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Mike Macchiarola's Takeaways From The NCUA Annual Report

WFC 101 | NCUA Annual Report

Each March, the NCUA releases its Annual Report, summarizing the agency’s performance in meeting its strategic goals and objectives. As usual, this year’s report makes for an interesting read, particularly given the banking industry’s recent challenges around liquidity.

At the outset, the NCUA should be commended for putting together such a comprehensive, accessible, and intelligent presentation. Last year’s Annual Report won the prestigious Certificate of Excellence in Accounting Reporting award from the Association of Government Accountants. It would not be a surprise if this year’s presentation is a repeat winner. The document is laid out smartly and packed with information.

Overall, the NCUA’s focus in 2022 concerned five broad categories:

  • Responding to evolving economic and financial challenges;

  • Strengthening the credit union system’s capital levels;

  • Increasing cyber resiliency;

  • Supporting small credit unions and minority depository institutions; and

  • Fostering greater diversity, equity, inclusion and belonging.

Join this conversation today as Mike Macchiarola of Olden Lane who offers his analysis on the key takeaways from the NCUA Annual Report.


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Mike Macchiarola's Takeaways From The NCUA Annual Report

I'm excited to have Mike Macchiarola from Olden Lane. I know them well, but I pulled up their website in preparation for this show. I love the new summary on the homepage, which says, “A unique investment bank dedicated to the goals of our credit union partners.” His clients and I know him better as Mike Mac. Mike, I'm excited to have you here on the show.

Thanks. It's great to be with you.

We're both pretty active on LinkedIn. I saw you did a newsletter and a post on NCUA's annual report and it's called Eight Takeaways From NCUA's Annual Report. I thought it would be good to get you on here to talk through those eight. I know that you have some real thoughts on annual reports and what they mean.

It was cool for me having been at NCUA to see your take on the annual report because it gives me a little bit different perspective, but because of my 33 years at NCUA, I looked at it through one lens. I'm looking at it through a different lens and I like the lens you looked at it through here. Let's chat about the article and annual reports, and get started.

Thanks for having me. You bring up the annual report arena. It's interesting because, for me, it means two things. The first is it's a showpiece for the agency. You would appreciate this more than most. You can see how it gets passed around. There are plenty of folks who have input and have responsibility for a portion of this report. It hits all sectors, all divisions, lots of personnel, and lots of initiatives.

It's meant to be their summary piece of what they did in ‘22 and honestly more important for me, where they're going in ‘23. If you can read it with a little bit of an eye, you can see from the tea leaves where they think the world is going to be in ‘23. That's important when you're in the business that we're in, which is advising credit unions looking forward.

I have a couple of thoughts relative to my time at NCUA and I don't think a lot of people know this. Todd Harper, the chairman, started at NCUA as a political appointee and staff member in the Office of Public and Congressional Affairs. He worked for Paul Sarbanes and is a communication guru. He came to raise the bar of NCUA communications. As part of that, he raised the bar on the annual report under Debbie Matz, Rick Metsger, Mark McWatters, Rodney Hood, and all those board members he assisted.

He is now the chair, but he raised the bar. He got them applying and winning awards. It's a much better product these days. It hits the mark on the things that you mentioned. Some of my favorite people over at NCUA play a big role in this. When I saw what you had to say relative to your take on it, you nailed it and I thought it'd be kind of good to walk through the individual items. Anything before we jump into the eight items you wanted to say?

As a segue from that, another theme that's important for us here at Olden Lane where we've been beating the drum. If you look at the product and judge it, there are a couple of things that jump out. Most notably that the NCUA has been doing a fine job as a regulator. They seem to be ahead of the curve. They're forward-thinking, cooperative, and supportive and are accessible through this document.

The NCUA has been doing a fine job as a regulator. They seem to be ahead of the curve. They're forward-thinking, cooperative, and supportive.

If you read it the right way, certainly, there's going to be plenty that we that are deep in the weeds in the industry can quibble with. As an overall assertion, you have to say that the NCUA has been in front of a lot of things that are now going to be challenging. Here's where the rubber meets the road. What we have in front of us is certainly going to be a challenging period of time. This is when we see we're going to test the metal of the agency.

They've positioned well for this. They've got a lot of good guidance out, rules or scaled back certain rules, but we're entering likely a recession. Are we in a recession? Will we be in a recession? The statistics might already say that, but it's going to be an interesting challenge. They've been ahead of the curve.

The question will ultimately be how prepared are there staff as far as expertise because of turnover, different things because of The Great Resignation and the challenges agencies can have in that regard. It’s an excellent point. The first item that you identified is it says, “Interestingly, despite ample discussion of risks, the NCUA did not mention the potential for rising rates to create losses in the available-for-sale portfolios of credit unions.” What are your thoughts relative to that?

There's plenty of rate discussion and I don't want to short-shrift them, but it seems to me that where the rates caught up with everybody is not exactly where they were looking. Traditionally, we all were in the position to understand that rates were going to rise.

WFC 101 | NCUA Annual Report
NCUA Annual Report: Where the rates caught up with everybody is not exactly where they were looking. Traditionally, we all were in the position to understand that rates were going to rise.

Everybody was looking at the pace of that rate rise and to understand whether they could work two sides of their book. Could they rerate their loans fast enough to pick up the cost of deposits that were going to hit them on the other side of the balance sheet?

While we were looking at that and we were talking so much about loan pricing, which frankly, honestly, the industry missed in Q3 and Q4 of ‘22, which we may get into. What got us more than anything else was the investment book. What's interesting here is you got to walk down memory lane a little bit and unpackage exactly why it happened. It's a little lazy to go after the Signature Banks and the SVBs of the world and say, “They didn't understand the asset-liability matching.” I'm not sure it's that simple because what we have here is a policy that is unlike any policy we've ever seen.

If you go back and understand what happened, we begin all the way at the beginning of 2020. We get hit with COVID. We're told to go home for two weeks and hide under our desks. We're also hit with 150 basis points of cuts right out of the gate in March 2020. What happens is everybody stays home and we get a lot of government stimulus onto the balance sheet of the credit union.

We have anomalous inflows of stimulus. Deposits balloon. Every credit union that we were talking to at the time asked the same question, “How sticky are these deposits?” I want to be responsible with what I'm doing here because if they're going to leave, I don't want to get myself in trouble. We had that conversation over and over again in 2020 and into 2021.

You reached a point where folks said, “I have a certain pain threshold. I can't hold these deposits on my balance sheet and earn nothing.” You were earning nothing. Folks went out, extended their investment mix, and picked up duration. They didn't necessarily do it as cowboys. They didn't get into crazy assets. We're talking about treasuries and agencies. We have a limited permissible investment universe, to begin with.

If you look at the numbers in 2020, investments into the 10-year-plus bucket doubled across the industry. From Q4 of 2020 to Q1 of 2022, those 5 quarters, the 5 to 10-year bucket doubled. If we have an extension of duration in the investment books of these credit unions, then what happens? We get the fastest rate hikes in history. I went back and looked at this. I don't think I've studied this hard since I was in law school. I looked at the rate hikes.

March 2022, 25 basis points. May, 50 basis points. June, 75. July, 75. September, 75. November, 75. December, 50. Feb ’23, 25. March, ‘23, 25. Altogether, 9 hikes in 1 year for 475 basis points. I will argue that it is not the hike that we all knew was coming. It is the pace and the aggressive nature of that hike. It's way above my pay grade to say whether it's appropriate or not, but it is very easy to say that folks who got caught whip sawed in that action because of two policy swings, the likes of which we've never seen in our history weren't doing their job. I wish they were all hedged and we didn't take losses like we did but this was a massive move in two directions, one after the other.

You have the pandemic, which was a black swan event. You have the unprecedented level of government stimulus, which was a black swan responding to the Black swan, which triggered the next event of an unprecedented rate hike. To be hypercritical of those, they sat on that money for the longest time as long as they could, and then eventually they had to do something. The world that they'd been in for many years would've shown that the range of things that they could do fell into reasonableness and then you get these rates going up.

The industry missed raising rates on loans. The loans took off on one side. They went long on the investments. You see these two scenarios where there was too much liquidity and you immediately went to not enough liquidity, which I'd like to jump. The number eight in your writeup was liquidity, but it's closely tied to the available for sale, the lack of share growth topic, and things like that.

Let's jump to that last one. Take them out of order. I'm trying to throw you off your game there. You pass the test. We'll go to number eight. I love the title of this. It's Liquidity. What I say here a lot is, “Liquidity doesn't matter until it matters, then it's the only thing that matters.” Let's chat about liquidity.

Unfortunately, there's not much to say here. You got caught in a very difficult circumstance and one of the things we keep an eye on here was how much of the liquidity, the deposits that the industry was relying on were the cheapest deposits and on demand. They were paying nothing for those. What's happening now is that portion of the deposit base had grown to its largest. It was the largest percentage ever of the overall deposit mix.

Not only are deposits hard to come by, but the internal mix at a credit union is also becoming more expensive as well as those on-demand now have a reason to shop. If you were telling me I can earn 0, 25, or 50, I'm going to be a certain level of stickiness. If you tell me I can earn 5%, you better have a pretty compelling conviction for me to stay.

One thing that the big bank failures alerted everybody to is maybe you were sitting on the sideline not paying attention to what you could get, and you see that people start moving. You have events and news stories that get you engaged and you go, “I didn't realize I could get those higher rates.” One of the things I do is look at my Schwab account and see what a 30-day CD is going for.

You can buy big chunks or $1,000, but you can get an over 5% on a 30-day CD. The Fed fund rates are pretty near that as well. It’s the interesting times on the liquidity piece. Looking at what you have here as well as the asset quality. One of the things Todd Miller, who is part of my team, talks about is, “The liquidity issues will resolve as long as your asset quality holds.”

Here's where it's interesting. Here's where you don't want to be a policymaker because you've got a difficult choice. What's interesting is they can step off of the pedal here and say, “We'll deal with a little bit of inflation, but we'll give the banks or the credit unions a respite so that they can breathe a little easier. We don't push the pedal on the deposit side.”

The problem with that is then you put more inflation on the back of the consumer. When you do that, it may be delayed, but it's likely going to express itself in higher delinquencies on the other big bucket of the assets of the credit union, which are its loans. What worries me about that is, I honestly believe that Q3 and Q4 of ‘22 were a whole batch of mispriced loans that came to credit unions.

Frankly, they were at the credit union. When the credit union thought they were taking shares, they were taking shares from the bank, but it's because the bank had stepped away from the market. Community banks were a little smarter and quicker to reprice exit. There's a lot of sorting that has to go on here. The credit box has to be redefined, and that's going to bring a slowdown.

At the same time, people are going to pull their sales in here and look for the price that they're being paid for their deposits. The cost of funds is going higher. As you said with liquidity, what we tell all the clients all the time is, “Have as many available sources. Test those sources. Use those sources. Take it when you can get it. Now is not the time to be real stingy on price.”

On the inflation side, before our show, I was on the phone with one of my clients getting an update on the West Coast. They've been getting hit hard on the deposit side because of inflation. They've pinpointed it down to the fact that people are spending more on a box of cereal. Instead of growing, that takes off again. That's going to have big ramifications.

On the credit side, there's another podcast I started listening to. It's a guy who's anonymous in a car dealership. He reports on Twitter and on his podcasts the different banks that are getting out of floor planning auto loans and the layoffs that are happening in different banks that are cutting all their junior lenders on their car loans because there's a storm brewing there and $50,000 Toyota Celica today are going to be worth $50,000 in a few months. If you start having those challenges, what might that do for your liquidity and your overall operation? I wouldn't want to be a policymaker that every lever pulled has consequences and unattended consequences.

The credit union mix is going to be autos and mortgages. You've got a batch of mortgages that you're holding that are struck with a three handle and have to run the term, then you've got a bunch of autos that we can argue about where they were struck and that they're mispriced in that whole capital intensive and credit intensive industry.

It is going to come under some significant pressure if it hasn't already. I watched the same thing about the dealerships that are closing and the banks that are exiting the market. To price that floor plan at the dealer is a capital-intensive effort. As people exit and as assets concentrate in larger banks, you're going to have issues. They're going to be geographic. They're going to be in places and times you might not see them coming.

I always have to find a silver lining. Here's the good news. The good news is that nothing brings clarity of thought is quite like a little existential risk. You'll think very clearly when your back is up against the wall. You are no longer in the benign interest rate and market environment that some of us have enjoyed for the last few years. It is not going to be smooth sailing. We are going to have choppy seas, but this is where the bold and the well-oiled machine are going to be rewarded.

Here’s the good news: nothing brings clarity of thought is like a little existential risk. You'll think very clearly when your back is up against the wall.

This is where there's going to be a great sorting. Those credit unions that have been doing their job consistently, understanding their risks, delivering for their members growing, but rationally, understanding the new buckets of loans into which they've been growing in the last several years are going to be rewarded. Those that have been a little bit lighter on risk, quicker to move to growth for growth's sake without a true strategy, it’s going to be exposed. As Buffett said, “Only when the tide goes out, do we see who's swimming naked.”

You reminded me of one of my other favorite quotes, which is from Napoleon Bonaparte. Napoleon allegedly said, “Hearing improves when the guillotine is near.” Scared straight. It’s fascinating. I'm going to jump around on one other topic: consolidations. For those that planned well, things will be bountiful. Those that didn't measure their risks much are going to have some challenges. You've got an item in here about consolidation. I'm not sure which item it is. That's something that we're going to see potentially pick up because of where we're at economically. Any thoughts on the consolidation likely to continue in number seven?

Consolidation is going to be a little different than what folks are used to. Not to do a commercial, but here is where good bankers or good advisors are going to be worth their weight in gold. I do not believe the next round of mergers is going to be as simple as the last round. I don't think it's going to be over coffee in the neighborhood and in the geography because one CEO was retiring and the other CEO knew him or her and said, “Let's get together and we'll take your business out.” Those transactional collegial mergers may still be there, but that's not where I'm interested.

Where I'm interested is I think the geographic bounds are going to break down. They're not as important as they once were you've seen some of this. You saw there was an Illinois credit union and a Maine credit union considering a merger. That deal did not work out. They broke it off, but that told you that geography doesn't matter as much. That makes sense in the mobile environment when customers are all about pricing and we've got an understanding of how to manage risks and work from home.

WFC 101 | NCUA Annual Report
NCUA Annual Report: The geographic boundaries are going to break down. They're not as important as they once were you've seen some of this.

Credit unions in Michigan go for a bank in Florida. Those are the types of things you're going to see. People are going to do things more strategically to get their way into geographies that they desire, get themselves balance sheets that they like from a liquidity standpoint, business lines, or talent that they admire from afar. The merger box is going to open up, and it's going to be more about strategic mergers. I don't think credit unions to date have been as strategic as they could be.

My version of a merger goes all the way back when they taught it either law school or business school, and it was Goldman Sachs bankers who come in and they show the Ford Motor Company on a model and a PowerPoint why they should buy Nissan. It is driven by a bank and a bank's idea of why it makes sense for a credit union in this case. The credit union understands it and realizes that its choices are bigger than it might have realized. That's what's going to happen in the space.

Not only credit union to credit union, bank into the credit union, those types of acquisitions where there might be a bank. You touched on it. What's their asset mix? I'm 95% or 110% loaned out, and there's a bank that's available that's 50% loaned out. As a credit union, I could pay with cash as opposed to the guy down the street that the other banker has to pay with stock and maybe the stock is deflated and it's not a good time. There could be some acquisitions coming up in that vein as well.

The other thing that dawned on me was tied to SVB, Signature Bank, and other things, one of the articles I read tied to that talked about how there are few banks in many countries like Canada, but we still have almost 5,000 banks here and 5,000 credit unions.

We used to have many more. Part of that is tied to the fact that you couldn't cross state lines if you were a state charter. It was Illinois. Banks would be in Illinois. Illinois state-chartered credit unions would be Illinois. Not only do you see mergers of Federal credit unions across the country, but you'll see neighboring states where mergers many years ago wouldn't have been approved. It might need the state regulator in both states’ approval. It's now been an option for many years. That geography is expanding along with field memberships in both states and Federals, whether it's underserved rules or broad state rules. There are plenty of opportunities out there.

The other thing to piggyback on that, what you've highlighted is the holistic approach. You have to understand the field of membership, low-income, and underserved tracks. You have to be able to map, take all of that, and project it on top of a financial model. The bar for figuring these things out and optimizing them is higher than it's ever been. You've got to put all those pieces into the recipe to get it. Some of this honestly has dawned on us through some of the processes that have happened, for example, the Emergency Capital Investment Program from Treasury.

It forced people to marry up the concept of sub-secondary capital or whatever we call it these days with the concept of delivering to MDIs or CDFIs. Because treasury had a certain requirement, went and applied for that money, but then the NCUA had another set of requirements around sub-debt, you had to have a full appreciation for not fitting a single box but fitting 2 boxes and then having the 2 boxes talk to each other. Those methods of mapping and projecting for the social benefit or for low-income or minority status are also married with projecting share and deposit growth along with loan growth which is organic.

If I remember right, every one of your credit unions who applied was able to get either what they asked for or get a part of what they asked for. Do I have that right?

You put the jinx on it because what you forget is that there's round two. In round one, all of our folks got what they asked for a very significant amount. Everybody got more than the average award. There was an incentive to ask for the moon and some did. God bless them. If you think about it, honestly, when that started, some folks turned it down and rates were 500 basis points ago.

I'm sure there are a lot of people who turned it down that would love to have it now, but there was a round two, much smaller happened at the end of 2022 when a lot of folks were celebrating the holidays. Some of us were hard at work for clients, but we've got a few pending and we expect to hear that soon. The awards for that should come pretty shortly.

That part had slipped my mind. I'm glad you reminded me that's out there. Let me know when you hear about those. Jumping back on number two, “Although short on measurables, the agency remains committed to its virtual exam project.” Any thoughts on that?

This goes all the way back to 2017 when the board first approved the notion that they could do exams at a distance. The NCUA didn't exactly have their arms around how this would happen. In the interim, they probably had to figure much of it out on the fly because whether you like it or not, you were doing exams from a distance because of COVID. It leaves me with a question, which is, “How far down the road are we? Shouldn't we have a sense of exactly what's possible here because we've been tinkering with this very practically since COVID?”

I do like the effort. I do think it makes sense. You hear plenty from credit unions that the examiners are in here. They're in here too often. They take up too much of my resources. If we can find an arms-length agreement where you share enough information and with enough frequency that the examiner doesn't have to bother you as often, as long as it works for them and it makes sense in terms of the supervision that they need to do, this could be a win-win.

In 2017, I was the NCUA Executive Director. It was board member Mark McWatters, who was the chair at the time, who got us going in this direction. There were some debates within the office. There were the trade groups that were hearing what you said about your clients is “We'd like to have NCUA not here as much.”

The virtual exam idea was born. I can tell you at the agency, when people were joking about it, they pictured Tom Cruise and the movie Minority Report with the goggles that you would put on, which would predict the future and who was going to do wrong. The people that weren't supportive of the virtual exam would look in that direction. Lo and behold, NCUA's union and its staff didn't want it. Some people wanted to work offsite. Some people didn't want to work offsite, and there was this whole union issue, and then COVID hit and no one was going onsite. You nailed it in that regard.

It's like, “Now we got to see what we can do and we're going to do it all.” We got to do it all, but they learned a lot in that process. They'll never be fully virtual. I say this occasionally on here, “When you're driving down the road at 75 and you're supposed to be going 60 and you see the police car and then your spouse next to you looks over and said, ‘There's nobody in it.’ It's the empty police car.”

The fact that they show up keeps people honest and there are stats that prove it. There'll be some level of onsite that always happens. One of the blessings if there are any, if you can say anything of the pandemic, was a blessing, is it made NCUA and everybody realize what you can do offsite and onsite. In the end, that's a better thing.

Two things occur to me. I think of the version of the police car, and I'm going to show off my philosophical law thing here. It's Jeremy Bentham, the panopticon. They put the guy who's looking at the prison in the middle of the prison so that he can see out on all sides, but the prisoners couldn't see in. They felt like they were always being watched and their behavior would increase accordingly. The other thing that occurs to me is this virtual exam thing is going to go away anyway because at the rate we're going by about 2025, we can type in, “How's credit union A, B, C doing?” into ChatGPT, and we'll be all set.

2022 was a busy year for regulatory updates. You talked a little bit about how NCUA was ahead of the curve. During the busy year, they had regulatory updates that you want to highlight.

The succession planning rule makes sense. Any good governance system would have that. It makes sense for the board to understand the succession within a credit union and good for the agency for pushing that. Earnings retention waivers for COVID show their flexibility and willingness to work with the industry when some of these folks were impaired. With the cyber incident notification, it's reasonable for folks to have to be able to self-report within 72 hours. Although, I'll note there's a little bit of friction to the CFPB. They had their own leak and they haven't self-reported the extent of it and where it was.

The succession planning rule makes sense. Any good governance system would have that. It makes sense for the board to understand the succession within a credit union.

Member expulsion rule is good as long as it's not too onerous. We have to figure out a way to kick a member out. It should be fair, but it shouldn't be crazy onerous on a credit union. I get the financial innovation release. Forward-looking, it makes sense. It shows flexibility. It’s principles-based. They're letting you make your own bed as long as you don't go out of some of the guardrails. For 2022, although it's in my mind a 2021 effort, the big one is the sub-debt rule.

You're seeing a lot more interest. We're very involved in that world. We can quibble about individual pieces of it and I do from time to time when I run into the people from the agency, but overall, they understood that is an important piece of the capital structure or can be for certain folks in certain situations. I do think it's going to take a much more pronounced role. Right now, we're in phase one, which is about liquidity, triage, and finding where the new equilibrium is.

After that, when folks look in the mirror, they're going to realize, “I want to fortify my capital structure.” One of the ways to do it as long as you're responsible for it is certainly going to be sub-debt. Those rules are easy to follow. You can understand them. There are places where I would argue with the margins, but it makes sense. Job well done. I know it was a big lift.

On succession planning, I'm not a fan of a rule. Guidance is where they should go. That might be where they end up. I did a blog where I said, “Ten reasons why they should not make it a rule.” Guidance is more nimble. It is one of the reasons. It can be more easily changed. There is an issue of succession who's going to take over as CEO at credit unions? At least elevating the topic is important. On the whole sub-debt issue, that's a big part of what Olden Lane has been involved with recently. Not only the ECIP money and several of the biggest deals, but Olden Lane also played a big role.

I remember we started by placing some of this debt very early at the end of 2017. Those transactions were $10 million and $12 million apiece, like $20 million or $22 million of paper, which at the time was significant because the overall market at the end of 2017 was about $120 million or $130 million outstanding. Since that time, the market is now north of $3 billion.

Roughly $2 billion of that is ECIP related. It's government money that came into about 90 credit unions through the treasuries program. The balance of it, or $1 billion or has been done in the private market. Olden Lane has been at the tip of that effort. We've been fortunate to work with some of the largest, some of the most complex, and some of the cutting-edge.

Not to take up too much time with a commercial but here are some of the things we did. We raised $200 million for Vystar at the beginning of 2022. We raised $100 million in February 2023 for GreenState. That's the first credit union sub-debt transaction wrapped in an ESG bond. It was in a social bond wrapper. It was rated, also rated by S&P for its ESG bonafide, which allowed us to have a broader distribution.

That's the first deal I'm aware of any size that was more than 50% taken up by non-depository institutions. Some of that is attributable to the wrapper. We did in March 2023 right after Signature Bank blew up. I'm not sure how it got done, but it happened to be a great credit union. It is formally Alaska, USA that's now Global Credit Union placed $110 million in March 2023 into a wild storm right after SVB and Signature were failing.

Those three big items are at 13% or 14% of the entire pool out there and a bigger portion if you discount ECIP.

At the same time, we're as proud of it. When we raised our first transaction, it was $150,000. It's almost the same amount of work. It can be harder in many cases for the smaller folks. You have to do a little bit more work even, but it's the same package, model, and understanding of what they're trying to do with the money and how they cycle it into their business and use it. Most instances are for growth.

Sometimes for triage to repair a hiccup, and then sometimes, honestly for acquisition capital because if you buy a bank in particular or bank branches, it can be dilutive. Oftentimes, this capital can plug that hole or make that deal make a lot more sense.

One of your partners there at Olden Lane, Daniel Prezioso said a lot of these things at board member Rodney Hoods Capital Market Symposium. I was fortunate enough to attend that. That was a pretty cool event. It’s an exciting time on that front. You are doing great on that.

Supervisory compliance is likely to increase. A little thought on that. Anything you'd like to expand on there?

This is macro-driven. We're going to see a little bit of transition here from the agency's going to be a little less focused on rulemaking or the go forward. They're going to be a little more hyper-focused on the health of the underlying credit unions they supervise or examine. In my mind, that is largely driven by the environment. You have to play their hand or deal. There are going to be some folks who are going to have some situations.

It's only when you've got volatility that you start to drill into the books. Some of the things that have not been done well get exposed. You'll see enforcement. The leash of the agency will be a little shorter. They'll shoot first and ask questions later in a certain sense to try and get in front of things before they cascade or escalate. It makes sense. That's their job.

WFC 101 | NCUA Annual Report
NCUA Annual Report: The leash of the agency will be a little shorter. They'll shoot first and ask questions later in a certain sense to try and get in front of things before they cascade or escalate.

It is not in any of the manuals, but it's a wake-up call, a letter of understanding. In most instances when NCUA is talking about enforcement actions, it means a letter of understanding and agreement, which is where they sit down with the board and says, “You agree these are problems. You agree to fix them. We're going to make you sign it. We're going to sign it.”

It gets ratcheted up from there. They do cease and desist orders and conservatorships. Those are relatively rare in most instances. Letters of understanding are going to go up. One of the things that I watch closely at NCUA is every quarter, and it'll be coming up again in May 2023, they do the insurance fund report. That's the only glimpse publicly where they see where CAMELS codes are going.

Every quarter I ask, “Where did CAMELS codes go?” For the last few quarters, they've doubled in the large institutions. I look at the over $500 million in the over $1 billion basket. I'm seeing that with some of my clients. I'm expecting in May 2023, we're going to see numbers that are even higher on CAMELS code 3s and 4s in larger situations.

That might trigger an enforcement action. It might not trigger an enforcement action. It certainly triggers document of resolutions (DORS) and NCUA sticking around and showing up a little bit more. I have been seeing that quite frequently in the clients in 2022. It's going to be interesting where that goes, but I think you're spot on. Enforcement actions will be increasing.

You sit there and watch CAMELS ratings. I watch the 5300. It's gotten to the point where I watch them aggressively that we go to the 5300 on the researcher credit union page before it lands in Callahan because we can't wait. We're looking to see what happened to this hold-to-maturity bucket and how pronounced those losses are and what happened to this AFS bucket and how pronounced those losses are.

I want to see if AFS is starting to move from HTM, which would not be a good thing. I also want to understand the magnitude of these losses. They should come in because the mark on March 31st should be a good mark relative to 2022’s year-end. It's since gone out. Rates have risen again, but March 31 should, and hopefully, be a relief. I'd love to see credit unions because of the inverted yield curve that are taking advantage of trying to move in on duration if they can with their investments.

Can you sell out of a 7-year piece into a 3-year piece, pick up yield and take your duration in? I want to see if some of that's starting to happen and hopefully people are doing that. I want to see if there's movement there. As you sit here and watch CAMELS ratings, I'm sitting here and watching the AFS bucket and delinquencies. I looked on Callahan, which is very funny, 61 basis points were the Q4 delinquencies across the industry.

That's three quarters in a row of expansion. With about 1600 folks reporting in Callahan, which is roughly a third, it's hanging at 37 basis points. I asked Eli if it was going to go higher or lower, and he looked at me and laughed. It tells you that the folks who are having trouble are going to be at the back end of this quarter. There's no way it's below 61. It's going to come in above 61 for the quarter. We're going to see the laggards come in.

It's Eli from Princeton whom I met down in New York City. I like Callahan. I bit the bullet and subscribed to Callahan started by former NCUA Board Chairman, Ed Callahan back in the day. It's easier to massage that data sometimes than it is to get the free data from NCUA, but sometimes you can get that report off of NCUAs quickly like you're doing it. I did some analysis along the lines of “Who does have the big hold, the maturity losses?” If you look at the right accounts which losses aren't showing up in the GAAP Equity, that was an interesting exercise.

The other thing that's unfortunate is it's hard to track it across time because of what happened with the reporting and the changes in the 5300. Now we're geeking it up. It's like a universe of probably six people to play in those weeds.

You reminded me of me sitting in my office as the NCUA Executive Director. The E&I director came up and said, “We want to change these 57 fields in the 5300 report.” I got their briefing. The next day I had a briefing at the office of the chief economist who said, “They're changing all the fields. I can't compare anything anymore. You got to stop this.” They both made perfect sense, but we ended up making a lot of changes and it does create some backward-looking challenges, but exciting times. We are on our last item from your writeup, “The low-income designated credit union should continue to grow.” What are your thoughts relative to that?

Low income is important. Any credit union that doesn't have a sense of where they stand relative to the low-income criteria has to do the work and understand it. It's not hard. It's just taking the areas, and file members and running it across a geocode. You can do it across a commercial geocode or you can reach out to any of the folks who do it there are plenty of folks who do it in the space and do it well.

Any credit union that doesn't have a sense of where they stand relative to the low-income criteria has to do the work and understand it.

The issue here is whose status gets you certain regulatory relief. You can apply for certain grants and take your non-member deposits from any source instead of from public agencies and other credit unions. You can apply for subordinated debt and have it count towards your net worth, which is important. You get a lift on the limitation on member business loans, which can be important. All of those things, if you can get them, are worthwhile or can be worthwhile at any moment in time.

When we tracked the LID number, I believe when I started in this business in 2017 and 2018, digging into credit unions, it was about 35%. Now it is north of 50%. By the last numbers, it's about 2,600 and 2,700 of the 4,800 and 63 credit unions. Roughly 54% are low-income and growing. Some of it is growing because folks are getting wise and are applying. Some of it is growing honestly through consolidation because non like who's emerging into like who.

If you didn't say that, that's what I was going to say is those tools that you get because you increase your likelihood of long-term survival as good as it would be.

I'll give a plug to the agency. They added active-duty military to the low-income bucket. That was done through the chief economist's office. That enables certain credit unions to pick up certain memberships and get over the level, which is great because to the extent these credit unions can have a wider toolbox, especially in the macro environment that we're coming into. Good for them. They should do it. They should avail themselves of everything they can get.

A lot of good lobbying happened in the industry to get that change as recommended by the office of the chief economist. That was a good move adding and a no-brainer. That was an example of people out walking the walk and understanding credit unions communicating to NAFCU and CUNA, and beating that drum until n NCUA figured out a way to make it work. It's a no-brainer. It does help qualify, but they're certainly part of the un underserved. This has been fun. If the reader would like to reach out and chat with you or someone at Olden Lane, what's the best way for them to reach you?

We have a website. It's There's a contact form down the bottom that goes to an address called That will go to my inbox and four other folks. If you reach out through that, that's the best way. We'll field questions where, “Don't worry the taxi cab meter doesn't start running,” or anything like that. We try to do our part for the industry and try to be thought leaders and as helpful as we can across everybody from small to large. If we can be helpful in any way, please, anybody out there, don't hesitate.

I can reiterate that. We chat a lot. We have a lot of similar clients. What Mike said is true. If a lot of ways they can assist, make sure you reach out if trigger something discussed here triggered the desire to do so. I highly encourage you to do that. Let's put a wrap on this one. I appreciate your time.

It's been great and a pleasure as always to speak with you. Thank you.

Readers, thank you for reading this episode. Have a great day.

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