CAMEL Codes Get Worse - AGAIN

One of which are the camel codes and the continued deterioration of camel codes, particularly code threes, which if you listen to the special podcast I did, which was the Audio of the NCWA board meeting where there were only two board members because chairman Harper is out for back surgery. Todd, if you're listening, I hope that all that recovery is going well. Back pain is no fun for anybody. And again, hope Godspeed and hope you'll get back on your feet soon, but I digress.

The board meeting basically was just the share insurance fund briefing and they talked about camel codes, which again, deteriorated. Now there wasn't as much banter or language relative to what that might mean for the insurance fund, et cetera, et cetera, because Chairman Todd Harper is the one who usually drives those points home. And since he wasn't there, it was led by Vice Chair Kyle Hauptman and board member at large, Tanya Otska, and they agreed.

Didn't go into the level of detail that Todd typically does, but the stats are the stats and the deterioration is as follows. It's in large credit unions, typically, basically, if you look at their charts, they show that the total number of credit unions that are in Code 3 and Code 4. In totality basically hasn't changed much, but it's the big credit unions that are getting downgraded and the code threes over 500 million went up by 15 billion this. Last quarter.

And I want to say that's about the ninth or 10th quarter in a row that the number has gotten worse. Another way that they splice and dice it. And again, the only place that they make public data available is in the aggregate and it is quarterly at these quarterly budget briefings.

Now, last time they met, they talked about how camel code 3 of insured shares had tripled In 2023, that number went up again and is now at 8. 61 percent of total shares are in code three credit unions and from the low point that they're showing from your end data, the low point was 2. 33 percent in December of 2021, which is an increase of about what? I want to say 370%. The numbers keep going the wrong way.

I believe they will continue to go the other direction based on my conversations I'm having with credit unions. NCOA is very aggressive. Now, earlier I said that the total number of credit unions is about the same. What I'm seeing is that small credit unions have been treated a little rougher on camel and defining small as basically anything under 500 million. There are more of those but that number has been constant through all this.

What we're really seeing is that the larger credit unions NCOA is prescribing to the don't let any good crisis go to waste and they are finding some issues. Reacting over overreacting or one of those two things to what they're seeing in credit unions looking back and then looking forward on some of the books of business that they're running into.

But they are being very aggressive on camel codes, very aggressive on document resolutions, very aggressive on examiner findings, and some letter of understandings that we've been seeing in our conversations that are broader than what they would normally be. I'll just put it at that. Usually and we're going to have some discussions on this. Usually letters of understandings are more of a rifle approach than a shotgun approach.

But I think the massive turnover and staff at NCUA has led them to maybe lose their way a little bit on, on how. Credit unions pivot from documented resolutions to letter of understandings and agreement. But again, there'll be more coming out on that in detail down the road. But why do I think that this number will continue to get worse? So I went back and historically was looking at wanted to go back to the great recession, which again as a reminder was in 2008 and 2009.

In 2008 and 2009, the shares that were in code threes were at 11, just over 11%, and close to 14%. So 2008, 11%, 2009, close to 14%. The recession was over in 2010, but it peaked there at 18.26%. In 2011 the first quarter, it went down from the 18 to six to the, to 18, even in January to just under 17 in February and to 17 and a half in March. So that's still double of where it's at right now. So that's the context of why I think it will continue to get worse.

There are delinquency trends that show that I think losses will or lesser income will be out there during this period. And I think because of that, we're going to see throughout the remainder of this year and probably into 2025 and being aggressive on camel codes. And when they're aggressive on camel codes, that leads to longer reports that leads them to coming to see you twice a year. If you're a code 3 instead. Instead of once a year or less, if you're a code one or a code two.

And again, they are reacting in some instances they are overreacting. That's just my opinion, but it's going to get worse before it gets better. And my prediction is this will continue it until let's just say another year, probably the rest of this year, maybe half of next year. And then of course, there's the election that comes up at the end of the year.

And what that may mean for NCUA's board, which is probably nothing because of other than a change of chairman, if the president's changed, because the terms are pretty long right now for the two Democratic board members.

So if Biden's reelected and its status quo, if Trump or somebody else is elected the the Republic wouldn't become a chair and they can control the agenda, but they still wouldn't have the votes, which was the position Todd Harper chairman, Todd Harper found himself in at the beginning of his chairmanship.

So a couple other things vice chairman vice chairman Helpman spoke at the board meeting about share overdrafts and what he views as NCOAs overreach on the Data gathering and the fact that is going to negatively impact mergers, negatively impact small credit unions, negatively impact the underserved. Crystal clear that the board is divided on political political sides here with the Republicans thinking it's overreach and the Democrats full steam ahead on any fee is a junk fee, in my opinion.

Now, as somebody pointed out to me. Chairman Todd Harper has not specifically used the words junk fee, although he's been very aggressive. And I've documented that in my past podcasts on measuring this data, pointing it out, following the lead of the Biden administration, following the lead of the CFPB and attacking fees to the point of calling a concentration of fee income, a concentration risk.

So expect that Pressure to continue and it'll be interesting to see what happens in the budget later this year in that regard. Now, in regards to board meetings, so Chairman Todd Harper missed the last board meeting because of his back surgery and they've canceled June. So they canceled March. They canceled June. There's no meeting in August. They're going to be building up towards a budget. Todd's chairman Harper's first budget having a second democratic vote.

So hopefully if all, if he heals up they'll have board meetings. In September, October, November, December, they'll have a budget briefing. They'll have a budget. They'll have an annual plan, perhaps a change to their strategic plan. Now that they've got the votes to Change that in the way that they would like. Although I predicted once before that I think NCUA will be going to a quarterly board meeting. And that's how FDIC does it.

And the fact that they've canceled it twice this year, I think they're getting the public used to it. And they canceled March. They canceled June. That's the third and sixth month. If you'd roll that forward, that would be they wouldn't have one in September and December. I don't think that will work with that rhythm because of the challenges of getting the budget done at the end of the year. So I'm not exactly sure what they're year.

Their timelines might be for if they were to go to a quarterly board meeting, but here's what I'll predict. If they do that, they'll have one in April, they'll have one in July where they can talk about where they're at budget wise at mid year, they'll have one in October where they'll have their budget briefing, and then they'll have one in December. So my prediction, 2025, NCUA goes to a quarterly board meeting, one in April, one in July, one in October, and one in December.

All right that's all I've got for you today. I appreciate you listening. We've got a lot of exciting topics coming up that my team and I will be recording starting later this week on document resolutions, letter of understanding, cease and desist. Corporate governance, you name it. The hot topics that we're seeing in our conversations or hearing in our conversations with credit unions, we're going to be hitting them here over the remainder of 2024. As always, I want to thank you for listening.

I hope you'll listen again soon. Mark Treichel signing off with flying colors.