'cause I got involved in just a multitude
of things that kept it interesting

involving the, the corporate turnaround.

I would train examiners on problem
resolution and the wrote the

enforcement manual and, ended up
with a, the risk-based capital

and the vice president of the CLF.

And then since when Mark started
his firm up, we've gotten to.

Be active back with credit unions again.

Looking at the problems, I did
a stint as a CEO for a large

conservator conservatorship in
Manhattan, New York, which was fun.

But but that's been, it's been a fun
after 30 some years, NCUA to be able

to take that experience and continue
to apply it and keep sharpening.

Our saw has been really nice.

That's

Treichel: right.

Sharpening the saw, the old Stephen Covey
thing you taught me way back in the day.

Very good.

And Todd, how about yourself?

Miller: I was with NCA for 34 years.

It's interesting about the
first six, eight years of that.

I was actually in the, under the
same supervisors as Steve kind

working on the same kinds of things.

And then my path diverged a little bit.

He stayed a problem case
officer a lot longer than I did.

So I spent about 10 years or so as an
examiner and a problem case officer.

Then I spent a decade as
a regional capital market

specialist from 2000 to 2010.

And from 2010 to my retirement in
2011, I was a director of special

actions in the western region
supervising those problem case stoppers.

There's and capital market specialists
and regional lending specialists.

And then I had the lost year
in there where you drug me

into Westcorp for all of 2000.

Nine and when you were the agent for
the conservator for Westcore and you

let me retire for about two months
before you called me and convinced

me to come help you and help credit
unions from the other side of it.

And it's been enjoyable to actually
take that 34 years of experience and

help credit unions along the way.

Treichel: Yeah, it has been fun.

That was 2021 when we came through
in our then Class B through Montana.

Spent some time with Steve
and then recruited Todd and

and here we are in 20, 20, 25.

Time flies guys.

So this podcast is I think gonna be
some fun because we're gonna talk

about the 2024 trends that came
out the data that came out from

NCUA, which is a lot of raw data.

But before we jump into that, number
one, we're gonna talk about some

general multi-year trends that
kind of have got us here, right?

Because if you lose track of history.

You're condemned to repeat yourself.

And then after we walk through the
multi-year trends and the 2024 trends,

we're gonna talk about some of the things
that we've been seeing in our clients,

in our general conversations with credit
unions, et cetera, excuse me, et cetera.

So with that let's tee off the
let's start talking a little bit

about the general multi-year trends
as a primer for this discussion.

Miller: Steve's got his head down.

I guess he wants me to chat.

Yeah, go ahead.

Ahead.

So you know, it's interesting.

After that last recession, we had a
long decade really of 2012 up until

about 2020 of really flat rates.

Not a lot was going on in
the crediting industry.

And then Covid disrupted the whole
world, and that is still having a

huge impact on credit unions today.

During Covid, that savings
rate jumped up to the 20%.

Range credit unions had these
massive surges of deposits and that

was causing pressure on capital
and interest rates were low.

So what did a lot of credit unions do?

They went a long-term with
a lot of that covid money.

They went, bought long-term investments.

They made.

Real estate mortgages at three or 4%.

Of course then we hit
inflation right after that.

All of a sudden, people
have less disposable income.

Those deposits flow out the door.

The fed raises rates
to fight the inflation.

All of a sudden that interest
margins are shrinking.

In earnings, in credit union
industry have been declining

since Covid just about every year.

And so a lot of decisions that credit
unions made back in the years of covid

are still impacting their earnings today.

And, the agency's been beating
them up about interest rate

risk and about credit risk.

Because the decisions they
made, following Covid.

And we're still seeing that now during
inflation savings rate wins down.

Credit unions had to compete for funds.

So it's just somewhere interesting
than with the inflation years.

You had this surge in loan demand.

So bones went way up.

A lot of that is 'cause people seeing
their disposable income relative

to inflation fall and it hits a
lower income people really hard.

So you had the surge in credit
card borrowing, you had surges

in just about every kind of
borrowing, to be honest with you.

With no share growth.

And now as we get into 2023 and 2024,
you're starting to see unemployment creep

up and it's affecting credit quality.

So now the agency's kind of
focused on credit quality and.

It's not anything that credits have
done to change how they've made loans.

It's just the general trends in the
economy that, once again, inflation

is still faster than wage growth.

And we got unemployment growing
up in, I think 47 of the 50 states

unemployment went up last year.

So that's putting
pressure on asset quality.

So everything that's going on today
is a result of decisions credit unions

made in the last two, three years.

Treichel: Well said.

Steve, any thoughts you wanna

Farrar: add to that summary?

No, that's a good summary and then, it's
really most reflected and we'll cover

it a little bit more in that creeping
of the provision for loan losses.

You went through 2001, 2002 as
almost no loan losses, and now

we're back above what would be the.

Long term normal that we've had for the
industry, which used to be about 0.4,

and now it, it's creeped up to 0.6

and that's been a real
hindrance for the credit union.

So

Treichel: yeah, you add the extra
PLL and the inflation, which impacts

our operating expense, that kind of
figure out why that, that net income

is down, and one of the things, Todd,
as you're walking through that, I've

had some conversations, I've said it
on some presentations I've made with.

Some league groups is the, it's kind
of like that triple black swan event.

You had Covid and then
you had the Fred rate.

You people went long, started to go
long because they thought, hey, this

is the new normal rates are low.

And then the second black swan event
was fed rates going up 550 basis points.

I think it was five 50 and then
inflation from all the money we

were printing and other reasons.

Those three black swan events have really
led us to today, which get us to the

stats that we're gonna talk about next.

So

Farrar: yeah, and you had new accounting
standard in there for the loan losses.

Treichel: Okay.

Farrar: Yeah.

Treichel: Let's just

Farrar: keep piling it on.

Treichel: Yes.

Yeah, actually I just got an email
from a vendor that that was trying

to touch base with me when I was at
c Kuna, our America's credit union's,

GIC, about some Cecil issues that that
have popped up for one of his clients.

Anyway, I digress.

All right.

They lay out this data in, in
one direction, but we thought

we would walk through it in
the state of affairs of camel.

'cause we talk about camel a lot.

Any thoughts on what the report is
showing as it relates to capital?

Farrar: I just notice that when
you mean we did have an increase

in the net worth ratio for 2024
and that's really, that's good.

Much of it is because we did have,
of course, the growth rate in net

worth did exceed the growth rate
and for shares not by a lot, but

by enough to make a difference.

And it was kinda interesting.

I've been tracking, a lot of
growth is from share growth.

And so I tracked, we had, you had more in
dividends that were going into the shares.

So what was the share growth rate?

Discounting dividends and it
was, it was about half of what

is reported as the growth rate if
you take out dividends from there.

Around 2.16%.

And that compares to, how big
2021 was from that normal, which

was 12% excluding dividends.

But, dividends are, going in and
contributing to share growth.

The other thing though that I,
we really, we've looked at a

lot is the gap equity ratio.

'cause there's some always items
that are non gap in the net worth

ratio, but that showed improvement.

Quite remarkably from 9.11

to 9.66,

and that is the result of the
unrealized loss in the investments

has come down pretty substantially.

So that is my nutshell on capital.

Todd,

Miller: I would just point out the
gap net worth that Steve mentioned.

2024 is the first time that
ratio has improved since 2020.

And part of that is, as Steve mentioned,
the sugar, the growth has slowed way down.

So credits have been able to
actually accrete a little bit.

Capital.

I do think credit unions,
NCUA puts it on the FPR.

It's not on their key ratios with their
exams, but credit unions should probably

pay attention to their own gap net
worth, because creditors look at that

net worth when they're underwriting
loans and things of that nature.

So it is an important number, even though
NCUA deemphasizes it for the most part.

Treichel: And I'll just
add, go ahead, Steve.

Farrar: As a measuring stick.

I'm I compare credit union
performance a lot to what I can see

in the community bank environment.

And, their leverage ratio is 10.82

and our net worth ratio is 11.21.

So real comparable.

Treichel: Yeah, that's good.

That's good data.

I recently listened to treasury Secretary
Scott Cent on the Odd Lots podcast,

which is a Bloomberg podcast, which
is, really educational, but the Trump

administration, the treasury department
head is, one of their goals is to

get 30 tenure treasury rates lower.

Easier said than done.

And then of course there's the
Fed that makes the decisions

on rates, et cetera, et cetera.

But if that goal is achieved longer term
I think that gap equity will recover more.

Any thoughts on that?

Miller: It depends on the shape
of the yield curve a little bit.

If the 10 years come down, it will
definitely help the investment portfolios.

There's still a lot of investment.

You can see that the maturity of
investment portfolios are still

lengthening, even though they're
shrinking and as the investment

portfolio investment growth is negative.

Credit unions are putting that
into their loan portfolio, but

they still have this overhang of.

Long term investments that
they bought in 2022 and 2021.

And it's still gonna
be with us for a while.

Yet still a lot of investments are over
three years on their balance sheets.

And a lot of those are mortgage
backed securities that are

paying two, 3% coupons.

Those people are not refinancing.

Treichel: Yeah.

Yeah.

I was just chatting with my daughter
about the good fortune of having a, 20,

26 years left on her fixed rate mortgage.

So Great point.

Great point.

Alright, let's pivot to asset quality.

The I know one of you or both of you in
a lot of our conversations talks about

how it's when asset quality fails, it's
what kills credit unions oftentimes.

So I hope I didn't steal
your thunder there, but let's

fire away on asset quality.

Todd, go ahead.

I think you have lots of

Farrar: data on this one.

Miller: I do have lots of
stuff printed out on this one.

It's nice in CS call report now it
breaks, delinquency and charge offs down

by those individual loan categories.

So it takes you a while to sort through
it to find it all, but it is all there.

This one kind of follows really
much the covid pattern too.

During the covid years, loan growth was
pretty small down at 4%, 7% in 2021.

Then as we came out of covid and inflation
hit loan growth hit 20%, but it fell to

six last year and 2024, it was only 2%.

So it slowed way down, but
you just look at delinquency.

And delinquency has been creeping
up in virtually every loan category

on the credit union's balance sheet.

Credit cards and been hit really
hard, unsecured hit really hard.

You're seeing it in the new car loans too.

I mentioned people, especially the
lower income, they started borrowing

more during that high inflation period.

You really see that in credit
card charge offs, which, you know,

over the last years, if, when.

From 2% to 3.8%

to in 2024, 5%.

And we see some of our large, ones
type clients, the credit card charge

offs whack some of their capital plans
pretty hard because of that experience.

But even new car loans, just
in the last two years have

tripled their delinquency level.

Used.

Car loans have tripled
and charge off levels.

All the car loans are up to about 0.84

charge offs.

That's a pretty big charge off number.

It was only 58 basis points in
2023, so it's a pretty substantial

jump in that consumer loan.

We do see a lot of credit unions
making first mortgages and going

back to home equity loans, charge
offs with real estate loans.

That actually held up pretty well.

We're staying fairly small down at
less than a couple basis points is all.

So no one's charging off real
estate loans at the moment.

Residential real estate loans
and commercial loans, which they

haven't had the yo-yo growth.

They've been growing pretty steadily
at a moderate pace through all of this.

And their delinquencies have creeped
up a little bit, especially with

some of the commercial industrial
that actually improved in 2024.

Now mid time of peaked in 2023, but
commercial loan charge offs have

been at 20 basis points is all.

So that's almost one of the best
performing pieces of the loan

portfolios and credit unions out there.

Residential real estate loans are
doing the best credit quality wise.

Commercial loans are
doing the second best.

Consumer loans are getting hit
pretty hard in the last year.

And so Todd, if you had to

Farrar: A reason why the.

Consumer portfolio has experienced
this higher delinquency and losses

Miller: because unemployment has went
up in 47 states for two years in a row.

Credit unions can't really control,
the job market and they fall victim

to those trends, and it's somewhat
why some of that multi portfolio and.

Multi-dimensional analysis is
important to pay attention to what's

going on with their portfolio.

And it probably explains why your
commercial loan losses are less is

because you know you're doing annual
reviews and talking to them and you can

deal with problems and head them off
early with your commercial borrowers.

With the consumer loans, a
lot of it's indirect lending.

You maybe never talk to the member
until it's delinquent and if the

person's lost their job and they're
delinquent, there's not a lot they

can really do to help that member out.

So that's kinda why you make sure
you price things appropriately so

you have some sufficient spread to
cover those provision for loan losses.

And like I said, with the per when
charge offs are going up every year,

that provision is going up every year.

And Steve mentioned that earlier in our
podcast, that whole growth in provision

for loan loss expenses, spread here.

It's,

Farrar: Turning out to be a pretty big
competitive disadvantage compared to the

community banks 'cause they're not exper,
they're experiencing higher delinquency,

certainly consistent with our numbers.

But they're PLL expenses is 0.15

and ours is 0.60.

So that is the difference between.

Actual med income realized by credit
union industry and the community banks.

It's just that increased losses and
certainly Todd, what as if inflation

stays lower, that should be really
helpful as I think that hurt a lot of

people in the last, primarily year or so.

Miller: Especially people
at the lower income.

I don't remember what the article was
last year in the Wall Street Journal.

It was a huge percentage of people
can't cover a $400 expense outta cash.

And when you get that inflation
level like that, it hits those

low income people pretty hard.

And we have quite a few of low
income and minority development

institutions out there.

The credit union industry does have
a certain segment of credit unions

that serve that low income audience.

And I would suspect almost every
credit union out there has a percentage

of their members sit in that lower
income stratosphere and you know

that inflation hits them hard.

When they get to unemployment, it
takes 'em a couple weeks to get checks.

They only get unemployment for 26 weeks.

That job market is tough so that
people in that, I don't know, bottom

20%, bottom 30% of the, economic pile.

It's really tough on them when they're
facing inflation and unemployment is

going up in, like I said, 47 states.

Treichel: One of the, one of the things
I heard that put that in good context

for me was, in, if you have assets and
there's inflation and you're in the

stock market and the stock market's
going up, you're not hit by the

inflation as much, and you also have
little bit less pressure on your income.

So your stock funds are going up.

You own real estate that's going up.

If you're on the other end where you're
struggling paycheck to paycheck and can't

pay a $400 bill, and then that $400 bill
18 months later isn't a $400 bill, it's a

$600 bill and you happen to lose your job.

The barbells of the haves and the
have nots have gotten more pronounced

over these last several years, and
it's, it's not a, it's not a good

thing and it's gonna have continual
issues that trickle into society.

And we can, as we're talking
about it, we're seeing that it's

trickled onto the balance sheets.

Miller: I think this gets distorted
a little bit too by Covid.

There was so much government
assistance piled out to people

at the lower income levels.

It improved their credit score.

So it actually made them more able to
borrow money when the inflation started.

So you had a temporary.

You're almost hiding some of your higher
risk people with all the government

assistance that came out during Covid.

So that's impacting this a little
bit as well, and leading to some

of these higher charge offs.

I'm sure that's especially the case with
the credit card portfolios that improved

credit scores, that got these people a
lot of new credit cards and they used

them and now you got charge off that, 2.1%

on credit cards in 2024.

That's a pretty big charge
off number for credit

Treichel: unions.

Said.

Any final thoughts on asset quality guys?

Miller: No other than you're gonna
continue to see it's on NCUA.

Supervisory priorities.

And this is the reason, the delinquency
and charge offs have been creeping

up in just about every loan category.

And credit unions, it's to
your advantage to understand

what's causing your charge offs.

Is it unemployment?

Is it's something else
in your underwriting.

So larger credit unions, make
sure you're doing that analysis of

your charge offs and figuring out,
okay, what is the cause of this?

And the second piece of it,
it just comes back to you need

to price for some of this.

'cause it's likely to
remain elevated for a while.

Treichel: Good point.

Good point.

So the stats don't talk about
the m and camels, so we'll jump

over that over to earnings.

Let's, yeah,

Farrar: we talked to earnings.

I'd like to get Todd's opinion
because he's so well versed in

the a LM thing and talk to the
issues affecting the net margin.

Miller: It's somewhat interesting,
Steve, that if you look at NCUA.

When they put out quarterly data, they put
out a chart pack that's got 42 tables in

there and about half of them are boring,
but half of 'em are actually very useful.

One of 'em I have in there
is ROA components and they

track it from 2015 to now.

And we talk about, the net interest
margin and it was fairly up to 3.2.

In 2019, it fell to 2.6

during covid.

So it got really small, but it's
actually improving back to 3.1.

So it's back to where it historically was.

It took credit unions
2023 and 2024 to adjust.

A lot of 'em got beat up by
their examiners, but that net

interest margin has adjusted.

What's really impacted credit
unions is pretty much you've seen a

decline in fee income that started
in 2018 and continues to today.

And I think part of that is
the rising rates you're making.

Yes.

Less real estate loans.

And I think some credit union are very
sensitive to, Biden's whole era of

junk fees and things of that nature.

But fee income has come down, and
then you talked about it right at

the beginning of the podcast, that
provision for loan loss expense.

It was 30 basis points back,
pre covid or back in 2015.

It hit during the middle of Covid in 2021.

You had 10 basis points of
provision for loan loss expense,

and in 2024 it's 62 basis points.

So you've had, 50 basis points increase
in PLL expense just in three years.

So Freddy seemed to have recovered
on that interest margin a little bit.

They had made adjustments but they're
still fighting that PLL expense and that

fee income seems to have stabilized the
last two years, but it certainly is down

from what it was four or five years ago.

And.

And until rates fall and you start seeing
real estate origination fees go up, I

don't think you're gonna see much increase
in fee income across the industry.

There's just a lot of
political pressures against it.

Maybe with a new president that will
subside for a bit, but the consumer groups

complaining about, the, all those fees
attached to overdrafts and things like

that, I don't think that's gonna go away.

It might.

Simmer in the background for a
while, but it's gonna come back to

the forefront at some point in time.

It's not gonna go away entirely.

I don't think

Treichel: that pendulum will swing
any, anything that the data shows you

on other, on operating expenses other
than the PLL that jumps out at you.

Farrar: Yeah, I, I, when I was an
examiner I was always focused on,

that was an area that we could make
a difference and see it in the short

run was adjustments and what we could
do in the operating expense level.

And, for the year op net
non-interest expense was up 6.2%.

The category is up the most, of course,
employee compensation, which is about 7%.

Operate office operations
at six and a half and.

Professional on the
outside was up 7% mark.

So you must be getting a lot of
clients in there that are bringing

that ratio up and hurting the cause.

But and compared to what happened
with community banks, their

expenses same ratio went up 5.4%.

So a little bit of difference there.

But the other thing is when I pulled
the income statement for the industry

was all of the activity and the gains on
derivatives, dis disposition of assets.

Sale of loans and sale of other
real estate owned gain from bargain,

purchase, murder and other interesting.

All those show a lot more activity
and the other income figure of 14

billion or is equal to basically equal
to the net income for the industry.

And that's the same
for the last two years.

Little interesting.

Kinda change in the numbers from.

What we've seen more historically

Treichel: and that other, of those other,
that reminds me of some things we've

heard in credit union conversations
is what's your core earnings?

So if it that old, suzanne Vega line.

It's a one-time thing.

It just happens a lot.

This year you sell your Visa stock.

The next year you have some other oddball
item that helps you show a profit, and

then NCA comes in and focuses on core.

Todd, any thoughts on what
Steve had to say there?

Miller: I was gonna mention the
number of credit unions that had

negative earnings last year, but I
don't have that spreadsheet open and

I didn't write it down in my notes.

I didn't have time to actually go
back and compare it from other years.

But there are a not insignificant number
of credit unions that are experiencing

negative earnings at this point in time.

Treichel: Yeah, that's always an
interesting way to look at it too, is

there's the winners and the losers on
the net income in particular, and it's

always a number when you look at it.

It's bigger than you'd think.

Every time you look at it, it's
a good reminder that there's a

lot of credit unions that are
struggling and then that has them,

what does that do to their capital?

What does it do to their camel code?

What does it do to how
frequently NCA shows up and ask

them about all those things.

And I think, in my opinion, I think
the pressure on merger will still be

there, but not even having that number
in front of us knowing it's probably

knowing it's not a small number.

I think there'll be pressures
on mergers and such.

Any thoughts on that?

Farrar: I do have the numbers on
merger though, that, that's in the

the 10 year trends that's in the
back of the recently released annual

report and that we had 138 mergers.

To assisted, and that's down from
other recent years, slightly down.

But and then when yeah.

And then you get down to the, number.

We can talk a little bit about
the number of troubled institution

and from that same report, 135
that are troubled credit unions.

16 six, the its shares in
millions is 16,000 in million.

So the billion there, and that's a
substantial increase in that we have much

lar many larger, more or increase in the
larger institutions that are trouble.

Treichel: And for the listener
definition of troubled

Miller: camel four and five.

Treichel: Yep.

Miller: End.

We'll talk about camel threes.

I just want to point out another thing.

During Covid, we were losing
about 30 credit unions a quarter.

I have Steve's data quarterly.

Here in 2024, the quarters went 44,
34, 39, 32, so it's up a little bit.

Actually in 2022.

A couple years after Covid, that's
when the mergers were really high.

They were running about 50 a quarter.

Treichel: Yeah.

Was some, there was some pen up man there.

Yeah, of course.

The number, they're only
charter one or two a year.

The growth the percentage
is a touch higher.

Then when you just look at
the gross numbers, well,

Miller: surprisingly I have the
percentage change in opinions.

It's been 1% every year downward.

There you go.

We have less credit unions.

60 a quarter is turned into 40 a
quarter, but we went from 6,000 to 4,000.

So we're basically losing 1% of
our credit unions every year.

NCOs chart pack that they put out,
it goes back to 2015 by quarters.

It's been 1% every quarter.

I remember, it was like 10,800 or
something when I started in 87, but

that number that we lose every year
just seems to be fairly constant.

That's, yeah.

Good point.

Same with the community banks.

If you look at the number of them,
they disappear at about the same rate.

Treichel: Yeah, unless two things
that could impact that speed that

up would be mergers of the agencies
or loss of the tax exemption, which

I've talked about on other podcasts.

Most notably, one with former NCOA PACA
director and former cuna guru John Ney.

If you're interested
in that, those topics.

Check out that podcast.

Alright, so let's see.

We we, I think we're at LII got a
feeling that, that we wanna hear

from Todd Onel 'cause that all
that capital markets knowledge.

Miller: I would just say overall
what you're seeing in 2024

cash positions are improving.

Credit unions are relying a lot less on
borrowed money and non-member deposits.

So I.

Part of this is loan demand is way
down, so they're actually able to

improve their liquidity position.

Short-term investments are
still pretty low at 4.4

of assets, long-term investments over
three years, they're still 10% of assets.

That's that hangover from 2022 still.

But overall, in general liquidity levels
are improving throughout the industry.

Treichel: Good news.

Good news and anything on, when I was
back and still a regional director,

it was camel instead of camel's.

I still call it camel.

'cause old habits die hard.

Anything on sensitivity that
you'd like to add to the mix?

Yeah.

Miller: Just a couple things.

That long term assets are shrinking.

That's an indication that
interest rate risk is improving.

The NCOA has beat people up
over shares, migrating from non

maturity shares into CDs and money
markets and things of that nature.

I will just say that there's gonna be
a little bit of that at continuing.

I have a chart.

The share structure now is still
less hot money than it was before

the last recession in 2007.

So we're reverting back to a main.

People are rate sensitive, people are
moving to rate sensitive accounts.

That's gonna continue a little bit,
although we're nearing the end of it.

We talked about it already
in net interest margins.

They're back to 9, 20 19 levels,
so hopefully there will be.

Less pressure on credit unions to
de-risk in terms of interest rate risk.

'cause it's improving slowly too,

Treichel: which is good news.

As we wrap up those, we're gonna
talk a little bit about what we've

been seeing with our clients.

Looking, looking at the watch.

I know that, go ahead.

Miller: I wanna say
one sentence on camels.

Okay.

They have a.

Chart and NCOs chart back for that too.

In general, camel are
improving with one exception.

Code threes and those 500 million to
1 billion and 1 billion to 10 billion

and over 10 billion are really been
increasing the last three years.

Under 500 million Camel
codes are getting better.

That.

Over 500 million.

The number of code threes has been growing
for basically three years in a row here.

I think it's just interesting 'cause
usually those larger ones tend to perform

better and that's not the case recently.

Treichel: If I was a cynic, I would
say in good times the bigger ones

get treated a little kinder on camel,
maybe appropriately and when when the

economy gets a little bit more rocky
and there are real or more material

issues to raise with the big ones,
NCA gets a little bit more aggressive.

And that's what we're seeing.

A little bit more maybe truth in colding
in the big ones when there's really

actually something to talk about.

And the smaller ones tend to get beat
up about operational type issues just

because of their resources sometimes.

So their camel codes, in my opinion are
a little bit more reflective of that.

And I don't, I know that we're
gonna, we're gonna wrap this call

up in about eight minutes because
we, some of us on this call have to

talk about some of the issues we just
talked about with the client that's

dealing with NCUA coming up very soon.

With that let's talk a little
bit about the things that we had.

We had one podcast where.

Which was one of our very popular ones.

They're all relatively popular, but
that one was particularly popular in the

respect of talking about the things we've
been seeing in our discussions with credit

union's, clients, and other conversations.

Let's hit those and use the
rest of our time here on that.

Miller: I think you know, the biggest
concerns that we talked about here, the

negative trends, are all having to do with
asset quality that we spent a couple years

where our clients were getting beat up
about liquidity and interest rate risks.

There's still a little bit of that
going on, but their supervisory

priority is on asset quality, and
we are seeing a lot of that in our

clients commercial lending programs.

Even if there's zero losses, they're
still getting criticized, especially on

their risk rating and the annual reviews.

There's a higher expectation of board
reporting with commercial lending.

And we haven't seen this for a few years,
but in just the last six months, this has

come up in two or three credit unions.

NCOA is focusing on charge out policies.

They want loans charged off.

If they're not performing.

And so there's always been an emphasis
on concentration limits and NCOs

asking credit unions to justify them.

But what we've seen in the last
six months, they seem to be

getting increasingly granular.

About the concentration
limits, they're getting doors.

It's like we don't want a
concentration on indirect lending.

We want one on, indirect lending.

We want a concentration
limit on high LTVs.

We want a concentration on credit scores,
less than six 40, things of that nature.

And along with, we mentioned this
with the losses appropriate pricing.

We're seeing our clients get doors
and findings on proving that your

loan programs are profitable.

And that one's at a very
granular level too over time.

They want it broken down
into more finite and discrete

portions of the loan portfolio.

So that's a big one.

That's new in the last, what, six
to nine months that we're seeing.

Good point.

Treichel: Good point.

Steve, any thoughts on
those items that, that Todd?

Farrar: No, I covered those.

Anything that, one item that we were
seeing as a really big focus was

coming out, of course, FD seen all that
was the corporate governance issue.

And while the a kind of a
proposed rule that was put out

on there is very good guidance.

It that was withdrawn with the
change in the administration.

And so I think, the examiner comments on
corporate governance won't be as strong,

but me personally, I still feel that
area is one, when you strengthen that you

really strengthen your institution and.

Treichel: And you said it on the
front end, but I'll repeat it.

That was FDIC guidance.

We've talked a lot about it here.

We did podcast on the FDIC, guidance
on corporate governance in 2024 and

2023 conversations with credit unions.

We were seeing NCUA getting hit
hard on that, and any topic that

was brought up, they seemed to link
it back to corporate governance.

They seem to, on some of these
issues we're seeing, they've seemed

to maybe that's just not on their
checklist of pushing it this year.

'cause they seem to have backed
off a little bit on that.

I'll also say on the commercial
loan topics, we have a lot

of good podcasts on that.

If you have commercial loans and
you're getting beat up on that,

feel free to reach out to us
and or check out those podcasts.

Which are with Vin Viton of our team,
who helped write and was the major author

of the current Commercial Loan Rule.

Farrar: Yeah.

One, one last thing, one thing that
I've noticed that we were hearing a lot

about is that our, a lot of our clients
are saying that they're getting a lot

of different examiners in, even they're
experts, so they're having to be kind

to work with the examiners and getting
them familiar with their institutions.

And I, that's something
I think that might.

Be an ongoing issue as we look into this
year and that it's probably just something

that it's gonna have to deal with.

You got it.

Good points.

Todd, and there are

Miller: some continuing things
in the last three minutes.

Yes.

While liquidity has been beat up on a
lot over the last couple years, it's

less but we're still seeing a lot of
credit unions get criticism on their

liquidity contingency funding plans.

Not in so much general liquidity,
but the contingency funding plan.

The early warning triggers.

Seem to be a big thing that
they're focusing on and having

sufficient sources of liquidity
for contingency funding purposes.

Those still are recurring items.

It's more defined in liquidity in
general, but the contingency funding

plans are still getting high degree
of emphasis from the examiners,

especially the early morning indicators.

Treichel: Very good.

And then enterprise risk management's
been getting hit in the larger

credit unions in particular,
and eventually that will bleed.

And I think also you were, one of
the things we've been seeing is

the profitability issues that we've
been, that we've discussed here in

the trends is something that we're
starting to see brought up as well.

Any final thoughts on
recent exam issues, guys?

Have issues

Miller: with your examiners.

Give Mark a call.

We'll help you out.

That's right.

Treichel: Yeah.

Call Ghostbusters or
call us one of the two.

Very good guys.

As always this is a lot of fun and
I will say one more time, the recent

exam issues that I mentioned most of
those we have separate podcasts on.

So whether it's commercial concentration,
loans, interest rate risk, liquidity,

contingency funding, enterprise risk
management we hit all of those in separate

podcasts that you can find just by
Googling or sending me an email and I'll

send you a list of the ones that you want.

Want me to track down for you?

Alright, guys.

Always enjoy this.

Thanks so much for your time.

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

Hope you will listen again soon.

This is Mark TriCal, signing
off with flying colors