Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone, this
is Mark Trike with another

episode of With Flying Colors.

I'm here with my, my crew today.

I've got Dennis Bauer, Steve Farr, Todd
Miller all formerly of NCUA and or Credit

Unions and or Credit Union Exam Solutions.

How you guys doing today?

Good.

Doing

Farrar: well.

Merry.

Merry Christmas.

Treichel: Merry Christmas.

That's right.

And because it's Christmas near Christmas,
we have a a quarterly episode that

we've been doing and we're gonna be
talking about the quarterly credit union

data summary that comes out from NCUA.

Of course this would be for
quarter three as of September.

But before we jump into that, just
in case there's some New Watchers or

some new listeners, why don't you guys
give a little bit of your background,

and I'm gonna, I'm gonna start with
Dennis, and we're on my screen.

I've got Dennis, Steve, and Todd
in that, in going counterclockwise

Dennis state, your your name, your
background, et cetera, et cetera,

et cetera, for those new listeners.

I'll do that.

I'll keep

Bauer: it quick too.

Yeah, I've I've been in the credit union
industry for, or I was in the credit

union industry for about 38 years.

My first six years I spent with the
NCOA I, I worked as a field examiner

and then I my last couple years with
N-C-O-A-I was a problem case officer.

Then I switched sides, if you will.

And I I spent the next 32
years at a credit union in St.

Paul, Minnesota.

I was postal credit union, and when I
left, our name was Ideal Credit Union.

I came on pretty much in
the finance operations area.

So I stayed with that
credit union for 32 years.

I, I re, or I retired
in of September of 2024.

So just over a year ago I retired.

And I spent my time, as I said, in the
finance and in the operations area.

I finished up as the credit
union's chief financial officer.

So as I, I spent the 32 years there.

We grew from a credit union of about
a hundred million to just over a

billion, and then Mark mark tapped me.

I started out working with
Mark, actually with NCUA.

We started as examiners together
and I stayed in touch with

Mark throughout my career.

And he asked me if I needed
a little whiskey money.

And I so I jumped on and I tried
to bring a, I guess a an aspect a

little bit of probably NCA, but that.

That, that knowledge is long gone
after 32 years, but more from a

credit union operation perspective.

So that's my story.

That's

Treichel: your story.

I remember when I had a code four, a
code five credit union in my district

that will re remain nameless, who was
trying to open a branch on the west

coast and we were in the Midwest.

And we, I think we even had a
letter of understanding agreement

that they agreed not to do it.

And you said let's pick up the
phone and see if they opened one.

And you called information and Sure.

As rain, they were in violation.

They were iation.

Bauer: I go here, mark, why
don't you have a conversation

Treichel: here, mark, why
don't you talk to these guys?

Yeah.

I'm not sure.

We ratcheted it up somehow,
but they've since merged.

But we won't mention who that was.

No, we won't protect the guilty.

All right.

Steve Farr.

Farrar: Hey, I'm Steve Farr.

I break my career now
down into the three parts.

The first 15 years are in the field
for the NCUA and mostly as a problem

case officer, which was self-rewarding
work, I'd have to say, because you

loved working with the credit union.

Management in, in fixing the problems
and not having to necessarily merge

them, although that happens sometimes.

But that was, we had conservatorships
and extremely bad cases.

Spent a lot of time in
Alaska at one point.

Then after that, when Mark went
to the central office, I followed

him there and worked remotely for.

Basically about the next 12 years
or so in the division of risk

management, and we all became deep.

Todd and I and Mark were deeply
involved in the corporate resolution.

Towards the end of my career, I
was vice president of the CLF.

And spent the last couple years
working on the risk-based capital rule.

Since leaving NCUA, I enjoyed
the consulting that we do.

I got to do a stint as a chief financial
officer at a conservatorship in Manhattan,

which was, it's a great place to.

To be when you're able to stay
in the hotel and walk to work.

That was a great experience.

But yeah, I think we've enjoyed
being able to keep our saws sharp

with the consulting and keep up with
what's going on in the industry.

And now we're just sitting really
observing, this influx of change

that seems to be happening right now.

So it's, we're gonna,
we're gonna enjoy the ride.

Treichel: Yeah, that's for sure.

Enjoy the ride.

I like that.

I like that.

If I remember right.

Did.

So I'm gonna get part of this story wrong.

You came out and helped me when I was
out on the East Coast and you had to

do something for us in New York City,
and somehow I'm picturing a David Cone

no-hitter that you either were able to
go to or weren't able to go to which

Farrar: I bought tickets to go
to the game when I was actually,

I was doing the examination of
one of your conservatorships.

Treichel: Yep.

Farrar: And, nobody really showed
me how to ride the subway to Yankee

Stadium, and I was like, eh, I don't
think I'll take an adventure on my own.

And so I was working out in the hotel gym
and watching the no-hitter take place.

Treichel: You could have kept
those tickets and sold 'em now

on eBay, got your money back.

All right.

Todd Miller.

Last but not least.

Miller: I spent 34 years with NCUA.

I can break my career down into
a couple, three big chunks.

First decade, 10, 11 years, I
was an examiner, problem case

officer on the West coast.

Then I spent roughly 11 years as a capital
market specialist on the west coast.

And then I spent about 12 years
as a director of special actions

on the West Coast supervising.

Problem case officers, capital market
specialist, regional lending specialist.

Steve mentioned the corporate thing.

I have what I call my lost year in there.

After the agency conserved Westcorp
Martin drugged me in there and attorney

Bob Ner would send us a letter about
every three months, the same letter.

We're not allowed to talk to anyone about
what we're doing, I just didn't talk

to any of my fellow peers or anything
for a year, so I call it my last year

I just went to West Court every day.

Treichel: Yeah, that
was for the whole year.

That was a, that was an interesting time.

Miller: It was very much an interesting
time, but I enjoyed my 34 years with NCUA.

Like Steve said, there's times
we did assistance packages.

We gave credit unions
capital to help them survive.

A lot of them are still there.

I don't know how many conservatorships
I did, but I did return a couple

conservatorships back to the members and
those credit unions are still there today.

Those are quite rewarding.

You learn a lot on a conservatorship
because you get to be the board of

directors and the CEO and everyone
else and got your hands tied and

you got board members wanting
this from you and that from you.

And you tend to learn a lot of operational
things that examiners don't when you

have a credit union and conservatorship.

And it's very rewarding to
give those back to the members.

Treichel: It is.

Yeah.

I had a couple that we
were able to spin back too.

That's we all enjoyed our time.

Helping credit unions in that PCO role.

We were all PCOS at one juncture and
it's a lot more fun being on this side

of at least at this stage of our life,
a lot more fun being on this side

of the table helping credit unions.

But with that, let's pivot into the
quarterly data for the September, 2025.

Which trend do we wanna talk about
first and who wants to jump in?

Todd

Miller: Fire.

I'm never scared to talk first.

And it's not so much a trend.

It's somewhat interesting.

If you look where credit
unions went from like 2010 to

COVID, we had really low rates.

So things got distorted.

Then COVID, we had this massive
liquidity infusion and rapid growth

and a lot of dumb investment decisions
and long-term asset decisions made.

Then we get inflation and rising rates.

Caused some credit unions to struggle
and where we're at here in the last year

is it's almost a return to normalcy.

People are getting their net interest
margins back where they're at.

Balance sheets are getting
in much better shape.

You're almost seeing a return to what
credit unions look like in say 2007, 2009.

Your share structure
is returning to normal.

So all in all, this year,
it's like a really good year

for the industry as a whole.

Capital numbers have come up.

Growth is slow.

Okay.

There's some delinquency things
happening at the edges, but in

general, it's return to normalcy
here for credit unions, which is.

A good thing.

In other words it's not as exciting as
it has been here the last few years.

When you look at these trends,
even the negative earners,

there's only like 514 of them.

There were 630 of 'em last year.

So you know, that's way down.

And interest margins are looking nice.

So I would call the whole trend
is, it's a return to some normalcy.

Even though NCUA is in turmoil
the credit unions are returning

to a normal operating stance.

Treichel: Yeah.

There's a little bit of
turmoil going on at NCUA.

We may or may not dive into that.

Somewhere along this along this
call, Dennis, Steve, any thoughts

on what Todd had to say there?

Bauer: Yeah.

On the margin?

It was it was good to see that, I
think margins compared to a year ago.

There were up approximately 30
basis points from September of 24

to September of this year and right
in, and that it's predictable just

because of what, to some degree, what's
happening with the overall yield curve.

Todd mentioned that things
are getting back to normal.

I think the yield curve is not quite.

It's not quite, steep, the whole
yield curve, but from the two

year point on it's fairly steep.

And then the the difference
between the three month and 10

year and two year has shrunk.

And mainly because right short term
rates have come down, which then has

resulted in, cost of funds stabilizing.

They haven't really increased.

They're probably starting to actually
maybe start to decline a bit just

because of the way the, of the
short-term nature of short-term

CDs and non maturity deposits.

So I, I would assume credit unions
are starting to reprice those down,

whereas then on the assets side it's
geared more towards the longer end.

And that part of the curve is not
actually even, that's not coming down.

That's I think the tenure is actually
up higher than it was a year ago.

So that's good for maintaining higher.

Higher yield on assets, earning assets.

So as a result, we got a 30
basis point pickup in interest

spread compared to a year ago.

We'll, and I, we'll probably get
into that a little bit more, but

some of that was eaten up, right?

When you take a look at the ROA over
overall was only up 11, 11 points.

So we'll probably talk to as to
reasons why that's going on, but

that's what I would take onto the
margin and things getting back

to normal or for credit unions.

Treichel: Got it.

Got it.

Steve, any thoughts to highlight
add on to the, that theme?

Farrar: Yeah, just, in big picture,
one of the things I do e each quarter

is I compare the credit union's
performance against community banks.

And like we Todd said, it's been a pretty
good year in terms of performance and

it's that way with the community bank.

Also they come in with a significantly
higher ROA they're a 1.11%

so that, they're quite
substantially higher there.

And they have the other really
astonishing numbers, they're much,

much lower in terms of loan losses.

They're at like 0.19

in the credit union industry at 0.7177

or eight one.

So that's the biggest difference and
that, and then there's the funding

of those losses that, that the credit
unions are having to fund more in,

in loan losses than community banks.

But generally the numbers moved in
concerts where there net interest

margins went up by so many basis points.

It was really close to what,
the credit union industry did.

Like how Todd says it's,
it looks like a good year.

And then like Todd talked about, where
we're at in terms of unprofitable

credit unions have the number there.

For the industry it's, 11.78%.

But when you look at any the
credit union's over a hundred

million, it drops to 6%, which is
pretty comparable to the community

banks in that they run like 5.26%

of their institutions were unprofitable.

So we're, the performance of
credit union industry against

community bank, pretty consistent.

Treichel: I gotta text a
client back who wants to chat.

Let them know that after I'm recording
this podcast, I will give them a call.

All right.

Sorry about that.

So the community bank's numbers
are similar, but different.

And Todd you said something about,
delinquency around the edges.

So capital's strong and
getting a little bit better.

But let's talk about the asset
quality side of the game.

What are you seeing statistically
in the asset quality arena?

Miller: First off, let's just
talk about the effect that our

ones credit unions have on this.

So there are 25% of assets in the
country, but they have 37% of the

delinquency and 42% of the charge offs.

Our 21 credit unions at one
have a big impact on what the

national numbers are showing.

For charge offs.

But when you look at things in
aggregate, sometimes you break these

delinquency and charge offs numbers
down, and I sit there and wonder

why credit unions have credit card
portfolios anymore, or unsecured debt.

Charge off ratios on credit card
portfolios have been over 5% for

two years now that's a big number.

You're seeing.

A deterioration in auto loans.

And in fact auto loans have
been shrinking a little bit.

In terms of the portfolio that you see
credit unions, and maybe this is in

response to those loss rates, they're
moving more and more towards more real

estate loans again, and I think part
of the lending and the auto lending

shrinkage and slow down and you have
almost a 1% charge off in auto loans.

Not quite.

88 basis points.

1.1

for used cars, but part of that, I think
it's just a matter of the economy is

slowing and I just bought a new car and
there's a little bit of sticker shock.

You can hit a.

50, $60,000 really fast on a not so
fancy truck pickup anymore, or an SUV.

And I think maybe you're seeing
a slow down on that just because

of economic uncertainty, but
you're definitely, seeing.

Increased losses in those
auto loan portfolios.

Real estate and stuff is
still looking really good.

And maybe that's why credit union
are moving in that direction.

And commercial lending
losses are pretty low.

And maybe that's why you're seeing
some growth in commercial lending

the last two, three years too.

But I know NCUA is extremely worried
about those commercial loan portfolios

and how are they gonna hold up?

And that's always a
million dollar question.

All four of us have been around for
three, four different recessions,

and those tend to be a little
geographically isolated things.

This recession is in these three
states and this recession, the losses

are in these four or five states.

And this recession, that's these
states, and that's probably the way

it will play out again next time.

But trying to predict where those
states are gonna be, not so easy.

Yeah.

So N two A worries about everybody.

Treichel: That's right.

They worry about everybody and they
send out their warnings about everybody

on the delinquency and asset quality.

Steve or Dennis any
additional thoughts on that?

Bauer: One thing I saw not so much
in the data, but macroeconomic stuff

unemployment's starting to tick up.

I think unemployment came out even today.

I think it ticked up to 4.6%,

they were talking about maybe
because of participation rate.

So that might have an impact on that.

But over over the last year, we
were well below four, unemployment

rate is up to about 4.6%

right now.

And then medium home sales, right?

Those have declined over the
last year or two two years ago.

The medium house, I think
sold for about 4 35.

Four 35,000.

That's down to four 10.

So that's approximately not a big
drop, about a 6% drop, but Right.

As a, as I was leaving the credit
union, we were getting all into Cecil.

So those potentially could have
a little bit of an impact on your

overall Cecil calculation as you're
looking, as you're looking forward

and including macroeconomic things.

So I, I noticed that.

Then we did see that
delinquencies increased.

It hasn't really increased
from a year ago, but from

two years ago it's increased.

Let's see, from 72 basis points up to 94
over the last two years, and charge offs

have increased from 55 basis points to 77.

Then I looked at, okay, ha,
has the allowance changed?

That's actually compared to
loans that's improved from 1.2%

up to 1.3%.

So there's more dollars overall reserve.

So looks like credit unions are
taking that in into consideration.

But then I looked at another ratio,
coverage ratio, which you look at.

You take a look at your your
allowance compared to delinquency.

Two years ago that was sitting at 167%.

That's down to about 140%.

So that hasn't kept up.

And then I also look at net charge
offs to the prior years delinquency.

And that also has increased, so
charging off more than we had in

delinquency if you compare 2023 to 2025.

So those, so right.

So that may indicate if that
trend continues, that there might

be a little bit more pressure.

For provision for loan loss to
make sure to ensure that, we're

maintaining we're maintaining
proper reserves in the allowance.

So those are some of the things
that's interesting that I noted.

Yeah.

Miller: As you broke
that down by loan type.

'cause I looked at some of that similar
type of stuff, Dennis, and, I looked at,

okay, what are we provisioning versus
what we're charging off and, at least.

Through the last few years, there's
still more provision than there has

been charge offs through this year.

It's only 108% of PLL versus charge offs.

But if you go back to 20 22,
20 23, it was like 120, 130% of

provision versus charge offs.

It has to too, probably with loan growth
too, I don't know, is, some of that.

Numbers you're looking at changing
just because the makeup of the

loan portfolio is changing and
leaning more towards real estate.

Yeah, I didn't break it down.

Bauer: And you're right.

Yeah, there is a, there's a move, as
you said, into more real estate types

of products, and more commercial.

And right now those aren't carrying
maybe the same delinquency.

So that could have a, could
have an impact, obviously.

Yeah.

Yeah.

Miller: Played with lots of numbers
and couldn't reach any conclusions.

Yeah, and one reason Dennis looks at
it, one reason I look at it, amongst our

clients, and this has been going on for,
multiple years now, and the larger you

get, the more emphasis NCUA puts on it.

They want justification for
their concentration levels

in their loan portfolios.

They want you to model it.

They want sensitivity around it.

And I think that will probably
continue in the future too because

we see it consistently amongst
our various clients of all sizes.

And it's been going on
since we started in 2021.

And it's still going on today in 2025.

Treichel: Picking up a little momentum.

Yep.

Yep.

Steve, any thoughts on asset
quality, delinquency, the, anything

to add to the commentary thus far?

Farrar: Dennis covered it pretty
good because my analysis came out

with kinda the one thing as a.

Little bit concerned about the level
of the allowance when you look at

it in terms of metrics compared to
delinquency and charge off history.

And Todd talked about that ratio of
provision to net charge off used to

be around the 130%, and that's what it
runs in the community banking industry.

And it hasn't changed over the last
year and credit unions are running

significantly lower than that.

So there's.

Right now, the higher delinquency and
higher provision expense is a competitive

disadvantage that the credit unions do
have against community banks, and we

just have, we don't want that to become
more of a disadvantage going forward.

Treichel: Great point.

So on asset quality I was listening to
a podcast, a FinTech podcast where this

guy talks about different things, but
he was talking to a guy who used to work

at capital One, and they were talking
about the different risks that they

see in lending, and they talked about.

Where we're at today, and is
there gonna be a recession?

Are there gonna be problems
tied to the unemployment rate

going up, et cetera, et cetera.

But the guy had an interesting.

Comment about 2008, 2009 and back then
there was this concept that people were

more willing to turn in their, that
was, we're turning in the keys to our

second home, or the delinquency was
tied to a home situation, but people

needed their cars to get to work so that
the car loans at the time were viewed.

Almost safer than home
loans in some instances.

And his takeaway was in oh eight
and oh nine, we didn't have Uber,

so you couldn't get anywhere
as easily as you can with Uber.

And we also didn't have work from home.

And then he got into this discussion
about the sub the challenges in subprime

landing, subprime prime landing is
higher than it was in oh 8, 0 9.

But his thesis, and it was just that a
thesis was there might be more repos and

problems at the white collar, higher level
jobs because they can Uber and they can

stay at home and work in some instances,
but they might, if they, if something's

gonna give, it might be the car loan.

And he was saying that even
though subprime loans were a

little bit more delinquent than
normal, that it's the subprime.

Borrowers who really need to have their
vehicle to get to wherever they are going.

'cause they tend to potentially
be more in the service industry

or the blue collar side of things.

And any thoughts relative to that or do
you wanna move on to the earnings arena?

Bauer: That, that was interesting
because my last couple years at

the credit union we saw an a big.

Fairly significant increase of people
just turning in their keys for their car.

And Todd mentioned that.

I think part of it too is, and I think
what the guy said may maybe makes sense in

Minnesota here, I'm not sure, but Right.

Car and truck prices just
are just so exorbitant.

People just, can't after that
inflation hit and your bill.

So we saw, we did see a more than usual
number, and maybe that's continuing

today, where people are just turning in
their car or keys to their truck or car.

More than I ever had
ever seen in my career.

Miller: It doesn't really break it down
on the financial performance reports,

but repossessed assets on credits,
balance sheets are up quite a bit.

Ah, interesting.

8% just in the last quarter.

Treichel: Yeah,

Miller: so it's over a billion dollars
of repossessed assets setting on

credit unions balance sheets right now.

Treichel: And I wonder how many
different ways they're being

asked to account for that.

Miller: There's more than what's on
the balance sheet because examiners

and CPAs, they'll let people, carry
that as a delinquent loan rather than

a repo if it's going to auction in a
timely manner and things of that nature.

So the accounting aren't
exactly 100% consistent.

Bauer: Our last exam, our examiner
said you have to treat it as a.

Repoed and you gotta
change your whole process.

So we went through that whole
rigmarole and our auditor said it

was immaterial, but we still did it.

Our lending folks did not like that.

But it was a pain.

Hard to, it's hard to do it on a core.

You got you.

There's a process.

You have to.

You have to account for.

So not a lot of credit unions
do it that way, the right way.

Treichel: I had on a related note I don't
think I've mentioned this to any of you.

I had a chat with the credit union
that had been referred from someone

who is familiar with the podcast and it
related to some challenges in the 5,300

and how things were being reported.

And they were looking at.

We talked through some of that
and looking potentially for

some training on how to do that.

But in the middle of it all, I said
something like I imagine that every time

an examiner comes in, they might tell
you that the way you're doing it now is

wrong and you need to do it this way.

And then the next one comes in.

And I said, I've seen that, I've seen
that a lot in my last five years.

It happens a lot more.

And the CEO who was on the call,
more of as a, as an observer.

At the beginning of the conversation
came off mute and said, actually,

that's exactly what happened to this.

That's exact exactly why we're calling.

How much can we push back on this?

Can you provide us some
training relative to this?

And I basically said work with
your current examiner NCOs.

Instructions are the
instructions, and they interpret

them a little bit different.

Push back on where it says you have to
do it this way, but I said, you're they

felt better just knowing they weren't
alone, that this was happening to them.

But I digress.

I think

Miller: Steve and I heard a lot of that
from the Alaska Credit Unions back in

the late eighties and early nineties.

Tell us how you wanna do
it and quit changing it

Treichel: every quarter.

Quit changing it based on the flight.

And then they change the
definition a little bit.

But then they don't really
explain, how it works.

So then you get.

Hundreds of examiners a applying
it slightly different with

no real guidance from nsu.

And it's not ultimately the
examiner's fault because there's no,

they tweak it without telling 'em.

They walk in and then they have
to do their best to explain.

All right.

So earnings we touched on, Dennis.

You talked about NIM being up a certain
amount, but that the bottom line

wasn't up That certain amount that
the, that there's some difference.

We've alluded to that, but

Farrar: Yeah.

Treichel: Let's tiptoe into
the earnings equations.

Yep.

Bauer: So rates, so we
compare ROA from a year ago.

It's up 11 basis points, but 30 basis
points was positive because of the

nim that interest margin non-interest
income was down four basis points.

So that took away four.

Provision for loan loss
was about the same.

I think it was up maybe a basis point.

So you got total between
those two of five.

But the big one then is
non-interest expense.

That was up 12 basis points.

Compared to Q3 of 2024, and then I went
back to 2023 and it was up about the

same percentage, so it was up about 7%.

Expenses were up about 7% in 2023 to 2024,
and then another 7% from 2024 to 2025.

So right, so that, that is
eating up, almost half of the net

interest margin for the last year.

Miller: So that's interesting because
the expenses have been going up

since COVID it actually started.

Yep.

Non-interest expense started
increasing during COVID.

And supposedly if you let people
work from home, and a lot of credit

unions do, we have a lot of clients
who are almost half of their, back

office staff are working from home.

In theory you should get more productive,
but that's not the direction the credit

union industry has went during this
period at a time when there's work from

home and all of this, credit unions,
operating expenses have gotten higher.

Members per employee has
stayed roughly the same.

So you start asking yourself,
why are their expenses growing?

And maybe some of it's catch up
in systems, implementation of cil,

more credit unions hitting the
ones category, and capital planning

and models and things there.

But some of it is just flat
out we're paying people more.

2023, just two years ago, comp and
benefits were 97,000 here in September.

We're up to 107,000.

So almost, a 10% increase
in, 18 months roughly.

Bauer: Yeah, I think wage and
right inflation, I think inflation

has a bit to, to do with it.

We were up 20, I don't know how
much inflation is up since 2022.

It's probably 25, 20
6%, somewhere in there.

So that's eventually gotta, that's
gotta leak into employee comp and Ben.

So I think that's a piece of it.

But I looked, I broke down
like where, the big categories.

You got employee compensation
benefits, that was up almost 8%

over last year office operations.

That was up almost 8%.

And then professional services, which.

That could be a myriad of things.

That was up almost 10% from a year ago.

So I think inflation, cybersecurity
technology, all of that is contributing,

trying to keep up is probably contributing
to the overall expense structure growth.

That makes a lot of sense.

Farrar: Yeah.

We've heard from some of our clients
and that they've been investing.

Over the past few, year, 18 months
or so on their, in their technology

to try and take advantages of ai.

And they expect to see that
start to show in their numbers

starting really next year.

We'll see how that goes because I was
just listening to the guys talking about

the implementation of AI and some of the
businesses that have really taken it on.

Found that, they had to go back
and hire people back because they

needed a little more human touch
than they were getting off of ai.

So it's gonna be interesting to
see how that, that plays forward.

And I think we're gonna start seeing
some of those changes that pretty quickly

because I tried to look and see if I
could see the change in the numbers

yet, and it couldn't see anything.

It was an obvious reflection
and kinda confirmed by, the

analysis the other guys did.

Miller: So community bank experts,
Steve Farr, what's going on

with their operating expenses?

Are you seeing that increase there too?

Or they more successful at keeping it

Farrar: even?

It, it holds pretty steady there and they
do have a bit of a competitive advantage

over the credit unions in that realm.

It's like 40 basis points.

That that they have an advantage over
credit unions and operating expenses.

Yeah.

And I consider that, they have the loss of
revenue on taxes that comes into play too.

Treichel: Interesting.

So the last I, if you haven't, couldn't
tell, I went through the camel in order

here as we were talking Todd, on the
front end, you talked a little bit

about the liquidity side of things.

Any general thoughts on what you're seeing
in the the liquidity type statistics?

Miller: You have a fairly balanced
level of growth going on right now.

And what you're seeing with the
deposit base, it's stabilizing

back to historic numbers.

When we got to COVID after those long
years of flat interest rates, you had

a mixture of, people that were rate
sensitive, all that money was everywhere.

It was in money Market that was in
checking 'cause there was really no

differentiation on dividends from basic, a
savings account to a money market to a cd.

Of course, as soon as rates
started going up in 2023.

2022, you started seeing
this rate sensitive money go

to rate sensitive accounts.

Right now, CDs and money markets are
sitting at, let me look at this here.

I have it somewhere.

About 44% if you look back, 2007, 2008,
when we had a normal yield curve is right.

50%.

So there's still a little bit of movement
to go on, but basically our funding

basis have gotten a lot more stable for
our credit union than the last year.

This whole money moving from, checking
accounts into CDs or this dis air

mediation, it's slowed way down.

So it allows them to improve that
net interest margin because that.

Funding base has gotten very stable.

Loan and share growth were
really balanced in the last year.

There's only a percentage or two
difference, so realistically,

funding sources in our credit
unions have stayed exactly the same.

Wholesale funding, borrowed
money, non-member deposits.

It was 5.9%

of liabilities at the end of December.

It's 5.2

today.

It was eight in 2023 borrowed
money got paid down during 2024 and

it's never gonna go back to zero.

That 5% is probably mostly
people borrowing long-term

to hedge interest rate risk.

So liquidity trends look really good.

We have, clients are still getting beat
up over their liquidity and NCUA has these

expectations to support, how you operate
with a limited amount of liquidity, but.

As the industry as a whole, they look
in really good shape liquidity wise.

You've had balanced growth.

That funding base has stayed really
stable over the course of the year, so

things have gotten a little bit easier
for credit unions on that funding side.

They still have to compete with all
their other competitors that want

that money but they don't have to.

I don't have this volatility in funding
sources that was there a couple years ago.

So Todd, that's thing for the industry.

Treichel: Todd, you and I were on a call
with the credit union within the last week

and they were getting asked to put some,
what, some things that, that appeared to

be odd relative to restrictions on how.

Or parameters or guardrails on how
much they would put into certain member

types, whether it was money markets
or CDs or share drafts or, and if I,

Miller: they wanted to, the examiners
in that credit, they wanted to

limit on CDs and money markets
to net worth and, my responses.

I think that's bs.

You have legal limits.

And while it might be appropriate to put
guardrails on non-member deposits and

borrowed money, those secondary sources of
income, I don't think it's reasonable to

put guardrails on how you fund your share
base between money market, CDs, regular

shares, the marketplace and the yield
curve is going to determine that for you.

And competition is gonna
determine that for you.

And you can sort that out with
your interest rate risk models.

And how you measure interest rate,
risk, and other liquidity metrics i'd,

I basically said, I see no reason at all
why a credit union would say We're gonna

limit CDs to X percent of net worth.

It made no sense to me where the
examiners were coming from and they

didn't really justify it anywhere
in their exam report either.

Dennis is making a weird face

Bauer: yeah, no, I was gonna comment.

I wish I was a CFO.

I could do that.

We're gonna have, this
makeup of our certificates.

In a and a good example
of that, how the market.

Market really determines that.

Rates really determine it.

And Todd alluded to this, but back in
2022, before interest rates started to go

up quickly and interest rate environment
was really low, there was only 13% of 14%

of credit unions deposits were in CDs.

Fast forward when
interest rates started to.

Increase and credit unions are trying
to control cost of funds and they're

offering up short term specials.

That's now grown back up closer to 30%.

So it's not all a matter of asset
liability management and the market that's

gonna dictate at a particular point where
you're going to be, you try to, yeah.

You, you gotta model it all and you
gotta make compensation for that.

But yeah.

Putting a guardrail on CD portfolio.

I wish

Treichel: we could do that.

Yep.

Yeah so we advise them to push back gently
and hopefully they'll they'll achieve

some success in those negotiations.

With that examiner, any o any other
thoughts on the liquidity arena?

Bauer: Oh, just one other thing.

It was obviously with the decline
in interest rates, the unrealized

gains and losses on investments
as is under 1% set 0.79%

as of nine 30.

So that also gives you a little bit
more flexibility with maybe some

liquidity issues he had before.

So

Miller: we will touch on this.

I do have one more comment.

So in 2022 when rates were
low, a lot of credit unions

went long term on investments.

Because they had earnings
pressure in the flat yield curve.

It ended up hurting them a lot and
they still haven't recovered from that.

But what's interesting here this
quarter is you can see the industry

making bets on rates again, because
they bumped up investments in that.

Three to five and five
to 10 year category.

So there are some credit unions out
there who are not making loans, but

they are making bets on rates again,
and hopefully it works out a little

better for them than it did last time.

Treichel: Interesting.

Miller: Yeah.

Bauer: I want, I wanna get when
you do that one or credit unions

are mo I mean we always did that.

We modeled okay, we're we can hold it
in cash or we're gonna, we could pick

a longer term, investment model it and.

The risk that you take on for the little
bit of gain in a rising interest rate,

this, you could clearly see that it
wasn't worth, it's not worth the risk.

So it's just a matter of, okay, I
gotta make a decision what, how to

deploy some of this capital, this cash.

If you have a good AL model,
it should pretty clearly show,

you're not gonna pick up a ton in
a 300 rate plus rate environment.

Obviously it depends on the rest of
your portfolio or your balance sheet.

But generally speaking,
not gonna work out.

Miller: That's why it looks like it's
a pure rate, that they're just betting

that the fed's gonna lower rates again,
and they went long term with excess cash.

Bauer: Yeah, but then your gain, right?

If you're you're not getting much
of a gain, even if it works out.

Your benefit's not gonna be that great.

Might add a basis point or two to your
bottom line, but not worth the risk.

Man.

Treichel: When I hear risk reward, I think
about this example, this quote I heard in

the, there was a hedge fund that failed.

That was doing some risky things.

They were called long-term capital
management, but one of the, one of the

people who ended up buying that one
hedge fund, bought that hedge fund.

And they said that their
strategy was like picking up

nickels in front of a bulldozer.

And that obviously credit union
should avoid strategies of going long.

Hopefully if they're doing it, they've
got people that are advising them

on what makes sense and they're not
not betting the house so to speak.

Farrar: Yeah make a thoroughly
researched good business decision

Treichel: and MCA might ask for that
documentation on that business decision.

Who knows?

So I have one slide in front of me
from a lawyer a lawyer, and did a

presentation for Callahan on the
quarterly data that they'd have.

And of course, Callahan gets
their data out a little quicker

and does a presentation on it.

And one slide caught my eye, which
the title of the slide is, members are

Dipping Into More of their Available.

Heloc, home equity line of credit balances
and credit unions are issuing more lines.

And the visual is this.

So back in the end of 2020 through
about the middle of 2021, credit

unions had issued about 150 billion
in lines, and those lines bottomed

out on being tapped into at about
48% in the first quarter of 2022.

So jump ahead to today from the first
quarter of 2022 to the third quarter

of 2025, there are, if I'm reading this
right, about 325 billion outstanding.

So more than doubled home equity
lines approved line of credits.

And not only did they double,
instead of being tapped into at

48%, they're tapped into at 56.4%.

When I throw that out there
what pops into your heads?

Farrar: Yeah.

My experience with the HELOCs is
it was highly regionalized and that

it's always in, those areas with the
highest increase in property values.

And so I think it would
go beyond those numbers.

I would be pretty sure
that trend would continue.

Miller: It really accelerated in
2022 and 2023, even 2024, but that

has slowed way down here in 2025.

Okay?

It was double digit, so like I
have it right in front of me.

Just outstanding balances
went up 39% in 2022.

24% in 2023, 17% in 2024.

It's only up 4% in 2025.

So it's okay, have people tapped 'em
out to the extent they're able, right?

And then you get certain things with
the high cost of automobiles and stuff.

You know how many people are using
home equity loans to buy what would

traditionally been consumer goods?

So yeah so the answer to that,
but, so you got, when we started.

Treichel: When we started, it was,
what, 36 and 48 month loans and now

we're into 60, 72, 84 or more loans.

And then you could, because of
the costs you could spread it out.

You could just pay you get a home
equity loan and just pay the interest.

So that could be, or maybe you
get the car loan and you put a

little bit on the home equity line.

That could.

Create some pressure points.

Miller: The other piece of it too is some
of this could be just your remodeling

and home improvement stuff as well.

People, it's, 'cause the prices, it's
harder to trade up and there's less

trading up that makes going, makes sense.

And there's less home sales available.

There's probably ways to dig in and figure
out what that money's being used for.

Treichel: We'll just could be a

Miller: lot of different reasons.

We'll just, and maybe s are doing it
just to reduce their credit risk because,

home equity loans probably a little
bit less on that Cecil model than a

car loan is if people have that equity.

Interesting.

Bauer: Long as home values
stay where they're at.

That's so when you brought that
up, it brought back memories

of 28, 2008, nine, and 10.

And that's where we.

Experienced a lot of losses was were
in, the home equity portion of the

portfolio, so so we're increasing
that and looking at that, hopefully

good concentration risk limits in
place and following that particularly.

Values drop, making sure that you're,

Treichel: you're covered, that you're
on it and you've got reasonable limits.

Makes sense.

Yep.

Miller: I'm a belief that
every generation has to relearn

their lessons all over again.

Treichel: What does it, so I don't know
who said this, history doesn't repeat

itself, but it certainly does rhyme

Miller: well.

What else guys?

I think another interesting thing, and
see, they put out different pieces of

information each quarter and you have to
go to their analysis page and download

a whole bunch of different things.

On one of the things you can download,
they have charts of camel ratings

and while the number of code threes
isn't necessarily going up, the number

of code ones is plunging really.

Especially on credit
unions, 1 billion and over.

The number of code ones is just
dropping every single year.

Treichel: That's interesting.

Yeah.

I always focus in on the three, four,
and five data and I just ignore that

one, but that, that that's interesting.

Code

Miller: threes went up in 2024.

They haven't in, in 2025 but
certainly the number of code ones

is tumbling in the 1 billion in.

10 billion categories, which is
interesting when we know that,

supervision wise, NCUA is gonna do
less, they're extending exam cycles.

And it will be interesting
to see how that plays out.

I see a not good ending to
it personally, but just me,

Treichel: I had, along the lines
of, extending the exam cycle.

And as we've discussed on other podcasts,
and Todd, you discovered that on their

NSPM they changed without publishing
it, that they don't necessarily

have to do a follow up and a code.

Three every 180 days.

And it used to be that they had to, and it
had to be from finish date to finish date.

And then they played
with that a little bit.

Now they're saying you don't
necessarily have to have a follow up.

And of course the CAMEL code
in part is a resource tool.

So if you code them a three, but
you don't have to go back, are you

really using it at the resource
tool that it's supposed to be?

And I made a.

A, I was chatting with somebody
from NCOA and I was saying, so

what's the result of this gonna be?

Are you, are examiners gonna go in
and say, Hey, this is a borderline

two, three, I'm not gonna have the
resources to go in there, so you know

what I'm gonna err on the side of not
caution and give them an overall two.

Or are they gonna, were they
gonna put their thumb on the

scale the other way and say.

Hey, you know what?

I'm not gonna have to go back and
I don't want this to blow up on my

watch, so I might as well code 'em
a three anyway, because I'm not

hamstrung by having to go back.

Which one will it be or
will it just normalize out?

And you'll have some desu, some doing one
and some doing another, but there will

be some ramifications of this resource
issue on Camel codes one way or another.

Miller: The ones they put the thumb on the
scale are the ones that are calling us.

Treichel: Yes.

Oh yes.

Most definitely.

Most definitely.

And that conversation wa was around
that is, is what is it that we're seeing

And we see a little bit of that where.

Where there seems to be an an
overly aggressive situation

in a particular credit union.

Hey, if you're listening and that happens
to you give us a call and we can help out.

Miller: The other part of it, and
maybe I'm just overthinking it.

You're gonna have a change in
administration in a couple years.

They're going through all these massive
cuts now and this kind of happened during

the Reagan years with NCUA as well, by
coding them lower, they setting a stage

for, in 20 29, 20, 20 30, okay, we need
to hire all these many people back.

I don't know.

Like I said, I might be overthinking
it as a supervisor, I might.

Actually a thought long term like that,
how do we get out of the turmoil when

there's a change in administration?

Treichel: Sure.

Change in administration and at some
juncture, if they reduce costs in

the budget, a hundred million dollars
picking a number, and there's less of

a imprint in credit union, short terms,
individual credit unions like that.

At some juncture, the economy moves.

There is a loss or two, the IG does
an audit report, brings that audit

report to management and says,
you need to, we have to come on

an agreement on how to fix this.

And you, at that point in time,
you have an NCA board that has

the appetite to expand staff.

That's how I see it playing out in the
pendulum going in the other direction.

And it probably ties to a obviously a
different administration at that juncture.

Farrar: All right guys.

Another thing that I usually update every
quarter is I take a quick look at the

N-C-U-S-I-F to carrying it to the deposit
insurance fund, and they both have had

a pretty good quarter, but equity ratios
or the designated reserve ratios are up.

The equity ratio, the NCSF is 1.28

with the normal operating level 1.33,

but the deposit insurance
fund had a tremendous quarter.

They finished a restoration plan
when they got up above 1.36.

Theirs is at 1.40

now, so they're doing really well with
their long-term goal of getting to 2%

because of how massive their losses can
be because of contagion risk and all that.

One of the more interesting things
is the yield on investments is

so different between the two.

For the N-C-S-A-F-S, it's 2.77%

with a weighted average maturity of 2.7

years.

The deposit insurance fund
does yield investments is 4.2%

with a weighted average maturity of 0.57

years.

So they garner a lot more
off of their investments but

Bauer: They stay short.

So is that, so their maturity is 0.57,

you said?

Miller: Yeah.

Bauer: So they're shorter,
but a higher yield.

Then Okay.

Miller: Benefiting from that
inverted yield curve, it'll cost

them rates go back to normal.

Treichel: That sounds like a chip
Filson email to the NCA board.

Yeah.

All right guys, so what else we got?

Any final thoughts?

Let's go around the around
the horn here, as they say.

Miller: I started with, hey, things are
returning to normal, and that's where

I'll end it too, is we're returning to
a normalized level, which makes life a

little bit easier for the credit union.

They still have all these competitive
factors and competition is never

gonna go away, and their job is
not gonna become easy, but it's a

little bit easier for the moment,

Treichel: a little bit easier.

I like that Steve.

Farrar: Yeah, competition is continues
to change and you become more and more

real with other entities in which they
have to deal with and the demographics.

So I think that's, something that
might be affecting why, there's

why there are less camel ones.

Treichel: Makes sense.

And as you mentioned, demographics two
episodes back had a really good episode

with Dan Preso of Olden Lane about
the dynamics of of the the age, the

different age groups, the Gen X, the
Gen Z, the Gen Y, the Gen Q, whatever.

Whatever name they put on all
the generations and how that's

impacting credit unions and
having a game plan for that.

If you're, if you've made it to
the end of this episode, I, and you

haven't listened to that episode,
I highly recommend it, Dennis.

All right.

Last thoughts?

Bauer: Yeah.

I, basically what Todd Todd said,
and credit as we're getting.

To normal.

The only thing I point out, again,
credit unions continue to grow.

They're strong.

However, the number of credit
unions continues to drop.

I think since the last quarter
we're down 168 and any credit unions

under a hundred million, lost 179.

Credit union.

So obviously a shift and then mergers
accounted for obviously that, that change.

Treichel: And then there's the whole
arena of the big merging with the big,

which we won't get in here today, but
some interesting big approvals across

the industry, which will chan, which
will impact the landscape as well.

All right guys, and thank you
as always for being on the show.

And listeners, I want to thank you for
listening and or watchers on YouTube.

I want to thank you for watching.

This is Mark TriCal signing
off with flying Colors.