Credit Union Exam Solutions Presents With Flying Colors

Hey everyone.

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

I'm excited today to be here with Thomas
Griswald, the managing director of a

LM First Financial Advisors Services.

Thomas, how you doing today?

Yeah, doing well, mark.

How are you?

I'm doing great.

I'm excited to have this
opportunity to chat with you.

We've been in sub.

Joint calls in the industry before this.

And I've always appreciated what a
LM first can do for credit unions.

And there's interesting things
that have happened in credit

unions in all of the things.

I think probably that a LM first
touches here over the last I.

A few years.

But if there's a listener who may not
be, there's not a lot of credit unions

that aren't, haven't heard the name
a LM first, but if you wanna maybe do

a little primer on what a LM first is
before we jump into some questions about

the trends in the industry, et cetera.

Yeah, no, absolutely.

So again, a LM first we've been
around for, this is our 30 year

anniversary, so officially.

Been an institution for 30 years,
predominantly in the credit union space.

I'd say 95% plus of the work we do
is within the credit union industry,

and it's something we, we really
hold onto and we really love.

As far as what we do we've
grown a lot in those 30 years.

So started out as, a LM reporting,
interest rate, risk management

and investment management and
grown significantly since then.

And we have a number of subsidiaries,
but if I could maybe simplify.

Our approach, it's we want to help
institutions manage capital and generate

returns in a risk adjusted framework
with the a LM piece being center.

So we always like to understand,
what is your asset mix?

What is your liability mix?

How can we ensure that, we're
keeping a balanced balance sheet.

But outside of that capital allocation
piece, which again includes the investment

portfolio, we have a loan transaction
network that helps put buyers and sellers

together in the loan participation world.

We advise on securitizations.

We help 'em derivative hedging
and mortgage pipeline hedging.

But we also have m and a advisory
as well as the DDJ Meyers team that

focuses on, talent management and
talent acquisition is a part of our

team and has been for a couple of years.

Yeah, I'd say.

It's a mouthful.

We do so much and part of our
focus is really how do we help

credit unions just navigate these
very turbulent waters for sure.

Got it.

And, as you described that in,
in the capital allocation and

managing capital, as the hub, I'm
picturing a bike wheel, right?

That's in the middle and all those
other things relate back to that.

And the other thing that pops into my head
is cash is king, capital's king, right?

Because if you've got great capital
you can survive a lot of things.

You can survive a lot of trends.

And it is king, right?

So I guess that might be why it's at the
hub of the way you've just described it.

But it's been, it has been interesting
times we had in my mind when I.

Having been an examiner, having been at
NCUA, I always relied on the experts on

the A LM because there, there's nuances
there, there's assumptions there.

NCUA, getting the capital market
specialists and building that out is a, it

is a great resource and a great topic, but
it was always one that was nebulous to me.

And it's I've described that and
liquidity in different things as.

A, as like oxygen that, it's
you don't, you have to breathe,

but you don't think about it.

But then when you start, when it
starts to put you in a corner and

you can't breathe, you realize it.

And when you have liquidity and
a LM type things, you realize it.

And then it's wow, this
is super important.

And you think about the
pandemic, you think about.

That, the journey we went through
there with money coming in, and

then what credit unions decided
or not decided to do with that.

And then the fed drops the huge rates
rate increases on credit unions, which

created an interesting environment in
every area, but related to NEV, related

to liquidity, et cetera, et cetera.

So as.

That's my 10,000 foot level of the
recent history and where we're at.

And there's a lot more to it.

But in light of all that, what is it?

Let's talk trends since then.

Let's talk trends, if you wanna
link back to the things I just said,

but general thoughts on where the
industry's at today, where it's been

and where it's going trend-wise.

Yeah, no, absolutely.

And yeah, I think, we feels like
we've probably fallen asleep

a little bit prior to, 2022.

We were in a zero rate environment
for so long that, to your point,

we forgot that all of this was
important and it was intertwined.

A LM liquidity credit.

It's all linked.

And we all know that we've seen
such a significant rate increase,

now we're, possibly going into
a new rate regime with, some

recent, fed cuts marks about, or.

Are there cuts in the future?

Are there not, not one to speculate
on rates themselves, but it's

definitely made fixed income.

Interesting.

Again, we've, again, we're in this
period where, we were just sleepy

because we didn't have to worry about
interest rate risk, and in that extended

quantitative easing, there was also
no real credit risk to speak of.

And I'd say, given that the recent
trends that we've been observing that

I think are going to impact a lot
of institutions or one consumer loan

growth has been fairly, I'm gonna
say anemic the last few quarters.

And that's something that again,
directly hits all credit unions and.

What that has led to, has led in my
opinion, it's made balance sheets start

to look and feel a little bit more liquid
and that's something credit unions haven't

seen or experienced in a couple years.

When rates started increasing almost,
there's a little bit of a lag, but

very quickly credit unions started
to see those geometry deposits

that we had held onto and were such
a big part of our funding base.

We started seeing those outflows, and now
a lot of it was just being moving into

CD books, but that's not something we
had really seen across the industry in a

fairly long, a fairly good amount of time.

And so we saw margins compress.

We saw everyone just fighting for
every deposit they can get, and it

feels as though that's normalized.

The rate shoppers have shopped but.

The le liquidity piece to me is less
about all this not, deposit growth

coming back and more, it's about the
loan growth being a little bit slower.

And so we're starting to see a little
bit of cash come back on balance sheets.

And my big concern, if I look forward
into the future and play this trend out,

is when we see institutions that don't
have the loan growth they typically want.

They start trying to force
demand that's not there.

And the way we historically
have done that is drop rates to

just try and create that demand.

And one thing we're talking
about is, if the demand's not

there, the demand's not there.

We can't.

We can't throw risk out the window
and let you know, rates rule the day.

We still have to make sure
we're pricing our risks.

So those are one of the big high
level themes that we've been

seeing the last few quarters.

And again not that we have a crystal
ball, something that we see as storm

clouds on the horizon that we just
wanna make sure we're preaching

to still price risk appropriately.

And pricing the risk.

And then also, the other lever is
the quality of the loan, right?

It's like you, you can go into a meeting
saying, Hey, our profits are tight

because we're not getting the loans out.

Let's look at let's go back, let's
flip back through those last a

hundred loans we denied and see if
there's anything we should tweak.

And you know what, maybe there is.

I used to when I was an examiner and
I went to a credit union that had

commercial loans, which were more complex.

I would always ask to see some loans
that they denied just so I could get

a flavor for what I could see what
they thought was good, but I wanted

to see if I could see what was bad.

And sometimes that can
be that can be helpful.

You can learn from it, but it also can be
turning up the risk in a way that doesn't.

Keep the capital focused on
the center of that wheel.

Because if you put take too much risk
short term you might be okay, but longer

term, especially if the economy goes
the wrong way, you could really kind

yourself find yourselves in a tough spot.

Any thoughts on that side of it?

Yeah.

You're spot on.

If you're not pricing risk well, and
on the risk side it's not just the

duration or interest rate risk, but it's
the credit piece, the liquidity piece.

If you misprice that you don't see
it tomorrow, it's not that, the

next day you understand which of
those loans were priced well or not.

You see it six, 12 months,
18 months down the road.

And that's the hard part is that
the lag that you completely miss

and when you're not expecting it
is whenever you're getting hit

usually from multiple sides, right?

Yeah, exactly.

And it goes straight to capital.

And again, like you said,
capital is the lifeblood.

And if we're locating that or mismanaging
it, that's what really leads to problems.

And what's, what type of trends are you
seeing then on the profitability side?

Is it is the pressure
super intense situational?

Is everybody feeling it?

What are you seeing in that arena
in light of, these other trends?

Y Yeah.

Great.

Great question.

I do feel that it's maybe we're ca
able to catch our breath a little bit.

We've seen delinquencies, at least
the rate of delinquencies start

to plateau it feels and I think
some of the ju just the lack of.

Fighting for deposits has allowed
margins to catch a little bit of breath

because we haven't seen as many of
the CD promos that are being usually

being launched to try and capture
funding wherever you can get it.

So it seems as though the last
quarter or two we've been able

to catch our breath a little bit.

It's more for me of let's not be
complacent, let's catch our breath, make

sure we can get our feet a little stable.

But just be mindful of
where we are in the future.

But again, I think the shining light is,
we haven't seen as many of those, the CD

promos, the really short 6, 11, 12 month
promotional rates nothing against them.

At the end of the day, to me it's
not about your funding costs.

That's only one piece of it.

It's about how you can line
up funding costs and the rate

you're getting on the asset side.

I.

Again, it's this dynamic.

If we're not seeing consumer
loan demand, we don't need

that funding at that same rate.

And so again, just we've seen a
little bit of, a little bit more

breathing room the last quarter or
so as a result of that slowing down.

One of the thing on the funding cost
of the, when I, my head jumps to

like the funding source side of it
and it's money's fungible, right?

I remember like back
when I was at NCUA and I.

If I was lucky enough to get an
award where they gave me an extra

couple thousand dollars for something
that was really cool, that check

would come in and it's you know
what, I'm gonna buy a TV with that.

And then it's you'd see, it's I'm gonna
buy no wait, I already spent that money.

But, the money's fungible.

And one thing that always that always
sticks a little bit with me when

I'm thinking about the exam process
and the regulatory process is.

Every dollar is a borrowed fund, right?

You your undivided earnings,
you've borrowed from your members

because you've decided to keep
them and not disperse them.

Your share certificates
are from your members.

Your share deposits are from your members.

Money from the Federal Home Loan
Bank is a borrowed product MO money

from a purchased non-member cd.

There, it's all one sort of
borrowing and NCUA sometimes.

In my mind over relies a little
bit on the, it's not a core deposit

and core deposits are stickier
and I get all that stickier.

But there's definitely a regulatory,
I don't know, obviously a share

that's been there for a hundred
years is the best dollar.

And the worst dollar is one of those
other forms without naming one of 'em,

any thoughts about that whole concept
and how what's the best way for a credit

union to look at those different options
and different tools and different levers?

'Cause obviously you need policies and
procedures behind that, but every one of

'em can play a really good role in, in
making your credit union as its strongest.

It can be.

Absolutely.

No, it's a, the funding side's
a fun conversation 'cause you

get, so many different opinions.

But, on the, obviously, I
think on the core deposit side.

Would love for every institution to have
an entire balance sheet full of savings

accounts that cost five basis points.

That would be phenomenal.

And I'm sure every institution
out there would love that as well.

You, it's easier said than done, it's
about meeting consumers where they're at.

And I think on the, whether it's a
nonmonetary deposit a cd, a borrowing,

or a non-member CD or what have you,
they're all just, like you said, sources

of funding that all have different
dynamic structures and rates and I think

there's never a right or wrong answer.

It's all about how it fits
together as a part of the whole.

I think there, there's definitely a
case for borrowings from the FHLB and

other areas like that because it could
be a very good strategic lever to pull.

And I think one thing I try and tell
institutions is, yeah, CD promos,

I called them out a little bit ago.

Sure.

They may be more expensive, maybe
they're three 90 right now in a rate.

There are a lot of participants in the
financial industry that fund themselves

at much higher rates than that.

We're talking about our credit
unions that are, maybe their cost

of funds is 150, 200 basis points.

We're still borrowing in a cheaper
rate than the US government

right now you know that's still
something we have to keep in mind.

And it's not.

Good or bad in isolation, we have to
think about everything as part of a whole.

And it's about assets and liabilities.

How do they mix together and what is
the risk on the asset side compared

to the risk on the liability side,
and along those lines, and I'm, I I'm

having a senior moment in my head, but
the studies that credit unions need to

do about the, their deposit stickiness
i'm forgetting what that study is

called, but NCA is asking for that.

And during the last few years has
asked for it because it they wanna make

sure the assumptions are reasonable.

They have their NEV test, which allows
them to do a rough justice comparison.

But I've seen some anecdotal situations
where NCUA asked for that study to be

redone and the deposits are even more
stickier than the credit union thought.

And it end up, it ends up almost,
nCA thought that the study

would say, yeah you're being
too liberal in your assumptions.

And the exact opposite was the fact.

Have you seen that in
any recent situations?

A absolutely, we run a number
of those deposit studies as you

define, measuring how that decay
and those outflows of deposit works.

And in an a LM model, especially, it's
designed to be highly conservative, so

we've definitely seen that when we refresh
the deposits, it's, they're very sticky.

And that's still probably being
fairly conservative, right?

And in, in those types of studies, what
we're often doing is we're building

an assumption off of the individuals
that are actually moving their money.

So in an a LM model, it could be,
again, a hundred percent of your

pop of your population is going to
have assumptions that are driven by.

5% of actual behavior.

So the sample that we're using
to explain or apply to the

whole, it could be very small.

And so that's, whenever you run
these analyses, you actually see, hey

there, we've had deposits here that
have, they've been around right now.

Does that mean they're
gonna be there tomorrow?

Maybe not.

It's, the historical data's
only as so good as as it is,

credit unions being retail.

Institutions, they have very
sticky sources of funding.

Sure.

There's not as much concentration like
you see in the, commercial banking space.

It's like Silicon Valley Bank failing
and the run that happened there

and the the eye-opening experience
of, their uninsured deposit was

through the roof compared to banks.

And banks on average were five or six
times more than the average of the, or

of the biggest outlier in credit unions.

Which kind of speaks to that.

Exactly.

So it's just a, again, a different
funding base and that's where.

I'm the kind of person who says, there's
no such thing as risk if you price it.

The hard part though is pricing it.

And I think we, we can't take
anything as in isolation.

We just have to think through, okay,
what is the actual exposure and how

do we all fit these pieces together?

Is.

Credit union, that banking industry,
it's a very complex industry.

Not only just from the regulatory
side, but also just matching consumer

behavior and all the risks that we're
trying to evaluate simultaneously.

It is a lot of work.

It's tough and but we've just gotta
think how it all fits together and

along those lines, have there been
changes in, in, so having gone through

all the stimulus that kept rates low and
kept kept us, made us lose a little bit

of focus about this whole side of it.

And now we've got through it and
people have remembered or reremembered

and brought it back to a key focus.

Are you, were there any
learning lessons from that or.

Did that trigger any new tools or new ways
that, that you at a LM first are looking

at helping your clients and credit unions?

Yeah, a absolutely.

I think definitely some learning
experiences and gentle or not

so gentle reminders about more
how quickly things can move.

Especially with rate hikes, I
think we could all say that.

Yeah, maybe we expected rates to increase,
but not to the extent that they did.

And that kind of forgot that,
markets, deposits can move quickly.

I think that was one of the
eye-opening things of deposits

were changing at a rapid pace.

Maybe not necessarily again in the
credit union industry, but across,

banking and credit unions funds.

Were leaving the institution
fairly quickly for.

Again the Fidelity money market funds
at Schwab, et cetera, treasury, direct.

And the few things that
we've built since then.

We work to build more tools that our
clients can use to assess their own risk.

And so while we're an outsourced or
insource provider, we'd like to say of

a LM reporting we know that institutions
want more at their fingertips.

And we recently launched what
we call our liquidity on demand.

So that's been launched within the
last nine months to, so institutions

can be stress testing their liquidity,
run, okay, how can we survive various

versions of apocalyptic liquidity
scenarios and, have the ability to build

in, policy metrics and early warning
indicators so we can see when do we get.

Go from feeling nervous to
heartburn, to nausea if you

will and do that in real time.

And then, similar to that, building out
just more tools, like a more advanced

interest rate, risk on demand tool just
to give institutions more instantaneous

access to the scenarios that need to run.

Do you see are you yet tiptoeing
into artificial intelligence side of

that, or do you see that as something
that's in the arc here moving forward?

Any thoughts on that whole arena?

Yeah, absolutely.

Yeah.

I'm not the, admittedly the
best the AI and tech space.

We definitely have our eyes on it.

I, for me.

Ai and it's really just been
this evolution that, years ago we

called it machine learning, right?

And this is really just the next
evolution and advancement of that.

And I'm not tending to oversimplify
the people that are live and breathe

in the tech world would probably, throw
something at me for make saying that.

But do see that this is an
opportunity for advancement.

And where we're trying to evaluate
it is, can we use it to create.

Better capital allocation decisions.

Can we use it to measure risk more
in a real time basis and use that

to advise institutions of, okay, we
need to de-risk on the credit side

or at some points, I think a number
of institutions it might be the

opposite of, we need to take more risk.

We're getting paid a lot to take on.

Risk in this particular
sector, let's go do it.

And so that, that's one thing we're
evaluating and not something I'm gonna say

we have ready to unveil to the world, just
more on the investigation stage for sure.

Yeah, no, that makes sense.

The that the loan sale platform in a.

Environment where consumer loads
are drying up, there's probably some

credit unions that have a unique field
of membership or a unique situation

in their city or state that might
even have a little bit more demand.

Are you seeing that spigot
turn up or turn down recently?

Yeah.

Great.

Great question.

I'd say the market's definitely
changed within the last 12 months.

I'd say a year ago or so.

There wasn't as much
demand to purchase loans.

I think people were still trying to get
used to how much cash they had on hand.

The outflow of deposits
we were all experiencing.

I, I think it left some scars naturally.

But you, this year to start the year
off, I'd say that has turned, there

is more demand to purchase loans.

And definitely seeing more
appetite to fill loan buckets.

And I don't, obviously
nothing wrong with that.

I think things are pretty
well priced right now.

But again, my concern is more
for credit unions that feel,

married to hitting a budget.

At the end of the year, do we just add
loans for the sake of adding loans?

Regardless of what the rate is, that's
where, we get a little nervous of maybe

some discipline, falling by the wayside.

Sure.

But right now, that's more me just
crying crying out into the wilderness,

if you will, of let's be cautious.

I don't think it's anything
to be concerned about today.

Just keep your eye on it.

Exactly.

Exactly.

Yeah.

Yeah.

And then I.

There's a, was there a pilot program
that was recently approved by NCA?

You want to talk through that
a little bit and what it is and

how you see that progressing?

I.

Yeah, absolutely.

No, it's something we're really
exciting excited about getting to

advise on a loan fund for credit unions.

So for federally chartered credit
unions, they have, fund or funds, if

you will, with a max of 30 investors.

And the goal and the reason we're
really excited about and work with the

NCOA for a couple years prior to it
being the pilot program being launched.

Is that in this loan transaction
world and in the participation

world, there's some inefficiencies.

And for, say a large credit union that
wants to sell and generate liquidity,

a lot of, some credit unions will go
the securitization world where, we've

advised on a number of those, or they'd
go into the participation world and,

maybe if they wanted to sell 300 million
in auto loans, it would end up being.

10 different credit unions that they'd
have to piece it out to or even more.

And that just doesn't create
a lot of efficiencies.

It creates costs in many different forms.

And so one benefit we see is just
economies of scale of, we could have

the fund that just purchases that
300 million and then it's one buyer,

and then the fund is responsible for
parsing it out to the investor group.

So really love it from that
aspect where again, we can create

more efficiency in the industry.

And then again, because it can be a single
large purchaser, really giving credit

unions an opportunity to acquire assets
or, sub-sectors of assets, that it'd

be hard for them to get on their own.

And so we think it really,
again, is just a great thing.

For the industry on a number of different
levels and we're still building it out.

We're.

We want to take things in a very
methodical pace and make sure that,

we're not only dotting i's crossing
t's and checking boxes, but that

everything we do is gonna be really
in line with safety and soundness.

And so we're really going and, wanting
to make sure that everything's, even

the fund's even rated which isn't
necessarily a requirement, but we

think it's best for credit unions.

Overall.

Yeah, that makes sense.

And if I'm remembering right, the
derivative program started as a pilot

program and I remember the reason
I remember that is when I was at

N-C-U-A-I, I remember at some juncture
I thought, okay, pilot programs.

Need to either end or they need to
they either wind out as this didn't

work or they convert to a real program.

In that instance dipping the toe in
the sandbox of the pilot program led

to the agency saying, Hey, yeah, there,
if it's structured right and if it is

safe and sound, there's a, an arena
where this can mitigate the risk for the

credit union and then therefore mitigate
risk to the insurance fund and NCUA.

So I guess wise to.

To put good guardrails around it because
for it to convert from a pilot to a

real authority NCA needs to get that
their comfort around that as well.

So I think that's a wise approach.

Yeah.

Yeah, absolutely.

And it is been fun
talking with institutions.

We know there's a lot of excitement
around the fund and, we're, again,

very much looking forward to seeing how
the pilot program plays out and, very.

Excited to work with more
credit unions and advancing it.

Got it.

You mentioned mergers and the like.

So with these other pressures that we've
seen what are you seeing in that arena?

Is it, is there an uptick?

Are you seeing more more, more large
credit unions contemplating it?

Are you seeing mergers of
equals discussions more?

Any thoughts on that topic?

Yeah, absolutely.

And definitely seeing more more mergers
out there and more mergers of equals

that are, at larger asset sizes.

Number of hit the news wire as of
late that you, I think just spurred

the conversation regardless of asset
size of, oh, do we need to merge?

Do we need to grow?

And, I'm not on, on the merger
side of this, of the company.

So I won't speak for them, I think it's
all about to me, what is the institution's

goal, what is the board's goal and how
do you see that, that goal in perpetuity?

I.

So there's definitely
different reasons to merge.

Maybe it's just to, to
get economies of scale.

Maybe it's succession planning, but I
also think there's, for those institutions

that are kinda on the fence, not
sure if it's the right move or not.

I think there's a place for actual
community institutions as well

institutions that are really focused on.

Serving the community, serving
their members and being part of a

growing, thriving again community.

I think that can still,
that's still viable.

We just have to make sure we structure
it correctly and that we're thinking

of all all the possible pros and cons.

Yeah.

That makes good sense.

Yeah.

Is there any initiative or any
hot topic that I should have

asked you about here, Thomas?

That, that I didn't.

Great question.

I think we really hit on the high
points of what we're focused on.

I'd say one other thing that we didn't
touch on, which, I think is something

that's important for credit unions is just
the consistent focus on talent management.

One of the challenges I think
that sets credit unions apart from

banking counterparts is the ability
to lock in, your high level talent

for a period of time, banks have,
equity at their fingertips where

there's some way of developing
deferred compensation plans that are.

A little bit easier to structure.

Credit unions don't have that.

And when looking at, how do we get
overcome that type of challenge

we've really focused on advancing
and building out, employee benefit,

pre-fund portfolio management as well
as executive benefit teams because

it's something that's not going away
at least as we see the industry today.

And I think it's important
because, to keep.

Quality employees in the credit union
right now, effectively institutions

have to pay, oversimplifying,
it's cash compensation cash

bonus and that's expensive.

I.

So that's another thing that,
we've been working at for a number

of years now and really excited
to, to keep pushing that forward.

Again, we think it's
best for the industry.

And we'll keep plugging away at it.

Yeah.

Yeah.

Building those leaders is expensive
and, keeping 'em might seem expensive,

but if you don't keep 'em, replacing
'em is even more expensive and can have

other collateral, collateral challenges.

So no doubt.

Gr I'm glad you brought that up.

This has been a lot of fun.

Talking through where you guys are
at, where we think the industry's at.

If one of my listeners or watchers
want to touch base with you, Thomas,

what's the best way for them to reach
out to a LM first or to you directly?

Yeah, absolutely.

Feel free to, reach out.

My email is.

T griswold@almfirst.com.

That's T-G-R-I-S-W-O-L-D at ALM first.

And you can also reach out
to our company directly.

Go to our website, www.almfirst.com,

or info at a LM first.

All of those are perfectly accessible.

We, we love helping institutions.

However we can.

Our mantra is really, we wanna
help institutions solve problems.

So love talking about
whatever we can do to help.

Very good.

Appreciate your time today, Thomas.

Absolutely.

Thanks Mark.

Really appreciate it.

You got it.

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

I hope you'll listen again soon.

Mark TriCal, signing
off with flying colors.