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Treichel: Hey everyone.

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

I'm excited to have Mike Macchiarola
from Olden Lane here today.

Mike, how you doing?

Mike Mac: Doing well, Mark.

Good to be with you.

Treichel: Yeah, glad, last year
we, we had our first annual

podcast on NCUA's annual report.

There's a lot of annuals in
there, but this is number two.

You and I saw on LinkedIn that that
you had done an article on this and

I thought, Hey, that'd be great to do
our follow up on NCUA's annual report.

But before we get into that, why
don't you describe what it is you

and Olden Lane do for credit unions?

Perfect.

Mike Mac: And thanks
for having me on Mark.

Olden Lane is very technically
a registered investment

advisor and a broker dealer.

We're also a credit union
service organization.

It's made up of a group now, 10 or
11 deep of financial professionals.

We got together about 5 years ago or
so, a little longer than that now.

And we realized that the credit union
industry was being underserved in certain

pockets most notably in some of the
delivery of capital markets expertise.

So we set out to do a number of things
through our broker dealer and our RIA.

We've Been most notable, I would
guess in our contribution to the

subordinated debt market of the
transactions that have happened.

Olden Lane has had a pronounced role.

We've been involved in that
business all the way back to its

early days as secondary capital.

When we got in that business, it was
about a 200Million dollar market.

Now it's touching 4Billion.

Olden Lane has played a significant
role in helping lots of credit unions

across the country, large and small
and use sub debt for growth, for

acquisition related growth and to
repair a hiccup on the balance sheet.

If that happens from time to time
we continue to be in that business.

More recently, we've been playing
a lot in the M and a business.

We can do anything in that area from.

Identify targets screen for
targets in particular geographies

or across asset classes.

And then we can advise, we can work
on the negotiation between parties.

We can do M and A between banks
and credit unions and between

credit unions and credit unions.

We can do the valuation suite.

We can do the negotiations
and we can help in any way on

that whole suite of services.

That's important, and that's somewhat
new to us but we think as we'll get

into, I'm sure, in a little bit, we think
that's going to be ripe for a lot of

activity in the coming months and years.

Treichel: Yeah, I think you're right.

I think that's definitely going
to be A lot of that going on here

based on, what I'm seeing and
what's happening in the economy etc.

With that, let's Let's pivot
to NCUA's 2023 annual report.

I know you have several thoughts
on some of the themes that you saw

there, but I'm just going to, I'm just
going to kick it over to you, Mike.

And let's say, so what, in summary,
what do you have to say about it?

And, or, what was your first takeaway?

Mike Mac: Okay, first of all I
always look at it as a picture.

I'm a, I'm not a good one,
but a struggling artist.

So from its artistry and its
presentation and the way it's laid out.

We give it an A or an a plus.

And that's not surprising.

That has been the theme
consistently from the agency.

They've won a few awards in recent
years for the way it lays it out.

That's good because honestly, it should
be accessible for the industry and the

professionals that are in the industry.

It should be a document that
the NCA is proud of because at

the end of the day, it's really
a summary of what they've done.

But we're most interested in it here.

Because we can glean from it and
read between the lines and see

what lens the agency seems to
be looking at things through.

And that's where, of course, it's most
interesting to us because we try to pivot

in the proper directions and respond to
where we think the agency is going and to

help advise our clients as to what we see
as potential things coming down the line.

All right.

I would say in that regard,
I think 1st and foremost.

The biggest observation I
would have is that the agency.

Is very concerned about the
macroeconomic environment.

That is the biggest thing that I
would take away from the presentation.

Treichel: Yeah, and that's consistent.

It seems to be a general theme.

When NC way talks about.

The state of the insurance fund,
which happens quarterly, and I talk

about that a little bit here and it's
another document that I like to refer

to when they do their power point on
the condition of the insurance fund.

They also include really the only
public snapshot of where camel codes

are and it's when they do that.

I think at the last 1, they did,
they said that camel code 3 dollars

insured share said tripled in 2023.

And then each of the board member talks
about and particularly Chairman Harper

will speak to the fact that he's worried
about, is it going to be a soft landing?

Is it not going to be a soft landing?

Is it going to be a recession?

You're hearing about commercial
loans ballooning and empty office

space and people working from home
and how's that going to impact?

Real estate.

How's that going to impact credit unions?

And they're they're definitely sending
signals in many different ways.

And they also talk about it quite a bit
here in, in this in this annual report.

Mike Mac: We watched that, that camel's
code report, the NCUSIF financial

statistics report pretty religiously.

Now, I think I stole that habit from you.

So thank you for that.

I would point out last quarter,
as you said, We've now got 19.

5 percent of credit unions by count are
now in a three, four or five camel code.

That's significant.

As you said, the trend is higher.

Almost 8 percent of the industry's
assets now reside in a three,

four or five coded institution.

And those with more than 500
million in assets we've seen eight

institutions and more than 20 billion
in assets move into that camel

three over the last quarter alone.

So those are things that we
watch and you're exactly right.

The other thing I would say is that
the trends are not your friend.

We point out that there are
trends in everything from cost of

funds to delinquencies and charge
offs to ROA, to OPEX that are

trending against getting better.

So if you look at cost of funds,
for example, this is pronounced,

and this has been the stress.

We can call it whatever we want.

Interest rate risk cost of funds stress.

Here we see an industry that averaged 1.

58 percent cost of funds
in the latest quarter.

That's not by itself so troubling.

What's more troubling is that
is a full 1 percentage point

higher than Q4 a year ago.

So two thirds of your cost of
funds is new in the latest year

at the average credit union.

That is extraordinary and it's not
surprising because we saw this interest

rate hike and we saw it move with
a certain rapidity and a certain

violence that we've never seen before.

On top of that, it comes from
what we've all known was the most

benign interest rate environment
we had probably in history.

Delinquencies is another thing we
watch closest closely delinquencies

at 83 basis points in Q4.

That's double the bottom tick in the
beginning of 2022 net charge offs 77 basis

points in Q4 up steadily from when it low
ticked in 2021 when money was abundant.

What I saw this morning on the delinquency
front on the charger front, actually

discover credit card just reported, right?

5.

7 percent charge offering.

You have to go all the way back to 2011
in the height of the great financial

crisis to find that same level as
concerning 256 basis points of that

charge off level is new from a year ago.

Those are not good trends.

Industry wide are away 69 basis points.

The industry was regularly hitting
better than 1 percent through all

of 2021 and has now been steadily
declining since the end of 2020.

OPEX is 2.

95 percent and has been climbing
steadily since the beginning of 2022.

Employment related expenses are now
51 percent of what's going on at your

credit union and those very often are
the hardest to unencumber yourself.

So it's Difficult.

Now it is likely to persist.

We do not think these
stresses are going to abate.

And then I would say overall, the largest
concern is that we do not have a good

picture of the macroeconomic environment.

Yield curve remains inverted.

We are now past 650 days
of an inverted yield curve.

That is the longest inverted yield curve
in the history of the United States.

And we are in a business.

Which takes deposits at the short
end and lends them long in an

inverted yield curve environment
that is foundationally impossible.

So we've got tough sailing here.

We've got choppy waters.

Now we have to figure
out how to navigate it.

And it is appropriate for the agency
to point this out in the annual report,

the way they did respectfully, but
they're signaling that it's tough.

Treichel: As you're saying all those and
again, my head always goes back to camel.

I think it's probably six or
eight quarters straight that

the camel data has gotten worse.

But if you go back to 0809 2010 2011,
it was the bad numbers back then.

Camel wise, we haven't come
close to hitting, right?

So when you go through and rattle off all
those trends, I think the only positive

trends statistically might be yield.

Because loans are pricing higher and
investments are pricing higher, but.

Operating expenses going up because of
inflation, cost of funds going up, charge

offs going up, delinquency going up.

It it ties into that, that M and
a activity which could increase.

And, one of the things I'm
seeing is the pressure.

Those credit unions who might have already
got sub debt or had above average capital,

let's say they're 12 percent capital and
they have another 2 percent of sub debt.

So they're 14%.

Those are the credit unions
that are going to be out there.

Being able to take on merger candidates.

You have others who thought they were
fine with maybe eight and a half percent

and well capitalized, didn't take the
opportunity of the sip, or maybe didn't

seize sub debt when rates were low, and
now they're starting to get, bitten at

the ankles by all this other statistics.

So it's it's going to be an interesting.

2024 for sure.

And that's what NCUA is
really pointing out here.

So yeah, great points.

Anything that I said there that
you want to comment on or you're

ready to go to number two?

Mike Mac: I can go to number two, but
I would say something on sub debt.

It is incredible that
we're looking at today.

Some of the largest sub debt offerings
that went off only a couple of years ago,

went off in the threes, fours or fives.

And honestly, that's the
cost of funding today.

So you've got folks that have big
pieces of sub debt to your point.

That are inside where they would do the
marginal funding trade today, which is

just an amazing and it goes to number one.

Those people were smart to do that.

And in hindsight, we're all, we'd all be
a lot smarter and we all should realize

there was a sort of asymmetric risk to
raising capital when interest rates were

as low as they were historically but.

I do think you're right.

Those that are capital rich are going to
be in a good position to be picking here.

I will say though, I
wouldn't hurry into risk.

I had a credit union the
other day very smart CEO.

She's great.

And she said, I am not
in an asset arms race.

And she said, it is not risky
to stand Pat here as others on a

relative basis don't perform as well.

Very interesting.

I thought that was pretty insightful.

Treichel: Yeah, very much looking at the
article that you did I think you had the

next bullet you had in your article was a
creeping emphasis on consumer protection.

I like the word creeping that you, in
a lot of ways that you use there, but

what are your thoughts relative to that?

Mike Mac: Look, I think this is
somewhat driven by the NCUA and the

internal changes that have happened
there on the board composition.

I think it's also in line with what
we're seeing across a larger swath

of sort of regulation and industry.

People don't like overdraft.

They don't like fees on
non sufficient funds.

We can argue about what
they are or what they mean.

Yes, some have abused them, but
in many instances, they are part

of a responsible business model.

I would argue that as a general matter
in the credit union space credit unions

in particular are not abusers of fees.

Our whole industry is built
on going the other way there.

But We're all going to be susceptible to a
regime for the foreseeable future that is

hyper focused on ringing a lot of this out
for the benefit of consumer protection.

What this means is certain credit unions
that have this as a substantial piece of

their business are going to have to pivot.

And the problem is that it is
a very difficult environment

in which to replace revenue.

We just went through all of the
trends which are you against you.

And now you're being told to
substantially in many cases, pivot

from a business that has been tried
and true over a number of years.

One of the more interesting thing is
the CFPB's most recent proposed rule.

I can't fully get my arms
around it because what it does

is it proposes to prohibit.

banks and credit unions, among
others, from charging a fee where

there's an instant instantaneous
or near instantaneous decline based

on your balance in your account.

That very rarely happens.

Yes, your debit account can come up
short as you swipe it at a cash register,

but there's generally not a fee there.

The fees in large measure are A.

C.

H.

Related fees, and they come later.

They're nowhere near instantaneous.

They're part of a clearing
fee and they wouldn't be

captured by this proposed rule.

So it's curious where the CFPB is
going with that proposal, but it

does highlight, at least for me, the
intensity under which all of these

fees are going to remain for some time.

So we're seeing a lot of credit
unions to their credit, abandon

them but again, it puts substantial
train, a strain on what they're doing

from just an economic standpoint.

Treichel: Yeah, and I commented
this on one of my more recent.

Episodes.

But chairman Harper talked about how
two of the three largest banks have

said, no NSFs, no overdraft fees.

We're not going to do them.

And then trickle down effect on,
on if they're going to do it,

everybody else has to say that
they're going to go away from it.

But the reality is those three
biggest institutions, they're going

to be here 300 years from now, right?

So they're like the Amazons.

They have the ability to get rid of
those fees and ride out the storm.

Then you've got other institutions that
are, hearing NCOA say that that fee income

is a new type of concentration risk, which
I think it's a new type of concentration

risk because of what they're doing.

NCOA is making it a concentration
risk by deeming it such.

So what are they going to do?

Okay, I'll get rid of my fees.

And then, as you said, at the same
time as your delinquency is going

up, your charge offs are going Down
and then you're, you're, I don't

know, pick a number, 100 million, 200
million, and the CEO wants to retire.

And you're looking for someone who's
going to balance all these things when

it's in, getting harder and harder
every day to do so I think it's, I

think it's here to stay for a while.

The focus on fees, just particularly
because as you said, the makeup of the

board but it's going to drive up it's
going to drive up mergers and make

profitability and everything else.

More challenging going forward
and just, and as you said, just at

the wrong time when there's other
issues that NCA has to deal with and

credit unions have to deal with it.

And I get it from an NCA perspective.

There's finally two, two
Democratic board members, and

it's a democratic led initiative
all the way from the White House.

Therefore, they have to seize
the opportunity, but it's really

not well timed for credit unions.

Mike Mac: Yep.

A couple other things I would add.

Number one is I just
hate the word junk fees.

I think it's a misnomer.

I think it's inappropriate.

I think it's overly
hostile to what this is.

Number two is when you compare the
largest banking institutions to

your typical credit union, what
everyone leaves out of that story

is the subsidy for too big to fail.

Those guys can raise capital,
raise deposits much cheaper

than the smaller institutions.

And no one has done anything to address
the fact that subsidy from the federal

government exists and I'm one of these
guys that's old enough to remember

the whole point of what we were doing
after the great financial crisis was

to take that risk and move it out of
a concentrated group of institutions.

That's an epic failure.

Someone needs to write that
story and tell it out loud.

And what's happening is, unless and until
it's done, it's going to be a disaster.

We get honest about the fact that the
smaller credit unions are the ecosystem

by which we move capital into the smaller
communities throughout this country.

And that ecosystem has been built up
over 100 years or 90 plus years of a

federal credit union act in our case.

We have to start valuing that because
the small bar owner or the small

restaurant owner in the rural America or
urban center is not necessarily covered

by the largest banking institutions,
and nor do they want to cover him.

So he or her need to rely on this credit
union network, the community bank network

to find that capital to find those
loans to find that really big capital.

That banking institution that
cares down at his or her level.

And we've got to value that.

We have to understand that's
absolutely important to them as a

mechanism throughout this country.

Treichel: Very well said, and I
think it's being forgotten right now.

Excellent point.

So another theme I see you picked
up on in, in the current 2023 annual

report is once again, NCOA speaks
to third party service providers.

Any color you can provide
to what you picked up there?

Mike Mac: Yep.

Some of this I get from the
report and some of this I get

from some recent conversations.

I've done some in the
field work here, Mark.

Treichel: Very good.

Mike Mac: You're not my only NCUA insider.

Perfect.

So insiders assure me that
this is unlikely to happen.

And there is enough resist from what I've
heard from a lot of different corners

that this should not or will not have.

This is something that they've
harped on for a while that they'd

love to get their tentacles.

The agency would love to get their
tentacles into some of the QSOs and get

more than a sort of perfunctory filing.

They want to have some
oversight over those QSOs here.

It's interesting, right?

So many QSOs already have a regulator.

So take Olden Lane, for example.

We're among the most regulated
institutions you could ever have, right?

I've got the SEC, I've got the NFA
and the CFTC, and I've got FINRA.

All review me regularly.

I'm subject to exams.

And those folks know our
business quite well, right?

The folks at FINRA, the folks at
the SEC, when they do an exam, they

know exactly what they're To look
for and understand our business.

So I don't know in our case, for example,
what the NCUA would lend other than

inconvenience for us and cost for them.

I suspect this is a
little bit budget creep.

I think it's a little bit, in fairness,
I get where the agency's coming from,

because there are certain things
that have happened been caused by or

driven by what's happened at a QSO.

There have been some high profile
events tied to information or

data loss that are QSO related.

So I think there might
be a middle ground here.

I think if we start talking about sharing
information or personal identifiable

information of customers and members,
I think that may be subject to higher

scrutiny that may get a little bit
of a different regime where the N.

C.

U.

A.

can get some additional oversight,
but I think in the normal course.

Other than budget creep.

And frankly, I think when the NCUA looks
a little harder, they're going to realize

some of these industries, they don't want
to be in, they don't have the expertise

and there's already an existing regulator.

So I think some of this is real.

But some of it is overplayed and
I think we're unlikely other than

really in data to see much movement,

Treichel: It's two things jump into my
mind when I maybe two or three things.

The It's the dog chasing
the ice cream truck.

You, you caught the truck.

Now, what are you going to do with it?

And I worry about that.

I really worry about that because the NCOA
everybody's having a challenge being fully

staffed, but you take on a new arena where
you don't have expertise, how's that going

to go and how are you going to do it?

And are you going to rob
from Peter to pay Paul?

And then when I was at NCOA, one of
the thoughts, that I had when Congress

would say, Hey, what authorities don't
you have that you should have, right?

You have to tell them that FDIC has
third party service provider authority.

You have to point it out and you have
to say, yeah, in a perfect world, we

should have that because if something
blows up and you didn't ask for it.

They're going to say why didn't you
tell us you needed this authority?

So they will ask for it forever.

When I was there, I asked for it and
I hoped I didn't get it because there

was no way I could do it without
either pretending I was doing it or

jacking the budget up so much that,
it created a burden for credit unions.

Yeah, it'll be there.

It'll be in the annual report.

It'll be in every request for Congress.

And then, every once in a while, when
one really bad cyber thing happens, I

start to think, you know what, maybe
NCUA should have this authority.

And then I kind of drift back to
the dog in the ice cream truck.

Mike Mac: It's funny.

They've got it indirectly now in the
cyber world, or they, what they've done.

Union through the latest
cyber release, right?

You've got to do your own vendor
diligence, but you'd have to do anyway.

But I think, honestly, I think
that's your insights are perfect.

What happens is if I catch
this, I've screamed truck cause

then I don't know what to do.

I think that's perfect.

Treichel: So yeah, we'll see where
we're next year we'll talk about their

need to have third party due diligence.

Mike Mac: Yeah.

We'll put it on next year's list.

Treichel: And a big part of, we've talked
a little bit about sub debt, you guys

do a lot in the sub debt arena and.

The ability to do that comes from
low income designated credit unions.

Any thoughts or takeaways relative
to that and the report the annual

report and, or just in general.

Mike Mac: I think the LICU piece of the
annual report will be there every year.

I think we can talk about it
almost the same way every year.

Like who, as you mentioned, brings you
several pieces of regulatory relief.

It gives you a lift on your
member business loan cap.

It gives you the ability to take
non member deposits from any source

instead of just from other credit
unions or from municipalities.

It allows you the case of subordinated
debt to raise that subordinated

debt, but to count it towards your
PCA net worth, as and then it allows

you access from time to community
development revolving loan fund grants.

And I believe there's a window open
right now for some of that money.

Those regulatory relief, those 4 forms
of regulatory relief can be important.

I think the best, most important in
most cases is really either the member

business loan lift or the sub debt that
you get in PCA net worth but we're going

to see people increasingly try to get
to who status those numbers have been

creeping up steadily over the years.

It's basically 50, 50 in terms
of assets at this point non

who, and who is about a 1.

1 trillion of each.

And there are a few more who's than non
who's about 54 percent of the industry

is now low income credit unions.

Again, to get that status, you've got
to basically meet certain thresholds

in terms of who your membership is.

We can help with that.

There are several others
that do that as well.

But I think it's something that
people will continue to seek

either through strategic merger.

Or optimizing their membership.

The other thing I would say in that regard
is anecdotally we're definitely seeing

evidence that the NCUA is enforcing this.

So long long respected LICUs will
continue to be examined on this number.

And if they fall below it
they will be sent a letter

from the NCUA to that effect.

The way the reg works,
I think it's 7 0 1 34.

Under that regulation you can act if
you lose your status, if the NCA says

you, you're longer a ku, you can act
as if you are a KU for five years.

You have a period of up to five
years to cure that status and

get that, that letter back from
the NCUA that you have done that.

So not much to say other than it's
gonna be here, and it's gonna be

something that people increasingly seek.

Treichel: Yeah, a couple of thoughts.

So I was chatting with the credit
union recently who just got one

of those letters and has their 5
year clock that has just begun.

And I think if I'm not mistaken,
somewhere along along the way, N.

C.

U.

A.

had a proposal that would allow once a you
always a like you with the concept being

if you're so successful in your community.

At the low income.

Percentage is resolved for lack of
another, you have so much success

that there's so many people who move
from low income to middle income.

Is it do you really want to penalize
them for being an institution at?

As in whose collective
membership has improved.

Now that would take an act of Congress
which would be like getting an act

of Congress, so will it happen?

Will it happen?

I don't know, but it's a great theory.

Mike Mac: There's two people
that have told that to me.

I used to refer to that as the Mike
Kochman theory and Mike sits next to me

here in the office because he's always
been a staunch defender of that position.

And then I believe that position is the
same position that I heard repeated to

me by a former board member Rodney Hood.

Treichel: I think you're right.

I think you're right.

Mike Mac: If that's right, Mike's in
pretty good company because I hold

Rodney in some pretty high rare air.

Treichel: You got it.

And since you mentioned former
NCOA chairman Rodney Hood,

he was a recent guest on.

On the podcast and to the
listeners, if you missed that

episode, I recommend I recommend
you go back and give it a listen.

And Mike, if you haven't listened to
that one, go back and give it a listen.

It's Rodney was chock full of
wisdom in that one as usual.

So we've talked at different
stages of this conversation.

We've talked about consolidation.

Anything else we need to hammer
home on consolidations and mergers.

Couple of things here.

Mike Mac: I now begin most of my
conversations with folks on this topic

with something to the effect of welcome
to the opening ceremonies of the M.

N.

A.

Olympics.

Because I really think
that's where we are.

I think if this was a baseball game,
we'd still be in batting practice

and we've seen some movement here.

What's very interesting if you look
at the numbers and it's going to be

the same, both on the bank acquisition
side and on the credit union for credit

union side, you have a trend line that
begins in 2019 and is trending upward

in terms of deal volume by dollar and
by number turns sharply lower in 2023.

It almost evaporates and then
it starts to pick up again.

We've had some pretty good activity
in both of those fronts in 2024

and folks say why did this happen?

Is this a trend or what happened?

If you remember 2023, nothing external
is going to happen in 2023 because we're

all reeling from the interest rate shock
that we had internally and we're all

fundamentally changing our business.

In response there, too.

So the last thing we're gonna do
is entertain some inorganic growth.

Now, fast forward to today.

We're at a place where the cost of member
acquisition is as high as any of us can

remember the cost of member retention in
terms of paying up on deposits is as high

as anyone can remember with that As our
backdrop, it is going to be hard to grow

organically in many places in the country.

Now, we've also got massive demographic
shifts that are going on, so it's

making it easier for some and much
harder for others simply because

your neighborhood is evaporating.

You've also got competition on the
deposit gathering side that you didn't

even know was here when you were Stacked
up with money in 2021 because stimulus

came directly on your balance sheet.

You didn't even realize that the chimes
and the sofis of the world and the

markets from Goldman Sachs as a world
were going to come in and be able

to sweep up deposits very quickly,
simply by being competitive on price.

And because COVID sped up the
move to mobile, price becomes even

more important as we move forward.

So the geographic moat that you
think you had, the moat that

you had from your seg group.

Those are all evaporating very rapidly.

And so we're in an environment
where we're going to look for

growth in places that are inorganic.

And so we've seen already in 2024, we've
seen 7 Announced credit union purchases

of banks that are of significant size.

And we've seen, I think it's six credit
union for credit union mergers that

are substantial in terms of size.

And I would call strategic instead of,
to assist somebody who's in trouble.

So we're seeing, Peer for peer
credit union merger of size

and we're seeing significant
bank purchase by credit unions.

That is likely to persist given
the economic environment we have

and in that environment capital
becomes king as you said earlier.

Treichel: And you think about COVID,
the pandemic and the shift, the mobile

ability to get your deposits mobile
ability to to get, food delivered to

your front door instead of having to go
to your restaurant, mobile ability to

work from home and not have to go into
the office and all of these things have.

Consequences or unintended consequences.

That's all, it's as if the pandemic
shrunk 20 years of progress down

into a one year period where
everybody was fighting to survive.

And the business models of so many
things changed and it's it's impacting

mergers, it's impacting deposits,
it's impacting commercial loans.

It's impacting the fact that every, that
there are restaurants that now exist

just to deliver, and many other things
that I haven't even touched on, I'm sure.

Mike Mac: I wish I was a sociologist
because you would have unbelievable

amounts of things to study in terms of
the hollowing out of the city, right?

You first of all, you've got the Amazon,
Amazonification of the retail streetscape.

Which is already having dramatic impacts.

Then you've got the hollowing out of
the city in terms of the work from home.

Then you've got a declining tax
base in terms of tolls and pricing.

So now you are in a potential difficult
loop for the municipality itself.

You're also in a difficult loop that we're
seeing expressed in the CRE market, right?

In terms of a redefining
of what office is.

We've seen a very significant default
in the last two weeks in Brooklyn

which is a, an interesting market.

The largest building in
Brooklyn had a default.

You've seen a hollowing out in
major cities, San Francisco.

Of course, you've seen some
difficult defaults in Baltimore.

You've seen them in Chicago.

And that's 1 of the things where we're
not yet through the credit cycle, because

we're seeing those difficulties happen
Luckily here, not every credit union

has commercial real estate exposure.

Only the larger guys do.

And the larger folks are struggling.

We've seen some pretty pronounced write
downs and charge offs in the last quarter.

Some which were even
readjusted more recently here.

And a lot of them are related to
asset classes that are Riskier or

really honestly, we're only the
biggest credit unions can play that

has effects, too, because and some
of that is alluded to in the hand.

The interplay of big and small
credit union is something that the N.

C.

U.

A.

Seems to be watching because as
this consolidation happens, the

increased bigness brings with it
its own attendant risks, and the N.

C.

U.

A.

Is keenly focused on that.

They have a quote.

Actually, it says large credit
unions tend to offer more complex

product services and investments and
increasingly complex institutions will

pose management challenge for those
institutions themselves and for the N.

C.

U.

A.

Very insightful by the agency to
understand where we are in that in

that continuum and to be looking
out for what may come with it.

Again a good grade to the agency there
in terms of understanding that cycle.

But again, I don't think we're anywhere
near through the credit cycle here

and it's going to get more difficult.

Treichel: It's going to, yeah, it's
going to get worse before it gets better.

And, but.

All those things are going to be
solved by artificial intelligence.

So we can maybe get to that a little
bit later in the conversation.

I'm saying that tongue in cheek, but
maybe that's, that's one of the things

maybe Nswe is alluding to, right?

These bigger institutions are going to
find themselves having to do things in

the AI world and what does that mean
for all the other complicating factors

we just mentioned but but I digress.

We can't talk about N.

C.

U.

A.

And we can't talk about banks and
we can't talk about mobility without

talking about cyber security.

Certainly, they discussed
this in the report.

Any thoughts on what NCUA said in
their annual report on cyber security?

Mike Mac: When you're, when you live
as exciting a life as I do, Mark, you

do things like you take the NCUA annual
report and you search the word cyber.

And then you bet with the folks
in the office to see who can

get closest to how many times
it appears across the 236 pages.

The winner this year.

Was it was 92.

Tyler and our office got
it right on the screws.

He suggested that it was going
to be 92 times and he was right.

So 92 times they use the word,
or if it's a partial word,

cyber and where do they use it?

And what do they mean?

They're proud of their updated and
scalable cyber exam procedures.

And so good for them.

They've got a standardized steps, a set of
steps that they go through to understand

data collection and how it's analyzed.

And so good that they're
paying attention there.

Good.

Great.

The other thing that they're
running a victory lap for, and

again, rightly is that they release
their cyber incident reporting.

And what's interesting here is that
they run a victory lap for the fact

that the cyber reporting went up
dramatically after the rule was passed.

I don't know whether that's
a good thing or a bad thing.

Because here in this instance,
they've caught the ice cream

truck and it's full of ice cream.

So it begs the question why
weren't they chasing it a year

ago or two years ago or three?

Treichel: Sure.

Mike Mac: But then they also have their
most recent letter to credit unions,

which is rolling out the cyber incident.

And they require credit unions here
to do a couple of things, all of

which seem to make very good sense.

You've got to update your response plans.

You've got to review your third party
contracts, which we alluded to earlier.

You've got to keep your employees
trained and up to date on cyber

and all things attendant to it.

And you've got to monitor and
document any incidents very quickly

to the NCOA, which is what a lot of
folks have paid extra attention to.

The other thing I will say here is this
is a perfect place where scale matters.

One of the places where we see
scale expressing itself is the

incidents of cyber attack are up.

Every CEO that I talk to tells me about
how difficult it is to avoid fraud,

to avoid cyber attack, and how often
they have to refresh their tech stack.

That's a spend.

That's a significant amount of money.

It's a significant amount of time
and energy in an environment.

It is increasingly difficult for
smaller credit unions to keep up there.

And that is one of the one of the
key drivers behind a lot of the

consolidation that we're seeing is
that the smaller credit unions just

cannot continue to withstand that
the frequency of those attacks and

the sophistication of that fraud.

And so they are very often looking
for a more sophisticated, bigger,

stronger partner to help them.

And we see that in shared services.

We also see it, honestly, in
consolidation that's happening,

Treichel: And it's going to be that
it's going to be some institution

that makes a judgment call that
leaves the door with the best people.

It's hard to, keep the wolves at bay.

But if you are having to make
dollar decisions And maybe not

doing everything that you need.

That's going to lead to some situations
where credit unions could be subject

to ransomware or or, Out and out fraud
which, and it's those examples that

will continue to have NCUA beating,
beating the drum for needing third party

authority, like we talked about earlier.

The other thing that popped into my head
is I love word search in NCUA documents.

It's something that I picked up from Steve
Farr formerly of NCUA, also of my team.

And one thing I like to do is I like
to, See how many words, how many times

NCOA says safe and sound or safety and
soundness and compare that to how many

times they say consumer compliance.

And I didn't, if I did it to this
document, I don't have the data in front

of me, but I will tell you that the use
of the word safety and soundness, their

primary responsibility is lessening
compared to the amount of times they

say the word consumer compliance.

And is it at the right balance?

I don't know, but there's
a, but that word shit word.

Count shift shows the shift in focus a
little bit and of course, Chairman Harper

will tell you that consumer compliance is
safety and soundness and I've disagreed

with him here on the podcast and and
I, I won't go any further into that,

but I love the word search because it
tells you what their focus is, right?

You, and cyber is always a focus.

I mentioned AI, artificial intelligence
emerging technologies any thoughts

NCOA has been progressive in that arena
from the blockchain letter where they

made it clear that they didn't want to
what's the word I want to use that they

wanted to have an open mind to credit
unions playing in the fintech arena.

And all three board members at the time,
this is when Rodney Hood was there.

We're comfortable with being a
little bit more progressive in that

arena than what was coming up from
the FFIEC, which is a good thing.

But any thoughts on that and or emerging
technology, AI is the buzzword every

stock owned company out there has to
talk about how they got AI because

they think their stock's going to
go up just because they said it.

But any, What are your takeaways
relative to the annual report,

AI and emerging technologies?

Mike Mac: Personally, I'm still
working on acquiring the eye.

I'm trying to get as much of the eye as I
can and just try to retain it at my age.

But anyway, this is important.

It's also somewhat dangerous.

Here is where you've got to weigh your
business opportunity with your risk.

And you're doing it into
an uncertain environment.

The example I use is we've gone so fast on
this front that a couple of years ago, I

remember how everyone was telling me that
voice was really the state of the art.

Way to validate an account and to be sure
that a person who was who they said they

were On a telephone call and therefore
can get access to their account, etc fast

forward two years and then you realize
that the ability to do a deep fake on a

voice is very pronounced And people were
breaking through A lot of those safeguards

that we thought were state of the art.

So here it's It's you have to be in this
game and you have to be tinkering, but

you have to do it responsibly because
you can't threaten the franchise.

So you really have to understand
what you're dealing with and what's

coming down the pike as you use these
emerging technologies and you have

to be trying continually tinkering
and playing in this field to be

up to speed and be best in class.

But at the same time, you got to make sure
that you don't threaten the franchise.

And so what the agency's
done here, it reminds me of

what they did in derivatives.

They're opening it up.

They're saying we're going
to allow you to tinker.

But they're also telling
you, don't screw it up.

And it's almost what you have to do in
this type of field where it's wide open.

I will say, we see plenty of and,
maybe it's the sexiest stuff, but

it tends to get plenty of the press.

We see plenty of investments
by credit unions into fintechs.

We see lots of credit unions doing
progressive things in fintech, whether

it's on payments or it's on validation.

Are tinkering into blockchain.

We've done some of that.

We're familiar with some of it here.

Some of its talk more than its adoption.

But, we'll see.

This is something that takes time.

It has to marinate.

You don't make a sauce very quickly.

It takes time and you've
got to let it simmer.

So the jury's still out.

Treichel: All great points.

You talk about AI and being able
to imitate somebody's voice.

I actually did a podcast based on the pod,
the software I use for my podcast has, it

has two different artificial intelligence
modules, an older one and a newer one,

which is much better, but I took the
older one and did a podcast that was like

three minutes long and it was all fake.

It was all, Them generating my
voice and I sounded even more

monotone than I normally do.

And that was the giveaway.

If someone knows me, they know
it's not me, but it sounds like me.

And then you look at the newer generation
version of it and it's better, and

that was over like an 18 month period.

And then earlier this year, I
started a second podcast called

credit union regulatory guidance.

And that is AI, where I take a letter to
credit unions, or I just did next week,

I've got Barry Hunt's letter to NCOA
saying don't disclose overdraft fees.

And I took that letter and I turned
it into AI and I had 15 female

voices to choose from 15 male voices.

My wife and I listened to
all of them and came up with

someone who was called Samantha.

And I, so I named her Samantha
shares because of the shared draft.

But anyway she's far more eloquent
than me she says the one kink in

the armor is she says supervisory.

So she says that like she's from
from Australia or England, and I

haven't been able to figure that out.

And sometimes I have to,
sometimes she says N C U A, right?

And N C U A.

And so I change that to agency on occasion
or we change that when we're editing.

But just the fascination that I
could take, we can take a 20 page

letter and get it into a voice that
look, that sounds almost natural.

And we're a couple of
years into doing this.

What's it going to be two years from
now, four years from now, let alone,

the Peter Gabriel guys that'll be
out there making songs like they're

Peter Gabriel and writing songs
like Peter Gabriel and all of that.

Mike Mac: I don't know if it's giving
away too much, but I have listened to

Samantha shares while I've driven across
the Midwest, that's, I guess I was

scraping the bottom of the, I had been
through all of the with flying colors.

Treichel: Exactly.

Exactly.

So yeah, you get up in the morning and
you look at what's new in the list today.

It's yeah, I subscribe to this one, but
I don't think I've got, three months

later, you decide to get rid of that one.

But, it's a, it's an audio book
for it it's not as popular as with

flying colors, but it is out there.

But the technology that, yeah.

That was that were where my wife
and I could sit down and figure

out how to do it so easily.

And it sound relatively good, right?

And it's crazy where that
whole arena is going to go.

I don't pretend to understand
where AI is going to take us.

But it like you said, it's like
the derivative comparison was very

good on how NC way that you made.

That derivatives and they want
you to play in the sandbox.

They want you to be careful, but
if you don't have the opportunity

to get into, you get into it, you
could become irrelevant real quick.

Mike Mac: But here's the
thing you have to play.

And I say to people in derivatives
and I don't mean, I'm not going to.

In derivatives, there are 1000
things you can do before you

even get to the water's edge.

So and they're all prescribed
in those regs, right?

You have to educate your
management, your board, your staff.

You have to have multiple people
with multiple responsibilities so

that you've got silos, but you've
got cross eyes across multiple pieces

so that not one person can get your
organization in too much trouble.

But you've also then got to stand
up counter parties and counter party

documents, and you've got to understand
the products that you would trade.

Now, all of that can be done and should
be done because it's part of the learning.

And that is just the price of
admission that gets you to the

water's edge where you can then trade.

And the folks who just.

Don't get started on that path
because they're scared of it

or it's not a priority, right?

When it comes time to trade or when
it comes time to put a hedge on to do

something that's responsible, their
path to affecting that transaction

is so much longer than if they
had done the work in the beginning

and gotten themselves educated.

And we say all the time, you've
got to be engaged in the process

of learning and standing up the
undergirding of all of those

foundational pieces that are important.

Otherwise you're not doing
what you're supposed to do.

And then when it comes time to do the
work you're too late, your process

you're get too long of a runway
before you can affect something.

And we see it in sub debt where
people take a look at it and then.

They come back to us and say,
how quickly can I get this done?

And I said you could have, I could
have made that quickly a month.

Now that quickly is six months,

Treichel: right?

Great point.

Great point on that, on derivatives
on, testing your relationship with

the federal home loan bank in the fed.

When you need to move quick, you need
to understand how the world works before

all of a sudden you have that need and
all of those arenas that you mentioned.

Great point.

Mike Mac: Broker deposits, any
of your liquidity valves, we tell

people all the time, have many.

Any sources because I don't know which
price is going to be in favor and I don't

know who's going to have, that supply
that you need when you need it, but test

those pipes, put your test trade down.

It's not going to make or break
your institution, but you need to

be able to understand that you can
flow through any of those networks

that you need to when you need it.

Treichel: Yep.

Great.

Great

Mike Mac: point.

Treichel: Mike, is there anything
we've hit a lot of the highlights.

Is there anything that I should have
brought up relative to the annual

report or any questions I should
have asked you and or any last

thoughts that you have before we.

Wrap up here.

Mike Mac: I think you've got it all mark.

You're just a tremendous
questioner at this point.

You're so savvy having done
so many of these podcasts.

So you're spot on.

But I think we've gotten
all the important points.

I do think we're in for a little bit
of a tough environment here, as I said.

I think credit unions
shouldn't hide from that.

The most successful credit unions are
going to move into that and just make

good decisions on behalf of their members.

And I would say if, Holden Lane
can be a part of assisting in

any way we're happy to do that.

We have a very talented team here.

They are.

They're great people.

This is what we do.

We enjoy it.

It's a great industry to be in.

So if we can be helpful in any way
we're here to help every credit

union we can, large or small.

Treichel: Yeah, Mike you
do have a great team.

This was a lot of fun today.

And if someone's listened to this and
they're going, Hey, I want to talk to

Mike and, or the team at Olden Lane,
what's the best way for them to reach you?

Mike Mac: We're pretty
prevalent on LinkedIn.

You can find us there.

You could.

I'm certainly there.

We have a website.

It's www dot old and www
dot old and lane dot com.

And you can get us there.

We've got an info box.

If you fill that out, it will
come to all the 4 principles over

here and a couple of other folks.

And we're happy to assist in any
way we can, as I said and Mark

again, thanks for having me on.

It was it was a lot of fun.

Treichel: Yeah, it was fun.

Mike, as always, I wanna thank you
for your time today and listeners,

I want to thank you for listening.

This is Mark reel, signing
off with Flying Colors.

Thank you for joining us on this episode
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