Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey, everyone.

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

I'm here with Steve Farr, and
if you're watching on video you

can see the name Todd there,
but Todd's camera's not working.

We're having some technical difficulty.

Anyway, guys good to see you.

We're gonna be doing a podcast
on the quarterly NCUA data that

came out a couple weeks back.

We got into a routine of updating
the listeners and watchers on

what's going on in the credit
union data every three months.

And they got … Next week, they're doing
their briefing on the CAMELS ratings

and I'll be watching for that one.

Some other things going on at NCUA.

The new board member's supposed to get
his c- confirmation hearing next Thursday.

There's a board meeting next
Thursday, as I mentioned.

By the time this comes out, that may
have already passed, so I'm gonna stop

talking about what's happening next week.

But with that if, … Guys, if,
just in case there, there's a new

listener who hasn't seen us before or
listened to us before, if you could

give a little bit of your background.

Let's start with Todd this time
down there in black and white.

Miller: Good morning, everyone.

So I was spent 34 years with NCUA.

I can break that career and my time
with NCUA into three general groups.

The first third of my career, I
was an examiner and a problem case

officer in the Western region.

Then the middle third of my career, I
spent roughly a decade as a regional

capital markets specialist in the
Western region, of course dealing

with large and complex credit unions.

And then the last 11 years of my career,
I was the director of special actions in

the Western region, supervising problem
case officer, regional capital markets

specialist, regional lending specialist.

Very fun part of my career.

Was involved in a lot of
complex credit unions.

Did a few conservatorships,
returned a couple to the members.

Those are highlights of the
career when you can do that.

And there's a lot of those instances you
end up liquidating them or doing purchase

and assumption to assist with mergers.

So was involved in all of that stuff.

All in all, enjoyed my 34 years with NCUA.

It was very enjoyable working with
credit unions that entire time.

Good people at NCUA to work with as well.

Treichel: Very good.

Very good.

And now we've been doing
this five, six years.

And Steve g- give a, g- give us a little
bit of your background then and now.

Farrar: Oh, I gotta tell you about my
background and my, behind me there.

Treichel: That's

Farrar: good.

It's a mountain lake.

The, I'm not at this mountain lake,
but in one just about like it, and I,

we literally ran off of the boat to
get in, up in time to do this thing.

So I tell every- I would say this morning,
I probably caught 10 pounds worth of fish.

But I never kept a single one.

They were all pretty little.

But lots of activities.

That was fun.

Treichel: That's good.

That's better than the amount of fish you
and I caught when I came through Montana.

Farrar: Yeah, but you guys
went through a lot of bobbers.

Treichel: Yeah, that's, … I
tend to do that.

I tend to do that.

Yeah.

Farrar: Yep.

My career at NCUA was 30-plus
years broke into two parts.

The first half was predominantly as
a pr- a problem case officer, and

did a lot of work with Todd in that
we helped the troubled institutions

primarily out on the West Coast.

And a lot of satisfaction from that
job and getting those turnarounds

to, to be successful, and many
of them are still around today.

Todd and I like to talk about that we
were able to save credit unions with

even negative capital back in the day.

Then I followed Mark when he went to
the central office and went to work for

the Division of Risk Management, where
I spent another 15 years basically.

And in, in that job I got to work
in just so many different things.

I, I dealt with a lot of the
accounting for the insurance fund.

And then w- we were still involved
in all of the major problem credit

unions, including the corporate system.

Todd and I both worked
a lot of time on that.

And that was an interesting part
of our career that wasn't exactly

the most enjoyable, but necessary.

And then I ended as the vice
president of the CLF when I

actually went and moved back to
Alexandria, Virginia for a few years.

And, then we've been doing this
consulting now for quite a while, and

that, it, that's been super enjoyable
to be able to keep active in the

industry and keep our saws sharp.

Treichel: Yep.

No, it is a lot of fun, and I always enjoy
chatting with you guys about what's going

on and looking forward to seeing what we
got to say about the March 31, 2026 data.

So with that, is there one
particular thing or either

of you wanna jump in first?

Do we wanna walk through, the camel from a
capital asset quality earnings liquidity?

How do we wanna approach this one, guys?

Miller: Maybe a little background
before we start- That's good … just

to what's going on with conditions.

Treichel: You got it

Miller: What you'll find as we go through
this podcast, there hasn't been a lot

of changes other than credit unions'
performances improved a little bit.

Inflation is still persistent.

Interest rates have been fairly stable.

The short end was inverted a year ago.

It's normal now.

Longer term rates have went
up 50 basis points or so.

But in general, there hasn't been
a lot of changes to interest rate.

Inflation has been fairly persistent.

The Fed can't seem to
get that under control.

But despite that, credit
quality is holding up.

Wages are growing about the same
as inflation, not quite as much.

Unemployment trends
are all over the place.

I use a FRED tool from the Federal
Reserve just to track a lot of data,

and one of those things I track is
unemployment in all 50 states every month.

In the last year, we have 31
states where unemployment is

higher, 15 states it's lower.

Somewhat interesting along with
the whole government reduction in

force is the District of Columbia's
got the highest unemployment rate

in the country right now at 6.2%.

And then the other places where you
see high unemployment is the tech

sector, California, Washington, Oregon.

Those tech hotspots all have
unemployment numbers over 5%.

Little bit in Michigan is that way
too, and a couple other states.

South Dakota's got the lowest at 2.2%.

Savings rate have been- but,

Treichel: but South
Dakota only has 74 people.

No, I'm just kidding.

Miller: They've got like 174.

Come on.

They get a couple thousand when
they have the motorcycle rally.

Treichel: That's right.

Sturgis.

That's right.

Miller: Sturgis.

So you know, things are fairly the same.

Things are moving around
at state-to-state level.

But in general, country's been
pretty resilient even though

inflation is a little high.

I do know with all three of
my vehicles, it takes 50 bucks

to fill up the gas tanks now.

You notice it when it crosses
over that $50 a tank mark.

But for the most part, credit
unions have held up well.

Earnings are improving.

Despite the fact we're in a shooting
war and inflation is quite high, our

economy seems to be fairly resilient.

Treichel: Steve from that
10,000-foot level walking- Yeah

through that data any thoughts on that?

Farrar: Yeah, Todd and I shared it
when we first looked at this data when

it came out, and it was like nothing
really changed, that liquidity seemed

to improve just a little bit, but,
that the, this quarter was, uneventful.

No real, glaring negative
trend jumping out.

I did my usual comparison
to the community banks.

Miller: Yeah.

Farrar: And we still have the
same … the competitive disadvantage

that credit unions have against the
community banks is the loan losses

continue to be significantly higher
than they are in the community banks.

Their n- their net charge-off ratio
is very low, and it went lower.

It's down to 0.18%.

And the credit union's net
charge-off ratio was they have .78

written down.

So that is a, a … And it gets
reflected in the provision expense,

that the losses are higher.

And that's a competitive disadvantage
that we have ag- when you compare a-

against the community banks right now.

'Cause they were really strong in profit.

Their pre-tax return on assets was 1.42%,

which is higher than it was in the fourth
quarter, and the credit unions were .83,

but, as … When I read summaries of
that, they point out that, the bankers,

banks have higher earnings, as they're
more driven for that, of course.

Sure.

But credit unions have much more in terms
of growth of members than and more growth

in loans than they're seeing in those,
both have some good things going for them.

Treichel: When you talk about the loan
losses, I guess if I was trying to figure

out a glass half full, maybe it's because
credit unions are trying to meet their

purpose of serving people of modest means.

Maybe not.

I don't know.

But that's a, that's an interesting stat.

Todd, do you have any thoughts on that?

Miller: I think credit unions
have always had slightly higher

charge-off ratios than banks.

A little bit more liberal lending
type of policies across the industry.

So that's not unusual.

I don't know if you have it at your
fingertips, Steve but usually the FDIC

used to publish a percentage of credit
union or banks that are negative earnings.

You have to dig for it at
NCUA and do a custom query.

That may be one negative spot
in the credit union industry.

There's 639 credit unions
that are negative earnings

here in the first quarter.

That's a pretty big number
out of 4,250 credit unions.

So what percent- about
what percent is that?

There, Is that 15?

Oh.

15-ish.

I have it written down
here somewhere, Steve.

Yeah, so-

I don't know where I have it written down.

I'm gonna-

Treichel: Let's see … I'm gonna pull out
my … I'm gonna guess it that it's 15%.

Let's see if I'm right.

16-

Miller: It

Farrar: is

Miller: about 15%.

Farrar: Yeah.

Yeah, the per- percent of unprofitable
community banks was 4.98%,

so basically 5%.

It's a little lower than it was a
year, with in fourth qu- quarter.

Yeah.

Now,

Treichel: and a lot

Miller: of those- So for
credit unions, it's up.

By way of comparison, I have
pulled this when we did our

podcast at the end of the year.

At year end, there was 498
negative earnings credit unions,

and now there are 630 of them.

18 of those are over a billion.

18 are between 500 and a billion.

So not very many negative
earners at the larger size.

Yeah.

523 of that 639 now are credit
unions under 100 doing this.

Yeah.

There's a lot of small credit unions
out there generating negative earnings.

Treichel: They- they're tread- they're
treading water until the CEO retires

and then probably merge, a lot of those.

Yeah.

Miller: So that's a big number that
changed is look at, intangible assets

and equity acquired in mergers.

Okay.

That's a huge jump in the
first quarter of this year.

There had to be a very large mega
merger or two or three that closed

here in the first quarter, 'cause
those numbers went up quite a bit.

Treichel: Yeah, that's interesting.

I've, I did some … I've got
some data analysis I've, was

getting ready to do on mergers.

I'll have to, I'll have to make a
note of that and take a look at that.

Yeah that that phantom equity, right?

That equity that per GAAP accounts
as equity, but it's not, doesn't

have a whole lot of tangible value.

Miller: It went from 9.2

to $11.9

billion, so 28% increase in one quarter.

Treichel: That, That's an alarming number.

That- … I'm definitely
gonna dig into that.

That's huge.

That's huge.

So the topic of capital, some of the,
that, that equity related to those

mergers any other thoughts on, or
any thoughts in general on capital as

we're walking through what's happening?

Miller: So if you go dig around
NCUA's website, they put out a chart

pack with each of these quarters.

I don't know, there's
20, 30 graphs in them.

One of them is net worth ratios
and percentage of net worth ratios.

Capital-wise, 98.5%

of our credit unions are above
7%, and there's not a lot of

credit unions subject to PCA.

64 of them in the whole
country is all, out of 4250.

So capital-wise, the industry looks
really good, and there's not a lot

of credit unions out there subject
to net worth restoration plans or

pro- corrective action at the moment.

Treichel: That's

Miller: a good thing.

I think there was probably a time when
I was a director of special actions, we

had more than that just in our region.

Treichel: Yeah.

No, I think you're right.

I think you're right.

Steve, any thoughts on capital?

Farrar: N- not really.

It's … We- we're, st- staying
pretty steady on that, and real

comparable to what in capital in the
communi- with the community banks,

I think, it is interesting when
you talk about, those 64 in PCAs.

'Cause as the industry, the
numbers look really good and solid

and repeating itself th- this,
between one quarter and the next.

But we do know that there are
those individual institutions

that are they're facing problems.

I don't think it's any one thing.

I think, it's just something
inside of, what their kind of

core business ended up being as
deteriorated or something like that.

Some of them could've been where they
tried something new and are having

negative results and working through it.

But I don't see any common trend in
why the credit unions end up into

a kind of a, the PCA situation.

Usually it's loan losses, right?

Treichel: Yep.

Farrar: That's, that usually
what it comes down to.

It c- could always be, for a
couple or few, big frauds, which

we know occurred and are affe-
affected the industry recently.

But I c- you know, can't find … Here's
the one thing it always comes down to.

Are granting decent loans, and
can you stay out of trouble?

You see the ones that end up with
poor liquidity, and when they try to

cover that, sometimes they make bad
decisions trying to fix liquidity

that, that affects their profitability.

So it's those well-thought-out
plans are still super important.

Treichel: S- Todd, w-
Steve brought up liquidity.

Any thought with your 10 years as
a capital market specialist and

another 10 years supervising capital
market specialist, any thoughts on

what you saw on the liquidity front?

Miller: If there was
incremental improvements.

Borrowed money is paid down a
little bit across the industry.

Non-member deposits are down.

You see a lot of credit unions offering
money market accounts to capture

some of that certificate money.

I think people are uncertain, so you
see a little bit more money going into

money markets as opposed to certificates.

Given the inflation and everything else,
I'm actually surprised that the credit

unions could grow as much as they did.

Share growth was 10% this quarter.

That was a healthy share growth number.

And loans, of course, grew a lot slower.

They only grew at 4%, so
you had-- Actually, 1%.

So when you got 10% share growth and 1%
loan growth, liquidity tends to improve.

Credit union didn't invest long.

There is a nice spread between
short-term rates and what

they're paying on cost of funds.

Cost of funds has dropped
a little bit this quarter.

Credit unions are still improving
their net interest margin.

So liquidity just improved.

Not by a lot, but it was incrementally
improved across the industry.

It should cause NCUA to take
their eyes off of that and

focus on a few other things.

So I expect that will
continue to probably improve

Treichel: That all sounds good.

Before we started I've got this little
tool I've built where I can analyze some

of the 5300 data, and I asked a couple…

I dug into the delinquency side of things.

I'm gonna, I'm gonna read off a couple
of stats I've got here and see what what

it triggers for you guys, if anything.

The key takeaways that my
questions drove for March was that

total delinquency dropped 19.7%

quarter over quarter from
13 to 10 and a half billion.

And the overall delinquency rate fell
from 65 and a half basis points to 60.5

basis points, which is the first
meaningful decline since at least 2022.

But that hasn't been uniform.

Con- consumer and residential got better.

Used vehicle delinquency dropped 27%, the
single largest decline in dollar terms.

Firstly, in residential, real estate
dropped 34%, biggest absolute drop,

though this category is volatile and may
reflect seasonal cure patterns in Q1.

New vehicle delinquency was down
26%, credit cards down 13%, which

conflicts with some things that
we heard in a call the other day.

Other sur- sec- unsecured loans down 10%.

So all of those categories
collectively were down tw- 2.6

billion.

What's going the other way,
the one category I didn't

mention yet is commercial.

CRE construction and development
up 42%, the steepest percentage

increase in any category.

CRE non-owner-occupied up 7.4%

continues a relentless climb from
86 in 2022 to 861 million now.

CRE multifamily up 3.2%,

been rising for four straight years.

Ag production agricultural loans, 13%.

It's a small number, but that number's up.

Commercial non-accruals rose
over 2 billion, up 5%, even

though delinquency in total fell.

The composition shift
tells the real story.

Commercial real estate share of
total delinquency jumped from

11 to, 11 and a half to 15.1%

in one quarter.

The residential real estate is now went
from 50% to 44, and consumer held steady

at about 33%, which would not have gone
down, because of the growth, right?

So if the denominator's changing, that's
where you would make up that number.

Follow-up question I asked tied
to that circled back to CRE

construction and development.

2022 was at 26 million.

Next year, 45 million.

Next year, 2024, 112 million.

2025, 121 million.

March, 171 million.

So the commercial stuff i- is not
going in the right direction, which

is, when I think back over the
years, there's the office buildings

causing issues, but it's crept into
almost every type of commercial.

A- any of those numbers I threw out
there attract your attention make,

and make you come to any conclusions?

Farrar: Didn't surprise me at all.

The, the credit card one is
interesting because, like

you said, we keep hearing it.

Credit card is pretty-- is is up
pretty good in the community banks.

Treichel: Yeah.

Yeah.

Yeah and Todd and I heard that in a call
the other day that it-- that it's up

and it's, We haven't seen credit cards
up in our conversations with clients

generally, but we-- I've heard that stat.

Todd?

Miller: Outside of the commercial loans,
if you go back one year, you're seeing

steady increases in delinquency in the
second, third, fourth quarters of 2025.

And we ended up March of 2026 just about
exactly where we were in March of 2025.

So over the year, we had some increases,
and then it dropped down- Yeah.

So back to- … every category
except the commercial.

The commercial loans, it's interesting.

Like I read, delinquents or unemployment
numbers are vary widely over the

course of the country from 2.2

to as high as 6.2.

Commercial loans and real estate
loans in general are the only loan

categories that have consistently
been growing over the last decade.

So credit unions, we have more
and more credit unions getting

into commercial lending.

They're expanding those portfolios.

And there's always a price
to pay for experience.

You tend to make a few
mistakes along the way.

So some of this commercial lending
delinquency, I suspect it's people

gaining some experience in how they're
underwriting and servicing those loans.

And then the other piece of it, like I
said, when you've got these variables

unemployment that are so high.

And if you look at past recessions too,
and commercial loan problems that we

had during our 30 years of career, they
always tend to be geographically isolated.

Sure.

So it makes you wonder if all that
rise in commercial delinquency isn't

happening maybe in three or four states.

Not necessarily uniform
across the country.

The interesting thing is that you
can do custom queries at NCUA and

get raw numbers, but you can't do
custom queries and get percentages.

It'd be nice to actually go get individual
credit union commercial loan delinquency

percentages and see where they're at.

I didn't take the time to calculate it.

You can get loans and assets and
figure that piece out backwards at

an individual credit union level.

But I think it's gonna be what
Steve said just about troubled

credit unions in general, that
there's no one reason driving it.

Treichel: Sure.

Yeah.

Miller: There are markets where housing
prices and commercial real estate

values are still high, and there's
other places where they're falling.

And, So it'll be interesting to see
how that one plays out over time.

Treichel: Yeah and is it states,
specific states and maybe a few … And

I didn't, I didn't dig into the numbers.

Are there big credit unions that have big
portfolios that are driving those numbers?

Steve, sorry I interrupted you there.

Farrar: That regional
differences is really evident

in the community bank numbers.

They're, when you look at their,
they break it down with New

York, Atlanta, Chicago, Kansas
City, Dallas, San Francisco.

When you look at multifamily it's just
it's twice as high if, for the New York

West, East Coast region area there.

Their commercial loans are also big
differences there in certain- the New

York district and Atlanta, really high.

San Francisco's super high on that one.

And the interesting one is credit
cards varies incredibly wide.

It you get for instance,
the Atlanta one is only 2%.

Kansas City, 13.75%.

So there's these the, that's a huge
aberration that you just wouldn't expect.

So I think there is, as you,
we talked about, different re-

regions are feeling the impact.

And the San Francisco one also has
really high credit card delinquency,

Miller: that's not surprising
with all the tech layoffs.

Farrar: Yeah, good point.

Treichel: But what in the
world's going on in Kansas City?

Miller: I wonder if some of that isn't
just because they have a lot of those

credit card banks chartered, like in South
Dakota who also- I was thinking the same

Treichel: thing

Miller: on South Dakota, yeah … which
is probably in the Kansas City region.

That's just pure speculation on my part.

Farrar: That, that would explain
that, because it's just, it's so

huge, it's gotta be something odd

Treichel: So as you a- as we were
talking there I pulled up, let's

see, what states the state data.

Interesting.

Kansas c- Kansas it says
is the biggest red flag.

Commercial delinquency went up from 1.2

to 59.4

in one quarter.

So as I say that I go, gosh, someone
could probably go look and see

which credit union that was at.

That, that's a little precise.

Washington State more than doubled.

Virginia up from 62
million to 100 million.

Florida also went up substantially.

And New Hampshire, which doesn't have
a lot went from zero to having some, so

that number looks statistically large.

Farrar: Yeah.

Yeah.

Treichel: So yeah, so interesting stuff.

Any other thoughts on delinquency,
asset quality, investments?

Farrar: No.

As a whole, we'd say asset quality,

Treichel: Is holding

… Farrar: is pretty good.

Treichel: Yeah.

Farrar: Yeah.

We're not that worried about it.

Treichel: Very good.

All right, so we talked capital,
we talked asset quality.

We talked earnings from a pers-
a perspective of the bottom line.

We talked earnings from the
perspective provision for loan loss.

Yes.

Farrar: Yeah.

Anyhow, on earnings, Todd, do you
have anything to say on, you and I are

always so focused on operating expenses.

We can't not talk about operating expenses
and what you think is going on there.

Miller: Aside from the operating
expenses, credit unions they're still

catching up on improving the yields
on their loan portfolio and cost

of funds are coming the other way.

One of the things that NCUA does
in their chart pack is they have a

10-year history of yield on loans,
yield on investments, cost of funds.

Loan spread at 4.4%

over cost of funds is the
highest it's been in 10 years.

So it's taken credit
unions a while to catch up.

They got behind during the inflation years
in 2022 and stuff, where loan spreads were

almost the narrowest they've ever been.

Now they've generated them back up
to the highest they've ever been.

Positive for the credit unions.

It looks like they're doing a better job
of pricing things and that's probably

a piece of why earnings went up.

Just an interesting observation
that, those yields are better

than they've ever been.

And, credit unions historically are
not necessarily good about watching

their marginal yields and marginal
cost of funds, but as an industry, they

seem to be doing better about it here.

Some of this is just catching
up from the inflation.

The rates went up really quick.

Treichel: All great points

So any anything we've missed here, guys?

Any stats we typically talk about that
we want to, or are we ready to give a

final wrap on- Well- … on the quarter?

Go

Miller: ahead,

Treichel: Todd

… Miller: Steve mentioned expenses.

They're always an
important piece of things.

The number or the ratio of
operating expenses to average

assets stayed roughly the same.

But when you dig into the expenses
employee compensation and benefits

went up 5% in the first quarter.

And some of that might be bonuses
paid from last year's results, but-

Treichel: Sure

… Miller: that was a, a, a pretty big
jump and well ahead of inflation.

Treichel: Interesting.

Farrar: Yeah.

And credit unions as the, compared to
the community banks continue to run

substantially har- higher expenses.

Not substantially higher.

The community banks came
at it to basically 2.6%,

and credit unions are 3.1,

so-

Treichel: 50 basis points … that,

Farrar: that's been there for a while.

Treichel: Yeah.

Yeah.

Yep

Very good.

All right, guys.

Good news is good news, right?

So the numbers didn't get got generally
a little bit better, I would say,

from the discussion we just had.

Next week NCUA's gonna be
revealing the CAMEL codes.

We recorded another podcast that I
haven't launched yet, which is about

the changes in the CAMEL letter.

But I'm guessing with the data
getting a little better that we

should see CAMEL ratings getting a
little bit better next week as well.

So I'll be curious.

Miller: Finally executive at NCUA who
just went through a 25% cut in staff,

I'm pretty happy that the credit
industry's performance is doing well,

'cause it buys them some time to adjust.

Treichel: To their new normal.

I agree.

Yep, and they've got a new board
member coming in who's gonna wanna

move, make it his place, so they're
gonna have some more new challenges.

Probably have a couple other retirements
coming that of people who don't

wanna break in new board members, but
we'll have to see how that plays out.

Very good, guys.

Steve, are you going back out on the
boat, or are you done for the day?

Farrar: We'll probably go
back out this evening, yes.

Yeah.

Try and catch something
worth keeping here.

That's the goal now.

Miller: And I told my wife I'd
come help her weed the garden

when this podcast was over.

Treichel: Todd, you gotta go tell her
that you need to go get an external camera

before you can weed the garden Maybe not.

Maybe not.

Miller: Best Buy is not
very far from my house.

Treichel: Over the weekend
you could get that.

So very good, guys.

All right, as always, it's fun.

We'll be chatting with you
I'm sure sometime next week

on some of our client calls.

Guys, thanks for participating, and
listeners and watchers, as always I wanna

thank you for listening or watching,
and hope you'll do the same again soon.

This is Mark Trakel signing
off with flying colors.