Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone.

This is Mark Trekel with another episode
of With Flying Colors NCA released its

quarterly Credit Union Data summary
report for quarter number two of 2025.

And the FDIC issued a couple reports,
their overall banking profile report

and a community banking report.

And I'm here with Steve Farr, Todd
Miller, and Dennis Bauer of my team to

discuss whatever might have caught our
eye when we read through these reports.

Gentlemen, how you doing today?

Farrar: Good.

Good.

Treichel: Glad, glad to hear it.

Glad to hear it.

Hey, uh, a quick
introduction for each of you.

Let's, uh, let's start
with, uh, Dennis, this time.

Bauer: All right.

Yeah, thanks, mark.

I've known Mark for about 39 years.

Uh, we both started out with
the NCA, uh, back in 1986.

So that's where I, I started my career.

I've worked in the credit
union world for about 30, or

had worked for about 38 years.

So six of those years were spent with
the N-N-C-U-A from, from 1986 to 1991.

So I started out obviously as
a field examiner and and also

was a problem case officer.

So in 1991 I transitioned
over to a credit union in St.

Paul, Minnesota, and I worked there
for, um, 32 years at Ideal Credit Union.

Ultimately, I retired this past,
um, last September, so almost a

year ago, um, as the chief financial
Officer and executive vice President.

In my, obviously my main focus at the
credit union was my CFO role, but I

oversaw other operational areas such as
enterprise risk management, uh, payments,

human resources, and it little bit, maybe
a little bit unique for the credit union,

we were consistently a high loan to
share, high loan to asset credit union.

A lot of my time as a CFO was
spent obviously on interest rate.

Risk management was big, obviously,
but liquidity management where we

tried to encompass di discipline
pricing for loans and deposits.

Obviously.

Collateral, pledging collateral
for wholesale funding.

Worked a lot in non-member deposit,
loan sales and participations,

particularly the last 10 years
or so, I was at the credit union.

So we got a lot of experience in that.

Uh, so over that period of time a
credit union from, from 1992 to last

year, we were, we grew from a hundred
million in assets when I started to

just over a billion when I retired home.

So that was.

It was our organic growth.

And this past year I joined Mark's
team and I enjoy staying engaged

with, um, everything that's going
on in the credit union world.

Treichel: Dennis, as you're walking
through that, it reminded me of, uh, that

used to be a postal credit union, right?

Bauer: Yep.

Yep.

It was, yeah.

Treichel: I remember you and I being
on an exam team there with Leon

Hendrick and Leon was training you and
he made you bring in this really big

computer printout into the boardroom.

Yeah.

And he had you carry, and he told you
you were gonna have to present it.

And uh, and then he didn't make you do it.

So he was just, he was just
making you carry that around.

'cause he could

Bauer: Yeah.

It was at a, it was at
a steakhouse in, uh, St.

Paul, Minnesota.

And that's where I had
my retirement party.

Oh my God.

Um, had great memories from my NC days,

Treichel: the circle, the,
the circle's complete.

That's funny.

That's awesome.

Yeah.

All right, Todd, you're up next.

Miller: I have spent.

34 years with N-C-U-A-I started
in 1987, retired in 2021.

Over that three decades, it breaks down
to roughly three pieces of my career.

That first third was spent as a
problem, case officer and examiner.

The middle third, I was a capital
regional capital market specialist.

And the final third, I was a
director of special actions in

the Western region dealing with.

Troubled credit union's, supervising
problem case officers, and regional

capital market specialists.

And for a period of time, even
the regional lending specialist

enjoyed my 34 years with NCUA.

Learned a lot, was involved in
a lot of conservatorships, um,

returned a few to the members.

Those are kind of
highlights of the career.

Unfortunately over that time we've
seen a lot of credit unions go by the

wayside, and unfortunately I had to
close more than a few of them myself.

But.

Uh, all in all, it was
a very enjoyable career.

Had a lot of diversity in the
career, spent a lot of time

with complex credit unions.

Spent some time with you for a full year
during the corporate crisis at Westcorp.

I call it my last year, but.

All in all my 34 years with NCUA was a
very enjoyable and diverse career, and

I retired and two months later he called
me up and said, Hey, come to dinner

with Marie and I, and I told my wife,
there's gonna be a job offer with this.

Treichel: That's right.

And here we are.

Here we are many clients later.

Almost closing in on 300 podcast guys.

Time flies, Mr.

Farr.

Farrar: Hey, has I, I like what
Todd says I on, on, uh, so our work

being gratifying, I, I did, uh, 32
years at NCA broken into two parts.

The first half was right in the field as
a predominantly a, a problem case officer.

And like Todd said, we worked really
closely with our credit unions then.

And, uh, you know, I felt like we
were really kind of a, a part of

the team that got some turnarounds
and that provided a lot of.

The job provided all the satisfaction
you need when they would turn around

and you knew when it didn't, that
we'd given it the best effort.

So those were, those were
great times and you know, we,

it took us all over the place.

I mean, we were out in American
Samoa and Guam, some of the really

interesting places that we got to go to.

Uh, then, uh, when you went to the
central office, mark, I followed you

there and worked remotely in the office.

Of examination and ex and insurance
and risk management for another,

uh, you know, 15 plus years.

And in, in there I got to be
involved in many, many, uh, projects.

Wrote a lot of, uh, policies and once you
write one regulation and it goes through,

they pointed you and say, we got more.

So that was, uh, always interesting work.

Uh, I enjoyed working with
legal counsel on that.

I did do training with the.

Examiners on communications
and that was very rewarding.

Then towards the end of the career, I
had spent the last part of it really

working on risk-based capital, but it
was really diversified, you know, and

then we've been doing the consulting now
for quite a while, and that's been great

'cause we continue to sharpen our saw.

In the industry and, and
work at keeping up with that.

And, uh, I, I really have enjoyed the
consulting and that, uh, uh, we, we

take the time to, try and work with
credit union management like we did when

we were resolving problems as a PCL.

Treichel: Yeah.

Steve, you that's a really I'm glad
you highlighted that 'cause that is a.

The, those PCO days, the DSA days when
you, when you got in a good rhythm with

the credit union where there, where they
had challenges, you had to do supervision,

but you could really work together
to get the credit union back on path.

We're exciting times and that's, and
that's really kinda what we do now.

So I, I hadn't really kind of in my
own mind, I hadn't looked at it in that

light, but it's kind of recapturing those,
those days when we were able to do that.

From not the NCA perspective, yet
having that NNCA perspective to help

the clients, which is kind of fun.

Farrar: In fact, it's interesting.

I'm good friends with the manager.

One of the first credit unions
I worked with as a PCO after all

these years we're good friends.

Treichel: Is that the one that
has a boardroom named after you?

Well, that's the

Farrar: credit union.

Treichel: Gotta love it.

Gotta love it.

All right guys.

Let's see.

We are going to be chatting
about the second quarter data.

Uh, which topic do we wanna talk about
first from either one of these reports?

Farrar: Todd, you can have first choice.

Miller: I thought we agreed
before this, that Steve was gonna

direct this whole conversation.

Treichel: I think he, I think
he said he just did that.

He just said, okay, Steve will direct it.

Todd, what do you wanna do?

He did a redirect.

Miller: Okay.

Well I'll, I'll start with
just something kind of simple.

Just looking at growth rates for.

Banks and credit unions.

Credit unions have done really well
with their deposit and loan growth, much

better than the community banks have much
better than the banking industry overall.

Pretty much since December of 2023,
back in 2023, bank deposits were

grown a little bit faster than credit
unions, but ever since then, credit

deposits have grown significantly faster
than those in the banking industry.

So far through the first six months of
2025, credit union deposits grew 6.4%.

Banks only grew two.

Wow.

And you're seeing a similar
thing with loan grow.

Um.

Credit union, both banks
and credit union's.

Loan growth was not very robust.

In 2024, it was actually small numbers,
but here in 2025 for the first six months,

credit union loan growth was at 4.4%.

Banks were only at 2.6%.

So credit unions are doing much
better at that loan growth key.

Um, it's kind of interesting where
the credit union loan growth is too.

It's mostly in commercial
loans and home equity lending.

Um, there are other lending types
that have been pretty much static

Treichel: and those contend to be
bigger loans, which could be how the

growth numbers you, you get a, a, a
little bit of a niche there that can

add, add to those numbers pretty quick.

Steven, Dennis, any, any thoughts on
what Todd had to say or that topic?

Bauer: No, that stood out to me
as well, uh, with, particularly

with deposit growth where.

Credit unions were struggling for
so many years, sort of lagging and

this past year, over year over year.

Yeah.

As Todd said, you know, over 5%
deposit growth and it's still

being fueled, it looks like mainly
by short term certificate growth.

Um, obviously there's some money
market growth as well as regular shared

growth, so it's great to see that.

And then, right as a result,
I think you, you see borrowing

the borrowing to asset ratio for
credit unions decline a little bit.

'cause liquidity is
probably improving as well.

So, so that was, that
was good to see that.

Treichel: Great point.

Steve, anything on that before
we move on to another category?

Farrar: No, I think we've
covered it pretty well.

Treichel: Very good.

All right.

Net interest margin.

Steve, I know this one's near and dear to
your heart, so I you wanna chat a little

bit about what your thought is on that?

Farrar: Well, it, it, it's kinda
probably always near and dear to

all of our, all of our hearts here.

And that, uh, it, it, it drives so much
and it's kinda like, you know, well,

how, how is it really going for the
credit unions the net interest margin.

You know, it did increase, was it eight
weight basis points for the quarter?

Pretty consistent with what you saw
in the, uh, community bank area there.

They had that their net interest
margin increase 16 basis

points for the prior quarter.

So everybody's seeing that in, in
increase and improve, and that was a key

driver to try and get income to come up.

Kinda what I wanna talk
about with that one is.

And I, I always talk about what,
what, what, what do we think is

gonna happen next quarter and
throughout the rest of the year.

I kind of would wanna throw
that out and see what Todd and

Dennis have to say about mm-hmm.

Where we're at with that from the
quarter performance and how it

looks for the rest of the year.

Bauer: Yeah, yeah.

From my perspective, depends on what
happens with short term rates, fed rates.

Right.

The Fed funds rate.

I think if the Fed gets aggressive,
which they may because of maybe un

or unemployment issues and seems
like maybe inflation is tamed, they

may go pretty aggressive, maybe 50.

They've been talking about this
next week, may probably 25,

but maybe another 50 to 75 to a
hundred before the end of the year.

I think if that happens.

Right, just because of the makeup
of balance sheet, a little bit

more cash, you might start to
see margins maybe narrow a bit.

But I don't think it would be, I don't
think it'll be that significant though.

But in the short term, when rates,
when short term rates drop credits,

generally the margins would,
would tend to narrow, uh, a tad.

So that, that's what my take
is on it, you know, over the.

You know, when you look, when you take
a look at the makeup of why the net

interest margin, I looked at it on a
year over year basis rather than a, on

a quarterly basis for credit unions.

They picked up a lot of
yield on earning assets.

That was up about 25 basis points
over the last year, whereas cost of

funds declined roughly five basis
points, which is interesting when

you look at all FDI insured banks.

You know, you, the big banks, I
think struggled on the margin a bit.

'Cause if you look, if you just look
at all banks altogether their margin

only improved seven basis points.

But if you look at, if you strip out
the larger banks and just look at the

community banks, their margins increased
similar to to credit unions at, around,

you know, 25 to 28 basis points.

Um, and the makeup of how that happened
in the community banks, the smaller banks.

Was is was sort of split.

It wasn't all related to
yield on earning assets.

It was partly yield.

It's probably 50 50 yield on earning
assets increased by about 16 basis

points, whereas their cost of funds
declined by 12, making up the 28.

So that was interesting to see
that that little bit of a nuance

I guess in community banks
versus credit unions of how.

How the net interest margin improved
is what I, I saw during my review.

Treichel: That's interesting.

That the big one, the big ones
dragging the average down.

Uh, and then when you compare the,
like the community banks which are

more similar to credit unions, there's
a little bit more of a correlation,

but still, still a difference.

Miller: Yeah.

I have kind of another take on it.

I'm gonna go put my old problem
case officer hat and my DSA hat on.

You know, and when credit unions
had earnings challenges, one

of the things we always talked
about was operating expenses.

'cause that's the thing they
have the most control over.

It's really interesting.

If you look at the six quarters
since December of 2023, the banking

industry have reduced their expense
levels every quarter, and the credit

unions have went up every quarter.

And right now there's about a 40 basis
point ROA difference between credit unions

and community banks, and it's almost all
in that operating expense difference.

Treichel: Yep.

Well, that, that could be
a podcast in and of itself.

That's interesting.

Yeah.

And

Bauer: yeah.

Yeah.

Where that hap and where that
happened mainly for credit unions.

Again, I look year over year was up 12.

Roughly 12 basis points, I think.

Yeah, non-interest expense was
up 12 basis points for credit

unions and for all banks.

It was up, let's see here,
about two basis points.

And for community credit or banks,
it was up it was up three basis

points and right for half of it
was related to salary and benefits.

That's where the, um, the bulk
of that increase occurred.

So, right.

I, I don't know, partly maybe inflationary
pressures on credit unions related to that

cost of living might've resulted in that
and, and banks sort of held back a bit on

increasing probably salary and benefits

Treichel: And hypothetically maybe bank
bankers are paid a little bit better.

It is getting more competitive
out there to keep people around.

The credit unions are having to pay
money to either bring people in.

Or up people to keep them there.

That possibly could lead to the, the, a
little bit of that credit union growth.

Miller: How much of it was
salary and benefits debt

Bauer: of the 12?

Um, I think it was up, from what I
remember, I didn't, I didn't write that

down, but roughly, I think about six basis
points, about half of that, I believe

came from salary benefits when you broke
it down into the various categories,

that one sort of stuck, stood out to me.

I

Miller: wonder if some of it, you know,
we've had a lot of clients that went

through data processing conversions.

I wonder if some of this is just keeping
up with technology, keeping up with

data security or information security.

I didn't look at the breakdown.

You know, it's just an
observation that they're going

in the opposite directions and

Farrar: yeah,

Miller: the two industries.

Bauer: Yeah.

One, one ratio I always
follow is just the average.

What is the average salary and
benefits for credit unions?

And if I didn't pull this report,
I, not in front of me, but I believe

I believe that average salary and
benefits for all credit unions was

approaching a little bit over a hundred,
a hundred grand right in front of me.

A hundred nine, five

Miller: hundred ninety

Bauer: $9.

Yeah.

So that's up I think a,
a, a bit from a year ago.

About six or 7,000 I believe per, a year
ago it was 1 0 2, so it's up almost 4%.

Yep.

So I think that's, I think that's
where the big, the bulk of that

expense is, is, is occurring.

Treichel: Fascinating.

Farrar: Yeah.

There is some increase also in
just education and promotion,

and that's not surprising.

And that we talked about competition and
that would be the reaction because you do

see, credit union advertising out there.

In more spaces that you
didn't use to see it.

So

Treichel: stadiums and the like.

Farrar: There we are.

Treichel: I didn't say it.

I did.

All right.

What, so what, uh, any, any last talk
topics on we, we did NIM, we kind of did

expenses as it relates to profitability.

Uh, what's, what's next, Steve?

Farrar: Let's go.

Loan loan portfolio performance.

Um, you know, the thing, trend
looked pretty good, I think

on just overall delinquency.

Uh, let me look at it again real quick.

I did delinquency is just, up just a
touch from where it was a year ago, up

a bit from the, the quarter compared to
the community banks, they're, the numbers

aren't always so comparable it seems like.

The credit union delinquency is higher
than that, and that's reflected in the

loan losses, uh, because the credit
union industry does operate pretty

significantly higher loan losses
than are in the community banks.

And that, of course, is
another element, uh, affecting

that, uh, overall net income.

You know, and that, uh, the PLL
average assets for the credit

union was, uh, was like 0.6%,

a little less than that.

And it hasn't moved much over
the last few quarters, but in

banking, it's, it's only like 0.2.

So that's a pretty significant difference
that's, that's occurring between

the two businesses, uh, out there.

So, uh, that was my
observation on loan quality.

Miller: Overall, what you
see is delinquency trends in

the banks and credit unions.

They're almost going in lockstep,
even though the banks measure that

delinquency number a little bit different
than the credit union industry does.

'cause they throw non accruals
into their delinquency and they

start measuring at 30 days.

Credit unions start measuring at 60
days, but the trends are just virtually

for the whole portfolio the same.

And what you do see in the
community banks is their commercial

loan delinquency is very low.

Credit union's, commercial loan
delinquency, and it's one of the

fastest growing portfolios, but
their delinquency in that commercial

loan portfolio is inching up too.

In fact, it jumped almost 20 basis
points just in the last six months.

So, it's like 1 0 5 now for just
their commercial delinquency

in the credit union industry.

And that's a number that I would
think would have the folks at

N-C-U-A-A little bit nervous.

Treichel: I'm so nervous they're
eliminating the risk ratings, but

that's a topic for another day.

Bauer: Just to add a little bit onto
that combination of where loan growth

is occurring and what's going on
with charge offs and delinquencies.

Right.

Unemployment's still relatively
low, which is a good thing.

And real estate values obviously are sky
high, uh, which right now is a good thing.

But if that concentration of, continues
to grow in real estate and we start to

see an increase in unemployment and we
start to see housing values drop, then

that most likely is gonna have a impact on
the Cecil calculation, which could impact

credit unions probably more significantly,
I think, than net interest margin.

If we start to see that downturn in
potentially in the economy right.

We're sort of at the high point,
if you will, for, for unemploy.

You know, unemployment's been picking
up a bit, but not significantly

in real estate values, right?

So we're at a very good
position with both of those.

So, um, most likely those are
gonna deteriorate a little bit or

significantly depending upon what, what
goes on with the economy that could

impact the provision for low loss.

Miller: Kind of an observation along
that lines, I didn't look at NCUA

state profiles, but the FBI's quarterly
profiles, they do put regional.

Information in there.

And for delinquency, like for community
banks, you know, it ranges from 0.4

in San Francisco to 0.68

in Dallas.

I mean, there's a 20 basis point
difference in delinquency just

amongst their different regions.

And they have similar differences
in ROA, there's a big spread in ROA

between, the different bank regions.

Like I said, I didn't dig into NCA's
regions are their state profiles,

but I wonder if maybe some of that
still exists within NCUA as well.

Maybe we have some regional differences
going on within our credit unions is I

Treichel: would imagine that's the case.

Uh, Steve, any any
thoughts on asset quality?

Farrar: No, I, I think we've,
we've covered it pretty well

and how, you know, that reflects
back into affecting earnings.

Treichel: You got it.

Well, and, and earnings, and Cecil,
you know, it, and I know enough about

Cecil to not quite be dangerous, but
it's definitely not my expertise.

It used to just be the allowance
and you'd, you know, you'd, you'd

individually classify it and be gone.

And we've changed it a
few times from there.

But there were some, some
sways with credit unions on how

that when they implemented it.

And it had some unintended consequences.

And then the next, the second year,
there were some, some challenges

that it created in some institutions.

But as Dennis, if, if, uh, if the
economy starts to slip, it's almost

like a double hammer now in that Cecil,
'cause you've got the, you've got the

real delinquency in the losses, and
then you have some other, environmental

factors and different things out.

You know, there, this isn't
a Cecil podcast, but I could

see that really having.

A bigger increase or a
bigger impact than pre Cecil.

Bauer: Yeah.

And then, right.

There's so many different
flavors of Cecil.

They're not consistent at all.

I know the one we used is heavily
influenced by sort of what's going

on with real estate values and
what's going on with unemployment.

That can, even though you might,
it might look like your delinquency

is, is great and your charge offs.

I mean, if that starts the.

Those environmental factors
change that really supposed to

influence that calculation, so.

Right.

Um, and I don't know if that's
probably not being done consistently,

obviously across the board.

Miller: Good point.

One thing you see a little
bit of economic, you know,

struggles amongst individuals.

While unsecured lending isn't a
huge part of credit union's loan

portfolios, I mean the charge off
ratios for credit cards, unsecured

lending, they've been inching up.

And you know, within the credit
union industry, charge off

ratios on credit cards are 5%.

That's probably getting
up there where bank.

Charge off ratios are other.

Unsecured lending is in the 4% range, so
it's a small part of the portfolios, but

it's a big chunk of credit union losses.

And you know, I don't know, over
my last five to 10 years that NCUA,

you did see a lot of credit unions
leaving the credit card space.

And, you know, it's not
necessarily growing to any degree.

But it's definitely costing credit
union some money and charge offs.

And I think it's just the whole thing, the
economy and saving rates and everything.

But those unsecured charge
offs are pretty significant.

Treichel: Yeah.

Those are big numbers, which were,
um, I, I had pulled up a, a tweet

or, uh, do you still call 'em tweets?

Even though Twitter
changed from Twitter to X?

Is it still a tweet?

I'm gonna have to go to the dictionary
to check that out, but somebody

who listens to this podcast, who
is X-N-C-U-A, sent me a tweet from,

uh, uh, the co cobi Ossi letter.

I'm not sure if I'm saying that
right, but the tweet was this,

and you know, if it's on Twitter
or X, it's gotta be true, right?

Because, so this data has to be as.

High quality as NNC and fds.

Tongue in cheek, uh, the car market
bubble is bursting subprime auto loan.

Delinquency rates have now surpassed
5% for the first time in history.

The 60 day delinquency rate for
subprime auto loans has more than

doubled over the last three years.

Delinquency rates are now
one point, roughly 1.5

percentage points above the
2008 financial crisis peak.

At the same time, prime Auto
Loan delinquencies rose to

their highest level in 15 years.

Conclusion, an auto debt,
auto debt crisis is brewing.

My first reaction to that was
how is it possible that 5% is

the highest that subprime auto
loan delinquency has ever been?

Any thoughts on what I just
rambled on about there?

Miller: I suspect it's been
much, much higher, right.

In different times in the past.

For credit unions though, that just
kind of a side observation is their

auto loan delinquency has been
creeping up just about every quarter.

It's up to one, one now.

Um.

Just two years ago it was only 63 basis
points, so it's doubled in two years.

Okay.

But credit unions, in 2024, there was no
loan growth in the auto segments at all.

So their portfolios
are not going anywhere.

And you know, I think part
of it is, is, you know.

Car prices are ridiculous and cars
are ask lasting a little bit longer.

I haven't looked at automotive sales
in a while, but, um, only those

auto loan portfolios which we're
craving breads and butter have not

been growing the last couple years.

Bauer: Yeah, I think inflation
killed the consumer's ability

to service all those high costs.

Auto loans purchase the.

Auto, you know, if you purchased
an auto prior to inflation, right?

Then all of a sudden, you're up 20%.

And with inflation, that's what I
can remember experiencing the last

year I was at the credit union.

You, you saw that that household
income drop was impacted significantly

and it's probably still impacting a
lot of the, the consumers up there.

Treichel: Yeah.

Makes sense.

All right.

What, what's, what next
on the list there, Mr.

Farr?

Liquidity.

The big L

Farrar: liquidity and, and that one
I do have to throw to the operational

experts on our panel is, uh, that is not
my area of expertise, but it is always

a, a topic that's, you know, our clients
are dealing with quite, quite a bit.

So Dennis and Todd,

Bauer: yeah.

What, what was good to see is the unreal
life losses on in the investment portfolio

improved significantly year over year.

Um.

I, I thought I had this number as a
percentage of investments, but it's a

percentage of assets is what I found.

And so that is improved 41 basis points
from a year ago for credit unions.

I didn't have that for banks.

So Right.

That helps out that helps out obviously
liquidity positions significantly.

I think too, right, that just the
balance and growth that we're seeing in

loans and deposits, right, we're not.

We don't have loans.

Outstripping deposit growth, though,
that's provided some, some relief.

So that cash, the cash position for credit
unions has remained pretty stable compared

to a year ago as a percentage of assets.

It's dropped, but probably assets
are growing a little bit faster.

So that's from a racial perspective
that that accounts for the, the racial.

But I think it's far as far as
cash, if I remember reading that.

I think that's up.

A significant amount
compared to 12 months ago.

So from, from what I see, uh, liquidity
positions have improved just in general,

uh, for credit unions as a whole.

Miller: That's in part because now
we've had a year and a half shared

growth, outpacing loan growth, you
know, so cash and on hand is, the

ratios haven't really changed much,
but they've paid down borrowing money.

Um.

While those unrealized losses have
improved, they're still significant.

And you can definitely see that the
credit industry thinks interest rates

are gonna go down because the piece
of investments that grew the most.

Yeah.

Was that three to five year period the
really, I'm surprised that, think back

in 2000, let's go do it again in 2025.

Bauer: You must think we're at the
high end, but yeah, I was surprised

to see that that area grow again.

Oh my,

well, the 10 year rate, it was nice to
see the 10 year rates down to around 4%.

Um, so I, I would think if that
continues, I think the third quarter,

which is fast coming to a conclusion,
we'll start to see, we'll still continue

to see better, um, on realized losses
in that portfolio I would assume.

Treichel: So they're betting on
that 75 basis points to come by

going to uh, three to five years.

Well, we'll, we're gonna
find, you know, we'll do this

quarterly hereon until eternity.

We'll, uh, we'll just, we'll cut this
and we'll play it in a year and go, that

was really smart, or that was really not.

Oh.

Okay.

We covered liquidity, we
covered, uh, earnings.

We covered asset quality.

Have we talked about capital?

Or Steve?

Where are you taking us
next on this journey?

That,

Farrar: that was, uh, the last
topic I still had on here.

It was capital because that kind
of, it, it reflects everything

we've talked about previously.

Uh, the, the news is good for the
industry and banking industry.

Both Is that it?

It improved in the quarter,
uh, you know, for credit union.

With the, as you know, net worth
growth did outpace asset growth.

So that was good.

And we, so it did increase, we got 13
basis points in the banks, basically

on the same ratio had 10, or the
community banks had 10 basis points.

So it's nice to see that one growing up.

And then the, uh, the risk, risk-based
capital increased also, but we have

all those credit unions using the.

Credit union the complex
credit union leverage ratio.

So you expect that number to
remain, you know, uh, pretty

high, and it, it looks good.

With that, it feels like, you know,
the capital strength of the industry

is, is doing well even behind those
capitals, but the insurance funds.

Both had good quarters, especially
the FDIC insurance fund, which kinda

sits back there and, you know, that
affects their expenses is that that

reached the level where they're no
longer subject to a, a resolution plan.

So the, it increased greatly for them
so that, that that's good news for

the entire industry, I would say.

So capital with both the,
in the institutions and in

the deposit funds improved.

Miller: That's a good, I'll say there
is one observation now that's worth

noting is, credit unions largely
compete against those community banks.

And those community banks have
about 130 basis points more in

that capital than credit unions do.

And that gives them a little bit of
competitive advantage, you know, and I

don't know if we'll see a point where.

Subordinated debt grows, you know,
back in 2023 it went up about 9%.

The last, 18 months, it's
only been growing at about 1%.

Maybe if rates drop here a little
bit, we'll see a little bit more

issuance of subordinated debt.

Um, certainly I think there's, you know,
low income credit unions out there that

could still take advantage of that.

To a certain degree because
loans are still growing.

Having a little extra capital
always improves your strategic

options, so to speak.

Treichel: Always good to have options.

I think that's a good observation.

That rates coming down will
create that opportunity.

And, and thinking out loud, if
credit unions are 130 basis points

behind, if we take community bank.

Community banks.

Okay.

Community banks behind community banks.

130 basis points, lower net worth
ratio credit unions have, is it 230

basis points if you discount the
N-C-O-S-I-F or did you already do that?

Miller: No, I did not
discount the N-C-O-I-S-F.

So that makes it a little
bit bigger difference.

It's even now, overall, if you compare
'em against all banks, credit unions

have more capital than all banks.

But you know that direct competitor, the
community bank, the community banks are.

More capitalized than the larger banks.

And I think a lot of it is their
family owned banks too, so.

Treichel: Right.

Makes sense.

What else on capitals, guys?

Farrar: I think that's it.

Treichel: Any, any last
thoughts on, on quarter two?

Miller: I just think there's headwinds
for the credit unions out there.

Like I said, they haven't been able
to grow those auto loan portfolios.

That growth is in home equity
loans and commercial loans.

Um, you always.

It always makes me nervous when like
the banking industry is contracting on a

product, so you know, they're shrinking
their commercial loans or holding

them stable, and that's where they're
growing the f within the credit unions.

Now, in the big scheme of things, the
credit union's market share in that

commercial loan area, it's minuscule.

I mean, credit unions have six, 7%
of their assets in commercial loans.

Those banking industries,
that's up in that 30 40.

So it's a totally different business
model, but it always would make me

nervous as an examiner supervisor, when
you see credit unions growing an area

that the banking industry is shrinking,
it's like, is your timing really good?

Are you getting in this
at the exact wrong time?

Too many times in history it's like, well,
you got in there at the exact wrong time.

You know, being as credit union's,
market share is small, there probably

is a lot of cherry picking going
on where they're just picking off

some of the absolute best borrowers.

Um, but at the same time that
delinquency in those commercial

portfolios is inching up.

And you know, that's a tough one because
net charge offs have an inched up.

Delinquency has inched up a little bit
and you know, how will that play out?

Because the resolution timeframe,
especially for credits, which it's

a lot of commercial real estate, you
know, you don't fix that very easily

when people start getting behind.

Treichel: Great points, Dennis,
Steve, any last thoughts?

Farrar: I think, you know, I always
like, looking forward is that way to

try to focus on, and, you know, looking
at even some of the pronouncement OC

put out and looking forward is this
uncertainty that we continue to deal

with the market and nobody likes dealing
with uncertainty, but, you know, we, you

do have, you know, weakening signs that
could affect the consumer loans if, uh.

Inflation picks up or we hit stagflation.

All not good for the loan portfolios.

Interest rate uncertainty is certainly
elevated and factors in infecting that,

that we're not used to dealing with.

And, you know, and then, you
know, the EVA evolving and complex

operating environment is, uh.

Is proving to be difficult for some
especially not so large credit unions.

So lots of uncertainty
out there to deal with.

Great point, Dennis.

Last thought.

Bauer: No, it just, in, in
general though, credit unions to

continue to be well capitalized.

Hopefully they're managing credit
risk and concentration risks so

that they can see some of those.

Headwinds coming and, and have proper,
have proper risk management in place

to, to minimize any, any downturn
that we may have in the economy.

And I think in general,
most credit unions do that.

So there's gonna be some outliers.

Crane industries remain strong
through various cycles, so I would

think that would continue throughout.

Throughout the next, uh, few
years in, in front of us here.

Treichel: You got it.

And couple of you mentioned headwinds
and that made me think of this.

I've been listening to a couple
of different FinTech podcasts.

Uh, one because the guy's
just really funny and, and has

been teaching me some things.

And they have a podcast on once every
other month or something where they talk

about FinTech companies and they say it's
not investment advice, but they find these

companies that are doing unique things.

And they were talking about one
that was in the payments arena.

And the guy basically said, this
is really cool and I'd like if it

was on an app, but I don't know
how, how they'll win this market.

And he talked it in a concept of are
you just surviving or are you winning?

And I thought about it when I heard that.

I thought about, with mergers and things.

And so when I hear headwinds and I
think about, possible challenges with.

With the economy, MITRE might not happen.

Unemployment Mitre might not happen.

It's happening a little bit, but
then again, the numbers are squishy.

Credit unions that are in this
survival mode and then they just

tap out and they end up verging.

Uh, and what are you do, what are
you doing to make sure you're, you

know, gonna be here 5, 10, 15 years?

Uh, I think is probably the
biggest challenge that I see

financial institutions taking and
having to deal with right now.

Farrar: Yeah.

Another uncertainty, of course,
that's gonna affect everybody is that

turnover that occurred with all of
the banking regulators in terms of.

A lot of senior staff is, is departed.

Staffing levels are, are lower.

So it's, uh, hard to say exactly
what the impact of that will be.

You'd like to see some gains in efficiency
in examinations, not taking quite so

many resources from credit unions.

But, uh, ex experienced examiners,
I think, you know, are, are one

of your best resources and a lot
of those aren't there anymore.

Treichel: Yep.

Great point.

All right, guys.

Well, it the, boy, we're recording this.

What is it?

Wednesday?

This episode will go out Thursday, two
days ago, the JJ McCarthy era for the

Minnesota Vikings start off to a shaky

Bauer: start.

Treichel: What's that?

Bauer: He was off to a shaky start.

Treichel: I don't know.

He's the first, first, first
time starter to ever have three

touchdowns in the fourth quarter.

I think you're wrong, Dennis, your
Pittsburgh, your Pittsburgh guys

have a 42-year-old quarterback.

Mike.

Mike JJ is only 22 and the Micah
Parsons era has started in Green Bay.

We'll see.

We'll see.

We'll see.

We'll see.

I'll, I'll, I'll.

In two years, Dennis, when we check if
the commercial loan increases, were good.

We'll see where Aaron Rogers
is and where JJ McCarthy is.

And, and as JJ said where
else would you rather be?

Miller: Yeah.

In Minnesota as a Packer fan, I
stopped watching the Chicago, Minnesota

game in the third quarter thinking,
yes, Minnesota's gonna start the

season with a loss, see right away.

And then the next day it's like,
well, dang, that didn't turn out.

The

Treichel: way happened.

That didn't quite turn out,
that didn't quite turn out.

He's a, yeah, they have

Bauer: these on the NFL, they have
these probability charts and I think.

I think in the third quarter, Chicago
had like a 95% chance of winning the game

and um, there was a little questionable
call I thought on, on the holding.

Yeah, yeah, yeah,

Treichel: yeah, yeah, yeah,

Bauer: yeah, yeah, yeah, yeah, yeah.

Treichel: Come on, Dennis.

Bauer: But the Steelers have the B man,
they kick field goals all year long.

Treichel: Sure, that's right.

Yep.

Yep.

Well, we will see.

And Steve, who are you
rooting for this year?

Farrar: The referees.

Treichel: The referees.

Yeah.

Let's hope they get it right this year.

All right, guys.

As always listeners,
thank you for listening.

I hope you'll listen again soon.

Mark TriCal signing
off with flying colors.