Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone.

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

I'm back with Steve, Todd and Dennis.

Guys, how you doing today?

Miller: Doing well, doing well,

Treichel: doing good.

Steve, that, Steve, that nods
gonna come through good on YouTube.

Not so much on the, on the, uh,
on the podcast, but, uh, but

podcaster, Steve's doing well.

He's nodding.

So all, all is good.

We got Dennis hanging out in, uh,
Arizona, and I asked him if he saw

Kyler Murray on a plane to Minnesota.

I was hoping I could announce that today's
podcast is being recorded on the beginning

of the Kyler Murray era, but, uh, not yet.

Not yet.

But we're not here to talk about football.

We're here to talk about the fourth
quarter data, the fourth quarter

reports that have come out from NCUA.

This has gotten to be one
that we do every quarter.

That is always kind of
fun, where we look at.

What the numbers are showing,
what the numbers are not showing.

And guys let's, uh, what, it's been
a few months since you were on the

show, so let's, uh, let's start with
Steve, uh, short, uh, summary of, of,

uh, your background, uh, in credit.

Farrar: Uh, background, I'm gonna be
broken into three separate, uh, parts.

The first part was in the field
as a NCO, A examiner and problem

case officer for roughly 15 years.

And in that, the lot of enjoyable work
working with the credit unions and

conservatorships and turning turnarounds.

Then, uh, when you went to the
central office, I followed you

there and worked remotely in the
division of risk management and

highly involved in, in the, uh.

We came to the accounting for the
N-C-O-S-A-F in the training of problem

case officers, which was most enjoyable.

And, uh, towards the end of that career, I
ended up as the vice president of the CLF.

So I did that.

And then, you know, we've been doing this
for a while now and post-retirement and

the consulting and, and part of what I
did do a, a fairly short stint as, uh.

A chief financial officer
for a conservatorship into a

conservatorship in Manhattan.

And, uh, then we've enjoyed what
we've been doing to help the

credit unions doing this for, well,
we have almost five years Mark.

I

Treichel: think we're into
the sixth year of consulting.

Steve and I and Todd you're
like right behind that.

So let's pivot to, let's pivot to Todd.

Miller: Well, I spent 34 years with NCUA.

I can kind of break my career
into three pieces like Steve were.

The first third of it, I was an
examiner and a problem case officer

in the western western region.

Went through a few recessions then,
so the PCO side of the career was

very busy and active back then.

For the first decade of 2000,
I spent it as a capital market

specialist in the western region.

Did a lot of teaching on
capital market issues.

Occasionally would help seed with a
problem case class here and there.

And then the last third of my career.

From 2010 basically to 2021.

When I retired, I was a director of
special actions in the western region

dealing with problem credit union,
supervising problem case officer,

regional capital market specialist,
regional lending specialist.

Very enjoyable career.

There was some things not fun when you
had to close or liquidate a credit union.

There was a lot of fun when you
could actually see a credit union

go from troubled status back to
that Camel three, two did a lot of

conservatorships over my career.

I did return two of them to the members.

So that always kind of
a, a chip on my shoulder.

Some people at NCUA, they keep souvenirs
from credit unions that have failed.

You don't find any failed credit union
stuff in my house, but I do have stuff

in my house from the, um, credit unions
that went into conservatorship and

were returned to their members all, in
all a very enjoyable 34 years at NCUA.

I enjoyed almost every bit of my career.

Spent a lot of that working with Steve.

The first third of it.

I retired in June of 2021 and I don't
know, it was late August, early September.

Mark gave me a call and I told my
wife, yep, there's gonna be a job

offer here out of dinner tonight.

And so I've been helping
Mark since late 2021.

So when we get into the late 2026,
I'll hit the five year mark with you.

Treichel: There you go.

There you go.

Yeah.

That was a trip out to see Dave
Matthews at the Gorge, I believe,

and we made the pit stop there.

Caught up with Steve and Todd and Dennis.

Bauer: Yeah, I'm a short timer with Mark.

I've been with Mark for about
a little bit over a year now.

But I spent, uh, 38 years in
the credit union industry.

Um, most of it was with
a credit union actually.

Um, um, 32 years at
Ideal Credit Union in St.

Paul, Minnesota.

I was, uh, retired in.

In September of 24 as their
Chief Financial officer and

executive vice president.

But I started my career with NCUA
back in 1986, and that's where

Mark and I got to know each other.

We started about the same time in
Minnesota traveled up and down, uh, the

state of Minnesota examining credits
up on the Iron Range and all over.

So we had a good time those six years.

But that's where I, I,
started my career and.

Up to no credit union.

So I had enjoyed my time with NCA,
but thoroughly enjoyed working as the,

um, uh, working at the credit union.

I started when the credit union was
about a hundred million in assets

and I stayed there for 32 years.

And when I, when I left,
we were about a 1.1

billion in assets.

And that was mainly organic growth.

We had a couple small
mergers during that time.

So it was, it was sort of neat to
go through, uh, go through that

time, um, with that credit union.

And I enjoy working with Mark here.

The last year sort of kept me ke, it's
kept me engaged, uh, in the credit

union world, so I appreciate that.

Treichel: Yeah.

Yeah.

This is fun.

This is a lot of fun and I like
these quarterly reports where

you guys dive into the data and
tell me what's kind of going on.

So with that, what's going on?

Where do you want, where, what
topic what trend do you guys want

start with and who wants to start?

Miller: You know, these guys are
like keeping their mouth shut.

I'll open mine.

Treichel: Okay.

Miller: Maybe just give a little
background context about 2025.

You know, we've had a lot of
volatile years with COVID.

This massive influx of deposits, um,
from all the government assistance.

Then we had this inflation, spreading.

Kind of had a hard time dealing with that.

Um, a lot of long-term
investments underwater and stuff.

2024 last year, things kind of
normalized and I would say 2025 is

a little bit more of normalization.

Unemployment was fairly
stable through most of 2025.

There's some ups and downs in
different FTEs and a lot of

variations in different states.

The yield curve, while it's still
inverted at the short end, in

general, most interest rates fell
about a hundred basis points.

Throughout 2025.

So it gave credit unions a chance to,
um, catch their breath and get caught

back up on that net interest margin.

Some other just interesting things
that went on, and I think that this

will come out later on the podcast.

Even though inflation is down, inflation
is still faster than wage growth.

So savings rates across the
country have been dropping.

They were just a little over 5% in
the quarters at the end of 2024.

By the end of 2025, the national
savings rates down to 3.6%.

People that are being a little
bit challenged, but all in

all, 2025 was kind of a year.

Let people catch their breath and
still catch up from all those years of

volatility than that whip song that got
with COVID inflation and everything else.

Farrar: Yeah,

Bauer: Go ahead, Todd.

Todd.

Todd brought up interest rates and that.

The interest rates have come down and
it's interesting to see what's going on in

the, um, credit union's deposit portfolio.

Right.

We saw a huge runup of.

CDs in 2023 and 2024.

Um, well that's beginning
to shift a little bit as

interest rates, um, come down.

There's not much of a advantage
on that short-term end now

as, as there was in the past.

So you see, that there's a been a
huge acceleration of, of, uh, CD

growth and a lot of that growth is
now going into non maturity deposits.

Let me see here.

I got my notes here on, on growth.

Yeah, for, um, the, for the, uh,
for the, um, year end 2025, let's

see, share drafts were up 8.3%.

And in 2024, that was at 2.93%.

And the, the largest increase
in deposits was in money

markets this past year at 9.38%,

and at the end of the
year, 2024, that was 2.37

and CD growth, um, still fairly strong.

For 2024, it was at 7% roughly.

And in the year of 2024 it was around 14%.

So you're starting to
see that, uh, decel rate.

So, so, right.

So, and I think most of those CDs
that are maturing are short-term CDs.

So I think I read somewhere 80% of the CDs
are gonna be coming due in the next year.

Gonna be coming due here in 2026.

There'll be an the pricing will
be key as to, to try to keep those

margins try to keep those margins up.

So I think we're starting to see,
uh, the, the, we, we started to

see the cost of funds rate drop,
but that's sort of slowing down.

Um, and also with the yield on
assets as well, that's still that's

still up, but the growth that
of, of that increase has slowed.

So I think we're probably at the top of
the net interest margin at the top of the

net interest margin peak here in, in 2025.

So, be interesting to see next
year, 2026, what type of pressures

are put on that interest margin?

Miller: I'm gonna throw
another little piece out there.

So NCUA with their call reports
are, they also do a chart pack.

There's like 42 graphs in there and
they have it going back for 10 years.

But something that the industry
have to think about is where did

tomorrow's members come from?

So, well, deposit growth last
year was a little over 5%.

And I always question these numbers
because of how credit unions fill things

in and that's their membership numbers.

But membership only grew 2% last year.

It's the lowest level
in probably a decade.

And what does that mean for credit
union long term and when you can't

generate new membership growth or
membership growth is getting very low.

Just something that
industry to think about.

Where's tomorrow's members gonna come?

Farrar: Yeah, and I think that lower
growth is, is the result of this

increased competition that we keep
talking about and hearing about.

And so there is, uh, it's very
competitive for bringing people in.

And, and you always know that, you
know, people don't tend to leave

their primary financial institution
until they become angry about

something or, or feel mistreated.

But, you know, they're, they're real rate
conscious and it's easy to move money.

And there's really great marketing out
there, done by a lot of these, uh, really,

uh, institutions that you, that you see
that are, uh, on a lot of the advertising.

Treichel: Well, and, and along those
lines when you say that, I'm thinking of

the different generations and the makeup.

The makeup of.

Credit unions and boomers
who don't borrow, but have

a lot of, a lot of deposits.

Uh, and as you get younger, you know,
we've talked a little bit and may talk

about a little bit more here about,
what it takes to get the younger

people involved in credit unions.

There is a podcast I did a couple months
back with, uh, Dan Preso, Bolden Lane.

I'll link it in the show notes,
but, uh, where we talked a lot

about the different generational.

Challenges that credit unions are facing.

I think we talked about it maybe a little
bit on the crews that we did with, uh,

with the QS crews that we did as well.

But specifically on, on any more
on deposits or any more on growth

that you guys want chat about.

Miller: Growth was pretty
slow and balanced last year.

Um, share growth was a little bit
ahead to loan growth, so we did get to

see a lot of credits they were paying
back, borrowed money, um, that helped

their net interest margins again.

But, you know, all the growth numbers
were in single digits last year.

Maybe Steve will tell us about banks.

He usually digs into the bank numbers
when we do this podcast, but I actually

believe the banks probably grew a little
bit slower than credit Union did even.

They weren't growing very
fast last year either.

Farrar: Yeah.

The community bank growth rate
was, was pretty low for 25.

It was, it was basically 0.96%.

Wow.

And, uh, just up, I mean, down about
half from what it was the year before.

So, so the community banks are, are
seeing slower growth and also so

Treichel: interesting.

So we kind of, uh.

Started with the discussion on
deposits, which would, when I think

deposits, I think, uh, obviously you
think growth, but you think liquidity.

Let's go back to the
beginning of the camel.

Let's talk about, uh, any
camel, excuse me, capital.

Any capital trends that you
highlighted when you reviewed

this, that you want chat about?

Bauer: One, one thing I noticed,
I mean, when you look at net worth

year over year, it's up from 11.2,

I think at the end of
quarter or end of 24.

It's sitting at 11.28.

However, at the end of the
third quarter, it was at 11.35.

So we saw a slight down a
downward movement in, in that,

um, in the, uh, net worth ratio.

That, you know, right.

We had a little Right.

That might be a little bit
smaller amount of earnings.

Right.

So, so in effect you know, asset growth,
even though it's been somewhat muted, five

percent's not bad, but obviously equity
growth isn't keeping, didn't keep up with

it in the, in this last, uh, last quarter.

So I don't know if that's a trend or
if, um, if that is just related to.

Year end, uh, cleaning up
some of the balance sheet.

But I just, I did notice that a
little, little slight downward movement

in the, the net worth ratio which,
part of it might be related to.

DLL is a little bit elevated, right?

They're sitting at 61 basis points, which
is a little bit higher than average.

So I think we'll probably talk about that
in a bit, but that might be part of it.

And then, right, the, and we talked
about, I think this at the, in our last

podcast, we continue to see an a trend
upward in the non-interest expense.

So that might be putting pressure a
little bit on earnings, which then,

not making enough earnings to keep
up with that asset growth cause that

net worth ratio to slip a little bit.

Miller: On the positive side, there's
only 59 credit unions that are not

well capitalized in the whole us.

So, you know, you got that regulatory
well-capitalized number at 7%.

There's only 59 credit unions out of
4,000 that are below that 7% ratio.

So.

Well, NCUA has laid off 27% of their
staff, or 25% or whatever the number is.

They haven't publicly disclosed
how many people have actually

left in the last year and a half.

The credit unions are in
good shape for the moment.

NCUA can catch their breath a little bit.

There is a lot of capital out there now,
competitively, should capital ratios

be higher, you can make an argument.

Maybe they should be higher.

Overall from a regulatory standpoint,
credit unions are in pretty good

shape right now in terms of capital.

They're still recovering from,
those unrealized losses in those

investment portfolios that go all
the way back to the COVID years,

but that's getting better too.

Gap net worth and went up almost 200
basis points in the last couple of years.

So that's a positive there.

Later on we'll talk
about some credit union.

To undo all the good that's come
about with that, but we'll save

that for later in the podcast.

For the moment though, as an
industry, the credit union capital

wise are looking pretty good.

Treichel: Looking very strong.

Steve, any any thoughts to throw
in on capital before we pivot?

Farrar: Yeah, if you compare capital
back against the community banks who are

sitting, they're very similar right now.

'cause their core, uh,
capital ratio is 11.05.

It, theirs did increase, but
you would expect that 'cause

they had slower asset growth.

Treichel: Makes sense.

Makes sense.

So let's pivot to asset quality.

And you know, Todd, you mentioned
part of assets is, is the

investments side of things.

And, and, uh, you know, I went
back and kind of looked at what

we chatted about last time.

You, you talked a little bit
about people going longer in

the three to five year bucket.

Which if my numbers look right, that
investment category has gone up 17%.

So let, let's start with that.

People undoing, the rates have gone down.

They're recovering some of their gap
equity but they're starting to go long.

And Todd, any, what do you got on that?

Miller: Well, like I said, you
know, the yield curve has come

down, but it's basically flat.

Then you sit here and look at COVID years.

Credit unions went long.

Banks went long too.

Some of 'em failed because they went
long on investments during this time

period, a lot of credit unions did.

So now they ended up with investment
portfolios that are underwater for a long

period of time, and they're illiquid.

You can borrow against them,
but they're basically illiquid.

So now we're in a similar environment,
so rates have come down a little bit.

The yield curve is flat.

Then dollars of investments in that,
over five years, over 10 years,

over three years, every one of
those categories, dollars a grid.

And there's like no spread between, you
know, going out from three years to 10

years, and you just wonder why they're
making bets that rates are gonna fall.

What if rates don't fall?

You know, there's like 11
basis points between a five

and a seven year investment.

There's only like 14 basis points
between a three and a 10 year investment.

Why are you going out 10 years?

That little bit of yield you gain is
not worth putting that much interest

rate risk on your books or a decade.

It makes no sense to me.

The risk for the risk is, is
high and the reward is low,

is what I'm hearing you say.

I'm sure there's a whole bunch
of investment brokers out there

that will tell me, Hey, I don't
know what I'm talking about.

But you know, I know I fixed a lot of
problem credit unions in my career where

they made mistakes just similar to this
and it just seems to not make sense to me.

Now, maybe there's a credit
union out there where their

loan to share rates are always.

20% where they could maybe make
an argument that some of it.

But realistically, you know,
credit unions over a billion

dollars are 78% of the industry.

So this is big credit unions making
bets to make those dollars move.

This isn't little credit unions,
this is big credit unions doing.

Maybe some of them will be our
clients a couple years down the road,

Treichel: so there is that.

Yeah.

Yeah.

Investments, uh, in going along
Dennis, Steve, anything you

wanna add to that before we pivot
into the other asset categories?

Bauer: No.

And, and, and, and maybe this will segue
into the loan, but right when you look at.

If you're looking at, we're going longer
in the investment portfolio, you look

at where loan growth has occurred and
it's in mortgages and commercial, so

it tend to be a little bit longer.

So you're sort of, doubling
up there of extending your

balance sheet, uh, duration.

So

Treichel: that's a good point.

Bauer: Yeah.

Treichel: Steve, anything on investments?

Anything compare to banks?

Farrar: Uh, I have nothing to add.

Treichel: Nothing to add.

All right.

Let's pivot into the other
asset quality, uh, conundrums.

Or positivities, whatever they might be.

Loan delinquency.

Dennis, you talked a little
bit about charge offs.

Talked a little bit about PLL.

What's, uh, what's, what are the
numbers showing on loans, gentlemen?

Bauer: What I saw for like delinquency.

That has crept up a bit.

Particularly if you look at real estate,
I think that's where the, the biggest

category where you, where I saw, uh, an
increase in delinquency that was up 10

basis points from year end, uh, 2024.

Um, but it's interesting, right?

I think at the end of 2024,
delinquency rose quite a bit.

And then in that first quarter of.

Of last year, it, it came down nicely,
but now it's back up to where it was

at the end of, or a little bit, even
beyond where it was in, in 2024.

But it, you know, it looked
like it was real estate related.

I don't know if Steve or if Todd saw
anything different, but that's where

I sort of, saw that, that, where that,
uh, delinquency really picked up.

Miller: I've got every category on the
call report in a little chart right here.

Bauer: Alright.

Treichel: Alright.

Let's

Miller: hear it.

Let's hear it went out
just about everywhere.

But I'm gonna throw one other
thing out there too, because

this is kind of a red flag.

So I mentioned NCUA has their
little chart package that has

a decade of numbers in it.

This is the first time in a
decade where delinquency for the

whole industry has been over 1%.

Mic

Treichel: drop.

That's a big no, that's a

Miller: powerful stat.

Yes.

So within the credit unions, you
know, what you see is, so commercial

loans have been growing delinquency
in those commercial categories

have went up pretty significantly.

Especially with the construction and
development piece, the non-owner occupied

commercial real estate, that delinquency
jumped almost 25 basis points last year.

Farm operating loans, which there's
not a lot of in credit union, their

delinquency is really skyrocketed.

Student loan delinquency
has shot up govern.

Most credit unions have.

Um.

Non-government guaranteed
student loans that have went up.

Unsecured delinquency is
actually stayed kind of stable.

Car loans have stayed really stable.

You would think that would
be a troubled category.

But we talk about loan growth.

Auto loans actually shrank in the
credit union industry in 2025, and

I don't know if I've ever seen that
in my career where the dollars of

auto loans actually didn't go up.

Of course new vehicles are, I
just bought one here recently.

They're a lot of money.

I think people say there's trucks
out there that are a hundred thousand

dollars now, which is kind of crazy.

So a lot of the areas, the real
estate delinquency is jumped up

primarily like primary residence.

That hasn't moved much.

It only went from 79 to 88 basis points.

Real estate second longs
those HELOCs, they're.

Delinquencies only one
up nine basis points.

It's at about 0.89.

This other residential real estate,
though, kind of non-owner occupied that

shot up from 62 basis points to 141.

Bauer: Is that honest?

Miller: That's not a big chunk
of the real estate right though.

But it's so they're not commercial
loans, but they're one to four

family dwellings or single things
that are not on or occupied.

Say those,

Treichel: say those numbers again.

61 to 61 basis points

Miller: to 141 basis points to 1.41.

So you see these little segments
of the industry and you know, prior

to the old, under the old business
loan rule, those probably would've

been called commercial loans.

Treichel: Right?

Miller: And they're not anymore.

Treichel: Right?

Miller: Some of that's probably
undeveloped property too.

You know, there it's just bare land is
probably in that category somewhere too.

But.

You just see things kind of wearing away
at the edges, and I think it kind of

goes back, you know, I'm not gonna throw
out all the statistics, but you look

at unemployment across the 50 states.

You look at earnings in the
chart, map across the 50 states.

There's a lot of places where there's
huge disparities in performance.

And you see this with
the banks too, Steve.

You know, if you look at those.

Regional levels.

The numbers are very different
from region to region, so we

have parts of the US that.

Are doing really well and other
parts that are not doing as well.

And you know, I suspect if we actually
pulled this at a state level or regional

level, that you would find that a lot of
these delinquency increases are probably

isolated in, you know, a small number
of places, maybe a quarter of the US.

Which is kind of interesting 'cause you
go back and look at, our experiences

dealing with troubled credits, and I'm
sure you saw this mark as a DSA and a PCO

and regional director recessions in places
where performance deteriorate all tended

to be regionalized at different times.

You know, and when I was a PCO,
we had a time period, Montana

and Alaska kind of sucked.

And then they got better.

And then it was Southern
California where had issues.

And then it was Northern
California that had issues not

related to Southern California.

And we had a period of time,
we had issues in Hawaii.

And then of course the last
recession, the sand stakes.

You know, it was really five or six
states that got get really, really

hard compared to the rest of the us.

And I suspect you're getting some of that
with these delinquency increases here.

If we really dug into it.

There's probably very much
regional aspects to that

underneath the national numbers.

Treichel: Yeah.

If, if we duck and, and again, 1.4,

one a hundred forty one basis points is
the average delinquency on that category.

If we looked at the granular data going
out 1, 2, 3 standard deviations there's

probably a handful of institutions,
um, that are materially impacting

that number without getting into, I,
I haven't looked at those numbers, but

that would be an interesting deep dive.

Miller: I said the credit union's over
1 billion and you know, there's 439

of them and there's 21 in the ones
credit unions that are over 10 billion.

You know, those credit unions
account for about 79% of the

total credit union's assets.

And when you see numbers like this
jump, it's probably someone in one of

those two categories or maybe four or
five credit unions in that category.

Treichel: Yep.

Miller: In that four hundred and
fifty, four hundred sixty credit

unions, it's probably just a handful of
credit unions in that four 60 that are

actually moving some of these numbers.

Because I noticed, like with our
own clients, most of them, their

delinquencies were pretty stable in 2025.

They didn't move very much so.

You know, we, we might have a client here
and there that did see some delinquency

rise, but for most of our clients that we
deal with personally, their delinquency

and charge off numbers were really
stable from 24 to 2025, but nationally.

You're seeing some red flags out there.

Treichel: Well, and, and I'm gonna take
this opportunity, since you brought

up ones to say, Hey, NCA, if you're
listening, when are you going to tell the

world that ones is or may be going away?

You've told your staff but you
haven't technically told uh uh, the.

The stakeholders.

Uh, let's, uh, let's get on that.

Uh, as soon as you can.

Maybe there's, uh, good
reasons for not telling them.

I can think of a couple that might
be contemplated as potentially good

reasons, but, but there really are
no good reasons because the world

of Credit Union deserves to know.

And while it only impacts
as a few of the large credit

unions, that does trickle down.

So.

Alright, I'll, I'll get off
my soapbox on, on NCAAs.

Um, needing to communicate better,
uh, Steve, any thoughts from a bank

perspective or in general on this?

Farrar: You can see the similarities
they're having that in delinquency across

the industry for community banks and
great is double what it was in 2022, so

that's why people are worried about it.

But I always look more specifically is
delinquency is an issue that we have

to deal with in terms of collections
and all that, but where it really

becomes a problem is in losses.

And, um, you know, the, our, the loss
ratio, I didn't notice anything for

sign in our industry, but the credit
union loss percentages much higher

than it is in the community banks.

Their loss, uh, net charge
off for loans was 0.21

for 2025, and, and it stayed below 0.2

the last couple of years and, and our,
the credit union industry is 0.78.

So that reflects in the
provision for a loss expense.

And that's a little bit of a
competitive disadvantage that

the credit unions probably have.

And Todd did notice that that
regionality is huge when you look

at the community bank data that
their losses are, are just so much

higher in that San Francisco region
compared to every, every other region.

It's just way out almost outta bounds.

Treichel: Interesting.

Well, and some of that, if you were to
talk to individual credit unions, if

you're talk to low income, designated
credit unions or some of that higher

delinquency, uh, and loss ratio.

Loss ratio specifically would be,
would be tied to theoretically

serving people of modest means.

Right.

In some instances it's loan quality.

But some, but it's.

Credit union's owned by the owners.

So maybe they're making broader
decisions on their loans potentially.

Uh, but that gap is more
than what that would tend to.

Miller: I think that's part of it, mark,
to be honest with you, that is part

of it, that part of the tax exemption.

You know, you go back prior to the
last recession in 2008, and my numbers

are probably kind of foggy, but.

I don't remember.

Like 1% charge off being something
that bothered me back then.

Treichel: Yeah, exactly.

No, it's a great point.

When, when, when numbers double, but the
number was so low and when those are not

numbers that scare any of us is from a
risk perspective, but the, it's the trend.

It's more the, the trend and the
velocity of the change maybe.

Miller: Yeah.

And.

Like last year, the, all the numbers
were fairly stable with inflation.

Interest rates came down a little bit.

You know, now bonds are
flying through the sky.

That creates volatility and uncertainty.

So who know, who knows where
things are gonna go and like I

said, there's always been this.

Geographical differentiations, parts
of the country doing really well,

parts of the country not doing so well.

I think that will probably always be
there and it'll be just interesting

to see how that plays out.

But I do think for NCUA where they've
had these cuts in staff, they're gonna

have to be paying attention to loan
quality, loan quality loan quality

loan quality, and concentration
risk because it's loan losses that

cause losses to the insurance fund.

With their scarce resources.

That's the one thing they absolutely
need to be paying attention to is

asset quality in the crane industry

Treichel: and with their, and
when they're done with that, they

might wanna look at asset quality.

All right, let's pivot to, let's see,
we did the C, we did the A, uh, we sort

of did the LI think that leaves the E.

We've, we've talked about it a little bit.

What are we seeing in the
earnings arena, gentlemen?

Bauer: Compared to 2024.

ROA was up 16 basis points, very strong.

Fueled by net interest margin.

That was up 27 basis points, so right,
that, that contributed to the bottom line.

If you compare it to Q3 2025,
things are changing a bit.

Actually ROA is down.

Roughly three basis points from 79 to 82.

And as I mentioned, it seems like margin,
net interest margins possibly have peaked.

That was only up one basis point
if you compare year end to quarter

three compared to 27, so right.

So that's slowed down.

PLL is roughly the same.

Non-interest income is flat, not really
any changes, and we still continue to see

a little bit of an up upt uptick in on
operating expenses that was only up two

basis points for the quarter over quarter,
and it was up 10 basis year over year.

So, right?

I think so.

So I think that that acceleration of net
interest margin is, is basically done.

And that, that, that's depending upon
how we manage, uh, how credit unions

manage that non-interest expense.

Um, and then the loan quality
will really determine power leg.

First part of, of this year.

It'd be interesting to
see what, what plays out

Miller: part of the whole
net interest margin is.

You know, you talked about earlier
they've been whip saw with inflation

deposits, this, that rising interest
rates, interest rates falling, but

like last year they're still playing
catch up because loan yields went up.

They were able to bring cost
to funds down a little bit.

That's what helped that net interest
margin is they're still playing catch

up on those yield, uh, loan yields.

Investment yields were
up a little bit too.

Um.

But the last thing that Dennis
mentioned, the operating expenses,

that's a challenging one.

So we've got 1, 2, 3, almost four years.

We're operating expense numbers
relative to assets have increased.

And yes, there's been some massive
inflation in there and, but we've also

had some years where there's been a
fair amount of growth in there too.

Well actually not really.

Asset growth, 5 4, 2 5.

That operating expense
number going up though is.

It would make me nervous if
I was still working at nc.

Right.

Treichel: And it's been at least
6% for three straight years.

The, yeah.

Operating expenses which, um, I, I wonder
when the last time that happened was.

Bauer: Yeah, it's, I think a lot of
it's re related to wage inflation.

We talked maybe a little bit about
this in the last podcast, but Right.

The last two years, 2024 and 2025 salaries
and benefits went up roughly 8% each year.

Whereas asset growth is.

Been a lot lower than that.

So that's gonna push up, right?

That's just gonna push that ratio up.

But 8% right?

That.

I didn't go back to years prior to that
to see if that, that, that seemed a

little bit, that seemed a little bit high
compared to historical numbers, but Right.

I think it's a little bit of a catch up
because of, in, of inflation that went

on, um, from, you know, 2021 to 2023
trying to maintain and retain, uh, staff.

So that might be a big,
might be a big piece of it.

It's nice to see that.

It's starting to slow down the
rate of operating expense growth.

Hopefully that that's peaked.

Um, but that Right, that was a
contributing factor to uh, yeah,

to that obviously to the increase
in overall operating expenses

Miller: that kinda led the way in 2024.

But I actually just brought up that whole
income statement for 2025 in front of me.

It's virtually every category went up 8%.

Farrar: Yeah.

Yeah.

Miller: In back to your employee
compensation benefit only went up 11.2.

It was one of the lower growing ones.

Dollar wise it was a big one.

'cause dollar wise, it's
what, a third of mm-hmm.

Almost 50% of the total expenses,
operating expenses, it's almost

half of it is employee compensation.

Um, so that half went up 7%
and the other half went up.

Mm-hmm.

Most of the categories went
up close to 8% last year too.

So it's a little bit of everything.

But yes, wages and compensation.

You know, as Dennis brought up, that's
half of operating expenses, so it's

a big number and it's hard, bigger,

Farrar: it's

Miller: hard

Farrar: to

Miller: control that when
inflation is growing, you know.

But if we go back and just look at
staffing for members, I'm sure I

have that here in my notes somewhere.

I do.

Members to full-time employees
has stayed relatively stable.

Actually went down a
little bit in 2025, so

Bauer: yeah.

Could it could go back to what the
other expenses, you know, mark, you

were talking about membership growth
and credit unions staying relevant.

So, right.

Part of the challenge is in this
digital world, is to invest in

your infrastructure, your your
ai, your, your digital presence.

So.

That, that might be fuel a some
of the additional expense growth

in, you know, operating expenses.

Is that strategy or that of,
of staying relevant so that,

again, grow their membership?

I think it's, it's maybe
a piece of it as well.

Miller: I think you're
probably right, Dennis.

'cause I suspect during the COVID years,
a lot of that type of stuff didn't occur.

So people were playing catch
up here in the year since.

It's interesting how we're three years
out of that and you still see that

event having an impact on what's going
on across society in many ways yet

Treichel: Many ways.

For sure.

For sure.

Farrar: Yeah.

The, uh, that 7% expense growth
rate is basically what they

have had in the community.

Banks who are the Thera Unions
were, were actually below the, uh,

community banks and the rate of growth.

An interesting thing that we had
that when N two A had the, uh.

The podcast on, what was it, Todd?

The, where I submitted the question,
which podcast was it that or webcast?

NCA did,

Miller: was there supervisory priorities?

Farrar: Yeah.

Yeah.

And I'd, I'd submitted the question is,
you know, what's NCO a's thought on, uh,

credit union, putting their capital to
work, work in terms of raising expenses

as they try to increase technology
and increase in the competition.

They read the question, but the
answer had nothing to do with

the question that I'd asked.

'cause I wanted to try and get them like
more, you know, on the record is where

do they stand on credit unions trying
to put their capital to work to address

the competition that they're facing
or even other issues that they have.

Treichel: Well, and, and sometimes,
you know, having, having been

in on those webinars, you know,
it's a little bit like, um.

It can, when you're on the other side
with NCUA, it's a little bit like, uh,

making sure planes don't collide and
you've got, okay, this, this question

we wanna make sure we've answer it
and, and who are we gonna assign it to?

And you got people, RA that one's for me.

And I'm guessing what happens,
Steve, is someone said, Hey,

this is a good question.

Why don't we have this person answer it?

I haven't, I gotta go
back and listen to it.

But there was a mismatch between, uh,
what they thought the question was and

maybe the right person wasn't in the room.

Farrar: Yeah, but we can throw it out
to, you know, Todd and them as you know.

Yeah.

We we're hearing it from our
clients is really, we we're trying

to address this the competition
issues, but they're not feeling

support from nsu, their NCA examiner.

Miller: I mean, we've got credit
unions that are way, way north

of 7% and you know, they're
getting doors about earnings.

They're getting doors about, Hey,
we think you need more capital.

Of course, they can't
define what that number is.

And this is, you know, the one
client that we had, it, it's

a very diversified client.

They have like no concentration risk
or anything, you know, and they're

still cutting flack from NCUA about
putting some of their capital to work.

And we have another client
that just got a door.

It says, you may have too much liquidity.

Not you have too much.

You may have some I.

And, you know, so it's
kind of a nebulous thing.

And you know, Steve texted me that capital
question the day before and I said, oh,

they're not gonna read that question.

So they read it, but
they didn't answer it.

They didn't even read my question.

So I can't remember what I sent in, but
I always send one just to see if they'll

read it or not, because you know, they
can see your email that you register with.

So they know who's asking these
questions for the most part.

Treichel: I I don't ask questions.

I figure they'll, they'll, uh,

Miller: you just need to come up with
like a Mickey Mouse email or something.

They don't know who you are,

Bauer: I guess.

Right?

We, but we also gotta look at expenses in
relation to income, so efficiency ratio.

Right.

So those look pretty stable.

They've actually continued to
drop, partly because that in

net interest margin bumped up.

But so you don't, I guess you'd be
concerned if you saw operating expenses.

Increasing and then also the
efficiency ratio increasing.

But we're not, not
necessarily seeing that.

So that's one thing I looked at a
lot and at our credit unions just

kind of income are we generating to
be able to support those expenses.

And overall it looks like credit
unions have done that, uh,

quite nicely this past year.

Miller: Yeah.

Yeah.

The efficiency ratio hasn't
actually moved at all.

I mean, it moved a little bit.

49.

Bauer: Yeah.

I came to, I show that it was at
about 72% at the end of last year,

and it's down to about 69, 70%.

So it moved a little bit, didn't go up.

So

Farrar: that's what

Bauer: I'm trying

Farrar: to say.

Miller: Yep.

Farrar: Yeah.

And in the year end we had, uh, a 11.7%

of, uh, credit unions are unprofitable and

Miller: uh, only 5% of
banks are unprofitable.

Farrar: Yeah.

5% of banks.

Yeah,

Miller: so I actually, you know, and
that's another one that NCUA gives

you a little 10 year history on,
or No, I did a query on it myself.

We have a hundred credit unions
over a hundred million exactly

that were negative earners in
2025, there's 500 credit unions.

Lost money, but there was a hundred
over a hundred million not lost money.

And I thought that was kind
of a interesting number.

So you've got some large 17 credit unions
over a billion dollars, lost money.

You know, that's 5% of them.

So that's like in line
with the community banks.

But 11% of the industry losing
money, that's a fairly big number.

Treichel: Yeah, those small ones
that are losing that's probably

where a lot of the mergers are.

I was looking at merger data for
some separate stuff, but every year,

four to 5% of 'em are going away.

And so if 11% are losing money, a
lot of that four to 5% that goes

away are coming from that 11%.

Uh, especially when you look at the
reasons they say why they're going away.

Alright, so earnings.

Any, any more things on, on the earnings?

Uh.

Topic?

No.

All right.

So let any, anything you got on
your notes that you wanted to

talk about that we haven't hit?

Farrar: I usually give just a
quick update on both the insurance

funds and they both did really good
here in the end of the quarter.

Um, you know, n two ways
equity ratio in increased.

And, um, and the bank went increased
and so, so they're, they're both looking

really good as far as the insurance
funds and so that's always good news.

Treichel: Very good.

And Todd, any last words?

Miller: Couple a LM things,
you know, not long term assets

in the credit union industry.

They're going down just a
few basis points every year.

So there, there's no indication
that interest rate risk is going

up, it's actually staying stable
or going down a little bit.

And then last year, liquidity
improved quite a bit.

A lot of your wholesale
funding was repaid.

So try to have more capacity
to borrow money and bring in

non-member funds if they need to.

So that side of things
looked pretty decent as well.

So small improvements in liquidity,
interest rate risk wasn't going up.

If I'm an MCUA person, I'm
only gonna be worried about

credit risk for the most part.

Asset

Farrar: quality, asset

Treichel: Quality.

Asset quality,

Farrar: yeah.

And camel ratings, uh, you
know, it showed improvement.

That improve, especially
in terms of dollars.

It's wasn't a big improvement,
like the reduction in camel threes.

There was, there was 155 billion
reduction in assets, which means

there may have been somebody who was
pretty big that is no longer a three.

Treichel: That'll cover some of
their staff reductions and not

having to go to do follow up so much.

Dennis.

Bauer: The only thing I wanted to
point out is the allowance coverage

of delinquency a little bit more
back on asset quality, right?

So that, so how much, how much do we have
an allowance compared to delinquency?

So at the at the end of third
quarter of 2025, that was 140%.

So a lot more coverage and allowance
then and delinquency that dropped

to 131% at the end of the year.

So that just says that link
Delinquency's going up, but the

allowance isn't keeping pace.

So really interesting to see how
that transpires in this current year.

If that, if if, I mean a lot of it depends
on where that delinquency's happening.

A lot of it was happening in
the real estate portfolio,

so maybe that that's fine.

But it was, it was notable though that
it was at 140% coverage at the end of Q3.

It's only 131% at the end of.

And at the end of last year it was 136%.

So downward trend.

So Cecil, right?

So Cecil comes into play.

See what kind of, um, impact
that might have for provision.

In 2020, in 2026,

Farrar: and that number in
the community banks is 153%.

They've always had a, a bit more in their
allowance than the credit union industry.

Bauer: And Steve, do you have
any trends from them, Steve, or

is that just a point in time?

Farrar: I just looked at this
specific point in time and it's been

pretty consistent at that level.

Miller: The other thing though
too, is when you got delinquency

reporting the banks, they have.

30 to 90.

And then NCA has got zero
to 60 and then mm-hmm.

Over 60.

So the delinquency numbers
aren't exactly the same.

Farrar: Yeah.

Treichel: And when I hear coverage
ratio, I think of a meeting I was in

with Steve Farr and Dan Murphy, the
former regional director when Steve

and I worked for him on the West Coast.

And he said, when you guys
come in here and brief me,

you say, this one's doing bad.

This one's doing good.

I wanna believe you, but I just look
at their, this, the ratio of their

delinquency to their allowance.

And so we, we coined that the Murphy ratio
back before we knew it was the cover.

It might have been called the
coverage ratio back then, but we had

it, we, that was the Murphy ratio.

So I always, I always think, so the
Murphy ratio's not, not as good as it was.

It's a trending in the wrong way.

That's something we can
watch going forward.

All right guys, this was fun.

I've got a Costco delivery
coming in two minutes.

So this worked out perfectly.

Hopefully, uh, we'll get this uploaded
by Tuesday for Tuesday's episode.

Uh, hopefully by then I've got myself a
new quarterback for the Minnesota Vikings.

Uh,

Miller: good luck.

Treichel: Yeah.

Yeah.

Which Todd, by the way, if
we get if we get, uh, Kyler.

Bauer: Murray.

Treichel: Murray he was picked first.

The Bear's quarterback was picked first.

The lion's quarterback was picked
first, but not the Packers.

All right.

That's all I got.

Miller: They developed theirs in-house,
and they don't need a quarterback.

Treichel: They need You're
the quarterback farm.

You guys always develop 'em.

That's right.

Yeah.

Good comeback.

All right.

Asset quality.

Asset quality.

And develop your quarterbacks from within

Miller: Green Bay.

Find a defense.

Treichel: Hey, you just signed a guy.

We cut.

So, he'll be good for you though.

All right, guys, the listeners.

Thanks for listening, watchers.

Thanks for watching.

Uh, guys, thanks for, uh, your wisdom.

And this is Mark Rele signing
off with flying colors.