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UNITED STATES OF AMERICA 

FEDERAL DEPOSIT INSURANCE CORPORATION 

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ADVISORY COMMITTEE OF STATE REGULATORS 

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PUBLIC MEETING 

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WEDNESDAY, 

OCTOBER 6, 2021 

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The Committee convened at 1:00 p.m. EDT via videoteleconference, Jelena McWilliams, Chairman, presiding. 

ADVISORY COMMITTEE MEMBERS PRESENT: 

BRET AFDAHL, Director, Division of Banking, 

South Dakota Department of Labor and Regulation 

KEVIN R. ALLARD, Superintendent, Division of 

Financial Institutions, Ohio Department of Commerce 

CHARLES G. COOPER, Banking Commissioner, 

Texas Department of Banking 

MARY L. GALLAGHER, Commissioner of Banks, Massachusetts 

Division of Banks 

GREG GONZALES, Commissioner, Tennessee Department of 

Financial Institutions 

KEVIN B. HAGLER, Commissioner, Georgia Department of 

Banking and Finance 

MELANIE HALL, Commissioner, Montana Division of Banking 

and Financial Institutions 

DAWN HOLSTEIN, Commissioner, West Virginia Division of 

Financial Institutions 

LISE KRUSE, Commissioner, North Dakota Department of 

Financial Institutions 

G. EDWARD LEARY, Commissioner, Utah Department of 

Financial Institutions 

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JOHN RYAN, President and CEO, Conference of State Bank 

Supervisors, Washington, D.C. 

ANTONIO P. SALAZAR, Commissioner of Financial 

Regulation, State of Maryland 

CHARLES VICE, Commissioner, Kentucky Department of 

Financial Institutions 

FDIC BOARD MEMBERS & STAFF PRESENT: 

JELENA MCWILLIAMS, Chairman 

MARTIN J. GRUENBERG, Director, Federal Deposit Insurance

Corporation

MICHAEL HSU, Director, Federal Deposit Insurance

Corporation, and Acting Comptroller of the

Currency

LISA ARQUETTE, Associate Director, Division of Risk 

Management Supervision

DOREEN EBERLEY, Director, Division of Risk Management

Supervision

DIANE ELLIS, Director, Division of Insurance and Research 

MARTIN HENNING, Deputy Director, Division of Risk

Management Supervision

DANIEL HOOPLE, Financial Economist, Division of Insurance 

and Research 

SULTAN MEGHJI, Chief Innovation Officer, FDITECH 

SHAYNA OLESIUK, Associate Director, Division of Insurance 

and Research 

MARK PEARCE, Director, Division of Depositor and Consumer

Protection 

LISA ROY, Associate Director, Division of Risk Management

Supervision

BETTY RUDOLPH, National Director, Minority and Community

Development Banking

CAMILLE SCHMIDT, Section Chief, Division of Risk 

Management Supervision 

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C-O-N-T-E-N-T-S 

Introductory Remarks by Chairman McWilliams ............ 5 

Dawn Holstein, State of West Virginia

Discussion of State Banking Conditions 

............... 11 

G. Edward Leary, State of Utah ...................... 15 

Lise Kruse, Sate of North Dakota .................... 19 

Kevin R. Allard, State of Ohio ...................... 23 

Antonio P. Salazar, State of Maryland ............... 26 

Kevin B. Hagler, State of Georgia ................... 32 

Charles Vice, State of Kentucky ..................... 38 

Mary L. Gallagher, State of Massachusetts ........... 40 

Bret Afdahl, State of South Dakota .................. 49 

Charles G. Cooper, State of Texas ................... 54 

Melanie Hall, State of Montana ...................... 57 

Greg Gonzales, State of Tennessee ................... 61 

John Ryan, District of Columbia ..................... 65 

Shayna Olesiuk, Associate Director, Division of

Insurance and Research ............................. 72 

Camille Schmidt, Chief, Emerging Issues Section, 

Division of Risk Management Supervision ........... 76 

FDITECH Update by Sultan Meghji, FDIC Chief Innovation

Officer ............................................. 82 

State-Federal Coordination 

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Doreen Eberley, Director, Division of Risk Management

Supervision ......................................... 98 

Mark Pearce, Director, Division of Depositor and

Consumer Protection ................................ 105 

Martin Henning, Deputy Director, Division of Risk

Management Supervision ............................. 111 

Lisa Arquette, Associate Director, Division of Risk

Management Supervision ............................ 118 

Community Bank Outreach 

Diane Ellis, Director, Division of Insurance and 

Research ........................................... 126 

Daniel Hoople, Financial Economist, Division of

Insurance 

and Research ....................................... 131 

Minority and Community Development Banking Update, 

Betty Rudolph, National Director, Minority and

Community Development Banking ...................... 138 

Closing Remarks, MARTIN J. GRUENBERG, Director, Federal

Deposit Insurance Corporation ...................... 149 

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P-R-O-C-E-E-D-I-N-G-S 

1:02 p.m. 

CHAIRMAN McWILLIAMS: Good afternoon or good morning 

for those of you who are on the West Coast. Welcome to 

the fall meeting of the FDIC Advisory Committee of State 

Regulators. 

I'd like to call the FDIC's Advisory Committee 

friends because we have so much in common doing joint exams 

for states and the relationships that we have with state 

supervisors that span over decades. 

So, it truly feels this is an Advisory Committee of 

friends. Thank you for taking the time out of your busy 

schedules to participate today. I know you all have jobs 

regulating banks. 

So, giving us most of your day is a privilege, and 

we're grateful for that. I did hope that by this point 

in time we would actually meet in person. We're not, 

obviously. Hopefully, next time. I've been saying “next 

time” for several quarters now, but we'll see how things 

develop with the pandemic. 

Before we begin our meeting today, I would welcome a 

new member to the Committee. Charles Vice, Commissioner of 

the Department of Financial Institutions from the 

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Commonwealth of Kentucky, has graciously agreed to join 

the Committee. 

Charles, welcome. I will say that the other 

commissioners probably cajoled you to join. This is 

actually really a hard job. I don't know what you were 

thinking, but welcome. 

So, again, thank you, everybody. Welcome. I will 

now turn the program over to Doreen Eberley, who will serve 

as the moderator for today's meeting. And, I'm really 

excited to hear what you all have to say. 

Thank you and welcome again. 

MS. EBERLEY: Thank you, Chairman McWilliams. We 

are fortunate to have with us today Director Gruenberg and 

Acting Comptroller Hsu. Would either of you like to share 

some remarks with the Committee at this time? And, I'll 

start with Director Gruenberg. 

DIRECTOR GRUENBERG: Thank you, Doreen. I'll be 

very brief. I'd just like to thank all of the 

commissioners for taking the time to participate today. 

We deeply value our working relationship. 

In some ways, the foundation of our supervisory 

responsibilities is our collaboration with state 

commissioners. I particularly look forward to the 

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roundtable with your comments and your feedback from your 

particular states. 

When I think back to last year and what we 

anticipated might be the challenges facing the banking 

industry now, I think we probably are in a better situation 

than we might have expected last year. I think, 

nevertheless, considerable uncertainty in the short and 

long term. So, really, I welcome this opportunity to hear 

from you and to engage with you in terms of what you're 

seeing in your states. 

Doreen, thanks a lot. 

MS. EBERLEY: Thank you, Director Gruenberg. Acting 

Comptroller Hsu? 

MR. HSU: Thank you, Doreen. This is my first 

Advisory Committee of State Regulators meeting, so first 

let me thank all of you for taking the time to meet with 

us today. It's exciting for me to be in this virtual 

room with so many fellow regulators. It’s nice to be --

There's a kinship and brethren with fellow regulators. I 

very much look forward to the discussion, particularly 

hearing what you're seeing in your states, and how your 

institutions are doing. 

Just to echo something that Marty said, the last 18 

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months have been pretty extraordinary, and while there is 

continued economic growth and further improvements in 

credit quality, there are some challenges. 

I think we all know loan growth rates remain below 

average, and there are still some communities, geographic 

and demographic, that continue to face heightened 

hardships exacerbated by the pandemic. 

With these opportunities and challenges in mind, I 

look forward to the comments this afternoon and the 

opportunity to engage as long as I'm able to do so. So, 

thank you. 

MS. EBERLEY: Thank you, and welcome. So, before we 

continue I'd like to turn things over for a moment to 

General Counsel Nick Podsiadly for some brief remarks. 

Nick. 

MR. PODSIADLY: Great, thank you, Doreen. Madam 

Chairman, Director Gruenberg, Director Hsu, distinguished 

members of the Advisory Committee, good afternoon. 

Because we have the pleasure of being joined by three 

members of our board, we need to do just a little bit of 

housekeeping. 

Specifically, under the Government in the Sunshine 

Act, whenever a quorum of the FDIC Board of Directors 

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deliberates on agency business such as a regulation or a 

matter of policy, the Board is generally required to have 

an open meeting subject to public notice and certain 

requirements. This meeting is not a Board meeting called 

for those purposes. 

Accordingly, general discussions, which may occur 

among the Board members at this meeting, on subjects 

relevant to the FDIC's responsibility, but which do not 

pose specific issues for the Board resolution either now 

or reasonably anticipated in the future, do not constitute 

a meeting that is required to be open to the public and 

subject to the notification requirements under the 

Government in the Sunshine Act. 

Similarly, informal or exploratory discussions among 

Board members do not constitute a meeting that is required 

to be open to the public and subject to the notification 

requirements. Provided that any such discussions are 

preliminary in nature and that there are no relevant 

proposals for action pending before the FDIC and that the 

merits of any proposed agency action would be open to full 

consideration by the Board at a later time. 

If any of these types of events occur today, staff 

will identify these matters that are being discussed by 

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the Board or by the Advisory Committee. And, if those 

need to comply with the Sunshine Act, we will advise the 

Board members that those matters should be deferred and 

presented to the Board at a later date, at which time the 

Board can engage in a full and open discussion in 

accordance with the Sunshine Act. If you have any 

questions, I will be glad to answer them and our staff 

from the Executive Secretary will be here today to monitor 

as well. Thank you. 

MS. EBERLEY: Thank you, Nick. We'll go ahead and 

start this afternoon by turning to the committee members 

for a discussion about trends and issues relating to the 

banking environment and conditions in their states. 

After we've heard from the committee members, we've 

also asked some FDIC staff members to talk about their 

observations. 

Shayna Olesiuk, Associate Director, National and 

Regional Risk Analysis from our Division of Insurance and 

Research, will cover some observations about the national 

economy and banking trends. And then, Camille Schmidt, 

Chief of the Emerging Issues Section in the Division of 

Risk Management Supervision, will share some observations 

from our supervisory activities. 

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I'd like to start our committee member discussion 

with Dawn Holstein, the West Virginia Commissioner of 

Financial Institutions, who will then be followed by the 

other Committee members in the order that we provided 

earlier. 

So, Dawn, thank you for going first, and I'll turn 

it over to you. 

MS. HOLSTEIN: Alright, thank you, Doreen. Good 

afternoon, good morning, everyone, it is my pleasure to be 

with you here today. And, I would like to thank Chairman 

McWilliams for this opportunity to represent the State of 

West Virginia and for continuing this important dialogue. 

I will provide a brief update on the local conditions here 

in West Virginia. The West Virginia economy overall is 

holding its own and the state's revenue department has 

recorded significant budget surpluses recently. Our 

unemployment rate reveals a slow and small, but positive 

trend over the last six months and is currently at 4.8 

percent. 

The banking conditions in West Virginia remain stable 

and there are currently 38 West Virginia state-chartered 

banks with $33 billion in assets under our supervision. 

And, additionally, we also supervise credit unions and 

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over 1,200 non-depository licensees. On June 7th of 2021, 

our office staff returned physically to the office. 

It has not been without some challenges. There are 

no masks nor vaccinations mandates for state employees in 

West Virginia, and we've had to juggle exposures, testing, 

and absences as a consequence of COVID. 

But, all in all, we're making do and it seems to be 

working just fine. Our examination staff remains in a 

remote examination posture; and it is anticipated that the 

remote exams will continue at least through the first 

quarter of 2022. 

The vaccination rollout in West Virginia was very 

efficient at onset, but, unfortunately, those willing to 

get vaccinated did not keep up with the distribution 

opportunities. 

At last look, we were 50th in the nation for 

percentage of vaccinated population. So, as you can 

imagine, the consequences of low vaccination rates has led 

to record high hospitalizations and deaths for our state, 

which is very unfortunate. 

Our governor has done many things, incentives and 

everything, which are probably making some difference, but 

is not reflective in the percentages. 

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As far as our West Virginia banks go, they continue 

to show their resilience and their ability to navigate the 

pandemic. Our institutions continue to traverse the 

second, or this delta wave of COVID; and they are 

successfully using what they learned in 2020 to navigate 

2021, and continue to make sound risk management 

decisions. 

Asset quality is holding up well, but we will 

continue to watch it very closely as the foreclosure 

moratorium expiration makes those potential asset quality 

issues. 

Overall, West Virginia banks have remained proactive 

in their monitoring, their managing, and their mitigating 

of their identified risks. And, on a very positive note, 

last week we had our first de novo inquiry in probably 

more than ten years. So, I hope that is an indicator of 

some very positive movement here. Our IT exam team 

continually monitors cybersecurity threats and notifies 

our institutions when cyber threats occur, as well as 

providing a very rigorous IT exam for our institutions. 

We are currently using the ransomware selfassessment tool to assist our banks to become self-aware 

of those particular additional risks as ransomware 

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continues to be at the forefront. 

Our agency continues to work through several items, 

such as our fintech sandbox, marijuana banking as medical 

marijuana has been legal in West Virginia since April of 

2017. 

And, we are also working currently on how best to 

supervise and examine the risks that are involved for banks 

who are making investments in fintech companies. 

We currently have several of those investments that 

have happened. And, I'm definitely a glass half-full type 

of person typically, but the last 18 months have surely 

tested that mentality in myself, at times. 

But, I do think what comes to mind is my favorite 

quote that applies to this trying period and that quote is 

“Adversity does not build character, but it reveals it.” 

I feel like that has never been truer through many 

aspects of the pandemic for our banks, for our staff, and 

also extending to our relationships with our peers in the 

other state and federal agencies. 

In my opinion, all have stepped up to make sure 

financial institutions remain stable and strong throughout 

the pandemic. 

The interagency calls organized and managed by the 

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FDIC have supplied just invaluable information sharing and 

transparency for all the participants. And our agency 

relationship with the Atlanta Regional Office, under the 

Leadership of Regional Director John Henrie and his team, 

has never been better. We appreciate the efforts to 

communicate and increase the level of trust and 

collaboration between West Virginia and the FDIC, and 

that's where my glass is half-full. We have this pandemic 

and it has been just an atrocity of sorts for the whole 

United States. However, there have been positives that 

have come out of it, and I think our collaborative 

relationships are one of those things. So, I look forward 

to continuing to enhance and foster our relationship; and 

I really thank you again for the opportunity. At this time, 

I would like to turn it over to Utah Commissioner, Ed 

Leary. Thank you. 

MR. LEARY: Hello, all. Chair McWilliams and 

members of the FDIC Board, I'm Edward Leary, Utah's 

Commissioner of Financial Institutions. Utah has 37 FDIC 

insured banks with total assets of $371 billion. 

Utah Governor Cox issued a return to office order on 

June 1 of 2021, that covered the Utah DFI. However, 

starting shortly thereafter, the fires in the states to 

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the west of us caused unhealthy air along our Wasatch 

front. 

Earlier this year, a new law became effective that requires 

state agencies to reduce in-office employees by 90 percent 

on unhealthy air days. So, the net effect is that the 

UDFI is continuing to operate with a limited in-office 

presence. As of this time, all examinations are still 

being conducted remotely. The Utah DFI has a Board of 

Bank Advisors comprising senior management of state banks. 

The Board meets quarterly. 

Based upon some of the recent discussions, the 

following are what we believe to be the top five issues 

for Utah bankers. 

Number one, NIM compression. Margin pressure 

continues to be a significant concern. Despite tight 

margin, Utah banks have maintained healthy earnings in 

part through efficiency, low provision expenses in the 

recent two quarters, and PPP income. 

Bankers are cautiously monitoring the situation as 

government stimulus winds down, PPP loans roll off, and 

the ongoing effects of the pandemic continue to be 

uncertain. 

Two, cybersecurity, keeping up with emerging threats 

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and bad actors, is a constant challenge. Utah bankers 

continue to devote more time and resources to this area. 

Boards are increasing their level of understanding and 

enhancing the government's framework around cyber risk. 

Competition for talent: the market for key positions is 

incredibly competitive, particularly in the areas such as 

IT and compliance. 

Banks are reporting difficulty attracting talent, 

including markedly lower application numbers for job 

openings. Additionally, prospective applicants in some 

cases expect more flexibility in the work environment, 

including work from home options. 

In Utah, the challenge is multiplied by one of the 

lowest unemployment rates in the country, and a number of 

financial services companies relocating to the state or 

increasing their presence here. 

Number four, shifting CRE landscape. Many bankers 

are closely monitoring the recovery in CRE and sectors 

that may be lagging or face longer-term challenges due to 

the effects of the pandemic. While most sectors in the 

state have rebounded strongly, downtown office space is 

one area that appears to be slightly lagging in terms of 

vacancy rates and prices, though that has not translated 

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to troubled credits yet. 

Five, meeting rapidly evolving consumer 

expectations. Bankers are increasingly competing with 

fintechs to adapt to and meet new consumer expectations 

and financial services. 

In many cases, this leads to partnerships with 

fintechs. Bankers see this intermediation from a customer 

as a significant risk. There is concern what this 

shifting landscape means for the industry in the long term. 

The Utah economy continues to perform very well. 

Utah's unemployment rate is 2.6 percent; however, concerns 

are prevalent in housing affordability. Median home 

values have increased nearly 27 percent from July 2020 to 

July 2021, whereas the national average was closer to 17 

percent. 

The weather and the environmental issues continue to 

adversely affect Utah and Utah banks, predominantly from 

the extreme year-round drought resulting in lack of winter 

snow and resulting summer fires, which often decrease our 

air quality. 

In conclusion, I want to thank Regional Director 

Kathy Moe, for establishing and conducting monthly zoom 

meetings during the pandemic for the states and federal 

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banking agencies in the West. The coordination and cooperation with the San Francisco Regional Office and the 

Salt Lake City Field Office has been extraordinarily 

helpful. 

Thanks again for this opportunity to address you. 

I'll pass now to Kevin Allard of Ohio. 

MS. ROY: Okay, Commissioner Allard, we're not 

hearing you right now. So, why don't we go ahead and jump 

to Commissioner Kruse and we'll circle back to you. Thank 

you. 

Commissioner Kruse, would you mind stepping in? 

MS. KRUSE: I'm here, hopefully you can hear me. 

MS. ROY: Yes, we can. 

MS. KRUSE: I am Lisa Kruse. I am the Commissioner 

in North Dakota. I supervise 62 banks with total asset 

size of $37.5 billion. Our banking industry is healthy 

and as is true for most parts of the country, they are 

flushed with liquidity. 

So, the biggest challenge I foresee in the next year 

or so is finding enough loan demand. And, since our state, 

we haven’t had any trouble banks for quite some time and 

everything has been good, I have started the messaging 

about how bad loans are made in good times, and warning 

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against relaxing underwriting standards. 

That is such a temptation for banks when there is 

such competition for loans, so I just want to make sure 

that we are proactive. The other main talking points I 

use for the industry relate to cybersecurity and fintech 

partnerships. 

I have talked about cybersecurity for a long time 

because it is a concern, but then recently a banker asked 

me if we were not so concerned about asset quality anymore, 

and my response to that is typically, we don't see loans 

go bad, your whole loan portfolio go bad overnight. We 

see that coming and it gives us time to rectify the 

situation. And, it's the biggest driver on the balance 

sheet so we're always going to focus on asset quality and 

the loan portfolio and the investments. 

But, cybersecurity, you have to be prepared because 

that can happen overnight and you're done with the 

ransomware attack. So, really, that's been my focus when 

I speak to our bankers, just to be proactive so they're 

prepared. 

The ups and downs of agriculture is always the 

biggest part of our economy. And, this last year, we 

experienced both floods and droughts. And, the drought 

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has been severe, but our crop producers have received 

insurance and government support to make it through and 

prices have been good. So, overall, the effect on our 

banks has been better than expected. 

Unfortunately, there has been livestock producers 

having to sell, just the cost and availability of feed put 

pressures on the segment. And, our agricultural banks, 

they're well diversified within the agricultural sector. 

So no banks have been severely affected despite these 

challenges. These community banks are relationship-based. 

They just do a good job of working with their customers 

and walking with them through these hardships. 

It also confirms to me that our agricultural bankers 

know well how to manage and mitigate risks because these 

challenges come and go; and it's nothing new to the 

seasoned banker who has experienced similar conditions in 

the past. 

Although our state is completely open for business, 

we also see the workforce issues that is prevalent across 

the country. Our unemployment rate for August was 3.2 

percent. 

We had really low unemployment even before the 

pandemic, so we just need workers. It has worsened in a 

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way right now because we're seeing restaurants reduce 

their hours or close just due to the lack of workforce. 

In August, we went back to do on-site examinations 

and, of course, we are careful and flexible due to the 

COVID concern, and we really listen to the bankers to make 

sure everybody is comfortable if we are going to be onsite. 

We are doing a hybrid approach, which we are hoping 

would be our new normal. It means we do not send as many 

employees and people on-site to conduct the exam as in the 

past. 

We try to limit it to three or four people; and then 

the rest is handled off-site. And, that reduces the 

burden the examination can be for the banks, but it also 

reduces the travel required by our examiners. And, that 

helps our retention efforts. 

So far, the feedback has been very positive, the 

bankers are glad to see us back and we are glad to be back. 

I believe that examiner presence is important for 

effective and comprehensive supervision, and our community 

banks are relationship-based, so for us to build a 

relationship with employees at the bank is equally 

important, just so we can have an open dialogue between 

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regulators and any bank employee regardless of their role 

in the organization. 

I just believe that when we, as regulators, are 

accessible, we can better give guidance and help where it 

is most needed. Sometimes we need to have that dialogue 

to really understand what the need is. 

That concludes my remarks; and I'd like to turn it 

over. I assume we should try Kevin Allard, if he's 

available, again, from Ohio. 

MR. ALLARD: Thanks, Lise. Apologize for the 

technical difficulties. Good afternoon Chair McWilliams, 

Board Member Gruenberg, Acting Comptroller Hsu, and FDIC 

staff. 

I'm Kevin Allard. I'm superintendent from Ohio. 

am pleased to report out this afternoon the status of Ohio 

banking conditions. First, a couple of things to report 

from an economic perspective. 

Last month, Ohio's unemployment rate rose to a 5.42 

percent, from 5.2 percent a month prior. Ohio's GDP has 

essentially mirrored the national GDP rate of 6.6 percent 

over a similar time period. 

Ohio banks remain strong. The median Tier 1 Capital 

[ratio] of Ohio banks is 10.3 percent at June 30th, even 

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24 

despite significant asset and deposit growth in the last 

18 months. More importantly, we have not seen any 

significant asset quality deterioration to-date. 

Obviously, the trend we're paying attention to is 

continued, compression on the net interest margin. 

Ohio banks are not immune. At June 30th, the median 

net interest margin for Ohio banks was 3.13 percent, while 

still posting immediate ROAA of eighty eight basis points. 

However, coming from our micro-surveillance function, we 

are beginning to see a trend in the reduced number of 

financial exceptions reported. 

With regard to corporate activity, a couple of things 

to report out on, we are continuing to see a consolidation 

in terms of merger activity. I'm very pleased to report 

that we had Ohio's third de novo bank open in May of this 

year. And, lastly, we have had some very strong and recent 

interest in MDIs in Ohio. 

The Ohio Bankers League, one of the trade groups in 

Ohio, organized and sponsored a very unique event earlier 

this year with the aim of providing more diversity in the 

boardroom for Ohio banks. This program was titled 

Prospective Diversity Director Symposium. Nikita Pearson 

from the FDIC's Office of Minority and Women Inclusion led 

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off the program. 

Collectively, the regulators, FDIC, the Federal 

Reserve, the OCC, and my division provided a high-level 

overview of regulatory requirements for banks in general 

and for individual directors. 

We di]scussed the examination process and we shared 

best practices in running a successful banking 

organization. The centerpiece of the event was a panel 

of three former and current minority directors who shared 

their experiences in serving on a bank board. It would be 

great to see similar programs take place in other states. 

From an outreach perspective, earlier this year we 

had, virtually, our Ohio Bankers Day. We did not host 

this event last year for the first time in 35 years. With 

over 100 banks and interested parties attending virtually, 

clearly, there is a desire for bankers to hear more from 

their regulators. 

The event was highlighted by discussions with Ohio 

bankers regarding the future of bank examinations, the 

prospects for retaining the deposit growth experienced in 

2020, and a general discussion with regard to asset quality 

conditions in Ohio. 

With regard to future examinations in Ohio in the 

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hybrid environment, in general, Ohio bankers are 

supportive of the hybrid model, but still desire to have 

that face-to-face time with their examination teams. 

It is very important in these discussions that we 

engage our federal partners, so we can continue to operate 

in sync as that is important for the industry. 

Chairman McWilliams, that is my report this afternoon 

and I thank you for the opportunity. 

MS. EBERLEY: Thank you. Can we move to Antonio 

Salazar now? Antonio. 

MR. SALAZAR: Good afternoon, thank you, Doreen. 

This is Commissioner Tony Salazar from the State of 

Maryland. Chair McWilliams, Board Member Gruenberg, and 

Acting Comptroller Hsu, thank you very much. 

Staff, I appreciate the opportunity to be here today 

and talk to you about Maryland's conditions. The COVID 

conditions in the state of Maryland are very good. Our 

positivity rate is below four percent. 

Over 85 percent of Marylanders 18 and older are 

vaccinated. So, we're very pleased on those metrics and 

the hospitals are handling the situation really well right 

now. So, that is I think leading the way towards the 

economic conditions and the business conditions, which are 

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also doing well. Maryland reported just recently 

unemployment rate at the lowest level since the start of 

the pandemic, we are below 6 percent now, so we're very 

happy with that and the trend on the downward slope. 

Employers and the bankers are also reporting what you've 

heard from some of the other states, which is employment 

tightness, difficulty hiring. 

One of the areas that is of importance, obviously, 

to everyone is the IT area and they are, I think it was 

mentioned before in another state, also facing difficulty 

finding adequate IT staff. So, that is an area of concern. 

We're also having those same issues. We have a variety 

of posts that are open, and we are trying to hire them and 

finding that that is a difficult prospect these days. 

But, be that as it may, conditions seem strong 

overall. I'll talk in a minute about the conditions of 

the banks, which we're happy to report are good. 

One thing that's happening in Maryland is the 

consolidation trend in the Maryland banking marketplace 

continues in fiscal year 2020...the last one, 2021, we 

lost two banks, so that leaves us with 26 state-chartered 

institutions. 

Right now, we have two more so at a minimum at the 

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end of this fiscal year we'll be down to 24. There are 

80 banks operating in the State of Maryland, so that means 

there is about a third of them that are state charters. 

There's also 74 credit unions and other trust companies 

operating. 

The good news is from our state perspective, 

obviously, despite the losses, assets are up at statechartered institutions, deposits are also up, and the 

state depositories are continuing to grow with innovative 

programs, I'll tell you a little bit about that in a 

second, and some proactive actions that they do. 

Generally speaking, and overall, they have strong asset 

quality and they're augmenting capital. So we're pleased 

to see that, hope it continues. 

As you've heard before, I don't think we're immune 

from the compression of the net interest margins, while 

the ROAs are generally up as well. I think a lot of that 

comes from controlling overhead and the loan portfolios 

turning out to be a little better than they were before. 

So, they can turn back some of their reserves. 

In terms of capital, I mentioned that some of our 

institutions here in the state have been taking advantage 

of the conditions right now, and they've been pursuing 

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some successful capital raises. So, we were pleased to see 

that, we gave them the opportunity to go forward. And, 

we're happy to report that out of our 24 banks now, two of 

them have crossed the $10 billion threshold. 

So, we have a couple of large institutions that are 

operating here in the state. In terms of some of those 

innovative programs, I'll tell you just two. 

Right now one of the banks recently announced that 

they are pursuing a more ESG-focused strategy going 

forward. So, we had a good meeting with them and will be 

curious to see and hopeful that that works out well for 

them. From a business perspective, obviously it's a good 

social program to pursue. 

Secondly, we have another bank that has started to 

dip into the marijuana service business from a loan 

perspective. Previously, in the State of Maryland, there 

was one federal thrift that handled marijuana banking. 

Now, we have another state charter that has gotten in, as 

I mentioned, that's on the loan. That is a new development, 

so we'll be curious in watching that to see how it goes. 

From our office's perspective, we are continuing to 

work in a hybrid. So, we've been hybrid since Governor 

Hogan called the state employees back in July. We have not 

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really been on-site much, but just as others have said, 

the bankers do appreciate when we come on; and our plan 

going forward was to continue with hybrid examinations 

going forward. 

We're also in the process of moving our offices, so 

we will be moving in the next four to six months. We'll 

be staying in Baltimore, but that has led our office, just 

as it has led other businesses at post-pandemic, to reevaluate their space needs. The office is working on a 

hybrid model right now, with the majority of staff either 

working fully remotely or working two days a week. Lucky 

us, managers, we're generally working three to five days 

a week. 

But, be that as it may, it's working out well. We'll 

be seeing a reduced footprint in our new offices, which 

will be conjoined with the Department of Labor under which 

we serve. The ultimate plan is for the entire Department 

to move but that will be a year or two down the line. 

Lastly, the CSBS District One, which is basically 

the Northeast states from the District of Columbia north, 

along with Puerto Rico, have put together a climate change 

taskforce where the different states are working and that 

is being led primarily by New York right now, who you know 

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is one of the leaders in this area. 

We are working on that taskforce, our staff and 

others, to put together some tools that can help other 

state regulators navigate this new area and also provide 

information for their banks, so that we can all get up to 

speed and work in that area. 

Lastly, we're also working on a foreclosure 

initiative in our state where we're having discussions now 

with state and industry because we have some concerns. 

Areas in Maryland have traditionally shown a higher rate 

of default; and that is continuing as a result of the 

pandemic, so we're concerned of that with the CFPB’s action 

on the moratorium ending at the end of the year, we will 

see elevated levels of foreclosure. So, we wanted to 

engage the different groups to talk about Maryland's 

process and see what could be done from a very practical 

perspective to improve messaging, improve notices. We 

want to make sure that the citizens and borrowers have all 

the knowledge they need to take advantage of the programs 

that are out there; and try to make sure that foreclosures 

are at their lowest level, particularly in the hotspots. 

So, we're trying to put together information that lets us 

identify where we really need to get out and try to make 

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a difference. Because it seems that the elderly and 

communities of color are at most risk right now. 

I did say lastly, but one last thing, we're also 

working for the legislature on a report on banking deserts 

in the State of Maryland. As I mentioned, we'll see where 

that comes out but we do have 80 banks, 74 credit unions, 

and over 1,300 branches. So, financial services are well 

represented there. 

I would like to thank, of course, Frank Hughes, up 

in New York, and their office because we've had great 

relations with them, very communicative, and I appreciate 

all they've done to help us stay in touch during this 

pandemic. 

So, with that, I will turn it over the Commissioner 

from the State of Georgia, Kevin Hagler. Thank you. 

MR. HAGLER: Thanks, Tony. I appreciate that and of 

course, it's an honor to have the opportunity to present 

today. Kevin Hagler, Commissioner of Georgia Department 

of Banking and Finance. 

Just to level set, we have 121 state-chartered banks 

in Georgia with about $121 billion in total assets. 

I also have 48 credit unions with about $27 billion in 

total assets and another 34,000 licensees that we looked 

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at through our non-depository side of the house. 

I think it's a pretty common story with a lot of my 

comments. Georgia banks entered the pandemic really from 

a position of strength and the good news is we still see 

a very strong industry here today. 

Loan quality continues to show an improving trend by 

every performance measure out there, whether it be the 

allowance for loan losses, past dues, non-accruals, 

charge-offs, all these figures are drifting down across 

the portfolio. 

Earnings levels are still slightly lower than they were 

pre-pandemic, driven obviously by the decline of the net 

interest margin, again a common theme there, largely 

explained by the influx of low-rate PPP loans, but also 

more troubling is the scarcity of traditional loans at a 

higher rate that I think has most of the bankers concerned 

with -- that I wound up speaking with. 

Of course, liquidity is abundant, I think 

that's a common theme. It’s diluting capital levels some, 

but not typically to a point where we're concerned. 

Again, from speaking with my bankers, I think most 

are in kind of a frozen position where they're reluctant 

to invest long-term for a very small yield gain for fear 

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that rates will rise on them. 

Another problem is that spread is so thin that 

they're really may not be enough there to even use hedging 

as an option. It washes out completely. So, I certainly 

have earnings concerns today and those continue for me on 

the horizon. 

But, from a statistical standpoint, the vast majority 

of Georgia state-chartered banks are well rated and with 

an improving trend. So, there's only a handful of 

institutions that might need some additional attention. 

Merger activity is something that's always top of mind 

here. The last several years we've been experiencing 

anywhere from 6 to 12 mergers in a given year. So, I was 

a little surprised in preparing for today's presentation 

that we only had two this year, thus far. That said, 

there's been several more announcements out there and I 

know I've been privy to several more discussions, so I 

expect that number to rise, either through the end of this 

year, or more likely into the end of next year. 

I think there was a number of reasons for the 

mergers, but investors needing liquidity event seems to be 

the most common theme. Folks are a lot older now, after 

coming through the great recession and through the 

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pandemic, both physically and calendar-wise. 

But, pooling resources to improve technologies is 

another major theme there that is commonly cited for the 

merger activity. But, I really think regulatory burden 

is certainly a driver in there. 

In the eight years that I've been Commissioner here 

in Georgia, we've had housekeeping bills passed each year 

with the idea of modernizing the Georgia code and really 

trying to streamline things and improve efficiencies, both 

from my department as well as the industries that we 

regulate. 

So, I know what I am about to mention are not FDIC 

issues per se, but at the recent banking conference I 

attended, I got an earful about IRS reporting requirements 

for $600-plus transactions. And, of course, the CFPB’s 

proposed a notice of rulemaking on the small business loan 

reporting. And, I appreciate that the Dodd Frank Act 

requires the CFPB to do this and a lot of these things are 

driven by Congress, but my concern here is the layering of 

regulatory burden is just simply overwhelming for our 

community banks; and it's really driving them away. 

I know it's not a new topic, but one thing I just 

want to make sure we kept it top of mind. If rules and 

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regulations were being developed, we need to find a way to 

carve out our community banks; and I really appreciate 

what the FDIC's doing in the fintech space in terms of 

looking for solutions that alleviate these burdens and 

automate these tools. I think that's incredibly important 

work given what I just went on about. 

Shifting gears a little bit on a more positive note, 

we are currently investigating a de novo application. We 

have four de novo banks in the state already, so we would 

love to have a fifth, if that works out. But, on a little 

twist to that, we have had three banks go through changes 

in control and where significant additional capital was 

brought in as well. So, while they're not de novo banks, 

I do think that's a pretty positive development and puts 

a shot in the arm and some strength to our banking 

portfolio. 

Just touching on the exam program a little bit, on 

average, about 10 percent of our exams have been done with 

some portion on-site. That said, our state is divided 

into four geographic districts, so the results for our 

bankers vary considerably because we've allowed our 

district directors to experiment a little bit here. 

Some areas have been a lot more on-site and others 

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have been completely remote, for example. But, key 

takeaways so far, we've been getting really positive 

feedback from our banker regardless so far. So, when it's 

fully remote, I think one of the common things I'm hearing 

is that regular daily check-ins between examiners and 

management has been very helpful. As well as some kind 

of mechanism where questions and answers are being 

funneled both on the exam side and on the banking side, I 

think just to cut down on the constant email chatter and 

to make sure that things are getting addressed 

appropriately. 

In terms of the on-site piece, we've typically had 

three to four loan review examiners on-site for a few days, 

that's what constituted the on-site piece. So, we're far 

from any kind of definitive hybrid plan at this point, but 

we just wanted to let you know we are experimenting with 

that a little bit and staying real flexible with what we 

do. As I think you've heard from several other 

commissioners previously, one reason we've been able to be 

effective in doing an examination process throughout the 

pandemic is because we hope to have a strong rapport with 

our bankers and I do worry that prolonged absence from 

face-time with them will hurt that rapport, especially as 

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I 

we've added additional staff throughout. So, I do think 

we're going to have to have some kind of hybrid to keep 

those relationships fresh and balanced. 

That is the conclusion of my report out. 

appreciate again the opportunity to be a part of the 

committee today and I will pass the virtual baton over to 

Commissioner Charles Vice. 

Thank you. 

MR. VICE: Thank you and good afternoon. My name is 

Charles Vice. I'm the Commissioner for the Department of 

Financial Institutions in Kentucky. 

I first want to start out by thanking Chair 

McWilliams for hosting the meeting today, but also for her 

personal welcome to this Advisory Committee. Also, I want 

to acknowledge Board Member Gruenberg and Acting 

Comptroller Hsu. And, I just want to thank the FDIC as 

well for the invitation to serve on this advisory committee 

and for establishing a forum for us to exchange ideas and 

discuss risks to the industry. 

I would like to go back and address one point that 

the Chairman (audio interference) innovation conference 

that we have coming up here in Kentucky in the near future. 

So, Kentucky overall --

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MS. ROY: We may have lost Commissioner Vice. 

Commissioner Gallagher, would you mind stepping in? 

MS. GALLAGHER: Hi Lisa, can you hear me? 

MS. ROY: I can, thank you. I appreciate you doing 

this. 

MS. GALLAGHER: No problem. Good morning, Chair 

McWilliams, and other members of this committee. Mary 

Gallagher here from the Massachusetts Division of Banks. 

I greatly appreciate the opportunity to be part of this 

committee. It's always interesting to hear that despite 

our varied geography, many themes are common. So, I don't 

want to necessarily repeat what everybody else has said, 

but I certainly concur with others that there is great 

value in information sharing and collaboration. 

I'll take a moment here to provide an update on the 

banking conditions in Massachusetts. The pandemic has 

certainly necessitated and accelerated changes to consumer 

behavior, with mobile technology and wider adoption of 

online commerce, including in the areas of traditional 

banking, financial products and services. 

Massachusetts is a small state geographically, but 

we continue to enjoy an abundance of consumer choice when 

it comes to banking services. Our agency oversees 150 

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depository institutions, two-thirds of which hold bank 

charters. Although the pandemic has curved the doubledigit annual consolidation trend for our depositories, M&A 

activity does continue. 

And, like Commissioner Hagler from Georgia, I think 

we saw a dial-back, but it certainly is continuing; and I 

think we'll resume as we emerge from the pandemic. This 

consolidation occurs at a time when our non-depository 

licensing growth continues at a significant pace. 

Over the past few years, our agency has observed 

growth in the number of non-depository licensees, 30-plus 

percent growth in the area of money transmission and 

mortgage companies. Nearly 50 percent growth in the 

number of loan servicers and double the number of small 

loan companies. Optionality for financial services 

abounds in Massachusetts. 

As many have observed over the past 18 months, 

community banks across the country have served a critical 

role in supporting consumers, small businesses, and more 

broadly our local economies. 

I am pleased to report that the Massachusetts banking 

industry remains robust and quite strong. The 

overwhelming majority of our banks enjoys strong CAMELS 

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component ratings; and I can count on just a few fingers 

the number of informal actions in place. 

Asset quality continues to hold up, but no surprise, 

concerns remain for those institutions with significant 

exposure to the pandemic's hardest-hit sectors, including 

hospitality, restaurants, hotels, et cetera. 

Earnings have shown modest improvements buoyed by 

the non-recurring factor of negative loan loss provisions; 

however, as we all know, margins remain tight and squeezed 

to the point of national record lows. 

While Massachusetts banks have enjoyed steady 

deposit growth, as heard by other states, the concern here 

is for stagnant loan growth. Liquidity has remained 

abundant throughout the pandemic, while inflated balance 

sheets have spurred contracted capital ratios, the latter 

at least holding up for the time being. 

On the CRA side, our banks range from satisfactory 

to outstanding and, notably, not a single Massachusetts 

bank holds a needs to improve rating. 

Overall, we view our banks' management teams as 

having performed remarkably well across the board in 

identifying risks, protecting employees and consumers, 

supporting small businesses and local economies, and 

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broadly navigating the pandemic. 

One trend that we are keeping an eye on, although 

surely not unique to Massachusetts, we continue to see 

significant branch closures. In some cases, temporary 

pandemic-related closures of branches in either a high 

school or at a supermarket have become permanent. 

The closure application site reduced foot traffic, 

branch profitability, consolidation, and the movement 

towards digital and mobile banking, as dozens of branch 

closures have occurred here in Massachusetts. 

While each branch closure is reviewed for business 

and strategic reasons, we are mindful of how so many branch 

closures across the industry may impact consumer access, 

most particularly for those consumers who have yet to 

embrace remote banking options. We will watch this trend 

closely. 

To reiterate, the banking conditions in 

Massachusetts are healthy, and our institutions have shown 

strength and resilience throughout the course of the 

pandemic. We recognize that COVID isn't quite done with us 

yet and like our supervised entities, we have no intention 

of letting our guard down as we navigate the evolving 

regulatory landscape and future of examinations over the 

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coming months. 

We continue to enjoy great communication with the 

FDIC's New York Region, Frank Hughes, as Tony Salazar 

mentioned, and look forward to partnering with you as we 

contemplate post-pandemic supervision. 

Now, we'll turn things I guess back to Charles Vice 

if his technical difficulties have resolved. 

MS. ROY: Yes, we'll try Commissioner Vice again. 

MR. VICE: Can you hear me now? 

MS. ROY: We can. 

MR. VICE: Okay. I am so sorry about that. I've 

been having a little -- some technical difficulties today. 

So, I really do apologize for that. But, I want to go 

back and just start over because I don't know where I cut 

out. 

Again, my name is Charles Vice. Good afternoon. 

I'm the Commissioner for the Department of Financial 

Institutions in Kentucky. I want to start by thanking 

Chair McWilliams for her welcome to me to this advisory 

committee. I also want to acknowledge Board Member 

Gruenberg and Acting Comptroller Hsu. Also, just want to 

thank the FDIC for the invitation to serve on this advisory 

committee and for establishing this forum for us to 

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exchange ideas and to discuss risk that we are seeing in 

the industry. 

I also want to go back and address one of the comments 

that Chair McWilliams said earlier in the meeting, and 

that is relative to in-person meetings, and just offer 

that Kentucky is a perfect location for an in-person 

meeting when they resume in the future. 

I'll touch on three specific topics today: that's 

economic conditions in Kentucky, some banking trends 

within the state, and I'm going to mention the Banking 

Innovation Conference that will be hosted within the state 

in the near future. 

From an overall perspective, Kentucky’s economy is 

doing very well. Kentucky GDP grows -- GDP rose by 6.5 

percent in the second quarter of 2021. And, our 

unemployment rate continues to decline. It hit a peak of 

16.7 percent in April of 2020, and has steadily declined 

and now, as of August 2021, it is 3.7 percent. For the 

majority of this year, it has been very stable or declining 

each month; and right now it is at a low of 3.7 percent. 

One of the things that I wanted to do, too -- usually 

when I introduce myself to individuals that I'm the 

Commissioner from Kentucky, the first comment I get in 

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response is, well, I've never been to Kentucky before. 

And, a lot of people don't know a whole bunch about the 

state. Obviously, our two famous industries, bourbon and 

horse racing, are very well known. Both these industries 

are extremely important to the state, and they have a 

positive impact on the hospitality industry of Kentucky 

and generate a lot of economic revenue for the state and 

economic activity. 

However, Kentucky is a manufacturing state. And, in 

fact, just yesterday Governor Beshear designated October 

as manufacturing month in Kentucky. From an economic 

perspective, manufacturing generates $37.5 billion of the 

State's GDP. And, since 2020, since last year, we have 

had 200 new locations established in Kentucky, which 

created 13,500 full-time jobs in manufacturing, and $10 

billion in new investment. 

As a subset to manufacturing, Kentucky is also a 

large producer of auto lines -- I'm sorry, automobiles. 

In 2019, Kentucky auto exports equaled $4.8 billion. Auto 

production ranges from cars, to light trucks, to SUVs. 

And, that happens in the Toyota Lexus plant in Georgetown, 

Kentucky, at the Ford plant in Louisville, and, if you own 

a Corvette, that was made and come out of Bowling Green, 

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Kentucky. So, we have those three large manufacturers. 

In total, auto manufacturing and subsidiary industries or 

feeder industries represent 520 companies in Kentucky that 

employ over 100,000 people. 

This industry is also leading into the future. Ford 

just announced this week that they are going to establish 

a new $5.8 billion battery factory, which will be completed 

in 2025, in Kentucky; and also, Toyota announced that they 

are going to assemble fuel cell modules in Kentucky 

starting in 2023. 

So, a couple things that are impacting industry or 

economic activity in Kentucky as well is the housing 

market. Now, we've heard a little bit of a presentation 

relative to that. Kentucky housing market is extremely 

strong and evidence of that is last year our home prices 

increased 10 percent. And, just so far year-to-date this 

year, they have increased another 12.5 percent. 

So, a very strong increase in home prices and a lot 

of that is just a factor of supply and demand. We don't 

have a lot of new supply coming onto the market, but we 

have really strong demand for it. Mortgage originations, 

both in the way of refinances and new purchases have been 

extremely strong and that's driving up the home prices 

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here in the state. 

One of the things, though, that's a little bit of a 

detracting factor is office space. As we've talked about 

here, we think that that's just a structural change in the 

economy, the way people are going to interact, the way 

they work. Telework is becoming a prevalent mode of 

conducting business these days. And so, just looking at 

a small subset of the economy, looking at the Louisville 

office space can give you some indication of what's going 

on. Year-to-date 2021, net absorption of office space in 

Louisville alone has been negative 242,000 square feet. 

Vacancy rates in Louisville right now stand at 15.5 

percent, and another indicator of a soft market is the 

asking rent price is $20.23 a square foot, and yet, the 

overall rents that have been recently signed are about 

$18.18 a square foot, so about a 10 percent reduction from 

asking to actual rent. 

Switching to banking conditions, Kentucky is 

experiencing something very similar to the rest of the 

banks throughout the country. A significant in-flow of 

deposits. We've seen surges at both from March to June 

of 2020, but then also some significant surges as well at 

year-end, which has led to some excess liquidity and also 

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some declines in capital ratios. Now, we're trying to take 

that into consideration when we do examinations. 

From an industry perspective, we are dealing with 

M&A, mergers and acquisitions. When I became commissioner 

in August of 2008, we had 156 state-chartered banks. Right 

now, we're down to 107. Total assets, as of the second 

quarter of 2021, equal $64 billion. And, that represents 

last year a growth rate in total assets of about 15 

percent. And, this year there's been a growth rate of 

about 7 percent. 

However, on the other side of the balance sheet, the 

loan portfolio that's been reported here, definitely some 

struggles with growth, very modest growth in the loan 

portfolio last year, and we've actually seen the loan 

portfolio as an industry decline for the first two quarters 

of 2021. So, again, some challenges with matching loan 

growth with asset growth. 

From a financial performance perspective, our 

industry is doing quite well compared to the states around 

us and nationwide. The state-chartered banks of Kentucky 

had a net interest margin of 3.38. 

And, I was listening to a bank panel not too long 

ago at a conference, and the bank panel consisted only of 

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Kentucky bankers. And, for the most part they categorized 

themselves as living on margin. That is their biggest 

piece of revenue, with a sustained low rate environment 

and all this additional liquidity, with very limited 

ability to reinvest that in a meaningful way. I do foresee 

some margin compression to continue in the future. 

However, our net interest margin of 3.38, is the number 

one compared to the states around us. 

Return on average assets, again, is strong at 1.38. 

And, our capital ratios are typically, when compared to 

the states around us, either number one or number two. 

And, our leverage capital ratio right now is 10.43 percent 

so, again, very strong. 

And, I will conclude my comments today with 

mentioning the Bank Innovation Conference that is being 

hosted by the Eastern Kentucky University and the Kentucky 

Bankers Association that's going to occur on October 14th, 

2021, in Richmond, Kentucky. 

And, I do want to express my sincere appreciation 

for the FDIC Chief Innovation Officer Meghji for joining 

that conference and being a panel presenter and looking 

forward to his comments, both today and during that 

conference next week. 

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So, with that, I will turn it over to I believe Bret 

Afdahl is next on the list. And, thank you very much. 

MR. AFDAHL: Thank you, Charles. And, thank you, 

Chair McWilliams, and Directors Gruenberg and Hsu, FDIC 

staff, and all my state counterparts. 

I’ll start with an overview of banking conditions in 

South Dakota. We currently have 42 state-chartered banks. 

But, there was recently an announcement that our largest 

state-chartered bank is going to be acquired. So, that's 

a significant hit to us. They represent just a little bit 

under 40 percent of our total assets. 

Over the past six quarters we're seeing the same 

thing all of the other states are: a 23 percent increase 

in deposits. But, at the same time, when we take out PPP 

loans, our loan growth was negative 3.2 percent. So, that 

leaves us at a median loans to assets of just under 55 

percent, so down over 10 percent from a year ago. And, 

our liquid assets to total assets are over 28 percent, 

which is a 20-year high. 

And, as has been mentioned by others, our capital 

ratios have been impacted. Our leverage ratio on the 

median is right at 10.25 percent, which is down from 11.62 

percent a year ago; so pretty significant impact there. 

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And, our margins, seeing the same compression others 

are. We're at 3.67 percent, including PPP income. And, 

even including that one-time income, that's the lowest our 

margin has been in the median for at least 20 years. 

And, when we look at, you know, why we're seeing that. 

Our Ag loan, yield on agricultural loans is just over 5 

percent. When you compare that back to the 2006-2007 

time-frame, they were in the 8 to 9 percent range. So, a 

significant change. 

And, then our investment yields on the median are 1.64 

percent, so significantly lower than 4.5 percent back in 

that '06-'07 time frame. 

Asset quality is stable at the present. You know, 

commodity prices are strong. But, as my good friend from 

North Dakota mentioned, we're also in a pretty significant 

drought that has gone on most of the year. There's been 

some relief recently, but most likely too late to help 

most producers. We have extreme drought in 11 percent of 

the state, and severe in 58 percent, and there's only 7 

percent of the state that has no, no level of drought. 

So, we're feeling that impact across the state. 

And, as Lise indicated, primarily, the most severe 

impact is on cattle producers because we were so dry this 

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spring there was just no growth of grass in pastures so, 

some operators had to start making decisions to sell down 

far earlier than they'd like to do. 

Then from a state condition standpoint, our 

unemployment rate at the end of July was 2.7 percent. You 

know, compare that to August of 2020, it was at 4.8 

percent; and August of 2019, so pre-pandemic, it was at 

3.3 percent. So, we're facing some of those same labor 

challenges that other states are, even though our labor 

force participation rate is quite a bit above the national 

average at almost 69 percent. 

Housing is also a challenge. We had a lot of people 

move into the state over the past year-and-a-half. Seen 

significant increase in housing prices and apartment 

occupancy rates are really high in the Sioux Falls metro, 

which is our largest community. Apartment occupancies 

were over 97 percent; and the HUD housing is over 99.5 

percent occupied. And, the Rapid City market, which is 

our second largest, I won't call it a metro, but community, 

is at 97 percent as well. So, very tight housing market, 

especially for – it’s a limiting factor trying to bring 

new residents into the state to fill some of those open 

positions and they need that starter housing, and we're 

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really struggling in that area. 

You know, the Moody's CNN study, they peg South 

Dakota as having recovered from the coronavirus-induced 

downturn at 113 percent, and that's compared to the U.S. 

economy as a whole at 92 percent. So, doing pretty well 

economically. 

State revenue, the fiscal year-end 2021, our state ended 

with an $80 million surplus, but as with everywhere else, 

a lot of that was CARES Act money and other stimulus funds 

that were distributed down to the state level. 

And, then our job postings currently are double what 

those listed as unemployed in the state. So, we 

definitely have a mismatch in not only the number of people 

we need to fill open positions, but it seems like one of 

the big driving factors is there's a skill mismatch between 

those unemployed and the more and more highly skilled 

positions that are available. So, that's something I know 

our state is working on through the Department of Labor 

and economic development offices to try to close that gap. 

But, all in all, conditions are pretty good. You 

know, with the exception of the one large merger that's 

been announced, that activity has been fairly quiet. As 

others have indicated, we merged out three banks in the 

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last year-and-a-half. But, I expect we'll see more just 

based on the demographics of our bankers in the state and 

the demographics of our state. Some of our small 

communities keep getting small. But, the ones that are 

here are in good condition and ready to lend. It’s just 

there hasn't been a lot of loans made. 

So, that's the report out from South Dakota. And, I 

will turn it over to my good friend Charles Cooper. 

MR. COOPER: Thank you, Bret. 

I'd also like to extend my thanks to Chairman 

McWilliams for hosting the conference. And, I really 

appreciate Directors Gruenberg and Hsu for participating, 

and also thanks to the FDIC staff for setting this up. 

You know, collaboration is always important, but I 

believe it's particularly important now. So, for Texas, 

we have 216 banks under supervision, with total assets 

that are now over $400 billion. 

Asset quality continues to hold up. Our problem 

bank list, we also include banks rated three on that list. 

It remains at a record low. 

The average leverage ratio at June 30th is roughly 

10 percent, which is above the national average. 

All of our exams up to June of this month have been 

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off-site. But, in June, I gave our regional managers the 

authority to use their own discretion to do on-site bank 

activity depending on the situation in their particular 

area, and certainly after consultation with the banks. 

So, since then, we have conducted, I’m going to say six 

banks somewhat in the old fashioned method of doing it. 

But, all others have been on a hybrid basis. But, they 

also they have the authority to do board meetings, exit 

meetings, et cetera. And, we're trying to do most of 

those in-person, again, if possible. Following this kind 

of trial, I don't know if it's going to be continuous. 

And, we're evaluating every week. 

We did send a survey out to our banks and asked what 

their preference was. And, 14 percent said they wanted 

it to be on-site and 23 percent said off-site; 55 percent 

said hybrid; and roughly 8 percent said that they didn't 

care, whatever we wanted to do. 

On the asset quality side, commercial real estate seems to 

be holding up. But, we're obviously watching the various 

sectors. 

The energy sector, oil and gas prices are at a record 

high, probably the highest since 1987. That has not 

translated -- well, let me back up. The companies that 

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operate in this area, service companies and things like 

that, they're doing very well. But this increase in 

pricing has not translated into increased profit. And, 

the primary reason for that is they cannot find the workers 

at the lower end of the spectrum. But, they do expect the 

fourth quarter to be much higher than the third quarter. 

I'd like to follow up on what I think is a very 

appropriate comment by Commissioner Kruse. History 

indicates that when we're in a very low net interest margin 

that there is a corresponding search for yield, some people 

call it reach for yield and this results historically in 

lowering credit standards. 

So, obviously, we are continuing to be on guard for 

that. But, generally speaking, I'll say for the asset 

condition of our banks that I’m cautiously optimistic. 

And, recently I participated in three Texas bank CEO 

roundtables that was hosted by Regional Director Kristie 

Elmquist. 

So, this is roughly, say, roughly 36 bankers from 

across the country, all CEOs. But to a person, the number 

one concern that they have right now -- this was about a 

month ago -- was the COVID threat and the threat to, health 

threat to their staff, the health threat to their 

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customers, but the economic threat that it could cause 

to the customers' businesses. So, I found that to be very 

interesting because of the cycle that we all thought we 

were in. 

The number two threat, which I always felt was the 

number one threat by these bankers, was cybersecurity. 

So, cybersecurity is something we certainly need to look 

at. 

And, I would like to mention, in June of this year, we 

issued what we call an industry notice. And, this 

particular notice affirms the right or the ability of Texas 

state-chartered banks that they have the statutory ability 

to provide customers with virtual currency custody 

services. 

And, also in the industry notice it indicates that 

while you have the statutory right to do this, that you 

certainly need to have the right protocols in place to 

effectively manage the risk and to comply with applicable 

law. 

And, I will say that since we issued this notice we 

have received a lot of requests from the media and 

industry. It's received a lot of attention. 

So, that's all from Texas. I'd like to now pass it 

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to Commissioner Hall from the great state of Montana. 

MS. HALL: Good afternoon, everyone, except friends 

that are further west than I am, then good morning. 

Thank you so much for convening us, Chair McWilliams. 

I think this is an important opportunity for all of us to 

share, both with our federal colleagues, but with each 

other, the conditions and the situation that our states 

are currently struggling with or succeeding in. 

I'll start just briefly with the COVID pandemic. The 

division has been back in the office for a month. Governor 

Gianforte has returned all state workers to their offices. 

There will be a space study in order to determine who can 

telework and who cannot. But, right now, most state 

employees are back in the office. And, we have been 

working with our banks to be back in a hybrid situation 

over the past month-and-a-half, two months. 

We first went on-site, I believe, at the beginning 

of August, and are continuing to sort of do a hybrid model 

right now. And that has, you know, honestly, we were in 

that position prior to the pandemic, moving towards a more 

off-site model, because I think it is important in order 

to make sure that we are using the technology tools that 

are available in order to do our jobs in the best way that 

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we can. 

The most significant issues in the Montana economy 

right now are significant labor shortages, as you've heard 

from most everyone. I've been reading a lot lately about 

the kind of coined term the "sansdemic," without people, 

and I have a feeling that these issues are going to be 

here with us for quite a while. 

And, that labor shortage both impacts the economy as 

a whole, but also our banks and the division. We are 

attempting to hire people and are struggling with that. 

In addition, our banks are attempting to hire people and 

struggling with that, and it has led to more temporary 

branch closures with, you know, combining the labor 

shortages with, you know, people being out with COVID 

issues, more branch closures than we've ever had. 

And so, we've actually worked over the past week with 

the governor to do a proclamation that allows branches to 

close more easily in order to keep everyone safe and as 

long as banks are able to provide their traditional banking 

services. 

Additionally, Montana, you know, as everyone else is 

teleworking, everyone is trying to figure out a way to 

telework from Montana. Housing prices in the state have 

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increased over 25 percent year-over-year. It seems that 

we are going to have a kind of a -- I think it's going to 

exacerbate the labor shortage. Because although people 

want to move here, they are moving here, but continuing to 

work in their jobs somewhere else. But, they need to be 

housed here and those jobs in other places may pay more. 

It's driving up housing prices, and housing supply is 

unable to keep up with the demand for housing right now. 

So, that is also, hopefully, will ultimately lead to some 

wage increases, but at this point in time it's really just 

leading to labor shortages. So, we'll see how that plays 

out over the next few months. 

Additionally, I wanted to mention that Montana banks' 

merger activity is kind of beginning again. There was a 

real pause during COVID as we waited as I think our banks 

who typically participate in that activity, in acquisition 

activity, took a pause waiting to see how things are going 

to play out. However, at this point in time, merger 

activity is picking back up. 

Additionally, assets at banks, credit unions, all of 

our depositories, are incredibly high, which has driven 

down capital levels. This is less concerning at banks, but 

a little more concerning at credit unions that have reduced 

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ability to increase capital in the short-run. 

I also want to join Ed Leary in thanking Kathy Moe 

and the San Francisco Region of the FDIC for the work that 

they did in kind of bringing all of the states together 

during the pandemic, and setting up monthly calls, and 

making sure that we were all continuing to communicate and 

working together. It really was a successful, I think, 

18 months that we've been dealing with this thanks to, 

thanks to her leadership. So, thanks to Kathy. 

And, I think that brings Montana to a close. 

And, I, actually, I was supposed to turn it over to 

Tom Fite. But, I think Tom wasn't able to make it today. 

So, I will be turning it over to Greg Gonzales from 

Tennessee. 

MR. GONZALES: Thank you, Melanie. And, thank you, 

Chairman McWilliams, Director Gruenberg, and Acting 

Comptroller Hsu. 

I'm Greg Gonzales from Tennessee. And, the 

condition of the Tennessee banking system remains very 

good. We have 116 banks, $200 billion in assets, and 

while the overall risk profile of some institutions 

appears to have increased, risk management practices 

appear generally sound, with satisfactory capital and 

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earnings performance continuing. 

Some CAMELS component ratings have been adjusted both 

upwards and downwards for certain institutions. But, both 

component and composite ratings have held relatively 

steady. And, just as you've heard from others, tier 1 

capital ratios have been impacted by significant deposit 

activity. But, we've not really seen capital rating 

downgrades around the state. For those banks that have 

experienced such a decline in tier 1 capital, we've seen 

a reduced risk profile in these institutions as the 

increase in deposit funds continues to be held as cash or 

in the investment portfolio. 

Certainly, federal and state economic relief has 

played an important role in supporting the health of our 

economy and the banking system. Overall, Tennessee 

bankers are reporting payment resumptions on previously 

deferred loans. Generally, no major problems have yet to 

be identified. 

The Tennessee banking system, which is primarily 

state-chartered, has consolidated considerably in recent 

years, but has also grown significantly, aided by multiple 

conversions over the years from federal to state charter. 

We're very interested in the strategic planning that 

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institutions have and will be engaging in, especially 

given the lower rate environment, surplus liquidity, new 

consumer spending habits, in some areas suppressed loan 

demand. 

And, with regard to commercial real estate, while we 

do have a small number of banks with non-owner occupied 

CRE in excess of 300 percent, it appears that the system 

as a whole is well diversified. Though there may be some 

banks monitoring hotel loans or loans to restaurants that 

are still struggling, it does not seem to be a large loan 

concentration at the majority of banks in industries 

directly affected by COVID. 

In looking at hospitality, travel, tourism sector, 

which is very important to Tennessee, clearly there has 

been an impact in the state, although we continue to see 

positive trends. In East Tennessee, tourism is strong at 

the Great Smokey Mountains. In 2020, the Great Smokey 

Mountains National Park had over 12 million visitors and 

for the first four months of this year, over 3 million had 

visited the park, which is a 115 percent increase to the 

same time period of last year. 

The Nashville metro area in Middle Tennessee has 

experienced strong economic growth this year. As housing 

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prices remain elevated, closing time frames are quicker 

for real estate transactions. 

Several corporate offices and headquarters, such as 

Amazon, are locating to the Nashville metro area, with the 

most recent corporate announcement in Tennessee being a 

nearly $6 billion regional mega site in West Tennessee for 

Ford Motor Company, which will result in the most advanced 

and efficient automotive production campus in the 

company's history, creating nearly 6,000 jobs in the West 

Tennessee Memphis area. 

Annual earnings potential is estimated at over a 

billion [dollars]. The greater Memphis Chamber has called 

the project the largest single investment in Tennessee 

history, with the executive chairman of Ford Motor Company 

stating “This is the largest single investment in the 

company's history.” 

The Ford investment will transform West Tennessee 

with ripple effects throughout the state, and should 

support and provide the Tennessee banking system with 

opportunities to leverage its economic activity. 

Another important development for the state, 

including our banking system, is Governor Bill Lee's 

broadband initiative. Broadband accessibility, as you 

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know, is a key to thriving communities, especially in light 

of greater reliance on remote access to banking services. 

I do think the digital divide between those citizens with 

broadband access and those without, often in rural areas, 

has been magnified over the last 18 months - certainly 

impacts access to banking services. And, our department 

response is what we've done from an IT regulatory 

standpoint. 

About three years ago, we established a position to 

lead our regulatory IT operations department-wide. We are 

further building out a team to enhance our regulatory 

capabilities in the IT area. 

And, with that, thank you again Chairman for bringing 

this group together. We certainly appreciate the working 

relationship we have with Regional Director Kristie 

Elmquist and her staff. 

And, I'll turn it over now to John Ryan. 

MR. RYAN: Thank you, Commissioner Gonzales. And, 

again, thank you, Chairman McWilliams, Vice Chairman 

Gruenberg, and Acting Comptroller Hsu. Really appreciate 

your attention and interest to the state system of 

regulation. 

I want to focus on a few things that I think connect 

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all of us. The areas of focus of CSBS that I think are 

of importance to all of the members of the FDIC Board as 

well as state regulators. 

Coming out of our Community Bank Research Conference, 

about a week ago, I'm definitely thinking a lot about, and 

coming into the 10-year anniversary of the launch of that 

conference, about the structure of our banking industry, 

our financial services industry, why that matters, why 

that matters to states. 

You, the states, have fought to defend their role in 

banking and financial regulation, with an appreciation for 

the consequences of access to credit on local communities 

and state economies. And, the states have paid a lot of 

attention to the health of the community bank sector 

because of a belief and really an understanding of the 

connection of locally owned institutions to local economic 

development and the relationship model that they generally 

use with their customers and what that’s meant to local 

businesses. 

So, CSBS recently at the end of August looked at the 

Call Report data for the PPP to better understand --

linking of the Call Report data and the PPP data -- to 

better understand how banks and non-banks contributed to 

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the program. So, I think this isn't news to any of us, 

that banks accounted for 90 percent of all PPP dollars 

lent. 

Something that we focused on was “What's the role of 

the state?” And, we viewed the bank and the non-bank 

sector as important that states regulate both states and 

non-banks. 

So, state-chartered banks, which make up 78 percent 

of the charters in the banking system, but just north of 

30 percent of the assets of the banking system. And, 

community banks, as we know, both state and federally 

chartered, are below 20 percent of the assets of the 

banking system. So, state-chartered banks provided 51 

percent of all PPP funding by dollar volume. While we 

have, at least coming into the crisis -- I'm not sure that 

it's changed too much -- about 30 percent of the assets, 

51 percent of the dollar volume. State-chartered banks 

originated 42 percent of total PPP loans by number of 

loans. 

And, I think we heard in the research discussion from 

Governor Bowman how supplemental and important in 

supplementing, and maybe for a lot of smaller dollar, small 

business loans that the non-bank sector was. But, the 

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banking sector was a big driver and the state system 

outsized to its percentage of assets may be reflective of 

the number of institutions we regulate. 

So, state-chartered banks also were a prominent force 

in PPP lending in rural areas. Sixty-five percent of all 

PPP loans in rural areas came through state-chartered 

banks. And, state-chartered banks provided 50 percent of 

all PPP funding by dollar volume to low-to-moderate income 

areas. 

So, I raise this because I think we all are here 

understanding the financial ecosystem, the chartering 

ecosystem, the regulatory ecosystem, how those pieces fit 

together, the diversity of the industry fits together. I 

was reflecting on, Chairman McWilliams, your comments at 

the research conference that we're losing about 200 banks 

a year. And, over 10 years, that could add up to about 

1,000 banks. And, our understanding that some of these 

are market forces, but they may not be market forces. The 

regulatory burden challenges do come up a lot in our 

discussion. And, the consequences of that diversity, 

demonstrated by the data that we've identified coming out 

of the PPP program, that diversity of a system has real 

local economic consequences. 

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So, that's a shared interest of all of ours. And, I 

think it's important we think of how the pieces fit 

together in our regulatory system, and within banking, and 

bank and non-bank, how important this is that, you know, 

we, we focus on the outcomes, and the outcomes we desire, 

and what sort of structures get us closer to the outcomes 

we desire. 

Another area of shared interest, and I think will 

make us an even better partner to both the FDIC, and the 

Fed, and the OCC, is our focus on data, data analytics, 

our own innovations where we may be doing some things new 

and different, or making sure that we're talking the same 

language with our federal counterparts. 

So CSBS has been developing early warning predictive 

analytics models, model or models, that state regulators 

can use to detect bank risk and potential failure. We 

came out with, and I think we shared this with our federal 

counterparts at a recent large bank conference, our Risk 

Identification for State-Chartered Institutions, or RISCI 

tool, which we crowd sourced in the development and 

continue to crowd source in the refinement of state 

regulators and examiners. 

So, I think this will be really helpful to us. 

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Talking from shared data, whether it's the Call Report or 

other data sources, to understand the regulatory actions 

we need to take and the consequences of the regulatory 

actions we're taking. I think that's what helps make us 

good partners. 

I also wanted to mention we’ve talked about the 

condition of banks and a lot of -- when we're talking about 

the condition of banks, there's a heavy emphasis on 

community banks. CSBS has done an annual survey of 

community banks. 

We also about a year-and-a-half or so ago started a 

quarterly Community Bank Sentiment Index. That came out 

today, and the index is right at 100, so, down from 115. 

Above 100, positive; below 100, negative. So, we're right 

there. 

We think, and I think listening -- and this is where 

it's so important that, you know, these conversations and 

hearing each other and our understanding of what's 

happening around us, based on survey, a lot of things that 

you've been hearing in terms of flux deposits, declining 

loan demand, compressed net interest margins, that we can 

understand that. 

But, we probably haven't quantified, I'm sure we 

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haven't quantified what Commissioner Cooper raised, in 

terms of the fear and risk around an ongoing health and 

national health crisis. 

I would be remiss if I didn't mention some of the 

work that we're doing on cybersecurity, as October is 

National Cybersecurity Awareness Month. CSBS has issued 

cybersecurity tools and a media kit for state supervisors 

to help promote National Cybersecurity Awareness Month 

with both bank customers, state consumers, and bankers. 

We really value our partnerships, state partnerships with 

each other, the federated system. We have our 50 states 

and federated with our federal counterparts. I think this 

is going to be critical as we are facing current and future 

challenges and opportunities around fintech broadly, 

crypto, distributed ledger technologies. There are 

challenges to our regulatory system, and there are 

opportunities. 

We share the concern for both the stability of our 

financial system and the health of our consumers; and we 

all will be better together addressing these challenges. 

And, with that, I think I turn it back over to Lisa. 

MS. EBERLEY: So, thank you, John. Actually turning 

it back over to me. 

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Thank you to everybody for sharing your observations 

from your states. It was a great discussion. And, the 

themes that you talk about, the things that I wrote down 

the most were cybersecurity, number one; the challenges 

operating in the current economic and interest rate 

environment and risks that banks may be taking on operating 

in that environment; the need to be vigilant in keeping an 

eye on commercial real estate performance; and, finally, 

and, you know, very importantly, the importance of our 

collaborative relationships. 

So, these are all important issues for us to talk 

about, areas we're focused on as well. Thank you again 

for all of your commentary. 

And, at this point I'll turn it over to Shayna and 

Camille to lead our next discussion. 

MS. OLESIUK: Great. Thank you very much, Doreen. 

And, thank you to all of the participants. I really 

enjoyed hearing all the information and insight shared 

today; and I always learn something new from these 

conversations. So, I appreciate being invited. 

I'm going to spend a few moments talking about some 

of the observations from my team in Washington from a 

national viewpoint. And, then I'll also talk a little bit 

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about our Risk Review publication from earlier this year. 

And, the press release and the information about that was 

included in the materials. 

So, in summary, we're continuing to see economic 

growth and credit conditions improve nationally. Of 

course, still sensitive to the path of the pandemic. The 

outlook is positive, but it's certainly faces downside 

risks from labor market constraints and supply chain 

constraints, which many of you mentioned today, and we, 

too, are concerned there. 

Key risks for banks, I think, remain the potential 

credit strains as pandemic support programs for borrowers 

begin to wind down and loan forbearance periods end, along 

with the earnings pressures that many of you mentioned. 

So, a little more information about the economic 

conditions. 

So, GDP growth has been more than 6 percent in the 

first and second quarter of this year, clearly very strong 

numbers. And, as of the September 2021 Blue Chip 

forecast, the current consensus for full year 2021 growth 

is at about 5.9 percent. Now, obviously, these are very 

strong growth numbers, but I think it's important to notice 

that they have been coming down over the last couple of 

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months. The GDP forecast just back in June for the full 

year was 6.7 percent. So, that has come down nearly a 

full percentage point just in a couple of months, so, 

reflecting the slowing growth in the economy. 

The employment picture is similar, showing slowing 

growth and although as of August of this year, the economy 

has regained about three-quarters or just about seventyfive percent of the jobs lost in the early days of the 

pandemic. Now, while this is positive news, the flipside 

is there are still about five million fewer jobs now than 

before the pandemic started. So, we clearly still have 

continued weakness among some people, and potential 

financial difficulty when programs such as the extended 

unemployment and forbearance ends. 

And, lastly, we are watching inflation very closely. 

Inflation certainly remains a concern. The Blue Chip 

consensus forecast continues to point to a return to 

inflation levels just above 2 percent by next year. And, 

the numbers that we're seeing now are still being driven 

by COVID sensitive sectors. But, we're still certainly 

watching the inflation numbers as they matter a lot to our 

outlook. 

Now, I'll spend a few minutes talking about some of 

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the highlights from our 2021 Risk Review, which, as I said, 

was published earlier this year, since our last meeting of 

this group. And, a link was shared in the materials for 

the meeting. 

So, in the publication we covered key credit risks 

in the aftermath of the pandemic in sectors such as 

commercial real estate, energy, and small business. 

Commercial real estate was one of our focus areas. 

Commercial real estate loans held by FDIC-insured 

institutions reached a record high in 2020. And, 

community banks hold about 28 percent of these total CRE 

loans. This is well above their share of the total banking 

industry assets. So, certainly more exposure to 

commercial real estate than other sectors. 

Now, the good news is, is that commercial real estate asset 

quality has remained stable. And, is much more favorable 

than it was during the recessionary period following the 

previous CRE cycle back in the Great Recession. 

So, of course we still await the post-pandemic period 

after loan accommodations and forbearance ends. But, 

right now commercial real estate conditions look fairly 

stable. 

Now, there's other sectors that we talk about in the 

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report, including housing and agriculture where there is 

notable exposure among commercial risk -- among community 

banks. But, these sectors actually did very well during 

2020. So, the report highlights many of the strengths in 

housing and agriculture. 

Then, finally, as many of you had mentioned, we 

looked at -- we looked at some of the banking performance. 

And, as of the second quarter quarterly banking profile, 

net interest margin reached a record low, as many of you 

have mentioned. However, loan growth is a bright spot. 

Total loans actually increased from the first quarter, 

between first and second quarter. And, this was following 

three consecutive quarterly declines. So, we see that as 

continued evidence that banks are staying strong in this 

environment. 

So, I encourage you to read the Risk Review, and let me 

know if you have any ideas or suggestions for topics in 

the next issue, which we'll be starting work on soon. 

So, I will now turn it over to Camille to discuss 

supervisory viewpoints. 

MS. SCHMIDT: Alright, thank you very much, Shayna. 

And, hello again, it's good to see all of you again this 

October. 

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I'm going to expand on what many of you have talked 

about, and what Shayna's talked about, from a supervisory 

perspective. 

As far as pandemic-related banking trends across the 

industry, when we look at institutions with layered risks 

and those known to have exposure to the industries and 

economies most affected by the pandemic, like you've all 

said, excess liquidity and compressed net interest margins 

are certainly top of mind for these bankers, as they are 

for all banks I'm thinking. 

Banks' earning asset mix has certainly shifted to 

lower-yielding assets. Cash and due from balances have 

doubled in the last two years. But, in the second quarter 

we did see that deposit growth and we saw it slow, likely 

due to the pandemic support programs that are expiring, 

and the second quarter deposit growth was more in line 

with pre-pandemic levels. 

We saw loan growth, as reported in the QBP, and bankers 

are reportedly optimistic about loan growth emerging as 

the economy recovers, although their timeframes for this 

continues to lengthen. 

At institutions with layered risk and the loan 

exposure to industries affected by the pandemic, their 

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overall risk profiles are decreasing. We're seeing 

decreases in accommodated loan volumes, they're certainly 

continuing. And, by and large, the pandemic has really 

only weakened a small number of lending relationships per 

institution. 

Accommodated loans have often moved to watch lists 

or special mention, but there has been limited migration 

to adverse classification. And, concerns and migration 

are usually centered around industries well known to be 

affected by the pandemic, like hospitality, or office, or 

taxi medallions. 

Like everyone said, staffing concerns are showing up 

in, you know, the surveys and programs that we look at. 

It's a prominent theme now. And, it's really a doubleedged sword for banks because they're also concerned that 

many of their business loan customers are struggling to 

hire or maintain sufficient staff. So, this labor 

shortage is affecting their loan portfolios, too, and 

that's a concern for them. 

I want to talk a little bit about commercial real 

estate. As Shayna mentioned, a quarter of all 

institutions have CRE concentrations and most of those are 

supervised by the FDIC. CRE supervisory recommendations 

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remain the same as they have for the past year. The areas 

most frequently reported as in need of improvement center 

around board and management oversight, portfolio 

sensitivity analysis, and portfolio management. 

For the first half of 2020, supervisory 

recommendations concerning credit underwriting, 

management information systems, and market analysis 

increased compared to the last half of 2020. However, 

those levels all remain manageable. 

Most CRE concentrated institutions have stable 

lending risk profiles. Among the banks with increasing 

risk profiles, managing growth is the main theme. 

I want to briefly talk about LIBOR transition 

readiness. I'm not sure if anyone has talked about that. 

But, first, I would like to thank the CSBS and the state 

supervisors for their support during the LIBOR transition. 

Many of the states have provided us with their LIBOR exam 

assessment results and helped us complete our work 

programs. 

Collectively, we have reviewed about half of the 

FDIC-supervised community banks. And, only a small 

percentage, just around 15 percent, have meaningful LIBOR 

exposure. Those that do, tend to be the larger 

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institutions and those with high levels of derivative 

contracts. 

Generally, these institutions are followers, and 

they're just waiting to see what their peers and the larger 

market leading firms settle on for replacement rates, 

particularly for loans. We have found that a number of 

community institutions have selected Prime as a temporary 

alternative to LIBOR. But, eventually, many of them have 

indicated that they intend to move to Term SOFR. 

As a result, FDIC examiners have found that institutions 

have made progress, but still have more work to do towards 

selecting appropriate replacement rates and developing 

effective communication strategies. There is also further 

work needed to ensure that all contracts maturing before 

the June 30, 2023 extension include appropriate fallback 

language. 

And, I'll close by just a brief summary of what we're 

seeing at agriculture institutions. The current theme 

from our agriculture bank examiners is optimism. 2020 

yields were average to above average. But, like, for our 

supervisors from I think the state of North Dakota and 

South Dakota mentioned that extreme drought crop 

conditions do vary across the state depending on those 

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weather conditions. As of mid-September, 58 percent of 

the corn and 57 percent of soybeans were rated good to 

excellent. 

The corn and soybean harvest is, on average, about 

one-third complete as of this past Sunday. So, we will 

really see how, what the final yields are in a month or 

so. 

You know, the producer balance sheets, producers 

ended 2020 with pretty good balance sheets, really their 

scorecards really looked good. And, our examiners really 

think that many of these producers are poised to even be 

more profitable in 2021. 

Livestock producers generally broke even. But, they 

are expected to be modestly profitable in the last half of 

2021. 

Other good news is that real estate values are 

reported as rising significantly in some states. We're 

seeing increases between 12 to 14 percent reported in 

states like Kansas, Nebraska, and Indiana. 

Producer sentiment is strong. I think the risk in 

Ag right now is higher input costs, caused by price 

inflation and the supply chain issues that you've talked 

about. Input costs like fuel and oil expense, fertilizer, 

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machinery and equipment, and labor costs are expected to 

increase more than in previous years. 

So, with that, I will wrap up and turn it back over 

to Doreen Eberley. 

MS. EBERLEY: Okay, thank you so much, Shayna and 

Camille, for the great report outs. We appreciate it. 

We are a little bit past time, but let's go ahead and take 

a 15-minute break. And, we will come back at 3:05. 

Thank you so much. 

(Whereupon, the above-entitled matter went off the record 

at 2:50 p.m. and resumed at 3:05 p.m.) 

MS. EBERLEY: Thank you everybody and welcome back. 

This afternoon, we have FDIC Chief Innovation Officer 

Sultan Meghji with us. Sultan is going to share an update 

on our FDIC's Office of Innovation, which we call FDITECH. 

Sultan. 

MR. MEGHJI: Thank you so much, Doreen. And, first 

off, it is so great to have been sitting here in the 

background watching the presentations so far. This is 

such an awesome group of people, and it's great to see a 

few familiar faces giving the updates. 

With that, I would just like to say it's an honor to 

be back here speaking to all of you. It's been a little 

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bit, and we have a little bit to talk about here. But, 

first if we go to the next slide, I'll do a little bit of 

an update. 

So we're past six months after I've joined. We've 

got some staff now. In fact, you're going to hear from 

one staff member who's been spending some time with us in 

just a little bit here. I'm excited to see that. The 

program today is just wonderful. 

But, I'd like to remind all of you what I've 

mentioned before, which is the four key pillars we're using 

here at FDIC to organize our thoughts around innovation. 

The first is around inclusion. How do we create the most 

inclusive, equitable, and diverse banking system out 

there, not just for consumers, but also for small 

businesses, especially women- and minority-owned 

businesses, which make up such a big piece of economic 

development here in the United States. 

The second one is around resilience. And, if you 

haven't listened to the FDIC podcast, I'd highly recommend 

it. And, I'll show a little bit for one of the more recent 

podcasts where I took over and I interviewed former 

Homeland Security Secretary Michael Chertoff, where we 

talked exclusively about resilience and talked about 

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everything from how you could use the metaphor of the human 

immune system or boxing to discuss this. It was a great 

discussion and one that really focuses on the fact that 

resilience has been and will continue to be a critical 

component of the safety and soundness of our banking 

system. And, whether we're talking about cyber actors and 

ransomware or we're talking about backhoes cutting off a 

bank's connection to the internet by cutting through a 

fiber optic cable, these are big, important conversations. 

The third is around amplification, and it's one of 

the greatest things I think of the banking industry here 

in the United States is that there's so many experts. 

think we're incredibly fortunate to have so many of them 

on a program like today. But, also we have this amazing 

group of people at FDIC and the banking system and those 

organizations that support them. 

And, when I see experts, I really want them to be as 

efficient as possible. I want them spending as much of 

their time being the experts that they are and not having 

to fight things. So, amplification is about getting the 

maximum amount of people and removing the friction in their 

daily lives. 

Then finally, protecting the future. I think the 

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last time I was here, I made an off the cuff comment about 

how Elon Musk might try to put a bank on Mars. Well, 

since I've spoken to you previously, we now have banking 

infrastructure in orbit. So clearly, these things are 

moving quickly and there are a lot of other activities. 

Just yesterday, the Department of Homeland Security 

announced an entire discussion around quantum computing 

and what it means as it relates to cybersecurity. And, 

obviously, we're also talking about things like artificial 

intelligence. 

There is a tremendous amount of activity going on in 

this space. But, the one through-line is around data, and 

we call it the new capital. Whether it's examiners 

looking at data at institutions, whether it's looking 

horizontally at risk across the system, whether it's a 

consumer looking at their own credit file, data is the 

underpinning of all of this. It's the lifeblood. 

And so, a lot of the things that we're looking right 

now that we'll talk about more in the future are around 

data. But, that's the through-line through all of these 

discussions. So, with that, let me talk about some of the 

things that have been going on since I spoke to you last 

if you go to the next slide. 

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And, first is an update on Rapid Phased Prototyping. 

So, as a refresher, last summer, we put out a call for 

concept papers and about 30 organizations came back and 

gave us some ideas about what they were thinking about in 

terms of what we could do in the market and at FDIC to 

remove friction from the examination and supervision 

processes, especially as it related to data. 

And, we went through the summer into the fall. We 

went from concept papers to initial prototypes right 

before Christmas. And, the list of entities shrank down. 

I think it ended up being 11 at that point. And, then we 

asked those 11 to do a final demonstration in the spring. 

And, we got a bunch of really great demonstrations and 

views from those institutions about what they thought they 

could do. 

On the back end of that, we spent a little bit of 

time reviewing them and then circling up with others, 

including some of the people here. And, a few weeks ago, 

a month ago -- kind of lost track, time flies here in D.C. 

-- we've called for pilot programs. These would be oneyear potentially programs where these very small group of 

organizations could come in and basically run their 

project in partnership with us to take it to that next 

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step, to look at what it really looks like in market with 

real data and really sitting with it shoulder to shoulder. 

We are still collecting some of those pilot proposals. 

And so I look forward to having discussions like that in 

the future. But, expect to hear more about this, 

especially next year, as these pilot programs go on. 

This has been an incredible evolution for us as an 

organization in terms of not just being able to acquire 

new technology in more streamlined ways, but also 

operating with a more integrated view and more 

transparency in terms of how we do these things. I'm 

incredibly excited for the value that can get created out 

of the Rapid Phased Prototyping program and can't wait to 

talk to you all about that here in the future. So here, 

let's jump onto the next slide, and we'll talk about our 

sprint program. 

So, one of the things I did before I joined, and 

right after I joined was I went on a bit of a listening 

tour. In fact, I talked to some of the other presenters 

today, other people listening to this, to try to really 

understand what's going on out there, what the problems 

people are having are, and what they see as opportunities. 

Out of that listening program, we created an office hours 

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program. 

We specifically first talked about artificial 

intelligence. But, there are a couple of other areas 

we've been talking to people about. And, I will just say 

right now that we created an email address, 

innovation@FDIC.gov, to make ourselves available. So, if 

you have thoughts, if you have ideas, if this is an area 

that you care about, please don't hesitate to email us. 

And, we'll set up some more office hours to talk about 

things. 

But, out of that, we looked at something that's 

become a fairly normal thing in the tech community. It 

used to be called hackathons. We're calling them tech 

sprints for us in the regulatory system. 

But, these are short programs, usually just a few 

weeks, where we ask teams to apply based on a question. 

And, that question, we spent some time on. And, then we 

basically collect the applicants, we go through a little 

bit of a process, and then we work with them through this 

sprint to take our expertise, our needs, their expertise, 

their energy, and look at how we can solve specific 

challenges. 

And, it's not just a company coming in and pitching a 

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product. We look for something new. We look for 

something unique. And so, in many cases, the sprint teams 

are actually a combination. Maybe it's a bank and a tech 

company. Maybe it's a very large tech company and a couple 

of smaller tech companies. 

Then, after those few weeks, we have a demonstration 

day where we allow them to come in and demonstrate what 

they've done and the value that creates. It's an 

incredibly cool way of not just increasing visibility, but 

also helping people understand what the state of the art 

is and what the art of the possible could be. So, out of 

that, we've done two where -- we're doing two so far. 

And, I'll talk about both of them here. So if we go to 

the next slide. 

I'll talk about our first one which is on inclusion, 

which was really about reaching the last mile of the 

unbanked. Now obviously, there are lot of things that 

have been going on for the last few years and a lot of 

great activity that's been done. But, technology is 

changing quickly and ways people operate with technology 

are also changing. 

So, the first tech sprint on inclusion was held from 

August to the end of September. Eight teams were 

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participating. And, the question was, “What data, tools, 

and other resources could help community banks meet the 

needs of the unbanked in a cost effective manner, and how 

might the impact of that work be measured?” 

And, that last part is really important, and I'll 

highlight it. In many cases, when people go down more 

researcher skunk-work style programs, they just kind of do 

stuff. I'm not a big fan of just doing stuff. 

I like to then say, okay, we did something, and what 

could we measure out of that? What is the result of that? 

And, could we then extrapolate what the value that we could 

create from that actually is? 

And so, let me talk about a few of the outcomes, and 

there's going to be more to come on that. We're going to 

start putting some content out about this here in the 

future. But, let me talk through a couple of the bullet 

points that are really worth highlighting. 

The first is that we have created a forum that allows 

some of these entities to refine and focus what they're 

doing and then be able to launch them and market in just 

a few months. There are some that were already out there 

that had to go back to the drawing board. There were some 

that hadn't gotten their thinking together and now have an 

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opportunity to do that. 

So, that's a really amazing opportunity because it 

allows us to become more proactive and see what's out there 

and also make sure it's aimed in the right direction. 

It's given us tremendous insight into some of the barriers 

that still exist as well as some of the trends, both 

historic, current, and emerging, so that we can continue 

to enhance our thinking about this. We have tremendous 

resources here at the FDIC, and I think a lot of people 

don't actually know about them, even if you're in the 

banking sector. 

And so, we're really excited to be able to share some 

of that, that is out there already. Even this week, I had 

to point out to someone that you can just download Call 

Report data. You don't have to go through any special 

process, which was kind of a fun thing to remind someone 

of. 

We have recordings of all the demos. Those will be 

made publicly available. And, we're very excited to hear 

about that. So, when those come out, if you have thoughts 

or comments on them, we'd love to hear them. So remember 

that email address, innovation@FDIC.gov. 

And then finally, it really helped us understand what 

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some of the lessons learned was. And, we're growing a new 

muscle here. We're learning how to do things in a slightly 

different way. 

All of this is very straightforward and it's 

something that people have done in the tech sector for a 

long time but not necessarily in a federal regulatory body. 

And so, we're learning how to do things and learning how 

to shape them into things that work and are fit for purpose 

for us. And, it's a great program. We learned a lot out 

of it. 

So, two actions are coming out of this. The first 

is we're going to be making a bunch of the information out 

of this sprint public. From the demo recordings, some of 

it's already out there on social media and through our own 

press functions. But, then also we're looking at what to 

do next. 

And so, as this stuff becomes available publicly for 

everyone to look at, we also invite people to give us 

thoughts about what to do next. And, it can be directly 

related to what they see out of this tech sprint or maybe 

it's something completely unrelated. We're very open to 

that. 

So, let's jump on to the tech sprint that's going on 

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right now on the next page, which is around resilience. 

From hurricanes to ransomware, we need to measure 

resilience in this world. So, it started just in the 

middle of August and it ends here towards the end of this 

month. In fact, the kickoff was just Monday with the 

teams. 

And, the problem statement for this tech sprint is, 

“What would be the most helpful set of measures, data, 

tools, or other capabilities for financial institutions, 

particularly community banks, to use to determine and to 

test their operational resilience against disruption?” 

Now this might not seem very sexy. This might seem kind 

of boring to a degree. 

But, one of the most interesting things about 

resilience is that subsets of it can be measured. Within 

IT or within tech, we can measure service level agreements. 

This is a service being delivered at the level it's 

supposed to. Is the service only available Monday through 

Friday, 9:00 to 5:00, or is it available 24x7, 365? That's 

a measure of a technical function. 

But, if you look at resilience, there really isn't 

an agreed upon common framework for how people measure. 

And, once we know how to measure it, then we can start to 

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think about how we can take that measurement and use it to 

add value. So, really what we're looking for is looking 

for the teams to come in and help us think through this, 

but then also make recommendations and see how it applies 

against existing operating entities in the banking system, 

especially community banks, which don't always necessarily 

have the biggest budgets. 

We would love to see the following outcomes. First 

is, we would love to identify opportunities to leverage 

emerging technologies to mitigate risk. That's huge. 

Using technology to mitigate these issues is a huge 

opportunity and one that I hope we can begin to make some 

forward movement on. 

The second is really making sure that we highlight 

how important this is, especially to the smaller and midsize financial institutions. If you're one of the top 50 

banks in this country, absolutely you're doing this. This 

is part of your daily life. But, every institution should 

be thinking about this. 

One of the things that I tend to ask banks when I 

talk to them is, which board member is accountable for 

resilience for your institution? I find it a really 

useful question to start with. And, in many cases, it's 

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great. 

It's this person. Here's what we do. Here's how 

they report on it. It's a very cool conversation. In 

other cases, it gives people a place to start because 

that's an important thing. If you're not really aiming 

at making sure that resilience is discussed about all the 

way up at the board level, then that's a place to start, 

something to do. 

We also want to promote data and measures that can 

be used to determine the resilience of institutions 

relative to a disruption. So, ransomware is a big topic 

right now. It's something that a lot of people spend a 

lot of energy on. 

We have issues with data centers going offline 

because of electrical issues. We have hurricanes, 

tornados, and floods that sometimes disrupt things. There 

are a lot of these disruptions coming. So, how can people 

measure themselves and understand what that means? 

And, we also very specifically want to lay the 

foundation here for future tech sprints to foster stronger 

resilience in banking. And, this is an important one, and 

it's something that I would highlight for everyone. If 

we go back in time 30 years, banking was not reliant on 

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technology. The interconnectedness of the financial 

system was very analog. It was very kind of day-by-day 

or week-by-week, not second-by-second like it is now. 

And, as we continue to move in this environment where 

everything is real time, everything is at the tip of your 

fingertips. 

I can do anything I want with this little device in 

my hand. And, because of that, the institutions have to 

support that. Even if they're not necessarily offering 

all of those products and services, you might not be 

offering a variety of different real-time services on a 

mobile device, but if you're integrating with real time 

payments networks, you definitely have to be thinking 

about that. And, what does that mean? And, not just for 

accidents or weather or something like that, but also in 

terms of nefarious actors. 

This is a whole new landscape of threat that's 

available, and it's something that we can't spend too time 

on. So, that's going on right now. I'm incredibly 

excited to talk about that, and you'll see more about that 

publicly as we get through October and into November. 

So, with that, let's jump to the next slide. So, 

here it is, my final comment on our email address. Please 

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don't hesitate to reach out to innovation@FDIC.gov. Keep 

in touch with us, FDITECH. We're going to have a really 

cool new website soon. I can't wait for you guys to see 

that. 

But, really do keep engaged in this part of the 

discussion because as we think about banking regulation, 

here in the tech lab, we're spending a lot of time thinking 

about the next five to ten years. And, our view is that 

these changes are going to accelerate. There's going to 

be more and more of these things happening. 

I, for the life of me, can't imagine us going 

backwards or slowing down in any way. And, it doesn't 

matter what kind of technology we're talking about or what 

actions are going on in the market. There's going to be 

a lot of activity here. 

And, with that, I just want to thank you all for 

having me. I can't wait to come back and give you some 

more updates on some of the other activities we have going. 

But, thank you all so much, and please enjoy the rest of 

the program. 

MS. EBERLEY: Thank you, Sultan. We do have a few 

minutes if anybody had any questions or comments. 

MR. MEGHJI: Yes, thank you, Doreen. I forgot to 

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mention that. 

MS. EBERLEY: Okay. I'm not seeing any hands up, 

Sultan. So, we'll go ahead and move on, and thank you 

very much. 

MR. MEGHJI: Thank you, Doreen. Have a great day, 

everyone. 

MS. EBERLEY: Thanks. Alright, so we'll move on to 

our next discussion. Next is going to be a panel 

discussion on state and federal coordination. And, I'll 

be joined by Mark Pearce, Director of the Division of 

Depositor and Consumer Protection; Martin Henning, Deputy 

Director for Operational Risk in the Division of Risk 

Management Supervision; and, Lisa Arquette, Associate 

Director for Anti-Money Laundering and Cyber Fraud, also 

from the Division of Risk Management Supervision. 

So, Mark and I are going to kick us off. And, we're 

going to talk about what we've learned from this extended 

period of off-site exam work and what we're thinking exams 

are going to look like when we return to our new normal 

after the pandemic. Martin will lead a discussion about 

cybersecurity, and Lisa is going to provide updates 

regarding the Bank Secrecy Act and anti-money laundering. 

And, we are very interested in hearing from all of you as 

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we elaborate on these issues. So, Lisa, I'm going to 

count on you. I can't see hands up while I'm talking. 

So, if there are hands, please let us know as we're going 

through. 

So, we'll kick off with me and Mark. We'll talk 

about what we've learned from this extended period of offsite exam work and what we think things are going to look 

like in the new normal. And, I would just start by saying 

we did talk in prior meetings about how in March of 2020 

we all had to rapidly shift to mandatory telework and a 

virtual work environment due to the pandemic. 

For us in Washington and the field offices, regions, 

we all quickly adapted our existing processes for virtual 

operations and had to create new processes and 

capabilities to address emerging needs. A simple one was, 

how are we going to mail reports and examinations to banks? 

How are we going to retrieve incoming mail? So, things 

like that, that we had to work out in pretty quick order. 

But, we really wanted to focus this discussion on the 

examination program. And, although we haven't been able 

to conduct exams and -- or I'm sorry, have been able to 

conduct exams and other mission critical work virtually, 

it's not ideal. There are certainly parts of the safety 

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and soundness and consumer compliance and Community 

Reinvestment Act examinations that are better suited to 

on-site, in-person assessments. 

Several of you mentioned that in your comments this 

morning and really talked even about banker preference for 

onsite presence for part of the time. And, when we are 

able to resume an on-site presence, we do plan to do that, 

but again, using a hybrid approach like many of you 

mentioned this morning or earlier this afternoon. An 

approach that'll offer some opportunities to conduct a 

greater degree of activities off-site compared to prepandemic, at least on the safety and soundness side, and 

Mark will talk about the differences between RMS and DCP. 

But, we do think we can do more. And, I would just 

start with a little bit of background. So, pre-pandemic, 

our safety and soundness exam teams generally started --

it was kind of already hybrid. They started an 

examination off-site planning the examination and 

performing preliminary financial analysis. 

Then, they generally traveled to the bank as a team, 

on average, about six to seven examiners for 11 days for 

the typical financial institution. Then, they generally 

finalized the examination report off-site and mailed it in 

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to the regional office. And, over time, we've sought to 

move more of that time into those two end buckets, the 

before and after, the off-site work as an examiner 

retention tool. 

I think it was Lise that mentioned this morning that 

you've really focused on the hybrid approach as a retention 

tool. We have too. And, we've increased that percentage 

over time. On the RMS side of the house, we've gone from 

about 32 percent of our exam hours being off-site in mid2016, to about 47 percent at year-end 2019. 

So, for the future, we're envisioning really an 

enhanced version of our prior hybrid model. And so, that 

middle onsite portion will likely be shorter, less than 

the average 11 days we had pre-pandemic, because we've 

learned that we can do a lot more off-site than we were 

pre-pandemic, more than we thought we could for sure. 

And, we envisioned that not every examination team member 

will participate in the on-site portion. 

And, I believe, again, it was Lise that talked about 

that in kind of your new hybrid model, so you'll have some 

examiners on the team that'll work off-site throughout the 

examination. So, we're in the midst right now of 

completing a lessons learned study that incorporates 

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feedback from our own staff. 

We surveyed staff at all levels, field offices, 

regional offices, Washington office, and also the 

industry. We have a request for information outstanding 

with comments by October 12th. And, we've asked 

everybody, what worked well during this period of virtual 

examinations, and what needs to be improved? 

So, it's a little premature to talk about that. It's 

still in process. But, I can share some key learnings 

from the last 18 months that we're already considering to 

make part of our vision of an enhanced hybrid approach in 

the future and making sure that it's both efficient and 

effective. One of the biggest challenges -- and again, 

this was mentioned earlier today -- has been accessing 

bank records to conduct exam loan review and transaction 

testing, particularly in banks that don't image loan 

files. And, until we develop a solution to this 

challenge, those loan review activities may require a 

longer onsite presence than for a bank that does image 

files. 

During the pandemic, we've asked institutions to scan 

documents for us and send them to us. And, sometimes 

we've learned even with the banks that are imaging, there 

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are ways that we could enhance our processes. And, we're 

going to be looking at the security considerations of those 

options and seeing what else we might be able to do. 

A second key lesson is that the videoconferencing 

solutions and collaboration tools that we've used over the 

last 18 months have been great in supporting an entirely 

virtual environment. And, I think I said last time, thank 

goodness we started piloting those early, well in advance 

of the pandemic. But, we're thinking now about, what do 

we need to support a hybrid work environment? 

So, what different tools do we need that are going 

to allow exam team members that don't participate in the 

on-site portion to continue to work and interact with the 

on-site team as if they were right there. And, we think 

that this is really an important part of our apprenticeship 

model of on-the-job training and necessary for sharing 

examination information among team members. It's also an 

important aspect of our joint examinations when we have 

FDIC examiners collaborating with state examiners. We'll 

have to figure that out on the broader scale. And, we're 

all going to have some security protocols to work through. 

So, this is definitely an area where we're going to be 

needing to work together as we move forward. 

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We're going to be using the best practices that we've 

gathered to provide training for examiners on managing 

remote teams and hybrid teams to make sure that all team 

members feel included and engaged in the examination. 

There's some simple things, and we heard some of this 

earlier today too. We're all really on the same track 

here. 

Daily check-ins with bank management, scheduling 

meetings that if you don't have a lot to discuss, everybody 

can be let go. But, you've got a set time every day to 

check in, talk about what the exam team is finding, what 

materials they may need, how things are going, and get 

questions answered. Using cameras during meetings, so 

that everybody can see everybody else, and we can mimic 

the in-person environment as best as possible. So, we'll 

be gathering together those for examiner training. 

And, we've been delivering all of our classroom 

training in a virtual environment since March of 2020. 

And, we're thinking about that too. We found there's 

advantages and disadvantages compared to the traditional 

in-person training we provided pre-pandemic. 

The folks that we've surveyed, our students, and 

instructors for that matter, generally have expressed a 

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preference for in-person training, particularly when 

they're learning how to conduct examinations going to the 

core schools. But, the distance learning gives us really 

an awful lot of additional opportunities for folks to 

participate in training that might otherwise not have been 

able to because of travel, because of cost, because of 

time constraints associated with in-person learning. So, 

there's been a tremendous benefit there. 

We’ve also benefitted from an expanded pool of 

available trainer resources and capitalized on expertise 

nationwide. That helps us reach a broader audience. So, 

there's that positive as well. 

On the flip side again, current training platforms 

for large groups don't necessarily have all the engagement 

features we would like, so breakout rooms, polling 

features, whiteboards, the kind of things that help make 

it more engaging and interactive. So, going forward, 

we're anticipating that we'll be offering a blend of inperson and virtual training. We're going to try to 

optimize both convenience and effectiveness. 

But, that's where we're heading with kind of the 

formal training process. So, these are just a few of the 

lessons learned we're considering as we develop our plan 

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for future examinations. And, I will turn it over to Mark 

and ask him to highlight the differences and similarities 

from the consumer protection perspective. Mark? 

MR. PEARCE: Great, Doreen. I'll give it a second 

just to make sure. Yeah, there it is. It switched over 

to me. It's good to be with you all this afternoon or at 

least virtually with you this afternoon. 

Doreen has really covered the waterfront of most of 

the activities that also apply to the consumer compliance 

and CRA examinations. But, I do want to just talk about 

a couple of differences. And, one that Doreen mentioned 

in her remarks is that on the consumer compliance and CRA 

examination side, we had, pre-pandemic, conducted more of 

that activity off-site. So, somewhere around two-thirds 

of our exam work was off-site in 2020 pre-pandemic. 

Obviously, when the pandemic hit, we went to 100 percent. 

But, we sort of came into the pandemic having made some 

adjustments in our pre-exam planning process to do more of 

that work in advance of the on-site piece to make sure we 

understood the bank's business model and operations and 

profile and identify what the level in risks of consumer 

harm was in those operations in advance of the on-site 

work. 

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Doreen talked about a number of the challenges that we all 

had, and I don't think there are any that were really 

unique on the DCP side. I'd just maybe reiterate a couple. 

One is the pre-exam planning work that we normally do in 

advance, we actually moved that a little bit further in 

advance to give bank staff time for scanning, more offsite 

collaboration and conversations in advance of that, what 

would be the normal on-site portion, but a little bit 

longer lead time, in essence. 

Then, this came up. Doreen just mentioned it, Kevin 

mentioned it earlier, those discussions with bank 

management, the on-site portion having a lot more informal 

interactions with bank staff and bank management and 

really hard to replicate that in a virtual off-site world. 

And so, whether it's scheduling those daily check-ins that 

Kevin was talking about or just having some preset 

engagements with bank management, we found that to be 

pretty helpful and important as part of the consumer 

compliance and CRA examinations. 

Doreen talked a lot about some of the initial lessons 

learned. We're still sort of working through and talking 

with our teams about lessons learned. I think on the DCP 

side, there will be maybe some differences from the hybrid 

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team model that Doreen talked about, and this is really 

driven by the fact that on the consumer compliance and CRA 

exam side, the teams tend to be smaller than the safety 

and soundness teams. 

And so, there's probably less need to have folks 

onsite, at a bank and working remotely and using that 

videoconferencing technology during the actual exam 

process. I'm not saying that's not going to happen. 

just think it's probably less of a change than the current 

or pre-pandemic process. 

But, I would also say we're not going to go back to 

the old, even though we were doing two-thirds off-site in 

advance of the pandemic. I think we're going to be doing 

somewhere between that two-thirds number and the 100 

percent number that we're on now. And, that's really 

going to require us to clarify elements that we can conduct 

off-site and be more concrete about what those things are 

versus what are the things that we really want to have 

onsite. 

And, it's really both for the purposes of the 

examination and the quality of the examination. But, it's 

also based on the feedback that we've gotten from bankers 

through our post-exam survey responses, feedback from the 

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Office of the Ombudsman, is that we really get a strong 

desire from the bankers to have an on-site presence in 

those interactions that can happen informally and in 

person really being beneficial, not only for us on the 

exam side, but for the bankers as well. 

Doreen talked about the digital, virtual 

collaboration. And, I think one of the things we really 

learned during this process was the importance to continue 

to refine and improve our understanding of these different 

tools, and when we can use them, and the security 

requirements around them, and to really maximize the 

functionality in that. I think that's going to be an 

ongoing process. And, then the last thing that I would 

point out that we really observed during the pandemic so 

far, and I think probably something that we'll need to 

focus in on in the future, is the internal resources we 

have for our examination teams. 

We've gotten a lot of feedback that some of the 

resources that we were able to produce and put online and 

our intranet and other things were really important 

because examiners in the past might have turned to another 

examiner right next to them and said, “hey, do you know 

where I can find this?” Well, now, they're basically 

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doing self-service. And so, they need to be able to get 

to the resources. And, there are tons of resources, and 

a lot of the challenge is really finding the right one and 

having it be relevant to what they're doing. And so, the 

more we can do to make those available and timely and 

accessible, I think the better we're going to be. As 

Doreen mentioned, a number of you talked about the hybrid 

approaches, and really did appreciate hearing from you 

about the different ways that you're doing your return to 

bank activities. So, thanks. And, definitely as we move 

forward, we'll want to continue to stay connected and in 

touch and really have some lessons learned, not just from 

what we're doing but what you're doing as well. And, 

hopefully, that'll help us optimize and reach the best 

outcome together. 

And, with that, I think that's sort of all I had. 

And, before I turn it over to Martin for the next part of 

this presentation, I want to stop here and see if any of 

you have any questions or comments for either me or Doreen 

on our examination efforts during the pandemic and at least 

our initial thoughts about where we may be heading in the 

future. 

MS. EBERLEY: Thanks, Mark. While we're waiting for 

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hands, I might mention I don't think either one of us 

actually affirmatively said this, that we are still 

operating off-site and intend to do so through the next 

phase of our Return to Office Plan, unless there's a need 

for us to come on-site. We will go if we have to, but 

generally, we're going to be working off-site. And, I 

really appreciate the collaboration and coordination with 

those states that do have some examiners onsite. We're 

already dealing with some of the challenges that I 

mentioned where we've got some folks in the bank, some 

folks outside of the bank and how do we get those two teams 

talking. So, my thanks to all of you who are already 

participating in that collaborative endeavor. 

MR. PEARCE: So, I'm not seeing any hands, but I'm 

not a great Webex expert. So if there's anybody that has 

a question or maybe Lisa, you can help me if you see 

anything that I don't. 

MS. EBERLEY: I don't think there's any hands, Mark. 

I think we can go ahead. 

MR. PEARCE: Great. Alright, well I'll turn it over 

to Martin Henning. And, Mike, you can go ahead and move 

to the next slide in the deck. 

MR. HENNING: Great. Thank you, Mark and Doreen. 

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My name is Martin Henning. I'm the Deputy Director for 

Operational Risk in our Risk Management Supervision 

Division and happy to be with you here today. 

Unhappy to hear about cybersecurity risk out there, 

but I suspect that that's going to be a continuing theme. 

I heard Doreen mention probably the top on her list of 

risks that you all mentioned. And, that was my thought 

too. We heard it last time. I think I'm hearing it more 

from you this time. 

Bank and service provider work to mitigate 

cybersecurity risk continues to be near the top of our 

examination focus. When asked what we can do to help bank 

management and their boards mitigate cybersecurity risk, 

a foundational answer we give is great, relevant 

examination. So, I want to discuss two items with you 

along those lines. 

First, I want to give you an update on a key -- what 

we consider a key cybersecurity control publication on 

authentication. Of course, the states worked with us 

through the FFIEC to put this out. It's a preventative 

control. 

And, then second, talk to you and give you an update 

on sort of a response-related control if something bad 

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happens, and that's incident notification. So, on this 

first slide, we have the FFIEC guide. And, the FFIEC 

guidance dates back to at least 2001 on authentication 

controls, how people authenticate to computers. 

It was updated in 2005, and then again in 2011 

through the FFIEC. And, the FFIEC member agencies 

published the latest update in August of this year, August 

11th as you see there. To set the stage, I want to 

highlight the importance of authentication controls in 

today's cyber risk environment, particularly multi-factor 

authentication. 

On August 30th, the Department of Homeland Security, 

Cybersecurity and Infrastructure Security Agency published 

an alert, the title of which reads, CISA Adds Single Factor 

Authentication to List of Bad Practices. On September 

22nd, CISA and the FBI published an alert about the 

increased use of what's called Conti or named Conti 

Ransomware and more than 400 attacks. 

The alert recommends implementing mitigation 

measures described in the advisory. And, the first 

measure is requiring multi-factor authentication. On July 

4th, CISA and the FBI issued guidance for managed service 

providers and their customers affected by the Kaseya 

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vulnerability to enable and enforce multi-factor 

authentication on every single account that is under the 

control of the organization and, to the maximum extent 

possible, enable and enforce multi-factor authentication 

for customer facing services. 

So, that's the stage. We've talked already about 

the threat of ransomware in particular, a particular type 

of cybersecurity threat. On this slide, I bolded words 

that are different in the FFIEC guidance this time around 

in this update. 

The scope of the guidance has importantly expanded. 

The guidance is no longer customer-centric. It covers a 

wider range of entities. We certainly don't lose the 

focus on business and consumer customers. But, you can 

see employees being highlighted in this version, third 

parties, people and computers interacting with the banks' 

computers. 

It also takes a stronger stance on the inadequacy of 

single factor authentication. And, I pulled out a quote 

for you here. We do believe, I think, that this is leaning 

forward on the need for multi-factor authentication. Many 

banks have already implemented strong authentication 

controls, of course, for these groups of entities. But, 

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for those that haven't, the bar for demonstrating that the 

risks of unauthorized access should be a little bit higher 

after this. And, we're thinking at the FDIC about what 

additional support we can provide our examiners to make 

sure our examinations of authentication controls are the 

best that they can be. Of course, we use the InTREx 

Program with many states. And, that's where we're focused 

as we consider this new guidance. 

I should end these comments by stating that good 

authentication controls are not a silver bullet that 

brings a risk of cyber compromise to zero. But, good 

authentication is a foundational control that banks and 

service providers should be improving. And, there are new 

solutions every day in the marketplace. 

So, with that, let's move to the next slide. As I 

said, the FDIC, OCC, and Federal Reserve published a notice 

of proposed rulemaking regarding a computer-security 

incident notification rule in January of this year. And, 

we have received and read those comments. I wanted to 

review the themes in the comments, which, of course, are 

public and just give you a sense for them, not expecting 

that you would be out there looking at that. 

Let me set the stage here again by reminding you of 

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the proposal and reiterating the reason why we publish 

this NPR and are thinking about this rule, which was stated 

in the preamble of the Federal Register notice. The 

proposal was to establish a requirement that any FDIC 

supervised bank notify the FDIC when it experiences a 

computer security incident that disrupts or degrades the 

bank's ability to carry out material banking operations, 

disrupts or degrades any of its core business lines, or 

could pose a threat to the financial stability of the 

United States. And, of course, there are similar 

requirements relevant to the other federal regulators. 

The proposed rule also would require bank service 

providers to notify clients, client banks, if such service 

providers experience a computer security incident that 

disrupts or degrades banking services for four or more 

hours. 

So, why did we propose this rule? We stated this 

notification requirement is intended to serve -- and I 

think these are the key words -- as an early alert to a 

banking organization's primary federal regulator -- and we 

said this in the preamble -- and is not intended to provide 

an assessment of the incident. 

As banking regulators and with you all, and some of 

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your states already have rules like this, once we have 

that early alert, we can interact with a bank in an 

appropriate way or the service provider to watch their 

recovery efforts and ask questions. What we need to know 

at the very beginning is just that it's occurred. Because 

it was -- the rule -- intended to simply provide an early 

alert and not intended to provide an assessment, the bank 

notification could be as simple as a phone call to the 

regulator. 

Now, to the major themes and feedback, which I've 

summarized on this slide. The first comment reacted to a 

part of the NIST computer security incident definition 

that we used, which talked about policy violations, for 

example. The comments also mentioned that there are 

planned outages for system maintenance that might be 

caught up in these notifications. 

The second theme there had to do with reporting 

complexity. One item in relation to these comments was 

that the draft rules service provider requirement was to 

report to two bank employees. And, that was an example 

of the complexity that some commenters pointed out. 

The third theme had to do with the point at which 

the 36-hour clock starts for notification, which 

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commenters said was unclear in some cases. And then, the 

fourth comment pointed to the requirement in many cases, 

for notifications to banks of outages at service providers 

that are already in contracts. The fifth theme pointed 

to the existence of other regulations that have some 

bearing on the situation which regulations we also 

identified in the Federal Register notice like the 

suspicious activity reporting requirements, the GrammLeach-Bliley Act incident response plan requirements that 

do have some notifications in them. 

So, those are not all the comments but obviously, 

just as I say, the major themes. We are considering all 

these comments and thought it might be helpful to review 

the feedback with you all since incident notification is 

something in the headlines much more recently. And, 

again, I know several states even on the call have existing 

incident notification requirements. 

Before I close, I just want to -- and turn it over 

to Lisa Arquette to talk about the AML Act of 2020, I just 

want to thank -- I know Director Tom Fite is not here but 

I did listen to Superintendent Kevin Allard earlier -- for 

working with the FDIC and the other federal regulators to 

continue to improve our program for state participation 

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and service provider exams. States have participated in 

service provider exams for many years and because of their 

work in particular, more states are joining us on those 

exams. And, I think the information sharing is just 

getting better and better. So, I really appreciate their 

work. We were on a call with them, a routine call we 

have, Tuesday, I guess yesterday morning or afternoon, and 

just really appreciate their collaboration with us on 

that. So, with that I'll turn it over to my colleague, 

Lisa Arquette, to talk about the AML Act of 2020. 

MS. ARQUETTE: Thank you, Martin, and good 

afternoon, everybody. I plan to focus on certain 

significant provisions of the Anti-Money Laundering Act 

that will impact state regulators. The AML Act was passed 

by Congress on January 1st of 2021, as part of the National 

Defense Authorization Act. 

The AML Act is the most comprehensive set of reforms 

to the Bank Secrecy Act since the passage of the 2001 USA 

PATRIOT Act. The Bank Secrecy Act has been in place for 

50 years since 1970, and has undergone many changes, this 

being the most significant since 2001. The key objective 

of the AML Act is to modernize the AML, Anti-Money 

Laundering, Countering the Financing of Terrorism regime, 

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or AML/CFT. 

The first section that I would like to highlight is 

Section 6101, which directs the Department of the Treasury 

to establish and make public national AML/CFT priorities. 

The Financial Crimes Enforcement Network, or FinCEN, which 

is a Treasury bureau and they are the administrator of the 

Bank Secrecy Act, published these AML/CFT priorities on 

June 30th of 2021. These priorities focus on threats to 

the U.S. financial system and to national security. 

These priorities in no specific order include 

corruption, cyber-crime, terrorist financing, fraud, 

transnational criminal organizations, drug trafficking 

organizations, human trafficking and smuggling, and 

proliferation financing. These priorities are intended 

to assist all covered financial institutions, including 

banks, to combat money laundering and to counter terrorist 

financing. At a minimum, the priorities will be updated 

at least every four years to account for new and emerging 

threats to the U.S. financial system and to national 

security. 

The FDIC along with the other federal banking 

agencies, FinCEN, and state bank and credit union 

regulators issued a statement on June 30th, which was 

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concurrent with the issuances of the priorities. We 

issued it through Financial Institution Letter 46-2021. 

That statement makes clear that FinCEN's publication of 

the priorities does not create an immediate change to BSA 

requirements or to supervisory expectations for banks. 

Importantly, FinCEN recognizes that not every 

priority will be relevant to every bank. But, each bank 

should review and incorporate these priorities into the 

BSA compliance program, as appropriate. Next slide, 

please. 

FinCEN is also required to promulgate regulations 

regarding these priorities. A notice of proposed 

rulemaking from FinCEN is expected in the near term. And, 

FinCEN will announce in the proposed modifications, in the 

NPRM, the priorities and how those priorities will fit 

into the compliance program -- the AML Compliance Program. 

The FDIC, along with the other federal banking agencies, 

plans to revise the BSA Compliance Program rule to 

incorporate these priorities in a manner consistent with 

FinCEN's amendments. The final rule and the preamble to 

that rule will provide clarity regarding how these 

priorities should be reviewed and incorporated into a 

bank's BSA Compliance Program. In the meantime, if you 

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or your staff are interested in understanding the basis 

for these priorities, you could review the 2020 National 

Strategy for Combating Terrorist or Other Elicit Financing 

and three related risk assessments. 

These documents, which form the basis of the AML/CFT 

priorities, were issued by the U.S. Department of Treasury 

and can be located on the FDIC's public website on the 

banker's resource Bank Secrecy Act page. These documents 

include various vulnerabilities to the financial system. 

But, again, at this time, there is nothing that banks or 

examiners are required to do relative to these priorities. 

Next slide, please. 

The next important provision to be aware of is 

referred to as the Corporate Transparency Act. It 

addresses changes to how beneficial ownership information 

will be collected and reported. FinCEN will soon issue a 

notice of proposed rulemaking associated with this change. 

FinCEN will be required to maintain beneficial 

ownership information in a confidential, secure, and 

nonpublic database. After the development of the database 

and consistent with the implementation date of FinCEN's 

new regulation governing the collection and storage of 

beneficial ownership information, then banks will no 

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longer be required to collect beneficial ownership 

information. FinCEN is authorized to disclose that 

information with the consent of the reporting company to 

banks, and others to facilitate compliance with customer 

due diligence requirements. Next slide, please. 

Finally, I want to highlight for you a few AML Act 

sections that will likely impact state regulators. 

Section 6209 relates to testing methods rulemaking, and it 

requires the Secretary of the Treasury to issue a rule 

regarding standards by which financial institutions are to 

test technology and technology-related internal processes 

that facilitate compliance with BSA regulations, for 

example, standards associated with suspicious activity 

monitoring systems. The standards may include an emphasis 

on using initiative approaches, such as machine learning 

or other enhanced analytics processes, risk-based testing, 

oversight, and other risk management approaches, specific 

criteria for when and how risk-based testing against 

existing processes should be considered to test and 

validate the effectiveness of relevant systems, specific 

standards for risk government frameworks for financial 

institutions, requirements for appropriate data privacy 

and information security, and requirements that the system 

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configuration include any applicable algorithms and 

validation of those configurations used by the institution 

and that those be made available to FinCEN and the federal 

functional regulator. 

The reason that it would be important to state 

regulators clearly is that these will be standards for 

banks that we all supervise. There is another requirement 

in Section 6209 that requires the FFIEC, Federal Financial 

Institutions Examination Council, to update our BSA/AML 

Examination Manual to reflect the standards and the 

rulemaking. That's definitely a first. 

The next section that I want to highlight is 6216, 

which requires Treasury to undertake a formal review of 

regulations implementing the Bank Secrecy Act and required 

and related guidance -- excuse me, related guidance not 

required. The purpose of the review is to ensure that 

these regulations and the associated guidance continue to 

protect the financial system from threats and that they 

continue to require certain reports or records that are 

highlight useful to countering financial crime. 

Additionally, the review is intended to identify 

regulations and guidance that may be outdated, redundant, 

and otherwise that do not promote a risk-based AML/CFT 

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regime or that do not conform to international standards. 

FinCEN has coordinated with federal banking agencies and 

with state regulators related to this formal review 

process and will seek public comment regarding any 

proposed changes. 

The last AML section that I wanted to highlight today 

requires annual AML/CFT examiner training. With respect 

to potential risk profiles and warning signs that an 

examiner may encounter during examinations, financial 

crimes, patterns and trends, the context for why AML/CFT 

programs, or for us, BSA programs are necessary for law 

enforcement agencies and for other national security 

agencies and what risks those programs seek to mitigate, 

and the effect of de-risking on the provision of financial 

services. 

The Department of Treasury is required to consult 

with the FFIEC and others to establish training materials 

and standards for use in this annual examiner training. 

The last item that I have on the slide is the FFIEC/BSA/AML 

Examination Manual. As you might know, the federal 

banking agencies, along with state regulators, developed 

the FFIEC manual in 2005, and we have updated it several 

times since 2005. 

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Right now, the manual is undergoing a review and 

update of every section, including an emphasis throughout 

the sections on the bank's risk-based approach to BSA 

compliance and examiner's risk-focused approach to BSA/AML 

supervision. We have also diligently evaluated each 

section to clarify legal requirements versus examiner 

instruction. We've taken significant steps to be very 

clear on what the requirements are versus steps for 

examiners. 

The manual will be updated to reflect requirements 

of the AML Act such as Section 6209, the testing standards. 

And, in fact, we have four sections under review right now 

that we plan to publish by year-end. So, I want to thank 

you and your colleagues for the hard work in updating the 

FFIEC/BSA/AML Examination manual that we jointly publish, 

and I thank for you time today. And, with that, I will 

turn this back over to Doreen and Mark. Thank you. 

MS. EBERLEY: Okay. Thank you to Mark, Martin, and 

Lisa. Let me pause a moment and see if we have any 

questions or comments or discussion items. 

All right. I'm seeing none. So, we will go ahead 

and move forward to our next presentation. So, next, we 

have Diane Ellis, the Director of the Division of Insurance 

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and Research, along with Dan Hoople, who is a financial 

economist in the Division of Insurance and Research. And, 

they're going to talk about community bank research. 

Diana, Dan. 

MS. ELLIS: All right. Thank you, Doreen, and good 

afternoon, everyone. I'm happy to have 15 minutes on this 

agenda, just to give you a quick update on some research 

that we thought would be of interest to you all and that's 

really what Dan is going to do. 

I'm just going to take a few minutes here before 

passing the baton over to him to reflect a little bit more 

on the 2021 Community Banking Research Conference, which 

John Ryan mentioned earlier. That was just a week or so 

ago, and it was the ninth annual conference. It's the 

fourth where the FDIC has cosponsored along with the CSBS 

and the Federal Reserve System. 

And, I just want to state how very pleased we are to 

be a cosponsor of this conference, which gathers bankers, 

researchers, and supervisors to discuss challenges faced 

by community banks. The conference has really achieved 

what we believe is a very high level of quality. And, as 

I've heard John Ryan say before, it's first and foremost 

a research conference. And, I really appreciate his 

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continued focus on that fact. And, I would say that it's 

quite a very good research conference. The conference is 

really -- is attracting paper submissions from wellrespected and high profile researchers, both in the United 

States and internationally. 

For a couple of years now, we've had papers accepted 

from authors abroad which I just think -- it's wanting on 

to write on you have community bank issues. So, I think 

that's just fantastic. We're going worldwide here. 

But, it's a unique research conference. It's just 

not -- it's not just researchers talking to each other. 

The conference also has bankers and supervisors, and I 

think everyone gets a lot out of this combination of 

stakeholders. 

The bank -- I think it's good for the bankers and 

supervisors to know what sort of empirical research is 

being done to answer some of the most important policy and 

operational questions affecting banks. But, I also know 

for a fact that the researchers get an awful lot out of 

the real world and sort of practical feedback that they 

get from the bankers who serve as discussants or keynotes 

and also the supervisors as well. In this conference, 

just like the prior ones, had an excellent agenda with 

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high quality research, keynotes, policy discussions. 

It included keynotes from our Chairman, Chairman 

McWilliams, and Governor Miki Bowman. Chairman McWilliams 

emphasized the importance of transparent communication 

from regulators in building and maintaining trust in the 

financial system; and emphasized the importance of 

evolving the regulation, supervision of, and communication 

with community banks, so that they can remain competitive 

and continue to provide the services to meet all the needs 

of the members of their community. And, the research 

sessions really reinforced many of the themes of those 

keynotes. 

There were a couple of papers that found that the 

Federal Reserve's Paycheck Protection Program Lending 

Facility allowed banks to make greater volume of PPP loans 

to the communities. Two papers found that bank's 

supervision had a positive effect on bank's willingness to 

lend to minorities and to recognize trouble to failing 

loans, something that all members of this audience should 

appreciate. Always nice when this is -- when something 

we know to be true is empirically proved by the 

researchers. 

And, then one paper demonstrated how uncertainty 

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about PPP loans led -- or the program led to firms 

returning certain PPP loans. And, here's an example where 

that research was echoed and the experience shared by David 

Krause, President and CEO of Pioneer Bank in Mankato, 

Minnesota, who had faced that very situation. So, again, 

just one example of how great it is to bring together 

researchers and bankers who confirm or dispute or deny 

each other's assumptions and experiences. So, again, 

that's a great example of the benefit of this conference. 

One thing we were particularly excited about at this 

conference is that we had the first-ever live FDIC podcast 

in conjunction with a conference. And, the conference has 

always had a bankers panel to talk about a topic of 

importance to everyone and this time, we decided that the 

future of commercial real estate would be the topic. 

In this particular case, we brought together Brian 

Sullivan in FDIC's corporate communications who hosts our 

podcast series, along with Bob DiChiara -- also from the 

FDIC, and he leads our CRE team in my division -- along 

with three bankers, John Buran, Jim Edwards, and Joanne 

Kim, who talked about where are we with the state of 

commercial real estate. And, all three bankers, I think 

it's fair to say, were cautiously optimistic about the 

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future of CRE, a somewhat counterintuitive perspective 

given the impact of the pandemic on the economy. And, I 

won't go into the specifics of what they said but I will 

say that we're kind of -- we're very pleased that this 

podcast will live on, on our website in our podcast series. 

So, I appreciate the planning team members from the CSBS 

and the Federal Reserve who are always looking for 

something new to do each year. What sort of new thing can 

we introduce? How can we keep this conference fresh and 

relevant? 

And, that was sort of the new innovation this year 

is the FDIC podcast occurring at the same time as the 

banker's -- or serving as the banker's roundtable at this 

conference. So anyway, just -- I want to just take a --

like I said, take a few minutes and reflect on the 

importance and the quality of that conference and, again, 

express our appreciation for our partnership with CSBS and 

Federal Reserve. And, we look forward to many more years 

of this successful partnership. 

So, now I'm going to turn it over to Dan Hoople who's 

going to use the remaining minutes of our segment to talk 

about some research he's done using some data that we love 

that's collected by the CSBS. We've used these data 

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before on banks’ use of technology. It's really the only 

place to go to find any kind of data on this issue, how 

much the bank's use technology. 

He's used it for analysis in our community bank 

research paper we published last year. But, he's now 

found a new application for it. And, I'm going to turn 

the floor over to him and let him describe what he's done 

next. Dan. 

MR. HOOPLE: Great. Thank you, Diane. I'm just going to 

follow up, like Diane said, on one of the themes from the 

community bank conference. Looking at a couple of aspects 

of how community banks faired during the pandemic, 

specifically the article that was published recently in 

the FDIC Quarterly, focuses on -- or asks the question of 

how prior investment by community banks in their 

technology stacks affected a couple of key outcomes, 

specifically deposit and loan growth during 2020. 

And, this question arose out of thinking back to the 

beginning of the pandemic and throughout where community 

banks, their customers, and their employees needed to move 

from where technology was a convenience, to where 

technology was a necessity in the face of temporary branch 

closures, mandatory stay at home orders, or just a general 

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desire to limit physical contact. And so, the hypothesis 

was that banks that had invested more in technology leading 

up to the pandemic might've been -- had an easier time 

pivoting to a technology first or technology prominent 

strategy of interacting and doing business with our 

customers. And, therefore, then that would show up in 

loan and deposit growth during 2020. 

And, the difficulty with this question, of course -

-- and Diane has already alluded to this -- is that the 

data on technology spending and adoption is very limited. 

And, this is where the second touch-point with the 

conference comes in with this article. As Diane 

mentioned, one of the highlights of the conference for me, 

and many others, is the overview of the survey that the 

Conference of State Bank Supervisors does the survey of 

community banks that they do each year. 

They ask a variety of questions, including questions 

related to technology. And, those questions formed a 

solid basis of, as Diane mentioned, research that has been 

done in the past, in 2020, for the community bank study as 

well as this article. And, I would be remiss not to echo 

Diane's comments that -- of appreciation and thanks to 

CSBS, the state regulators, and the community banks for 

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continuing to encourage, support, and participate in this 

survey because it really is a fantastic source of 

information, not only for technology investment, but also 

other aspects of how community banks operate and thrive. 

And, as I said, this was a key data input as well as 

data from the Call Report and some data from Aberdeen Data 

Technology Cloud. And, with those data, we created a 

multitude of four different measures where we were able to 

separate banks into banks that had invested less in 

technology and banks that had invested more in technology 

and then compare those during the pandemic. And, what did 

we find? 

I think one of the key findings is depicted on this 

slide, and that relates to loan growth. And, what we 

generally found is that community banks that invested more 

in technology reported faster growth in 2020 than banks 

with less investment in technology prior to the pandemic. 

No, this wasn't a new phenomenon. It's something that we 

did see prior to the pandemic as well. As you can see in 

the lighter blue bars and the purple bar or rather the 

bars that are slightly to the left of each set, banks that 

invested more in technology grew faster prior to the 

pandemic as well. But, what was interesting is that in 

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2020, that differential between high investment and low 

investment in technology, banks widened during the 

pandemic in 2020. 

And so, banks at that point grew even faster in their 

loans had they invested more in technology prior to the 

pandemic. And, this was not something that was focused 

on large banks or banks in metropolitan areas. It was 

something that we saw, albeit at different magnitudes 

above and below the median asset size among metropolitan 

banks, among rural community banks. 

It was something -- it was a pattern that held 

throughout those different subsets. And, I don't think 

it's a surprise to anyone familiar with banking during 

2020, or at least lending that most of this differential 

in loan growth was driven by participation in the Paycheck 

Protection Program. In fact, if you remove PPP loans from 

the equation, the differential moves back to the way it 

was pre-pandemic. 

So, this was interesting, and what the article then 

does is because this differential, this widening occurred 

only in this one loan subset, it delves into this question 

of, was there something special or different about PPP 

lending, either the loans themselves or the situation in 

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which they were made in, that gave this maybe additional 

advantage to banks that had invested more in technology. 

And so, the article explores a couple of different 

possibilities. One, that banks with greater technology 

invested just simply made larger loans. They didn't 

necessarily help more borrowers or lend to more borrowers. 

They just -- the loan size was larger. It looked at 

whether banks that invested more in technology made these 

loans all earlier, where they were faster out of the gate 

and that's where the advantage came in and also whether 

these banks were -- whether technology investment was 

associated to how far the borrower was from the closest 

bank branch. 

And so, for each of these categories, like, what we 

saw was that it did follow maybe what you'd expect, that 

banks that invested more in technology tend to make loans 

to larger borrowers. They did tend to make loans at a 

greater rate or rather that the share of PPP loans to 

assets was larger for a greater distance from the bank as 

well as early on. However, what was interesting is that 

this advantage of high investment banks and technology was 

present throughout the distribution. So, it didn't matter 

what the loan size was. It was for the largest loans, but 

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it was also for the smallest loans that banks that invested 

more in technology had a larger share of PPP loans to 

assets. Same goes for time, every week of the program, 

there was this advantage for higher investment in 

technology. And then, finally, distance, at 100 miles or 

more or 5 miles and less, banks that invested more in 

technology had a greater share of PPP loans to assets. 

And so, what this maybe says is that there wasn't 

necessarily one key factor that could be pointed to, to 

say that a greater investment in technology led to this 

outcome because of A, B, or C. It really was a mix of all 

of them and it certainly begs for further research to dig 

into this and maybe see if there is better data, more 

information to continue to dig at this question. 

Now, as I mentioned, we also looked into this for 

deposit growth. And, what we saw was a very similar 

pattern for loan growth. Banks that invested more in 

technology prior to the pandemic had increased deposit 

growth before 2020. But, in 2020, that pattern held but 

widened further, so again, similar to loan growth. 

Unfortunately, we don't have a lot of data at the 

individual depositor level. For PPP loans, we were able 

to use SBA individual loan level data. But, we didn't 

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have similar data at the deposit account level to be able 

to say, it was deposits from these type of customers or 

perhaps deposits associated with PPP loan proceeds. 

What we were able to glean a bit from Call Report 

data is that the faster deposit growth did seem to stem 

from existing customers. So, what we did not see is that 

an increase investment in technology led to more deposit 

accounts, number of accounts, for these banks. So, it did 

seem to be a growth in deposit balance size rather than 

new depositors net flowing into these banks. 

So, in sum, I think the article kind of presents 

interesting evidence to indicate that prior technology 

investment did have an association with deposit taking and 

lending functions for community banks during the pandemic. 

I think it'll be really interesting and I know it's 

something that we'll look at in the future and I hope 

others do as well to dig further into the why as well as 

whether these trends continue into the new normal. 

And, like I said, I certainly look forward to 

continue to dig into that question. And so, with that, I 

think I'm fully wrapped up. I'll turn it back to perhaps 

open up to questions or questions for Diane about the 

community bank conference. 

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MS. EBERLEY: Thanks, Dan, and thanks, Diane. Any 

questions or comments? 

Okay. I am scanning through. I see no hands raised. 

So, Diane, Dan, thank you very much for your presentation, 

really appreciate it. Okay. Next up is Betty Rudolph, 

National Director of Minority and Community Development 

Banking. And, Betty is going to provide us with an update 

from her area of work. Betty. 

MS. RUDOLPH: Well, thank you, Doreen. And, it's a 

pleasure to be here. I don't think I've ever met with 

this group before, so I'm really pleased to provide you an 

update with what's happening in the minority and community 

development banking area. 

As the National Director for Minority and Community 

Development Banking, my role is to preserve and promote 

mission-driven banks. And, that includes about 144 FDICinsured minority depository institutions, or MDIs, and 168 

community development financial institutions that the FDIC 

also insures. Our research has shown that these banks 

play an outsized role in serving minority, low income, and 

rural communities relative to their size, and this is what 

we put forward resources to preserve and promote these 

institutions. 

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So, just a quick overview. Of the fourteen 

commissioners on the committee, eight of you have MDIs 

headquartered in your states. And, those total 33 FDIC 

supervised banks. And, that's about a third of the banks 

that we supervise overall. And, five of you supervise 14 

FDIC supervised CDFI banks or about twelve percent of the 

115 CDFIs that the FDIC supervises. So, I think we have 

some good representation on the committee of these 

institutions. 

I'm going to talk about two things this afternoon. 

The first one is the Statement of Policy Regarding Minority 

Depository Institutions, which our FDIC Board approved 

this past June. This is a policy statement that sets 

forth the FDIC's commitment to preserving and promoting 

these institutions, and it's been around since 1990. 

But, we strengthened it and we had circulated a draft 

for public comment back in late 2019. And then, the Board 

approved the final one in June, as I mentioned. And, we 

subsequently published it in the Federal Register in June, 

and it became effective on August 23rd. And, I believe 

you have a copy in your packet of materials. 

The one key point I was going to bring to your 

attention today is that the statement of policy includes 

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an affirmative statement that the Uniform Financial 

Institutions Rating System, or UFIRS, and the Uniform 

Interagency Consumer Compliance Rating System, UICCR, both 

expect examiners to recognize the distinctive 

characteristics and differences in core objectives of each 

financial institution, and to consider those unique 

factors when evaluating the institution's financial 

condition and risk management practices. And, 

specifically, examiners are instructed to consider all 

relevant factors when assigning a component rating. 

And, these rating systems are designed to reflect 

the examiner's assessment of the individual institution 

based on its size and sophistication, the nature and 

complexity of its business activities, and its risk 

profile. And, we also stated that peer comparison data 

are not included in the rating criteria. And so, we 

thought it would be important to just -- while this has 

always been the case to affirmatively state that in the 

statement of policy, we had received feedback from 

institutions that, particularly, I think in the earnings 

component that these institutions felt that their unique 

circumstances as a mission-driven institution were not 

necessarily taken into account. 

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So, we're developing some training for our examiners 

regarding these unique business models and applying the 

factors. So, now I'd like to turn to the presentation on 

your screen which is a brief update on the Mission-Driven 

Bank Fund. And, this fund, the FDIC launched the fund on 

September 16th, so just a couple of weeks ago, with a press 

conference that Chairman McWilliams had and a website that 

we launched which includes a copy of this Mission-Driven 

Bank Fund at a glance, which I think you also have in your 

packet. Mike, if you'd advance to the next slide, please. 

The fund came about -- the idea, I think, a couple 

of years ago. And, it was to provide investors with an 

opportunity to support mission-driven banks that do 

support low and moderate income, minority, and rural 

communities. And, support for these institutions really 

helps them build their size, scale, and capacity which 

will enable them to have a greater impact in the 

communities that they serve. Next slide, Mike. 

This is just a brief recap. There are about 280 

mission-driven banks that are FDIC insured MDIs and FDIC 

insured CDFIs that cover branches in 29 states. 

mentioned our research shows the outsized role that these 

institutions play in serving low or moderate income 

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communities and minority communities. And, for CDFI 

banks, they are actually required to get their 

certification to have 60 percent of their lending and other 

financial services in low income communities. Next slide, 

Mike. 

So, the fund is -- this is just a very simple graphic 

that private investors, which include corporations, 

financial institutions, and philanthropic organizations 

invest in the fund. As of September, we have $120 million 

committed and growing. That includes our two anchor 

investors that were announced on September 16th, Microsoft 

Corporation and Truist Financial Corporation along with 

Discovery, which is a founding investor as well. 

And, we have $15 million in matching funds committed 

as well. So, the next $15 [million] will raise $30 

[million] and bring that up to $150 million. And, this 

is sort of before our launch. 

And so, we have -- since our launch, our mailbox, 

we've received a number of inquiries about -- from 

potential investors, from MDIs and CDFIs, wanting to know 

how they can access the fund and other interested 

stakeholders. So, the fund will invest in mission-driven 

banks through small business loans, home mortgages, 

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community development loans, among others. And then, 

these banks in turn support their communities which are 

largely minority, low income, and rural. Next slide, 

please. 

This is just designed to depict sort of the three 

major stakeholders in the fund. And, at the top of the 

pyramid on the right, we show MDI and CDFI banks. As part 

of designing the fund, the FDIC hired a financial advisor 

and two outside law firms, and worked to develop the design 

based on input from interested stakeholders. 

So, we met with about 70 CEOs of MDIs and CDFIs. 

That included those nine that serve on our advisory 

committee, our MDI Subcommittee, as well as members of 

some key trade groups that support MDIs and CDFIs. And, 

we met with some potential investors. 

And, essentially, some of the interest of these 

stakeholders conflicts at some point. And, our fund is 

designed to prioritize the impact within the communities 

that MDIs and CDFIs serve. So, we heard from them, they 

want patient permanent capital. They would like 

flexibility in the types of investment that this fund might 

make in them, whether it be equity or debt or other types 

of funding which we'll talk about on the next slide. They 

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talked about minimizing the operational burden of the 

underwriting process. 

And, the investors obviously would like to see the 

return of their capital and a modest return on their 

capital. This fund is designed to provide a very modest 

return, and that's what most of these impact investors are 

looking for. They want to focus on prioritizing impact 

in these communities as well. 

And, obviously, they want access to liquidity as well 

and to hear about how their investment is making an impact 

in these communities. And, the fund manager will bring 

it all together by underwriting these investments, 

minimizing complexity and costs, meeting the fund 

performance targets, and planning for the exit of the fund 

-- execution of the fund exit. Next slide, please. 

So, the fund would provide for MDIs and CDFIs. They 

would come in and give a pitch. And, I think when Chairman 

McWilliams talks about the fund, she talks about how she 

was inspired by -- after visiting a number of MDI CEOs, 

she was on a flight and saw an episode of Shark Tank and 

really liked the aspect of empowering someone to come 

forward and give a pitch for something that they need. 

And so, that's sort of how this fund is designed. 

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And so, banks will make pitches to the fund for 

potential investments in a variety of asset classes. And, 

that's what we did hear from those 70 CEOs that no one MDI 

or CDFI is alike. They're very unique in terms of their 

business models, the customers that they serve, whether 

they'd been around 125 years or if they are brand new, 

whether they're serving longtime residents or new 

immigrants. They all have unique needs. So, they like 

the flexibility of being able to come forward with a pitch. 

And, some of the suggested pitches that we heard in 

our design of the fund included equity, but also loan 

participations, loan share agreements, CDs, term debt, and 

importantly the next to the last bullet there, investments 

proposed by mission-driven banks. And, that's things that 

we might not have thought about and that the banks come 

forward with or a group of banks could come forward with. 

So, these would be pitches that will be making a difference 

in their communities and that will provide a modest return 

to investors. 

And then, we have a bullet there for strategic 

advisory service as we did here from a number of these 

CEOs that they would -- maybe when they were coming forward 

with their pitch, they may not have their capital stack 

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structured as efficiently as they might want. Or, they 

might want some strategic advisory services around 

building out an IT roadmap or a digital transformation 

roadmap. So, we're envisioning the fund would provide 

some of those strategic advisory service as well. Next 

slide, Mike. 

This is designed to show sort of the fund manager 

and how they work in what we're calling the ecosystem of 

the fund. So, in that outer ring there, we have missiondriven bank's stakeholders, business leaders, and 

community leaders, and they would all be part of an 

advisory council that would be overseeing this fund. 

Their role would be to support the mission focus, 

share community perspectives and the FDIC will be a member 

of that advisory council serving in a non-voting capacity. 

And, that is all designed to sort of keep the fund on track 

with its mission focus. And, the fund manager roles there 

are basically to underwrite the pitches. I think we 

talked about some of these other roles, managing the fund 

targets, planning for the fund exit that we talked about 

on the prior slide. 

I do want to draw your attention to the fourth bullet 

there, that the anchor investors, Microsoft and Truist 

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Financial Corporation, will be selecting the fund manager 

based on a competitive process. And, they will be 

emphasizing the mission perspective with prospective 

candidates for a fund manager. And, they will be informed 

by input from mission-driven banks. Next slide, please. 

This is just a recap of where we are. So, we've, 

to-date, secured $120 million and growing. We designed 

the fund structure. I spoke a little bit about that. 

The outside law firms drafted some terms and 

conditions, and then we sort of shared that with the anchor 

investors. And, we've been working with them now. On the 

right-hand side there, we announced the anchor investors 

when we launched on September 16th. 

We didn't make our target of September 30th for 

soliciting the fund manager. I think that's still a 

couple of weeks away. One of the fun things about working 

on this fund is that it's a unique public-private 

partnership. And so, we've got one government agency that 

has a set of governance and stakeholders. And then, we've 

got two private corporations that operate within their 

sort of governance structure and government relations and 

communications and lawyers and all kinds of folks. So, 

it's just taking a little bit longer as a public-private 

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partnership. But, I think it's working really well. So, 

we're looking forward to announcing soon that they are 

going to be soliciting the fund manager. 

And then, the goal was to onboard the fund manager 

in the fourth quarter, finalize the funds, terms, and 

conditions, form the advisory committee, secure the first 

round of funding. And, we will be working with the fund 

manager to advise mission-driven banks about the pitch 

process. And, we're happy to work with any state 

supervisors, if that's a role you would like to help us 

with as well to make sure that any FDIC insured institution 

understands about the process and the fund and what 

opportunities this provides for them. 

And, all of that's with a goal for actually hearing 

the first round of pitches in the first quarter of next 

year. And, the next slide, Mike, just shows a recap of 

some of the key terms and conditions for the investors. 

I think what I would emphasize here is this is a -- well, 

target size, we're aiming for 500 million to a billion 

dollars. We have just started sort of more formally 

talking to investors other than the anchor investors and 

founding investors we secured. It's a ten-year closed end 

fund. It has a specific focus on mission alignment and 

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fund purpose written into -- embedded in the founding 

documents which we think is important. 

And then, there are just a few more things there 

about the investment period distributions and investment 

limitations -- I won't get into detail on that -- and then 

the reporting requirements for the fund manager. And, the 

last slide is just our standard disclosure for any 

conversation about investments. So, with that, I will 

conclude the presentation and see if there are any 

questions. 

(No response.) 

MS. RUDOLPH: The last thing I'll mention, then, if 

there are no questions, is the presentation, which I think 

you have a copy of, also has a copy of the mission-driven 

bank fund mailbox. And so, if there are any questions you 

have, feel free to send in a question and we'll get around 

to it. Thank you, Doreen. I'll turn it back to you. 

MS. EBERLEY: Okay. Thank you, Betty, very much. 

And, thank you to everybody, all of the committee members 

and today's presenters. We really appreciate everybody's 

participation. I will turn things over now to Director 

Gruenberg for some closing remarks. Director Gruenberg? 

DIRECTOR GRUENBERG: Thank you, Doreen. I'll be 

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very brief. I want to thank all of the commissioners for 

taking the time today to participate. I want to say a 

word of acknowledgment, if I may, to Ray Grace who had 

been a member of this committee. I'm sure he's known to 

all of you, the former Banking Commissioner for North 

Carolina. As you all may know, Ray retired in July, and 

we just wanted to say a word of thanks to Ray for his 

service to this committee, to the state of North Carolina, 

and to his country. We very much appreciated our 

relationship with him. 

I was struck in the roundtable today the comments by 

the commissioners, by the commonality of their 

observations as to what's happening in their states. 

think perhaps reflective of the fact that we're all still 

being impacted by this pandemic. And, we still clearly 

have a ways to go in working our way through this 

experience. And, to me, it underscores the importance of 

our working relationship as we try to steer our supervised 

institutions through this pretty extraordinary time. 

So, listen, thank you all again. We really 

appreciate your willingness to serve and share your 

thoughts with us, and we'll see you the next time. Doreen, 

do you want to close it out? 

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MS. EBERLEY: I think we are all set. Thank you so 

much, Director Gruenberg, and thank you, everybody. We'll 

see you next time. Thank you very much. 

(Whereupon, the above-entitled matter went off the 

record at 4:38 p.m.) 

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