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FEDERAL DEPOSIT INSURANCE CORPORATION

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ADVISORY COMMITTEE ON COMMUNITY BANKING

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MEETING

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THURSDAY,

OCTOBER 10, 2019

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The Advisory Committee on Community 

Banking convened at 9:00 a.m. in the Federal 

Deposit Insurance Corporation Board Room, 550 

17th Street, N.W., Room 6010, Washington, D.C., 

Brandon Milhorn, FDIC Chief of Staff, presiding.

PRESENT:

BRANDON MILHORN, FDIC Chief of Staff

MARTIN GRUENBERG, FDIC Board of Directors

DICK BESHEAR, Chairman, President, and CEO, First

Security Bank and Trust Company

FRED DeBIASI, President and CEO, American Savings

Bank

CHRIS DONNELLY, President and CEO, Bank of the

Prairie

JAMES J. EDWARDS, JR., CEO, United Bank

KEITH EPSTEIN, Executive Vice President and CEO,

Roxboro Savings Bank, SSB

SARAH GETZLAFF, CEO, Security First Bank of North

Dakota

KENNETH KELLY, Chairman and CEO, First 

Independence Bank

BRUCE KIMBELL, President and CEO, First Community

Bank of the Heartland

THOMAS LEAVITT, President and CEO, Northfield

Savings Bank
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LORI MALEY, President and CEO, Bank of Bird-inHand

GILBERT NARVAEZ, JR., President and CEO, Falcon

International Bank

MARK PITKIN, President and CEO, Sugar River Bank

ALAN SHETTLESWORTH, President and COO, Main Bank

CATHY STUCHLIK, Chairwoman and President, 

Clackamas County Bank

LOUISE WALKER, President and CEO, First Northern

Bank of Dixon

LEN WILLIAMS, CEO, People's Intermountain Bank

ALSO PRESENT:

LISA ARQUETTE, Associate Director, Division of

Risk Management Supervision

SHANNON BEATTIE, Section Chief, Division of Risk

Management Supervision

BENEDETTO BOSCO, Section Chief, Division of Risk

Management Supervision

CHAD DAVIS, Deputy to the Chairman for External

Affairs

MICHAEL DEAN, Regional Director, Atlanta Region

DOREEN EBERLEY, Director, Division of Risk

Management Supervision

KRISTIE ELMQUIST, Regional Director, Dallas

Region

WILLIAM HENLEY, Associate Director, Division of

Risk Management Supervision

MARTIN HENNING, Deputy Director, Division of Risk

Management Supervision

SANDRA KERR, Senior Program Specialist, Division

of Risk Management Supervision

M. ANTHONY LOWE, FDIC Ombudsman

THOMAS LYONS, Section Chief, Division of Risk

Management Supervision

PATRICK MITCHELL, Deputy Director, Division of

Insurance and Research

SHAYNA OLESIUK, Associate Director, Division of

Insurance and Research

BETTY RUDOLPH, National Director for Minority and

Community Development Banking
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CONTENTS

Introductory Remarks .......................... 4

Discussion of Local Banking Conditions ........ 7

Insurance and Research Update ............... 111

FDIC Ombudsman Update ....................... 139

Supervision Update .......................... 162

Opportunity Zones: Tools and Resources ...... 236

FDIC Subcommittee on Supervision

 Modernization ............................. 263

Closing Remarks ............................. 265
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P-R-O-C-E-E-D-I-N-G-S

8:58 a.m.

MR. MILHORN: Good morning. Welcome 

to October meeting of the FDIC Advisory Committee 

on Community Banking. We really thank you all 

for agreeing to be here and participate in this 

group. Chairman McWilliams is traveling 

overseas for a speech with the International 

Association of Deposit Insurers. She regrets 

that she can't be here. Obviously, she is 

probably a much better overseer of this committee 

than me, but she certainly appreciates your time 

in being here, and we've got a good agenda 

planned. I will let you guys talk and primarily 

stay out of the way.

Before we get started, I'd like to 

take a minute to welcome some of our new members 

to the Committee who are here for their first 

meeting. Sarah Getzlaff, CEO of Security First 

Bank of North Dakota, New Salem, North Dakota. 

Welcome Sarah.
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MEMBER GETZLAFF: Thank you.

MR. MILHORN: Gilbert Narvaez, 

president of CEO of Falcon International Bank, 

Laredo, Texas. Welcome, Gilbert. 

Cathy Stuchlik, Chairwoman and 

President of Clackamas County Bank, Sandy, 

Oregon. Welcome. 

And Mark Pitkin, President and CEO of 

Sugar River Bank in Newport, New Hampshire. 

Thank you to all our new members. Welcome to the 

table. You know, our members serve two-year terms 

on the Committee and we regularly add new 

members, to make sure that we've got a broad 

perspective on what's happening with our 

community banks across the country. So we are 

glad that all of you could join us here with some 

of our older members, our veteran members. So 

again, welcome to everyone, and I'll turn the 

program over to Chad Davis, who will moderate 

today's meeting. 

MR. DAVIS: Great. Thank you 
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Brandon, and I'll add my welcome to the new 

members especially, but everyone, thank you for 

making the trip again. We're going to start this 

morning with our discussion on trends and local 

issues. For the new members, this is what we 

talked about, where we go around the table and 

everybody gets a few minutes to tell the group 

kind of what they're seeing from their 

perspective.

After that, we've asked some FDIC 

staff members to talk about the agency's 

observations from a national and regional 

perspective. Shayna Olesiuk, Associate Director 

of the Regional Operations Branch from our

Division of Insurance and Research, is going to 

discuss the FDIC risk review that was published 

in July.

We also have two of the FDIC's 

regional directors with us today to discuss 

observations of local FDIC staff. Going forward, 

at each meeting, we'll bring in two regional 
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directors. We'll rotate those throughout the 

year, so that hopefully over the year we'll have 

voices from all six regions represented.

Today, we have Kristie Elmquist and 

Mike Dean from Dallas and Atlanta, respectively, 

and so if I may, I'll start with Kenneth Kelly to 

my left, and yes, he was aware that he gets on 

the spot first.

(Laughter.)

So, we will rotate left to right. 

Again, if you could just take a few minutes and 

we will work a break into the discussion at some 

point. I know everybody just had breakfast and 

coffee -- so Kenneth.

MEMBER KELLY: Great. Thank you 

Chad. Good morning everyone. I'm Kenneth 

Kelly. I serve as Chairman and CEO of First 

Independence Bank, and I'm glad to report that 

overall, things are going well in our market. I 

want to talk a little bit about housing, labor 

markets, and consumer confidence. The housing 
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market is a tale of two cities. We have an 

infrastructure of a lot of dilapidated housing 

inside of the City of Detroit. In the desirable 

space, the other side of that tale of two cities 

is really a limited supply of housing stock 

that's desirable. We're seeing that there's been 

a limited amount of skilled labor from the 

construction perspective, and then we're also 

seeing developers just being very skittish of 

going out and supplying speculative homes in that 

market. 

On the labor market side, it's pretty 

challenged in the market as it relates to skilled 

labor, and we're seeing that impacting the 

economy in general. Unemployment in the overall 

market is about 8.9 percent, versus the U.S. 

average of 3.9 percent. But overall, we're still 

seeing a moderation in the overall economy there.

The challenges of the Bank at the 

local level, we're seeing compression in net 

interest margins. We're seeing deposit requests 
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rising at a rate that's faster than seeing the 

ability to make loans. In fact, we're seeing 

with loans, actually, that the trend has been 

coming down. We're also seeing credit quality 

begin to change, in that competition for parent 

guarantees and others is changing the way that 

people are making loans, so that's a trend that 

we're seeing. That is consistent with what we're 

seeing in the discussions that I had last week 

with my peers at the Federal Reserve based there 

in Chicago.

(Siri just decided to walk in.) A

couple of other topics I'd like to talk about in 

general -- I think cybersecurity is an issue that 

many are concerned about. Fintech is a concern 

we've talked about in the past, but would like to 

see if there's a position that can be taken where 

there are some guidelines created around 

partnerships and what that should look like going 

forward, because we're facing challenges as it 

relates to fintech.
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In my role as the National Bankers

Association Chair, I'd like to take a moment just 

to thank the Chair for her support and being there 

and speaking last week at our conference. I 

thank Director Gruenberg, Betty Rudolph and 

others for their support of the National Bankers 

Association, ensuring that we're continuing to 

preserve and promote minority banks in the 

country.

The other thing I would like to talk 

a little bit about is the unbanked. I think we 

share the concerns regarding the unbanked and how 

it disproportionately impacts low- and moderateincome communities and in particular people of 

color.

One request we'd like to ask is to 

look at developing some form of a cost analysis 

towards the unbanked, that will give us an 

opportunity to have discussions around the 

importance of getting into the banking system --

so that is a request we'd like to have. So those 
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conclude my comments at this time. Fred.

MEMBER DeBIASI: Thanks Kenneth. 

Good morning. Fred DeBiasi, American Savings 

Bank of Middletown, Ohio. We'd like to start off 

this morning by asking a favor of Kenneth to my 

right and Keith to my left, if they could nudge 

me this morning and keep me awake after that 

fabulous breakfast. I think I kind of need a 

nap. I'm not a coffee drinker, so it's really 

difficult to stay awake, but that was excellent.

Back home, again in the Midwest, you 

know, Middletown, Ohio, is certainly in the Rust 

Belt. You know, things have improved. We are 

certainly much more stable than we were obviously 

during the crisis, as most of us are. But just 

to give a little just anecdotal evidence of what 

we're seeing now compared to where we were, just 

as an example, obviously delinquency is virtually 

non-existent now.

I don't want to -- knock wood -- and 

not to jinx ourselves. But we're not seeing much 
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in the way of delinquency at all. We did have a 

situation this last quarter, where we did have to 

take a home back due to -- the owner was deceased. 

He passed away, didn't have any heirs. We ended 

up -- I'm not going to bore you with all the 

details. But we did have to take the house back 

into our REO portfolio.

Again, just to give you an idea. This 

house was in a middle class, lower middle class 

neighborhood, and you know, ten years ago, even 

as recently as five years ago, it probably would 

have taken six to nine months to even take this 

property back. It would have been -- our county, 

I think, was the second highest county in terms 

of foreclosures in the state of Ohio.

Fast forward to today, we took this 

house back and listed it with a realtor. Again, 

not a very -- not a super affluent neighborhood. 

Within a week, we had seven offers and got more 

than our asking price for the home. That just 

gives you an idea where we're at in terms 
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of -- and there's a lot of factors that go into 

that. Obviously inventory is low right now, and 

there's demand for living space.

So we've come a long way, but again I 

wonder, we've talked about it earlier, but I was 

wondering if that brings on another set of 

problems. You know, is real estate inflated now 

and are we into a bubble? So, you know, while 

we feel good about that compared to where we were, 

you know, five to ten years ago, obviously I can 

tell you we did not take a loss on that house.

We're talking, you know, in the low 

hundreds. Like I said, ten years ago, even five 

years ago, we would have easily lost $15,000 on 

the house, we would have taken a loss, maybe even 

$20,000 on that same home. So, you know, that's 

a little bit of anecdotal evidence of kind of 

what we're seeing. Things are certainly better, 

not perfect. Unemployment in our community is 

over five percent, which is above the national 

average, as Kenneth mentioned, in the high 
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threes. 

But we feel good. We're in a better 

place. We feel good about where we're at and 

hopefully we can continue this trend we're on and 

with that, I'll pass things over to Keith. So 

thank you. Thank you for your time and thank you 

for the opportunity to speak to you today.

MEMBER EPSTEIN: Good morning. Keith 

Epstein with Roxboro Savings Bank, Roxboro, North 

Carolina. I appreciate the opportunity to be 

here and to contribute to this committee. We are 

a 96-year old mutual savings bank with $225 

million in assets located in Person County, North 

Carolina, population just shy of 40,000.

We are positioned just north of Durham 

County, on the northwestern corner of the 

Triangle, and to our north our rural communities, 

agricultural communities just south of the 

Virginia state line. So it gives us an 

opportunity to bank two pretty distinct customer 

bases, one metropolitan and one rural. 
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Small business and consumer lending 

are important but complementary portions of our 

business. Our primary focus is on housing, and 

residential construction in particular has been 

a strong and growing segment of our business. 

Year over year, we have seen an increase in 

quantity of 14 percent and dollar volume up 21 

percent, and the micro-economic impact of the 

construction loans that we're making is difficult 

to overstate.

Most of the contractors we're working 

with are local general contractors using local 

subcontractors, purchasing their materials from 

the local supply houses. So we feel like that's 

a critical role that we play. Those transactions 

really give us a chance, if you'll excuse the 

pun, to build a relationship with our customers 

that can have some lasting value.

The biggest challenge that we find 

amongst our contractors that we work with and 

from what we hear in the construction industry is 
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a shortage of labor. They have full pipelines, 

but they can't build out as quickly as their 

customers would like. 

The real estate market is quite 

healthy where we are. Fred mentioned inventory 

levels being low in his region, and ours in the 

Triangle there's what I call a scant 2-1/2-month 

supply of inventory and in the northern Triangle,

where we operate primarily, 3.1 months. These 

figures are through July 31, according to the 

Triangle Multiple Listing Service.

The mortgage market is very 

competitive and very crowded in Durham and Chapel 

Hill. We do have a small but meaningful and 

profitable portion of that market. But in the 

northern portion of our territory, the more rural 

communities, there is not the same level of 

competition, and we are committed to being a 

reliable source of credit and investment in those 

communities.

I was very pleased to have an 
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opportunity to review and then listen to the 

hearings related to the Treasury's Housing 

Finance Reform Plan. In particular, we were 

concerned and remain concerned, but to a lesser 

extent now that we've heard the plan, about

maintenance of equal access to the secondary 

market.

Obviously, we are a small volume 

lender. We want to have the ability to provide 

our borrowers with the same pricing and the same 

products that the higher volume lenders can. It 

sounds as if there is some bipartisan support for

continuing on with the mandates in some form or 

fashion that will allow small lenders to 

participate in the secondary market, and we 

certainly hope that that is built into any new 

administrative or legislative action that's taken 

as the GSEs are reformed.

Origination costs are greater in the 

rural communities, as I'm sure most of you know. 

It's not the ability to do desktop valuations. 
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It's just not the same level of data available 

for comparables. There's not the ability to do 

instant income verification or employment 

verification. Again, you have a number of selfemployed, especially those that work in the 

agricultural field.

For those reasons, not to mention lack 

of broadband service in some areas that prohibit 

the transaction from being conducted 

electronically, the larger originators are just 

disinterested. Where the subdivisions stop, you 

know, that's where we play a critical role, and

so we hope that any GSE reform will recognize 

that, and it seems as though there's discussion 

that is encouraging on that front.

For the first time, more than half of 

the loans, the mortgage loans originated in our 

markets are being issued by out of state or nonlocal online lenders, 50.5 percent. That's up 

five percent just from the December 31 figures of 

2018. So that's a trend that we're combating 
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with our own online and new electronic delivery 

channels for the markets that demand those 

services.

The Triangle Region continues to lure 

new businesses. Recent examples just since our 

last meeting include Policy Genius, an insurance 

company that's bringing 350 new jobs to Durham. 

Medline Industries is a medical supply provider. 

They're going to be investing $63.5 million in a 

distribution center in neighboring Orange County, 

with the promise of 250 new jobs.

And 35 miles north of Durham, where 

we operate in our small town city of Roxboro, 

population, 8,362, year-to-date we've had 15 

ribbon cuttings for new and expanding businesses. 

Recent examples include a law firm, an ice cream 

parlor and a hair salon, and while those small 

businesses typify our customer base and the kind 

of activity that we generally have in our small 

community, we do have some larger industry and a 

recent example, Polywood, is a manufacturer of 
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furniture. They opened their new center in 

Roxboro two months ago. The ceremony's going to 

be held at the end of this month, and when that 

expansion was announced, Governor Roy Cooper was 

on hand to make the announcement. He proclaimed 

that there would be 384 new jobs, average wage, 

annual wage of $43,000. So that's a big win for 

our community.

The banking landscape is changing a 

bit too in our region. J.P. Morgan Chase opened 

their first North Carolina branch in August, not 

long after our last meeting. Jamie Dimon was on 

hand for the ribbon-cutting in Chapel Hill. 

SunTrust and BB&T are working ever more closely 

towards the completion of their merger. Each has 

an office in our town and the SunTrust location 

is now up for sale. We understand that 

throughout our state, probably throughout their 

combined footprint, they will be seeking to 

achieve some cost savings and some efficiencies

through branch closure and consolidation, and we 
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think that it's going to provide an opportunity 

for us, in particular with the smallest of their 

small business customers.

The northern portion of our county and 

smaller tracts in urban Durham and Chapel Hill 

have been designated Opportunity Zones. The 

Richmond Fed, in conjunction with our local 

economic development office, recently conducted 

a workshop for community stakeholders and 

potential investors, and that did spur quite a 

bit of interest.

We would ask that the regulatory 

community consider granting automatic CRA 

eligibility to loans issued by banks to qualified 

Opportunity Zone funds for projects that would be 

occurring within the lending bank's assessment 

area. It seems as if that would align the 

interests and the motivations of both the 

investor and the lender. 

The timing seems right in that I know 

there are ongoing discussions about reforming and 
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modernizing CRA. We certainly appreciate the 

FDIC's willingness to listen to our opinion and 

that of others and the methodical but deliberate 

way that they are going about contributing to 

that process.

According to the ABA, there are over 

$100 billion in CRA-eligible loans issued 

annually. So modernizing CRA is not an academic 

exercise. It's not just a matter of tweaking the 

examination process or the examination criteria. 

It really has the potential to steer enormous 

sums of capital, and in changing in the 

eligibility of what will or will not grant a bank 

or a lender CRA credit, it is going to impact the 

flow of that credit.

We would ask the FDIC and others to pay special 

-- give some special considerations to -- rural 

communities who have fewer banks operating in 

those markets, and perhaps are no longer part of 

anyone's assessment area. So we ask for that 

consideration. In summary, our business is very 
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good. We're very fortunate. Credit quality 

remains good. 

As the real estate market remains 

strong, we expect that our prospects will 

continue to be bright. We are investing heavily 

in technology. What was to be a 12- to 18-month 

project to launch a digital platform has turned 

into an overhaul of really our entire 

infrastructure. But at the end of this project, 

we are going to be able to, we expect, to meet 

the needs of our customers and the next 

generation of customers in our markets. 

So one of our biggest challenges to 

date is trying to manage these projects. We have 

30 employees, none of whom is a project manager 

with a project management team. So all of us 

have to just contribute where we can and maintain 

our focus on our existing customers and the 

business at hand.

And as others have said, with the 

Fed’s easing and interest rates falling, we have 
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not been able to adjust our deposit rates and 

move those downward without putting our funding 

sources at risk, so margin compression is a 

concern. It hasn't impacted us too much to date, 

but we expect that going into next year, there's 

going to be a lot of pressure on our margin, and 

that is something that we're going to have to 

contend with. I thank you so much for listening.

MEMBER BESHEAR: My name is Dick 

Beshear. I'm with First Security Bank in 

Oklahoma City. We've recently here in the last 

year become designated a minority depository 

institution. We're kind of still exploring the 

ways to leverage that to a certain degree. As 

far as economic conditions in Oklahoma City, 

we're seeing low unemployment. As a matter of 

fact, a lot of industries have help wanted signs 

out. They're having a hard time finding 

employees, as Keith mentioned, especially in the 

construction trade. A lot of things are going 

on, but it's just having a hard time finding 
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quality employees.

We're also anxious to see what happens 

with the cannabis legislation that is hopefully 

on track to be passed here in D.C., and see if we 

can -- since Oklahoma passed or approved cannabis 

or CBD here about a year ago -- we're still trying 

to figure out what we need to do to go forward in 

that area.

As far as banking goes, like I said,

the economy's basically good. We're starting to 

see a lot of competition for loans and deposits, 

and as a consequence, we're starting to see 

interest rate compression as well. Like I said, 

basically things are pretty good in Oklahoma 

City, and I'll just kind of leave it at that and 

turn it over to Louise.

MEMBER WALKER: (Okay.) Louise 

Walker, First Northern Bank, and we are located 

between San Francisco and Sacramento, and so I'll 

talk about what's going on in our area. We 

continue to believe that there are considerable 
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economic risks due to the length of the current 

recovery. 

There are regional excesses exhibited 

by extremely high commercial real estate and 

residential real estate values in the Bay Area. 

The lack of skilled labor, housing affordability 

and the sustainability of new home construction

-- they all present elevated risk. Having said 

that, we believe that the overall regional market 

in both San Francisco and Sacramento is mostly 

healthy.

Sacramento is one of the top markets 

in the country based on sales per project, and we 

do have considerable ag in our area, and ag is 

holding up well, with walnut prices stabilizing 

and almond prices actually increasing a bit. 

There are -- the CRE is a primary concern -- that 

many competitors are making significant 

concessions on price and terms, creating 

additional market risk.

Competition for funding, specifically 
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in core deposits, remains strong and some need 

that to offset borrowings or deposit 

concentrations. Our loan balances in the first 

quarter dropped. They were flat in the second 

quarter due to delays in agriculture planting, 

construction in general, C&I activity as a result 

of the usually cool and wet weather this past 

spring.

However, we've seen a stronger loan 

and deposit growth in the third quarter. We 

opened a new branch in a market in our Sacramento 

area this past Monday. We're getting ready for 

our first quarter compliance and CRA, so it makes 

me think about CRA modernization, and I echo 

exactly what Keith said. We have Opportunity 

Zones in our area. We actually have an OREO 

property in an Opportunity Zone, and I thought 

the piece that you were going to be covering, 

that was helpful on different things that banks 

can do. But I think it's important that we know 

that we receive CRA credits, so thank you for 
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bringing that up Keith. Also glad to see on the 

agenda hemp and the discussion on hemp. Since 

we do have an agriculture portfolio, we are 

getting many questions from borrowers who are 

considering, and actually some are growing it, so 

clarifying compliance and reporting requirements 

in that area specifically would be helpful. In 

California, we're preparing to comply with the 

California Privacy Act, and deal with the passage 

of AB 857. For those of you who don't know what 

that is, that is the formation of the public bank. 

So we'll be dealing with that and just thanking 

the Chairwoman on her recent comments on the need 

for community banks to broaden the adoption of 

technology, and focusing or commenting on core 

providers, so that we're able to meet our 

customers' expectations for a totally digital 

experience, and for the FDIC Tech Lab project 

that is being worked on. So that's it. Mark.

MR. PITKIN: Well good morning, 

everyone. My name is Mark Pitkin from Sugar 
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River Bank in Newport, New Hampshire. The first 

thing I want to do is to say thank you for 

allowing New Hampshire to have its voice around 

the table. We certainly appreciate that. Sugar 

River Bank is a 124-year old mutual bank, and we 

have six branches primarily from Concord, which 

is central New Hampshire, to the west, which 

borders Vermont.

An interesting story if I may, because 

all I was told was I could bring my observations, 

thoughts and perspectives. So I don't have a lot 

of the individual detail that others have, but I 

thought I'd share a couple of stories. So the 

first one is, I have told a few, but I am 

incredibly honored to be able to say that I am 

around this table and I started my career as an 

assistant bank examiner with the FDIC. So if you 

would have ever told me, right Lisa, back in the 

Concord field office in 1991 that I would be 

sitting around this table, I would have thought 

you were all crazy. So again it's interesting 
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how everything comes full circle. So I hope my 

perspective is helpful in the way that I have 

been an examiner. I will say I've only been an 

examiner for four years, and I've been at Sugar 

River Bank for 26, so certainly one outweighs the 

other.

A couple of other things that I just 

wanted to share. Sugar River Bank is very much 

interested in making sure we are sustainable and 

viable as a mutual, and we have realized that an 

important way to do that is through partnering 

with fintech.

So another story. So back in 2015 in 

particular, Sugar River Bank was the first small 

community bank that partnered with Lending Club 

to provide national-based unsecured consumer 

loans. So interestingly at that time, in every 

single publication that was put out by any type 

of ABA, ICBA -- I can still see the headlines and 

I saved them -- Mark Pitkin is sleeping with the 

enemy. What are you doing partnering with these 
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fintechs? So I am so happy to say that at this 

point in time, ABA in particular, has individuals 

that do nothing but figure out how banks can work 

with fintech. So I feel blessed that we were 

able to start that or maybe pave the way a little 

bit, and with regards to that, one suggestion 

that I may have to examiners is -- please don't 

come to the bank with any predetermined notions 

as to what makes sense and what doesn't make 

sense. So the first comments we got, because we 

started working with a company called 

BancAlliance, of which I sit on the Board, we 

were doing middle market C&I loans that were 

basically generated through BancAlliance. So we 

had to go through that process. But sometimes 

it appears -- and our examiners are wonderful. 

I mean they are some of the best in New Hampshire 

without question. But there was a slight 

predisposition that what is a community bank at 

that time of $250 million working with fintechs 

and getting loans across the country? All I can 
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say is those have been the two most successful 

products we have had at our bank for the last 

probably three to eight years and without those,

it truly would have made us much less sustainable 

and viable. So when people come in and they say,

“Mark, those are very risky assets,” and I say, 

“I don't disagree, but there was much more risk 

to the bank if we did not have these 

relationships.” So just a different perspective. 

I do know that one of the examiners, which is 

wonderful, spent two weeks in my office learning 

about Lending Club. But what I also heard from a 

number of other bankers that were starting to use 

that is that they had examiners that were 

spending two weeks in their office. So the other 

perspective is, if you find that there is 

something that is being used by multiple banks in 

multiple different regions, maybe one of the best 

things to do is to send a team similar to the 

syndication or SNC, and send a team to maybe go 

through at least that process once, and then 
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maybe have at least some sort of idea as to what 

the situation is. 

So to the actual strength of the bank, 

and those are my two observations that I thought

were important, the actual strength of New 

Hampshire and the bank. So New Hampshire is 

still very strong. I hear some of the 

unemployment rates. We are fortunate our 

unemployment rate in the poorest county in New 

Hampshire is 2.4 percent. So we are incredibly 

strong. We are hard-working people. We support 

individuals of all types and always will, and 

that's the strength of New Hampshire, and 

everything else is going well. So again, I 

apologize. I didn't have a whole lot of 

specifics, but I thought maybe those observations 

were helpful.

MEMBER STUCHLIK: Thank you. Thank 

you for the opportunity to be here this morning. 

I'm Cathy Stuchlik, president of Clackamas County 

Bank, the oldest community bank in the state of 
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Oregon. We were established in 1911. We're an 

S-Corp with about 37 shareholders -- we have 37 

shareholders. We are headquartered in the small 

town of Sandy, Oregon, which lies just east of 

the Portland/Vancouver area, and at the foothills 

of Mount Hood, which is near a popular year-round 

recreation area.

Our main office and three branches 

serve communities with a total population of 

about 135,000. I am fourth generation of the 

Proctor family to help guide the bank, and with 

my two sons, CFO and Chief Lending Officer, 

representing the fifth generation. We have about 

$226 million in assets and run with about a 75 

percent loan-to-deposit ratio.

We are predominantly a commercial 

bank, focusing on commercial real estate and 

construction. Our consumer lending is minimal. 

Our market right now is relatively stable, but it 

is showing signs of slowing. Our loan growth is 

moderate, but our deposit growth is keeping pace. 
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Our loan quality is good with no delinquencies or 

problem loans. 

We've had a number of years now that 

recoveries have outpaced losses, and by the end 

of this year, the bank will have recognized 

recoveries of 100 percent of our workout loans 

that were charged off in the last recession. In 

addition to a full suite of traditional banking 

services, we offer property and casualty 

insurance, health insurance, financial and wealth 

management.

In Oregon, banks are doing well, 

although there is concern about the overall 

business environment in Oregon given we have new 

taxes, new employer mandates and other statelevel policies that are burdening all our 

businesses. 

Oregon is among the states with the 

lowest number of bank headquarters, especially 

considering our population. Currently we have 

16 community banks headquartered in Oregon, and 
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in comparison, we have 59 credit unions 

headquartered in Oregon. So communities risk 

losing that community bank option. We feel 

credit unions are out of control in many areas, 

and especially in Oregon and Washington. They're 

becoming commercial lenders by the acquisition of 

community banks, and with the recent changing in 

the appraisal threshold, it runs even further, 

that inequality between banks and credit unions, 

and should give us all cause for safety and 

soundness concerns.

In Oregon, nine out of ten of our 

largest financial institutions headquartered are 

credit unions. So in addition, we just recently 

had a gross receipt tax put into effect for next 

year from our Governor, and there again, credit 

unions are exempt from it. We would appreciate 

a dialogue for looking at the largest credit 

unions, which for all intent and purposes are a 

bank, and at a minimum holding them to the same 

standards as their same size peers in the banking 
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world.

Another concern or challenge we have 

is protecting our systems from cyberattacks, but 

still being able to deliver innovative products 

and services through technology to remain 

competitive. We are also seeing competition 

offering lower rates and longer terms, and our 

mind set is the same as it was during the last 

downturn, and that's that we're going to give up 

profit today for long-term safety and stability.

As a community bank, we would 

appreciate continued discussion on small 

community banks being exempt from impounding 

taxes and insurance on residential real estate 

loans; increasing the threshold for HMDA 

reporting requirements; relief from complicated 

consumer real estate disclosure requirements, as 

it directly impacts the timeliness of servicing 

our customers. We are also hopeful of the 

agencies working together to jointly issue 

consistent CRA reform and help with the BSA/AML
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reform in Congress. 

We'd like to see regulations 

thoroughly vetted before they are implemented.

For instance, CECL had an original implementation 

date at our bank that we worked hard to comply 

with. That date now has been set out years. In 

the meantime, we purchased software and spent 

numerous hours in preparation for that original 

deadline.

The regulatory climate overseeing 

marijuana and hemp remains a concern for us and 

our ability to bank those customers, and low 

unemployment rates are causing challenges in our 

ability to hire a qualified workforce. We're 

looking forward to our upcoming safety and 

soundness exam in February. 

We would like to commend the FDIC on 

the quality and professionalism of our Oregon 

examiners. We consider our examiners a valuable 

resource, and we rely on them for guidance 

throughout the year, not just at exam time. 
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They've been fair and consistent, giving us 

feedback on areas that we need to improve on, and 

they commend us when we're doing things right. 

So with that, thank you. 

MEMBER WILLIAMS: Good morning. I'm 

Len Williams. I am CEO of People's Intermountain 

Bank located about 30 miles south of Salt Lake 

City, Utah. We're a 106-year old community bank 

with just under $2.5 billion in assets, and we 

have 27 branches that basically span the state.

What I'm going to talk about is a 

little bit of what's going on in the Utah economy, 

but it's hard to give a clear picture when we've 

got a branch in Salt Lake and we've also got one 

in Preston, Idaho, quite different economies, an 

ag-based economy versus a metropolitan area 

there.

Utah in general has a very diverse 

economy, continuing to grow in excess of the U.S. 

GDP, with unemployment under the U.S. GDP. We 

continue to have net in-migration with higher 
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paying jobs. Although that sounds great and it's 

been working well for us, there are some concerns 

starting to creep up as far as affordability for 

folks from the rural areas and some of the instate younger folks coming up through school.

Housing affordability is becoming more and more 

of an issue.

Housing is in demand due primarily to 

the increase in high-paying jobs, and those homes 

are being purchased and filled by a lot of outof-state in-migration, a lot from California, 

particularly the tech area, which Utah has put 

some focus on over the past several years. 

As a matter of fact, we've seen a lot 

of speculative growth. We've got over two 

million feet in commercial spec buildings going 

up in our market right now. Interesting time for 

the bet to be going on from our perspective, but 

investors are putting a lot of money out there 

with a lot of faith in the long-term economy.

We've also recently completed our 
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safety and soundness exam, the first one we've 

had in the last 18 months and the experience was 

generally good. You know, I think we found 

examiners open to discussion. It was more 

collaborative than it has been in some times 

past, and I think we all walked out pretty 

satisfied with the results and the interaction 

and the plans going forward. So I commend the 

FDIC and the state of Utah for their work with us 

through that process. 

One issue that we're seeing, that 

we're having a hard time finding guidance on, is 

in our vendor management program and 

understanding who we interact with, is coming up 

with a way to validate and understand cloud-based 

suppliers. As a matter of fact, that was one of 

the discussions we had during the exam, is we're 

using a couple of cloud-based, and we go through 

our standard underwriting and discussion and from 

the examiners, the feedback we got was, “You 

know, it's great that you're doing this. We know 
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they're nationally known. We know they're used 

universally, but we need more input.” And our 

question was, “Well, what do you use to 

understand them?” and the response we got was, 

“Well, that's a really good question. We don't 

know either.” So I think universally, the 

examiners, the banks, as we look at some of these 

fintech options and opportunities to interact 

with, we've got to understand a better way to vet 

those that we're on the same page with. We 

continue to invest in technology, and determining 

who those -- I heard earlier -- who those fintech 

partners need to be. You know, we're in a state 

of Utah, where there are a lot of industrial 

banks. It's one of the top charterers in the 

country, and we've actually found that probably 

more helpful than threatening, just due to 

they're not necessarily acting in our market, but 

they're providing goods, services, and technology 

that are helpful. Our local bankers’ association 

does a pretty nice job keeping all of us together, 
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to kind of work out and talk about plans like 

we're doing here. We found some of those tech 

companies quite helpful. 

We continue to invest in loan loss 

reserves to ensure a fortified balance sheet 

during these days of plenty. Not knowing how 

long this, you know, I don't want to play 

doomsday, but not knowing how long this will 

last. . . 

I was encouraged a week ago. I saw 

some graphs showing the contraction and expansion 

of markets since the Civil War. The takeaway for 

me was that historically, I mean there have been 

some drop offs, and then a fairly sharp rise. 

This one is the slowest rise in history, but also 

the longest. So there's a long-term 

sustainability factor that was somewhat 

encouraging. So I'm not quite as doomsday, as 

maybe I was last time I gave this discussion.

Another fact that was interesting, and 

it pertains to our market and the U.S. in general,
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is there are more job openings than there are 

numbers of unemployed people. Which is a 

problem, frankly, in finding quality help to 

continue to grow economies. 

I am concerned about margin 

compression. We've got rates going down and most 

banks are asset sensitive. We're quite asset 

sensitive and it's a bigger impact on us. So the 

timing and movement of those due to political 

pressure versus economic pressure, I'm not sure 

what the difference is. But I think a lot of 

banks will be hurt by that compression issue that 

we're looking at. 

We are seeing competition, as had been 

mentioned earlier also, and I'm not so concerned 

about rates moving. We'll compete as we need to 

there, but I'm starting to see concessions on 

financial covenants and structure, which are much 

more concerning. Looser underwriting standards, 

which cause concern over the long run for the 

whole industry. 
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With that, the economy's strong. We 

have a couple of agricultural segments that 

struggle a little bit more in this economy. But 

we're still pushing ahead, hopeful and as we like 

to say, hope for the best, be prepared for the 

worst and take whatever you get. Thanks.

MEMBER NARVAEZ: Good morning. I'm 

Gilbert Narvaez, Jr. I'm President and CEO of 

Falcon Bank, and I want to thank the FDIC for 

allowing us to be part of this committee and I'm 

certainly looking forward to continuing to 

contribute. A little background on our bank. 

We're a $1.3 billion independent community bank. 

We're headquartered in Laredo, which is the 

number one port right now in the country for 

international trade, so international trade is 

very important to us.

Our network is we have 17 branch 

locations and we -- our markets span from the 

Lower Rio Grande Valley from Brownsville-McAllen 

up to Laredo, Eagle Pass in Del Rio, up the Rio 
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Grande. So we're right on the water, and also 

we're up and down the inner I-35 corridor. We're 

up in the San Antonio Metroplex, and also in the 

Austin market as well. So we've been very 

fortunate to expand into those markets, and it's 

been very fruitful for the organization.

We do have also an insurance operating 

subsidiary within the bank, so we're able to 

compete with our other competitors there in our 

markets. In terms of economic conditions in our 

areas we operate, they do continue to be very 

robust but very competitive.

The unemployment rates in most of the 

markets we operate in are right at or below the 

national employment rate. So hiring people is a 

difficult task at this point, especially if we're 

growing. 

We have been affected by principal 

paydowns on our loans. So the first six months 

of the year and actually last year, we actually 

did not grow in loans. We had a lot of loan 
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production, but there were a lot of principal 

paydowns. But we attribute that to the good 

economy. There's a lot of liquidity out in the 

market. Folks are purchasing or acquiring 

investments in properties and real estate and we 

are paying off our own or our own customers are 

actually paying down their loans.

But there's quite a bit of activity 

that continues in our markets, and in terms of 

non-performing assets, we're at record levels 

right now, where our past dues are almost nonexistent and we hope that trend continues and it 

seems like it will. On the political front, as 

I mentioned, international trade is very 

important to us, and we're hoping that the new 

NAFTA, which is the new North American Free Trade 

Agreement, which now is the United States-MexicoCanada agreement, we hope that there's a safe 

passage on that in this coming quarter, the next 

time Congress is going to be there. It is 

important to us. I think there's a lot of 
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players out there, and I say "players," investors 

out there on the sidelines that are willing to 

make investments for going forward, but they want 

to make sure that the agreement is inked. So 

it's going to be important. There is a 

tremendous amount of warehousing needs in our 

markets, and especially along the border, and 

this is, you know, the passage of this agreement 

is going to be very important to all.

Also because of our proximity to the 

Mexico border, we are -- there are also some 

political features that have happened, and what 

we're seeing is with the new presidential 

administration in Mexico, that has spurred an 

influx of investors into the states, actually 

wealthy international folks that are actually 

considering or are actually starting to move into 

neighboring states like Texas and Arizona and I 

think as far as California as well.

So they're making investments, 

bringing their funds, bringing their businesses 
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to us. So we have been the benefactor of some 

of that business and it's only, with the trade 

agreement, I think that will only solidify some 

of those additional investments that need to take 

place.

On the regulatory side, I'd like to 

commend the FDIC. We are actually undergoing an 

examination right now. We're in our final week 

of the examination and it's gone very, very 

seamless. It's been non-intrusive to our business 

and their approach, this time around and I have 

noticed the trend, that they are more structured 

and there's more, I guess, effort put into preplanning, and there's a lot of collaboration and 

a lot of communication beforehand, and I think 

that's led to a very smooth examination at this 

point. 

So as a matter of fact I'm here. This 

is our last week. So I need to -- I felt I needed 

to be at the bank. But I do have an exit next 

Tuesday. So but everything's going well, and I'd 
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like to commend the FDIC for their efforts in the 

examination process. That's all I've got. 

Thank you. 

MR. MILHORN: Sarah.

MEMBER GETZLAFF: Good morning. 

Thank you for inviting me to be here. It's 

really an honor to be invited to this committee 

and you guys also got me out of 12 to 18 inches 

of snow in North Dakota today so -- everybody was 

asking me yesterday when I was getting ready to 

leave if I was worried about getting home and I'm 

not. 

(Laughter.)

MEMBER GETZLAFF: I'll be fine if I 

have to stay an extra day or two, you know. So 

I'm with Security First Bank of North Dakota in 

Bismarck, New Salem, Center Mandan, North Dakota. 

It's a $185 million bank, third generation. 

North Dakota is an oil state and an agricultural

state. We didn't really become an oil state 

until about ten years ago, and so we got out of 
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the first recession. Things have slowed down 

considerably for us in the last few years with ag 

prices being down and oil prices being down.

At the same time, that oil brought in 

a lot of homebuilders and so we actually have 

kind of an excess supply of houses in our area. 

Our mortgage department in the last couple of 

years has not done that well. This year we're 

doing significantly better because of a little 

bit of a refi boom that we've experienced just in 

the last few months.

As a third-generation banker, I'm 

friends with several other third- and fourthgeneration bankers in North Dakota, and 

collectively I would say the thing that keeps us 

up at night is the consolidation of the banking 

industry. People ask me all the time, “Well,

what size do you think you need to get to 

survive?” Everybody thinks it's that $500 

million mark. A lot of things change at $500 

million. It's not that we don't want to grow, 
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but you lose a lot of that small town feel, that 

small town appeal, when you get to be too big. 

But we're kind of at this level where we're too 

small to get out of some things like HMDA. We're 

unfortunately right around that $100 million mark 

loan limit, so we won't get out of any of that. 

But we were lucky enough to get out of the 

expanded HMDA, although we had converted our 

systems and kind of got in line and got ready for 

that. It would have been really nice if that 

relief would have come a few months sooner.

We're also right now as of today at 87 

wires for the year. We don't want to get to 100, 

so last week we implemented a minimum 

international wire amount, and the next day, we 

had four customers say, “We're leaving for 

Nicaragua next week; we're done farming. We want 

to close our accounts. We need to do wires under 

the limit.” And of course, we do them because 

we're not going to tell them we can't, even though 

they're under that limit. So now we're at 87, 
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and trying to figure out a way to not get to 100. 

If we were going to be at 200, it would be fine. 

The cost of compliance would be worth it. But 

when you're right at 100, it's really not. When 

we work with technology vendors, you know, 

whether it's Fiserv or Jack Henry or anywhere 

else, we also feel like we're kind of priced out 

of some of these new technologies, and that's 

where fintechs probably will be a good option for 

us. We haven't really gone down that path yet, 

but for us to offer things like person-to-person 

payments or some of the other new technology 

things, it's just really expensive and some of 

the things we've tried, we just don't get enough 

traction on and when we figure out how much we're 

paying per customer that's actually using the 

technology, it's not necessarily a good return on 

investment for us, but we usually do it anyway 

because we know that if we don't, they'll go 

somewhere else.

Kind of our biggest thing right now is 
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mortgage compliance. So in my home town of 550 

people, we're the only bank in town. We're the 

only bank in the county because we're the only 

town in the county, and we don't have a loan 

officer that will do mortgages anymore. It used 

to be that the loan officer there did consumer 

loans, real estate loans, commercial, 

agricultural, whatever came in the door. Well, 

when TRID passed, all of our loan officers said, 

“We don't want to do it anymore.” So we actually 

took a mortgage underwriter from our mortgage 

department and made her our home loan specialist. 

Everything has to go through her, which is really 

good for compliance but it's really bad when 

she's out for 12 weeks because she had to have 

her ankle reconstructed. 

And so then I actually became kind of 

the TRID specialist for those 12 weeks. We kind 

of pieced it together, but then people in our 

small towns have to rearrange their schedules to 

either drive 45 minutes or our loan officer has 
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to drive 45 minutes in reverse, and some of those 

bigger competitors like Rocket Mortgage, they 

won't do those mortgages because they're hard and 

they're expensive. So we end up doing all the 

hard, expensive mortgages, and they kind of 

cherry-pick the easy ones in the bigger cities. 

What ends up happening is then, you know, -- I 

don't know if I can say this, but when a Wells 

Fargo screws up and the rest of us have to pay 

the price on the compliance side, then you drive 

banks like us out of the mortgage business, and 

then they just go back to the Wells Fargos or to 

the Rocket Mortgages or somewhere else because 

that's all that's left. So that's a big concern 

for us.

We also have an appraiser shortage, 

and thanks to Doreen, North Dakota applied for an 

appraisal waiver, and we were granted the first 

one since 1991. That was spearheaded by our 

banking commissioner in North Dakota, and the 

appraisers are really not happy with it. I don't 
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think it will affect them a ton, because all the 

GSEs are still going to require us to get an 

appraisal at the $250,000 limit, so for houses 

it's not really going to help, but on the 

commercial side it’s helped, and we're using it 

wisely. We're having any appraisal waiver usage

go through Loan Committee, because there are 

still going to be complex properties that we 

don't feel comfortable valuing. But it's nice to 

have that flexibility, and the waiver lasts a 

year, which is nice but, you know, until the 

Appraisal Standards Board steps up and changes 

the way that appraisers get certified, I think 

it's going to be an ongoing problem. The 

appraisers in our area are just kind of aging out 

and new ones aren't getting into it. It's really 

hard to make that career switch late in life when 

you have to be an apprentice for two years and 

basically work for peanuts if you can find 

someone to take you on. To come right out of 

college, I feel like it's not a big enough 
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industry where people are even really aware of 

that as a career option. It would be nice to get 

some sort of training, you know. If you can go 

to college to be anything else, why not be able 

to go to college to become an appraiser, I guess.

I think that's it for me again. Thank 

you for inviting me to be here.

MEMBER DONNELLY: Good morning. I'm 

Chris Donnelly with Bank of the Prairie in 

Olathe, Kansas. We're a $140 million bank and 

Olathe is a southwest suburb of Kansas City, 

Missouri. I'm going to hit a couple of topics 

about the metroplex or metro area of Kansas, and 

I really want to focus more on the rural section 

of Kansas.

Pretty much in Kansas City, it's the 

same as everybody else. We have a labor 

shortage. Unemployment in Olathe is under 2.7 

percent. The housing affordability is 

difficult. It's hard to find anything that's 

affordable. The margin compression is 
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difficult. We're now seeing loans being offered 

in the high 3's fixed for ten years, and we don't 

play in that market.

We're also seeing a loosening of 

standards in the credit underwriting. So we're 

obviously pulling back on that. The economy is 

still strong and things are going well in Olathe 

and the Kansas City Metropolitan and really 

metropolitan Kansas, which is not much. We're 

seeing a weakness in the Wichita area, which is 

aircraft. The Boeing issue is creating 

significant issues for Wichita, which has Spirit 

AeroSystems, which builds the frames for the 737,

unfortunately.

One thing I would like to address is 

yesterday I had the chance to sit with 31 CEOs 

from Kansas banks. They were there for a general 

conversation, but they're also preparing for a 

meeting with Chairman Powell and President of the 

Kansas City Fed, Esther George, and Jerry Moran. 

One of the things that came up was a line, a 
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distinct line, that you can see in Kansas between 

metro and agricultural Kansas. If you draw a 

line down Highway 81, which about separates the 

state in half, the western part of the state is 

suffering, and it appears and for the first time 

and some of you young bankers won't understand 

these terms, but back in the 80’s when I was in 

banking in Oklahoma and they were closing two 

banks a week, and Dick probably remembers those 

days, they came out with a couple of plans. 

Yesterday was the first time I heard it in 

probably 30 years of trying to get in front of 

the bank closures that might happen, might 

happen, from the difficulty in agriculture with 

programs that came around, capital forbearance 

and amortization of ag loans, ag charge-off 

loans.

I don't know if anybody in here remembers 

that. I remember it clearly and was one of the 

first banks that took advantage of those. And 

so the preemptiveness is what the discussion was. 
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Instead of letting lots of banks fail, can we get 

in front of it now? That was the discussion with 

Chairman Powell yesterday, because the -- as I 

look down my notes from these 31 bankers -- the 

difference between eastern Kansas and western 

Kansas is significant, and the deterioration in 

the ag banks has probably started to increase, 

and I think the FDIC clearly knows that. So what 

I was tasked to bring -- the message was -- can 

we get in front of this before it starts back to 

the old days of closing two banks a week? 

There's not two banks a week to close left; 

there's not that many.

So it's quite interesting to hear 

those old things back in the 80's, and then if 

you recall the recession of 2009 and '10 and how 

fast they were closing. Trying to avoid or get 

in front of that before it happens. So overall 

in Kansas, the bulk grain type things, we are 

hearing people for the first time considering not 

planting wheat because of the margin -- the
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profitability of it.

Also going back, corn prices and bean 

prices are difficult, and we're starting to see 

an increase in Chapter 12 bankruptcies, which is 

difficult. So anyways, my story today is what 

can we do to get in front of it before it gets 

too bad? In the 2019 Risk Review -- excellent, 

excellent product -- the section on agriculture 

clearly spells out where the issues are and it's 

right there in the center of the United States, 

which is also rural. The most rural parts of the 

country, where we might have one or two banks in 

five or six different counties, and they're the 

only one there to serve those rural settings. So 

hopefully we can find solutions to keep those 

banks viable and keep them in business to support 

rural America. 

So I'll get off my soapbox for now, 

but looking forward to talking more about it 

later.

MEMBER KIMBELL: All right. I'm one 
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of those rural bankers. Bruce Kimbell, First 

Community Bank, Clinton, Kentucky. We have 

locations in the southern, southwestern-most 

Kentucky and also northwestern Tennessee, right 

on the Mississippi River. Highly agricultural, 

highly rural, a small population basis. 

We're about $245 million and about 

seven locations throughout those two states. To 

speak to what Chris just spoke of, beginning to 

see some deterioration in ag, although last week 

we had a farm sale not 20 miles from one of our 

locations, and it brought a record price from a 

farmer, nothing more. Not an outside investor.

So there are -- we still have a wide 

disparity between the upper end of agriculture. 

This particular piece of ground brought $7,900 an 

acre. Probably the high was $6,500, $6,750, you 

know, over the last ten years. So this gentleman 

probably paid mostly cash. It was a $2 million 

purchase, and probably paid at least half of it 

down in cash. And so we're -- you know, we're 
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still there. We're still there. 

I started lending to ag in 1983 right 

at the beginning of the downfall. We know how 

to use guarantees. We know how to put those 

things in place that limit our risk. We've used 

those things extensively. We do a lot of 

poultry. We have two integrators in our part of 

the world. We have a pork integrator in our 

immediate market.

So we use guarantees a lot and have had a 

lot of success with USDA and FSA in dealing with 

that. Also SBA, when they have allowed us to 

cross over and to utilize those products when we 

do run into the funding limits, and so those 

things are always important to us. Yes, from an 

examination standpoint past dues may get a little 

high occasionally, but fortunately for us, that's 

never really led to charge offs, so there's a 

difference there, you know. And so I think 

that's one of the things we always have to keep 

in mind, those past dues may spike because if you 
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have a $2 million poultry loan come on your past 

due list for a couple of weeks while the family 

is waiting on their check to arrive, you know, 

and you've got a 90 percent guarantee on that, 

the risk of loss is very limited, and we've been 

doing guarantees for 30 years. So we feel good 

about that and our ability to maintain those 

guarantees. And so that's something that's 

really important to us. Kind of like Sarah said

too, we're it, you know. In a lot of our markets 

we're the only bank. We do a little bit of 

everything from residential to commercial, ag, 

consumer. We try to do it all.

We've had a lot of success here 

lately. Our residential markets have been 

propped up here lately, especially in Kentucky, 

from our friends in Illinois. Because of a lot 

of things going on with taxation issues and all 

that, we've had a lot of retirees from Illinois 

moving to our part of the world. I'm in a county 

of 5,000 people, you know, and folks just don't 
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show up for no reason. But folks are showing up. 

Folks are showing up for a reason, and they're 

looking for a slower lifestyle, no traffic, 

fairly inexpensive home prices and just a relaxed 

way of living. We've had good success with it, 

and as we have conversed with these individuals, 

that's what they tell us, you know. They're just 

looking for a change in lifestyle. For those of 

you that live in D.C., come to Kentucky.

(Laughter.)

MEMBER KIMBELL: So although my 

friends in Tennessee, they have no state taxes. 

So they have a little bit more advantage on us 

than Kentucky. But I did too reach out to our 

state banking execs in Kentucky and Tennessee. 

One of the issues they brought up again, like 

Sarah, was in Kentucky we're beginning to see, 

especially in the eastern part of the state, some 

shortages of appraisers and beginning to -- and 

even then, some of the times of trying to get 

some appraisals in. Not so much in my immediate 
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area, but at least in the eastern part I'm 

beginning to see some problems there. They're 

wondering about maybe there needs to be a re-look 

at some of the requirements. Maybe the 

appraisers have stacked things too much to their 

advantage and how to get into that marketplace to 

doing these, to having apprenticeships and all 

this for some period of time. The market, the 

market will take care of that. I think we as 

bankers and lenders, we know a good appraiser 

from a bad appraiser and we will figure that out. 

So that's where we want to look. 

Tennessee is still having some 

questions, especially the Nashville marketplace 

as far as brokered deposits. A lot of their 

banks are asking about that. They feel like the 

fintechs are taking a lot of the deposits out of 

the marketplace and so they're having to look to 

brokered deposits to be a more -- to be a stable

source of deposits -- and so they were really 

concerned with that. Kentucky too, we're one of 
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the -- I heard hemp mentioned a couple of times. 

We too, we're right there at the forefront with, 

you know, production. And it's a dynamic 

marketplace right now, lots of questions, lots 

of -- lots of entities trying -- lots of money 

chasing CBD production. And so it's been 

interesting. We don't have -- we have a couple 

of folks that are doing it. But as we have 

listened and as we have learned, it's still about 

making wise credit decisions and how do we -- how 

do we deal with these particular producers, and 

coming across with the funds that they need. 

Again out of Tennessee too, we've heard credit 

unions mentioned. Actually have had a couple of 

acquisitions in Kentucky by credit unions of 

local banks, and a credit union out of Tennessee 

recently purchased a bank up in Central Kentucky. 

So I'm not really sure how that's all going to 

play out in the future. I wonder how well a 

credit union would do in my environment, in my 

world, with ag and the small businesses that we 
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deal with. Probably not the best fit there, and 

so we really want to be mindful of that and I 

think the FDIC definitely has a role in that, in 

helping those banks just like we've talked about,

rural banks, in trying to make sure that we can 

keep institutions out there to help these 

communities.

There's a big need for capital in 

those rural areas, and lots of good ideas can 

come from there. But when you're not from there 

and when you don't understand the dynamics of 

that community, whether it's downtown Detroit or 

a small town Clinton, Kentucky, you know, we have 

to live there, we have to be there, we have to 

understand the dynamics of those communities.

So good to be here with you, and look 

forward to hearing everybody else's comments.

MEMBER LEAVITT: I'm Tom Leavitt of 

Northfield Savings Bank in the heart of the Green 

Mountains of Vermont, and I want to welcome the 

new members to the table. It's great to have a 
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twin state of New Hampshire in the house. 

Welcome Mark, and to our visiting friends, the 

Regional Directors as well, great to have you 

listening to us. It's an honor, thank you.

Our bank has $ 1 billion, fifty 

million in assets after 152 years of trying real 

hard in our communities, and we have done all of 

that organically. Never acquired, never been 

acquired. Hope to continue on that path.

We're three years, almost three years 

into a four-year strategic plan. We've been 

growing at better than state peer and regional 

peer rates on average, and feeling good about the 

impact of the tactical initiatives and themes 

that we've established.

Going into Year 4, we saved that for 

the heaviest lift of all. We're going to do a 

conversion to a new core within the same vendor 

family, to get us to a scale that could see us 

elevate organically, hopefully to the $2 billion 

mark. So we feel we're at an important 
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inflection point in terms of technological 

backbones. We're going to take that on in Year 

4 of our strategic plan.

We've got that all queued up. We've 

got a great team working on it. We had a big and 

spirited all staff meeting last week to kick it 

off. So everybody's focused on the big job 

ahead. 

We're moving gradually to a more 

commercial focus as part of our strategic 

efforts. Even though many mutuals, we are a 

mutual, have grown up in bread and butter 

consumer activities, taking deposits, turning 

those deposits back around into performing loans 

and residential real estate, we've migrated 

certainly much more assertively over this century 

into the commercial space, and we're really 

picking up steam as we go up against what we call 

the legacy banks that were formerly headquartered

in Vermont, that have ceded their independence to 

larger, regional players.
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So we're picking up some market share 

as a result of that, but also making sure we have

the programs and the services and the solutions 

that meet that same grade of value. We can't 

just do it based on local alone.

Our economy is characterized by very 

low unemployment, among the lowest in the 

country, but with that comes the unfortunate low 

workforce formation that we're dealing with in 

the state due to demographics. Along with the 

state of Maine, we're two of the slower-growing 

states in New England in terms of population. 

The shift is a result of an aging population 

cohort, a struggling net in-migration, lower 

birth rates and a reduction in some of the popular 

and successful immigration programs that we've 

benefitted from over time. The City of 

Burlington, where I'm from, was a large refugee 

resettlement center, had great programming. 

We've had 36 native languages being spoken in 

Burlington's high school. But there are signs 
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that that pipeline and that energy is slowing. 

We're concerned about that. When you look at 

cities like Barre and Rutland and Winooski in the 

state of Vermont, these are all municipalities 

that were built on immigration. They all came 

about because of hard-working folks that came 

from away or elsewhere that landed in our state, 

and got to work and built their lives and their 

families through many generations.

And we've got new generations of new 

Americans that are trying to do the same thing, 

and we would like many more of them. If you 

think about climate change, it's just one global 

factor right now. The possibility just before 

the first half of this century concludes that we 

might have upwards of one billion climate 

refugees trying to find higher ground or better 

places where resources are more consistent, and 

where the quality of life is sustainable.

When you've got great bones like we 

have in northern New England with these town 
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centers, intellectual capital, cultural 

amenities, beautiful landscape and people that 

are open and willing to welcome, then you have 

the makings to resettle some of those dislocated 

populations. And I think at the federal level 

we need to be thinking deeply about that, because 

that issue is going to be with us long after the 

next economic cycle starts and ends.

And so that's something that as I age 

personally, I'm going to be talking about a lot 

and have been every time I've had an opportunity 

with a group of impressive decision-makers like 

the ones we're with today. 

So conditions today are okay. We're 

battling net interest margin compression like 

everyone else. We're going to do our best to 

assure there's a floor to that, even in a 

declining rate environment. We are really 

confident about the near-term future in our 

institution, in our state. But we don't quite 

know what tomorrow's going to bring or what the 
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tomorrows after that will, and we want to get to 

work making it better for the next generations to 

come.

The meeting materials for today's 

package are very encouraging because they signal 

the progress that has been made. Just in the few 

short months that I've been coming to these 

meetings since March, I'm really gratified by the 

supervisory team and the other sections of the 

department that are reaching out, listening and 

crafting modernization and new tools to help us 

meet our regulatory responsibilities and burdens, 

and I look forward to the topics the rest of the 

afternoon.

MEMBER EDWARDS: Good morning. I'm 

Jim Edwards. I'm CEO of United Bank. We're a 

110- year old community bank just under a billion 

and a half dollars in size. (Is this on? I've 

got a red light blinking here. Is this better? 

Good, better, thanks.)

So we're located about an hour south 
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of Atlanta, and we operate in 11 contiguous 

counties on sort of the southeastern and western 

sides of the Atlanta market, all the way down to 

just north of Macon and outside of Columbus. So 

sort of in that triangle area of the state there. 

We have a large mortgage operation as 

well, also do trust and wealth management. We're 

an S-Corporation and Sarah, like you, I'm a 

third-generation banker, and Cathy, that's very 

impressive. You guys are into your fifth 

generation. That's -- we think we're doing 

something with third generation, but if you have 

five generations, that's really amazing, so 

congratulations on that.

It did occur to me as we were coming 

around the table here that I'm going to be asked 

to opine on the state of the Georgia economy and 

how banking is doing, and then I look up to see 

our Regional Director here.

(Laughter.)

MEMBER EDWARDS: Boy, I sure hope 
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our views align at least a little bit here. But 

anyway, having said that, the state of the 

Georgia economy from my perspective is very good, 

and United Bank's having a very, very strong 

year.

But being a 25-year banker, that 

starts to make me get nervous, and I get a little 

nervous hearing some of these comments. From the 

time I've been on the committee here, it seems 

like maybe there's a little more concern out 

there than there has been in some of our earlier 

meetings that I participated in. So that's 

concerning.

But having said that, the bank's 

having solid growth this year. In fact, loans 

are going to grow eight or nine percent year over 

year, and we've also had, continue to have solid 

deposit growth. We've been very blessed with 

that in our market, and have -- it's not grown 

quite as fast as loan demand is. 

But I think what's happened is our 
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more rural markets in our footprint have finally 

come back, and it's taken a long time after the 

Great Recession in Georgia for some of those more 

rural markets to begin firing on all cylinders 

again, and that has happened and we're delighted 

to see that. We've got low unemployment as I've 

heard many of you say around the table here. 

Interestingly, we're opening a new 

branch in one of our markets. We bought it from 

a regional bank that in their mind was kind of 

rationalizing their branch footprint. It was an 

opportunity for us. I don't know about all of 

you, but when we open a facility all my career, 

two things have kind of been the holdup. One has 

been getting all the regulatory approvals. But 

even worse than that was getting the 

telecommunications stuff set up. It's just a 

long lead time from that. Well, I found out 

yesterday that we may not be able to open this 

new branch on time because the cabinet makers are 

so backed up that they can't get the cabinets in 
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on our projected start date. So that's how tight 

construction labor is in our part of the world 

right now. Very, very strong housing demand. 

Only about a 90-day supply in many of our markets.

But having said all the positive 

things, I do have some concerns as well. We have 

begun to see a slight uptick in delinquencies and 

problem assets, and it's too early for me to

really be able to tell you that this is a trend 

change. Those areas have been so low for the last 

several years in our market and our Bank that 

maybe we're just moving back to a more, a little 

more normalized type area there. So that is 

something we're paying attention to.

Another issue is that the 

inventory -- in the housing market, the inventory 

of old, recessionary lots that were put on the 

ground before the recession -- that inventory of 

lot supply for new home construction -- is almost 

gone, and the cost to put a new lot on the ground 

is much higher than these older lots were.
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So that -- I think that's pricing some 

of our first-time home buyers out of the market, 

really. That's where we're seeing the most 

demand, but we're also seeing the hardest time 

getting people qualified in that market there. 

Another area of concern, we've talked 

about the declining rates. As we begin to do our 

budgeting for next year, you know, these are 

going to be big headwinds. That was a tailwind 

for us for the last several years, and it's going 

to be something we're going to have to deal with 

there. I think that's obviously affecting all 

of us around the table here.

I am concerned about the banking 

sector just taking on more interest rate risk. 

There's a lot of pressure to do that, to find 

assets now. But I think we're taking on more 

interest rate risk that that's concerning to us. 

So trying to manage that and be sure we're on top 

of that and just be prudent and be conservative 

is something we're spending a lot of time 
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focusing on. But it is challenging. You heard 

some of the rates thrown out around the table 

here from some of this long-term fixed stuff, and 

that's a challenge.

I would echo comments I think Louise 

made about the opportunity, maybe others as well, 

about obtaining CRA credit for Opportunity Zones. 

We have those in several of our markets. That's 

a big deal. That seems like a really helpful 

program, and we are very interested as a bank in 

participating in that. We’d like to see CRA 

credit for that.

Also, we'd ask that you pass along to 

the Chairman how much -- and I'm sorry she 

couldn't be with us today, but I certainly 

understand -- how much as a banker I appreciate 

her focus on trying to bring fintech and the cores 

together to work better.

This is really the challenge. You 

heard Keith say, talk about, how the pressure 

from outside non-bank and fintech companies is 
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pressuring us in the mortgage area and some of 

these areas. We've got to be able to figure out 

a way to integrate fintech, appropriate fintech 

technologies with our cores. So I appreciate her 

recognizing the need for that and her support of 

that.

The last thing I would just close on 

is something nobody else has hit on and I'm 

certainly not an expert on this, but it's the 

proposal or the request or the application rather 

to the FDIC from Rakuten for this ILC charter. 

This is a Japanese fintech as I understand it, 

and I just would ask the FDIC to please be 

cautious and careful when they are looking at 

charters from these non-banks. Make sure we have 

a level playing field. I think our markets are 

challenging, and we certainly don't want to 

impede commerce. But I think just speaking for 

myself personally, all I would ask for is that 

there be a level playing field. If folks are 

going to have the ability to use FDIC insurance, 
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they need to have the same requirements that we 

as community banks have on us.

Thank you for the time to make these 

comments.

MEMBER MALEY: Good morning. I'm 

Lori Maley from Bank of Bird-in-Hand. I'm the 

president and CEO. For those of you that may 

know, Bank of Bird-of-Hand was the first bank 

chartered in the United States after the Great 

Recession. From our humble beginnings in a small 

town, in Lancaster, Pennsylvania, we are happy to 

report we started at $17 million in capital. We 

have now reached a level of $450 million in 

assets, just under $450 million. So we're kind 

of the babies or the toddlers around the table,

with all these well-established banks.

In our market, we have very low 

unemployment and it kind of resonates the same 

message around the table. Skilled employees are 

hard to find. We see that same issue. We do a 

lot of agricultural lending. 2019 was a very 
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good year for ag in Lancaster County, a wonderful 

harvest of corn and other items that they harvest 

such as tobacco. Dairy is suffering, though. 

We're seeing a lot of the dairy farmers go away. 

So that part is sad, because a lot of it is 

families that have been in that, generation to 

generation passing the farms down. So we're 

seeing some farms being sold.

We actually now have three brick and 

mortar locations. We opened our latest branch 

in June of this past year. So we serve a large 

Amish population and plain community, which for 

those of you that may know, their travel options 

are restricted due to the means of traveling by 

horse and buggy. So they have a limited 

circumference, you know, five to ten miles. So 

we really try to cater, not only to the community,

but especially to that part of the community. We 

do courier service for them. We do bank by mail, 

things that you may not necessarily see at other 

banks. We process 500 pieces of mail a month 
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from the Amish. So, you know, mailing in checks 

and again, it makes sense, because for them 

travel is an issue. We also -- a couple of years 

ago we launched what we call a mobile bank, the 

Gelt Bus, which means money bus, which really is 

a bank on wheels. We've had a lot of success 

with that. In just a little bit over a year, the 

deposits have grown to $12 million. We service 

nine locations a week. So we're actually looking 

to see where we would put another one of those 

units. We try to do some research to figure out 

which areas are really underbanked or are really 

non-banked.

So we deal with a lot of remote 

communities. That's really what we serve. 

Banking is very competitive in Lancaster County 

right now, be it on deposits as well as the loan 

side. We've seen really crazy pricing on loan 

deals, as low as -- I know we talked a little bit 

before -- as low as 3.26 percent for a 15-year 

mortgage amortization. Some deals we see banks 
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are starting really offering loans about 1.25 

percent under prime. So the competition is very 

strong in our area, and again I think not from 

our perspective, we have really good loan 

quality. We've had no charge offs in almost, 

we'll be six years old in December of this year. 

So we've had really strong loan quality and, you 

know, we don't really compromise the underwriting 

standards, but we've seen other banks do loans 

that our bank wouldn't do at incredibly crazy 

prices.

The deposit side, we also have fierce 

competition on the deposit side, and again the 

mention of credit unions. We see a lot of credit 

unions moving into our area as well as other 

banks. But you know, credit unions are putting 

up really Taj Mahal branches and offering crazy 

CD rates. Some I saw, you know, actually over 

three percent.

So I think the message is clear from 

all of us in the banking industry, that margins 
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will be squeezed. I think we're trying to adjust 

the deposit rates, but the falling loan rates 

also hurt us a little bit in that instance. So 

in some instances, it's cheaper, honestly, to 

obtain brokered deposits. But that's not what a 

community bank is built upon, and I truly believe 

our mission is to take those deposits in and loan 

it back out to people in the community.

Last week, I attended the 7th Annual 

Community Bank Research Conference at the Federal 

Reserve Bank in St. Louis. It was actually 

attended by regulators, educators and bankers and 

it was very interesting. I think some of the 

conclusions that I had drawn from that is that 

bankers are and do remain optimistic about the 

economic conditions overall, even though interest 

rate pricing is a problem, and it's going to 

squeeze banks a little bit.

As someone mentioned, Chairman 

McWilliams was in attendance and discussed that 

community banks must adopt changes with 
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technology and embrace them. I think we all know 

that that is really something that we all need to 

look at. Technology and cybersecurity, they tend 

to be the things that keep us up at night. You 

know, they're getting smarter, they're getting 

more clever. You know, our first line of defense 

is the employees. We do a lot of training and I 

think now it almost gets to the point I tell 

people if you don't hear back from me, I don't 

click files, I don't click links, you're going to 

have to call me. So I think that's where we're 

at. We're kind of reverting back to the phone, 

and I think the theme of that conference overall 

-- what I took away is -- community banking is 

still alive and well in this country, and that's 

a very positive thing. I think we're getting 

back to realizing that community banks do have 

value and do provide a service, and I think we 

can all co-exist with the large, medium and small 

banks. I think there's a value for everyone in 

the market. 
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So I thank you for the opportunity. 

It is wonderful to sit around this table with 

such esteemed colleagues and hear similar 

stories; it does bode well for the banking 

industry. 

MEMBER SHETTLESWORTH: Thank you. 

Saving the best for last, I suppose.

(Laughter.)

MEMBER SHETTLESWORTH: Alan 

Shettlesworth, Main Bank in Albuquerque, New 

Mexico. I'm the president and COO. I'm working 

on the CEO title, but my dad has that title right 

now, so it's going to be probably a little longer 

until I get that title. We're a small, mostly 

real estate and small business related bank. We 

started the year with a little over a $114 million 

total assets. As of September, we had a really 

nice big loan fund and also safety deposits, so 

now we're at $166 million total loans -- oh, I'm 

sorry, total assets. 

We're having a lot of success. This 
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third quarter was the best quarter our bank has 

ever had in profitability. So it's a very 

exciting time for us, and I'm hoping the next 

week, because we'll be removing the punch bowl 

because it's kind of fun right now. It's very 

competitive, though. Some of the rates, we have 

participated in some of these crazy low rates, 

not necessarily the 15-year fixed, but our market 

is really wild. So it's an exciting time.

In New Mexico, the banks that are 

located along I-25 which goes north to south to 

Santa Fe-Albuquerque, Las Cruces, the banks 

headquartered in those areas along I-25 are doing 

really well right now. Most of the banks in New 

Mexico are not located along that corridor, along 

that interstate. They're doing okay. They just 

are not experiencing the same growth. 

So the banks that are doing really 

well are along I-25 from Santa Fe to Las Cruces 

in the southeastern part of the state there's a 

lot of oil and gas activity going on there, so 
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banks are doing really well. Although it hasn't 

left my mind that in the last recession the banks 

that failed in New Mexico were located along the 

I-25 corridor.

So I don't think we're seeing any 

signs of any major weaknesses right now. Stuff 

is just really clean. That's just a lot of fun. 

We are literally wrapping up today our FDIC 

safety and soundness examination, so I have my 

phone here, so if you hear me scream later -- 

(Laughter.)

MEMBER SHETTLESWORTH: But our EIC 

came into the bank a week ago and stated multiple 

times throughout the examination that he is not 

interested in presenting any surprises for us and 

the exam is going very well. It's a very 

rigorous exam and your people, your examiners are 

really sharp. That's both a compliment and also, 

maybe I wish they weren't as sharp in some cases.

(Laughter.)

MEMBER SHETTLESWORTH: We're doing 
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great from that standpoint. On the IT front, we 

had one of the most interesting helpful things 

come from the team in a while. We're a small 

bank. We have 15 people. So we have to wear 15 

different hats all the time. And so that's 

saying with everybody in this room, we don't 

necessarily in a disaster recovery realm, we 

don't probably do exactly what we should or what 

the large banks do in all these cases and 

performing these tests and documenting everything 

the way we should, in a thorough analysis, or we 

don't do it as thoroughly as we probably should.

But the examiner suggested, he goes, 

“You have these instances where people are out of 

the bank because someone's sick, someone's kid is 

out or whatever, and you have three or four or 

five people out of the bank” and for us that is 

a very impactful situation. He goes, “Just 

document that situation. That will prove that 

you guys are addressing some of the disaster 

recovery stuff.” And so that was a very simple 
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solution, a very simple recommendation, and one 

that I just thought was incredibly helpful 

because we rely on the examiners in there to help 

make sure we're doing things the right way, but 

we also rely on them as a resource.

The FDIC examiners are probably some 

of the best consultants out there, even though we 

don't tell them they're consultants. We do try 

to get all the information out of them we can 

while they're there. So, anyhow, things are just 

really good and since I'm the last one until break 

I will stop.

MR. DAVIS: Great. So it is 10:30 

now. Why don't we take ten minutes for a break 

and reconvene here at 10:40, and then we'll 

continue with our panelists. 

(Whereupon, the above-entitled matter 

went off the record at 10:30 a.m. and resumed at 

10:43 a.m.) 

MR. DAVIS: Okay. Continuing our 

discussion on local banking conditions, in the 
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interest of time I'll go ahead and just turn it 

over to our panelists. Thank you.

MS. OLESIUK: Thank you, Chad. And 

good morning, everyone. It's great to be here, 

and I think we're all very encouraged that our 

list of risks coincides very well with the list 

of risks that you all summarized. So I think 

we'll be able to stay on time and quickly 

summarize what's our views both in the report and 

out in the regions from a supervisory 

perspective.

So the risk review that we published 

in 2019, this was sort of getting back into 

publishing externally, which is one of our 

current goals. Prior to the last crisis, we were 

doing a lot of publication externally about risks 

out in the economy and in the banking sector. We 

stopped that for a while and have gotten back 

into it with this overview presentation. 

So we broke down the risk review into three 

sections. It starts with an executive summary. 
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Then Section 2 summarizes economic trends, 

financial market trends, and banking industry 

trends. And then Section 3 is the bulk of the 

report, and that's where we highlight some of the 

key banking risks. 

So the risks that are highlighted in 

the report are broken into two broad categories. 

First, credit risk and then market risk. And we 

really tried to highlight in our report risks 

that were relevant to community banks, given that 

we have a focus on community banks. And so those 

are some that we're talking about here today, but 

that was also a focus in the report, to make sure 

that we were highlighting how each risk affected 

community banks and how community banks were 

integrated into the risk.

So I'll briefly touch on these five 

risks and we'll talk about them both from the 

report as well as supervisorily. First off,

starting with agriculture, so many of the credit 

risk sections of the report have maps like this 
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which highlight where the banks that focus on the 

risk area are located.

So this first map is agriculture 

lending. Probably no surprise in what we heard 

earlier today, that the majority of banks that 

lend to agriculture are located in the Midwest. 

There's about 1,300 banks with concentrations in 

agriculture risk. Those are defined here as 

banks with over 300 percent of total capital in 

agriculture. 

And this really is one of the risk 

areas that is most centered with community banks. 

Community banks hold the majority of agriculture 

loans outstanding, almost 70 percent, $127 

billion of the $184 billion outstanding. So this 

is definitely a risk that is of certain concern 

to us.

MEMBER EPSTEIN: May I ask a question?

MS. OLESIUK: Sure.

MEMBER EPSTEIN: I'm sorry. Are 

these adjusted for any USDA or other guarantees 
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that might be in place --

MS. OLESIUK: So --

MEMBER EPSTEIN: Are these the net 

exposure?

MS. OLESIUK: So this is the banklevel exposure -- bank loans, both ag production 

as well as ag real estate loans held at our banks.

MEMBER EPSTEIN: Thank you.

MS. OLESIUK: And so just one chart 

from the report, there's several throughout the 

report. But one that I think illustrates some 

of the risk that was already talked about is this 

chart, Chart 8 on Net Farm Income. So as you can 

see, Net Farm Income has been on a steady decline, 

no surprise probably to anyone in this room.

We're six years in to declining net 

incomes from the high in 2013. But on the other 

hand, the strong farmland values, which were also 

talked about, have helped to keep agriculture 

past dues and delinquencies relatively low. So 

this is certainly something we're watching, but 
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right now we're not -- our concern's increasing, 

but we also recognize that banks are -- seem to 

be managing the risk quite well. So I'll turn 

it to Kristie.

MS. ELMQUIST: Sure, thanks. So if 

you look back at that other map with all the dots, 

you may not think that the Dallas Regional 

Director would talk much about agriculture. But 

we do. Our Dallas region and our eight states, 

we do lead national production in cattle, cotton 

and rice, and make significant contributions to 

row crops and livestock in other ways too. So 

we have about 200 banks on that, on that map that 

are headquartered within the region, that do have 

a fairly sizeable engagement in agricultural 

lending. So I wanted to just share a few 

observations about what we're seeing from an exam 

perspective. All in all, those banks are doing 

very well. They continue to have solid earnings 

and steady but slower loan growth.

We are seeing delinquencies rise in 
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some of these institutions. We are seeing more 

of the farm borrowers being leveraged compared to 

what they were in the past, and we are seeing 

more use in our institutions of governmentguarantee programs. So all in all, things are 

looking pretty well.

We are seeing more carryover debt in 

our institutions as we examine them. The debt 

is well collateralized, and we are seeing them be 

structured appropriately with regard to 

amortizing out that carryover debt. So that is 

very positive.

We are anticipating additional 

carryover debt, particularly along the 

Mississippi Delta. We had a lot of banks in that 

area that were not able to even plant this year 

because of the significant flooding, so we 

anticipate that there will be additional 

carryover debt added to the balance sheets.

We're encouraging our banks, 

particularly in those flooded areas, to work with 
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their borrowers in a reasonable way, to the 

extent they can. From an examination 

recommendations perspective, honestly we're 

seeing really good credit administration, really 

good underwriting with regard to our agricultural 

lending.

So our exam findings are not 

necessarily systemic by any means, but here are 

a few things that we are asking banks to do if 

they have not already done so. Track and monitor 

carryover debt on a portfolio-wide basis, so they 

can understand what their exposure might be in 

that regard, and track and report any policy 

exceptions that exist. And then in a very, very 

few situations, we're asking banks to do a little 

bit better job of documenting crop inspections.

So those are sort of our three 

observations from an agricultural perspective. 

Again, nothing systemically challenging and most 

of our banks are doing really well, despite some 

of the challenges that they have with regard to 
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their farm borrowers.

MS. OLESIUK: So moving on to the next 

credit risk area, which is commercial real 

estate, this is something that is also an area of 

concern that we're watching, and certainly an 

area of exposure for many banks across the 

country. This map showing the exposure levels -

- the patterns have been different than 

agriculture, not surprisingly. Although there's 

about the same number of dots on this map as there 

was on the agriculture map, there's about 1,400 

banks on this map. Those are banks with at least 

300 percent of total capital in commercial real 

estate loans. They're primarily in metropolitan 

areas in the west, northeast and south.

Also, while there is certainly 

community bank exposure here, there's relatively 

less than in the agriculture section. Here, 

about 30 percent of total outstanding loans are 

held by community banks, and the rest of the 

exposure held by non-community banks. And as far 
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as the chart to illustrate the trends we're 

seeing, there are some charts and information in 

the report about market conditions.

I think in general, and as I heard 

around the table, market conditions as far as 

vacancy rates and property prices seem quite 

strong. We see low vacancy rates and relatively 

high property prices, although some of the 

comments about prices being sort of propped up by 

concessions certainly resonate. We are seeing 

pockets of that as well.

But, in general, the chart that I 

wanted to highlight up here is showing the volume 

of commercial real estate lending in aggregate, 

and as you can see in the first quarter of 2019, 

we're at record levels of aggregate exposure to 

commercial real estate. I was out in San 

Francisco prior to the last downturn, and we were 

telling a similar story back prior to that 

downturn, and we've seen reaching, seen the 

levels reaching new highs now.
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I think one of the distinctions here 

is the growth that we're seeing in the 

multi-family segment, that gray segment of the 

bar. We did a little digging into this story, 

and it's really a combination both of the big 

multi-family lenders growing their portfolio, but 

also other lenders who hadn't really been active 

in this multi-family space getting into 

multi-family lending as well. And I think it 

somewhat reflects some of the comments that you 

talked about related to high housing prices and 

just shifting preferences into more multi-family 

space. So with that, I'll turn it to Mike for 

any comments.

MR. DEAN: Thanks, Shayna. Coming 

from Atlanta where CRE concentrations, if you 

think about the last crisis where Atlanta was the 

epicenter, we were used to significant 

concentrations of CRE. But CRE is a key lending 

factor for community banks, and lenders as well 

as borrowers remain very cautious about the 
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volumes of speculative lending.

Banks aren't lending more on spec. 

They're limiting and they're basically focusing 

on their better borrowers, if you will. If you 

think about the crisis and where we were, and I 

know Jim can appreciate this. In Georgia, if you 

had a truck and you had a hammer, you were a 

builder.

(Laughter.)

MR. DEAN: You were given a number of 

money to loan on speculation. Although

concentrations are building for Atlanta, these 

levels of CRE concentrations remain well below 

pre-crisis levels. And also a significant 

portion of it for our concentrations are in the 

owner-occupied CRE. ADC lending has declined by 

almost 40 percent since 2010 in the Atlanta 

region. So Atlanta CRE concentrations are 

heaviest in metro Atlanta; Florida; Charlotte and

Raleigh, North Carolina; as well as coastal

Carolina. 
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But what we're seeing is banks are 

doing a better job of managing their CRE 

concentrations, and so it's just kudos to them 

for the work that they're doing with regard to 

CRE. 

MS. OLESIUK: The next topic, this is 

probably the topic that's least relevant to 

community banks, but I think so important to talk 

about at least quickly. So we're looking at the 

growth in leverage lending and the growth in 

corporate debt, just as an exposure primarily for 

some of the large banks, but also just throughout 

the economy.

As you can see in this chart, the 

debt-to-GDP ratio is also at record highs, and 

that green segment of the bar of the chart, 

corporate bonds, this is where much of the growth 

is coming from. I think this is reflective of 

the very low rates, and so corporations taking 

advantage of these low rates and increasing their 

debt levels.
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The risk here to banks is those banks 

that are lending directly or indirectly to this 

area. But again, this is just something that I 

wanted to highlight, but not really as relevant 

to community banks. 

In the interest of time, we will move 

on to the next topic. Interest rate risk and 

deposit competition. Again, this is something 

that we heard from many of you, I think. So I 

think we're happy that our thoughts are aligned 

in terms of the risk that we're seeing out there. 

The chart here, the two lines 

representing community banks and non-community 

banks, these lines represent the ratio of 

non-interest bearing deposits to assets. And so 

as you can see, in 2018 and 2019 that ratio of 

non-interest bearing deposits to assets is 

trending down, and as many of you mentioned, 

demand for interest-bearing deposits trending up.

And so this obviously has implications for net 

interest margins. I'll pass it to Mike for some 
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additional comment.

MR. DEAN: Okay. Yes, sure 

absolutely. As you can see this phenomenon is 

very pronounced in the Atlanta region as well, 

and what you may have noticed when we were in an 

artificially low rate environment, people 

basically had their money parked in non-interest 

bearing accounts, and with the Fed teasing us a 

little bit and giving a couple of incremental 

increases in interest rates, depositors have now 

started shifting their money to more 

interest-bearing deposits. And I think that 

is -- I don't know what's going to happen now, 

because now there have been some reductions in 

the interest rates by the Fed. So for right now, 

I think it's people are sort of ambivalent, and 

they're trying – they’ll likely take a wait–andsee approach. But for the most part, I think 

that the shift is very pronounced, and I think 

it's very consistent with what I've seen in this 

region as well. 
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MS. ELMQUIST: I'll just maybe add a 

little bit of comment on interest rate risk 

management as well. So we did, we did see some 

interesting moves, both upward and then downward 

recently, and I would encourage you to look at 

that as an opportunity to back test your interest 

rate risk modeling, so you have an opportunity to 

see, you know, did that rate increase lead to X 

earnings or X impact on capital, and conversely, 

did this rate decline? Are we modeling it 

effectively? So it's a really pretty easy way 

to quickly look to see if your models are working. 

I would also just encourage you to 

look at your stress testing assumptions, versus 

the reality of your pricing decisions. So I 

think that's one of the common examination themes 

is, you know, we see stress testing based on more 

parallel shifts in expectations that you're going 

to price at prime plus something or prime minus 

something. But the reality is we're seeing your 

pricing decisions being far more frequently one-
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off situations. And if it was just a one off, I 

wouldn't ask you to adjust your model by any 

means. But if it's becoming more of a routine 

situation, really think about how that's driving 

or how it should drive the assumptions in your 

interest rate risk model.

MR. DEAN: And I would also add the 

severity of the recommendations that are coming 

from examiners are less severe in examination 

reports, and when I compare with Kristie, you 

know, that has been really the bulk of the areas 

of recommendations to bank management in regards 

to the assumptions that you're using in the 

modeling.

MS. OLESIUK: Okay, and our last topic 

from the risk review is liquidity, also something 

that we heard from many of you. So the chart 

here shows the relationship between the share of 

liquid assets and wholesale funding that we've 

been seeing industry-wide. This chart is just 

for banks under $100 billion in assets. There 
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are several other charts in this section of the 

report if you're interested.

So the trends here -- we see 

increasing use of wholesale funding and declining 

use of liquid assets, I think in large part to 

fund the loan growth that you all talked about. 

So we're -- and to that point -- and there's a 

chart in the report that highlights this even 

more, we're seeing that this gap between 

wholesale funding and liquid assets is even 

greater for banks with higher concentrations in 

lending, and we looked at it for many different 

types of lending.

So commercial real estate, 

residential real estate, agriculture, banks that 

are growing those concentrations, this gap is 

even larger. So with that, I will pass it to 

Kristie for her comments.

MS. ELMQUIST: Sure. On a regional 

basis, we also observed a decline in the balance 

sheet liquidity over the last several years, and 
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the movement towards I guess more diversification 

of the funding base. Lori mentioned the CSBS 

event that was a week or two ago, and the 2019 

CSBS National Survey. That was a part, a product 

that was distributed during that event.

It showed that one-third of the 

bankers that responded to that survey indicated 

that they ranked either core deposit growth or 

the cost of funds as their greatest challenge, 

and we definitely are seeing that in our 

examinations. The report also showed that banks 

were going to either plan to continue to use or 

expand their use of wholesale funding going 

forward.

From a regional perspective, we did 

see the cost of funds increase about 40 basis 

points from a year ago, and I imagine, as many of 

you suggested today, reversing that, even though 

rates are declining, might be a little tricky 

with regard to competition and the desire for 

consumer/customer retention.
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Switching gears a little bit from an 

examination recommendations perspective with 

regard to liquidity and funds management, we have 

been making recommendations to improve cash flow 

analyses to fix certain gaps that we've 

identified. We've definitely spent some time 

reviewing and encourage you to review and update 

your contingency funding plan, just to ensure 

that the assumptions are reasonable and that the 

collateralization of lines that you've used, that 

you're thinking about the collateralization 

effect in different kinds of scenarios 

appropriately. Just make sure you're considering 

the collateralization.

The last thing I would just mention is 

as we do have a growing use of different types of 

funding, make sure that you have established good 

risk limits for your policies, to make sure that 

your management team understands what the risk 

limit is for your use of different kinds of 

alternative funding.
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MS. OLESIUK: Okay. So for this 

report, we plan to publish at least annually, so 

our next report should be coming out hopefully in 

the first half of next year, and feedback from 

the industry at events like this is definitely 

helpful. So if you have any suggestions for 

topics that we should be covering that we didn't, 

I would certainly be open to feedback.

MEMBER DONNELLY: Yes, a question if 

I may? Just on the ag piece in the Midwest, an 

observation first. Similar to the expansion 

that's been going on for what, ten years now, it 

appears that the -- at least in Kansas -- that 

the agricultural decline is similar. It's 

extended or it seems to be delayed in its nature, 

and we're just now seeing ag real estate prices 

fall, but they're falling slower than normal 

because of this expansion.

So, and especially in the area where 

we're exporting most soybeans, corn, not 

necessarily wheat, but so that expansion and part 
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of the level raised the concern in Kansas because 

it is slower, but now it's starting to pick up, 

and there's no improved outlook in the future. 

So are you connecting that taking the same thing 

if you go back and living through the ag crisis 

of the '80s, how it peaked and how it moved, that

it’s just almost like this is extended out? So 

getting in front of it is really important. So 

are you seeing that? Do you forecast that out, 

that it may have the same ramifications like back 

in the late '80s, but it's just extended out 

farther? I hope that makes sense. But do you 

see that happening?

MS. OLESIUK: So we don't, we don't 

do forecasts necessarily of what would happen in 

the industry. But I do agree with you, that 

the -- there are some important differences in 

the current conditions relative to what happened 

in the late '80s. I think one primarily is the 

level of equity that both farmers themselves and 

farm banks are entering this downturn, I think, 
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in a far better and stronger position to weather 

this downturn than they did in the late '80s.

So yeah. I agree with you with the 

trends that yes, we're seeing some declines in 

farmland values, but the levels are still fairly 

modest. The levels of decline are still fairly 

modest.

MEMBER DONNELLY: Okay, thank you.

MS. ELMQUIST: I would also, maybe 

also just suggest that from an exam perspective, 

the collateralization, the loans and reviews that 

we're looking at today are significantly 

different than what we saw 30 years ago. So the 

protection level and I would also say just the 

amount of guarantee lending that's done in that 

space is also a nice buffer. So I agree with 

Shayna. I think it's a really different picture 

from the prior ag downturn.

MEMBER DONNELLY: Thank you.

MEMBER MALEY: Just one comment 

relative to the agriculture exposure also is, you 
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know, I think banks need to look at how do you 

mitigate that risk. One of the big things is 

know your customer. In Lancaster County, we have 

a Chief Lending Officer, Bill O'Brien, that's 

been in the business 30 years. He knows exactly 

who his customer is, you know, touch base with 

them.

I think if you can mitigate the risk 

that way. I mean, the farmers are up against a 

lot of challenges, be it weather, be it 

pestilence. I mean, they really have, foreign 

imports. They really have a lot of challenges, 

but the good ones are the ones that have succeeded 

throughout these downturns historically. So I 

think, you know, that's what we do. We build the 

relationship, how we know the customer.

MR. DAVIS: Okay, thank you very much. 

Next up is Pat Mitchell. Pat is Deputy Director 

of the Division of Insurance and Research. He's 

going to go over national conditions for 

community banks by sharing some highlights of our 
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Quarterly Banking Profile. And then Pat's also 

going to touch on small bank deposit insurance 

assessment credits.

MR. MITCHELL: Well, thank you. I'm 

very honored to be here to talk to you all. 

There's going to be some expansion. I'm not 

going to get on the exact same topics. But 

certainly to the extent that there's aggregate 

data, it's good that it’s reflective of what 

we're hearing here from a -- this is kind of from 

a top level down. Hearing it all from you from 

the bottom up, well it's good to hear that we're 

hearing some more, we're thinking and seeing

similar things.

So now we'll go through these slides, 

and again I'm happy to stop if you have any 

questions or want to discuss something, just let 

me know, just interject. So the growth 

in -- these are for community bank only results. 

So the growth in net income, again it's been -- I 

would call this slide more of the same. It's 
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been this trend for a while. We continue to see 

strong growth in net income.

And really when you look at all the 

components, there's nothing really alarming or 

significant change here. There's a small blip 

on the realized gains on securities, but of 

course that's always going to be -- on loans and 

securities -- that's always going to be slightly 

volatile. But nonetheless, it's not a 

significant contributor to the overall, the 

overall story. But net income was up eight 

percent over the year in second quarter, again

across the board improvement. 

So now this is a story that I think 

we've all been talking about, and you know, one 

thing I would know right here in just looking at 

this chart, this chart doesn't -- I don't think 

this chart tells the story that we're likely to 

see, as you've all talked about and mentioned 

over the next, you know, next quarters, years.

I mean, one thing to remember about 
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the second quarter, as of the end of second 

quarter, we have had nine interest rate increases 

from 2015 on, and in fact we've had two cuts 

since. And of course the yield curve now, as you 

all know, the yield curve is flat, inverted 

frankly, from you all's perspective, you know, 

flat and inverted is, you know, is materially the 

same.

So, you know, we sometimes like to 

talk about wonky things about inversions and so 

on and so forth. But it's a challenging interest 

rate environment, no matter which way. Of course 

what we had seen on the net interest margin up 

until now has been slow. As the increases have 

come along, you'll get -- the deposit betas have 

been slow, the repricing of deposits have been 

slow, and just recently, at least in the 

aggregate, and each of you might all have a 

different story, just recently in aggregate, you 

had started seeing some traction of deposit cost 

increases getting passed along. I'll call it 
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catch up, even as rates had subsided. 

Now we have the two cuts of the last 

quarter, and I think the direction of deposit 

pricing, I think you've all mentioned, is a 

little less clear and the question is, “Is there 

still more catching up to do?” The competition 

and the competition for deposits, how is that 

going to drive it? Certainly I doubt you will 

see any 50 basis point reductions over the last 

quarter in your deposit costs.

So I think that's a true, you know, 

true challenge. You've all mentioned it. But 

nonetheless, one thing to note here is that the 

community bank net interest margin continues to 

exceed the overall industry, and one of the 

things the last quarter you'll see is the 

industry actually declined, you can see a little 

bit more, and that was the case of where some of 

the larger banks had exposure to -- well, they 

had loans that were tied to more market-based 

instruments, that were tied for example to LIBOR, 
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that actually would have reset during the second 

quarter because of the market, the 

forward-looking nature of those instruments, and 

less so in the -- so I think you see maybe a 

little bit of, some of the future decline in them, 

but we will see in the third quarter results.

MEMBER EPSTEIN: Can I ask you a 

question real quick?

MR. MITCHELL: Sure.

MEMBER EPSTEIN: So this -- our 

favorable net interest margin as compared to the 

industry as a whole and our larger regional and 

national banks is obviously a product of our 

having higher earning or higher yielding assets, 

not a lower cost of funds?

MR. MITCHELL: Right. So that --

MEMBER EPSTEIN: How does our cost of 

funds compare? Because you know, we've have 

mentioned we're asset sensitive. So obviously 

we're going to see a retreat in those yields. 

But at least in our specific experience, we are 
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a little bit hamstrung right now. To reprice our 

deposits in any meaningful way, that puts that 

funding at risk.

MR. MITCHELL: Right. Yeah, so 

that's an interesting point. So on funding 

costs, for the last six quarters through the 

second quarter, community banks' funding costs 

have been actually lower than non-community 

banks. However, that was a reversal of the trend 

from first quarter '08 all the way through first 

quarter '18.

So, you know, the question, I think 

your question is certainly relevant and I think 

we'll see. Certainly, there are a lot of 

non-community banks that are really competing for 

deposits, and their pricing is going up rapidly. 

And obviously all this -- the industry is -- it's 

influenced heavily by the largest institutions. 

Again, they're less loaned up, less yield.

So it really is a -- it's a mixed 

story. I think, you know, it's uncertain as far 
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as how quickly deposits will reprice. Does that 

help?

MEMBER WILLIAMS: While we're on 

that, along that same line, it appears to me, 

anyhow, that deposit betas are on a downward 

trend, given liquidity issues in the industry are 

going to be much, much lower. Are you seeing 

that?

MR. MITCHELL: I don't know that we're 

seeing it yet, but I think we anticipate what 

you're saying. In fact, I wouldn't -- I'm not 

projecting, predicting, but you may even still 

see a negative I mean for a little bit, in that 

they may continue to pick up over this 

quarter -- or last quarter, third quarter now, 

while we saw two rate decreases.

MEMBER WILLIAMS: Yeah. We're kind 

of seeing the same thing.

MR. MITCHELL: Right. There's still 

some of the catch up that's going on where there's 

still competition for deposits, people are 
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looking for deposits and there's some fishing for 

some institutions paying it, you know. I think 

depositors are saying whoa, hold on. I can now 

get paid on deposits, shopping around. I mean, 

you're living it. So --

MEMBER WILLIAMS: That's kind of what 

we’re seeing.

MR. MITCHELL: You know, the third 

quarter numbers will be interesting to see. But 

again, I would even there say not fully 

reflective in that, you know, the last cut -- so 

there's a cut in July and then the most recent 

cut was really at the end of the quarter in 

September.

So, again, I think there's always 

going to be a little bit of a lag. And I think 

we're anticipating some of the story of what 

you're seeing. But, yeah, we'll see what the 

numbers say.

MEMBER DONNELLY: A question on -- you 

had mentioned that obviously the -- big banks do 
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a lot, soak up a lot of liquidity in the market. 

But in your charts, do you have any separation 

between the non-bank deposit gathering that's 

really coming online rapidly now? It started in 

'08 or whenever it started. Do you start to 

separate the big banks and the non-banks that are 

taking liquidity out? You go online, a non-bank, 

be that a brokerage house or something that is 

now offering deposit --

MR. MITCHELL: Oh I see. 

MEMBER DONNELLY: -- Rates and --

MR. MITCHELL: I mean our numbers 

are -- we haven't really -- we reflect it just in 

terms of --

MEMBER DONNELLY: Just in the insured 

piece of it?

MR. MITCHELL: Yeah, yeah -- With, you 

know, with the bank itself. So you're talking 

about originating in a non-bank, kind of a 

brokered deposit type? Or even where you have --

MEMBER DONNELLY: Just everybody's 
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taking deposits nowadays. A lot of them are not 

insured by FDIC, and how much of that's coming 

out of what was traditionally in the banking 

industry?

MR. MITCHELL: So your thought -- when 

you say not insured, deposits not insured by the 

FDIC, are you talking about more like money

market?

MEMBER DONNELLY: Yeah, yes. I mean 

you see all -- any day on the Internet, somebody's 

offering you and says but I'm not FDIC insured.

MR. MITCHELL: Right. You know, to 

the extent there are always, there are always 

going to be other competitions, and in fact when 

rates were really low, I mean I'll just use money 

market funds as an example. I mean they weren't 

very attractive for anybody, and now you have to 

compete with those that effectively are Treasury 

types -- 

MEMBER DONNELLY: Yeah.

MR. MITCHELL: So I mean I think as 
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rates have increased, you're seeing additional 

opportunities for people to compete for the 

deposits. In other words, a depositor has a lot 

of -- they have a lot of options on where to park 

their money.

MEMBER DONNELLY: You know, I was just 

looking for it. Are you distinguishing between 

the percentage? Is that growing as a percentage 

over time or can you identify, can even identify 

it?

MR. MITCHELL: I'm not sure we 

can -- I mean we'd have to look closer. I'm not 

sure you can identify them in a way that you're 

looking at. But we can look closer at that. I 

don't think – we’re still seeing strong deposit 

growth in the industry, and that would be the 

indicator really. If they have a net loss in 

deposits, we're still seeing very strong deposit 

growth. I think the indicator that, you know, 

deposits are still, banks are still, people are 

still broadly speaking putting their money in 
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banks, using that as a deposit.

MEMBER DONNELLY: Thank you.

MR. MITCHELL: Okay, so it's still a 

positive story right now, but next quarter we 

will see. It will be a challenge. Pretax ROA. 

So on this, in this case, again this is a story 

where it increased at community banks, and it 

declined mildly at non-community banks year over 

year. You know, the gap was widening at

non-community banks. It's kind of a, it's a 

little bit of a mini-story here right, moved up 

in conjunction with them. And you know, last 

quarter it narrowed against the industry about 12 

basis points. So and also I note here 96 percent 

of community banks reported a profit last year, 

so again positive, mostly reflective of the 

previous slide.

Net operating revenue as a percentage 

of average assets. One thing always remarkable 

to me about this slide is how steady it really 

is. When you adjust for assets, this has really 
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remained amazingly stable over a long period of 

time. Net interest income was up 5.1 percent 

last quarter, and non-interest income up 4.7 

percent. So there we see very strong growth over 

both aspects.

And now to go back to a recurring 

theme, and I won't spend -- I'm not going to 

reiterate all the points here, but the asset 

quality story that you all have told and the 

numbers are very small. We really have to 

be -- you literally have to squint, and then we 

have to blow up the box to show any type of 

movement, even when looking at and including 

things such as farm loans, which is the one area 

I would note where there's a slight diversion.

But really asset quality overall is 

still strong. Farm loans, roughly 1.28 percent 

last quarter non-current rate, up 1.13 basis 

points. But again, due to all the 

aforementioned, previously mentioned areas, it's 

still a relatively low non-current rate, 
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especially when you provide for the fact of how 

long you had sustained low farm income.

So really it's shown strong resilience 

due to the bankers working with the farmers, the 

carryover debt and the strong, the strong 

farmland values. 

I'm going to dive a little bit deeper 

into this, because this is the only real -- at 

least a current, right now credit story out 

there. This is just to breakdown the non-current 

into farm loans that before previously in other 

slides we had aggregated, now it's breaking it 

into farmland and ag production.

We can see a slightly stronger uptick 

again, not at an alarming level, a slightly 

stronger uptick, in the non-current on farmland. 

But as everybody mentioned, the farmland values 

remain strong and the collateral coverage really 

remains strong, which we're going to show on the 

next page. Sorry, two pages from now we'll show 

it on the charge-off rates.
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So this one, this slide, again we want 

to get a little more granular. It's not -- so 

we talk about ag, we talk about farm. It's not 

the same story everywhere and not the same story 

at every bank. So this is just to show, the way 

this chart works is the box in most of your 

charts. So the green dot is the median bank. 

The 75th percentile is your top quartile hash. 

The 25th is the bottom hash, and what we're 

showing here, are those states where there are at 

least 20 farm banks. 

So we wanted to make sure that there 

is a reasonable concentration of farm banks, and 

just to show hey, how are the median banks doing 

relative to other states, and again how are 

you -- how is the tail bank doing? It's not 

quite the tail, you know, it's the 75th, because 

really at least, you know, you tend to not 

have -- the median bank doesn't fail. It's 

usually the banks that are under stress that are 

out further towards the tail.
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And one thing that, you know, amidst 

all the press, you can see here I think -- Lori, 

I think you mentioned the challenge in dairy, and 

you can see that here with Wisconsin, where at 

least the 75th percentile are the highest and the 

median. Again, I don't think these rates are 

alarming, but it does show that there's some 

dispersion when you get into a little bit deeper, 

rather than just looking at the aggregate

problem.

And then this is what I was alluding 

to, when you look at net charge-off rates, again 

you have to blow up the box to see any type of 

movement up or down, and certainly it's very 

difficult to go down. It's at 11 basis points. 

It's two basis points off the aggregate, two 

basis points off the recent low, and this is 46 

basis points lower than the industry when looked 

at in the aggregate.

And again, this is -- so this is the 

charge-off story. When you look at the farm loan 
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charge-offs and you really, it even underlines, 

underscores even more the strength of the 

farmland value and the working with the farmers, 

that even though you see more of an uptick in the 

non-current, the charge offs are still very low, 

slightly uptick again. You almost have to squint 

at this one.

So here's another -- everybody's 

mentioned this. Loan growth has remained strong. 

6.3 percent year over year for the community 

banks. It's 4-1/2 percent for the industry. So 

this has been a long five-, six-year story in 

terms of community banks outpacing non-community 

banks in terms of loan growth. And it's pretty 

broad-based in terms of, in terms of growth.

You know, this is something where you 

see that continuing to lend into the community -

- this is a challenging lending environment, 

you've all mentioned that. I don't know whether 

we're going to see this tighten a little bit or 

slow but, you know, we'll see.
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And then this slide has been a longterm trend also, certainly post crisis. If you 

add up the loans and the securities greater than 

three years, you come up with almost 50 percent, 

so 47 percent. At the height, it was 50 percent. 

So this has actually helped in the environment. 

It's a good help in the environment, actually 

reduced some of the compression. 

You might see more in the industry 

where they are more sensitive to repricing 

assets. So, but nonetheless, you can see a 

material change since -- just coming out of the 

crisis it was 37 percent of combined loans and 

securities greater than three years, and now 

we're at 47 percent. It's just merely a trend, 

but it's also coming down slightly.

This is another look. This is a 

community bank look at the liquid assets. So 

liquid assets and wholesale funds, again slightly 

different than the aggregate story. But that 

looks similar in that the wholesale funds seem to 
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have stabilized around where they are in 

aggregate, and so have liquid assets. You can 

see this steep decline over time, as community 

banks have become more and more developed. 

Nothing surprising, nor is there any strong trend 

now. 

Moving to capital, capital continues 

to build. It's higher than the industry. They 

continue to improve. Then the last slide is, you 

know, I know several of you mentioned this. 

Consolidation. So it continues, continues. The 

long-term rate is about four percent for the 

industry. This is the industry.

Community banks have actually had a 

slightly lower long-term average of closer to 

three percent over the same time period, from '85 

to 2019. You can also see there are periods. 

Let me show you. When I say -- so the 

consolidation rate is intra, merger rate is 

inter. So some of this, what you can see is the 

activity at least for a period of time was heavily 
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concentrated in the intra merger.

We looked at it a little bit 

differently, definitely a little differently. 

But most recently that's shrunk, as probably a 

lot of efficiencies have been gained as people 

have merged. And now what we have seen, at least 

post '12/'13, you've seen an increase in the 

percentage of inter-bank mergers, and at least 

at, you know, certainly at least some level 

you're seeing price values, you're seeing price 

multiples go up in terms of acquisitions.

It's leveled out. It's slightly 

slower this year when you look at your second 

quarter now. That's about four percent 

annualized year over year. It's of course the 

long-term average, but slightly lower than what 

we've seen over the most recent time. 

Now it could be a function of many 

things, multiples, the challenging interest rate 

environment. As you all know, there are a lot 

of factors that drive, drive these decisions both 
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in terms of buyers and in terms of sellers. 

MEMBER EPSTEIN: Are you expecting 

Patrick as -- we won't discuss the pressure on 

our margins, which obviously is going to create 

pressure on our earnings. So are you 

anticipating that there will be an uptick in 

merger activity, as banks are not as 

independently profitable perhaps and are needing 

to find economies of scale to combat pressure on 

their margins?

MR. MITCHELL: Yeah. I think 

that's -- I don't -- so I'm not sure if that's 

actually going to fully, fully drive it, because 

that also can drive down -- well, it could be a 

driver, a one-off trying to get economies of 

scale. We have studies out there that say 

economies of scale, in our 2012 community bank 

study, economies of scale are reached around $500 

million. After that, it's not as much of an 

effect, and again every bank's going to be 

different.
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I think that that really depends also 

on the economic outlook. That can be part of the 

story, in terms of how optimistic people can be, 

because again I think what you saw as coming out 

of the recession, banks said buyers were a little 

less willing to maybe do the -- well, let's go in 

the balance sheet, there are some concerns there.

Also, you have people not willing to 

sell at, you know, low multiples if you don't 

have to sell, if you're not a forced seller. So 

I think that -- I think that the price multiple 

is a big driver. I also think that, you know, 

if it gets too high also, you have to -- yeah.

So yeah. You know, I don't know. I 

think that -- I think you can see that during the 

time of rising rates there was slightly more 

optimism. You had, you had it strong, I think 

it's stronger than average. Then well what do 

you think? Do you think that it could result 

in --

MEMBER EPSTEIN: Well you know -- it's 
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not the outlook -- it's not the outcome I'm hoping 

for, but I am concerned that there's going to be 

another wave of consolidation as banks, you know, 

see this pressure on their earnings.

You know, we've talked about other 

issues that come to bear on those decisions too, 

such as succession planning, and the FDIC, just 

to their credit, has done a nice job of 

encouraging community banks to plan appropriately 

for succession, so that part of the succession 

plan isn't well, we'll just find new management 

that will take over our institution.

I'm concerned about it and I can't 

help but ask you, you may not be the appropriate 

person to answer this question, but I would hope 

the FDIC is approving the sale of a community 

bank to a credit union only with some degree of 

reluctance, and that there is not another path 

forward for the selling bank, that there's not 

another suitor that's a community bank or -- I 

mean I can understand if the only buyer in a 
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situation where a bank has to sell, you know, for 

the betterment of the community in which it's 

located, and you have an obligation to protect 

the taxpayers. But I've heard of a few that 

don't seem to fit that scenario, and I'm just 

curious what the FDIC's thoughts are about that 

because the fact that the credit unions, some 

have been successful in acquiring community 

banks, I think is only whetting their appetite 

for additional acquisition opportunities.

MR. MILHORN: So Doreen Eberley is our 

director of Risk Management Supervision, and I 

think she can speak to this very question, which 

we have discussed ourselves.

MS. EBERLEY: We have, and so first I 

would just let you know that there is no 

application that comes to FDIC to approve that 

merger. The acquisition application goes to the 

NCUA. The application that comes to us is on the 

very back end of that. When a bank is leaving 

the Deposit Insurance Fund, they will file an 
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application to terminate deposit insurance in the 

FDIC's Deposit Insurance Fund. So that's really 

the only involvement that we have there.

To the extent credit unions want to 

become insured by us, and we do have transactions 

that go that way, that's an application for 

deposit insurance of an operating non-insured 

entity. So even though they're insured by the 

NCUA, we consider them uninsured, and so we go 

through a deposit insurance application process 

before granting them deposit insurance and then 

have them be part of our Fund. So that's kind 

of the process there.

MR. MITCHELL: Sorry, out of my 

peripheral vision. Doreen walked in and I said, 

thank goodness --

(Laughter.)

MR. MILHORN: I hope that helps at 

least understand the process and where we play in 

it.

MEMBER EPSTEIN: I actually didn't 
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realize the FDIC role was really almost in the 

aftermath of the transaction.

MR. MITCHELL: Yeah, that's it -- all 

right. So the last thing I'm going to cover, and 

this is a very -- this is unequivocally a happy 

story. So it's small bank assessment credits. 

Hopefully you all know and are well aware of the 

amount of credits you all have earned over what 

we call the surcharge period, the growth in the 

DIF between 1.15 and 1.35 percent. We announced 

as of second quarter we’re at 1.40, and credits 

would get paid once the Fund was at or above 1.38. 

So we’ve reached that, and hopefully 

you all -- it actually talks about we said yeah,

$320 million of credits will be used and in fact 

you should have seen those recently. Just that's 

a tense issue. So you, I think well, it should 

have been applied. Probably all, most if not all 

of you I assume had no assessment charges last 

quarter, actually something very odd.

Well, there were times. So and now 
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there's still a remaining $445 million of credits 

to apply over the next term and so you can see 

here, it tails off pretty quickly. We expect to 

apply 238 in third quarter of 2019, leaving the 

remaining 207, then 144. You can see it starts 

tailing off quickly. Most institutions use up 

their credits over three or four quarters. 

If you all have any questions in terms of 

projecting or trying to understand that, please 

reach out to us. We have a hotline and we'll be 

happy to talk to you about your specific 

situations. But three to four quarters, most 

banks should see relief, and again it really 

depends on certain things such as your actual 

assessments, how much you've grown and most 

earning the credits, things along those lines. 

So it's an institution-by-institution story.

I will say that we put out for -- this 

is kind of in the weeds, but it's important for 

you to know. So previously when we initially 

wrote the rule, we said the credits would only 
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continue to be applied so long as the Deposit 

Insurance Fund is at or above 1.38 percent. 

We put out for comment a rule, that 

now the comment period closed, that we lowered 

that down to 1.35 percent. When you look at the 

size, while we know it's all sizeable and 

meaningful for you all relative to the Fund size,

now we're down to less. If we were to apply it 

all, it's less than a basis point. 

So one thing we were worried about and 

concerned about was applying credits and then in 

fact having something else occur that would have 

put us into -- we didn't know the size of the 

credit when we initially did the rule -- that may 

have placed us into a restoration type of thing 

and our minimum reserve ratio has to be at or 

above 1.35 percent. So nonetheless, that's why

the NPR was out there, just to provide a little 

more certainty to you, you all. 

We now have more certainty on the size 

of the actual credits, and know and understand 
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that better. So anyways that's -- this is all a 

good story. I'm very happy to answer any 

questions on this.

(Laughter.)

MR. MITCHELL: Has it all gone 

smoothly for you all? Do you understand your 

future, the future applications and all? Okay. 

That's everything from me.

MR. DAVIS: Great. Thank you, Pat. 

Next up we have Anthony Lowe, the FDIC's 

Ombudsman, and he will provide an update to all 

from his area.

MR. LOWE: Okay, good morning 

everyone. Well, I was feeling really good this 

morning until Chris made that comment about 

capital forbearance, and it made me reminisce 

back some 30 some odd years.

MEMBER DONNELLY: I'd glad somebody 

else remembers that other than me.

MR. LOWE: I was a young examiner in 

Shreveport, Louisiana, about 33 pounds lighter 
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and had hair. So thanks for that.

(Laughter.)

MR. LOWE: So a few weeks ago my 

office provided all of the existing members of 

the CBAC a copy of our 2018 Annual Report of the 

Ombudsman Activities. In that report, we did 

talk about some of the cases that we handled back 

in 2018 at a pretty high level.

So what I wanted to do today, kind of 

in that vein, is to provide, kind of walk through 

an actual case that we've had this year from the 

beginning to the end, and show how the Ombudsman 

Office was involved in a case, and again I think 

this is a success story, and it shows how the 

complainant, the Ombudsman and one of our active 

divisions worked together to again resolve a 

matter in a pretty timely manner, you know, 

through a process of communicating.

So earlier this year, the FDIC was 

conducting an examination, a routine examination 

of a bank. Assets of the bank were under $5 
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billion and the ratings of this bigger 

institution, both in safety and soundness,

compliance, and all the specialty areas, were 

favorable. Management was highly rated, meaning 

it was either a 2 or 1 rating. So again, no real 

issues with the bank's operations.

Gentlemen, I'm on the third slide now. 

So during the course of this particular 

examination, the examiners identified certain 

transactions that raised some questions with the 

way that they had been booked, and initially we 

felt there might be some violations, and there 

was a lot of back and forth with the bank with 

regard to these transactions. So the banker had 

some concerns about, preliminarily about these, 

being looked at – oh, sorry about that. 

So there was a lot of back and forth 

with the examination team and the EIC with regard 

to this preliminary finding that there were going 

to be some violations. The banker made the case 

that there was a state law that provided a very 
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unique and narrow exemption, and this is somewhat 

unique, that state law would usurp federal law. 

But in this particular case, it did provide a 

narrow exception, and the banker kept making the 

case that this, you know, was the case in this 

particular instance. But you know our examiner 

continued to review this matter, consulted with 

his direct supervisor and their supervisor, and 

at the exit meeting made a determination that he 

was going to go forward with citing this matter 

as a violation in the Report of Examination.

So needless to say, when the report 

did get to the regional office, and mostly all of 

our Reports of Examination now are reviewed at 

the regional office level, the compliance, risk, 

all of the specialty areas. They're all reviewed 

at the regional office for consistency purposes 

primarily. 

The report was reviewed by the review 

folks and management level. It eventually issued 

and it did include the violations, you know, that 
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the bank had disputed. We did include a comment 

in the report that the bank did not agree with 

those violations. So the bank eventually did 

receive the report. Of course, they were 

disappointed in the findings and concerned about 

the violations. The bank did make the claim or 

did tell our folks, once they contacted us, that 

it was going to cost them a considerable amount 

of time and money potentially to correct these 

violations because there was going to be a lookback that was going to be required to fully 

remediate these violations.

So the bank, after they received the 

Report of Examination, contacted one of my 

regional ombudsmen and had a discussion with him, 

and asked what can we do? What should we do in 

this particular situation? So the regional 

ombudsman, as they usually do, you know, kind of 

went through from soup to nuts, the A to Z of all 

of the available options.

Number one of course, as we always do, 
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have you had direct discussions with the 

examiner? Have you presented, you know, the 

alternatives of, you know, how you arrived at 

your conclusions versus the examiner? Have you 

asked to speak with, you know, direct 

supervisors, the field supervisor? Have you 

thought about, you know, asking to have a meeting 

at the regional office level or with the regional 

director? Have you asked for an extension of 

time to file your response to the examination?

And we also, you know, did talk about 

the formal appeals process, but we did say that 

should be a last resort. Let's think about first 

trying to approach the region and, you know, have 

a discussion, a meeting or whatever the case 

might be. That was the approach that the bank 

settled on, was to prepare some correspondence to 

send to the region.

In that vein, we also told the bank it 

would probably be to their advantage if they had 

a legal opinion to back up their position. They 
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should include that with the correspondence that 

they were preparing and going to send to the 

regional office, which is what they did. 

Before they sent the correspondence to 

the region, they did send the correspondence to 

our office and asked us just to take a look at 

it, and we told them, “We can't write the 

correspondence for you, but we can just take a 

look and make sure, from our perspective, that 

you are focusing on that one issue, you know, 

that you think is egregious and that you think 

needs to be addressed.”

The bank completed the correspondence 

and did send it to the regional office, and 

eventually it was being, got to the point where,

it was being reviewed by the region again. Once 

the report or the information that the bank 

submitted was reviewed or received in the 

regional office and I think I'm up on Slide No. 

4 now, with the ombudsman as an intermediary, the 

information was shared with the region's Legal 
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Division, to take a look and see again did this 

have merit?

Was there actually some type of 

exception as the bank had claimed initially 

during examination and that was indicated in the 

supplement that was provided with the package 

that was sent to the regional office? It did not 

take long for the Legal Division at the regional 

office to come to the conclusion that the bank's 

information was correct. 

We provided that -- that information 

was provided back to the Supervisory Division and 

the Report of Examination was corrected, and a 

revised Report of Examination was eventually 

submitted to the bank with the violation 

eliminated and removed. 

I think there was a positive outcome 

here because there was again some additional 

communication, I think because the Ombudsman 

Office did become involved in this situation, 

that we did facilitate, you know, the bank 
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thinking about some alternatives and also, you 

know, assisted the bank in thinking about 

alternatives, beyond just thinking about an 

appeal or, you know, doing anything rash.

 You know, we always -- as I said 

before, we always encourage banks try to resolve 

your issue with the examination team or with the

region. Sometimes it can just be a 

miscommunication or some additional information 

that needs to be exchanged and usually, I'd say 

99.9 percent of the issues or disagreements can 

be resolved at the local level.

That's what we always encourage our 

bankers to do when they do contact us. That's 

one of the first questions we ask, is “Have you 

had that discussion? Have you presented this 

additional information that may, you know, shed 

a different light on this issue that again can 

exonerate or put a different light on how the 

examiners are looking at this particular matter?”

So this slide says, Lessons Learned, 
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and I just really would say what are some of the 

outcomes or what are some of the successes here, 

some of the things that maybe could have been 

done differently. 

Again, you know I would stress that 

this was a well-run, well-managed bank. One of 

points that I don't think I stressed earlier, the 

bank had been conducting these transactions for 

over 20 years. So they had gone through four or 

five examination cycles, and they had never been 

cited for any criticisms or any violations.

In that particular situation, from an 

examination standpoint, we probably could have or 

should have stepped back and said, “Hey, let's 

take another look. Let's do some additional 

analysis and let's figure out why we have not 

cited this as a violation for this bank.” And 

also, you know, give a little bit of deference to 

management since it was a well-run and 

well-managed bank. Let's go ahead and do some 

additional analysis and maybe get our Legal 
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Division to take a look. Also from the bank's 

standpoint, since they were so adamant that this 

was an incorrect call, you know, the bank 

probably should have or could have put together,

early on, put together a legal review, some type 

of a legal analysis that they could have provided 

to the examination team early on.

Also, when the report, you know, the 

draft report got to the regional level, again 

there could have been, there should have been,

some additional analysis and definitely some 

additional analysis involving the Legal Division, 

consulting with the Legal Division.

So again, this is just one case that

we had again earlier this year and I just have to 

throw out the disclaimer that no two cases are 

typical. Every case has to be looked at just a 

little bit different. You have to look at the 

facts and circumstances. Not all of them get 

resolved this way. Sometimes, banks have to 

consider other alternatives.
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But you know in this particular case, 

again I think there was a favorable resolution 

because we got to the point where an accurate 

Report of Examination was issued, and the bank, 

you know, prevailed and did end up getting the 

situation resolved in the manner that they 

thought it needed to be. I'll stop there and see 

if any questions or comments. 

MEMBER PITKIN: So I have an 

observation. I'm sorry.

MEMBER KELLY: Go ahead.

MEMBER PITKIN: It's just that I have 

an observation, and I mentioned it in the 

hallway. I truly appreciate the fact that a 

success story of the Ombudsman was that the FDIC 

was not correct, and that sets the appropriate 

tone with regards to those of us that always hear 

some things about interpretation, 

interpretation. 

The other question I have is was there 

any discussion with regards to how much time, 
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energy, effort, resources and cost that something 

like this does cost, and is there any 

consideration with reimbursement or was there any 

consideration to reimbursement for the bank, 

which at the end of the day, it was basically 

proven, or they had to prove, that they were 

innocent, when basically it was indicated that 

they were doing it wrong?

MR. LOWE: I'm not sure that we had 

any discussion about any reimbursement per se to 

the bank. But I do know that we do have these 

type of discussions, that when we do identify an 

issue that, you know, we should have maybe done 

some additional investment of time or resources 

to make sure we got it right, that we do from a 

remedial standpoint try and have a discussion 

with our staff and make sure we don't make that 

type of a mistake again.

So that's, I guess, the investment or 

what we do, and just think going forward, let's 

try and make sure, you know, that we -- to the 
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degree that we can -- not make this mistake or 

error again.

MEMBER PITKIN: Thank you.

MEMBER KELLY: Anthony, thanks for 

sharing this. This is a great success story 

relative to the last discussion we had. So I 

appreciate you sharing this particular business

case. The question is I thought I heard you 

describe, there was the potential for a 20-year 

look-back, which suggests that it was probably 

fairly material to this institution.

What policies or what guidelines are 

in place on a look-back, especially when the item 

has probably been either looked over or maybe not 

captured in the review process? Is there a way 

to improve that?

Because I think of myself, and you 

know, if you have missed something, not you 

personally, but if there's been something missed 

in a review and then it comes back and it goes 

back 10-15 years, it automatically causes us to 
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be quite defensive because it appears we didn't 

know and apparently you didn't catch it so to 

speak.

Now I understand it's risk-based, so 

you're trying to get the big things first, and 

then you drill down. But I'd love to have your 

thoughts or your response to that.

MR. LOWE: Yeah. You know, the 20-

year look-back, that was the bank when they were 

having a discussion with our regional ombudsman. 

I doubt that we would have required the bank to 

go back that far. I know when we've had some 

other cases where we've had a bank go back, you 

know, sometimes maybe five years, seven years, I 

doubt we'd have them go back that far in time 

because records, some of that information may not 

be readily available or may not be accurate.

But you know, again we try to be 

prudent, try to be reasonable with the 

institution, and you know, if there has been 

something really egregious, you know, we may 
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think about how far back can we go and how far 

back are the records accurate. But you know 

again, that's going to be dependent upon what 

records are available and how egregious the 

potential action or non-action is.

MEMBER KELLY: Great, thank you.

MEMBER DONNELLY: Anthony, just would 

you clarify what type of legal opinion you -- I 

know you can't get into detail who it was or not. 

Is that just my own attorney or is that state 

banking department attorney, or is that an 

independent third party? How would that be?

MR. LOWE: You mean for the bank?

MEMBER DONNELLY: Yeah. What --

MR. LOWE: The bank themselves got 

their legal, outside legal counsel.

MEMBER DONNELLY: Their own outside 

counsel?

MR. LOWE: Right, yes. 

MEMBER DONNELLY: Okay, thank you. 

MEMBER DeBIASI: Anthony, 
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just -- excuse me -- a couple of comments. I 

know the last meeting we had a pretty good 

discussion on your presentation regarding any 

feedback from the banks as to the Ombudsman's 

Office and why you would or would not use the 

services. Because I know their usage has been 

low for a lot of reasons in recent years. I know 

the Ombudsman's Office with the strong 

examination cycles we've been in, it probably 

feels more like the Maytag repairman lately. 

There's just not a lot of reason to bring an issue 

to the Ombudsman if you're satisfied with your 

exam.

But I know one of the issues that came 

up is, you know, especially for smaller community 

banks, is fear of reprisal, you know. Somehow 

if we take this to the Ombudsman or we try to 

take on our regional office, that somehow it's 

going to work against us somehow in the end. I 

think that was a pervasive feeling among some 

community banks, which you may have indicated in 
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some of your surveys and findings.

So one thing, one comment I would like 

to make regarding in our region, in the Chicago 

region, I know the regional ombudsman has worked 

very hard, which is Dan Marcotte, to really reach 

out to the banks. He's reached out to us and we 

feel like we have a comfort level with Dan, you 

know. He's visible, he stops in, he calls, he 

checks up on us.

And you know, it's a good practice and 

we appreciate it, and I know he's even worked 

with our trade association in Ohio to attend as 

many functions as he can. So I think that should 

go a long way in alleviating some of that 

nervousness amongst banks, particularly if we 

start to go into a down cycle and maybe the exam 

process starts to become, I hate to use the word,

contentious, but it starts to become a little 

more intense.

It's nice to know that that is out 

there and that an Ombudsman Office does exist and 
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they're real and they're willing to help. So 

that's the feel that we've gotten in our region. 

We appreciate that. 

MR. MILHORN: Can I -- can I 

just -- just a clarification for my purposes. 

But going back to Chris' question I think on the 

legal opinion, that's not something we would 

require. It's just something that the bank could 

provide as additional evidence of compliance. 

I mean if they came, if they came with 

a question and they didn't have a legal opinion, 

we could still have the conversation and try to 

resolve it. It's just if you've got it laying 

around in the file cabinet, it's something that 

we can take a look at. Not, or you know, if you 

feel compelled, it's your decision to go out and 

get it. But it's not something that we would be 

required to get, to have the conversation.

I think that's the important point of 

this story, is the role that the Ombudsman can 

play in keeping that line of communication open, 
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short of formal appeals and, you know, digging 

in, and I think that's the goal of the office. 

And ultimately, our goal is to get it right. 

We're not always going to agree, but we want to 

get it right. So having those lines of 

communication is great. 

MR. LOWE: Thank you.

MR. MILHORN: Thank you for that 

clarification. 

MEMBER EDWARDS: Anthony I can just, 

well just encourage folks around the table here 

as well, that you don't have to go to the 

Ombudsman to have that process work. What you're 

saying as well. I can give you a good example 

since Mike is here. Probably four or five years 

ago, we had -- no, it's good.

(Simultaneous speaking.)

MEMBER EDWARDS: It's good. Mike 

might not even know about it but it was good. We 

run a Trust Department as well which also handles 

self-directed IRAs. It's a small part of our 
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overall business, never really been looked at all 

that closely. Had an examination. It was 

rotated through and examiners looked at it, and 

they had some questions about how we were 

handling certain accounts there.

We felt like they were -- what they 

were asking us to do was going to basically make 

us a fiduciary when we're a custodian. So we had 

a good conversation at the exam. It did get in 

the report. We went, had a conversation with our 

outside attorneys and they said you know, “We're 

concerned about you guys doing what they're 

asking you to do here.”

And so, you know, we had a 

conversation with the folks in Atlanta. It was 

not adversarial. We just said, “Hey, this is 

our -- this is our issue, it's our, you know, 

this is what's there, what we're being told.” We

had a good conversation with them about this and 

they looked at it, spent time with it and we got 

it resolved.
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And not that we were all right and 

they were all wrong. It helped us also -- our 

process was better on the back end of it. But 

I'd never really done that, where I had gone to 

the FDIC and said, “Hey, I've got an outside 

attorney here telling me something different 

here,” and I was nervous about it. But we didn't 

feel pushback. Everybody said, “Yeah, let's look 

at it.” 

So I just would encourage everybody, 

this is outside of the Ombudsman, if you really 

feel like something's not right, you know, pick 

up the phone and call your folks in the regional 

office and just be honest with it, and we had a 

good outcome with it.

MR. MILHORN: Yeah. Like Al said, 

you know, we're not, we're not consultants. 

We're not your lawyers. Ultimately, the business 

decisions are yours. But really we are always 

willing to engage, whether it's at the local 

level, the regional level and even back at 
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headquarters to work with institutions on 

questions like that. I think that's fair. I'll 

let Doreen, you know. That's --

We see that as our role. Like I said, 

we're not always going to agree, but the 

engagement is something that we can help. It 

helps us identify and mitigate risk. It helps 

you all do the same thing, which ultimately is 

the goal.

MEMBER EDWARDS: Sure. 

MEMBER PITKIN: Anthony, could I ask 

one last question? I apologize I wasn't here at 

the last meeting, of which it sounds like you had 

a discussion. So do you track whether internally 

and/or for a public record the successes, so to 

speak, of the actions that are taken through the 

Ombudsman? 

So in other words, you know, who is 

coming to the table with the issues and the 

outcome? Do you track that?

MR. LOWE: We have some internal 
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metrics that we do, we keep some information with 

regard to cases that are brought to our 

attention. I don't know that we, you know, have 

a running tab per se. But we do, with all the 

cases that come to our attention, we try to get 

them resolved.

Again, we're not trying to say that 

they're all successes or anything. But we try 

to get them resolved, to the point that the bank 

clearly understands at least how we arrived at a 

decision, how the supervisory divisions or if it, 

you know, if something was regarding even the 

resolution folks, how they arrived at the 

decision, or a FOIA request, you know. How 

decisions were resolved to make sure it was a 

fair process.

That's what we're trying to do, is 

make sure that at the end of the day the bank or 

whoever has contacted us thinks it's been a fair 

process and they understand how decisions are 

made.
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MR. MILHORN: And one of things the 

Chairman has instituted since she got here is 

every other month, we have an operational review 

for our Division of Risk Management Supervision, 

and then our Division of Consumer Protection. 

All our leadership sits around the table and 

Anthony and his team are there. 

So we make sure that we understand the 

feedback we're getting from our institutions 

through the Ombudsman, as well as any trends that 

we're seeing on examinations. We think that's 

been a very helpful process.

MR. DAVIS: Okay. Thank you, 

Anthony. At this point we'll go ahead and break 

for lunch, and reconvene here as close to one as 

possible. Thank you.

(Whereupon, the above-entitled matter 

went off the record at 12:01 p.m. and resumed at 

1:10 p.m.)

MR. DAVIS: I think we’ll go ahead and 

get started. It looks like we’ve got a quorum, 
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and we’re a few minutes behind. At this point, 

we want to provide the committee with an update 

on several supervisory issues. I'm going to turn 

the program over to Doreen Eberley, the director 

of the Division of Risk Management Supervision, 

who will introduce our panel and cover the first 

discussion item.

MS. EBERLEY: Thanks, Chad. So we're 

going to break this panel into two because we've 

got a lot of topics to cover. So this is our 

first group, and I have with me Tom Lyons, who's 

section chief in our Policy area; Ben Bosco, 

who's the section chief in our Capital Markets 

area; and Shannon Beattie, who is a section chief 

over our Accounting and Securities Disclosure 

area.

So Tom's going to talk about a Notice 

of Proposed Rulemaking relating to interest rate 

restrictions applicable to institutions that are 

less than well capitalized. He's also going to 

talk about the new appraisal threshold for 
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residential real estate loans. Ben's going to 

review the final community bank leverage ratio, 

and Shannon's going to talk about FASB's exposure 

draft on effective dates for CECL. 

But before they get started, I did 

want to take just a couple of minutes and talk 

about a financial institution letter that we 

issued in August, addressing risk-focused 

forward-looking supervision. So you do have a 

copy in your materials there. So this financial 

institution letter or FIL announced an update to 

our Manual of Examination Policies in the form of 

a new section. 

The section's titled Risk-Focused, 

Forward-Looking Safety and Soundness 

Supervision. The new section describes our 

long-standing philosophies for conducting 

examinations, and the methods that we use for 

supervising institutions, by focusing on the 

areas presenting the greatest risk. Hence, the 

risk-focused title.
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It also explains how we conduct 

examinations, from the planning stages until the 

time that we mail the Report of Examination. So 

I wanted to highlight just a few items in the 

document for your attention. First, one thing 

that we changed was how we plan for an 

examination. So the actual process of planning 

has been accelerated. We've moved it up. So 

about 90 days out, you'll be contacted by your 

field supervisor or supervisory examiner. They'll 

ask you a few logistical questions to see if we 

can do loan review offsite. They'll ask about 

connectivity, and they'll send you two 

questionnaires: the IT risk profile script that 

you're used to receiving for our InTREx 

examination, and a new examination planning 

script to ask about changes that have occurred in 

your institution since the last examination.

So we've then also accelerated the 

timing of the exam planning by the examiner in 

charge. So that's the 90 days out. Six to eight 
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weeks out, the EIC will actually come into the 

office. They'll review the materials, the 

answers that you provided to the exam planning 

script. They'll spend time reviewing the prior 

Reports of Examination, the UBPR, looking through 

the correspondence files, talking to the case 

manager, learning about what's happened since the 

last time the bank has been examined, and they'll 

reach out to you during that period of time as 

well, and talk to you about their exam plan. 

Some of the things that are different 

here as we've broken this into -- this all used 

to happen, but it happened much closer to the 

examination date. So we've moved some of those 

exam planning activities earlier in the process. 

The examiner in charge will, once they've done 

all of that activity, develop a preliminary view 

of what is the institution's business model, risk 

profile, complexity.

Then they'll develop a preliminary 

exam plan based on the institution's actual risk 
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profile. They'll develop a request list that's 

tailored to the exam plan. So we're hoping that 

our request lists will become even more tailored 

than they are now, and we'll be asking for less 

information. And then they'll make a preliminary 

determination about the exam activities that can 

be conducted offsite. So we'll go back to that 

initial question 90 days out. Do you have imaged

loan files, can we review them offsite? We've 

got a couple of different ways to do that, and 

they'll ask about connectivity at the 

institution, to speed our examiners’ work. If 

we need to add a circuit in the institution, we 

can do that.

The second phase of exam planning is 

going to occur about two weeks ahead of the exam 

on site start date, and the EIC and any available 

staff will start to work on an off-site basis on 

any of the materials that you've submitted. 

They'll go through all of the items we requested, 

they'll start the examination work, everything 
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that can be conducted off-site. Some staff may 

work off-site through the entire examination. 

In combination, we do think that these 

changes we've made to just our actual planning 

process will provide for a more focused and 

shorter time on site. We've already heard some 

positive comments, so this program, the changes 

to our exam planning really became effective 

October 1st in planning for examinations that 

will start in January. But this is something 

we've been training our examiners on and walking 

through the changes to the process with them over 

the course of this year, so some have already 

started, and we've heard positive comments from 

bankers that have already experienced these 

changes, more focused examination, fewer people 

on site, people leaving when they were done, you 

know, so you didn't have as many people in the 

institution over the course of the examination. 

And then a third item I wanted to 

highlight about this is that we did reemphasize 
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in this new manual section principles that we 

adopted as a member of the FFIEC, along with the 

other banking agencies, about the importance of 

clear and transparent communication and risk 

tailoring during the examination process.

So those principles are set forth in 

this new manual section. I wanted to just harken 

back to the last session and talk about one of 

those principles for communication, which is 

inform institution management of areas under 

review. We'll do that ahead of time in the 

planning process. We'll tell you what we're 

going to do. We'll talk about it during the 

examination like we do now, and provide 

management the opportunity to communicate any 

additional information or clarification before 

the conclusion of the examination.

I think the thing that I really wanted 

to emphasize here is that if you're experiencing 

any difficulty, we've always asked, you know, 

please raise your hand, let somebody know. Don't 
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suffer in silence, and if you feel like you're 

trying to share information with an examiner that 

they're not receptive to receiving, raise it up 

the chain.

In the situation that Anthony talked 

about in the last session, you know, as soon as 

regional management became aware, the matter was 

resolved fairly quickly. So please avail 

yourself of all the opportunities you have to 

raise questions and communicate during the 

examination, and we will do our part as well.

So that's our statement on 

risk-focused forward-looking supervision. I'll 

turn it over to Tom.

MR. LYONS: Thanks, Doreen. I wanted 

to talk to you a little bit about the rate 

restrictions rule, as well as the appraisal rule. 

So in February 2019, the FDIC published an 

Advance Notice of Proposed Rulemaking on the 

brokered deposit and interest rate restriction 

regulations. So the comment period ended in May, 
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and we've received about 130 comments, about 59 

of which were focused on the rate restriction 

aspect. They particularly highlighted the 

concerns that folks were having with the National 

Rate Calculation. 

So on September 4th, the FDIC 

published a Notice of Proposed Rulemaking seeking 

comments on the proposed revisions to the 

regulations relating to interest rate 

restrictions that apply only to those 

institutions which are less than well 

capitalized. 

So a little background on that is 

Section 29 of the Federal Deposit Insurance Act 

restricts the institutions that are less than 

well capitalized from paying rates that 

are -- significantly exceed those that are -- in 

their normal market area. And so the FDIC had 

adopted rules to implement these restrictions in 

1992, as well as revised them in 2009.

So from '92 to 2009, these rate 
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restrictions were tied to the Treasury rates for 

various different tenors and products. So that 

worked well for a while, because they were 

closely correlated in how they behaved with 

deposit rates. But as we got closer to 2009, 

that correlation really kind of fell apart as the 

Treasury rates really fell very, very low.

So in 2009, we revised the rules. So 

we made them so there's an average from all 

branches, all banks for various products, the 

interest rates that were available for certain 

tenors. So also for savings and checking and 

money market deposits, and that worked for a 

while.

But soon we started to see some issues 

crop up with that as well, because the -- what 

we're gathering for those, for the averages was 

posted rates, and those weren't the same as what 

was really being offered in a lot of places. 

Also, there was a lot of innovation with 

different deposit products which didn't fit into 
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the tenor buckets that we had had out there. 

That was another problem.

The large institutions with a large 

branch network tended to have a significant 

influence on what the rates would be in the 

averages there, and there's new business models 

out there where institutions that do a lot, 

gather a lot of deposits through online weren't 

getting -- weren't very represented within the 

rates.

So under the new proposed rule, the 

FDIC amended the methodology for calculating the 

national rate and the rate cap for those 

deposits. The National Rate would be weighted 

by the average of rates paid by all insured 

depository institutions on a given product, where 

the weights would equal the institution's market 

share of total domestic products or deposits.

Now the National Rate would be set 

at -- excuse me, the National Rate Cap -- would 

be set at the 95th percentile of the rates paid 
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by the insured depository institutions, weighted 

by each institution's share of domestic products 

or the proposed National Rate plus 75 basis 

points. So it would be an either/or. So it 

would be the higher of either of those. 

The thinking on this was that it would 

allow institutions to compete, while not 

necessarily being at the top of the market, all 

right. So but for products where there was a 

convergence of the rates around the same place, 

we kept that option in for going 75 basis points 

above the average, because we felt that the 75 

basis points was still not significantly 

exceeding.

The ANPR also discusses several 

alternatives, that commenters had suggested 

through the ANPRs. So we have several of those 

in the NPR as well to get comments on, including 

using the higher of the two previous caps, you 

know, the Treasuries or the average, simple 

average, and there was another one that we had 
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received was using an average of top ratepayers, 

and there's a couple of others that we mentioned 

within the NPR.

So the proposed rule would also 

greatly simplify the current local rate cap 

calculation in the process by allowing less than 

well capitalized institutions to offer up to 90 

percent of the highest rate within their local 

area for those deposits that they're gathering 

locally. So we felt that that was a significant 

simplification of the process that we currently 

have now.

So the comment period ends on November 

4th. To date we've only received four comments, 

but that's not unusual since we usually get a lot 

of comments in as we get closer to the end of the 

comment period.

So I'm going to go right into the 

appraisal aspect, and so for the real estate 

appraisal rulemaking, back in December of 2018 

the agencies issued a Notice of Proposed 
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Rulemaking to raise the threshold for residential 

real estate appraisals. We've received -- the 

comment period closed in February. We received 

over 600 comments on that. 

And after considering the comments, we 

prepared a final rule with the other agencies. 

We define a residential real estate appraisal 

transaction as being secured by a one- to fourfamily residential property. It increases the 

threshold for requiring a residential, an 

appraisal from $250 to $400,000. It requires, 

you know, for those that are less than 400, it 

would still require an evaluation to be performed 

on those transactions.

It also incorporated the 

self-effectuating exemption from section 103 of 

the Economic Growth, Regulatory Relief and 

Consumer Protection Act. I have to say that 

slowly. And that, it sets the rural appraisal 

exemption, where if you're having trouble getting 

a rural, an appraisal in a rural area, there would 
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be documentation of the aspects to that. 

So what we did there, the final rule 

will require lenders to obtain an evaluation, you 

know, instead if they can't get an appraisal. It 

also adds a conforming amendment from section 

1473(e) of the Dodd-Frank Act, which requires 

lenders to subject appraisals for 

federally-related transactions to appropriate 

review for the USPAP compliance.

So our Board had approved this on 

August 20th in 2019, and it was just published in 

the Federal Register two days ago, October 8th. 

So the final rule's going to be effective -- it's 

effective now with two exceptions. So the 

appraisal review provision and the exemption for 

rural appraisals, those will be effective on 

January 1st of 2020, because those are new 

processes. So that's my spiel on two rules. 

MEMBER SHETTLESWORTH: Can I ask a 

question back on the interest rate piece? It's 

kind of the same question, just in two different 
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parts. The very first thing is like where the 

National Rate would be weighted, would be the 

weighted average of rates offered on a given 

product by all reporting institutions. Is that 

just FDIC-insured institutions, or does that 

include credit unions?

MR. LYONS: That includes -- that's 

FDIC-insured institutions.

MEMBER SHETTLESWORTH: Well, that's 

what I'm trying to clarify and this, and this 

highlight says under the proposed rule, the FDIC 

would amend the methodology for calculating the 

National Rate for specific products. The 

National Rate would be weighted, "would be the 

weighted average of rates offered on a given 

deposit product by all reporting institutions." 

So my question is does reporting institutions 

mean just FDIC-insured?

MR. LYONS: I believe it does. I'll 

go back and check in there, because we have

allowed the use when we were talking about from 
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a local perspective. 

MEMBER SHETTLESWORTH: Okay.

MR. LYONS: You know, institutions do 

have the option to incorporate the --

MEMBER SHETTLESWORTH: Okay, good.

MR. LYONS: Currently right now, we 

are not collecting the information for credit 

unions.

MEMBER SHETTLESWORTH: Okay. That's 

how I took that, so then -- so that's my 

first -- my problem with this FIL. However, then 

you kind of give us some flexibility with that 90 

percent of a local rate. So that clearly, I'm 

hoping allows for credit union competition, 

because that's where -- that's where our 

competition is for rates period. So, right. 

Thank you.

MEMBER LEAVITT: During exam 

procedures, will you be limiting the analysis in 

the exam to the new calculation of the National 

Rate Cap, and not conducting local market 
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studies? That would only be in the event that 

the institution becomes less than well 

capitalized and has to demonstrate that they're 

living within the 90 percent rule I'm assuming?

MR. LYONS: Right. So when, you 

know, depending on what the final rule would look 

like, and assuming that this would be the final 

rule. The examiners could only for those 

institutions that fall below the, below well 

capitalized and for those institutions that elect 

to use a local rate cap, use the local for their 

locally set deposits, our examiners would be 

looking to see to make sure okay, how did 

you -- how did you determine what your highest 

is? What kind of procedures did you have there?

MEMBER LEAVITT: For those of us that 

are well capitalized, which is probably everyone 

in the room, will there be a critique based on 

the National Rate in the exam or part of 

examination, irregardless of the biopsy of the 

local conditions and the 90 percent rule?
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MS. EBERLEY: So Tom the answer to 

that's no, and I think we had some confusion and 

we've conducted training on that. I mentioned 

that we trained on our new exam procedures. Over 

the course of this year, we've trained all of our 

commissioned examiners. They've all had 

in-person training here in Washington.

One of the other things that we 

reviewed with them is the National Rate Caps, 

where they apply, where they don't. But the 

confusion existed around we did ask examiners to 

take a look at the contingency liquidity funding 

planning for institutions that were heavy users 

of deposit products that would be subject to the 

National Rate Cap. So that was really 

institutions that were either -- basically using 

listserv deposits.

MEMBER LEAVITT: I see.

MS. EBERLEY: As interest rates 

started to rise, we did see a number of 

institutions that were heavy users become 
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impacted very quickly in a very surprising way to 

them, and so we had asked our examiners to do 

that. That instruction was carried out in a 

little bit different way than we intended, and so 

we've redirected that, and so it will only be a 

discussion item if you're a heavy user.

MEMBER LEAVITT: Okay.

MS. EBERLEY: And we have reminded 

everybody that the local rate determination 

always exists, and it exists today. Local rates, 

we are finding across the board, are much higher 

than the rate caps. So if institutions come to 

us for local rate determinations, we grant them. 

MEMBER LEAVITT: That's very helpful. 

Thank you.

MS. EBERLEY: Okay, Ben.

MR. BOSCO: My name is Ben Bosco. 

I'll be going over the community bank leverage 

ratio. As you may recall, back in February of 

2019, the federal banking agencies published a 

Notice of Proposed Rulemaking to implement
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section 201 of the Economic Growth, Regulatory 

Relief and Consumer Protection Act, and we 

proposed to establish a community bank leverage 

ratio for qualifying community banking 

organizations as a simple alternative methodology 

to measure capital adequacy.

In response to the proposal, the 

agencies received approximately 50 public comment 

letters and 500 form letters. 

The agencies carefully considered 

these comments and in response made several 

modifications to the final rule, including 

adoption of Tier 1 capital and therefore, the 

existing leverage ratio, into the community bank 

leverage ratio framework; removal of the 

qualifying criteria for mortgage servicing assets 

and deferred tax assets arising from temporary 

differences; removal of the PCA proxy levels; and 

allowing a banking organization that elects to 

use the community bank leverage ratio framework, 

if you're considered well capitalized during the 
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two-quarter grace period, if its leverage ratio 

is nine percent, is nine percent or less and 

greater than eight percent. 

Under the final rule, a qualifying 

community banking organization that opts into the 

community bank leverage ratio framework is only 

required to calculate and report a leverage ratio 

to measure its capital adequacy, and therefore is 

not required to calculate and report its 

risk-based capital ratios.

A qualifying community banking 

organization must meet the following qualifying 

criteria: a Tier 1 leverage ratio greater than 

nine percent; less than $10 billion in 

average -- in total consolidated assets; offbalance sheet exposures of 25 percent or less of 

total consolidated assets; trading assets plus 

trading liabilities of five percent or less of 

total consolidated assets; and not be an advanced 

approaches bank.

Qualifying community banking 
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organizations that elect to use the community 

bank leverage ratio framework and have maintained 

a leverage ratio of greater than nine percent are 

considered to have satisfied the risk-based and 

leverage capital requirements in the agencies’

generally applicable capital rules.

Additionally, such insured depository 

institutions are considered to have met the well 

capitalized ratio requirements for purposes of 

the prompt corrective action framework. I'd also 

like to emphasize that the community bank 

leverage ratio framework is an optional 

framework, which serves the purpose of reducing 

burden for banks that meet qualifying criteria. 

A bank can opt out of the community bank leverage 

ratio framework at any time without restriction 

by reporting its risk-based ratios in the Call 

Report. 

So for example, if a bank is on the 

community bank leverage ratio framework and an 

event happens in its community that would cause 
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it to go out of compliance with the framework for 

an extended period of time, then the bank can go 

back to the risk-based framework by reporting 

those ratios in its Call Report.

The bank can then opt back into the 

community bank leverage ratio framework again 

through its Call Report at a point in time that 

makes sense for the institution, assuming that it 

meets all of the qualifying criteria. So again, 

it's a completely optional framework the banks 

can use or not use, based upon their own facts 

and circumstances. 

Now if an electing banking 

organization fails to satisfy one or more of the 

qualifying criteria but maintains a leverage 

ratio greater than eight percent, that banking 

organization would have a grace period of up to 

two quarters during which it could continue to 

use the community bank leverage ratio framework 

and be deemed to meet the well capitalized ratio 

requirements.
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An electing banking organization is 

only required to report the risk-based ratios if 

the banking organization is unable to restore 

compliance with all the qualifying criteria 

during the two-quarter grace period, has a 

leverage ratio of eight percent or less, or 

ceases to satisfy the qualifying criteria due to 

the consummation of a merger transaction.

So take, for example, a bank that 

elects to use the community bank leverage ratio 

framework on its March 31st Call Report, and of 

course it would meet all the criteria at that 

time, and then in its June 30 Call Report the 

bank reports off-balance sheet exposures of 30 

percent or more of total consolidated assets. 

The bank would have to come back into 

compliance with the 25 percent requirement by its 

December 31st Call Report. If it cannot, then 

the bank would have to report its risk-based 

ratios on its December 31st Call Report. As 

mentioned before, the bank must maintain a 
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leverage ratio greater than eight percent during 

this grace period.

Based on reported data as of March 

31st, 2019, there were 5,221 insured depository 

institutions with less than $10 billion in total 

consolidated assets. The agencies estimated 

that approximately 85 percent of such insured 

depository institutions would qualify to use the 

community bank leverage ratio framework under the 

nine percent calibration and the other qualifying 

criteria.

The agencies believe that the final 

rule provides a simple framework that 

simultaneously meets safety and soundness goals, 

and responds to the concerns conveyed on the 

proposal. That concludes my presentation.

MEMBER SHETTLESWORTH: Can I ask a 

question on that? It's more involved to our 

specific story. At the beginning of this year, 

we would have told you that we would have gone 

for this community bank leverage ratio all day 
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long. We've experienced a good positive event 

in the last say four to five months, where we've 

had a lot of excess deposits come our way.

So for September 30, our actual Tier 

1 leverage ratio is going to be below nine percent 

for the first time in I don't know how long. So 

that's okay, I mean and if these are temporary 

deposits and if they go away, our capital ratio 

Tier 1 may increase. 

But I'm just curious, once a bank 

tries to report the community bank leverage ratio 

and let's say they fall out of compliance, they 

have to report risk-based capital ratios, how 

regularly could I go back if I qualify? 

Is it a quarter by quarter, I mean 

Call Report by Call Report decision, or is there 

a period where I have to stay out of reporting 

the community bank leverage ratio for a period of 

a year or anything?

MR. BOSCO: If so you opt in and out 

through your Call Report, and if at -- you're at 
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the time to prepare your Call Report you meet all 

of the qualifying criteria, you can opt back into 

it. So there's not a restriction on --

MEMBER SHETTLESWORTH: You could go 

back and forth?

MR. BOSCO: You can go back and forth, 

yes.

MEMBER SHETTLESWORTH: Okay, thank 

you. 

MS. EBERLEY: Before we move to 

Shannon, I want to step back, because I 

shorthanded my answer to your question, Tom, a 

little bit too much and missed a key point. So 

the key point in our training was that we had 

talked about on the concentrations page, looking 

for deposit concentrations in addition to asset 

concentrations. 

That was a key factor in failures 

during the crisis. So we wanted to highlight 

that. We used a term, "potentially volatile 

deposits," and that was the issue. So 
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potentially volatile deposits, we meant 

rate-sensitive, and rate sensitive was being 

considered to be above the National Rate Cap, not 

paying attention to what was in local markets.

So that's the clarification we made 

around the local markets, but I wanted to make 

sure I didn't leave you with the impression that 

listserv would be compared to the local market 

because it cannot be. Listserv is a national 

deposit, so any deposit that is not local has to 

be compared against the rate cap itself, not the 

local -- not eligible for the local 

determination.

MEMBER LEAVITT: So even for well 

capitalized institutions, that review that might 

identify potentially volatile deposits or high 

concentrations thereof, would still be called 

out. 

MS. EBERLEY: No, it actually won't.

MEMBER LEAVITT: Oh, it won't be?

MS. EBERLEY: So yeah. We changed 
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that, and because that had -- it really just 

created -- it wasn't the information that we were 

looking for, and we weren't trying to call out 

rates that were above the national rate. So if 

you have a concentration in a specific type of 

deposit like uninsured over 100 percent of your 

capital or large deposits, that would be the same 

thing, what are some of the others that we -- if 

you're using --

MR. LYONS: Specific programs that 

are really designed to go right at a certain type 

of market, that would be a little bit out of the 

ordinary. We've adjusted our instructions 

accordingly. They're out in our publicly 

available manual, so we can get you the 

concentrations instructions.

MS. EBERLEY: So we've eliminated 

that as a concentration heading. It wasn't 

intended to be a concentration heading or 

descriptor but it was being used that way. So 

that's the change we made on the concentrations 
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page, so you won't see that in your report again. 

Okay, Shannon.

MS. BEATTIE: Hi. So I'm going to 

talk a little bit about FASB's statement on 

allowances for credit losses, and as Doreen 

mentioned, the FASB has issued an exposure draft 

over the summer that proposes to extend the 

effective date for the implementation of the 

allowances for credit losses standard, which 

introduced the CECL methodology.

So currently as the standard is 

written, institutions would begin adopting the 

CECL standard in 2020, with then staggered 

implementation depending on the institution's 

characteristics in 2021 and 2022. Now the 

exposure draft would extend the effective dates

for entities that are either non-public business 

entities or smaller reporting companies. So those 

public filers for the SEC that are not smaller 

public, smaller reporting companies would 

continue to start implementation in 2020. So 
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there are still some public filing institutions 

that are set to implement early next year. If 

the exposure draft is final, then at least to the 

extent of the credit losses standard, many of our 

institutions that are community banks will have 

until 2023 to implement the standard. 

I learned today that the FASB does 

have on their agenda for next week to discuss the 

comments they received on this exposure draft. 

So we're hopeful soon to hear what the final 

determination there is. Now one of the reasons 

the FASB used for explaining the extension of the 

effective dates, and this impacted not only the 

allowance for credit losses standard but also two 

other standards impacting leases and hedging, was 

to allow more time for those entities that are 

not public filers, to learn from the public 

filers' implementation and give them more time to 

implement new accounting standards.

So our messaging has been that it's 

not a time to put pencils down on CECL, that we're 
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encouraging institutions to still work towards 

implementation, and in that regard the regulators 

have done the same thing as well. We've 

continued to work with the other banking 

agencies, the NCUA and also with input from the 

CSBS to draft an interagency policy statement on 

allowances for credit losses.

That will eventually supersede the 

current policy statements you may be familiar 

with. So we have a 2006 policy statement on 

allowances for loan and lease losses, and a 2001 

policy statement on allowances for loan and lease 

losses that addresses methodologies and 

documentation. As institutions adopt CECL, 

those policy statements would no longer become, 

be relevant and the new interagency policy 

statement on allowance for credit losses would be 

applicable.

That policy statement was approved by 

our Board in August of this year, and once all 

the other agencies have reached agreement on the 
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policy statement it will be issued in the Federal 

Register notice. 

That policy statement does go on to 

cover many of the same concepts that are covered 

in our existing policy statements today, 

including how the accounting standards would be 

implemented by institutions, what are the 

expectations of boards and management as far as 

responsibilities, and then also what you can 

expect from our examiners as part of reviewing 

allowances for credit loss. Thank you.

MEMBER PITKIN: Can I ask a question? 

So what I'm finding and a few other banks I'm 

speaking with, is we've been doing this now for 

quite some time, and we've actually done some 

testing. What it basically does is it reduces 

our required allowance by about 60 percent. So 

being an ex-FDIC examiner, I am just wondering 

how that is going to happen when the examiners 

come into the bank with the reserve that was 

required at a certain amount now is only required 
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at 60 percent less, because sometimes FASB has 

been a little bit different than sort of 

government accounting. Any thoughts on how that's 

going to be?

MS. BEATTIE: I can speak to our 

training program for examiners. So we realized 

that the CECL methodology is very different in a 

shift from how allowances are currently 

calculated under the incurred loss methodology. 

So we have been training our examiners since the 

adoption or since FASB issued the CECL standard, 

to make them aware of some of those differences, 

including the fact that under the incurred loss 

methodology, different methods may be used.

In particular, I think what you're 

speaking to, is allowances are lifetime 

allowances, but the standard itself restricts the 

analysis to the maturity period. So you can't 

assume renewals necessarily. So that, for 

instance, could be one area where a segment of a 

portfolio would have lower allowances if prior 
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the allowances they had the loss immersions 

period that extended out beyond the contractual 

term. So to that extent, examiners are aware of 

differences between the current incurred loss 

methodology and the CECL methodology. On the 

flip side, for those portfolios that may have 

smaller allowances going forward, there is still 

the documentation standards that examiners would 

be looking to. So what assumptions are being 

used in the methodology, how are those documented 

and supported because certainly, as you're seeing 

from an examiner's standpoint, to see allowances 

go down may warrant some questions or raise some 

questions from examiners.

MEMBER PITKIN: Thank you.

MS. EBERLEY: And we've heard similar 

comments from other institutions.

MEMBER MALEY: Just one comment. I 

think you're going to find it's going to be a 

little bit difficult for de novo banks to come up 

with the loss history. I mean, you know, we have 
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no charge-offs and who are our peers? You know, 

if you go by asset size, that's one 

determination. But that doesn't necessarily 

mean it reflects our portfolio and our ag 

portfolio especially.

So I think that's going to be an issue, how do we 

come up with, you know, what data do we really 

use for that?

MS. BEATTIE: Sure, and in that 

regard, we're realizing I think some of our 

messaging all along and within the standard 

itself is the importance of data, and where do we 

get the data and what's the relevant data to use. 

To some extent, the additional time will allow 

folks to gather more of the relevant data needed 

to implement the CECL methodology. There are 

also discussions where some entities may be 

looking at using proxy data to fill data gaps, or 

looking to their peers, which may be a remedy 

until an entity has its own data. Now we aren't 

suggesting or requiring institutions to go 
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outside and use third parties, but we have heard 

that some are using third parties to help fill 

some of those data gaps.

MEMBER EPSTEIN: I've got a quick 

question. You mentioned that it would be 

ill-advised to put the pencil down, I think, is 

the way you put it. So like some others at the 

table, we have invested a lot of time and 

considerable resources in preparing for adoption. 

We're fortunate in that we will not now have to 

adopt for another three years. We were prepared 

to run parallel calculations, and we ran a really 

rough sort of mock draft. But we spoke with our 

auditor, and they have not had an opportunity to 

examine any of their clients who have yet 

transitioned over to the CECL standard, and 

didn't feel like they could really provide us a 

whole lot of relevant feedback if we were to share 

our parallel calculations.

And so we had a meeting of our CECL 

preparedness committee and basically documented 
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our intent to put our efforts on hold, to remain 

aware of any opportunities for education, whether 

those be seminars or just attending events such 

as this, and being attentive listeners as to 

what's going on.

But to spend any more time, I know 

Cathy mentioned how much time her bank has 

invested, it just seemed unnecessary at this 

point. We've very deliberately documented our 

intent to sort of put our preparation on hold. 

We feel like we were at a point where we could 

have met the early adoption requirement, if 

necessary. Is that appropriate or do you think 

we have opened ourselves up to criticism? We 

won't necessarily put the pencil in the drawer 

and lock it but might, you know, slide it to the 

side and say let's help a customer today. Any 

thoughts on that?

MS. BEATTIE: So what I'm hearing 

though is that you said you were also looking for 

opportunities for education and learning more 
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about the CECL implementation that might inform 

your process. 

MEMBER EPSTEIN: Correct. As others 

begin to progress towards their own adoption and 

of course the early adopters will be using the 

CECL standard for their provision here in short 

order, and we're anxious for feedback from our 

auditor and just peers that may have had some 

early feedback from examiners and so forth.

So it's not as if we are going to 

pretend that we won't have to implement or forget 

the time that we have spent. So we want to 

monitor developments in this area, but to run the 

parallel observations, you know, again I 

mentioned earlier we're a 30-person, a 30-

employee bank. We all have direct customer 

contact, and for me to be -- and my chief credit 

officer to busy ourselves running these mock 

calculations three years in advance of 

preparation doesn't seem like time well spent on 

our part. But if that's not going to be 
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favorably received from, you know, the regulatory 

community, then we will certainly do it.

MS. BEATTIE: Well certainly. So I 

think to the extent you've indicated, that you 

would be looking towards other adopters in 2020 

and learning from their adoption, and that is 

partly what was intended by FASB to increase the 

or lengthen the effective dates, that would be 

appropriate. It sounds like you may have some 

modifications to your implementation plan to 

incorporate some of those activities. Then the 

other item I would point to, just like you would 

with an incurred loss methodology today, is that 

even internally you should be looking at that 

parallel run in either validating the methods 

you've used or otherwise back testing to see does 

it even make sense from your standpoint. That 

would be a normal activity we would expect of 

management today. But as far as your question, 

as far as would you be subjecting yourself to

criticisms, if you're making changes to your 
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implementation plan for CECL and have documented 

why you're doing that to observe what's going on 

in the marketplace, to observe peers, that's --

MEMBER EPSTEIN: And frankly just to 

reallocate our time and resources to something 

that's more pressing.

MS. BEATTIE: Sure, sure. No, I 

think as long as you're thoughtful and not 

completely ignoring CECL, that's going to still 

need to be implemented.

MEMBER EPSTEIN: Right, right. We 

have had some conversations with others who are 

hoping that the delay will be indefinite through 

their own retirement or what have you --

(Laughter.)

MEMBER EPSTEIN: And while I can 

understand that, I'm thinking we're trying to be 

a little more pragmatic.

MS. BEATTIE: And our viewpoint, from 

the regulatory standpoint, is we expect 

institutions to make a good faith effort on 
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implementing, and we realize it's going to be an 

iterative process too, that right out of the 

gate, whether it's data gaps or other 

limitations, that there's going to be improvement 

over time, and that's what we're looking for.

MEMBER EPSTEIN: Well, we appreciate 

that approach. 

MEMBER DeBIASI: You know, sorry 

about that. Yeah. Along the same lines, you 

know, the current methodology we've been under, 

if you look back to its inception 30, 40 years 

ago, it's evolved quite a bit today from where it 

was at its beginning. I know with CECL I would 

look probably for more of the same. 

It's not going to be -- Day 1 I doubt 

it's going to be the same as it's going to 

be -- as it evolves, and I would certainly hope 

to your mention, to your point, that there would 

be some patience, that as long as the banks are 

making a good faith effort, certainly that that's 

going to be looked upon, you know, favorably, 
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because it will be a difficult transition 

especially for smaller banks that lack the 

resources of larger institutions. But I 

won't -- I won't bore everyone today. Any 

regulator that's ever been in my office has 

gotten a pretty lengthy spiel from me, not 

necessarily on CECL but the whole concept of the 

allowance methodology and contra-asset accounts 

in general for small institutions. To me, I'd 

love to have that debate some day with anyone but 

I know I'm going to lose the argument. But I’m

still, still going to continue to have that 

debate. But regarding CECL, again my point is 

it's going to be evolving. I mean the current 

methodology has evolved, you know, quite a bit 

over the years and this one I'm sure will, too. 

So again, I think we'll have to take it. I guess 

my hope is that Day 1, we're not expected to be 

at the, you know, the highest end of the learning 

curve and there will be some, some patience with 

the whole process. Thank you.
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MEMBER SHETTLESWORTH: At this point, 

one quick question. I know the answer to this 

question for me, but I need to ask it anyway 

because there's an interesting problem popping 

with CECL, is who wins, the regulators or the 

accountants? So the model was built for CECL for 

the accountants, and so I understand that we're 

going to run on that going forward when this is 

implemented -- maybe it won't be. But I could 

obviously see an environment where it's getting 

bad quickly. The FDIC is doing an examination 

and a recommendation or a directive to increase 

your provisions on the spot. I could -- it's not 

too far of a stretch to see that that might be in 

direct conflict of the bank's currently validated 

CECL model. And so under that situation, if 

you're a publicly traded corporation, you're 

probably going to do what the regulators say. At 

the same point, that could be in direct conflict 

with the accountants. I'm just curious if that 

has ever come up, that idea.
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MS. BEATTIE: So in that regard, we 

collect the CECL information, the CECL allowance 

is in the Call Reports, and the Call Reports do 

need to be within, in accordance with, GAAP. 

That is how we're training our examiners as well, 

that we are following the GAAP standard. So 

there is the understanding that if you talk about 

the forecasting period used for CECL, if that 

forecasting period is reaching the height of a 

recession and expecting a turnaround for 

recovery, and that it's documented as part of 

your forecast and included in your methods 

appropriately, our examiners are informed that 

that is what GAAP permits and allows.

MEMBER SHETTLESWORTH: Does it mean 

though, that I'll -- would that work? I'm just 

thinking in an environment where it's really 

intense and really heavy, like it just might be 

well, our model says this but like everyone in 

the room, the banker and the examiner didn't 

realize we've got to put more provisions in there 
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and just, you know. It's just an interesting 

problem.

MS. BEATTIE: And understandable, 

because that's one the biggest shifts with this 

methodology change. Thank you.

MS. EBERLEY: Thank you. So Tom, Ben 

and Shannon thank you very much, and I'll 

introduce our next panel as they're getting 

situated. We have Martin Henning, our deputy 

director who oversees our operational risk 

activities, and with him Lisa Arquette, associate 

director for Bank Secrecy Act and anti-money 

laundering and cyberfraud, and William Henley, 

who oversees IT supervision. 

So Lisa is going to talk about banks 

doing business with customers that are hemp 

farmers or somehow related to the hemp industry. 

William's going to talk about examiner 

observations and recommendations relating to IT 

strategies. I'll turn it over to Lisa.

MS. ARQUETTE: Thank you Doreen, and 
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good afternoon. It’s nice to be here. This is 

our second presentation on hemp production. I 

hope you can hear me okay. I'm guessing this is 

the slide deck. No, it is not. Yes, it is. All 

right. So this seems to be a very interesting 

topic. Can I get closer to the mic? Of course 

I can. Okay. Is this a little bit better for 

you? Good?

MEMBER PITKIN: Yes.

MS. ARQUETTE: Okay, great. Okay. 

So hemp. What's important is that in December 

of 2018, the 2018 Agricultural Improvement Act 

was signed into law. The 2018 farm bill removed 

hemp as a Schedule 1 controlled substance under 

the Controlled Substance Act. The 2018 farm bill 

also directed the U.S. Department of Agriculture, 

in consultation with the U.S. Attorney General,

to regulate hemp production. 

The 2018 farm bill states that hemp 

production will be subject to a plan established 

by the USDA, states or tribal governments. The 
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USDA has issued a legal opinion and other 

guidance interpreting the farm bill and has 

announced that it expects to issue regulations by 

year-end 2019.

According to the USDA, hemp may be 

produced by properly licensed hemp producers in 

accordance with the farm bill only after the USDA 

issues regulations and guidance for commercial 

production of hemp in the U.S. The USDA intends 

to have regulations in effect to accommodate the 

2020 planting season.

These regulations are expected to 

provide details on sampling procedures, testing 

requirements, licensing, compliance and other 

procedures that production facilities and 

oversight authorities will need to follow. So 

I'm going to back us up for just a moment to the 

2014 farm bill, and the reason that I'm doing 

that, actually I'm going to cover the 

definitions. The 2014 farm bill and the 2018 

farm bill have very similar definitions for hemp. 
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The 2014 farm bill addressed industrial hemp in 

the context of research, academic research and 

research for growing hemp. It was referred to

as industrial hemp, but it had a specific 

chemical composition of not more than .03 percent 

THC. It's got a longer term, but we call it THC 

and that's the psychoactive ingredient in the 

cannabis plant.

Fast forward to 2018, and the 

definition is very similar. It's only referred 

to as hemp, but the chemical composition is the 

same, .03 percent THC or less and what happened 

in 2018 is that it was eliminated as a controlled 

substance. So it moved from research and 

agricultural development to removing it as a 

controlled substance because it had a very 

minimal amount of the psychoactive ingredient. 

However, growers are still subject to 

the 2014 ag bill because the USDA has not yet 

issued regulations that would govern the 

production of hemp as a legal substance. So 
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those institutions of higher education and those 

that were growing hemp for agricultural purposes 

and research are subject to the 2014 ag bill. 

The USDA of course will issue 

regulations. They plan to issue them by year 

end, so this will establish a regulatory 

infrastructure for growing hemp. States, tribal 

governments and territories can also submit plans 

to the USDA so that they can establish policies 

and procedures for growing hemp. Until that 

happens, the USDA regulations will govern the 

growing of hemp in the United States.

So they haven't issued regulations 

yet. So the 2014 ag bill is in effect for those 

growers of hemp that were growing it for research 

purposes. But what's important to note is that 

hemp that meets a certain chemical composition is 

not a controlled substance. It's a little, it's 

a little confusing to navigate, but it's an 

important distinction.

I'm going to fast forward to what 
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probably matters to bankers in the room, 

onboarding and maintaining hemp customers. The 

FDIC doesn't direct banks on the types of 

customers that it can offer banking services to. 

We don't discourage, we don't prohibit any type 

of customer, so long as the bank manages those 

customers and the risk associated with the 

customers and complies with regulations. In this 

case, Bank Secrecy Act and Anti-Money Laundering 

regulations are pertinent. Customer due 

diligence requirements are pertinent, and 

suspicious activity monitoring for all customer 

types.

Let me back up for just a moment. 

This is where we get the most frequent types of 

questions. What are we supposed to do if we have 

hemp customers, and I will get to a slide in just 

a couple of minutes, where I'm going to provide 

maybe a couple of suggestions about what banks 

have been doing for their hemp customers.

But it's probably helpful to see the 
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landscape, the state landscape. Most states, for 

one reason or another, have legalized the 

production of hemp. They haven't established the 

plans and the policies and procedures for 

measuring the production of hemp yet. They're 

waiting for USDA to issue their rules, but you 

can see that most states for one reason or another 

have legalized hemp.

Cannabis, on the other hand, which 

looks and feels and smells just like hemp because 

it comes from the same plant, still remains a 

controlled substance. So marijuana is a 

controlled substance; hemp is not a controlled 

substance. Very hard to distinguish between the 

two. Not your job, but it's very hard to 

distinguish the difference between hemp and 

marijuana.

If you have a customer that provides 

services, marijuana-related services or grows 

marijuana, the bank is still required to file 

currency transaction reports and suspicious 
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activity reports consistent with the guidance 

that FinCEN, the Financial Crimes Enforcement 

Network, issued February 14th of 2014. 

If you have a customer that is a hemp 

producer and you have no reason to believe that 

it's anything other than hemp that meets the 

definition in the ag bill, you would not be 

required to file a suspicious activity report 

solely because the customer was producing hemp. 

Banks generally rely on the representations made 

by their customers, and unless you have reason to 

believe that it was anything other than hemp, you 

would not be required solely based on the 

production of hemp, to file a SAR on that 

customer.

So questions that we get circulate 

around CBD oil, CBD included in various products, 

hemp, CBD that's derived from hemp and it's a 

little bit difficult to navigate because the 

products look the same. Again, not the job of 

the banks to make a differentiation, but it's 
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tough to know without states having established 

a licensing and maybe a measuring program to 

determine the difference between hemp and 

marijuana, whether your customer has gone from a 

hemp producer to something a little bit 

different.

We understand that even from growing 

season to growing season, that the chemical 

composition of this part of the cannabis plant 

can change. So based on representations from the 

customer and at some point soon, the 

infrastructure, the regulatory infrastructure 

that is established with USDA, states, tribal 

governments and territory governments, you'll be 

in a much better position to at least validate 

that customers who are growing hemp in fact are 

following state licensing procedures, growing 

procedures, measuring procedures, that they're 

regulated.

But there is one other stakeholder. 

So there's the USDA, there is the states and the 
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territories and tribal governments, and there's 

also the FDA. You've probably seen, like many 

of us have, that CBD is contained in food 

products, cosmetics and there are many 

representations about the benefit of CBD oil and 

the medical benefit.

The FDA would have to approve anything 

that has CBD oil in it, including CBD oil that 

was derived from hemp. So there are many 

stakeholders. There's an awful lot for banks to 

navigate. But I think that the signs are clear 

that there's going to be a regulatory structure 

in place soon. 

With that said, the FDIC is 

considering issuing a statement regarding the 

current regulatory environment, and provide 

resources like maybe links to the USDA, links to 

FDA. They have a series of FAQs, both those 

agencies, that help a banker to navigate some 

important aspects of the difference between the 

two types of cannabis plant.
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But I think what we're finding through 

our experience in talking with examiners and 

bankers alike is that most banks that are 

providing services to either marijuana-related 

businesses or hemp-related businesses are 

essentially doing their customer due diligence, 

understanding the nature and purpose of the 

accounts, asking the questions of the customer, 

“What are you doing to make sure that your 

production is consistent with the farm bill?”

We haven't seen any problems arise 

related to that. But if you have any questions 

for me, I'd be happy to field a couple of 

questions. Either now or after William is done 

talking. 

MR. HENLEY: Thank you Lisa, and so 

good afternoon. I've prepared a couple of slides 

that I hope are responsive to the recommendations 

that we've received. We've selected some 

examples to share that we think will resonate 

with you and your boards of directors, and based 
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on some of the comments that I heard this morning, 

that really point to the importance of managing 

IT and cybersecurity risk.

So we introduced the information 

technology risk examination program, what we call 

InTREx on June 30th of 2016, and we're nearing a 

complete examination cycle using these 

examination procedures. So I'll share a couple 

of insights. From what we have learned, from 

what we've derived and also share what we're 

telling examiners and what they are finding.

So in the second slide, from the 

management module, examiners are instructed to 

evaluate the adequacy of short- and long-term IT 

strategic planning and the budgeting process. 

Just a brief aside, when we -- when I use the 

term "information technology" or "IT," this term 

includes cybersecurity, as cybersecurity is woven 

throughout the examination procedures.

But returning to that evaluation about 

strategic planning, examiners will evaluate the 
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involvement of appropriate parties. The FDIC 

recognizes the important roles that senior 

management and the Board of Directors play in 

governing the institution's programs to protect 

one of its most valuable assets, and that's 

confidential customer data.

Cybersecurity is not just a server 

room obligation we like to say, but a concern of 

the entire enterprise. It involves all employees 

from the tellers to the Chairman of the Board. 

So it is important to implement a culture 

throughout the organization that prioritizes 

strong management of cybersecurity risk. 

Another aspect examiners will 

evaluate is the alignment of business and 

technology objectives. Examiners will review 

the Board's strategic objectives and evaluate how 

well they're implemented and integrated into 

daily operations. 

Turning to the third slide, some of 

the findings of examiners that have led to IT
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downgrades are listed here, or the URSIT rating 

downgrades, and these findings have been taken 

from our analysis of examination comments and 

examination work papers since the implementation 

of the InTREx exam program.

Listed on this slide are some of the 

more frequently mentioned comments. The 

observation regarding the lack of Board 

oversight, the first observation. Examiners are 

looking for Board involvement consistent with the 

complexity of the institution. The third bullet 

listed, increased consideration of business 

continuity, and other terms that you may be 

familiar with or you may hear that are synonymous 

with business continuity are resilience or 

operational resilience. The financial 

institution should manage their operations to 

both avoid disruptions and to recover services as 

quickly as possible when necessary. 

Then the fourth bullet, the use of 

standard assessments to guide increasing 
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cybersecurity maturity. With that bullet, we 

recently made a public statement as a member of 

the FFIEC and on the fourth slide, and I believe 

in your packages, the press release is included 

with respect to standardized cybersecurity 

assessments.

Now there are several assessments that 

are included in this press release. We 

contributed to the FFIEC's cybersecurity 

assessment tool, which is commonly known as the 

CAT. But there are others like the National 

Institute for Standards and Technology or the 

NIST cybersecurity framework, The Financial 

Services Sector Coordinating Council or the FSSCC 

sector profile, and we're agnostic with respect 

to these profiles or these standardized 

assessments. But we feel that there's value in 

standardized assessments because with the 

repeatable process, over time performance metrics 

and performance indicators are measurable and 

meaningful. 
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Also on this slide, you'll notice the 

box, business continuity update coming. So this 

is a coming attraction with respect to the FFIEC

IT Examination Handbook, and shortly we will 

release the Business Continuity Management 

booklet, which is the update to the currently 

titled, Business Continuity Planning booklet.

But what I've covered are just some 

areas that examiners are considering, and some of 

the findings as well as a few coming attractions. 

But I'll stop there as I want to answer any 

questions that you might have regarding the 

FDIC's IT supervision program, and hear some of 

the challenges you're facing managing IT 

cybersecurity risk, or any questions you may have 

for Lisa.

MEMBER LEAVITT: Just a question 

about a little bit of the chicken or the egg. 

The NIST cybersecurity framework came first, and 

the cybersecurity assessment tool was built 

largely modeling or mirroring, to some degree, 
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some of the best principles within that NIST 

framework. Is that, is that accurate?

MR. HENLEY: Yes, that's accurate. 

So, you know, the NIST cybersecurity framework 

was a tool that could cut across all of the 

critical infrastructure sectors. So the 16 

critical infrastructure sectors. 

MEMBER LEAVITT: Right.

MR. HENLEY: The cybersecurity 

assessment tool was -- we took those principles 

and wanted to, and we wanted to make it a useful 

tool, we hoped, for community bankers. So it's 

more focused on the financial services sector. 

MEMBER LEAVITT: And do we have data 

based on examination due diligence within the 

institutions over the last, I think it was summer 

of 2015, when the FFIEC and then the FDIC,

springboarding from that, was giving briefings at

the regional level. I attended one, and we 

brought that back to create an Information 

Security Council at Northfield Savings Bank and 
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adopted the CAT as a working tool to try to 

establish our first baseline and then come back 

to it with repetitive efforts, to see how we might 

be progressing along the maturity spectrum.

So the question is, given that we've 

shared that with auditors and regulators, is that 

a finding that is coming up repetitively in 

exams, and do you have data to suggest how many 

community banks are now applying themselves to 

that rigor?

MR. HENLEY: Yes. We don't have data 

that specifically notes how many have adopted the 

tool, because, as I mentioned, we encourage

financial institutions to manage that with a 

process. But we think the CAT is a good tool. 

But from our data, we have noticed that there has 

been an improvement in that area, because there 

are many community banks that are either using 

the tool or have improved their position by 

adopting a repeatable process.

MEMBER LEAVITT: And part of my 
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questioning has to do with an anticipation on the 

briefings that were conducted when the CAT was 

being promulgated around the country. I think 

the Kansas City region might have been leading 

the tour at that time. But there was some 

expectation this might become written into 

examination requirements, and that we would 

simply have to all submit to that at some point. 

It seems like there's – it’s not been adrift, but 

there's ambiguity relative to that tool versus 

some other framework that an institution might 

adopt.

MR. HENLEY: Yes, so --

MS. EBERLEY: Sorry. We try to be 

super clear at the very beginning, and it was 

Martin's predecessor as deputy director of 

Operational Risk that led the tour, Mark Moylan. 

But that we're not, we're not directing 

institutions to use any tool.

MEMBER LEAVITT: That was clear to us 

then.
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MS. EBERLEY: Any specific tool. But 

you need to --

(Simultaneous speaking.)

MEMBER LEAVITT: We were talking 

among ourselves.

MS. EBERLEY: Right. You need to do 

a risk assessment. Every institution needs to 

do a risk assessment and understand their level 

of maturity and have a repeatable process for 

doing that.

MEMBER LEAVITT: That has been 

consistent.

MS. EBERLEY: But the choice of tool 

is up to you.

MEMBER LEAVITT: That has been 

consistent.

MS. EBERLEY: So we haven't --

MEMBER LEAVITT: I didn't mean to 

imply that the language of the presentation 

suggested this would become a requirement. It 

was, it was built into the expectation of the 
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bankers that coming to a briefing like this and 

beginning down that road, it may mature into 

something that was more of a standard 

requirement. And so that clearly hasn't evolved 

and it's not evolving, and that's the simple 

clarification I'm seeking today.

MR. HENNING: I think, you know, maybe 

another thing to say with regard to this thought 

is there is anecdotal evidence that companies are 

doing what your company is, which is picking up 

something that's useful for them and using it 

through time. 

And I'd be curious to hear any 

feedback of any of you about, to the extent you're 

doing something similar either with the CAT or 

another tool, if it's helpful in allocating 

resources.

I think that to the extent that you're 

using something that other institutions are 

using, then, you know, your IT types might have 

a language for comparing more across, and NIST 
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seems to be at the base of a lot of these tools. 

So that provides some level of comparison. 

But even within your own institution, 

just having something that's the same from year 

to year should allow you to focus resources a 

little bit better, you know, obviously consistent 

with strategic plans, generally. I'm wondering 

if that's, you know, if that's panning out the 

way we hoped.

MEMBER DONNELLY: I'd like to comment 

on that. We use the CAT tool, but my question, 

my first question is how often would you expect 

us to reassess that, and, I mean, is that like at

18? With the way technology moves, you may have 

to reassess it tomorrow. But in general, it 

takes a lot of time to sit and assess that and 

put it into your strategic plan and your IT 

strategic plan, which needs to mold into the rest 

of it. So are we looking at an 18-month window, 

a two-year window? I know it should be relative 

to the environment, but if you follow. And we've 
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tried to move up the scale and move up with, 

improve our position and it gets exponentially 

more expensive the farther up you move. So there 

comes a point in time that a community bank, 

especially a small one, has to make decision. Is 

it -- how do you document that we're done or we're 

going to go broke trying to keep up? So I mean 

at what piece or point -- I guess my question is 

where, how often do you assess, and then when do 

we raise the white flag, not necessarily to give 

up, but to say this is as far as we can go because 

it's not logical?

MR. HENNING: Yeah, great questions. You know, 

to the first one, in terms of how often, I think 

you hit the nail on the head at the end there, 

risk-based is something that comes quickly to 

mind. If you're changing your core, 

that's -- you know, right after that's done, 

that's a good time to go through again and say. 

Or, I know William said, of course, we were 

reading about integrations with, you know, for 
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example fintechs. If that's something that's 

happening and material, that would be a good time 

to go back through and reassess. On the other 

side of the spectrum, if things aren't changing 

materially, you know, I would expect a longer 

time frame would be acceptable. 

You've got -- you may have another way 

to allocate resources and focus whatever you're 

spending is audits as well. So you've got an 

assessment your management team may be using, but 

you may have IT audits that are happening, and 

that might allow you to focus resources in a year 

where, you know, not a lot's changing but they're 

finding weaknesses here or there. That might be 

the better way -- better tool to use to focus 

resources at that point in time. We don't have 

instructions to our examiners on any specific 

time frame, but they would be evaluating along 

those lines. 

MEMBER LEAVITT: There is an 

expectation, though, that at least institutions 
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of our size, a billion and up, will have a 

distinct information technology strategic plan 

that is complementary to the bank's strategic 

plan and in alignment on cyber-related content. 

So that in the past, or in our current plan, that 

was developed in 2016 for implementation January 

1, 2017, we spoke to information technology as an 

embedded core principle, and information security 

and all the things that are talked about in the 

CAT process. But what we did not do is build a 

parallel strategic plan for IT, and in the more 

recent examination that was called out for 

remedy.

Not remedy in the sense of we had done 

anything inappropriate, but that at our size, at 

our complexity going forward, it would be 

important to have a discrete information 

technology strategic plan, and so we have that in 

our program of work. As we next year build our 

subsequent strategic plan, we'll be putting 

resources into building a parallel IT strategic 
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plan. That's too many words, I'm sorry, but 

that's, that's been a redirect as a result of 

interface with the FDIC.

MR. HENNING: Which maybe a question 

back to you. Has that been helpful? Do you 

think it was --

MEMBER LEAVITT: We agree with that 

direction. Would we have advanced it as quickly? 

I'm not sure. We certainly would have gotten to 

it, but we've actually added personnel just for 

purposes of being more robust in this function, 

in project management, in strategic planning, in 

compliance, and we're going to be stronger 

because of it. It's more expensive, but it's the 

right thing to do.

MR. HENNING: That would -- you know, 

one of the reasons William and I talked about 

choosing, you know, this specific examination 

procedure is just to kind of show you guys what 

examiners are told. These are the instructions 

to examiners, here's the things to look at. So 
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it's pretty broad, and I would say -- I mean just 

listening to your example there's not, as you can 

see here, an explicit requirement that you have 

a separate IT strategic plan.

I know some of -- some of you are, you 

know. There's 10 people, 12 people in the 

institution. I mean the value of that may not 

be significant, especially if things aren't 

changing very much.

But, you know, the more IT is integral 

to the operations of the bank, especially at 

points in time when you're heading in a new 

direction, where IT's supporting that, maybe even 

calling out in the general strategic plan the IT 

support components and what's changing and how 

resources will have to be allocated to make that 

safe and sound, is a reasonable thing to be doing.

MEMBER DONNELLY: A general comment. 

I could have sworn I've been told to have one of 

those separate strategic plans out of Kansas 

City, and you're saying not. That really 
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surprises me --

(Simultaneous speaking.)

MEMBER DONNELLY: I'm pretty sure I 

was told that. Maybe I interpreted it wrong, but 

hmm. I'm a whole lot smaller.

MEMBER LEAVITT: I'm not saying that. 

You might be hearing that we're not being 

instructed to have a separate IT strategic plan, 

but we were left with the impression that we 

needed to get to work on ours.

MR. HENNING: Yeah. I would say 

again, these are the procedures, and they're 

not -- they're not prescriptive. And I'd say if 

you feel like you're being pushed, you know, as 

with any examination recommendation, if it 

doesn't make sense and seems inconsistent with 

the complexity or the things that are changing, 

that's an opportunity to talk to the examiner 

about that.

MEMBER DONNELLY: Frankly, it makes 

total sense, and it works and it's very helpful. 
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Also, you can also forecast out expense on it, 

but it's darned expensive to do that. I mean 

we've been doing it for three or four years now 

since we started -- three years in developing a 

strategic plan on the IT side that goes along 

with the corporate plan. You can forecast out 

farther the cost, but man it can scare you to 

death. At least it scares me to death as to how 

much it could actually cost. I think for a much 

bigger bank it'd be even scarier, I think.

MR. HENNING: I think another, 

another thought that comes up in relation to sort 

of the infinite amount of resources you get to 

apply to either IT or within IT cybersecurity, 

something I've seen institutions do and William, 

you might comment on this too. But, you know, 

if it's, for example, audit results that they're 

using to drive some of the allocation, they're 

not -- they're not getting the risk down to zero 

and remediating every last thing that could be 

remediated.
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They're looking at the significance of 

the highs, allocating resources to deal with 

those and accepting the risk, or maybe even, you 

know, documenting at least the mitigating 

controls that they've got in place for things 

that are going to remain and going to show up 

every time they come through. But, you know, 

we're conscious about that as a management team. 

We're transparent with our board. We all know 

what we're doing there.

MEMBER LEAVITT: Well, I've told our 

team Slides 2 and 3 of this particular 

presentation become our road map as of this 

afternoon so --

MR. HENNING: I hope that means 

they're good.

(Laughter.)

MR. DAVIS: Great. So it is 2:25 now. 

Let's take a short break and reconvene at 2:40. 

Thank you.

(Whereupon, the above-entitled matter 
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went off the record at 2:25 p.m. and resumed at 

2:39 p.m.) 

MR. DAVIS: Okay. I think we can go 

ahead and move to the next item on the agenda. 

We now have Betty Rudolph, National Director for 

Minority and Community Development Banking, and 

Sandra Kerr, Senior Program Specialist from the 

Division of Risk Management Supervision. 

They're going to discuss tools and resources 

related to Opportunity Zones.

MS. RUDOLPH: Thanks, Chad. By way 

of background for those who are new on the 

committee, our presentation today came out of the

meeting at the end of July, and I had given an 

update on the Minority and Community Development 

Banking Program there, and Opportunity Zones, and 

kind of did a show of hands on who's engaged with 

Opportunity Zones, what do you know, what are you 

interested in, and that in addition to other 

outreach we've done, we've found that a lot of 

community banks have questions, wanted a little 
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bit more information, how can we engage, what are 

the barriers.

With respect to your question, Keith, 

this morning, I think and maybe somebody else 

brought it up about CRA. That did come up at 

that meeting as well as their automatic CRA 

consideration. The answer is no, but I'll talk 

a little bit more as we go through the 

presentation.

MEMBER EPSTEIN: But I think, if I 

may, that it would probably be inappropriate to 

have all lending to qualified Opportunity Zone 

funds receive automatic CRA eligibility. That's 

why I was narrowing my, our suggestion to those 

that are, would be domiciled in the bank that's 

issuing the loan in their assessment area. That 

just -- that's something that we were hoping 

would be considered. 

MS. RUDOLPH: Okay, okay. Thank you 

for that clarification. So what we promised to 

do, at that meeting at the end of July, was to 
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come back with you today and talk about some tools 

and resources that we might be able to provide. 

Opportunity Zones are a tax incentive. They're 

not a federal program. It's not the kind of 

space where there's a lot of federal influence 

except perhaps for CRA.

A lot takes place at the local level, 

but we're hoping that two tools and resources we 

put together for you that we can get some feedback 

on today. So the first one is in your packet and 

it's a paper. It's actually a draft excerpt from 

a paper we're putting together on just what are 

Opportunity Zones, what's the tax incentive, how 

does it all work? But more importantly how can 

banks play in that space?

So we're not going to go through the 

paper in detail today, but I just wanted to bring 

up a couple of things regarding CRA. There's a 

section on that on pages -- this is not 

page-numbered, but a couple of pages in, 

“Investments in qualified Opportunity Funds do 
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not automatically receive CRA consideration."

We have had a lot of discussion with 

our CRA experts and lawyers. A lot will qualify, 

and what I would encourage people to do as they 

engage in projects in Opportunity Zones is to

reach out to our regional office, and get some 

consultation from our senior review examiners on 

whether or not something will qualify early on in 

the process. 

The reason it's not a blanket is a lot 

of these projects are the ones that are sort of 

low-hanging fruit that are coming online now, are 

things that probably were in the works before 

Opportunity Zones were actually enacted. And so 

some of those may or may not qualify under the 

community development test, CRA.

The other thing I would just briefly 

talk about is the role of banks. So we've come 

up with a couple of pages of examples of benefits 

for banks. Mainly they boil down to banks 

serving as facilitators in putting together 
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projects; advocating for development in these 

zones; and bringing projects that you know about 

online, working with local governments and local 

leaders, putting together a pipeline of projects.

The second real theme there is 

financing, that you all can be involved in 

financing for projects. And finally, serving as 

brokers, your knowledge of the community. In 

many cases, many of you work with low-income 

housing tax credits, new markets tax credits, and 

those are things that have skills that are really 

important to putting together projects in 

Opportunity Zones. So we'd welcome, if you have 

any, comments on the paper. The idea behind this 

is we would put it on our website just as a 

resource for bankers, for Opportunity Funds, for 

investors, just showing the role that banks do 

play. 

And then the second tool we have is an 

interactive website with resources, and I think 

in your packet we attached a couple of pages, 
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state by state, as far as resources that are 

already out there on state and local incentives, 

tax credits, other kinds of things they're 

providing, information on Opportunity Funds and 

what they're doing in your state.

Sandra's going to walk you through a 

website where that information is contained. 

This is a concept, and we just wanted to get your 

feedback on that today. So we'll do a quick demo 

of the -- what I'll call a clearinghouse and see 

what you think. I'll turn it over to Sandra.

MS. KERR: Good afternoon, everyone. 

Before I get started, I want to introduce a few 

people to you. Behind the computer is a 

gentleman by the name of Dustin Allison. He and 

Sasha Rybak from our Division of Research created 

the interactive map that you're going to see 

right in just a few minutes. 

Since we're in D.C., I decided to 

bring my legal counsel, Susan Sturc, behind me is 

a tax attorney for the FDIC, and just did so much 
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work on our paper, to make sure to review the tax 

incentives and make sure that everything that we 

have is correct in there.

The web page, and gentlemen I'm sorry, 

but you may have to turn around, because the 

majority of this is really on the screen. The 

web page you see before you was created by Diane 

Bellis, who is RMS's webmaster. This has truly 

been an inter-divisional project. Not only the 

MDI program, RMS, Capital Markets, Graphics,

Research and a whole series of other divisions 

have worked on this project, and I'd be remiss if 

I didn't say Legal as well.

I've been told that some of you have 

to leave a little bit early. I'm going to, if 

you will indulge me, read from my script, because 

when I go off script I tend to talk a little bit 

more. So I'm going to try to keep this succinct, 

and everyone can make their planes home. I'm 

going to provide you an overview of the work that 

we've done to date, and in the remainder of time 
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we really want your feedback.

We want to make it very clear that 

everything you're seeing today is in development. 

Nothing has gone live. So if you see something 

that you don't like, we can change it. If 

you -- if we're missing something, we can add it 

in. This is all really for you, and we want to 

make sure that it's effective for you.

Betty provided the overview for the 

Opportunity Zone tax incentive very briefly. I'm 

not going to go into a lot of details about that, 

but rather how we envision providing the 

information to you. As you can see, the first 

map up here is about Opportunity Zones 

themselves. 

The blue-shaded areas are Opportunity 

Zones. The yellow areas are tribal lands, and 

it's very difficult to see on this screen, but 

where the two come together it turns green, and 

that provides Opportunity Zones that are located 

on tribal lands. You can see many of the dots 
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are very, very small. It's because Opportunity 

Zones are done by census tracts. So some of the 

areas may actually be one or two census tracts 

only, and that's why they're very small on this 

screen.

There are more than 8,700 census 

tracts across the country that are qualified as 

Opportunity Zones, and of these almost 300 of 

these Zones are in Native American lands. Going

back to the screen here, I'm going to skip around 

just a little bit on this page. As you can see, 

we're focusing predominantly on community banks, 

MDIs and CDFI banks in Opportunity Zones.

Because the Opportunity Fund must keep 

at least 90 percent of its funding in projects at 

all times over a ten-year period, we believe that 

banks with a pipeline of projects will become 

very valuable over time. As many of you have 

already probably seen in the news, right now 

we're getting a whole lot of information on very 

high profile projects being done in Opportunity 
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Zones.

Those are projects that likely would 

have been done whether they were in an 

Opportunity Zone or not. But since 90 percent 

of these funds have to be in projects over ten 

years, that's where we see they're going to have 

to continue to look for new projects, and we think 

that that's where investment opportunities are 

going to be over the next ten years, as they 

continue to look for more and more projects to 

invest.

To give you an idea of how many 

community banks, CDFI banks, and MDIs are 

headquartered in Opportunity Zones, we've created 

several maps. The map that you're seeing right 

there shows you for community banks. We have 

almost 900 community banks headquartered in a 

zone, and 36 of these are headquartered in a zone 

within a tribal area. 

In addition to that, we have another 

4,000 community bank branches located in a zone. 
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We've created similar maps. We're not going to 

go over those today, but we want to go back to 

the beginning of the web page, to show you that 

we're going to have a variety of sources for you. 

We're going to have direct links to all the IRS 

forms that are relevant to Opportunity Zones and 

Funds so you can directly download them.

In the future, we plan to include 

successful bank participation examples. We're 

hoping if you participate, please let Betty or I 

know. We'd love to include some examples on this 

web page. 

One of the things I think is very 

valuable, Dustin if you would go to the state 

resources. Perfect. The map that you see right 

up there, eventually when you click on the state, 

you will go directly to your state's government 

site for Opportunity Zones. Because this is in 

development, we aren't quite there yet, but we do 

have all the states listed. So Dustin, go ahead 

and go to Vermont. As you can see, Vermont has 
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a lot of information and resources about 

Opportunity Zones in the state. I think it's 

really very well worth your time for each of you 

to go to your states and to look at what 

additional information they have, because there 

may be some additional requirements. There may 

also be some additional incentives.

We have found that a couple of states 

are already considering a state tax incentive to 

go with the Opportunity Zone tax incentive, much 

like the way that many states do new markets tax 

credits. So it's well worth going to each one 

of your states to look, and we've provided every 

state, every territory on this web page.

When putting the project together, the 

first thing we did was of course research the tax 

incentive, how it works, and the rules for the 

investment. This is what's included in the 

paper. But we also thought it was so very 

important to know which banks are located in 

Opportunity Zones, and even more importantly the 
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Opportunity Funds. Where are they, what are they 

looking to invest in, and where are they looking 

to invest? So we tried to bring all of this 

together for you. 

That's why we created the application 

called the Financial Institutions in Opportunity 

Zones. Ta-da. It will load in just a moment. 

Okay. What's coming up here, the blue areas of 

course are Opportunity Zones, the yellow areas in 

this case are Opportunity Zones on tribal lands.

But what you're seeing on this map is every 

community bank, every CDFI bank, and every MDI 

headquarters located in an Opportunity Zone. 

I don't know if you're familiar with 

508 compliance, but at the FDIC we take this very 

seriously. In brief, we must make sure that all 

of our materials are available to everyone, 

including persons with disabilities. For 

example, you're seeing all of these symbols up 

here, and Dustin just clicked on one of the stars.

If you are blind, you don't use a mouse. So you 
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can't click on one of the symbols. Instead, that 

person uses a tab on a keyboard. So, as you can 

tell, there are a lot of symbols up there for 

someone to try to tab through. So we are 

working -- and one of the things we did was put 

accessibility up at the top, and, as Dustin will 

kind of tab through, what we did was put a list 

of every bank on the computer. This is something 

that can be tabbed through. A computer can read 

out loud and go through the tabs and read what 

each tab says. The FDIC has a new compliance 

officer, Brooke Aiken. We're working with her 

to ensure that the map is absolutely compliant 

before we go live. We've got some things to work 

out, but I'm very hopeful. I think that this, 

we'll be able to work this out so everyone can 

see this information.

By now I'm sure you're probably 

curious. What are all those stars and dots and 

squares, oh my, on the screen. Dustin, yeah. If 

you'll look at the legend, what we have the 
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community banks are the green stars, the MDIs are 

the red diamonds, and CDFI banks are orange 

squares. Now, these only denote headquarters 

that are located in Opportunity Zones.

When we get to the state level, you're 

going to start seeing dots. Those dots are all 

of your branches that are located in Opportunity 

Zones. As you can see at the top of the page, 

we divided the country into regions. That was 

just a practical matter in the fact that we've 

got 56, because we have states and territories 

with Opportunity Zones, and to put 56 tabs going 

across one page, nobody could understand it.

So with that, let's go to a state. 

Let's start with Georgia. As you see, Dustin 

went to the southeast region, then went to 

Georgia, and then Georgia zooms in on the map. 

Dustin, why don't you go ahead and zoom in on 

Thomaston, Georgia, which, by the way, is the 

home town of Mr. Edwards. 

You'll see that while United Bank is 
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not headquartered in an Opportunity Zone, the 

bank actually has two branches in Thomaston that 

are located in an Opportunity Zone, and they also 

have branches in Griffin and Newman, Georgia, 

that are in Opportunity Zones. But now I want 

to focus on the information that you're finding 

on the left-hand side of the paper. 

This was some of the information that 

you all had in that draft paper about the 

individual states. So for example, in each state 

we're going to show you the number of census 

tracts designated as Opportunity Zones and those 

on tribal lands. We also show the number of 

community banks, MDI banks, CDFI banks in the 

state, as well as those headquartered and the 

number of branches, and we also give you all of 

the FDIC-supervised banks that are located in 

Opportunity Zones as well.

But I think one of the most valuable 

pieces of information provided is about the 

Opportunity Funds. While the IRS has not yet 
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released a list of registered funds, and quite 

honestly they very well might not do that, we do 

have groups that are compiling voluntary lists of 

these funds, that include information on the size 

of the fund, geographic focus, investment focus 

and contact information. 

There are presently at least 235 

self-reported Opportunity Funds across the 

country. These funds collectively hold between 

$62 and $72 billion in the funds. Now please 

keep in mind that these funds are just growing at 

a phenomenal rate. The reason for this is to get 

the maximum tax incentive, these funds must be 

created by December 2019.

That doesn't mean funds won't be 

created after that date, but simply to get the 

maximum tax advantage for the investors, that's 

the final date. So what we've done is in each 

one of the states, we have got links to two of 

the groups that are collecting the information on 

the funds, so you can search that and find 
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information for your states.

Because these are moving so rapidly, 

we are committed to, probably at the first 

quarter of next year when things settle down, the 

growth slows a little bit, we will go back and 

readjust all of the numbers that you're seeing 

now to more accurately reflect that time. Now 

with that said, let's go back to Georgia for a 

minute. In Georgia specifically, there are 12 

Opportunity Funds that include Georgia in their 

investment focus.

These funds range from $20 million to 

$250 million each. The 12 funds together have 

over a billion dollars. The investment 

focus -- and keep in mind this is very consistent 

across the country -- the investment focus 

usually includes affordable housing, commercial 

real estate, mixed-use development, small 

business development, student and workforce 

housing. In Georgia, we've got one unusual fund 

that is specifically focused on hydroponic 
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systems relating to agriculture. So we've got 

one fund for that. 

I do not want to mislead you. When I 

say 12 funds with an investment focus in Georgia, 

what we did is we’ve got 71 funds that 

self-identified as national focus, willing to go 

across the country. We had several funds that 

said they had a focus of the Midwest, Southeast, 

so we did not put those states in. But what we 

do have are 12 funds that very specifically put 

Georgia in their investment area. I believe 

we've got about two funds that have an investment 

only in Georgia. The others include Georgia, 

plus they include other states. So please note 

that not all $1 billion is targeted to Georgia, 

but it does include Georgia, so it could go to 

other states as well.

Another feature that I would love to 

show you that is one of my favorites, is that if 

you go up at the top to the search, Dustin why 

don't you go ahead and put in First Independence 
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Bank? And we've got a couple of them, so we want 

to go to Detroit. So you can actually search by 

your bank name. You don't have to just search 

by a zone.

What I neglected to say earlier, I'm 

not sure if you can see it up there on the screen, 

when that pops up we give you the bank name, the 

contact information, we tell you what type of a 

bank it is as well. So First Independence Bank 

is an MDI bank. So that shows up, it will show 

up if you’re a community bank, if it's a community 

bank branch, so you know what's on the screen.

By the way, First Independence Bank is 

headquartered in an Opportunity Zone, and it also 

has a branch in an Opportunity Zone. Dustin, 

because of time, let's just go to one more state. 

Let's go ahead and go to Texas. Okay. 

Falcon International Bank is located 

in Texas. It has a branch that's located in an 

Opportunity Zone, and Dustin's going to pull that 

up to show you how easy it is to find it, 
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especially if you practice finding where it is on 

the map before we get here.

(Laughter.)

MS. KERR: But I do want to draw your 

attention to the left, to the narrative, and just 

say looking at this, you're going to see there's 

a whole lot of banks headquartered and branches 

in Opportunity Zones in Texas. But if you look 

further down, Texas also has 27 Opportunity Funds 

interested in investment. This is more than any 

other state in the country right now. We'll see 

how that changes as they continue to grow. 

I'm getting real close to the end. 

I'm sure at this point you're probably saying to 

yourself, you know, this is great, but how do I 

know whether I'm in an Opportunity Zone or not. 

Well, we're going to show you.

For example, I know that Roxboro 

Savings Bank is not in an Opportunity Zone. So 

Dustin, if you would put in the search, put -- it 

will come up and as you see there's nothing blue 
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around it. Therefore, you get information about 

the bank, but you see that it is not located in 

an Opportunity Zone. 

MEMBER EPSTEIN: Can I ask you a 

question real quick --

MS. KERR: Yes, of course.

MEMBER EPSTEIN: We are surrounded 

by -- this is the city of Roxboro --

MS. KERR: Correct.

MEMBER EPSTEIN: -- and all the little 

parts of the county that surround us are part of 

the Opportunity Zone --

MS. KERR: If it is in blue, it's an 

Opportunity Zone, correct.

MEMBER EPSTEIN: And that is part of 

our assessment area.

MS. KERR: Exactly. Now you can also 

find an FDIC-insured bank that's not a community 

bank, MDI or CDFI bank, and let's just give an 

example here. Dustin, let's go to the Chairman's 

former employer. Let's put in Fifth Third Bank 
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in Cincinnati, which is regulated by the Federal 

Reserve. 

As you can see, information pops up 

and again it's not in an Opportunity Zone. So 

we just want to make it real clear that all 

FDIC-insured banks are included in this map. You 

can find them. Our focus is on community banks, 

MDI banks, and CDFI banks, and we really want to 

limit that to really show those that are in 

Opportunity Zones. But you can find almost any 

bank in this -- on this map.

With that said, there are a whole lot 

of other features that you could go to. But I 

have really talked enough for one day. So now 

I'd really like to turn it over to you, and ask 

you if there are any comments, suggestions, 

questions about what you've just seen, or about 

Opportunity Zones or Opportunity Funds in 

general.

MEMBER KELLY: Sandra, great 

presentation.
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MS. KERR: Thank you. I got you in 

in time --

(Simultaneous speaking.)

MEMBER KELLY: Very simply --

When can this be live?

MR. MILHORN: Before you go, Len's got 

to go, and I just wanted to take the time to thank 

him again on behalf of the Chairman of the FDIC 

for participating on the committee. You've been 

a great resource for us --

MEMBER WILLIAMS: It's been a 

pleasure meeting you and the rest of the group.

(Applause.)

MEMBER KELLY: Yes. So, how long 

before this is live?

MS. KERR: Yeah. We have got the 

paper in clearance. We want to make sure 

everything's 100 percent correct. This map is 

actually complete, except we do have to wait for 

508 compliance. We have to make sure that 

everyone will be able to view it. To give you 
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an exact date, I'm not sure. Can I say soon, and 

we could just go there?

MS. RUDOLPH: We're shooting, we're 

shooting for either end of the year or early next 

year.

MEMBER KELLY: Okay. Very impressed.

MEMBER EPSTEIN: I find this 

extremely helpful. Reading over the materials 

before the meeting, I had this all marked up and 

made copies for co-workers, and this is really 

informative. It's a great complement because 

it's specific to the bank aspect.

MS. KERR: Exactly.

MEMBER EPSTEIN: A nice complement to 

the materials that the Federal Reserve has 

provided and the workshop that they conducted in 

our area. 

One question I do have, I know we're 

always very careful not to give any kind of tax 

advice to our customers, and I know the FDIC is 

not in that business either. But it does strike 
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me that at least for larger projects or customers 

that have larger capital gains, and perhaps the 

administrative costs to having a qualified 

Opportunity Zone Fund will come down in time. 

But this may be a viable alternative to a 1031 

tax exchange, and I think if that information 

could somehow be accessible, either bank giving 

to customer or customer obtaining from FDIC, from 

Federal Reserve, from someone. There are some 

differences, but I could see where this would 

perhaps create an even greater tax advantage in 

that you have to put money into the fund quickly, 

but the fund doesn't necessarily then have to 

reinvest the money as quickly.

Whereas with the 1031 exchange, if 

they identify the property quickly, you have to 

purchase the property quickly, and sometimes 

there's some real stress to get that done. 

MS. KERR: Isn't that like 30 days or 

there's a very short window on that?

MEMBER EPSTEIN: Short identification 
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period of time, and then I believe it's six months 

to actually consummate the sale of the like 

property and the restrictions in terms of like 

property. Here, you wouldn't have that. So if 

I wanted to sell commercial property and reinvest 

in residential or even into a business, and not 

so much a piece of real estate, this would give 

that flexibility and I think that would appeal to 

investors. If that information can somehow be 

compiled and then disseminated in a way that we 

don't overstep our, well --

MS. KERR: Right. What you 

received -- the paper that you received was 

actually the executive summary to our larger 

paper. And many of the issues that you're 

addressing right now, because of Susan, we have 

addressed many of the investment areas and the 

timing of all of this. So I think that you'll 

have more information. You may want even more 

than that, and we'll be happy to look into that.

MEMBER EPSTEIN: Thank you.
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(Off mic comment.)

MS. KERR: Yes, absolutely.

MEMBER EDWARDS: Sandra.

MS. KERR: Yes, sir?

MEMBER EDWARDS: First of all, I echo 

the thanks. This is fantastic, and I appreciate 

the work that you and your teammates have done 

here on this program. But I ask that, if 

possible, if you could please email us or have 

somebody email us from the FDIC when the site 

does go live, I'd love to get our team working on 

this.

MS. KERR: Oh, we absolutely will.

MEMBER EDWARDS: I was just curious 

though. So obviously the CRA credit is important 

to all of us here. I just want to be sure I 

understood. You're recommending that we contact 

the regional office related to specific, either 

direct investment or facilitating of loans to 

some of the Opportunity Funds. That would be the 

most appropriate thing to do or --
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MS. RUDOLPH: I think the question is 

if you're getting ready to participate in a big 

project, and you think that qualifies for CRA 

credit, call your regional office and they will 

provide some advice. 

MEMBER EDWARDS: Okay.

MS. RUDOLPH: While we're on that 

topic, I just wanted to plug it, it is in the 

paper too, that you know, in a lot of cases banks 

that engage with minority depository institutions 

get that CRA credit even when it's not in the 

assessment area. I talked about that to this 

committee last October. We have a resource guide 

on that. So that's also another consideration.

MEMBER EDWARDS: Okay, great. Thank 

you.

MS. KERR: Anything else? Thank you.

MR. DAVIS: Great, thank you, both. 

We are winding down on time. So our last 

segment, I'll turn it over to our chief of staff 

Brandon, to update on supervision modernization, 
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and then also to give some closing comments.

MR. MILHORN: Thank you. So I will 

take five minutes and I will get you to the door. 

In January, the Chairman set up the Supervision 

Modernization Subcommittee of the CBAC. The 

Subcommittee was designed to bring together 

bankers, technologists, former examiners to give 

us some thoughts and put together some 

recommendations on what our examinations might 

look like in the next, in the next little bit, 

but also the next ten years and how technology 

would change that.

The committee has met three times this 

year. They are pulling together their report and 

recommendations, that ultimately will be 

presented to the CBAC to consider and make any 

proposed edits or recommendations for changes, 

and ultimately to submit the report, if you all 

see fit. Ultimately, the subcommittee is a 

function of the full committee.

That's the process we're in right now. 
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We look to have that report and recommendations 

completed for the committee's recommendation 

sometime in -- early in the next year. So keep 

that in the back of your head as something that's 

coming your way, and as soon as it's available 

and we can circulate it to the committee members, 

we'll make sure that happens.

That's my Supervision Modernization 

Subcommittee update. If there are any questions, 

feel free. We don't have to do it now. We can, 

we can do it offline. 

MR. MILHORN: Lastly, thank you all 

again for coming today. Thank you for your 

service on the Subcommittee. I know the Chairman 

wishes she could be here, and -- instead of on 

the plane. But I'm sure she looks forward to 

being here next time. Your advice and guidance 

and input is crucial to the Corporation, and we 

certainly appreciate that. Thank you all again, 

and with that, the meeting is adjourned.

MR. DAVIS: Thank you.
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MR. MILHORN: Catch your flights.

(Whereupon, the above-entitled matter 

went off the record at 3:11 p.m.)