Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey everyone, this
is Mark TriCal with another

episode of With Flying Colors.

If you're watching on YouTube,
you can see a different

background I haven't used before.

The WFC of course is with flying
colors, and we're calling these

types of new episodes, quasi new
episodes, the Credit Union Round table.

And if you're an old fan of ESPN
sports reporters, that font if

you're looking on YouTube might bring
trigger some memories of Mike Luka.

Jeremy Schapp Jeremy Schapp son, and
some other reporters that used to

talk sports every Sunday used to be my
favorite show, so I stole their font.

All right.

Today other than this new format with
with the the Credit Union Roundtable

approach we're adding a new guest,
which we'll get to here shortly.

But first we're joined by Steve
Farr, Todd Miller, and Dennis Bauer.

Steve and Todd have been on the podcast
before but, and this is Dennis's first.

But if someone's listening or watching
for the first time, could you gentlemen,

give me a brief summary of your
credit union and or NCA experience?

We'll start with you, Steve.

Farrar: Okay.

If I'm trapped in an elevator and
have to tell you really quickly

where, what I've done for my
career, it's I break it into three.

Three phases.

The first, basically 15 years at
NCUA was in the field as an examiner.

Most of that was as a problem case officer
predominantly on the west coast, but got

to be involved in resolutions involving
conservatorships assisted mergers.

We used to take credit unions
from actually negative capital and

restore capital in there with some
forgiveness and stuff involved.

But some of those are gone
from negative capital.

They're still in business today.

So that was a fun part of the career.

Then I when Mark went to the central
office, I kinda followed him and

did, worked remotely there for almost
another 15 years in the division of risk

management work that I really did enjoy
getting to see help with resolution

of problems in all of the regions.

My favorite thing that I did
was I taught I cost on problem

resolution that focused on.

Communications and I think that
was probably my favorite bit there.

But inside of there, we got to
be involved in the corporate

resolution and many issues.

Towards the end of the career, I
wrote the risk-based capital rule

and served as the vice president
of the central Liquidity facility.

And then in retirement I joined
mark, and now we've got a number of

years behind us with the consulting.

And shortly after retire retiring,
I did do a stint as a CFO in a

conservatorship in New York City, which
was a nice experience to be switched

over to the other side rather quickly
from regulator to being regulated.

So that's my career in a nutshell.

Treichel: That's a great summary.

You mentioned working remotely in the
central office and if there's any NCA

folks, listening or watching Steve and
I created that opportunity for you all.

It was a situation where we
couldn't get people to apply

for jobs in the central office.

And I went to then I was the deputy
executive director and suggested Dave

Marquee announce his job remotely.

I said, you might get people
like Steve far to apply.

And and lo and behold he did.

And ever since then, NCUA has been
able to supplement their regional

offices with these remote positions.

And of course in the current
administration right now, that whole

remote thing is I don't know if taboo's
the right choice of words, but it

they're trying to reign that in a
little bit, but obviously in the right

situations, it makes perfect sense.

But I am I'm going down a rabbit
hole on Oh and Todd, I'm not gonna

be able to introduce you right
now 'cause you just stepped away.

You must be moving your cat or something.

Exactly.

I closed the door so he
couldn't come interrupt us.

No cats.

No cats on the round table yet.

We'll introduce them next quarter.

All right, Todd.

Let's a little bit of your
background for those who may not

have watched or listened before.

Miller: Keep my elevator pitch a
little bit shorter than Steve's.

I was with NCUA for 34 years.

The first seven of it or so was
probably spent with Steve in the

SE group and as PCO together.

And then I diverged a little
bit, but I can break my career

down into about three parts.

That first decade or so, I was either
an examiner, problem case officer.

The second decade I spent it as a capital
market specialist in the Western region.

So there's a lot of n NCAA's
interest rate, risk policies

and procedures and things.

I helped develop, did a lot of teaching
with that examiners in that area.

Even helped Steve once or twice with
problem case type communication classes.

The last third of my career I spent
it as a director of special actions in

the western region, supervising problem
case officers, regional capital market

specialists, and some regional lending
specialists for part of that time as well.

Like Steve, it was a
very gratifying career.

I was involved in a number of
credit unions that received special

assistance that are still there today.

I conserved a couple credit
unions, returned them to the

members, they're still there today.

Those were pretty rewarding
parts of the career, but I

enjoyed my 34 years with NCUA.

I retired in June of 2021, I think
Mark called me up about August and

I started helping him and looking
through my folder really quickly here.

I had helped you out with 68 different
credit unions in the last four years.

Treichel: Wow.

Amazing.

Amazing.

Yeah, it's been a lot of fun.

And I've known both Steve and Todd a
very long time, but I've actually known

Dennis just a touch longer 'cause we
were examiners in the same supervisory

examiner group in Minneapolis before
before he went out to the real world.

Dennis yeah, gimme, gimme your background.

Bauer: Yeah.

I've been in the credit
union industry for 38 years.

I just recently retired from
Ideal Credit Union, located in St.

Paul, Minnesota.

However, my career started out with.

As Mark said with NCOA back in 1986, mark
and I were in Group A in region five, I

think it was region five back in 1986.

Yeah, so I spent six years with the
NCOA, both as a, obviously a field

op, a field examiner and then finished
my last part of the, my career

with NCA as a problem case officer.

However, in 1992, mark was
approached by a credit union.

I was looking for a VP of
finance, VP of operations.

He wasn't interested, so he passes my
name along to that credit union ideal

or postal credit union back in the day.

And I interviewed with them and after
that interview, I took a job as the VP

of, I think it was VP of operations, but
I oversaw the finance and some of the

operational aspects of the credit union.

And then I've grown along
with the credit union.

We were about a hundred
million back in 19.

92, and as I mentioned, I just
recently retired in September of

this past September of last year,
and we were just over a billion,

so a billion dollars in assets.

Most of that was organic growth.

I don't think we had much in the way
of mergers along that way, so I simply

grew along with the credit union.

So a lot of experience,
obviously on the finance side.

I ended up was, I was the C-F-O-E-B-P,
so I had other areas report into me.

Risk management obviously
accounting, finance, it.

I think I had HR at one point.

I think when I first started too, I
think the tellers reported into me back

when we were a bit smaller credit union.

Wow.

That is, that's my story.

Treichel: So you, yeah, so you
bring a little bit of the NCUA

things from back in the day.

Ironically, we were all in special
actions at different times in different

positions but a lot of real world having
been out there for so many years at

your credit union and yeah, I remember
you wanted to get off the road and yep.

And I had just accepted to move to
Texas to be a supervisory examiner,

so that that worked out pretty
good for the credit union too yeah.

Yeah.

Appreciate it.

Yeah.

Very cool.

Very cool.

With NCUA in, in a unique situation,
I guess is the way to put it.

They have one board member, they're
going through a major restructuring.

We have the administration who
is discouraging regulations,

discouraging new guidance.

There's not a lot coming out from NCUA
and historically we've always taken a look

at the other banking regulators 'cause
they issue some things that are very.

Very detailed Sometimes
that can help credit unions.

And in this instance, today's topic
is going to be the OCC Spring 2025

risk report that just came out.

It's the June data.

I'll put a link to it in
the in the show notes.

But we're gonna talk through the top
topics of that risk report and how

they might relate to credit unions.

And there's, the it's, there's a
lot of rhythm between banks and

thrifts and and credit unions.

With that we'll just
jump into the top topics.

And the first item that I wanted to bring
up here that was outlined in the risk

report is the commercial credit risk
and the fact that there's some risks

that are re rising relative to that.

Any of you wanna jump in and gimme your
thoughts relative to commercial credit.

Miller: Seeing Dennis and
Steve's lips not moving.

I'll jump in.

Bauer: It's my first time, so
I'll let you guys kick it off

and I'll jump in occasionally.

Miller: Perfect.

There's a couple things.

The commercial credit risk, it's been on
the kind of a horizon or in the bullseye,

so to speak, of all the regulators pretty
much since COVID started and you had this

work from home and vacancies appearing.

So I think the commercial credit
risk, it's been at the top of the

mind for all the regulators or
we're going on five years now.

There has been some rising
delinquency in that, in both the

credit unions and the banking
industry over the last couple years.

It's not.

What you would call a
severe level of delinquency.

It's still under 1%, but
it has been going up.

And I think that kind of
catches everyone's highlights.

We had the low interest
rates during COVID.

A lot of people refinanced
their properties during that

time at low rates, two, 3%.

A lot of those are
variable rate type loans.

They're coming due for
resets in the coming years.

Of course, rates are up
in that six, 7% range now.

So some of these borrowers are looking at
three, 400 basis point stocks and there's

concerns are they gonna be able to pay.

And what's gonna happen with,
future losses and delinquencies.

So that's a, it's been the center of
the bullseye for all the regulators.

We've seen it at NCUA.

They some of our clients,
they've been asked to stress

test their commercial borrowers.

They've been asked to stress test
their ability to handle payment shocks.

And I think we'll continue
to see more of that.

It's somewhat interesting when
you read through that whole risk

report from the OCC, they almost
seem optimistic and surprised at

how well banks are performing.

But man, they are uncertain
and totally worried about which

direction things might go.

Treichel: Great points.

Steve or Talk, or Steve or Dennis,
anything you wanna add on this topic?

Bauer: Yeah, I think, commercial
loans, it's a broad, right?

It's a broad category.

Within commercial loans there's
different types of commercial loans.

Obviously.

I think what's getting the most press
is obviously real estate values,

particularly in like city center
types of locations, where I think,

as Todd mentioned, the whole remote
work, the high interest rates, right?

There's a lot of vacancies occurring
in those types of of properties.

Just in the city of Minneapolis, for
example, I think real estate values in

the city center area, I think they're
down since last year, almost 22, 20 5%.

So right.

That's where the concern or
the concern lies is in those, I

think in those types of more in
those types of commercial loans.

And I know in our credit
we didn't, our, ours was.

Our commercial loans were fairly
small in nature for the most part

spread out either residential types of
multifamily dwellings, and those seem

to be those seem to be handling economic
environment we're in pretty good.

So I think where it gets challenging not
only for commercial loans but also retail

and consumer loans, is how do then, do
you forecast this as Todd mentioned,

what's your forecast for the future?

Because that all has to be somewhat
incorporated now into Cecil.

So particularly as it relates to
unemployment and real estate values.

So it'll be interesting to see going
forward with the current environment,

what type of impact, those Cecil types
of factors how that comes into play.

Based on what I've seen.

Trending for both commercial,
just overall loans.

It appears that Cecil
since was enacted in 2023.

It's increased, but probably not
at the same rate that we've seen

delinquency and charge offs increase.

So I know there's different
flavors of Cecil out there.

Not everyone treats Cecil the same,
but that could be a big, that could

be a big impact I think to the credit
union performance down the road.

Miller: You bring up an interesting
point with Cecil Dennis, 'cause

you would expect provision expense
to grow at about the same rate

that loan portfolios are growing.

Yeah.

And for the last couple years for
the credit industry, their provision

for loan losses has grown much
faster than their loan portfolios,

much faster than delinquency.

But for the first quarter here of
2025, Cecil charges, a provisioning

actually shrank when you still have
loan growth and rising delinquency.

And it's like you ask yourself, did
they get ahead by Overfunding in

the past or are they just getting
behind because of earnings pressure?

Like I said, just the way Cecil works,
you would expect provisioning to grow at

about the same pace that loan growth is.

And for the first quarter
anyway of 2025, it's behind.

Yep.

Treichel: And as you tell, it could
be behind because they're trying

to manage earnings a little bit.

It could be a little bit of
architecture of earnings there.

Miller: Yep.

Treichel: So a couple one other thing on
commercial loans not related necessarily

to the risk report, but the things we've
seen in our discussions with credit

unions is NCA being hyperfocused on the
annual review process that's required

in the commercial loan portfolios.

And oftentimes recently some credit
unions have not kept up with that.

And that's something that
definitely gets written up.

And then the, the discussion about
office buildings being empty and the

return to, to the workplace and how
that might reinvigorate some of these

office spaces near where NCA is at.

Patent and trade is right, right
across the street from NCA and

they used to rent three or four
buildings in addition to the one.

That they own.

And they've let leases go on two or three.

And then across the street from that,
there's a, another agency that was

renting the building right next to that.

And their lease is up in a year and
it's been vacant for four years.

And they have guards that walk around it
just like the patent and trade offices.

And they actually did a public notice
that they're trying to convert that

to either a condo or apartments.

And then when you think about, when
you think about the rate situation

that, I think you both mentioned that,
and that's mentioned in the report.

And there's the, a lot of those
loans are structured with five-year

balloons where those can get repriced.

So what happens when that
happens if you can't reprice it?

Reminds me of some or all of you may
have gone to the School of Banking of

the South for commercial lending class.

Yep.

I've seen, I'm seen some nods.

There was a guy there, professor Willie
Stotts, he looked like Groucho Marx.

And he coined the phrase, or
first time I heard the phrase

a rolling loan gathers no loss.

So you get to that, you
get to that rewrite date.

You wanna rewrite to a new, to the new
rates, which is why you put that in place.

But can they do it?

Can they not?

You might see some pressure
on delinquency in that regard.

Steve, did you wanted to add
on this topic before we move?

Farrar: Yeah.

The commercial lenders you're always
dealing with you kind of new issues

that your borrowers are dealing with.

Whenever I am out talking with people who
own businesses and stuff, the conversation

anymore always goes to insurance.

They are really being surprised.

This is just in, in property and
casualty insurance, that they're being

very surprised and some of 'em are
even being counseled by institutions

they've been with for 20 some years.

So I think that's gonna be a new problem.

And then you look at, just
the state of some of the, the

flooding and that kinda stuff.

Insurance is gonna continue to be
a new and more dramatic issue for

a lot of your commercial borrowers.

Within the

Miller: fine print of the report,
they actually mentioned that

rising insurance costs, that are
increasing expenses for these folks.

Just turn this into credit unions too,
and something we're seeing with some of

our clients, as Dennis mentioned earlier,
there's different types of commercial

loans, but we're seeing NCUA is asking
credit unions that are involved in the

commercial lending business to really set
concentrations on those different types of

loans, the different types of properties.

Before it was a concentration
limit on commercial loans.

Now they want concentration
limits on hotels, on office

buildings, on, just a variety.

Go through the whole N-A-S-I-C codes
and want concentration limits, very

detailed for the different types of
commercial lending they're doing.

Raising the bar on expectations for
credit risk management, for card unions

that are involved in commercial lending.

Treichel: Great.

Great point.

I that's a nice pivot.

We touched a little bit on
commercial credit, but another

storyline is the retail credit.

Performance remains
stable despite headwinds.

And that's a little bit, I think,
Todd, you might have touched on

the headwinds that the report seems
to talk about the past and the

future a little bit differently.

Any thoughts on retail credit performance?

Gentlemen?

Bauer: One, one thing I've seen
that's changed recently is right

during the last administration
and a lot of student loan debt.

You could stop making payments,
but I think that with the current

administration now that's back on.

So it'd be interesting to see I forget
how, what the millions of dollars

in student loan payments that are in
arrears, how that might impact consumer's

ability to make other payments depending
upon where they prioritize where

they prioritize making loan payments.

All right.

With inflation, the cost rate, that could
be a challenge and that could impact

I think credit unions delinquency and
potentially charge offs in the future.

I, again, the trend seems to be
for credit unions, delinquency and

charge offs seem to have leveled off.

Maybe even down a little bit for
this first quarter, but Right.

There's always with that student loan
potentially hanging out there, that

could be an, that could be a concern.

I think that credit
unions need to address.

Treichel: Good point.

Good.

Miller: Todd?

I think the student loan thing is
gonna be a huge one in the future.

I don't know how that impacts,
our accrediting people.

It definitely hits your borrowers
in those younger age demographics.

It's just somewhat interesting.

The, they talk about headwinds and,
which way is our economy going?

And Trump jumps this way then that
way with tariffs and this and that.

Delinquency levels are really manageable.

There definitely seems to be a pullback
in consumer spending are in bank credit

union lending standards because for
both banks and credit unions, auto loan

portfolios have shrank a little bit.

And I don't know how often that happens.

Maybe it was just because there was a
huge spike in purchases during COVID,

but auto lending numbers did shrink.

I tracked unemployment by states and
if you look from December to May, 24

states had higher unemployment, but 26
of them had lower unemployment levels.

So everything is mixed and muddled.

And if you look at the FDS
quarterly reports, they break

things down by their five regions.

There's a lot of performance
differences across regions.

There's all these risks that are
generic to, our credit unions.

But there's certainly different
economic zones in different parts of the

country are performing very differently
than other parts of the country.

Treichel: We had the sand
states in oh 8, 0 9, right?

That's what at NCUA it was, where there
was sand, there was a problem, whether

that was Florida Las Vegas, et cetera.

Any, when you look at the 24 versus the
26 that had up or down any, anything

pop out at you on an individual state?

I

Miller: didn't

Treichel: PO

Miller: look at individual
states or I didn't look at NCA's

performance by region or states.

But when you look at the banks,
basically your coast, your San Francisco,

New York thing are struggling more
than the heartland of the interior.

Last time the sand states I, my
first four or five years as a DSA,

right through that last recession,
it was all spent in Utah and Arizona.

And I closed a lot of credit
unions in Utah and so did the FDIC.

Treichel: Steve Dennis.

Any anything to add here?

Farrar: The one thing that I kinda
observe is there's this big differences

in the with all the generations in terms
of how they view a borrowing and how

they're doing their own finances, which
will affect future retail loan growth.

And to see how credit unions are
able to adjust their marketing for

the, the borrowing type generation.

We'll see how that behavior is in
the future, but it's something they

definitely should be looking at in
the Yeah, that's one of the key.

I agree with you.

Treichel: That's one of the keys
to long-term survival, figuring

out where the borrowers how they're
gonna react so that you can make good

loans and add to the bottom line.

It's how do

Miller: you capture them as
depositors too, because Yeah.

They move their money around.

How do you get them to use your debit
card when you know, a lot of 'em use

Venmo and PayPal and Apple paid now.

So like the whole payment systems are,
circumventing the general credit union in

banking industry with these third parties.

And, it'll come up later maybe
with fraud because the OCC risk

report mentioned some of that.

But like Venmo, people under 40, I had a
thing the other day I looked it up, how

many accounts there were people that are
using Venmo, most of them are under 40.

If I go through my history
here on copilot, I can probably

find it again really quickly.

So Venmo's transactions are up 80%
just over the last three years.

2025 first quarter here, Venmo
did $342 billion in payment

transfers between people.

Wow.

And you think of the
industry, that's not a lot.

And they're not the biggest one.

They're just the fastest growing one.

But it says 85% of their
users are under 40.

Treichel: So I'm one of the, I'm one
of the fif, I'm one of the 15% not,

Miller: I've used it maybe twice
in the last couple years when

I've sold stuff to other people
and got an account just for that.

So it's like, how do Fred gather up
and get these people to become members

for their transaction services,
for those checking accounts and

for those deposits, it's gonna be
somewhat of a challenge, I think.

Treichel: And by the
way, here's my Venmo tip.

If you are on Venmo and you don't
know that you have to set some privacy

things up so that you can't, so that
your friends or contacts don't see.

Every time you send a Venmo, you might
wanna look at your privacy 'cause,

because my kids tip me off to that.

And then there are some other
connections I have that are constantly

or frequently having payments to or from.

And it it's something that you wanna make
sure is not toggled in the wrong way.

So interest rate, environment created
is creating mixed opportunities.

One thing that popped into my head
is, Todd, I think you mentioned

the Trump tariffs and it's should
we stay or should we go now?

The Clash song?

But the Fed came out.

The fed chair came out saying, yeah,
one of the reasons I haven't reduced.

Rates is because of the tariff situation.

So that kind of feeds into the interest
rate environment that we're having.

Any general thoughts on the interest
rate environment for banks and how

it might apply to credit unions?

Bauer: One Oh, go ahead.

Okay.

Yeah.

One thing I've noticed, and I
followed this quite a bit, and as

a CFO as the yield curve, right?

The yield curve was inverted for so many
years, and then right in, I think at

the end of last year, it finally, if you
look at the 10 year and the two year rate

was inverted, you had negative spread.

But now and I think that's why we're
starting to see margins improve is that

yield curve is not between the 10 and
two year now it is plus 50 basis points.

So that makes it a little bit easier to
work in an environment where the longer

term rates higher than shorter term rates.

Back in September of 24, it
was a negative 35 basis points.

Today it was about 50, so that's
a 85 basis point swing in a

fairly short period of time.

So yeah.

I think mark was talking depending
upon Fed that could influence that.

Maybe not so much the tenure, but the
short end of that curve might come down

even farther, thereby hopefully allowing
credit unions to continue to maybe

drop their cost of funds a little bit
faster rate than on their asset side.

And we actually did see a drop in cost
of funds in the credit union world in Q1

2025, similar to, I think in that article
in the LCCI think banks saw that as well.

So that rate, that's all
helping improve margins.

For credit unions, we're
up about 20 basis points.

If you go back to pre COVID or around
right when COVID started, we're up about

20 basis points from the Q1 of 2020.

So that, that looks positive from that
perspective, just we're, the environment

that we're in, the yield curve is
getting back to maybe a more normal.

That, that could have an impact.

And then also the mix, right?

A mix of deposits has changed
dramatically, which also could have an

impact on cost of funds and margins.

Back in 2022, right before rates
started to jump, we were sitting

only with 13% of, in credit unions.

13% of our deposits were in CDs.

Today, that's 28%.

So we got a lot of high cost CD
money sitting out there with the Fed,

most likely dropping rates for sure.

Or hopefully by September.

All of that will start to reprice.

And again if that yield curve stays
positively sloped, that should be good

news for, I think the credit union world.

Treichel: Todd, go ahead.

I know.

Todd, in the past you've talked about CDs
being at all time lows and going back to

new normal are we at normal or is it gonna
swing back a little bit or any other?

I think we're,

Miller: I think we're
back close to normal.

It's been pretty stable for the last
two or three quarters, and it's about

back to where we were in prior to
the last recession in 2008, 2009.

Back then CDs, money markets
together were running around 40,

45% of credit union deposits.

And then we had those long periods through
COVID were interest rates were flat,

where there was really no difference
in pricing in the industry between a

regular share account and a money market.

And you maybe got five more
basis points for a cd, hot money.

Was mixed with regular money.

Once rates started coming up out of
COVID, you started seeing a reversion

to mean where people are putting money
to where it fits their lifestyle.

I'm willing to tie money up.

I want a little bit more
for my money market.

Both credit union and banks improve
their net interest margin in 2024.

So I would say what's really going on
is they're adapting to the new normal.

And even now it's hard to make
money 'cause rates are really flat.

Monday fed funds were 4 33 and
a 10 year treasury was 4 32.

So really a flat curve still exists.

The OCC report throws out that
volatility of those longer term rates

is higher than it was in the past.

And, credit unions and banks, and it
sounds like from the OCC report, banks

are in worse shape than credit unions
on this, but they still have investment

portfolios that are way underwater.

The credit unions here in
the first quarter, their a FS

stuff was about 6% underwater.

Their I have it right here
somewhere in front of me.

On their HTM portfolios, it's
about 6% under their water.

Let me correct that.

Their a FS portfolios were still 7%
underwater, so they still got some

liquidity in pricing challenges in that
they're still sitting with investment

portfolios that are not yielding market
rates and there's unrealized losses there.

I.

They mentioned this in the risk report.

They expect GDP growth to
be really flat this year.

Like you said, the fed doesn't know
which way to go on rates and, because

of this uncertainty, what we're seeing
from examiners with our clients is

they want way more stress testing
on interest rate risk and liquidity.

And they want different yield curves
and they want different shapes of

things and they want credit stresses
combined with liquidity stresses.

So there's it's uncertainty on their part.

And when you do all these stress tests
of this nature and scenario analysis

is, it's to inform decision making.

And I think we're seeing
a lot of regulators.

Imposing this stuff on credit unions,
not necessarily to inform the credit

union's decision making, but Yeah,
maybe somewhat that, but I think a

lot of it is the examiners want to
see this to inform their own decision

making so they can apply appropriate
risk ratings to their credit union

for liquidity and interest rate risk.

And it does help the credit union,
but this whole uncertain market, it

shows up in that your examiners want
enhanced scenario analysis of what

might happen under different scenarios.

And that's a burdensome
request at sometimes.

'Cause all the scenario analysis,
it isn't easy to put together.

It's costly, it's time consuming.

Then when you end up with results
from 6, 8, 10 different scenarios, how

do you communicate that risk level?

To your board and what
should you do about it?

So it's things that can inform decision
making, but it's things that can just

lead to more, how would you put it?

Confusion amongst the
board or uncertainty.

Some of the scenario analysis increases
uncertainty rather than lowering it.

But for our credit union listeners, you
can expect that from your examiners.

They want more scenario analysis around
interest rate risks and liquidity and

cash flow forecast, in part due to the
uncertainty of where things might go.

Treichel: And theoretically
that should happen.

It, if you're, if this is the
simple credit unions and you get

more complex going up my arm here,
if you're listening, you can't

see the visual I'm creating, but.

A plain vanilla credit
union should need less.

A very complicated credit union
with different sources and uses

of funds or unique loan programs
should expect to see more of that.

And that continuum doesn't always
necessarily work for examiners.

'cause examiners will see something
cool that they learned that one, one

examiner made a complex credit union do,
and then they'll apply it in situations

that might not necessarily make sense.

And Todd, as you touched on you didn't
say it this way, but one of the things

NCA is not very good at is figuring
out what actions they ask to be done

compared to how much it costs the
credit union to do that compared to

what the actual value of that is.

And you can see some disconnects in that.

We've seen it amazing disconnects,
I would say, over, over the five

years in general, but in particularly
over the last short period of time.

Steve any thoughts on this topic?

Farrar: Very item you talked about in
that, be able to, if when asked to do some

of these additional stress testing, have
some knowledge of how much that's gonna

cost and share that with the examiner.

'cause they don't tend to think that way,

Treichel: then they beat
'em up on profitability.

Yeah.

So we tiptoed into unrealized investment.

I think we co we may have
covered that next topic.

Any more thoughts on the upside down
nature of investment portfolios?

Bauer: Just the comment that's
been so volatile, right?

The 10 year treasury rate alone, in, I
think this year it's been as high as 4.8%

and as low as 4%.

So that'll, that raises havoc
on that unrealized investment

losses and on health to maturity.

Types of investments we're currently
it's at 4 35, so hopefully that

stabilizes and that those portfolios
can get a little relief, but that's

a big swing right in, in a less than
six, seven months 80 basis points.

So that's all I wanted to say on that.

Treichel: Got it.

Farrar: Yeah, we had some of our, a number
of credit unions that ended up with in

the COVID times, taking all that in inflow
of funds and investing at long term.

And now we're starting to
see the effects of that.

The negative effects of that are starting
to dissipate out of the balance sheets.

Treichel: No, good point.

Good point.

Next up the general topic in the the
risk report was operational risks

being elevated across multiple fronts.

Any thoughts on that broad topic?

Bauer: Yeah, the only thing I wanted
to add or talk on is cyber right?

Cyber risk.

We spent a lot of time obviously
developing our incident response plan.

And I think that is so key for every
credit union is to have a incident

response plan that is ready and tested.

And probably the most important part of
that is just your communication plan.

So you take the, we took the
approach that we're gonna have a

cyber incident, something's gonna
happen, we're gonna get hacked, we're

gonna have some kind of exposure.

So we took that approach in
developing our incident re response

plan, and we spent a lot of time.

All the different aspects
involved with that.

But the hard part, I think at the end
and is it's not the technical part

of cyber, but it's communication.

How do you communicate to all the
stakeholders, to your board, to your

staff, and most importantly, how do you
communicate this to your membership?

'cause that's so critical because
you can, if you mess that up, then

you could have a huge reputation risk
'cause social media will explode.

And you're gonna have bigger issues.

So that to me is the most important
part of dealing with with cyber.

And then obviously having
proper cyber insurance in

place, understanding your risks.

You might have to have multiple cyber
policies to get the coverage you want.

But that to me is so key
for for accrediting today.

Treichel: Great points, Steve.

Todd.

Miller: Just kinda one thing they
point out in the risk report along

this line and operational risk,
they talk about legacy technologies

creating competitive disadvantages.

We've seen this with a
couple of our clients.

They try and upgrade systems so
they can keep up with the rest of

the world and they end up having
conversion issues and members lose

access to payment systems and they
get accounts that can't be reconciled.

And so while all these upgrade
paths are very important, it's

like you need to have good plans
and testing before you go through

conversions of some of these older.

Legacy systems, the cost of
doing a conversion improperly is

pretty significant and sometimes
it drags you for a couple years.

Back to Dennis's whole thing about having
a plan for when something like this does

happen, you had the big credit union
in the news last year on the West coast

where members couldn't access their funds
for where to drag on for a week or more.

Those are pretty significant risks.

NCUA has been really good about how
they handle this with credit unions.

They have their information security
officers, they rarely write doors,

but they're really good about findings
and they issue a lot of findings.

And I think their whole attitude is
amongst their information security

officers is they are there to help
you and improve your security profile.

That's generally the
course of action they take.

Some of this gets back to a cost thing.

Again, what can you afford?

So I would just say, for the cranes out
there, when you get multiple findings

in your information security, ask your
examiner, prioritize them for you.

Because some of the stuff is
very expensive and you know what

has to be done today versus.

What kind of residual risk can I take if
I don't spend that money, for six months?

So ask them to prioritize.

I don't think operational risk
and cybersecurity risk will ever

leave the top three or four risks
from our regulators ever again.

And the AI fraud tools, there's,
you can go on the dark web and find

AI tools to help you commit fraud.

So it's just gonna be an ever growing kind
of a race to the top or race to the bottom

depend if you're a criminal or a credit.

You trying to keep criminals out.

Plan on spending money in this area.

Treichel: Forevermore, Steve?

Farrar: No, I think we covered it.

'cause I had wr written down and Todd
covered it was you that we, are surprised

that, the conversion issue has become.

Something that's when it rears
its head, it is just so ugly.

Yep.

Bauer: Yeah, that's one thing.

We did a pretty much a wholesale
change back in 2018 through 2022.

We upgraded core digital debit card.

We did a lot in a in a
three year period of time.

But just the core itself, take the
time to do the necessary data cuts.

I think we did three or four
before we were comfortable.

Before we moved to our core, we,
so then when it came to conversion

weekend, it went without, incident.

And then o other thing I've seen out there
is you credit unions purchase a new a new

core system, and they don't necessarily
know a hundred percent what they purchase.

It's too much.

They don't have the expertise.

So I think understanding exactly what
you're getting into before what's all

involved, particularly at the end as,
as far as generating the necessary

reports that you need, how the report
writers work how the accounting

function's gonna work, how that's
gonna maybe integrate with a third a

third party type of accounting system.

Making sure that's all tested.

So that's so key.

Taking as, as Todd and Steve said
taking your time and spending

the money to do it right.

And if you've gotta overspend a little
bit to get it right I think it's well

worked out so you don't have issues with
your membership at the end of the day.

Treichel: As someone once said, if
you don't have time to do it right,

you don't have time to do it over.

Miller: Exactly.

Treichel: All right.

Fraud schemes targeting traditional
payment methods and otherwise, Dennis,

I know you and I were chatting a little
bit about a generic situation from

a member that, that you worked with.

But any thought, anything you wanna
share about that example or anything

else on, on what you're seeing and
hearing about fraud or what you

did at your credit union to it?

Bauer: Yeah and this was a, at
the end of my career, is just all

the fraud that post the elderly.

That's, that, that happens quite a bit.

Particularly, and this one happened
to be a timeshare resale fraud

scenario where where we get a member.

Wants the wire off 25,000.

I get wind of it.

I was contacted saying, Hey, we
think there's something wrong here.

This doesn't really fit
the member's profile.

She's a retired school teacher.

This doesn't fit her profile.

So then we do a little bit more digging.

Give her a call, ask her what's going
on, and she talks about I can sell

my timeshare for a million dollars.

I forget the number.

That's not how, there's no way
you're gonna sell a timeshare

for a million dollars.

It just doesn't work like that.

Maybe there are some, but not for us.

Not for her.

Not for that type of individual.

She's elderly.

We're trying to talk to her and
saying if you take a look at some

of the latest scams, that's a big
scam going out there right now.

Go to the Attorney General's site.

We can show you that information.

'Cause this person wants to send,
wants you to send them 25,000.

You're probably not gonna
get that money back.

So they call her, they, it was
an uns, probably unsolicited

type of offer that she received.

Say, Hey, we can sell your
timeshare for a million bucks.

All you gotta do is we'll just need
to wire us 25 grand and then you

can collect that back at closing.

And she was convinced right,
that it was the real deal.

So tried to talk to her, got her
on the phone with attorney General.

So we went well beyond,
'cause I was right.

It was an elderly individual
don't want her to lose 25,000.

'cause once a wire is
gone or is out, it's gone.

You can't get that back.

I think finally at the end we were
able to maybe talk to her and maybe

a daughter of hers to have her stop.

'Cause we weren't gonna, we
weren't gonna do the wire.

We said if you want this, you're gonna
have to, you're gonna have to take,

you're gonna have to do it someplace else.

'cause we know this is a, this is fraud.

Oh, that's great.

You're gonna be out 20 grand.

There's a lot of that stuff.

Not only that, right?

You got the male bride.

We've seen those where, it's crazy what
goes on out there in, in the, for our

members, what they're facing as far
as as far as these types of incidents.

So I just wanna share that one.

Miller: Yeah.

I have a question for you, Dennis.

Yeah.

Had you heard about ATM
Jack potting before?

I never heard that term
till I read this risk word.

I have.

Bauer: Yep.

I've heard of that.

That, yeah, I haven't seen
that happen in our area.

Maybe it has, but in our area where
we've seen a lot of ATM fraud was

on skimming and it's gotten a lot.

It was, there was a ring here
about two or three years ago.

I don't know.

There are a lot of financial
institutions that got hit.

It was pretty sophisticated.

So with skimming, they put a device at the
ATM and they read the card, make stripe,

and then they have a little camera.

Up above getting the pin number, and
then they create these cloned cards.

Then four or five days later, we get
these phone calls right from our members

saying, Hey, here, we got money we
got money leaking out of our account.

What's going on?

Then you, we take a look at our cameras,
sure enough, you see the individuals

messing with our ATMs generally
at two or three in the morning.

So no one's necessarily
is paying attention.

And so we've seen that.

But yeah, I've seen it.

I've heard of ATM jackpot jack potting,
but the skimming thing I've seen that

part, that type of situation maybe should
be maybe diminishing just because of

the types of cards we're using today.

But those types of things happen
I think quite often to financial

institutions skimming and
possibly jack potting as well.

Treichel: What is ATM jack potting.

Miller: So they actually get
control of the, a TM using

a universal key or whatever.

And they install software to let them
just push a bunch of buttons and it just

spits out all the cash in the machine.

Oh my.

Farrar: So they're

Miller: actually getting into the
operating system of the ATM quite

often with Universal Keys, which means
there's probably somebody from inside

the credit union or somebody inside the,
the bulk or the money transfer people.

Wells Fargo, the people that
pick up money and stuff.

Armored car services.

There we go.

They have Universal ATM keys.

Treichel: That's just reminded me of,
it's like a different version of stealing

the key from the post postmaster to,
so you can go right, go to the corner

mailbox and then take all the checks.

And wash off wash off the ink
and rewrite 'em and all that.

Yes, I hopefully have good tampering

Bauer: types of tools on your ATMs
that would, detect that someone's

messing around with your ATM and,
get some kind of notification.

So

Treichel: Yep.

Add another layer

Miller: of cost

Treichel: to protect it.

Yep.

Miller: There's a lot of times they'll
hook a laptop or a palm like raspberry

to 'em and they'll put 'em in like a
supervisor mode or like almost your super

user, like you're, altering the software
and they literally take over the a TN.

That's wild.

That's wild.

I said I didn't even know it was an
issue until we read this risk report and

I guess it's an ever-growing big issue
big enough that they spend a paragraph

talking about it in this risk report.

Good point.

Good point, Steve.

Treichel: Nothing to add.

Nothing to add.

He's very good.

Alright B-S-A-L-M-A-A-L-M-A-M-L
compliance burdens are increasing

is the theme of the report.

Any general thoughts on that?

Farrar: Hire experts.

Treichel: Hire the experts.

I like that.

Yeah.

Bauer: Yeah.

To me it's a burden.

It's a burden.

More for the smaller,
maybe under a billion.

So we always had a challenge, how do
you staff BSA when it's necessarily

not a full-time, not necessarily
a full-time position because of

maybe your risk profile, but you
still gotta comply with all that.

So that that's a challenge
for smaller credit unions.

And when you have a department of one
maybe and they leave, then you got issues.

So trying to work around that, how do you
how do you staff, how do you create a BSA.

Department, if you will,
or an office of BSA.

So that's what we did is we as a smaller
credit union, I, and I say smaller,

under a billion we some more created an
office of BSA where we had a BSA officer,

but that was not their full-time job.

And we collaborated right with,
throughout the credit union.

So someone left, we, we had that work
spread out throughout the organization

and we had a BSA committee that
dealt with it on a monthly basis.

We get together, talk
about what's going on.

So I think that's the biggest challenge.

I think for smaller credit unions,
Saudi staff, it in my opinion

Treichel: makes sense.

I'm going the next topic we have in
order on the list I put together was

the economic outlook remains cautious.

I'm gonna jump over that
for the sake of time.

But if you have a thought on that.

You can weave it into one of these
other two topics that I do wanna

make sure we give time to get to.

It talks about low loan growth
weakening, which kind of links

into the economic outlook and
deposit competition continuing.

Any general thoughts on
that topic, gentlemen?

Miller: Loan growth was slow for both
banks and credit unions last year.

Of course, you had that huge
loan growth when we had the

inflation coming out of COVID.

Deposit growth has been somewhat slow,
but a little bit better than loan growth.

So all the liquidity that credit
unions were getting beating

up over the last couple years,
that's mitigating a little bit.

For the credit unions, they're doing a
better job than the banks are at growth.

I track that deposit concentration
and and piece of it in credit unions,

they've been managing to increase
their market share for deposits versus

banks pretty much on a steady basis
since, oh, the third quarter of 2022.

Even continuing to now.

So our credit unions are doing a
little better job than the banks

are which is a positive thing.

It's just all with the flat yield curve.

Credit unions are adjusting pricing.

Consumer, like I said, loans
are going down a little bit

especially the auto loans.

So I think it's back to
the uncertainty thing.

People are just starting to become
more cautious and that leads to some

of the economic uncertainties, but
it is nice to see the credit unions

actually getting some share growth again.

Bauer: We'll see how things play

Miller: out.

Bauer: Yep.

The only thing I wanted to add is I
think the deposit growth will be a

little bit easier since money supply is.

Is increasing as A-C-F-O-I, I
pretended to be an economic economist,

so I play one at, I played one at
work, but I'm way no expert at it.

But I started falling M1 and
M two, the whole money supply.

So more money's available.

Deposits should be easier to come by.

And that was very easy to see
when all that COVID money came in.

It, I think it peaked
at 22 trillion in 2021.

And then right then we saw a big drop.

Not a big drop, but a drop.

It dropped down to about 20
trillion in money in July.

And credit unions were struggling
right during that period

of time to grow deposits.

But since then, it's almost back up to
what it was when it hit its peak in 21.

So with the increase of money supply that
should tell a credit union a few things.

It maybe a little bit easier to come
by deposits, you still obviously gotta

promote, but you might not have to pay as
much 'cause there's more supply out there.

So I think you gotta be cautious of how
you're pricing now because of that factor.

So I think taking that into consideration,
I think we'll see credit unions

deposits most likely increasing un
unless the money supply starts to dip.

But right now it's on a, it's
on a trajectory upward since

20, like second quarter of 2023.

Miller: I'm not as
sophisticated as a dentist.

I just tend to look at personal income
and debt service and saving rates.

Saving rates actually improved
in 2024, over 2023 and 2022.

Yeah, and part of that's people probably
being cautious too, and saving more money.

Now that money they save doesn't always
go into your credit union or bank.

It goes into their IRA and, the
stock market and bond market.

But people are saving a little bit
more money again here in 2024 versus

what they were doing in 2022 and 2023.

Bauer: Yeah, I still, I think
there's a lot of money still sitting

in retail money market accounts,
which is included in money supply.

So we'll see if that actually stays in,
if that stays or moves into the market.

It's hard to tell,

Farrar: good

Treichel: point,

Farrar: Steve.

Nope.

Nothing more to add on that one.

Treichel: The only thing I'm gonna add
is, Dennis, you've mentioned being,

playing an economist at work, so I'm
gonna, one of my favorite economist

jokes, you know how an economist gets
out of a hundred foot hole in the ground?

No.

That he assumes he has a
rope and he climbs out.

Bauer: That works.

Treichel: That works.

All the, before we wrap AI and
technology adoption is accelerating

the good and the bad and the ugly
of ai and technology adoption.

General thoughts, gentlemen.

Miller: Freddy Unions need to learn this.

They need to learn how to validate
these models especially if they're

gonna be doing the lending side of ai.

Some credit unions have had
some bad experiences with this

already, but a lot of people are
using 'em for customer service.

They're taking members calls.

I think the big thing,
and they point this out.

Several places in the
occs Risk reports forge.

You're responsible for the risk
related to all of this, and and how

do you control that when you sign
up for a third party vendor that's

using AI to do something critical?

With your members' data or making
credit decisions how you validate

those models is very challenging
because the models change every day.

They're a self-learning thing, and
there's ways to do it, but credit union,

you just need to educate yourself.

When you go down this path, it's gonna be
one of those competitive advantage things.

You are probably going to have to go
down this path for some pieces of it.

Dennis mentioned, BSA and a LM,
anti-money laundering compliance.

There's a lot of AI type models coming out
nowadays to help with that type of stuff.

So maybe you need less
people than in the past.

So it's a very challenging thing,
and to see where these things

are going to go in the future.

Mark uses ai.

He used it to figure out our whole process
today, what we're gonna talk about.

Treichel: That's right.

That's right.

To me, AI is a, a.

A team of summer interns and you're
gonna get some good data back and

you're gonna get some dad bad data back.

And if you're researching a topic, a
lot, it can just save you a lot of time.

That's the my big takeaway on on, on ai.

I've got one other general
comment on ai, but Steve and

Dennis any thoughts before I,

Farrar: mine's just on the technology
adoption accelerating I think some

of that is going to result in more
merger and acquisition activity as

people, just, I can't afford it.

I can't get the staffing to do it.

My customers are demanding it.

So I think mergers and acquisitions
will probably continue to accelerate.

Treichel: Got it.

Got it.

Dennis?

Bauer: No I was gonna talk on model
validation to ensure accuracy and then

you're not being biased and then you
can explain, you gotta understand why.

It kicked out this answer, so you
gotta be able to explain the decision.

So model validation
can help with all that.

Treichel: Great point.

The, so ai I have a second podcast, credit
Union Regulatory Guidance, which uses an

AI voice and we'll it's audio book style.

Which is where I started to
learn some of the nuances of ai.

And I will also do some AI summaries
of bigger documents with the host

Samantha shares which is Samantha's
the name of the AI voice and

shares, of course, for Credit Union.

So if you haven't listened
to that, check that out.

And my final comment is a
pivot to something on AI

related to N-C-A-N-C-A Board.

Chairman Halman has talked about how
he wants to be able to embrace it.

Conversations that I've had indicated
to me that NCA and government

agencies are not allowed to use it.

And in my keeping up with stuff at
NCUA, I downloaded some recent IG

reports to Congress and they talked
about so they have to report on anybody

over a certain pay level if there were
any actions taken against somebody,

and there was a reference in there.

Got caught that fly too.

Multitasking.

There, there was a reference
in the document to somebody.

One person resigned and another
person wa decided to retire because

they had used their personal computer
and sent private NCA information

to their personal computer.

And I later learned when I asked somebody
who, when I pointed this out to somebody

who was either at NCA or recently left
NCAI posed the question, did you see that?

And what I learned was.

That individual had sent it over to their
personal machine because their machines

are locked down from using ai, and they
wanted to use AI to create some of their

presentation that I'm interpreting a
little bit there, but I know it definitely

they used AI when they sent it over
or I was told that's what they did.

And then they denied, and you can
see that in the report, they denied

having done it, which the coverup
was as bad as the crime as they say.

The chairman at NCA wants to embrace ai.

I think that's smart.

Government agencies have to be careful.

I think that's smart because
you don't know you don't know

what that AI can open you up to.

It's here to stay.

Embrace it but don't overuse it.

And if you're at a credit union, just
be very careful about building out those

systems as you guys discuss discussed.

All right, guys, we got a call to get on.

Some of us have a call with
a client here coming up.

Any last ten second elevator
pitch comments before we wrap?

Our first with flying colors,
the Credit Union Roundtable.

I don't.

Very good.

Steve, Todd, Dennis, appreciate
your time as always, listeners,

I want to thank you watchers.

I want to thank you.

I for watching.

This is Mark TriCal signing
off with flying colors.